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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2005 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-14516 PRENTISS PROPERTIES TRUST (Exact Name of Registrant as Specified in its Charter)
 Maryland
    
    75-2661588(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 3890 West Northwest Highway, Suite 400, Dallas, Texas 75220
(Address of Principal Executive Offices) (214) 654-0886
(Registrants Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding as of May 5,
2005, was 45,190,280 and the number of outstanding Participating Cumulative Redeemable Preferred
Shares of Beneficial Interest, Series D, was 3,773,585.




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PRENTISS PROPERITES TRUST INDEX Page NumberPart I: FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004
(unaudited)
    
    
    5Consolidated Statements of Income for the three months ended March 31, 2005 and 2004
(unaudited)
    
    
    6Consolidated Statements of Comprehensive Income for the three months ended March 31,
2005 and 2004 (unaudited)
    
    
    7Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and
2004 (unaudited)
    
    
    8Notes to Consolidated Financial Statements
    
    
    9-20Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21-37Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    38Part II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    39Item 2. Changes in Securities and Use of Proceeds
    
    
    39Item 3. Default Upon Senior Securities
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 5. Other Information
    
    
    39Item 6. Exhibits
    
    
    40-44SIGNATURE
    
    
    45Promissory NoteCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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FORWARD-LOOKING STATEMENTS This Form 10-Q and the documents incorporated by reference into this Form 10-Q may contain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as
anticipate, believe, estimate, expect, intend, predict, project, and similar
expressions, as they relate to us or our management, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of our management as well as assumptions made
by us and information currently available to us. These forward-looking statements are subject to
certain risks, uncertainties and assumptions, including risks, uncertainties and assumptions
related to the following: 
    
    Our failure to qualify as a REIT under the
Internal Revenue Code of 1986, as amended;
    
    
    
    Competition in markets where we have properties;
    
    Possible adverse changes in tax and
environmental laws, as well as the impact of newly
adopted accounting principles on our accounting
policies and on period-to-period comparison of
financial results;
    
    
    
    Our dependence on key personnel whose continued
service is not guaranteed;
    
    Potential liability for uninsured losses and
environmental contamination;
    
    
    
    Changes in our investment, financing and
borrowing policies without shareholder approval;
    
    Our properties are illiquid assets;
    
    
    
    The effect of shares available for future sale
on the price of common shares;
    
    Factors that could result in the poor operating
performance of our properties including tenant
defaults and increased costs such as taxes,
insurance, utilities and casualty losses that exceed
insurance limits;
    
    
    
    Limited ability of shareholders to effect
change of control;
    
    Changes in market conditions including market
interest rates and employment rates;
    
    
    
    Conflicts of interest with management, our
board of trustees and joint venture partners could
impact business decisions;
    
    Our incurrence of debt and use of variable rate
and derivative financial instruments;
    
    
    
    Our third-party property management, leasing,
development and construction business and related
services;
    
    Our real estate acquisition, redevelopment,
development and construction activities;
    
    
    
    Risks associated with an increase in the
frequency and scope of changes in state and local
tax laws and increases in the number of state and
local tax audits; and
    
    The geographic concentration of our properties;
    
    
    
    Cost of compliance with the Americans with
Disabilities Act and other similar laws related to
our properties.
    
    Changes in market conditions including
capitalization rates applied in real estate
acquisitions;
 If one or more of these risks or uncertainties materialize, or if any underlying assumption proves
incorrect, actual results may vary materially from those anticipated, expected or projected. Such
forward-looking statements reflect our current views with respect to future events and are subject
to these and other risks, uncertainties and assumptions relating to our operations, results of
operations, growth strategy and liquidity. All subsequent written and oral forward-looking
statements attributable to us or individuals acting on our behalf are expressly qualified in their
entirety by this paragraph. A detailed discussion of risks is included, under the caption Risk
Factors in our Form 10-K, filed on March 15, 2005. You are cautioned not to place undue reliance
on our forward-looking statements, which speak only as of the date of this Form 10-Q or the date of
any document incorporated by reference into this Form 10-Q. We do not undertake any obligation to
update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise. 3




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PART I
FINANCIAL INFORMATION 
 Item 1. Financial Statements (this page intentionally left blank) 4




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PRENTISS PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share amounts) March 31,
    
    
    December 31,2005
    
    
    2004ASSETSOperating real estate:Land
    
    $
    349,779
    
    
    $
    341,321Buildings and improvements
    
    
    1,827,141
    
    
    
    1,789,043Less: accumulated depreciation
    
    
    (245,518
    )
    
    
    (234,007
    )1,931,402
    
    
    
    1,896,357Construction in progress
    
    
    28,963
    
    
    
    23,417Land held for development
    
    
    59,084
    
    
    
    59,014Deferred charges and other assets, net
    
    
    269,015
    
    
    
    260,283Notes receivable, net
    
    
    1,500
    
    
    
    1,500Accounts receivable, net
    
    
    55,910
    
    
    
    55,772Cash and cash equivalents
    
    
    10,785
    
    
    
    8,586Escrowed cash
    
    
    7,151
    
    
    
    9,584Investments in securities and insurance contracts
    
    
    5,110
    
    
    
    3,279Investments in unconsolidated joint ventures and subsidiaries
    
    
    14,648
    
    
    
    12,943Interest rate hedges
    
    
    7,242
    
    
    
    2,804Total assets
    
    $
    2,390,810
    
    
    $
    2,333,539LIABILITIES AND SHAREHOLDERS EQUITYMortgages and notes payable
    
    $
    1,249,083
    
    
    $
    1,191,911Interest rate hedges
    
    
    1,222
    
    
    
    3,850Accounts payable and other liabilities
    
    
    89,059
    
    
    
    105,304Distributions payable
    
    
    28,192
    
    
    
    28,103Total liabilities
    
    
    1,367,556
    
    
    
    1,329,168Minority interest in operating partnership
    
    
    24,613
    
    
    
    24,990Minority interest in real estate partnerships
    
    
    62,029
    
    
    
    35,792Commitments and contingenciesPreferred shares $.01 par value, 20,000,000 shares
authorized, 3,773,585 shares issued and outstanding
    
    
    100,000
    
    
    
    100,000Common shares $.01 par value, 100,000,000 shares authorized,
48,394,871 and 48,268,845 (includes 3,269,746 and 3,286,957
in treasury) shares issued and outstanding at March 31, 2005
and December 31, 2004, respectively
    
    
    484
    
    
    
    483Additional paid-in capital
    
    
    1,024,545
    
    
    
    1,020,917Common shares in treasury at cost 3,269,746 and 3,286,957
shares at March 31, 2005 and December 31, 2004, respectively
    
    
    (82,376
    )
    
    
    (82,694
    )Unearned compensation
    
    
    (6,491
    )
    
    
    (3,386
    )Accumulated other comprehensive income
    
    
    6,595
    
    
    
    (302
    )Distributions in excess of earnings
    
    
    (106,145
    )
    
    
    (91,429
    )Total shareholders equity
    
    
    936,612
    
    
    
    943,589Total liabilities and shareholders equity
    
    $
    2,390,810
    
    
    $
    2,333,539
 The accompanying notes are an integral part of these consolidated financial statements. 5




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PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts) Three Months EndedMarch 31,2005
    
    
    2004Revenues:Rental income
    
    $
    95,039
    
    
    $
    84,298Service business and other income
    
    
    3,050
    
    
    
    3,48898,089
    
    
    
    87,786Operating expenses:Property operating and maintenance
    
    
    26,045
    
    
    
    21,377Real estate taxes
    
    
    10,859
    
    
    
    9,336General and administrative and personnel costs
    
    
    2,883
    
    
    
    2,585Expenses of service business
    
    
    2,655
    
    
    
    1,649Depreciation and amortization
    
    
    24,559
    
    
    
    21,28467,001
    
    
    
    56,231Other expenses:Interest expense
    
    
    17,875
    
    
    
    16,199Amortization of deferred financing costs
    
    
    718
    
    
    
    56518,593
    
    
    
    16,764Income from continuing operations before equity in income of
unconsolidated joint ventures and subsidiaries and minority interests
    
    
    12,495
    
    
    
    14,791Equity in income of unconsolidated joint ventures and subsidiaries
    
    
    698
    
    
    
    578Minority interests
    
    
    (505
    )
    
    
    (1,600
    )Income from continuing operations
    
    
    12,688
    
    
    
    13,769Discontinued operations:Income from discontinued operations
    
    
    
    
    
    
    1,978Gain from disposition of discontinued operations
    
    
    15
    
    
    
    Minority interests related to discontinued operations
    
    
    
    
    
    
    (64
    )15
    
    
    
    1,914Income before gain on sale of an interest in a real estate partnership
    
    
    12,703
    
    
    
    15,683Gain on sale of an interest in a real estate partnership
    
    
    
    
    
    
    1,316Net income
    
    $
    12,703
    
    
    $
    16,999Preferred dividends
    
    
    (2,113
    )
    
    
    (3,713
    )Net income applicable to common shareholders
    
    $
    10,590
    
    
    $
    13,286Basic earnings per common share:Income from continuing operations applicable to common shareholders
    
    $
    0.24
    
    
    $
    0.27Discontinued operations
    
    
    
    
    
    
    .04Net income applicable to common shareholders  basic
    
    $
    0.24
    
    
    $
    0.31Weighted average number of common shares outstanding  basic
    
    
    44,884
    
    
    
    43,426Diluted earnings per common share:Income from continuing operations applicable to common shareholders
    
    $
    0.23
    
    
    $
    0.26Discontinued operations
    
    
    
    
    
    
    .04Net income applicable to common shareholders  diluted
    
    $
    0.23
    
    
    $
    0.30Weighted average number of common shares and common share equivalents
outstanding  diluted
    
    
    45,109
    
    
    
    43,670
 The accompanying notes are an integral part of these consolidated financial statements. 6




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PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands) Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    12,703
    
    
    $
    16,999Unrealized gains and losses on securities:Unrealized (losses)/gains arising during the period
    
    
    (90
    )
    
    
    26Unrealized gains and losses on interest rate hedges:Unrealized gains/(losses) arising during the period
    
    
    6,987
    
    
    
    (2,004
    )Other comprehensive income
    
    
    6,897
    
    
    
    (1,978
    )Comprehensive income
    
    $
    19,600
    
    
    $
    15,021
 The accompanying notes are an integral part of these consolidated financial statements. 7




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PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands) Three Months EndedMarch 31,2005
    
    
    2004Cash Flows from Operating Activities:Net income
    
    $
    12,703
    
    
    $
    16,999Adjustments to reconcile net income to net cash provided by operating activities:Minority interests
    
    
    505
    
    
    
    1,664Gain from disposition of discontinued operations
    
    
    (15
    )
    
    
    (1,316
    )Provision for doubtful accounts
    
    
    528
    
    
    
    887Depreciation and amortization
    
    
    24,559
    
    
    
    23,111Amortization of deferred financing costs
    
    
    718
    
    
    
    565Earnings in excess of distribution from joint venture and unconsolidated subsidiaries
    
    
    (183
    )
    
    
    (122
    )Non-cash compensation
    
    
    550
    
    
    
    868Gain on derivative financial instruments
    
    
    (79
    )
    
    
    (86
    )Changes in assets and liabilities:Deferred charges and other assets
    
    
    (1,865
    )
    
    
    (1,731
    )Accounts receivable
    
    
    (666
    )
    
    
    (2,926
    )Escrowed cash
    
    
    2,433
    
    
    
    (1,149
    )Accounts payable and other liabilities
    
    
    (16,323
    )
    
    
    (14,487
    )Net cash provided by operating activities
    
    
    22,865
    
    
    
    22,277Cash Flows from Investing Activities:Development/redevelopment of real estate
    
    
    (6,065
    )
    
    
    (1,515
    )Purchase of real estate
    
    
    (51,376
    )
    
    
    Capital expenditures for in-service properties
    
    
    (15,045
    )
    
    
    (10,754
    )Proceeds from the sale of a joint venture interest in a real estate partnership
    
    
    
    
    
    
    69,338Proceeds received from repayments of notes receivable
    
    
    
    
    
    
    9,464Investments in securities and insurance contracts
    
    
    (1,009
    )
    
    
    (613
    )Investments in unconsolidated subsidiaries
    
    
    (1,586
    )
    
    
    Net cash used/provided by in investing activities
    
    
    (75,081
    )
    
    
    65,920Cash Flows from Financing Activities:Net proceeds from sale of common shares
    
    
    258
    
    
    
    46,760Redemption of series E preferred units
    
    
    
    
    
    
    (10,000
    )Redemption of series B preferred units
    
    
    
    
    
    
    (95,000
    )Capital contribution from minority interest partners in consolidated joint ventures
    
    
    25,146
    
    
    
    300Repurchase of operating partnership common units
    
    
    
    
    
    
    (891
    )Distributions paid to limited partners
    
    
    (756
    )
    
    
    (826
    )Distributions paid to common shareholders
    
    
    (25,234
    )
    
    
    (23,880
    )Distributions paid to preferred shareholders
    
    
    (2,171
    )
    
    
    (2,113
    )Distributions paid to preferred unitholders
    
    
    
    
    
    
    (3,176
    )Proceeds from mortgages and notes payable
    
    
    336,224
    
    
    
    165,000Repayments of mortgages and notes payable
    
    
    (279,052
    )
    
    
    (159,101
    )Net cash provided by/used in financing activities
    
    
    54,415
    
    
    
    (82,927
    )Net change in cash and cash equivalents
    
    
    2,199
    
    
    
    5,270Cash and cash equivalents, beginning of period
    
    
    8,586
    
    
    
    5,945Cash and cash equivalents, end of period
    
    $
    10,785
    
    
    $
    11,215Supplemental Cash Flow Information:Cash paid for interest
    
    $
    18,404
    
    
    $
    16,774
 The accompanying notes are an integral part of these consolidated financial statements. 8




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PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) 1. The Organization Organization We are a self-administered and self-managed Maryland REIT that acquires, owns, manages,
leases, develops and builds primarily office properties throughout the United States. We are
self-administered in that we provide our own administrative services, such as accounting, tax and
legal, through our own employees. We are self-managed in that we provide all the management and
maintenance services that our properties require through our own employees, such as, property
managers, leasing professionals and engineers. We operate principally through our operating
partnership, Prentiss Properties Acquisition Partners, L.P., and its subsidiaries, and two
management service companies, Prentiss Properties Resources, Inc. and its subsidiaries and Prentiss
Properties Management, L.P. The ownership of the operating partnership was as follows at March 31,
2005: Series DConvertibleCommon
    
    
    
    
    
    
    Preferred(units in thousands)
    
    Units
    
    
    %
    
    
    Units
    
    
    %Prentiss Properties Trust
    
    
    45,189
    (A)
    
    
    97.14
    %
    
    
    3,774
    
    
    
    100.00
    %Third parties
    
    
    1,329
    
    
    
    2.86
    %
    
    
    
    
    
    
    0.00
    %Total
    
    
    46,518
    
    
    
    100.00
    %
    
    
    3,774
    
    
    
    100.00
    %
  (A)
    Includes 63,741 common shares held by the company pursuant to a deferred
compensation plan. The shares are accounted for as common shares in treasury on the
consolidated balance sheet. As of March 31, 2005, we owned interests in a diversified portfolio of 135 primarily suburban
Class A office and suburban industrial properties as follows: Number of
    
    
    Net RentableBuildings
    
    
    Square Feet(1)(in thousands)Office properties
    
    
    108
    
    
    
    17,729Industrial properties
    
    
    27
    
    
    
    2,203Total
    
    
    135
    
    
    
    19,932
  (1)
    Includes 100% of the net rentable square feet of our consolidated
wholly-owned and joint venture properties and 100% of our unconsolidated joint venture
properties, which totaled 17.3 million, 989,000 and 1.6 million, respectively. Our pro
rata share of the net rentable square feet totals 18.5 million, which includes 504,000
and 669,000 from consolidated and unconsolidated joint venture properties,
respectively. As of March 31, 2005, our properties were 89% leased to approximately 960 tenants. In
addition to managing properties that we own, we manage approximately 9.5 million net rentable
square feet in office, industrial and other properties for third parties. We have determined that our reportable segments are those that are based on our method of
internal reporting, which disaggregates our business by geographic region. As of March 31, 2005,
our reportable segments include our five regions (1) Mid-Atlantic; (2) Midwest; (3) Southwest; (4)
Northern California; and (5) Southern California. At March 31, 2005, our properties were located in 10 markets, which were included in our
reportable segments as follows: Reportable Segment
    
