##### Table of Contents



(ARDEN REALTY, INC. LOGO)   Securities and Exchange Commission  Washington, D.C. 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2005 Commission file number 1-12193 ARDEN REALTY, INC.  Maryland
(State or other jurisdiction of incorporation or organization)
    
    95-4578533
(I.R.S. Employer Identification No.)
 11601 Wilshire Boulevard,
4th Floor
Los Angeles, California 90025-1740
(Address and zip code of principal executive offices) Registrants telephone number, including area code: (310) 966-2600 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 As of May 6, 2005, there
were 66,768,047 shares of the registrants common stock, $.01
par value, issued and outstanding.




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##### Table of Contents



ARDEN REALTY, INC.
FORM 10-Q
TABLE OF CONTENTS PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of March 31, 2005 (unaudited) and
December 31, 2004
    
    3Consolidated Statements of Income for the three months ended
March 31, 2005 and 2004 (unaudited)
    
    4Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004 (unaudited)
    
    5Notes to Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    27Item 4. Controls and Procedures
    
    28PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    29Item 3. Defaults Upon Senior Securities
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    29Item 5. Other Information
    
    29Item 6. Exhibits
    
    29SIGNATURES
    
    30Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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Part I. FINANCIAL INFORMATION 
 Item 1. Financial Statements Arden Realty, Inc. 
 Consolidated Balance Sheets
(in thousands, except per share data)
 March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)AssetsInvestment in real estate:Land
    
    $
    426,445
    
    
    $
    424,041Buildings and improvements
    
    
    2,319,317
    
    
    
    2,071,035Tenant improvements and leasing commissions
    
    
    355,944
    
    
    
    344,2103,101,706
    
    
    
    2,839,286Less: accumulated depreciation and amortization
    
    
    (483,827
    )
    
    
    (462,411
    )2,617,879
    
    
    
    2,376,875Properties under development/renovation
    
    
    
    
    
    
    16,295Land available for development
    
    
    23,795
    
    
    
    23,795Properties held for disposition, net
    
    
    120,219
    
    
    
    135,016Net investment in real estate
    
    
    2,761,893
    
    
    
    2,551,981Cash and cash equivalents
    
    
    3,524
    
    
    
    13,040Restricted cash
    
    
    14,852
    
    
    
    14,788Rent and other receivables, net of allowance of $3,693 and $3,748 at March
31, 2005 and December 31, 2004, respectively
    
    
    7,415
    
    
    
    5,953Deferred rent, net of allowance of $1,825 and $1,933 at March 31, 2005 and
December 31, 2004, respectively
    
    
    43,391
    
    
    
    42,886Prepaid financing costs, expenses and other assets, net of accumulated
amortization of $10,183 and $13,244 at March 31, 2005 and December 31,
2004, respectively
    
    
    34,015
    
    
    
    31,349Total assets
    
    $
    2,865,090
    
    
    $
    2,659,997LiabilitiesMortgage loans payable
    
    $
    369,971
    
    
    $
    371,548Mortgage loans payable  properties held for disposition
    
    
    3,857
    
    
    
    11,091Unsecured lines of credit
    
    
    259,000
    
    
    
    121,500Unsecured term loan
    
    
    125,000
    
    
    
    125,000Unsecured senior notes, net of discount
    
    
    792,537
    
    
    
    696,945Accounts payable and accrued expenses
    
    
    48,931
    
    
    
    58,215Security deposits
    
    
    25,928
    
    
    
    25,498Dividends payable
    
    
    33,681
    
    
    
    33,494Total liabilities
    
    
    1,658,905
    
    
    
    1,443,291Minority interest
    
    
    21,780
    
    
    
    20,414Stockholders EquityPreferred stock, $.01 par value, 20,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $.01 par value, 100,000,000 shares authorized, 66,695,239 and
66,325,709 issued and outstanding at March 31, 2005 and December 31,
2004, respectively
    
    
    667
    
    
    
    664Additional paid-in capital
    
    
    1,196,693
    
    
    
    1,212,508Deferred compensation
    
    
    (12,312
    )
    
    
    (12,830
    )Accumulated other comprehensive loss
    
    
    (643
    )
    
    
    (4,050
    )Total stockholders equity
    
    
    1,184,405
    
    
    
    1,196,292Total liabilities and stockholders equity
    
    $
    2,865,090
    
    
    $
    2,659,997
 See accompanying notes to consolidated financial statements. 3




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Arden Realty, Inc. 
 Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
 Three Months Ended March 31,2005
    