    MarketMid-Atlantic
    
    Metropolitan Washington D.C.Midwest
    
    Chicago, Suburban DetroitSouthwest
    
    Dallas/Fort Worth, Austin, DenverNorthern California
    
    Oakland, Silicon ValleySouthern California
    
    San Diego, Los Angeles
 9




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PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) Real Estate Transactions On February 14, 2005, Prentiss Office Investors, L.P., which is owned 51% by our
operating partnership and its affiliates and 49% by Stichting Pensioenfonds ABP, acquired from an
unrelated third party, a two building office complex with approximately 197,000 net rentable square
feet. The properties are located in Herndon, Virginia and were acquired for gross proceeds of
$51.8 million. Each partner contributed their pro rata share of the purchase price to Prentiss
Office Investors, L.P. for the acquisition. Amounts contributed from the operating partnership
were funded with proceeds from our revolving credit facility. Other Transactions On January 13, 2005, Prentiss Office Investors, L.P. completed a five-year interest rate swap
agreement in a notional amount of $20.0 million. The interest rate swap effectively locks 30-day
LIBOR at 4.00% on $20.0 million of our variable rate borrowings. The interest rate swap is
effective February 1, 2005 and matures February 1, 2010. During the first quarter 2005, we formed Prentiss Properties Capital Trust I, a Delaware
statutory trust, established to issue $26,250,000 and $25,000,000 of trust preferred equity
securities to Taberna Preferred Funding I, Ltd. and Merrill Lynch International, respectively in a
private placement pursuant to an applicable exemption from registration. Prentiss Properties
Limited, Inc., a wholly-owned affiliate of our operating partnership acquired for $1.6 million a
residual interest (common securities), of Prentiss Properties Capital Trust I, representing 3% of
the overall equity of the trust. The preferred equity securities will mature on March 30, 2035,
but may be redeemed by Prentiss Properties Capital Trust I beginning on March 30, 2010. The
holders of both the preferred equity and common securities will receive quarterly distributions
from Prentiss Properties Capital Trust I, at a variable rate equal to LIBOR plus 1.25%.
Distributions will be cumulative and will accrue from the date of original issuance but may be
deferred for up to 20 consecutive quarterly periods. Prentiss Properties Capital Trust I used the proceeds from the issuance of the preferred and
common securities to acquire $52.8 million of junior subordinated notes from our operating
partnership pursuant to an indenture agreement. The notes will mature on March 30, 2035, but may be redeemed at our option, in whole or in
part, beginning on March 30, 2010 in accordance with the provisions of the indenture agreement. The
notes bear interest at a variable rate equal to LIBOR plus 1.25%. Interest is cumulative and will
accrue from the date of original issuance but may be deferred by us for up to 20 consecutive
quarterly periods. The trust is a variable interest entity under paragraph 5(b)(1) of FIN 46, because the equity
investors at risk hold no substantial decision-making rights. Prentiss Properties Limited, Inc.s
investment is financed directly by our operating partnership and therefore it is not considered at
risk. Because Prentiss Properties Limited, Inc. is not the primary beneficiary in the trust, the
accounts of the trust are not consolidated with and into Prentiss Properties Limited, Inc. and
therefore are not consolidated with and into our operating partnership. Prentiss Properties
Limited, Inc.s investment in the trust is presented on our consolidated balance sheet as an
investment in joint ventures and unconsolidated subsidiaries and is accounted for using the cost
method of accounting. The proceeds received by the operating partnership in exchange for the notes were used to
repay a portion of the outstanding borrowings under our revolving credit facility. The notes are
presented on our consolidated balance sheet in the line item mortgages and notes payable. On March 22, 2005, we completed a ten-year, $114.2 million loan collateralized by our Burnett
Plaza property, a 1,025,000 net rentable square foot office building in Fort Worth, Texas. The
interest rate is fixed at 5.02% and the monthly payments are interest only until April 1, 2008 at
which time it converts to amortizing, on a 30-year amortization schedule, until the maturity date
of April 1, 2015. The proceeds were used to repay a portion of the outstanding borrowings under
our revolving credit facility. 10




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PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) 2. Basis of Presentation The accompanying financial statements are unaudited; however, our financial statements
have been prepared in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the
disclosures required by accounting principles generally accepted in the United States of America for complete financial
statements. In our opinion, all adjustments (consisting solely of normal recurring matters)
necessary for a fair presentation of the financial statements for these interim periods have been
included. The December 31, 2004 comparative balance sheet information was derived from audited
financial statements. The results for the three month period ended March 31, 2005 are not
necessarily indicative of the results to be obtained for the full fiscal year. These financial
statements should be read in conjunction with our audited financial statements, and notes thereto,
included in our annual report on Form 10-K for the fiscal year ended December 31, 2004. 3. Share-Based Compensation In December 2002, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure.
The statement amends Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, expanding disclosure requirements and providing alternative methods of
transition for an entity that voluntarily changes to the fair value based method of accounting for
stock or share-based employee compensation. On January 1, 2003, we adopted the fair value based method of accounting as prescribed by
Statement of Financial Accounting Standards No. 123 as amended, for our share-based compensation
plans and we elected to apply this method on a prospective basis as prescribed in Statement of
Financial Accounting Standards No. 148. The prospective basis requires that we apply the fair value
based method of accounting to all awards granted, modified or settled after the beginning of the
fiscal year in which we adopt the accounting method. Historically, we applied the intrinsic value based method of accounting as prescribed by
APB Opinion 25 and related Interpretations in accounting for our share-based awards. Had we fully
adopted Statement of Financial Accounting Standards No. 123 for awards issued prior to January 1,
2003 it would have changed our method for recognizing the cost of our plans. Had the compensation
cost for our share-based compensation plans been determined consistent with Statement of Financial
Accounting Standards No. 123, our net income applicable to common shareholders and net income per
common share for the three months ended March 31, 2005 and 2004 would approximate the pro forma
amounts below: Three Months EndedMarch 31,(amounts in thousands, except per share data)
    
    2005
    
    
    2004Net income applicable to common shareholders as reported
    
    $
    10,590
    
    
    $
    13,286Add: Share-based employee compensation expense included therein
    
    
    967
    
    
    
    500Deduct: Total share-based employee compensation expense
determined under fair value method for all awards
    
    
    (968
    )
    
    
    (521
    )Pro Forma net income applicable to common shareholders
    
    $
    10,589
    
    
    $
    13,265Earnings per share:Basic  as reported
    
    $
    0.24
    
    
    $
    0.31Basic  pro forma
    
    $
    0.24
    
    
    $
    0.31Diluted  as reported
    
    $
    0.23
    
    
    $
    0.30Diluted  pro forma
    
    $
    0.23
    
    
    $
    0.30
 The effects of applying Statement of Financial Accounting Standards No. 123 in this pro forma
disclosure are not necessarily indicative of future amounts. 11




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##### Table of Contents



PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) 4. Earnings per Share We calculate earnings per share in accordance with Statement of Financial Accounting
Standards No. 128, Earnings per Share, which requires a dual presentation of basic and diluted
earnings per share on the face of the income statement. Additionally, the statement requires a
reconciliation of the numerator and denominator used in computing basic and diluted earnings per
share. The table below presents a reconciliation of the numerator and denominator used to calculate
basic and diluted earnings per share for the three month period ended March 31, 2005 and 2004: Three Months EndedMarch 31,(in thousands, except per share data)
    
    2005
    
    
    2004Reconciliation of the numerator used for basic earnings per shareIncome from continuing operations
    
    $
    12,688
    
    
    $
    13,769Preferred dividends
    
    
    (2,113
    )
    
    
    (3,713
    )Gain on sale of an interest in a real estate partnership
    
    
    
    
    
    
    1,316Income from continuing operations applicable to common shareholders
    
    $
    10,575
    
    
    $
    11,372Discontinued operations
    
    
    15
    
    
    
    1,914Net income applicable to common shareholders
    
    $
    10,590
    
    
    $
    13,286Reconciliation of the denominator used for basic earnings per shareWeighted average common shares outstanding
    
    
    44,884
    
    
    
    43,426Basic earnings per share
    
    $
    0.24
    
    
    $
    0.31Reconciliation of the numerator used for dilutive earnings per shareIncome from continuing operations
    
    $
    12,688
    
    
    $
    13,769Preferred dividends
    
    
    (2,113
    )
    
    
    (3,713
    )Gain on sale of an interest in a real estate partnership
    
    
    
    
    
    
    1,316Income from continuing operations applicable to common shareholders
    
    $
    10,575
    
    
    $
    11,372Discontinued operations
    
    
    15
    
    
    
    1,914Net income applicable to common shareholders
    
    $
    10,590
    
    
    $
    13,286Reconciliation of the denominator used for dilutive earnings per share(1)Weighted average common shares outstanding
    
    
    44,884
    
    
    
    43,426Dilutive options
    
    
    109
    
    
    
    192Dilutive share grants
    
    
    116
    
    
    
    52Weighted average common shares and common share equivalents outstanding (1)
    
    
    45,109
    
    
    
    43,670Diluted earnings per share
    
    $
    0.23
    
    
    $
    0.30
  (1)
    The following securities were not included in the diluted earnings per share
computation because they would have had an antidilutive effect. Three Months EndedMarch 31,Antidilutive Securities (in thousands)
    
    2005
    
    
    2004Series D Convertible
Preferred
Shares
    
    
    3,774
    
    
    
    3,774
 12




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##### Table of Contents



PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) 5. Deferred Charges and Other Assets, Net Deferred charges consisted of the following at March 31, 2005 and December 31,
2004: (in thousands)March 31,
    
    
    December 31,2005
    
    
    2004Deferred leasing costs and tenant improvements
    
    $
    325,455
    
    
    $
    311,320In-place lease values
    
    
    30,972
    
    
    
    27,910Above market lease values
    
    
    5,668
    
    
    
    5,666Deferred financing costs
    
    
    14,851
    
    
    
    14,568Prepaids and other assets
    
    
    11,757
    
    
    
    11,610388,703
    
    
    
    371,074Less: accumulated amortization
    
    
    (119,688
    )
    
    
    (110,791
    )$
    269,015
    
    
    $
    260,283
 We record the amortization related to deferred leasing costs and tenant improvements and
in-place lease values in the line item depreciation and amortization. We record above market
lease value amortization in the line item rental income. Amortization for deferred financing
cost is recorded in the line item amortization of deferred financing costs, and the amortization
for prepaid items is recorded in the line items property operating and maintenance and real
estate taxes. 6. Notes Receivable Our notes receivable balance of $1.5 million at March 31, 2005 is the result of a real estate
transaction that included a non-recourse promissory note totaling $4.4 million, collateralized by a
real estate property sold, maturing March 1, 2005, bearing interest at 7.95% per annum and
requiring interest only payments until maturity. On December 22, 2004, we received correspondence
from the borrower indicating an inability to fulfill its total obligation under the note. Due to
the fact that our note receivable is subordinate to a first mortgage totaling approximately $12.0
million, we initiated an evaluation of the underlying real estate. Our evaluation was to determine
whether the fair value of the property, less cost to sell, would be sufficient to satisfy both the
first mortgage and our note receivable. In our opinion, the fair value of the underlying real
estate would not be sufficient to satisfy both the first mortgage and our note receivable and thus,
in the preparation of our financial statements for the year ended December 31, 2004, we recognized
a $2.9 million write-down of the note. On April 4, 2005, the borrower sent notice notifying us
that they were attempting to restructure the first mortgage. The $1.5 million note receivable
balance at March 31, 2005 represents our estimate of the present value of the expected future cash
flows to be received under the note. 7. Accounts Receivable, Net Accounts receivable consisted of the following at March 31, 2005 and December 31, 2004: (in thousands)March 31,
    
    
    December 31,2005
    
    
    2004Rents and services
    
    $
    8,581
    
    
    $
    10,449Accruable rental income
    
    
    53,258
    
    
    
    50,721Other
    
    
    422
    
    
    
    80962,261
    
    
    
    61,979Less: allowance for doubtful accounts
    
    
    (6,351
    )
    
    
    (6,207
    )$
    55,910
    
    
    $
    55,772
 13




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##### Table of Contents



PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) 8. Investments in Unconsolidated Joint Ventures and Subsidiaries The following information summarizes the financial position at March 31, 2005 and
December 31, 2004 and the results of operations for the three month periods ended March 31, 2005
and 2004 for the investments in which we held a non-controlling interest during the period
presented: Summary of Financial Position:
    
    Total Assets
    
    
    Total Debt(4)
    
    
    Total Equity
    
    
    Companys InvestmentMarch 31,
    
    
    Dec. 31,
    
    
    March 31,
    
    
    Dec. 31,
    
    
    March 31,
    
    
    Dec. 31,
    
    
    March 31,
    
    
    Dec. 31,(in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Broadmoor Austin
Associates(1)
    
    $
    97,312
    
    
    $
    97,962
    
    
    $
    130,224
    
    
    $
    131,979
    
    
    $
    (34,473
    )
    
    $
    (34,814
    )
    
    $
    4,324
    
    
    $
    4,217Tysons International
Partners(2)
    
    
    89,360
    
    
    
    89,268
    
    
    
    58,903
    
    
    
    59,113
    
    
    
    28,962
    
    
    
    28,914
    
    
    
    8,738
    
    
    
    8,726Other Investments(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,586
    
    
    
    $
    14,648
    
    
    $
    12,943
 Summary of Operations for the Three Months Ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Companys Share ofMarch 31, 2005 and 2004
    
    Total Revenue
    
    
    Net Income
    
    
    Net Income/(Loss)(in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Broadmoor Austin Associates
    
    $
    5,646
    
    
    $
    5,017
    
    
    $
    1,373
    
    
    $
    1,220
    
    
    $
    686
    
    
    $
    610Tysons International Partners
    
    
    3,159
    
    
    
    2,943
    
    
    
    48
    
    
    
    (126
    )
    
    
    12
    
    
    
    (32
    )Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    698
    
    
    $
    578
  (1)
    We own a 50% non-controlling interest in Broadmoor Austin Associates, an entity,
which owns a seven-building, 1.1 million net rentable square foot office complex in Austin,
Texas.(2)
    At March 31, 2005, we owned a 25% non-controlling interest in Tysons International
Partners, an entity, which owns two office properties containing 452,000 net rentable square
feet in the Northern Virginia area. On May 2, 2005, we acquired the remaining 75% interest in
this joint venture.(3)
    Represents an interest in Prentiss Properties Capital Trust I that we account for
using the cost method of accounting.(4)
    The mortgage debt, all of which is non-recourse, is collateralized by the individual
real estate property or properties within each venture. 14




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##### Table of Contents



PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) 9. Mortgages and Notes Payable At March 31, 2005, we had mortgages and notes payable of $1.25 billion, excluding our
proportionate share of debt from our unconsolidated joint ventures. The following table sets forth our consolidated mortgages and notes payable as of March
31, 2005 and December 31, 2004: (in thousands)March 31,
    
    December 31,Description
    
    2005
    
    2004
    
    Amortization
    
    Interest Rate(1)
    
    MaturityRevolving credit facility
    
    $
    171,500
    
    
    $
    217,500
    
    
    None
    
    LIBOR+1.250%
    
    February 19, 2007PPREFI portfolio loan (2)
    
    
    180,100
    
    
    
    180,100
    
    
    None
    
    7.58%
    
    February 26, 2007High Bluffs construction loan
    
    
    13,116
    
    
    
    8,929
    
    
    None
    
    LIBOR+1.400%
    
    September 1, 2007Collateralized term loan  Union Bank of
Calif.(3)
    
    
    30,000
    
    
    
    30,000
    
    
    None
    
    LIBOR+1.150%
    
    September 30, 2007Unsecured term loan  Eurohypo I
    
    
    100,000
    
    
    
    100,000
    
    
    None
    
    LIBOR+1.250%
    
    May 22, 2008Unsecured term loan  Commerz
    
    
    75,000
    
    
    
    75,000
    
    
    None
    
    LIBOR+1.250%
    
    March 15, 2009Unsecured term loan  Eurohypo II
    
    
    13,690
    
    
    
    13,760
    
    
    30 yr
    
    7.46%
    
    July 15, 2009Prentiss Properties Capital Trust I Debenture
    
    
    52,836
    
    
    
    
    
    
    None
    
    LIBOR+1.250%
    
    March 30, 2035Collateralized term loan  Mass Mutual (4)
    
    
    85,000
    
    
    
    85,000
    
    
    None
    
    LIBOR+0.850%
    
    August 1, 2009Variable rate mortgage notes payable (5)
    
    
    30,700
    
    
    
    96,700
    
    
    None
    
    (6)
    
    (6)Fixed rate mortgage notes payable (7)
    
    
    497,141
    
    
    
    384,922
    
    
    (8)
    
    (8)
    
    (8)$
    1,249,083
    
    
    $
    1,191,911
  (1)
    30-day LIBOR was 2.87% at March 31, 2005.(2)
    The PPREFI portfolio loan is collateralized by 36 properties with an
aggregate net book value of real estate of $235.5 million.(3)
    The term loan is collateralized by two properties with an aggregate
net book value of real estate of $18.3 million.(4)
    The term loan is collateralized by 9 properties with an aggregate net
book value of real estate of $107.2 million.(5)
    The variable rate mortgage loans are collateralized by 3 buildings
with an aggregate net book value of $40.4 million.(6)
    Interest rates on our variable rate mortgages range from 30-day
LIBOR plus 110 basis points to 30-day LIBOR plus 130 basis points. Maturity dates range from
July 2009 through December 2009.(7)
    The fixed rate mortgage loans are collateralized by 23 buildings with
an aggregate net book value of $571.3 million.(8)
    The effective interest rates for our fixed rate mortgages range from
3.70% to 8.05% with a weighted average effective interest rate of 6.69% at March 31, 2005.
Maturity dates range from November 2005 through April 2015 with a weighted average maturity of
6.3 years from March 31, 2005. Our mortgages and notes payable at March 31, 2005 consisted of $677.2 million of fixed
rate, non-recourse, long-term mortgages, $13.7 million of fixed rate, recourse debt and $558.2
million of floating rate debt, $415.0 million of which was hedged at March 31, 2005 with variable
to fixed rate hedges. Future scheduled principal repayments of our outstanding mortgages and notes payable are
as follows: (in thousands)2005
    
    $
    50,2572006
    
    
    9,7042007
    
    
    406,7982008
    
    
    107,0942009
    
    
    251,764Thereafter
    
    
    423,466$
    1,249,083
 10. Interest Rate Hedges In the normal course of business, we are exposed to the effect of interest rate changes.
We limit our interest rate risk by following established risk management policies and procedures
including the use of derivatives. For interest rate exposures, derivatives are used to hedge
against rate movements on our related debt. 15




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##### Table of Contents



PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) To manage interest rate risk, we may employ options, forwards, interest rate swaps, caps
and floors or a combination thereof depending on the underlying exposure. We undertake a variety of
borrowings from credit facilities, to medium- and long-term financings. To hedge against increases
in interest cost, we use interest rate instruments, typically interest rate swaps, to convert a
portion of our variable-rate debt to fixed-rate debt. On the date we enter into a derivative contract, we designate the derivative as a hedge of (a)
a forecasted transaction or (b) the variability of cash flows that are to be received or paid in
connection with a recognized asset or liability (cash flow hedge). These agreements involve the
exchange of amounts based on a variable interest rate for amounts based on fixed interest rates
over the life of the agreement based upon a notional amount. The difference to be paid or received
as the interest rates change is recognized as an adjustment to interest expense. The related amount
payable to or receivable from counterparties is included in accounts payable and other liabilities.
Changes in the fair value of a derivative that is highly effective and that is designated and
qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in other
comprehensive income, until earnings are affected by the variability of cash flows of the hedged
transaction (e.g. until periodic settlements of a variable-rate asset or liability are recorded in
earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair
value of the derivative exceed the variability in the cash flows of the forecasted transaction) is
recorded in current-period earnings. Changes in the fair value of non-hedging instruments are
reported in current-period earnings. We formally document all relationships between hedging instruments and hedged items, as
well as our risk-management objective and strategy for undertaking various hedge transactions. This
process includes linking all derivatives that are designated as cash flow hedges to (1) specific
assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted
transactions. We also formally assess (both at the hedges inception and on an ongoing basis)
whether the derivatives that are used in hedging transactions have been highly effective in
offsetting changes in the cash flows of hedged items and whether those derivatives may be expected
to remain highly effective in future periods. When it is determined that a derivative is not (or
has ceased to be) highly effective as a hedge, we discontinue hedge accounting prospectively, as
discussed below. We discontinue hedge accounting prospectively when (1) we determine that the derivative
is no longer effective in offsetting changes in the cash flows of a hedged item (including hedged
items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold,
terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur;
(4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management
determines that designating the derivative as a hedging instrument is no longer appropriate. When we discontinue hedge accounting because it is no longer probable that the forecasted
transaction will occur in the originally expected period, the gain or loss on the derivative
remains in accumulated other comprehensive income and is reclassified into earnings when the
forecasted transaction affects earnings. However, if it is probable that a forecasted transaction
will not occur by the end of the originally specified time period or within an additional two-month
period of time thereafter, the gains and losses that were accumulated in other comprehensive income
will be recognized immediately in earnings. In all situations in which hedge accounting is
discontinued and the derivative remains outstanding, we will carry the derivative at its fair value
on the balance sheet, recognizing changes in the fair value in current-period earnings. To determine the fair value of derivative instruments, we use a variety of methods and
assumptions that are based on market conditions and risks existing at each balance sheet date. For
our derivatives, standard market conventions and techniques such as discounted cash flow analysis,
option pricing models, replacement cost, and termination cost are used to determine fair value. All
methods of assessing fair value result in a general approximation of value, and such value may
never actually be realized. Over time, the unrealized gains and losses held in accumulated other comprehensive income
will be reclassified to earnings. This reclassification is consistent with when the hedged items
are recognized in earnings. Within the next twelve months, we expect to reclassify to earnings
approximately $2.4 million and $926,000 of unrealized gains and unrealized losses, respectively. 16




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##### Table of Contents



PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) The following table summarizes the notional values and fair values of our derivative
financial instruments at March 31, 2005. The notional value provides an indication of the extent of
our involvement in these instruments as of the balance sheet date, but does not represent exposure
to credit, interest rate or market risks. Swap Rate ReceivedNotional
    
    Swap Rate Paid
    
    
    (Variable) atAmount
    
    (Fixed)
    
    
    March 31, 2005
    
    
    Swap Maturity
    
    
    Fair Value(in thousands)$25 million
    
    
    4.345
    %
    
    
    2.87
    %
    
    July 2005
    
    $
    (89
    )$15 million
    
    
    4.345
    %
    
    
    2.87
    %
    
    July 2005
    
    
    (53
    )$20 million
    
    
    5.985
    %
    
    
    2.87
    %
    
    March 2006
    
    
    (432
    )$30 million
    
    
    5.990
    %
    
    
    2.87
    %
    
    March 2006
    
    
    (649
    )$50 million
    
    
    2.270
    %
    
    
    2.87
    %
    
    August 2007
    
    
    2,087$25 million
    
    
    2.277
    %
    
    
    2.87
    %
    
    August 2007
    
    
    1,040$70 million(1)
    
    
    4.139
    %
    
    
    2.87
    %
    
    August 2008
    
    
    348$30 million
    
    
    3.857
    %
    
    
    2.87
    %
    
    September 2008
    
    
    456$30 million
    
    
    3.819
    %
    
    
    2.87
    %
    
    October 2008
    
    
    494$20 million
    
    
    3.819
    %
    
    
    2.87
    %
    
    October 2008
    
    
    329$50 million
    
    
    3.935
    %
    
    
    2.87
    %
    
    May 2009
    
    
    858$30 million
    
    
    3.443
    %
    
    
    2.87
    %
    
    October 2009
    
    
    1,225$20 million (1)
    
    
    4.000
    %
    
    
    2.87
    %
    
    February 2010
    
    
    406Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,020
  (1)
    The interest rate swap agreement was executed by Prentiss Office Investors,
L.P., a partnership which is 51% owned by our operating partnership. Cash payments made under our interest rate swap agreements exceeded cash receipts from our
interest rate swap agreements by $1.5 million and $2.6 million for the three months ended March 31,
2005 and 2004, respectively. 11. Accounts Payable and Other Liabilities Accounts payable and other liabilities consisted of the following at March 31, 2005 and
December 31, 2004: (in thousands)March 31,
    
    
    December 31,2005
    
    
    2004Accrued interest expense
    
    $
    5,861
    
    
    $
    5,685Accrued real estate taxes
    
    
    18,444
    
    
    
    28,178Advance rents and deposits
    
    
    19,865
    
    
    
    20,010Deferred compensation liability
    
    
    7,139
    
    
    
    6,516Below market lease values, net of amortization(1)
    
    
    8,039
    
    
    
    8,319Other liabilities
    
    
    29,711
    
    
    
    36,596$
    89,059
    
    
    $
    105,304
  (1)
    Accumulated amortization for below market lease values as of March 31, 2005
and 2004 was $2.4 million and $2.0 million, respectively. We record below market lease
value amortization in the line item rental income. 12. Distributions On March 31, 2005, we declared a cash distribution for the first quarter of 2005 in the
amount of $0.56 per share, payable on April 8, 2005 to common shareholders of record on March 31,
2005. Additionally, we determined that a distribution of $0.56 per common unit would be made to the
partners of the operating partnership and the holders of our Series D Convertible Preferred Shares.
The distributions totaled $28.2 million and were paid April 8, 2005. 17




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##### Table of Contents



PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) 13. Supplemental Disclosure of Non-Cash Activities During the three months ended March 31, 2005, we declared cash distributions totaling
$28.2 million payable to holders of common shares, operating partnership units and Series D
Convertible Preferred Shares. The distributions were paid April 8, 2005. Pursuant to our long-term incentive plan, during the three months ended March 31, 2005,
we issued 110,250 restricted common shares to various key employees. The shares, which had a market
value of approximately $3.8 million based upon the per share price on the date of grant, were
classified as unearned compensation and recorded in the shareholders equity section of the
consolidated balance sheet. The unearned compensation is amortized quarterly as compensation
expense over the three-year vesting period. During the three months ended March 31, 2005, 5,483 common shares were issued pursuant to
the conversion of 5,484 common units of our operating partnership. The common shares had a market
value of approximately $199,000 on the conversion date. During the three months ended March 31, 2005, common shares held in treasury decreased by
$318,000 primarily relating to 26,165 common shares issued from treasury and 8,954 common shares
placed in treasury in connection with our Key Employee Share Option Plan. We marked-to-market our investments in securities and our interest rate hedges. During
the three months ended March 31, 2005, we recorded unrealized gains of $7.0 million and unrealized
losses of $90,000 on our interest rate hedges and investments in securities, respectively. In connection with the acquisitions during the three months ended March 31, 2005, we recorded
and assumed liabilities of approximately $520,000. 14. Segment Information The tables below present information about segment assets, our investments in equity
method investees, expenditures for additions to long-lived assets and revenues and income from
continuing operations used by our chief operating decision maker as of and for the three month
period ended March 31, 2005 and 2004: For the Three Months Ended March 31, 2005(in thousands) CorporateNotMid-
    
    
    
    
    
    
    
    
    
    
    Northern
    
    
    Southern
    
    
    Total
    
    
    Allocable To
    
    
    ConsolidatedAtlantic
    
    
    Midwest
    
    
    Southwest
    
    
    California
    
    
    California
    
    
    Segments
    
    
    Segments
    
    
    TotalRevenues
    
    $
    26,570
    
    
    $
    16,740
    
    
    $
    32,085
    
    
    $
    12,240
    
    
    $
    9,927
    
    
    $
    97,562
    
    
    $
    527
    
    
    $
    98,089Income from continuing
operations
    
    $
    11,752
    
    
    $
    4,259
    
    
    $
    9,600
    
    
    $
    4,395
    
    
    $
    3,573
    
    
    $
    35,579
    
    
    $
    (20,891
    )
    
    $
    12,688Additions to long-lived assets:Development/redevelopment
    
    $
    3
    
    
    $
    208
    
    
    $
    13
    
    
    $
    246
    
    
    $
    5,595
    
    
    $
    6,065
    
    
    $
    
    
    
    $
    6,065Purchase of real estate
    
    
    51,818
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,818
    
    
    
    
    
    
    
    51,818Capital expenditures for
in-service properties
    
    
    8,524
    
    
    
    569
    
    
    
    4,346
    
    
    
    208
    
    
    
    1,398
    
    
    
    15,045
    
    
    
    
    
    
    
    15,045Total additions
    
    $
    60,345
    
    
    $
    777
    
    
    $
    4,359
    
    
    $
    454
    
    
    $
    6,993
    
    
    $
    72,928
    
    
    $
    
    
    
    $
    72,928Investment balance in equity
method investees
    
    $
    8,738
    
    
    $
    
    
    
    $
    4,324
    
    
    $
    
    
    
    $
    
    
    
    $
    13,062
    
    
    $
    
    
    
    $
    13,062Assets
    
    $
    661,286
    
    
    $
    435,479
    
    
    $
    699,460
    
    
    $
    280,328
    
    
    $
    281,022
    
    
    $
    2,357,575
    
    
    $
    33,235
    
    
    $
    2,390,810
 18




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##### Table of Contents



PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) For the Three Months Ended March 31, 2004
(in thousands) CorporateNotMid-
    
    
    
    
    
    
    
    
    
    
    Northern
    
    
    Southern
    
    
    Total
    
    
    Allocable To
    
    
    ConsolidatedAtlantic
    
    
    Midwest
    
    
    Southwest
    
    
    California
    
    
    California
    
    
    Segments
    
    
    Segments
    
    
    TotalRevenues
    
    $
    24,194
    
    
    $
    14,156
    
    
    $
    30,427
    
    
    $
    8,448
    
    
    $
    9,803
    
    
    $
    87,028
    
    
    $
    758
    
    
    $
    87,786Income from continuing
operations
    
    $
    10,281
    
    
    $
    3,475
    
    
    $
    11,949
    
    
    $
    3,904
    
    
    $
    3,058
    
    
    $
    32,667
    
    
    $
    (18,898
    )
    
    $
    13,769Additions to long-lived assets:Development/redevelopment
    
    $
    
    
    
    $
    1,255
    
    
    $
    162
    
    
    $
    
    
    
    $
    98
    
    
    $
    1,515
    
    
    $
    
    
    
    $
    1,515Capital expenditures for
in-service properties
    
    
    1,604
    
    
    
    3,228
    
    
    
    3,625
    
    
    
    1,295
    
    
    
    1,002
    
    
    
    10,754
    
    
    
    
    
    
    
    10,754Total additions
    
    $
    1,604
    
    
    $
    4,483
    
    
    $
    3,787
    
    
    $
    1,295
    
    
    $
    1,100
    
    
    $
    12,269
    
    
    $
    
    
    
    $
    12,269Investment balance in equity
method investees
    
    $
    9,194
    
    
    $
    
    
    
    $
    3,973
    
    
    $
    
    
    
    $
    
    
    
    $
    13,167
    
    
    $
    
    
    
    $
    13,167Assets
    
    $
    616,069
    
    
    $
    414,660
    
    
    $
    635,634
    
    
    $
    252,698
    
    
    $
    241,946
    
    
    $
    2,161,007
    
    
    $
    24,424
    
    
    $
    2,185,431
 19




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##### Table of Contents



PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited) 15. Recently Issued Accounting Pronouncements In December 2004, the Financial Accounting Standards Board Issued Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment, a revision to Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation. The Statement supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance. The Statement which focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions, establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entitys equity instruments or that may
be settled by the issuance of those equity instruments. The Statement requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award (with
limited exceptions). That cost will be recognized over the period during which an employee is
required to provide service in exchange for the awardthe requisite service period (usually the
vesting period). No compensation cost is recognized for equity instruments for which employees do
not render the requisite service. The Statement, which originally was to take effect the beginning of the first interim or
annual reporting period that begins after June 15, 2005 for public entities that do not file as
small business issuers, was amended on April 14, 2005. The Securities and Exchange Commission
adopted a new rule to amend the compliance dates, which now allows companies to implement the
statement at the beginning of their next fiscal year. The Statement will not have a material
impact on our financial statements. 16. Subsequent Events On May 2, 2005, our operating partnership completed a transaction in which we effectively
acquired for $103.2 million the remaining 75% interest in Tysons International Partners, a joint
venture that prior to the transaction was owned 25% by our operating partnership and 75% by an
unrelated third party. The joint venture, through its two wholly-owned subsidiaries
(subsidiaries) owned two office properties totaling approximately 452,000 net rentable square
feet in Tysons Corner Virginia. Pursuant to the purchase agreement, our operating partnership
acquired from Tysons International Partners 100% of the subsidiaries thereby giving us 100%
ownership of the two office properties. Tysons International Partners distributed the proceeds
from the sale and immediately thereafter redeemed the 75% partners interest in joint venture. As
a consequence of the redemption, Tysons International Partners terminated as a joint venture. On May 3, 2005, Prentiss Office Investors, L.P. completed a five-year $30.9 million loan,
collateralized by two office buildings located in Herndon, Virginia. We may borrow an additional
$1.9 million over the next 24 months if certain conditions are met. The interest rate on the loan
is 115 basis points over 30-day LIBOR and the monthly payments are interest only, with the
principal balance due at its maturity on May 3, 2010. Proceeds from the loan were used to fund a
pro rata capital distribution to the joint venture partners based on their ownership interest in
Prentiss Office Investors, L.P. Our operating partnership used proceeds from the capital
distribution to repay a portion of the outstanding borrowings under our revolving credit facility. 20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of financial condition and results of operations
should be read in conjunction with our consolidated financial statements and related notes thereto
presented in this Form 10-Q. Historical results set forth in our consolidated financial statements
should not be taken as an indication of our future operations. Overview We are a self-administered and self-managed Maryland REIT. We acquire, own, manage,
lease, develop and build primarily office properties throughout the United States. We are
self-administered in that we provide our own administrative services, such as accounting, tax and
legal, internally through our own employees. We are self-managed in that we internally provide all
the management and maintenance services that our properties require through employees, such as
property managers, leasing professionals and engineers. We operate principally through our
operating partnership, Prentiss Properties Acquisition Partners, L.P. and its subsidiaries, and two
management service companies, Prentiss Properties Resources, Inc. and its subsidiaries and Prentiss
Properties Management, L.P. As of March 31, 2005, we owned interests in a diversified portfolio of 135 primarily
suburban Class A office and suburban industrial properties as follows: Number of
    
    
    Net RentableBuildings
    
    
    Square Feet(1)(in thousands)Office properties
    
    
    108
    
    
    
    17,729Industrial properties
    
    
    27
    
    
    
    2,203Total
    
    
    135
    
    
    