    
    2004Property revenues
    
    $
    102,120
    
    
    $
    94,257Property operating expenses
    
    
    33,549
    
    
    
    30,46568,571
    
    
    
    63,792General and administrative expenses
    
    
    8,245
    
    
    
    4,484Interest expense
    
    
    22,926
    
    
    
    23,058Depreciation and amortization
    
    
    30,696
    
    
    
    27,127Interest and other loss (income)
    
    
    251
    
    
    
    (765
    )Minority interest
    
    
    164
    
    
    
    1,301Income from continuing operations
    
    
    6,289
    
    
    
    8,587Discontinued operations, net of minority interest
    
    
    1,252
    
    
    
    3,845Gain on sale of discontinued properties
    
    
    2,057
    
    
    
    6,429Loss from debt defeasance related to sale of discontinued property
    
    
    (557
    )
    
    
    Net income
    
    $
    9,041
    
    
    $
    18,861Basic net income per common share:Income from continuing operations
    
    $
    0.10
    
    
    $
    0.13Income from discontinued operations
    
    
    0.04
    
    
    
    0.16Net income per common share  basic
    
    $
    0.14
    
    
    $
    0.29Weighted average number of common shares  basic
    
    
    66,258
    
    
    
    64,813Diluted net income per common share:Income from continuing operations
    
    $
    0.10
    
    
    $
    0.13Income from discontinued operations
    
    
    0.04
    
    
    
    0.16Net income per common share  diluted
    
    $
    0.14
    
    
    $
    0.29Weighted average number of common shares  diluted
    
    
    66,637
    
    
    
    65,228Dividends declared per common share
    
    $
    0.505
    
    
    $
    0.505
 See accompanying notes to consolidated financial statements. 4




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Arden Realty, Inc. 
 Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 For the Three Months EndedMarch 31,2005
    
    
    2004Operating Activities:Net income
    
    $
    9,041
    
    
    $
    18,861Adjustments to reconcile net income to net cash
provided by operating activities:Minority interest, including discontinued operations
    
    
    235
    
    
    
    1,568Gain on sale of discontinued properties
    
    
    (2,057
    )
    
    
    (6,429
    )Depreciation and amortization, including discontinued operations
    
    
    32,247
    
    
    
    30,332Amortization of loan costs
    
    
    870
    
    
    
    1,079Non-cash compensation expense
    
    
    519
    
    
    
    746Changes in operating assets and liabilities:Rent and other receivables
    
    
    (1,462
    )
    
    
    (2,057
    )Deferred rent
    
    
    (2,162
    )
    
    
    (1,637
    )Prepaid financing costs, expenses and other assets
    
    
    (481
    )
    
    
    (533
    )Accounts payable and accrued expenses
    
    
    (6,556
    )
    
    
    1,641Security deposits
    
    
    583
    
    
    
    271Net cash provided by operating activities
    
    
    30,777
    
    
    
    43,842Investing Activities:Acquisitions and improvements to commercial properties
    
    
    (252,740
    )
    
    
    (24,786
    )Proceeds from sale of properties
    
    
    16,331
    
    
    
    67,884Net cash (used in) provided by investing activities
    
    
    (236,409
    )
    
    
    43,098Financing Activities:Repayments of mortgage loans
    
    
    (8,811
    )
    
    
    (1,452
    )Proceeds from unsecured lines of credit
    
    
    253,500
    
    
    
    40,000Repayments of unsecured lines of credit
    
    
    (116,000
    )
    
    
    (105,000
    )Proceeds from issuance of unsecured senior notes, net of discount and other issuance costs
    
    
    293,216
    
    
    
    Repayment of unsecured senior notes
    
    
    (200,000
    )
    
    
    Proceeds from issuance of common stock
    
    
    8,614
    
    
    
    22,391Distributions to preferred operating partnership unit holders
    
    
    
    
    
    
    (1,078
    )Increase in restricted cash
    
    
    (64
    )
    
    
    (1,336
    )Distributions to minority interests
    
    
    (845
    )
    
    
    (853
    )Dividends paid
    
    
    (33,494
    )
    
    
    (32,535
    )Net cash provided by (used in) financing activities
    
    
    196,116
    
    
    
    (79,863
    )Net (decrease) increase in cash and cash equivalents
    
    
    (9,516
    )
    