    19,932
  (1)
    Includes 100% of the net rentable square feet of our consolidated
wholly-owned and joint venture properties and 100% of our unconsolidated joint venture
properties, which totaled 17.3 million, 989,000 and 1.6 million, respectively. Our pro
rata share of the net rentable square feet totals 18.5 million, which includes 504,000
and 669,000 from consolidated and unconsolidated joint venture properties,
respectively. As an owner of real estate, the majority of our income and cash flow is derived from
rental income received pursuant to tenant leases for space at our properties; and thus, our
earnings would be negatively impacted by a deterioration of our rental income. One or more factors
could result in a deterioration of rental income including (1) our failure to renew or execute new
leases as current leases expire, (2) our failure to renew or execute new leases with rental terms
at or above the terms of in-place leases, and (3) tenant defaults. Our failure to renew or execute new leases as current leases expire or to execute new
leases with rental terms at or above the terms of in-place leases is dependent on factors such as
(1) the local economic climate, which may be adversely impacted by business layoffs or downsizing,
industry slowdowns, changing demographics and other factors and (2) local real estate conditions,
such as oversupply of office and industrial space or competition within the market. On April 22, 2004, we acquired from 7-Eleven, Inc., an unrelated third party, the Cityplace
Center property, a 42-story, 1.3 million net rentable square foot class AA office building in
Dallas, Texas. Under the terms of the purchase, 7-Eleven, Inc. executed a 504,351 square-foot
lease at the property for a term of three years from the date of closing. 7-Eleven, Inc. has the
option to extend the term of its lease an additional seven years by notifying us no later than
October 21, 2005. The acquisition price of the building totaled approximately $124 million. In determining the
amount we were willing to pay for property, we projected 7-Elevens departure from the building at
the end of the initial 3-year term. The operating partnership is obligated to fund an additional
$14.5 million if 7-Eleven, Inc. exercises its extension option. Although 7-Eleven, Inc. announced to the public on April 20, 2005, that they do not intend to
renew their lease at the property, they have not provided us with formal notification and as a
result retain their rights under the purchase agreement to extend the lease in accordance with the
conditions included therein. Our industrys performance is generally predicated on a sustained pattern of job growth.
In 2004, while the overall United States economy began to demonstrate economic growth, there were
few indications that the economy was creating jobs at a pace sufficient to generate significant
increases in demand for our office space. We continue to operate in a period of weak fundamentals,
evidenced by relatively high vacancy and correspondingly lower rental rates. 21




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##### Table of Contents



As a result of the recent weak economic climate, the office real estate markets have been
materially impacted by higher vacancy rates. In 2003, vacancy rates appeared to peak in many of
our markets and some positive net absorption of space started to occur. During 2004, all of our
markets, with the exception of Downtown Chicago, experienced positive net absorption of space. In
addition, the overall vacancy rates were down as compared to 2003. Although there are some signs
of improvement in the economic climate, we do not expect any material improvement in the leasing
conditions for the remainder of 2005. In the face of challenging market conditions, we have
followed a disciplined approach to managing our operations. We are constantly reviewing our
portfolio and the markets in which we operate to identify potential asset acquisitions,
opportunities for development and where we believe significant value can be found, asset
dispositions. At the direction of our board of trustees we conducted an analysis of our business
strategy in our Midwest region during the first quarter of 2005. As a result of such analysis we
have decided to place all of our Chicago assets on the market to be sold. Holliday Fenoglio Fowler,
L.P. has been retained as broker and will be marketing the properties for sale. Our Chicago
portfolio consists of 16 office properties containing 2.2 million of owned square feet and 4
industrial properties containing 700,000 owned square feet. Additionally we have one office
property in Detroit, Michigan, a 100% owned property containing 242,000 square feet, which is also
being marketed for sale in this transaction. The occupancy in our portfolio of operating properties slightly increased in the first quarter
of 2005 to 89% at March 31, 2005 compared to 88% at December 31, 2004. Market rental rates have
declined in each of our markets from peak levels and there may be additional declines throughout
the remainder of 2005. Rental rates on our office space that were re-leased during the first
quarter 2005, 2004 and 2003 decreased an average of 3%, 8% and 9%, respectively, in comparison to
rates that were in effect under expiring leases. Our organization consists of a corporate office located in Dallas, Texas and five regional
offices each of which operates under the guidance of a member of our senior management team. The
following table presents first quarter 2005 regional revenues and the 10 markets in which our
properties are located, with the first market being the location of each regional office: Region
    
    Revenues
    
    
    Market(in thousands)Mid-Atlantic
    
    $
    26,570
    
    
    Metropolitan Washington D.C.Midwest
    
    
    16,740
    
    
    Chicago, Suburban DetroitSouthwest
    
    
    32,085
    
    
    Dallas/Fort Worth, Austin, DenverNorthern California
    
    
    12,240
    
    
    Oakland, Silicon ValleySouthern California
    
    
    9,927
    
    
    San Diego, Los AngelesTotal
    
    $
    97,562
 In addition to the $97.6 million of regional revenues, during the three months ended
March 31, 2005, we recognized $527,000 of revenue consisting of reimbursements from employees for
their share of health care related costs of $147,000, interest income of $91,000 representing the
portion not allocated to our regions and the balance of $289,000 relates primarily to income
derived from services performed for third parties not allocated to our regions. At March 31, 2005, we had 17.8 million square feet of in-place leases representing 89% of
the 19.9 million net rentable square feet of both our consolidated and unconsolidated properties.
Our leases range in term from 1 month to 20 years with an average term of 5 to 7 years. The
following table presents, by region, the expiration of our 17.8 million square feet of in-place
leases. Square Feet
    
    
    
    
    
    
    
    
    
    
    
    
    
    Northern
    
    Southern(in thousands)
    
    Mid-Atlantic
    
    Midwest
    
    Southwest
    
    California
    
    California
    
    Total2005
    
    
    237
    
    
    
    53
    
    
    
    298
    
    
    
    84
    
    
    
    518
    
    
    
    1,190
    
    
    
    6.7
    %2006
    
    
    674
    
    
    
    434
    
    
    
    812
    
    
    
    100
    
    
    
    295
    
    
    
    2,315
    
    
    
    13.0
    %2007
    
    
    663
    
    
    
    166
    
    
    
    1,054
    
    
    
    231
    
    
    
    599
    
    
    
    2,713
    
    
    
    15.2
    %2008
    
    
    309
    
    
    
    475
    
    
    
    461
    
    
    
    204
    
    
    
    278
    
    
    
    1,827
    
    
    
    10.3
    %2009
    
    
    576
    
    
    
    226
    
    
    
    859
    
    
    
    188
    
    
    
    403
    
    
    
    2,252
    
    
    
    12.6
    %Thereafter
    
    
    1,707
    
    
    
    1,426
    
    
    
    3,318
    
    
    
    742
    
    
    
    340
    
    
    
    7,533
    
    
    
    42.2
    %4,166
    
    
    
    2,880
    
    
    
    6,802
    
    
    
    1,549
    
    
    
    2,433
    
    
    
    17,830
    
    
    
    100.0
    %
 If one or more tenants fail to pay their rent due to bankruptcy, weakened financial condition
or otherwise, our income, cash flow and ability to make distributions would be negatively impacted.
At any time, a tenant may seek the protection of the bankruptcy laws, which could result in delays
in rental payments or in the rejection and termination of such tenant leases. 22




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First Quarter 2005 Transactions Real Estate Transactions On February 14, 2005, Prentiss Office Investors, L.P., which is owned 51% by our operating
partnership and its affiliates and 49% by Stichting Pensioenfonds ABP, acquired from an unrelated
third party, a two building office complex with approximately 197,000 net rentable square feet.
The properties are located in Herndon, Virginia and were acquired for gross proceeds of $51.8
million. Each partner contributed their pro rata share of the purchase price to Prentiss Office
Investors, L.P. for the acquisition. Amounts contributed from the operating partnership were
funded with proceeds from our revolving credit facility. Other Transactions On January 13, 2005, Prentiss Office Investors, L.P. completed a five-year interest rate swap
agreement in a notional amount of $20.0 million. The interest rate swap effectively locks 30-day
LIBOR at 4.00% on $20.0 million of our variable rate borrowings. The interest rate swap matures
February 1, 2010. During the first quarter 2005, we formed Prentiss Properties Capital Trust I, a Delaware
statutory trust, established to issue $26,250,000 and $25,000,000 of trust preferred equity
securities to Taberna Preferred Funding I, Ltd. and Merrill Lynch International, respectively in a
private placement pursuant to an applicable exemption from registration. Prentiss Properties
Limited, Inc., a wholly-owned affiliate of our operating partnership acquired for $1.6 million a
residual interest (common securities), of Prentiss Properties Capital Trust I, representing 3% of
the overall equity of the trust. The preferred equity securities will mature on March 30, 2035,
but may be redeemed by Prentiss Properties Capital Trust I beginning on March 30, 2010. The
holders of both the preferred equity and common securities will receive quarterly distributions
from Prentiss Properties Capital Trust I, at a variable rate equal to LIBOR plus 1.25%.
Distributions will be cumulative and will accrue from the date of original issuance but may be
deferred for up to 20 consecutive quarterly periods. Prentiss Properties Capital Trust I used the proceeds from the issuance of the preferred and
common securities to acquire $52.8 million of junior subordinated notes from our operating
partnership pursuant to an indenture agreement. The notes will mature on March 30, 2035, but may be redeemed at our option, in whole or in
part, beginning on March 30, 2010 in accordance with the provisions of the indenture agreement. The
notes bear interest at a variable rate equal to LIBOR plus 1.25%. Interest is cumulative and will
accrue from the date of original issuance but may be deferred by us for up to 20 consecutive
quarterly periods. The trust is a variable interest entity under paragraph 5(b)(1) of FIN 46, because the equity
investors at risk hold no substantial decision-making rights. Prentiss Properties Limited, Inc.s
investment is financed directly by our operating partnership and therefore it is not considered at
risk. Because Prentiss Properties Limited, Inc. lacks a significant variable interest in the
trust, the accounts of the trust are not consolidated with and into Prentiss Properties Limited,
Inc. and therefore are not consolidated with and into our operating partnership. Prentiss
Properties Limited, Inc.s investment in the trust is presented on our consolidated balance sheet
as an investment in joint ventures and unconsolidated subsidiaries and is accounted for using the
cost method of accounting. The proceeds received by the operating partnership in exchange for the notes were used to
repay a portion of the outstanding borrowings under our revolving credit facility. The notes are
presented on our consolidated balance sheet in the line item mortgages and notes payable. On March 22, 2005, we completed a ten-year, $114.2 million loan collateralized by our Burnett
Plaza property, a 1,025,000 net rentable square foot office building in Fort Worth, Texas. The
interest rate is fixed at 5.02% and the monthly payments are interest only until April 1, 2008 at
which time it converts to amortizing, on a 30-year amortization schedule, until the maturity date
of April 1, 2015. The proceeds were used to repay a portion of the outstanding borrowings under
our revolving credit facility. Critical Accounting Policies and Estimates Our discussion and analysis of financial condition and results of operations is based
upon our consolidated financial statements. Our consolidated financial statements include the
accounts of Prentiss Properties Trust, our operating partnership and our other consolidated
subsidiaries. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses for the reporting period. Actual results could differ from our estimates. 23




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The significant accounting policies used in the preparation of our consolidated financial
statements are fully described in Note (2) to our audited consolidated financial statements for the
year ended December 31, 2004, included in our Form 10-K filed on March 15, 2005. However, some of
our significant accounting estimates are considered critical accounting estimates because the
estimate requires our management to make assumptions about matters that are highly uncertain at the
time the estimate is made and different estimates that reasonably could have been used in the
current period, or changes in the estimates that are reasonably likely to occur from period to
period, would have a material impact on our financial condition, changes in financial condition or
results of operations. We consider our critical accounting policies and estimates to be those used
in the determination of the reported amounts and disclosure related to the following:  (1)
    Impairment of long-lived assets and the long-lived assets to be disposed of;(2)
    Allowance for doubtful accounts;(3)
    Depreciable lives applied to real estate assets and improvements to real estate
assets;(4)
    Initial recognition, measurement and allocation of the cost of real estate acquired;
and(5)
    Fair value of derivative instruments. Impairment of long-lived assets and long-lived assets to be disposed of Real estate, leasehold improvements and land holdings are classified as long-lived assets
held for sale or long-lived assets to be held and used. In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
record assets held for sale at the lower of the carrying amount or fair value, less cost to sell.
With respect to assets classified as held and used, we periodically review these assets to
determine whether our carrying amount will be recovered. All of our long-lived assets were
classified as held and used at March 31, 2005. Our operating real estate, which comprises the
majority of our long-lived assets, had a carrying amount of $1.9 billion at March 31, 2005. A
long-lived asset is considered impaired if its carrying amount exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the asset. Upon impairment,
we would recognize an impairment loss to reduce the carrying value of the long-lived asset to our
estimate of its fair value. Our estimate of fair value and cash flows to be generated from our
properties requires us to make assumptions related to future occupancy of our properties, future
rental rates, tenant concessions, operating expenditures, property taxes, capital improvements, the
ability of our tenants to perform pursuant to their lease obligations, the holding period of our
properties and the proceeds to be generated from the eventual sale of our properties. If one or
more of our assumptions proves incorrect or if our assumptions change, the recognition of an
impairment loss on one or more properties may be necessary in the future. The recognition of an
impairment loss would negatively impact earnings. We did not recognize any impairment losses
during the three months ended March 31, 2005. Allowance for doubtful accounts Accounts receivable are reduced by an allowance for amounts that we estimate to be
uncollectible. Our receivable balance is comprised primarily of accrued rental rate increases to be
received over the life of in-place leases as well as rents and operating cost recoveries due from
tenants. We regularly evaluate the adequacy of our allowance for doubtful accounts considering such
factors as credit quality of our tenants, delinquency of payment, historical trends and current
economic conditions. At March 31, 2005, we had total receivables of $62.3 million and an allowance
for doubtful accounts of $6.4 million, resulting in a net receivable balance of $55.9 million. Of
the $62.3 million in total receivables, $53.3 million represents accrued rental rate increases to
be received over the life of in-place leases. It is our policy to reserve all outstanding
receivables that are 90-days past due along with a portion of the remaining receivable balance that
we feel is uncollectible based on our evaluation of the outstanding receivable balance. In
addition, we increase our allowance for doubtful accounts for accrued rental rate increases, if we
determine such future rent is uncollectible. Actual results may differ from these estimates under
different assumptions or conditions. If our assumptions, regarding the collectibility of accounts
receivable, prove incorrect, we may experience write-offs in excess of our allowance for doubtful
accounts which would negatively impact earnings. The table below presents the net
increase/(decrease) to our allowance for doubtful accounts during the periods, amounts written-off
as uncollectible during the periods and our allowance for doubtful accounts at March 31, 2005 and
2004. Three MonthsEnded March 31,(in thousands)
    
    2005
    
    
    2004Increase/(decrease) in allowance for doubtful accounts
    
    $
    145
    
    
    $
    (1,028
    )Amounts written off during the period
    
    $
    (383
    )
    
    $
    (1,915
    )Allowance for doubtful accounts at period end
    
    $
    6,351
    
    
    $
    8,958
 24




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##### Table of Contents



Depreciable lives applied to real estate assets and improvements to real estate assets Depreciation on buildings and improvements is provided under the straight-line method
over an estimated useful life of 30 to 40 years for office buildings and 25 to 30 years for
industrial buildings. Significant betterments made to our real estate assets are capitalized and
depreciated over the estimated useful life of the betterment. If our estimate of useful lives
proves to be materially incorrect, the depreciation and amortization expense that we currently
recognize would also prove to be materially incorrect. A change in our estimate of useful lives
would therefore result in either an increase or decrease in depreciation and amortization expense
and thus, a decrease or increase in earnings. The table below presents real estate related
depreciation and amortization expense, including real estate depreciation and amortization expense
included in income from continuing operations as well as discontinued operations, for the three
months ended March 31, 2005 and 2004: Three MonthsEnded March 31,(in thousands)
    
    2005
    
    
    2004Real estate depreciation and amortization from continuing operations
    
    $
    24,407
    
    
    $
    21,155Real estate depreciation and amortization from discontinued operations
    
    $
    
    
    
    $
    1,827
 Initial recognition, measurement and allocation of the cost of real estate acquired We allocate the purchase price of properties acquired to tangible assets consisting of
land and building and improvements, and identified intangible assets and liabilities generally
consisting of (i) above- and below-market leases, (ii) in-place leases and (iii) tenant
relationships. We allocate the purchase price to the assets acquired and liabilities assumed based
on their fair values in accordance with Statement of Financial Accounting Standards No. 141,
Business Combinations. These fair values are derived as follows: Amounts allocated to land are derived from (1) comparable sales of raw land, (2) floor
area ratio (FAR) specifics of the land as compared to other developed properties (average land cost
per FAR) and (3) our other local market knowledge. Amounts allocated to buildings and improvements are calculated and recorded as if the building
was vacant upon purchase. We use estimated cash flow projections and apply discount and
capitalization rates based on market knowledge. Depreciation is computed using the straight-line
method over the estimated life of 30 to 40 years for office buildings and 25 to 30 years for
industrial buildings. We record above-market and below-market in-place lease values for acquired properties based on
the present value (using a market interest rate which reflects the risks associated with the leases
acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place
leases and (2) 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 for
above-market leases and the initial term plus the term of the fixed rate renewal option, if any for
below-market leases. We perform this analysis on a lease (tenant) by lease (tenant) basis. The
capitalized above-market lease values are amortized as a reduction to rental income over the
remaining non-cancelable terms of the respective leases. The capitalized below-market lease values
are amortized as an increase to rental income over the initial term plus the term of the fixed rate
renewal option, if any, of the respective leases. Other intangible assets, in-place leases and tenant relationships, are calculated based
on an evaluation of specific characteristics of each tenants lease. Our estimates of fair value
for other intangibles includes an estimate of carrying costs during the expected lease-up periods
for the respective spaces considering current market conditions and the costs to execute similar
leases. In estimating the carrying costs that would have otherwise been incurred had the leases not
been in place, we include such items as real estate taxes, insurance and other operating expenses
as well as lost rental revenue during the expected lease-up period based on current market
conditions. Costs to execute similar leases include leasing commissions, legal and other related
costs. The value of in-place leases is amortized to expense over the remaining non-cancelable term
of the respective leases. Should a tenant terminate its lease, the unamortized portion of the
in-place lease value would be charged to expense in current period earnings. Based on our estimates of the fair value of the components of each real estate property
acquired between January 1, 2005 and March 31, 2005, we allocated the purchase price as follows: Three Months EndedMarch 31, 2005(in thousands)Land
    
    $
    8,458Buildings and improvements
    
    $
    36,110Tenant improvements and leasing commissions
    
    $
    3,520Above/(below) market lease value
    
    $
    (140
    )In-place lease value at market
    
    $
    3,870
 25




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##### Table of Contents



Fair value of derivative instruments In accordance with Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended and interpreted, beginning January 1,
2001, we record all derivatives on the balance sheet at fair value. The accounting for changes in
the fair value of derivatives depends on the intended use of the derivative and the resulting
designation. Derivatives used to hedge the exposure to changes in the fair value of an asset,
liability, or firm commitment attributable to a particular risk, such as interest rate risk, are
considered fair value hedges. Derivatives used to hedge the exposure to variability of expected
future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For derivatives designated as fair value hedges, changes in the fair value of the
derivative and the hedged item related to the hedged risk are recognized in earnings. For
derivatives designated as cash flow hedges, the effective portion of changes in the fair value of
the derivative is initially reported in other comprehensive income and subsequently reclassified to
earnings when the hedged transaction affects earnings, and the ineffective portion of changes in
the fair value of the derivative is recognized currently in earnings. We assess the effectiveness
of each hedging relationship by comparing the changes in fair value or cash flows of the derivative
hedging instrument with the changes in fair value or cash flows of the designated hedged item or
transaction. For derivatives not designated as hedges, changes in fair value are recognized in
earnings. Our objective in using derivatives is to add stability to interest expense and to manage
our exposure to interest rate movements. To accomplish this objective, we use interest rate swaps
as part of our cash flow hedging strategy. Interest rate swaps designated as cash flow hedges
involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of
the agreements without the exchange of the underlying principal amount. During the three months
ended March 31, 2005, such derivatives were used to hedge the variable cash flows associated with a
portion of our variable-rate debt. As of March 31, 2005, we did not have any derivatives designated as fair value hedges.
Additionally, we do not use derivatives for trading or speculative purposes, and currently, we do
not have any derivatives that are not designated as hedges. To determine the fair value of our derivative instruments, we use a variety of methods
and assumptions that are based on market conditions and risks existing at each balance sheet date.
For the majority of financial instruments including most derivatives, standard market conventions
and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and
termination cost are used to determine fair value. All methods of assessing fair value result in a
general approximation of value, and such value may never actually be realized. Future cash inflows
or outflows from our derivative instruments depend upon future borrowing rates. If assumptions
about future borrowing rates prove to be materially incorrect, the recorded value of these
agreements could also prove to be materially incorrect. Because we use the derivative instruments
to hedge our exposure to variable interest rates, thus effectively fixing a portion of our variable
interest rates, changes in future borrowing rates could result in our interest expense being either
higher or lower than might otherwise have been incurred on our variable-rate borrowings had the
rates not been fixed. The table below presents the amount by which cash payments made under our
interest rate swap agreements exceeded cash receipts from our agreements during the three month
period ended March 31, 2005 and 2004. The table also presents the estimated fair value of our
in-place swap agreements as of March 31, 2005 and 2004. Three MonthsEnded March 31,(in thousands)
    
    2005
    
    
    2004Net cash paid under our interest rate swap agreements
    
    $
    1,486
    
    
    $
    2,579Fair value of interest rate swaps at period end
    
    $
    6,020
    
    
    $
    (10,001
    )
 26




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##### Table of Contents



Results of Operations Comparison of the three months ended March 31, 2005 to the three months ended March 31, 2004. The table below presents our consolidated statements of income for the three months ended
March 31, 2005 and 2004: Three Months EndedConsolidated Statements of Income
    
    March 31,(in thousands)
    
    2005
    
    
    2004Revenues:Rental income
    
    $
    95,039
    
    
    $
    84,298Service business and other income
    
    
    3,050
    
    
    
    3,48898,089
    
    
    
    87,786Operating expenses:Property operating and maintenance
    
    
    26,045
    
    
    
    21,377Real estate taxes
    
    
    10,859
    
    
    
    9,336General and administrative and personnel costs
    
    
    2,883
    
    
    
    2,585Expenses of service business
    
    
    2,655
    
    
    
    1,649Depreciation and amortization
    
    
    24,559
    
    
    
    21,28467,001
    
    
    
    56,231Other expenses:Interest expense
    
    
    17,875
    
    
    
    16,199Amortization of deferred financing costs
    
    
    718
    
    
    
    56518,593
    
    
    
    16,764Income from continuing operations before equity in income of
unconsolidated joint ventures and subsidiaries and minority interests
    
    
    12,495
    
    
    
    14,791Equity in income of unconsolidated joint ventures and subsidiaries
    
    
    698
    
    
    
    578Minority interests
    
    
    (505
    )
    
    
    (1,600
    )Income from continuing operations
    
    
    12,688
    
    
    
    13,769Discontinued operations:Income from discontinued operations
    
    
    
    
    
    
    1,978Gain from disposition of discontinued operations
    
    
    15
    
    
    
    Minority interests related to discontinued operations
    
    
    
    
    
    
    (64
    )15
    
    
    
    1,914Income before gain on sale of an interest in a real estate partnership
    
    
    12,703
    
    
    
    15,683Gain on sale of an interest in a real estate partnership
    
    
    
    
    
    
    1,316Net income
    
    $
    12,703
    
    
    $
    16,999Preferred dividends
    
    
    (2,113
    )
    
    
    (3,713
    )Net income applicable to common shareholders
    
    $
    10,590
    
    
    $
    13,286
 Included below is a discussion of the significant events or transactions that have impacted
our results of operations when comparing the three months ended March 31, 2005 to the three months
ended March 31, 2004. Acquisition of Real Estate.Acquisitions are a key component of our external
growth strategy. We selectively pursue acquisitions in our core markets when long-term yields make
acquisitions attractive. Between January 1, 2004 and March 31, 2005, we acquired ten office
properties containing in the aggregate approximately 2.5 million net rentable square feet as
presented below: Net Rentable
    
    AcquisitionMonth of
    
    Number of
    
    Square Feet(1)
    
    PriceAcquired Properties
    
    Segment
    
    Market
    
    Acquisition
    
    Buildings
    
    (in thousands)
    
    (in millions)Cityplace Center
    
    Southwest
    
    Dallas/Ft. Worth
    
    April 2004
    
    1
    
    
    1,296
    
    
    $
    123.3The Bluffs(2)
    
    Southern Calif.
    
    San Diego
    
    May 2004
    
    1
    
    
    69
    
    
    
    17.75500 Great America Parkway
    
    Northern Calif.
    
    Silicon Valley
    
    May 2004
    
    3
    
    
    306
    
    
    
    34.8Lakeside Point I & II(2)
    
    Midwest
    
    Chicago
    
    Oct. 2004
    
    2
    
    
    198
    
    
    
    32.62101 Webster
    
    Northern Calif.
    
    Oakland
    
    Oct. 2004
    
    1
    
    
    459
    
    
    
    65.7Presidents Plaza (2)
    
    Mid-Atlantic
    
    Metro Wash., DC
    
    Feb. 2005
    
    2
    
    
    197
    
    
    
    51.810
    
    
    2,525
    
    
    $
    325.9
 27




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##### Table of Contents



(1)
    Net rentable square feet defines the area of a property for which a tenant is
required to pay rent, which includes the actual rentable area plus a portion of the common
areas of the property allocated to a tenant.(2)
    Acquisitions were acquired by Prentiss Office Investors, L.P. The net rentable
square feet and acquisition price is presented at 100%. Each partner contributed their pro
rata share of the purchase price of each property to Prentiss Office Investors, L.P. prior
to acquisition. Real Estate Dispositions.During the period January 1, 2004 through March 31, 2005, we
disposed of eight office properties containing approximately 1.2 million net rentable square feet
and four industrial properties containing approximately 91,000 net rentable square feet. Six
properties, containing 566,000 net rentable square feet, representing our only properties in the
Sacramento area, a market within our Northern California region, were sold on May 20, 2004. Four
industrial properties, containing 91,000 net rentable square feet in San Diego, were sold on July
23, 2004. One office property, containing 466,000 net rentable square feet, representing our only
property in the Houston area, a market within our Southwest region, was sold on August 23, 2004.
One office property, containing 136,000 net rentable square feet in the Chicago area, was sold on
November 19, 2004. Other Significant Real Estate Transactions.On January 22, 2004, Prentiss Office Investors, L.P.
was established to acquire office properties in our core markets of Washington D.C./Northern
Virginia, Chicago, Dallas/Ft. Worth, Northern California and San Diego/Orange County. The
partnership was initially wholly owned by the operating partnership and its affiliates and was
seeded by the transfer of several properties the company acquired in 2003. Pursuant to a joint venture agreement, effective February 1, 2004, Stichting Pensioenfonds
ABP, a Netherlands based pension fund and unrelated third party, acquired a 49% limited partnership
interest in Prentiss Office Investors, L.P. for proceeds totaling $68.9 million. As a result of
the transaction, we recorded a gain on sale of $1.3 million. The joint venture is consolidated
with and into the accounts of the operating partnership. Proceeds from the transaction were used
to repay a portion of the outstanding borrowings under our revolving credit facility. The following is a discussion of the material changes in our consolidated statements of income
and a discussion of the impact that the significant events or transactions, as described above, had
on one or more line items of our consolidated statements of income when comparing the three months
ended March 31, 2005 to the three months ended March 31, 2004. Rental Income.Rental income increased $10.7 million, or 12.7%. The real estate acquisitions
resulted in increases of $11.9 million. Our other properties experienced a decrease of $1.2
million primarily due to a decrease in termination fee income of $710,000 and a decrease in rental
income relating primarily to decreased occupancy and rental rate declines for newly executed
leases. Termination fees for the three months ended March 31, 2005 were $2.7 million compared to
$3.4 million for the three months ended March 31, 2004. Service Business and Other Income.Service business and other income decreased by $438,000, or
12.6%, primarily due to a decrease in interest income resulting from the repayment of a note
receivable on February 4, 2004 and the reduction of consulting fee income due to the completion of
consulting contracts early in 2004. Property Operating and Maintenance.Property operating and maintenance cost increased by $4.7
million, or 21.8%. The real estate acquisitions resulted in increases of $4.1 million. Property
operating and maintenance expenses related to our other properties increased by $536,000. This
increase was due to increased utility and other operating costs. Real Estate Taxes.Real estate taxes increased $1.5 million, or 16.3%. The real estate
acquisitions resulted in increases of $1.5 million. Real estate taxes related to our other
properties increased $54,000. General and Administrative and Personnel Costs.General and administrative and personnel cost
increased by $298,000, or 11.5%. The increase in general and administrative and personnel costs was
mainly due to compensation related expenses, including bonus compensation and our long-term
incentive plans, offset by a decrease in amounts due participants under our deferred compensation
plans. Expense of Service Business.Expenses of service business increased $1.0 million, or 61%,
primarily due to an increase in compensation related expenses. Depreciation and Amortization.Depreciation and amortization increased $3.3 million, or 15.4%. The
real estate acquisitions coming on-line resulted in increases of $4.1 million. Other properties
decreased by $842,000 which is attributable to increased amortization in the three months ended
March 31, 2004 compared to March 31, 2005, which was the result of the acceleration of depreciation
and amortization of certain tenant related improvements and deferred leasing charges due to early
lease terminations. Interest Expense.Interest expense increased by $1.7 million, or 10.3%, primarily as a result of an
increase in weighted average borrowings outstanding for the three months ended March 31, 2005
compared with the three months ended March 31, 2004. The increase was partially offset by a
decrease in the weighted average interest rate paid on outstanding borrowings from 6.55% for the 28




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##### Table of Contents



three months ended March 31, 2004 to 5.95% for the three months ended March 31, 2005, and an
increase of $334,000 in capitalized interest resulting from an increase in development activity. Minority Interests.Minority interests decreased by $1.1 million, or 68.4%, primarily
due to a decrease in the proportionate share of net income attributable to the Series B Cumulative
Redeemable Perpetual Preferred unitholders as a result of the repurchase of these units on February
24, 2004. Discontinued Operations.Discontinued operations decreased by $1.9 million, or 99.2% due to
the disposition of properties recorded as discontinued operations during the three months ended
March 31, 2004. The properties included are the properties discussed in the real estate
dispositions section above. No properties were sold during the three months ended March 31, 2005. Gain on sale of a Partnership Interest.Gain on sale of a partnership interest decreased by $1.3
million. During the three months ended March 31, 2004, we recognized a gain due to selling an
interest in a real estate partnership. No properties were sold during the three months ended March
31, 2005. Liquidity and Capital Resources Cash and cash equivalents were $10.8 million and $8.6 million at March 31, 2005 and
December 31, 2004, respectively. The increase in cash and cash equivalents is a result of net cash
provided by operating and financing activities exceeding net cash used in investing activities for
the three months ended March 31, 2005. Cash flows provided by operating activities totaled $22.9 million for the three months
ended March 31, 2005 compared to $22.3 million for the three months ended March 31, 2004. The
change in cash flows from operating activities is attributable to (1) the factors discussed in our
analysis of results of operations for the three months ended March 31, 2005 compared to March 31,
2004 and (2) the timing of receipt of revenues and payment of expenses which is evidenced by cash
outflows of $16.4 million for the three months ended March 31, 2005 compared to $20.3 million for
the three months ended March 31, 2004 related to the changes in assets and liabilities. Net cash used in investing activities totaled $75.1 million for the three months ended
March 31, 2005 compared to $65.9 million in net cash generated from investing activities for the
three months ended March 31, 2004. The increase in cash used in investing activities of $141.0
million is due primarily to decreases of $69.3 million of cash generated from the sale of a 49%
interest in Prentiss Office Investors, L.P. and $9.5 million in cash generated from the repayments
of certain notes receivable, and increases of $51.4 million in cash used to acquire real estate
assets, $4.6 million in cash used in development and redevelopment of real estate, $4.3 million in
cash used for capital expenditures related to in-service properties, and $1.6 million in cash used
to fund an investment in an unconsolidated subsidiary. Net cash generated from financing activities totaled $54.4 million for the three months
ended March 31, 2005 compared to net cash used of $82.9 million for the three months ended March
31, 2004. The increase in net cash generated from financing activities of $137.3 million is due
primarily to a decrease of $105.0 million in cash used for the redemption of preferred units, a
decrease in distributions of $1.8 million, a decrease of $891,000 for the repurchase of operating
partnership units, an increase in net borrowings of $51.3 million, an increase in capital
contributions from minority interest partners in consolidated joint ventures of $24.8 million,
offset by a decrease in cash generated from the sale of common shares of $46.5 million. Net cash flow from operations represents the primary source of liquidity to fund
distributions, debt service, capital improvements and non-revenue enhancing tenant improvements. We
expect that our revolving credit facility will provide for funding of working capital and revenue
enhancing tenant improvements, unanticipated cash needs as well as acquisitions and development
costs. Our principal short-term liquidity needs are to fund normal recurring expenses, debt service
requirements and the minimum distributions required to maintain our REIT qualification under the
Internal Revenue Code. Our net cash flow from operations is generally derived from rental revenues and operating
expense reimbursements from tenants and, to a limited extent, from fees generated by our office and
industrial real estate management service business. Our net cash flow from operations is therefore
dependent upon the occupancy level of our properties, the collectibility of rent from our tenants,
the level of operating and other expenses, and other factors. Material changes in these factors may
adversely affect our net cash flow from operations. Such changes, in turn, would adversely affect
our ability to fund distributions, debt service, capital improvements and non-revenue enhancing
tenant improvements. In addition, a material adverse change in our net cash flow from operations
may affect the financial performance covenants under our revolving credit facility. If we fail to
meet any of our financial performance covenants, our revolving credit facility may become
unavailable to us, or the interest charged on the revolving credit facility may increase. Either of
these circumstances could adversely affect our ability to fund working capital and revenue
enhancing tenant improvements, unanticipated cash needs, acquisitions and development costs. 29