    
    7,077Cash and cash equivalents at beginning of period
    
    
    13,040
    
    
    
    4,707Cash and cash equivalents at end of period
    
    $
    3,524
    
    
    $
    11,784Supplemental Disclosure of Cash Flow Information:Cash paid during the period for interest, net of amounts capitalized
    
    $
    25,724
    
    
    $
    22,032
 See accompanying notes to consolidated financial statements. 5




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Arden Realty, Inc. 
 Notes to Consolidated Condensed Financial Statements
March 31, 2005
(unaudited)
 1. Organization and Basis of Presentation Organization The terms Arden Realty, us, we and our as used in this report refer to Arden Realty,
Inc. Through our controlling interest in Arden Realty Limited Partnership, or the Operating
Partnership, and our other subsidiaries, we own, manage, lease, develop, renovate and acquire
commercial office properties located in Southern California. As of March 31, 2005, our portfolio
was comprised of 121 primarily suburban office properties, consisting of 198 buildings with
approximately 18.9 million net rentable square feet, including 8 properties and 12 buildings
currently held for disposition. As of March 31, 2005, our operating portfolio was 91.1% occupied
excluding the 8 properties currently held for disposition. Including these properties, our
portfolio was 90.4% occupied. The minority interests at March 31, 2005 consist of limited partnership interests in the
Operating Partnership totaling approximately 2.5%. Basis of Presentation The accompanying consolidated financial statements include the accounts of Arden Realty, the
Operating Partnership, and our subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. We consolidate all entities for which we have controlling financial interest as measured by a
majority of the voting interest. For entities in which the controlling financial interest is not
clearly indicated by ownership of a majority of the voting interest, we would consolidate those
entities that we control by agreement. We would also consolidate all variable interest entities
for which we were the primary beneficiary. Arden Realty and the Operating Partnership currently own 100% of all of our consolidated
subsidiaries and we do not have any unconsolidated investments. Interim Financial Data The accompanying consolidated condensed financial statements should be read in conjunction
with our 2004 Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange
Commission. The accompanying financial information reflects all adjustments, which are, in our
opinion, of a normal recurring nature and necessary for a fair presentation of our financial
position, results of operations and cash flows for the interim periods. Interim results of
operations are not necessarily indicative of the results to be expected for the full year. Reclassifications Certain prior year amounts on our consolidated balance sheets and consolidated statements of
income have been reclassified to confirm with the current year presentation for properties sold and
classified as held for disposition pursuant to SFAS 144. Recent Accounting Pronouncements In December 2004, the FASB issued Statement 123 (revised), Share-Based Payment (FAS
123(R)). FAS 123(R) requires that all share-based payments to employees, including grants of
employee stock options, are to be recognized in the income statement based on their fair values.
The new standard will be effective as of the beginning of the first fiscal year beginning after
June 15, 2005. The adoption of this statement is not expected to have a material effect on our
results of operations or financial condition. 6




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2. Commercial Properties Property Dispositions Gross Sales PriceProperty
    
    County
    
    Submarket
    
    Date of Sale
    
    Property Type
    
    Square Feet
    
    ($000s)Activity Business Center
    
    San Diego
    
    Miramar
    
    January 5, 2005
    
    Office
    
    
    167,170
    
    $
    16,650
 Property Acquisitions Gross AcquisitionDate of
    
    
    
    
    
    
    Square
    
    
    PriceProperty
    
    County
    
    
    Submarket
    
    
    Purchase
    
    
    Property Type
    
    
    Feet
    
    
    ($000s)707 Broadway
    
    San Diego
    
    Downtown
    
    January 5, 2005
    
    Office
    
    
    169,536
    
    
    $
    48,000
    (1)Sorrento Mesa Corporate Center
    
    San Diego
    
    Sorrento Mesa
    
    March 22, 2005
    
    Office/Retail
    
    
    608,253
    
    
    
    185,000777,789
    
    
    $
    233,000
   (1)
    
    Approximately $2.0 million of the acquisition price was funded through the issuance of 54,950
common operating partnership units at an average price of $37.27. We expect to finalize our purchase price allocations to the assets acquired and
liabilities assumed after our valuation procedures are completed, but no later than one year from
the date of purchase. 3. Discontinued Operations and Properties Held for Disposition Since the beginning of 2004, we have sold a total of 13 properties and have classified as
held for disposition an additional 8 properties totaling approximately 1.2 million square feet as
of March 31, 2005. The results of operations classified as discontinued operations for these
properties for the three months ended March 31, 2005 and 2004 are as follows (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Revenues from rental operations
    