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##### Table of Contents



In order to qualify as a REIT for federal income tax purposes, we must distribute at least 90%
of our taxable income, excluding capital gains. We expect to make distributions to our
shareholders primarily based on our cash flow from operations distributed by our operating
partnership. We anticipate that our short-term liquidity needs will be fully funded from cash
flows provided by operating activities and, when necessary to fund shortfalls resulting from the
timing of collections of accounts receivable in the ordinary course of business, from our revolving
credit facility. In the event that our cash flow needs exceed cash flows provided by operating
activities, we may be forced to incur additional debt or sell real estate properties to fund such
cash flow needs. We expect to meet our long-term liquidity requirements for the funding of
activities, such as development, real estate acquisitions, scheduled debt maturities, major
renovations, expansions and other revenue enhancing capital improvements through long-term secured
and unsecured indebtedness and through the issuance of additional debt and equity securities. We
also intend to use proceeds from our revolving credit facility to fund real estate acquisitions,
development, redevelopment, expansions and capital improvements on an interim basis. Debt Financing As of March 31, 2005, we had consolidated outstanding total indebtedness, of
approximately $1.25 billion. The amount of indebtedness that we may incur, and the policies with
respect thereto, are not limited by our declaration of trust and bylaws, and are solely within the
discretion of our board of trustees, limited only by various financial covenants in our credit
agreements. Approximately $690.9 million, or 55.3% of our outstanding consolidated debt was subject to
fixed rates with a weighted average interest rate of 6.98% at March 31, 2005. Of the remaining
$558.2 million, or 44.7%, representing our variable rate debt, $415.0 million was effectively
locked at March 31, 2005 at an interest rate (before the spread over LIBOR) of 3.88% through our
interest rate swap agreements. At March 31, 2005, we had variable rate debt of $143.2 million,
which was not fixed through interest rate swap agreements. 30




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##### Table of Contents



The following table sets forth our mortgages and notes payable, including our unconsolidated
joint venture debt as of March 31, 2005: CurrentBalanceBorrower/Description
    
    (000s)
    
    Amortization
    
    Interest Rate
    
    MaturityConsolidated EntitiesBurnett Plaza AssociatesBurnett Plaza
    
    $
    114,200
    
    
    30 yr
    
    5.02%
    
    April 1, 2015PL Properties Associates, L.P.Park West C2
    
    
    32,784
    
    
    30 yr
    
    6.63%
    
    November 10, 2010Prentiss Properties Acquisition Partners, L.P.2101 Webster
    
    
    46,284
    
    
    1 yr
    
    3.70%
    
    November 1, 2005Highland Court
    
    
    4,319
    
    
    25 yr
    
    7.27%
    
    April 1, 2006Plaza I & II
    
    
    6,811
    
    
    18 yr
    
    7.75%
    
    January 1, 2007Revolving Credit Facility
    
    
    171,500
    
    
    None
    
    LIBOR + 1.250%
    
    February 19, 2007Collateralized Term Loan (1)
    
    
    30,000
    
    
    None
    
    LIBOR + 1.150%
    
    September 30, 2007Unsecured Term Loan  EuroHypo I
    
    
    100,000
    
    
    None
    
    LIBOR + 1.250%
    
    May 22, 2008Unsecured Term Loan  Commerz
    
    
    75,000
    
    
    None
    
    LIBOR + 1.250%
    
    March 15, 20097101 Wisconsin Avenue
    
    
    20,018
    
    
    30 yr
    
    7.25%
    
    April 1, 2009Unsecured Term Loan  EuroHypo II
    
    
    13,690
    
    
    30 yr
    
    7.46%
    
    July 15, 2009The Ordway
    
    
    47,283
    
    
    30 yr
    
    7.95%
    
    August 1, 2010World Savings Center
    
    
    28,115
    
    
    30 yr
    
    7.91%
    
    November 1, 2010One OHare Centre
    
    
    38,950
    
    
    30 yr
    
    6.80%
    
    January 10, 20113130 Fairview Park Drive
    
    
    21,841
    
    
    30 yr
    
    7.00%
    
    April 1, 2011Research Office Center I-III
    
    
    43,277
    
    
    28 yr
    
    7.64%
    
    October 1, 2011Bannockburn Centre
    
    
    25,760
    
    
    30 yr
    
    8.05%
    
    June 1, 2012Del Mar Loan
    
    
    43,242
    
    
    30 yr
    
    7.41%
    
    June 1, 2013Prentiss Properties Capital Trust I Debenture
    
    
    52,836
    
    
    None
    
    LIBOR + 1.250%
    
    March 30, 2035Prentiss Properties Corporetum, L.P.Corporetum Office Campus
    
    
    24,257
    
    
    30 yr
    
    7.02%
    
    February 1, 2009Prentiss Properties Real Estate Fund I, L.P.PPREFI Portfolio Loan (2)
    
    
    180,100
    
    
    None
    
    7.58%
    
    February 26, 2007Prentiss Office Investors, L.P.(3)The Bluffs
    
    
    10,700
    
    
    None
    
    LIBOR + 1.300%
    
    July 23, 2009Collateralized Term Loan  Mass Mutual (4)
    
    
    85,000
    
    
    None
    
    LIBOR + 0.850%
    
    August 1, 2009Lakeside Point I & II
    
    
    20,000
    
    
    None
    
    LIBOR + 1.100%
    
    December 1, 2009Prentiss/Collins Del Mar Heights, LLC(5)High Bluff Ridge Construction Loan
    
    
    13,116
    
    
    None
    
    LIBOR + 1.400%
    
    September 1, 2007Total Consolidated Outstanding Debt
    
    $
    1,249,083Unconsolidated EntitiesBroadmoor Austin AssociatesBroadmoor Austin (6)
    
    $
    130,224
    
    
    16 yr
    
    7.04%
    
    April 10, 2011Tysons International Partners(7)1676 International Drive
    
    
    43,376
    
    
    28 yr
    
    7.63%
    
    August 30, 20108260 Greensboro
    
    
    15,528
    
    
    28 yr
    
    7.78%
    
    August 30, 2010Total Unconsolidated Outstanding Debt
    
    $
    189,128Total Debt
    
    $
    1,438,211
 31




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##### Table of Contents



(1)
    The Term Loan is collateralized by the following two properties: 8521 Leesburg
Pike and the IBM Call Center.(2)
    The PPREFI Portfolio Loan is collateralized by the following 36 properties: the Los
Angeles industrial properties (18 properties), the Chicago industrial properties (four
properties), the Cottonwood Office Center (three properties), Park West E1 and E2 (two
properties), One Northwestern Plaza, 3141 Fairview Park Drive, 13825 Sunrise Valley Drive,
OHare Plaza II, 1717 Deerfield Road, 2411 Dulles Corner Road, 4401 Fair Lakes Court, the
WestPoint Office Building and the PacifiCare Building.(3)
    Our operating partnership owns a 51% interest in Prentiss Office Investors, L.P.
The accounts of Prentiss Office Investors, L.P. are consolidated with and into the accounts of
the operating partnership. The amounts shown reflect 100% of the debt balance.(4)
    The Term Loan is collateralized by the following 9 properties: Camino West Corporate
Park, Carlsbad Airport Plaza, La Place Court (2 properties), Pacific Ridge Corporate Centre (2
properties), Pacific View Plaza, Corporate Lakes III, and 2291 Wood Oak Drive.(5)
    Our operating partnership and its affiliates own a 70% interest in Prentiss/Collins
Del Mar Heights, LLC. The accounts of Prentiss/Collins Del Mar Heights, LLC are consolidated
with and into the accounts of the operating partnership. The amount shown reflects 100% of
the debt balance.(6)
    We own a 50% non-controlling interest in the entity that owns the Broadmoor Austin
properties, which interest is accounted for using the equity method of accounting. The amount
shown reflects 100% of the non-recourse mortgage indebtedness collateralized by the
properties.(7)
    As of March 31, 2005, we owned a 25% non-controlling interest in the entity that
owns the 1676 International Drive and 8260 Greensboro properties, which interest is accounted
for using the equity method of accounting. The amount shown reflects 100% of the non-recourse
mortgage indebtedness collateralized by the properties. The majority of our fixed rate secured debt contains prepayment provisions based on the
greater of a yield maintenance penalty or 1.0% of the outstanding loan amount. The yield
maintenance penalty essentially compensates the lender for the difference between the fixed rate
under the loan and the yield that the lender would receive if the lender reinvested the prepaid
loan balance in U.S. Treasury Securities with a similar maturity as the loan. Under our loan agreements, we are required to satisfy various affirmative and negative
covenants, including limitations on total indebtedness, total collateralized indebtedness and cash
distributions, as well as obligations to maintain certain minimum tangible net worth and certain
minimum interest coverage ratios. Our credit agreements limit total indebtedness to 55% of total
assets and require a debt service coverage ratio of at least 2 to 1. Our credit agreements provide
for a 30-day period to cure a default caused by our failure to punctually and properly perform,
observe and comply with the covenants contained therein. The agreements also provide for an
additional 75-day period if such failure is not capable of being cured within 30-days and we are
diligently pursuing the cure thereof. We were in compliance with these covenants at March 31, 2005. Hedging Activities To manage interest rate risk, we may employ options, forwards, interest rate swaps, caps
and floors or a combination thereof depending on the underlying interest rate exposure. We
undertake a variety of borrowings: from revolving credit facilities, to medium- and long-term
financings. To manage overall interest rate exposure, we use interest rate instruments, typically
interest rate swaps, to convert a portion of our variable rate debt to fixed rate debt. Interest
rate differentials that arise under these swap contracts are recognized as interest expense over
the life of the contracts. We may employ forwards or purchased options to hedge qualifying anticipated transactions.
Gains and losses are deferred and recognized in net income in the same period that the anticipated
transaction occurs, expires or is otherwise terminated. The following table summarizes the notional
amounts and fair values of our derivative financial instruments at March 31, 2005. The notional
amount provides an indication of the extent of our involvement in these instruments as of the
balance sheet date, but does not represent exposure to credit, interest rate or market risks. 32




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##### Table of Contents



Swap Rate ReceivedNotional
    
    Swap Rate Paid

    
    (Variable) atAmount
    
    (Fixed)
    
    March 31, 2005
    
    Swap Maturity
    
    
    Fair Value(in thousands)$25 million
    
    
    4.345
    %
    
    
    2.87
    %
    
    July 2005
    
    $
    (89
    )$15 million
    
    
    4.345
    %
    
    
    2.87
    %
    
    July 2005
    
    
    (53
    )$20 million
    
    
    5.985
    %
    
    
    2.87
    %
    
    March 2006
    
    
    (432
    )$30 million
    
    
    5.990
    %
    
    
    2.87
    %
    
    March 2006
    
    
    (649
    )$50 million
    
    
    2.270
    %
    
    
    2.87
    %
    
    August 2007
    
    
    2,087$25 million
    
    
    2.277
    %
    
    
    2.87
    %
    
    August 2007
    
    
    1,040$70 million(1)
    
    
    4.139
    %
    
    
    2.87
    %
    
    August 2008
    
    
    348$30 million
    
    
    3.857
    %
    
    
    2.87
    %
    
    September 2008
    
    
    456$30 million
    
    
    3.819
    %
    
    
    2.87
    %
    
    October 2008
    
    
    494$20 million
    
    
    3.819
    %
    
    
    2.87
    %
    
    October 2008
    
    
    329$50 million
    
    
    3.935
    %
    
    
    2.87
    %
    
    May 2009
    
    
    858$30 million
    
    
    3.443
    %
    
    
    2.87
    %
    
    October 2009
    
    
    1,225$20 million (1)
    
    
    4.000
    %
    
    
    2.87
    %
    
    February 2010
    
    
    406Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,020
  (1)
    The interest rate swap agreement was executed by Prentiss Office Investors,
L.P., a partnership which is 51% owned by our operating partnership. The interest rate swaps effectively lock in our cost of funds at the swap rate paid (before
the spread over LIBOR) on variable rate borrowings for principal amounts equal to the respective
notional amounts above. Capital Improvements Our properties require periodic investments of capital for tenant-related capital
expenditures and for general capital improvements. The majority of capital required relates to
tenant-related capital expenditures and is dependent upon our leasing activity. Our leasing
activity is a function of the percentage of our in-place leases expiring in current and future
periods accompanied by our exposure to tenant defaults and our ability to increase the average
occupancy of our portfolio. For the three months ended March 31, 2005 capital expenditures related
to our in-service properties totaled $15.0 million. We classify capital expenditures for in-service
properties as non-incremental and incremental revenue-enhancing capital expenditures representing
our estimate of recurring versus non-recurring capital requirements, respectively. Our
non-incremental and incremental capital expenditures for the three months ended March 31, 2005
totaled approximately $10.5 million and $4.5 million, respectively. Equity Financing During the three months ended March 31, 2005, we issued 126,026 common shares of beneficial
interest, par value $.01. The table below details the common shares issued during the period,
common shares in treasury activity during the period and the common shares outstanding at March
31, 2005: Common shares outstanding at December 31, 2004
    
    
    44,981,888Common shares issued:1996 Share Incentive Plan
    
    
    110,250Share options exercised
    
    
    8,500Conversion of operating partnership units
    
    
    5,483Dividend Reinvestment Plan
    
    
    978Trustees Share Incentive Plan
    
    
    815126,026Common shares placed in treasury/issued from treasury:Common shares placed in treasury in connection with our Key
Employee Share Option Plan
    
    
    (8,954
    )Common shares issued from treasury in connection with our
Key Employee Share Option Plan
    
    
    26,165Common shares outstanding at March 31, 2005
    
    
    45,125,125
 33




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##### Table of Contents



Off-Balance Sheet Arrangements At March 31, 2005 we had the following real estate related off-balance sheet
arrangements: (1) a non-controlling 50% interest in Broadmoor Austin Associates; and (2) a 25%
non-controlling interest in Tysons International Partners. Our investments in unconsolidated joint ventures represents less than .7% of our total
assets as of March 31, 2005 and 2.2% of our cash flow from operations for the three months ended
March 31, 2005. Our investments, however, do provide us with several benefits including increased
market share, important customer relations and a possible capital source to fund future real estate
projects. Broadmoor Austin Associates and Tysons International Partners represent real estate joint
ventures which own and operate office properties in Austin, Texas and Tysons Corner, Virginia,
respectively. We act as managing venture partner and have the authority to conduct the business
affairs of each joint venture, subject to approval and veto rights of the other venture partner. We
account for our interest in these joint ventures using the equity method of accounting. In
addition to our real estate related investments, at March 31, 2005, we held $1,586,000 in common
securities issued by Prentiss Properties Capital Trust I which we account for using the cost method
of accounting. The following information summarizes the financial position at March 31, 2005 for the
investments in which we held an unconsolidated interest at March 31, 2005: Summary of Financial Position:
    
    
    
    
    
    
    
    
    
    
    
    
    
    Companys(in thousands)
    
    Total Assets
    
    
    Total Debt(1)
    
    
    Total Equity
    
    
    InvestmentBroadmoor Austin Associates
    
    $
    97,312
    
    
    $
    130,224
    
    
    $
    (34,473
    )
    
    $
    4,324Tysons International Partners
    
    
    89,360
    
    
    
    58,903
    
    
    
    28,962
    
    
    
    8,738Other Investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,586$
    14,648
  (1)
    The mortgage debt, all of which is non-recourse, is collateralized by the
individual real estate property or properties within each venture, the net book value of which
totaled $163.1 million at March 31, 2005. Our proportionate share of the non-recourse mortgage
debt totaled $79.8 million at March 31, 2005. The following information summarizes the results of operations for the unconsolidated
investments which impacted our results of operations for the three months ended March 31, 2005. CompanysSummary of Operations for the Three Months Ended March 31, 2005:
    
    Total
    
    
    Net
    
    
    Share of Net(in thousands)
    
    Revenue
    
    
    Income
    
    
    IncomeBroadmoor Austin Associates
    
    $
    5,646
    
    
    $
    1,373
    
    
    $
    686Tysons International Partners
    
    
    3,156
    
    
    
    48
    
    
    
    12$
    698
 In connection with the disposition of a real estate property in May 2001, we entered into
a financial guarantee with a maximum future potential payment of $1.4 million. The financial
guarantee, provided to the third party purchaser, guaranteed payment of an amount not to exceed the
$1.4 million potential maximum if certain tenants, as defined in the purchase and sale agreement,
fail to extend their leases beyond the maturities of their current in-place leases. An amount
totaling $1.0 million representing consideration to be paid in the event a certain tenant failed to
extend its in-place lease was considered probable at the date of disposition and therefore, accrued
during the year ended December 31, 2001. During the year ended December 31, 2003, we paid an
amount totaling $1.0 million to the third party purchaser as a result of the failure of the tenant
to extend its in-place lease. See further discussion and table presented under the Contractual
Obligations and Commercial Commitments section below. Contractual Obligations and Commercial Commitments We have contractual obligations including mortgages and notes payable and ground lease
obligations. The table below presents, as of March 31, 2005, our future scheduled principal
repayments of our consolidated mortgages and notes payable and ground lease obligations of our
consolidated properties: 34




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##### Table of Contents



Contractual Obligations
    
    Payments Due by Period(in thousands)
    
    Total
    
    
    2005
    
    
    2006/2007
    
    
    2008/2009
    
    
    ThereafterMortgages and notes payable
    
    $
    1,249,083
    
    
    $
    50,257
    
    
    $
    416,502
    
    
    $
    358,858
    
    
    $
    423,466Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ground leases
    
    
    35,247
    
    
    
    315
    
    
    
    841
    
    
    
    848
    
    
    
    33,243Unconditional purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    1,284,330
    
    
    $
    50,572
    
    
    $
    417,343
    
    
    $
    359,706
    
    
    $
    456,709
 Our mortgages and notes payable consists of $690.9 million and $558.2 million of fixed
rate and variable rate debt obligations, respectively. At March 31, 2005, our fixed rate debt
obligations were subject to a weighted average interest rate of 6.98% and our variable rate debt
obligations were subject to interest rates that range from 30-day LIBOR plus 85 basis points to
30-day LIBOR plus 140 basis points. $415.0 million of our variable rate debt was effectively
locked at an interest rate before the spread over LIBOR of 3.88% through our interest rate swap
agreements. Interest payable under our mortgages and notes payable outstanding at March 31, 2005
are as follows: Payments Due by Period(in thousands)
    
    Total
    
    
    2005
    
    
    2006/2007
    
    
    2008/2009
    
    
    ThereafterInterest payable(1)
    
    $
    354,590
    
    
    $
    52,220
    
    
    $
    116,623
    
    
    $
    73,428
    
    
    $
    112,319
  (1)
    Interest payable under our variable rate loans is calculated using our
variable interest rate at March 31, 2005 which is equal to 30-day LIBOR of 2.87%
plus our spread over LIBOR which ranges between 85 basis points and 140 basis
points. As a condition of the purchase and sale and as security for our guarantee, as discussed
under the Off-Balance Sheet Arrangements section above, we provided to the title company at
closing, irrevocable letters of credit, totaling $1.4 million, drawn on a financial institution and
identifying the purchaser as beneficiary. One letter of credit totaling $1.0 million expired in
2003. The balance of the remaining letter of credit totaled $252,000 at March 31, 2005 and expires
as follows: Commitment Expiration by PeriodOther Commercial Commitments
    
    Total Amounts(in thousands)
    
    Committed
    
    
    2005
    
    
    2006/2007
    
    
    2008/2009
    
    
    ThereafterStandby letters of credit
    
    $
    189
    
    
    $
    63
    
    
    $
    126
    
    
    $
    
    
    
    $
    
 In June 2004, we began construction on High Bluff Ridge at Del Mar, an office development
project with approximately 158,000 net rentable square feet located in Del Mar, California. The
anticipated investment for this project totals $48.1 million of which $29.0 million has been
incurred as of March 31, 2005. We have signed leases for approximately 100,000 square feet, or
63.0% of the project. We expect that the building will be complete and available for occupancy
during the third quarter of 2005. Funds from Operations Funds from operations is a widely recognized measure of REIT operating performance. Funds
from operations is a non-GAAP financial measure and, as defined by the National Association of Real
Estate Investment Trusts, means net income, computed in accordance with GAAP excluding
extraordinary items, as defined by GAAP, and gains (or losses) from sales of property, plus
depreciation and amortization on real estate assets, and after adjustments for unconsolidated
partnerships, joint ventures and subsidiaries. We believe that funds from operations is helpful to
investors and our management as a measure of our operating performance because it excludes
depreciation and amortization, gains and losses from property dispositions, and extraordinary
items, and, as a result, when compared period over period, reflects the impact on operations from
trends in occupancy rates, rental rates, operating costs, development activities, general and
administrative expenses, and interest costs, providing perspective not immediately apparent from
net income. In addition, our management believes that funds from operations provides useful
information to the investment community about our financial performance when compared to other
REITs since funds from operations is generally recognized as the industry standard for reporting
the operating performance of REITs. However, our funds from operations may not be comparable to
funds from operations reported by other REITs that do not define funds from operations exactly as
we do. We believe that in order to facilitate a clear understanding of our operating results, funds
from operations should be examined in conjunction with net income as presented in our consolidated
financial statements and notes thereto included in this Form 10-Q. We believe that net income is
the most directly comparable GAAP financial measure to funds from operations. Funds from operations
does not represent cash generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income as an 35




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##### Table of Contents



indication of our performance or to cash flows as a measure of liquidity or ability to make
distributions. Funds from operations does not reflect either depreciation and amortization costs or
the level of capital expenditures and leasing costs necessary to maintain the operating performance
of our properties, which are significant economic costs that could materially impact our results of
operations. The following is a reconciliation of net income to funds from operations: Three Months EndedFunds from operations
    
    March 31,(in thousands)
    
    2005
    
    
    2004Net income
    
    $
    12,703
    
    
    $
    16,999Adjustments:Real estate depreciation and amortization(1)
    
    
    24,407
    
    
    
    22,982Minority interests(2)
    
    
    312
    
    
    
    496Minority interests share of depreciation and amortization
    
    
    (1,431
    )
    
    
    (821
    )Pro rata share of joint venture depreciation and
amortization
    
    
    747
    
    
    
    736Gain on sale of real estate and interests in real estate
partnerships
    
    
    (15
    )
    
    
    (1,316
    )Funds from operations
    
    $
    36,723
    
    
    $
    39,076
  (1)
    Includes real estate depreciation and amortization included in continuing
operations and real estate depreciation and amortization included in discontinued operations.(2)
    Represents the minority interests applicable to the common unit holders of the
operating partnership. Funds from operations decreased by $2.4 million for the three months ended March 31, 2005 from
the three months ended March 31, 2004, as a result of factors discussed in the analysis of
operating results. Recently Issued Accounting Pronouncements In December 2004, the Financial Accounting Standards Board Issued Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment, a revision to Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation. The Statement supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation
guidance. The Statement which focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions, establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entitys equity instruments or that may
be settled by the issuance of those equity instruments. The Statement requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award (with
limited exceptions). That cost will be recognized over the period during which an employee is
required to provide service in exchange for the awardthe requisite service period (usually the
vesting period). No compensation cost is recognized for equity instruments for which employees do
not render the requisite service. The Statement, which originally was to take effect the beginning of the first interim or
annual reporting period that begins after June 15, 2005 for public entities that do not file as
small business issuers, was amended on April 14, 2005. The Securities and Exchange Commission
adopted a new rule to amend the compliance dates, which now allows companies to implement the
statement at the beginning of their next fiscal year. The Statement will not have a material
impact on our financial statements. 36




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##### Table of Contents



Application of and Changes in Law Regarding Ownership of Subsidiaries and Qualifications as a REIT For federal income tax purposes, we were organized and have operated in conformity with the
requirements for qualification as a REIT under the Internal Revenue Code of 1986, as amended,
beginning with our taxable year ending December 31, 1996 and through the date hereof. The Internal
Revenue Code sets forth various income, asset, ownership, and distribution tests with respect to
which a REIT must comply in order to maintain its status as a REIT. Although the Internal Revenue
Service, based upon its interpretation of the relevant judicial and administrative authorities, may
take the position that a REIT has failed a particular qualification test, the facts and
circumstances upon which such a determination would be based are controlled by the REIT. To the
extent that a REIT does not comply with a particular test, the decision to take an action that
would prevent compliance or to not take an action that would have allowed compliance will be
directly within the control of the REIT. We are unaware of any instance in which a REIT has lost
its qualification as a REIT due to the failure of one of the statutory qualification tests under
the Internal Revenue Code. We believe that our current and proposed method of operation will
enable us to continue to qualify as a REIT. The REIT Modernization Act effective for 2001 and later years, contains several provisions
affecting REITs. The REIT Modernization Act allows a subsidiary to perform services for tenants
without disqualifying the rents received (as under prior law). These subsidiaries, called Taxable
REIT Subsidiaries, are subject to taxation and are limited in the amount of debt and rental
payments between the REIT and the Taxable REIT Subsidiaries. The fair market value of all Taxable
REIT Subsidiaries securities cannot exceed 20% of the REITs fair market value. Existing
subsidiaries could be grandfathered in a one-time tax-free conversion. They are not subject to
these limitations, unless engaging in a new line of business or increasing assets. If either of
these events occurs, new restrictions on debt and rental payments will apply to these entities as
well. The REIT Modernization Act also reduced the REIT taxable income distribution requirement
from 95% to 90%. American Jobs Creation Acteffect on REIT qualifications On October 22, 2004, President Bush signed into law the American Jobs Creation Act of 2004 (The
Act), which includes amended REIT qualification provisions. Under the Act, a REIT avoids disqualification for certain asset test violations if the
disqualifying assets meet a de minimis threshold (the lesser of 1% of total REIT asset value at
quarter end, or $10 million). The REIT may correct the problem by disposing of the asset within
six months after the quarter discovered or by increasing other assets to meet the test
requirements. If a disqualifying asset exceeds the de minimis threshold described above, the REIT will be deemed
to satisfy its asset requirements if (1) REIT files a schedule with a description of each asset
that caused the failure, in accordance with regulations; (2) the failure was due to reasonable
cause and not willful neglect; (3) REIT disposes of the assets within six months after the
discovery quarter, and (4) REIT pays a monetary penalty equal to the greater of $50,000 or a tax
computed by multiplying the highest corporate tax rate by the net income generated by the scheduled
assets for the period beginning on the first date that the failure occurs and ending on the date
when the REIT no longer fails to satisfy the asset test. The Act also amends the 95% and 75% income test rules so that the REIT is generally not
disqualified if the tests are failed. Upon a failure due to reasonable cause and not due to
willful neglect, the REIT may file a schedule for the tax year, detailing each item of gross income
(per IRS Regulations). For REIT test violations other than income or asset tests, the Act adds a provision that allows a
REIT to retain its REIT qualification so long as the violations are due to reasonable cause and not
willful neglect, and the REIT pays a penalty of $50,000 per each failure. Inflation Most of the leases on our properties require tenants to pay increases in operating expenses,
including common area charges and real estate taxes, thereby reducing the impact on us of the
adverse effects of inflation. Leases also vary in term from one month to 20 years, further
reducing the impact on us of the adverse effects of inflation. 37




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk Our primary market risk is exposure to changes in interest rates as a result of our
revolving credit facility and long-term debt. At March 31, 2005, we had total consolidated
indebtedness outstanding of approximately $1.25 billion. Our interest rate risk objective is to
limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall
borrowing costs. To achieve this objective, we manage our exposure to fluctuations in market
interest rates for our borrowings through the use of fixed rate debt instruments to the extent that
reasonably favorable rates are obtainable with such arrangements. In addition, we may enter into
derivative financial instruments such as options, forwards, interest rate swaps, caps and floors to
mitigate our interest rate risk on a related financial instrument or to effectively lock the
interest rate on a portion of our variable rate debt. We do not enter into derivative or interest
rate transactions for speculative purposes. Approximately 55.3% of our outstanding consolidated
debt was subject to fixed rates with a weighted average interest rate of 6.98% at March 31, 2005.
Of the remaining $558.2 million, or 44.7%, representing our variable rate debt, $415.0 million was
effectively locked at March 31, 2005 at an interest rate (before the spread over LIBOR) of 3.88%
through our interest rate swap agreements. We regularly review interest rate exposure on our
outstanding borrowings in an effort to minimize the risk of interest rate fluctuations. The following table provides information about our financial instruments that are
sensitive to changes in interest rates, including interest rate swaps and debt obligations. For
debt obligations outstanding at March 31, 2005, the table presents principal cash flows and related
weighted average interest rates for consolidated debt outstanding during the periods. For interest
rate swaps, the table presents notional amounts and weighted average interest rates for in-place
swaps during the period. Notional amounts are used to calculate the contractual payments to be
exchanged under the contract. Weighted average variable rates are based on 30-day LIBOR as of
March 31, 2005. The fair value of our fixed rate debt indicates the estimated principal amount of
debt having similar debt service requirements, which could have been borrowed by us at March 31,
2005. The rate assumed in the fair value calculation of fixed rate debt is between 4.60% and
5.76%, representing our estimated borrowing rate for fixed rate debt instruments similar in term to
those outstanding at March 31, 2005 (using U.S. Treasury Securities at March 31, 2005 plus a spread
between 100 and 150 basis points). The fair value of our variable to fixed interest rate swaps
indicates the estimated amount that we would receive had they been terminated at March 31, 2005.
Exclusive of our interest rate swaps, if 30-day LIBOR increased 100 basis points, total interest
expense would increase $5.6 million. (dollars in thousands)
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    Total
    
    
    Fair ValueLiabilitiesLong-Term Debt:Fixed Rate
    
    $
    50,257
    
    
    $
    9,704
    
    
    $
    192,182
    
    
    $
    7,094
    
    
    $
    61,064
    
    
    $
    370,630
    
    
    $
    690,931
    
    
    $
    732,744Average Interest Rate
    
    
    6.98
    %
    
    
    7.08
    %
    
    
    6.87
    %
    
    
    6.81
    %
    
    
    6.77
    %
    
    
    6.10
    %
    
    
    
    
    
    
    Variable Rate
    
    $
    
    
    
    $
    
    
    
    $
    214,616
    
    
    $
    100,000
    
    
    $
    190,700
    
    
    $
    52,836
    
    
    $
    558,152
    
    
    $
    558,152Average Interest Rate
    
    
    4.11
    %
    
    
    4.11
    %
    
    
    4.08
    %
    
    
    4.05
    %
    
    
    4.02
    %
    
    
    4.18
    %
    
    
    
    
    
    
    Interest Rate DerivativesInterest Rate Swaps:Variable to Fixed
    
    $
    40,000
    
    
    $
    50,000
    
    
    $
    75,000
    
    
    $
    150,000
    
    
    $
    80,000
    
    
    $
    20,000
    
    
    $
    415,000
    
    
    $
    6,020Average Pay Rate
    
    
    3.88
    %
    
    
    3.59
    %
    
    
    3.66
    %
    
    
    3.88
    %
    
    
    3.77
    %
    
    
    4.00
    %
    
    
    
    
    
    
    Average Receive Rate
    
    
    2.87
    %
    
    
    2.87
    %
    
    
    2.87
    %
    
    
    2.87
    %
    
    
    2.87
    %
    
    
    2.87
    %
    
    
    
    
    
    
    
 
 Item 4. Controls and Procedures As of March 31, 2005, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness
of the design and operation of our disclosure controls and procedures pursuant to Securities
Exchange Act Rule 15d-15. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed in our reports filed or submitted under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms. There have been no changes in our internal control over financial reporting that occurred
during the three months ended March 31, 2005 that have materially affected, or are reasonably
likely to materially affect, such internal control over financial reporting. 38




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##### Table of Contents



PART II
OTHER INFORMATION 
 Item 1. Legal Proceedings We are not presently subject to any material litigation, other than ordinary routine
litigation incidental to the business. 
 Item 2. Changes in Securities and Use of Proceeds Total Number of
    
    Maximum Number ofShares Purchased as
    
    Shares that May Yet BePart of Publicly
    
    PurchasedTotal Number of
    
    Average Price Paid
    
    Announced
    
    Under thePeriod
    
    Shares Purchased(1)
    
    per Share
    
    Plans or Programs
    
    Plans or Programs(2)January 1, 2005 
January 31, 2005
    
    
    1,231
    
    
    $
    36.82
    
    
    
    
    
    
    
    997,200February 1, 2005 
February 28, 2005
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    March 1, 2005 
March 31, 2005
    
    
    7,723
    
    
    $
    35.61
    
    
    
    
    
    
    
    Total
    
    
    8,954
    
    
    $
    35.77
    
    
    
    
    
    
    
    997,200
  (1)
    During January 2005, we purchased 1,231 of our common shares pursuant to our Key
Employee Share Option Plan. In March 2005, we purchased 7,723 of our common shares pursuant
to our Key Employee Share Option Plan.(2)
    During 1998, our board of trustees authorized the repurchase of up to 2.0 million
common shares in the open market or negotiated private transactions. On January 4, 2000, the
board of trustees authorized a 1.5 million-share increase in the share repurchase program
bringing the total authorization to 3.5 million common shares. On May 9, 2001, the board of
trustees authorized an additional 1.0 million-share increase in the share repurchase program
bringing the total authorization to 4.5 million shares. Since inception of the repurchase
program, through March 31, 2005, we have purchased 3,502,800 common shares and pursuant to
current authorization, we have the ability to repurchase an additional 997,200 in the future. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 39