    $
    5,006
    
    
    $
    11,964Property expenses
    
    
    (2,030
    )
    
    
    (4,392
    )Depreciation and amortization
    
    
    (1,551
    )
    
    
    (3,205
    )Interest expense
    
    
    (102
    )
    
    
    (255
    )Minority interest
    
    
    (71
    )
    
    
    (267
    )Discontinued operations, net of minority
interest
    
    $
    1,252
    
    
    $
    3,845Gain on sale of discontinued properties
    
    $
    2,057
    
    
    $
    6,429
 7




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4. Outstanding Indebtedness A summary of our outstanding indebtedness as of March 31, 2005 and December 31, 2004 is as
follows: Stated AnnualInterest Rate at
    
    
    
    
    
    
    Number ofMarch 31,
    
    
    December 31,
    
    
    March 31,
    
    
    Rate
    
    
    PropertiesType of Debt
    
    2005
    
    
    2004
    
    
    2005
    
    
    Fixed/Floating
    
    
    Securing Loan
    
    
    Maturity(in thousands)Mortgage Loans Payable:Fixed RateMortgage Financing III(1)
    
    
    131,889
    
    
    
    132,323
    
    
    
    6.74
    %
    
    Fixed
    
    
    21
    
    
    
    4/08Mortgage Financing IV(1)
    
    
    107,848
    
    
    
    108,194
    
    
    
    6.61
    %
    
    Fixed
    
    
    12
    
    
    
    4/08Mortgage Financing V(1)
    
    
    102,848
    
    
    
    103,504
    
    
    
    6.94
    %
    
    Fixed
    
    
    12
    
    
    
    4/09Mortgage Financing VI(1)
    
    
    21,273
    
    
    
    21,325
    
    
    
    7.54
    %
    
    Fixed
    
    
    3
    
    
    
    4/09Activity Business Center(1), (2)
    
    
    
    
    
    
    7,222
    
    
    
    
    
    
    Fixed
    
    
    1
    
    
    
    145 South Fairfax(1)
    
    
    3,857
    
    
    
    3,869
    
    
    
    8.93
    %
    
    Fixed
    
    
    1
    
    
    
    1/27Marin Corporate Center(1)
    
    
    2,549
    
    
    
    2,585
    
    
    
    9.00
    %
    
    Fixed
    
    
    1
    
    
    
    7/15Conejo Business Center(1)
    
    
    2,495
    
    
    
    2,531
    
    
    
    8.75
    %
    
    Fixed
    
    (Note 3)
    
    
    7/15Conejo Business Center(1)
    
    
    1,069
    
    
    
    1,086
    
    
    
    7.88
    %
    
    Fixed
    
    (Note 3)
    
    
    7/15373,828
    
    
    
    382,639Unsecured Lines of Credit:Floating RateWells Fargo - $310 mm(4)
    
    
    249,000
    
    
    
    111,500
    
    
    
    3.82
    %
    
    LIBOR + 0.90% (Notes 5,6)
    
    
    
    
    
    
    4/06City
National Bank - $20 mm(4)
    
    
    10,000
    
    
    
    10,000
    
    
    
    3.65
    %
    
    LIBOR + 0.90%
    
    
    
    
    
    
    8/05259,000
    
    
    
    121,500Unsecured Term Loan:Fixed RateWells Fargo - $125 mm(4)
    
    
    125,000
    
    
    
    125,000
    
    
    
    4.55
    %
    
    Fixed (Note 7)
    
    
    
    
    
    
    2/12Unsecured Senior Notes:Fixed Rate2005 Notes(8), (9)
    
    
    
    
    
    
    199,974
    
    
    
    8.88
    %
    
    Fixed
    
    
    
    
    
    
    3/052007 Notes(8)
    
    
    147,716
    
    
    
    149,395
    
    
    
    7.00
    %
    
    (Note 10)
    
    
    
    
    
    
    11/072010 Notes(8)
    
    
    49,795
    
    
    
    49,785
    
    
    
    9.15
    %
    
    Fixed
    
    
    
    
    
    
    3/102010 Notes(8)
    
    
    99,533
    
    
    
    99,513
    
    
    
    8.50
    %
    
    Fixed
    
    
    
    
    
    
    11/102011 Notes(8)
    
    
    198,343
    
    
    