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##### Table of Contents



Item 6. Exhibits  3.1
    Amended and Restated Declaration of Trust of the Registrant (filed as Exhibit 3.1 to our Form
10-K, filed on March 15, 2004, File No. 001-14516).3.2
    Second Amended and Restated Bylaws of the Registrant. (filed as Exhibit 3.2 to our Quarterly
Report on Form 10-Q, filed on September 30, 2004, File No. 001-14516 and incorporated by
reference herein)3.3
    Articles Supplementary, dated February 17, 1998, Classifying and Designating a Series of
Preferred Shares of Beneficial Interest as Junior Participating Cumulative Convertible
Redeemable Preferred Shares of Beneficial Interest, Series B, and Fixing Distribution and
Other Preferences and Rights of Such Shares (filed as an Exhibit to our Registration Statement
on Form 8-A, filed on February 17, 1998, File No. 000-23813 and incorporated by reference
herein).3.4
    Articles Supplementary, dated June 25, 1998, Classifying and Designating a Series of
Preferred Shares of Beneficial Interest as Series B Cumulative Redeemable Perpetual Preferred
Shares of Beneficial Interest and Fixing Distribution and Other Preferences and Rights of Such
Shares (filed as Exhibit 3.5 to our Form 10-Q, filed on August 12, 1998, File No. 001-14516).3.5
    Articles Supplementary, dated March 20, 2001 (filed as Exhibit 3.6 to our Form 10-K, filed
March 27, 2001, File No. 001-14516, and incorporated by reference herein).3.6
    Articles Supplementary Classifying and Designating a Series of Preferred Shares of Beneficial
Interest as Series D Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest
and Fixing Distribution and Other Preferences and Rights of such Shares, dated March 20, 2001
(filed as Exhibit 3.7 to our Form 10-K, filed March 27, 2001, File No. 001-14516, and
incorporated by reference herein).3.7
    Articles Supplementary, dated January 4, 2002 (filed as Exhibit 3.7 to our Form 10-K, filed
March 27, 2002, File No. 001-14516, and incorporated by reference herein).3.8
    Articles Supplementary, dated February 24, 2004, declassifying the Series B Cumulative
Redeemable Perpetual Preferred Shares (filed as Exhibit 3.10 to our Form 10-K, filed on March
15, 2004, File No. 001-14516).4.1
    Form of Common Share Certificate (filed as Exhibit 4.1 to our Registration Statement on
Amendment No. 1 of Form S-11, File No. 333-09863, and incorporated by reference herein).4.2
    Amended and Restated Rights Agreement, dated January 22, 2002, between Prentiss Properties
Trust and EquiServe Trust Company, N.A., as Rights Agent (filed as Exhibit 1 to Amendment No.
2 to our Registration Statement on Form 8-A, filed on February 6, 2002, File No. 000-014516).4.3
    First Amendment dated June 26, 2002 to the Amended and Restated Rights Agreement between
Prentiss Properties Trust and Equiserve Trust Company, N.A. as Rights Agent (filed as Exhibit 2 to
Amendment No. 3 our Registration Statement on Form 8-A, filed on June 27, 2002. File No.
001-014516).4.4
    Second Amendment, dated October 21, 2003, to the Amended and Restated Rights Agreement
between Prentiss Properties Trust and Equiserve Trust Company, N.A. as Rights Agent (filed as
Exhibit 3 to Amendment No. 4 to our Registration Statement on Form 8-A, filed on January 26, 2004
File No. 001-014516).4.5
    Third Amendment, dated February 14, 2005, to the Amended and Restated Rights Agreement
between Prentiss Properties Trust and Equiserve Trust Company, N.A. as Rights Agent (filed as
Exhibit 4 to Amendment No. 5 to our Registration Statement on Form 8-A, filed on February 16, 2005,
File No. 001-014516 and incorporated by reference herein).4.6
    Form of Rights Certificate (included as Exhibit A to the Rights Agreement (Exhibit 4.2)).4.7
    Form of Series D Preferred Share Certificate (filed as Exhibit 4.4 to our Form 10-K, filed
March 27, 2001, File No. 001-14516, and incorporated by reference herein). 40




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##### Table of Contents



10.1
    1996 Share Incentive Plan (filed as Exhibit 10.25 to Amendment No. 1 to our Registration
Statement on Form S-11, File No. 333-09863, and incorporated by reference herein).10.2
    First Amendment, effective as of May 6, 1997, to the 1996 Share Incentive Plan (filed as
Exhibit 4.6 to our Registration Statement on Form S-8, File No. 333-79623, filed on May 28,
1999, and incorporated by reference herein).10.3
    Second Amendment, effective as of May 5, 1998, to the 1996 Share Incentive Plan (filed as
Exhibit 4.7 to our Registration Statement on Form S-8, File No. 333-79623, filed on May 28,
1999, and incorporated by reference herein).10.4
    Third Amendment, effective as of May 9, 2001, to the 1996 Share Incentive Plan (filed as
Exhibit 4.5 to our Registration Statement on Form S-8, File No. 333-68520, filed on August 28,
2001, and incorporated by reference herein).10.5
    Amendment No. 4, effective as of October 15, 1996, to the 1996 Share Incentive Plan (filed as
Exhibit 0.5 to our Form 10-Q, filed November 14, 2002, File No. 001-14516).10.6
    Amendment No. 5, effective as of October 23, 2002, to the 1996 Share Incentive Plan (filed as
Exhibit 10.6 to our Form 10-Q, filed November 14, 2002, File No. 001-14516).10.7
    Sixth Amendment, effective as of May 5, 2004, to the 1996 Share Incentive Plan (filed as
Exhibit 4.22 to the Registration Statement on Form S-8 filed on February 14, 2005, File No.
333-122824 and incorporated by reference herein).10.8
    Amended and Restated Trustees Share Incentive Plan, effective as of May 15, 2002 (filed as
Exhibit 4.12 to our Registration Statement on Form S-8, File No. 333-97045, filed on July 24,
2002, and incorporated by reference herein).10.9
    Amendment No. 1, effective as of October 23, 2002, to the Amended and Restated Trustees Share
Incentive Plan (filed as Exhibit 10.8 to our Form 10-Q, filed November 14, 2002, File No.
001-14516).10.10
    Amendment No. 2, effective as of May 5, 2004, to the Amended and Restated Trustees Share
Incentive Plan (filed as Exhibit 4.25 to the Registration Statement on Form S-8 filed on February
14, 2005, File No. 333-122824 and incorporated by reference herein).10.11
    Trustees Share Incentive Plan (filed as Exhibit 4.8 to our Registration Statement on Form
S-8, File No. 333-79623, filed on May 28, 1999, and incorporated by reference herein).10.12
    First Amendment, effective as of May 5, 1998, to the Trustees Share Incentive Plan (filed
as Exhibit 4.9 to our Registration Statement on Form S-8, File No. 333-79623, filed on May 28,
1999, and incorporated by reference herein).10.13
    Second Amendment, effective as of March 1, 1999, to the Trustees Share Incentive Plan
(filed as Exhibit 4.10 to our Registration Statement on Form S-8, File No. 333-79623, filed on
May 28, 1999, and incorporated by reference herein).10.14
    Third Amendment, effective as of May 10, 2000, to the Trustees Share Incentive Plan (filed
as Exhibit 10.8 to our Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated
by reference herein).10.15
    Form of Stock Option Agreement (filed as Exhibit 10.9 to our Form 10-K, filed March 27,
2002, File No. 001-14516, and incorporated by reference herein).10.16
    Amended and Restated Share Purchase Plan, dated as of July 1, 2000 (filed as Exhibit 10.10
to our Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference
herein).10.17
    Amendment No. 1, effective as of October 23, 2002, to the Amended and Restated Share Purchase
Plan (filed as Exhibit 10.15 to our Form 10-Q, filed November 14, 2002, File No. 001-14516). 41




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##### Table of Contents



10.18
    Key Employee Share Option Plan (filed as Exhibit 10.11 to our Form 10-K, filed March 27,
2002, File No. 001-14516, and incorporated by reference herein).10.19
    Prentiss Properties Employee Savings Plan (filed as Exhibit 10.12 to our Form 10-K, filed
March 27, 2002, File No. 001-14516, and incorporated by reference herein).10.20
    Third Amended and Restated Employment Agreement, dated January 1, 2004 by and between
Michael V. Prentiss and Prentiss Properties Trust. (filed as Exhibit 10.18 to our Form 10-K,
filed on March 15, 2004, File No. 001-14516).10.21
    Amended and Restated Employment Agreement, dated May 10, 2000, by and between Thomas F.
August and Prentiss Properties Trust (filed as Exhibit 10.21 to our Form 10-K, filed on March
27, 2001, and incorporated herein by reference).10.22
    Third Amended and Restated Agreement of Limited Partnership of Prentiss Properties
Acquisition Partners, L.P., dated as of October 1, 2001 (filed as Exhibit 10.15 to our Form
10-K, filed March 27, 2002, File No. 001-14516, and incorporated by reference herein).10.23
    First Amendment, dated as of December 18, 2001, to the Third Amended and Restated Agreement
of Limited Partnership of Prentiss Properties Acquisition Partners, L.P., dated as of December
18, 2001 (filed as Exhibit 10.16 to our Form 10-K, filed March 27, 2002, File No. 001-14516,
and incorporated by reference herein).10.24
    Second Amendment, dated as of January 3, 2002, to the Third Amended and Restated Agreement
of Limited Partnership of Prentiss Properties Acquisition Partners, L.P., dated as of October
1, 2001 (filed as Exhibit 10.17 to our Form 10-K, filed March 27, 2002, File No. 001-14516,
and incorporated by reference herein).10.25
    Third Amendment to the Third Amended and Restated Agreement of Limited Partnership of
Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 10.40 to our Form 10-K, filed
March 27, 2002, File No. 001-14516, and incorporated by reference herein).10.26
    Fourth Amendment to the Third Amended and Restated Agreement of Limited Partnership of
Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 10.20 to our Form 10-Q, filed
August 14, 2002, File No. 001-14516).10.27
    Fifth Amendment to the Third Amended and Restated Agreement of Limited Partnership of
Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 99.1 to our Form 8-K, File
No. 001-14516, filed on August 14, 2003).10.28
    Sixth Amendment to the Third Amended and Restated Agreement of Limited Partnership of
Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 10.2 to our Form 10-Q, File
No. 001-14516, filed on November 12, 2003).10.29
    Seventh Amendment to the Third Amended and Restated Agreement of Limited Partnership of
Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 10.27 to our Form 10-K,
filed on March 15, 2004, File No. 001-14516).10.30
    Eighth Amendment to the Third Amended and Restated Agreement of Limited Partnership of
Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 10.28 to our Form 10-K,
filed on March 15, 2004, File No. 001-14516).10.31
    Series E Cumulative Redeemable Preferred Partnership Units Repurchase Agreement, dated
February 4, 2004, by and between Prentiss Properties Acquisition Partners, L.P. and Brandywine
Operating Partnership, L.P. (filed as Exhibit 10.29 to our Form 10-K, filed on March 15,
2004, File No. 001-14516).10.32
    Series B Preferred Unit Redemption Agreement, dated February 24, 2004, by and between
Prentiss Properties Acquisition Partners, L.P., Belrose Realty Corporation, Belmar Realty
Corporation, Belport Realty Corporation and Belshire Realty Corporation (filed as Exhibit
10.30 to our Form 10-K, filed on March 15, 2004, File No. 001-14516). 42




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10.33
    Credit Agreement, dated May 22, 2003, among Prentiss Properties Acquisition Partners, L.P.,
as Borrower, Eurohypo AG, New York Branch, as Administrative Agent, Bank One, NA, as
Syndication Agent, and other lenders as named therein, (filed as Exhibit 10.2 to our Form
10-Q, File No. 001-14516, filed on August 14, 2003).10.34
    Stock Purchase Agreement, dated January 1, 2003, by and between Prentiss Properties
Acquisition Partners, L.P. and Ampulla LLC, a single member Limited Liability Company, owned
by Michael V. Prentiss, Chairman of the Board of Prentiss Properties Trust, (filed as Exhibit
10.3 to our Form 10-Q, File No. 001-14516, filed on August 14, 2003).10.35
    Exchange Agreement, dated as of March 20, 2001, by and among Prentiss Properties Trust,
Prentiss Properties Acquisition Partners, L.P. and Security Capital Preferred Growth
Incorporated (filed as Exhibit 10.14 to our Form 10-K, filed on March 27, 2001, and
incorporated herein by reference).10.36
    Registration Rights Agreement, dated as of March 20, 2001, by and among Prentiss Properties
Trust and Security Capital Preferred Growth Incorporated (filed as Exhibit 10.15 to our Form
10-K, filed on March 27, 2001, and incorporated by reference herein).10.37
    Second Amendment and Restatement of the Agreement, dated March 22, 2002, among Prentiss
Properties Acquisition Partners, L.P., as Borrower, Bank One, N.A., as Administrator, Bank of
America, N.A., as Syndication Agent, Dresdner Bank, AG as Documentation Agent and each of the
Lenders that are signatory therein (filed as Exhibit 10.1 to our Post-Effective Amendment No.
2 to Form S-3, File No. 333-49433, filed July 26, 2002 and incorporated by reference herein).10.38
    Credit Agreement, dated March 16, 2001, among Prentiss Properties Acquisition Partners,
L.P., as Borrower, Commerzbank AG, New York Branch, as Administrative Agent, Sole Arranger and
Sole Book Runner, Fleet National Bank, as Syndication Agent, LaSalle Bank National
Association, as Documentation Agent and each of the Lenders named therein (filed as Exhibit
10.21 to our Form 10-K, filed March 27, 2002, File No. 001-14516, and incorporated by
reference herein).10.39
    First Amendment, dated as of November 28, 2000, to the Credit Agreement, dated September 30,
1999, among Prentiss Properties Acquisition Partners, L.P., as Borrower, Bank One, N.A., as
Administrative Agent, Mellon Bank and Union Bank of California as co-documentation agents
(filed as Exhibit 10.23 to our Form 10-K, filed March 27, 2002, File No. 001-14516, and
incorporated by reference herein).10.40
    Second Amended and Restated Credit Agreement, dated as of February 19, 2004, by and among
Prentiss Properties Acquisition Partners, L.P., Bank One, NA, Bank of America, N.A., Dresdner
Bank AG, Commerzbank AG, Societe Generale Southwest Agency and the lenders named therein
(filed as Exhibit 10.38 to our Form 10-K, filed on March 15, 2004, File No. 001-14516).10.41
    Amended and Restated Credit Agreement, dated as of March 2, 2004, among Prentiss Properties
Acquisition Partners, L.P. as Borrower, Eurohypo AG, New York Branch, as Sole Arranger and
Sole Book Runner, Bank One, NA as Syndication Agent, and other Lenders as named therein (filed
as Exhibit 10.39 to our Form 10-Q, filed on May 1, 2004, File No. 001-14516 and incorporated
by reference herein).10.42
    Promissory Note, dated as of June 1, 1999, by and between Prentiss Properties Limited, Inc.
and Christopher M. Hipps (filed as Exhibit 10.35 to our Form 10-K, filed March 27, 2002, File
No. 001-14516, and incorporated by reference herein).10.43
    Promissory Note, dated as of January 1, 2002, by and between Prentiss Properties Limited,
Inc. and Daniel Cushing (filed as Exhibit 10.36 to our Form 10-K, filed March 27, 2002, File
No. 001-14516, and incorporated by reference herein).10.44
    Promissory Note, dated as of June 14, 2002, by and among Prentiss Properties Limited, Inc.
and Daniel Cushing (filed as Exhibit 10.45 to our Form 10-K, filed March 28, 2003, File No.
001-14516, and incorporated by reference herein).10.45
    Purchase Agreement, dated February 25, 2002, by and among Prentiss Properties Trust,
Prentiss Properties Acquisition Partners, L.P., Prentiss Properties I, Inc. and Salomon Smith
Barney Inc. (filed as Exhibit 10.38 to our Form 10-K, filed March 27, 2002, File No.
001-14516, and incorporated by reference herein). 43




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##### Table of Contents



10.46
    Registration Rights Agreement, dated February 25, 2002, by and among Prentiss Properties
Trust and Salomon Smith Barney Inc. (filed as Exhibit 10.39 to our Form 10-K, filed March 27,
2002, File No. 001-14516, and incorporated by reference herein).10.47
    Sales Agreement by and between Prentiss Properties Trust and Brinson Patrick Securities
Corporation, dated June 10, 2002 (filed as Exhibit 1.1 to our Post Effective Amendment No. 2
to Form S-3, File No. 333-49433, filed on July 26, 2002).10.48
    Amendment to Sales Agreement by and between Prentiss Properties Trust and Brinson Patrick
Securities Corporation, dated May 5, 2004 (filed as Exhibit 10.51 to our Form 10-Q, filed on
May 1, 2004, File No. 001-14516 and incorporated by reference herein).10.49
    Sales Agreement by and between Prentiss Properties Trust and Brinson Patrick Securities
Corporation, dated May 28, 2004 (filed as Exhibit 1.1 to our Form S-3, File No. 333-116034, filed
on May 28, 2004).10.50
    Amended and Restated Limited Partnership Agreement of Prentiss Office Investors, L.P., dated
January 29, 2004 (filed as Exhibit 10.50 to our Form 10-K, filed on March 15, 2004, File No.
001-14516).10.51
    Prentiss Properties Executive Choice Share Deferral Plan (filed as Exhibit 10.1 to our Form
10-Q, filed May 15, 2003, File No. 001-14516, and incorporated by reference herein).10.52
    Prentiss Properties Executive Choice Deferred Compensation Plan (filed as Exhibit 10.2 to
our Form 10-Q, filed May 15, 2003, File No. 001-14516, and incorporated by reference herein).10.53
    Prentiss Properties Executive Choice Deferred Compensation Plan for Trustees (filed as
Exhibit 10.3 to our Form 10-Q, filed May 15, 2003, File No. 001-14516, and incorporated by
reference herein).10.54
    Prentiss Properties Executive Choice Share Deferral Plan for Trustees (filed as Exhibit 10.4
to our Form 10-Q, filed May 15, 2003, File No. 001-14516, and incorporated by reference
herein).10.55
    Form of Indemnification Agreement entered into between Prentiss Properties Trust and
Officers and Trustees of Prentiss Properties Trust (filed as Exhibit 10.53 to our Form 10-Q,
filed November 8, 2004 and incorporated by reference herein).10.56*
    Promissory Note by and between Burnett Plaza Associates, an affiliate of Prentiss Properties
Trust, as borrower and Bank of America, N.A. as lender, dated March 22, 2005.31.1*
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   *
    
    Filed herewith. 44




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRENTISS PROPERTIES TRUSTDate: May 6, 2005
    By:
    /s/ Scott W. FordhamScott W. FordhamSenior Vice President and Chief Accounting Officer
(Principal Accounting Officer and Duly Authorized
Officer of the Company) 45