    198,278
    
    
    
    5.20
    %
    
    Fixed
    
    
    
    
    
    
    9/112015 Notes(11)
    
    
    297,150
    
    
    
    
    
    
    
    5.25
    %
    
    Fixed
    
    
    
    
    
    
    3/15792,537
    
    
    
    696,945Total Debt
    
    $
    1,550,365
    
    
    $
    1,326,084
   (1)
    
    Requires monthly payments of principal and interest.(2)
    
    This loan was repaid in full on January 3, 2005.(3)
    
    Both mortgage loans are secured by the Conejo Business Center property.(4)
    
    Requires monthly payments of interest only, with outstanding principal balance due upon
maturity.(5)
    
    This line of credit also has an annual 20 basis point facility fee on the entire $310
million commitment amount.(6)
    
    We have entered into interest rate swap agreements that fixed the interest rate on $50
million of the outstanding balance on this line of credit at 3.95% through April 2006.(7)
    
    On February 18, 2005, we extended the maturity of this loan to February 2012. This
loan bears interest at LIBOR + 1.25%, however we have entered into interest rate swap
agreements that fixed the interest rate on this loan at 4.55% in 2005 and 4.70% from January
through June 2006. In conjunction with the extension of the maturity date of this loan, we
entered into interest rate swap agreements that fixed the interest rate at 5.29% from June
2006 through May 2007, 5.55% from June 2007 through November 2008, 5.76% from December 2008
through May 2010 and 5.99% from June 2010 through February 2012.(8)
    
    Requires semi-annual interest payments only, with principal balance due upon maturity.(9)
    
    These senior unsecured notes were redeemed on March 1, 2005.(10)
    
    We have entered into interest rate swap agreements to float the interest rate on $100
million of the outstanding balance of these notes at a rate of LIBOR + 3.1% through November
2007. Including these swap agreements, the effective interest rate on these notes was
approximately 6.83% as of March 31, 2005.(11)
    
    On February 28, 2005, we issued $300 million of unsecured senior notes at an interest
rate of 5.25%, maturing March 31, 2015. 8




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5. Interest Rate Hedge Agreements We have periodically entered into interest rate hedge agreements to effectively convert
floating rate debt into fixed rate debt or to remove the variability associated with forecasted
issuances of fixed rate debt. Net amounts received or paid under these agreements are recognized as
an adjustment to interest expense when such amounts are incurred or earned. Our objective in using
interest rate hedge agreements is to manage our exposure to interest rate movements. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), as amended and interpreted, establishes accounting and
reporting standards for derivative instruments and for hedging activities. The accounting for
changes in the fair value of derivatives depends on the intended use of the derivative and the
resulting hedge accounting 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, are
considered fair value hedges. Derivatives used to hedge the exposure to variability in 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 (loss), outside of earnings and
subsequently reclassified to earnings when the hedged transaction affects earnings. We have used such agreements to fix the floating interest rate associated with $50 million of
the Wells Fargo unsecured line of credit and the entire $125 million balance of the unsecured term
loan. In conjunction with the extension of our $125 million unsecured term loan in February 2005,
we also entered into a series of interest rate swap agreements to fix the interest rate through the
extension period. Under these interest rate swap agreements, the interest rate on this loan is
effectively fixed at 5.29% from June of 2006 through May of 2007, 5.55% from June of 2007 through
November of 2008, 5.76% from December of 2008 through May of 2010 and 5.99% from June of 2010
through February of 2012. The fair value of the interest rate swaps designated as cash flow hedges
of the interest payments on the unsecured term loan and unsecured credit facility of $3.6 million
at March 31, 2005 has been deferred in accumulated other comprehensive loss on our balance sheet.
The estimated fair value of these interest rate hedge agreements are dependent on changes in market
interest rates and other market factors that affect the value of such agreements. Consequently,
the estimated current fair value may significantly change during the term of the agreements.
Changes in the fair value of these instruments will be deferred in other comprehensive loss and
will be subsequently reclassified into interest expense as the hedged interest payments occur. If
these derivatives were terminated before their maturity and the hedged debt instruments remained
outstanding, amounts deferred in other comprehensive loss related to the terminated derivatives
would be reclassified out of other comprehensive loss into interest expense as the hedged interest
payments occur. If the underlying debt related to these hedges were to be repaid prior to
maturity, any amounts deferred in other comprehensive loss related to these derivatives would be
immediately reclassified into current earnings. In August 2004, we settled $150 million of forward-starting swaps that we entered into in 2003
that were hedging the variability associated with a forecasted $200 million issuance of unsecured
senior notes. Associated with the settlement of these forward-starting swaps, we paid approximately
$500,000 to the swap counterparties. This amount had been deferred in other comprehensive income
and will be reclassified into interest expense as the hedged interest payments on the debt occur. In February 2005, we settled $300 million of forward-starting swaps that we entered into in
2004 that were hedging the variability associated with a forecasted $300 million issuance of
unsecured senior notes. Associated with the settlement of these forward-starting swaps, we paid
approximately $3.9 million to the swap counterparties. This amount had been deferred in other
comprehensive loss and will be reclassified into interest expense as the hedged interest payments
on the debt occur. In 2003, we also entered into reverse interest rate hedge agreements to float $100 million of
the fixed interest rate associated with the 7.00% senior unsecured notes due in November of 2007.
Under these reverse hedges, we will receive interest at a fixed rate of 7.00% and pay interest at a
variable rate averaging the six-month LIBOR in arrears plus 3.10%. The interest rate hedges mature
at the same time the notes are due. These hedges qualify as fair value hedges for accounting
purposes. Net semi-annual interest payments will be recognized as increases or decreases in
interest expense. The fair value of the interest rate hedges will be recognized on our balance
sheet and the carrying value of the senior unsecured notes will be increased or decreased by an
offsetting amount. At March 31, 2005, the fair value of our fair value hedges was an unrealized
loss of approximately $1.9 million and was reported in accounts payable and accrued expenses line
item on our balance sheet. The offsetting adjustment to the hedged debt was included in the
unsecured senior notes line item on our balance sheet. No hedge ineffectiveness was recognized on
our fair value hedging relationships. The estimated fair value of these interest rate hedge
agreements are dependent on changes in market interest rates and other market factors that affect
the value of such agreements. Consequently, the estimated current fair value may significantly
change during the term of the agreements. During the three months ended March 31, 2005 and 2004,
we recognized approximately $30,000 and $700,000, respectively, as a reduction of interest expense
related to our fair value hedges. 9




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##### Table of Contents



6. Stockholders Equity and Minority Interests A common Operating Partnership unit, or common OP Unit, and a share of our common stock have
essentially the same economic characteristics as they share equally in the total net income or loss
and distributions of the Operating Partnership. A common OP Unit may be redeemed for cash or, at
the election of the Operating Partnership, for shares of our common stock on a one-for-one basis. During the three months ended March 31, 2005 and 2004, we redeemed an aggregate of 5,000 and
16,000 common OP Units, respectively, of the Operating Partnership for shares of our common stock. In conjunction with the acquisition of 707 Broadway (see footnote 2), our Operating
Partnership issued a total of 54,950 common OP Units for a total value of approximately $2.0
million issued as part of the consideration to acquire the property. During the three months ended March 31, 2005 and 2004, we issued a total of 338,234 and
1,023,304, respectively, common shares relating to exercises of stock options. On March 28, 2005, we issued a total of 39,625 restricted stock awards to certain key
employees. Holders of these shares have full voting rights and will receive any dividends but are
prohibited from selling or transferring unvested shares. The fair market value on the date of
these grants for these shares was $34.49. These restricted shares vest equally on the anniversary
date of the awards over 3 years. We recorded approximately $2,000 of compensation expense during
the three months ended March 31, 2005 and will record compensation expense for these grants on a
straight-line basis over the respective vesting period. On March 14, 2005, we declared a quarterly divided of $0.505 per share to stockholders of
record on March 31, 2005. This dividend was paid on April 20, 2005. We declared quarterly
dividends of $0.505 per share for each of the three months ended March 31, 2005 and 2004. 7. Income (Loss) from Taxable REIT Subsidiary Included in interest and other loss are the operating results of our taxable REIT subsidiary,
or TRS. Under the name of Next>edge, the TRS provides energy consulting services to commercial
real estate owners. The following is a breakdown of the components of interest and other income
(loss) for each of the periods presented (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Net (loss) income from TRS
    
    $
    (490
    )
    
    $
    638Interest and other income
    
    
    239
    
    
    
    128$
    (251
    )
    
    $
    766
 8. Stock Option Plan Beginning on January 1, 2003, we adopted the provisions of SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure under which we began expensing the costs of
new stock options granted to employees in 2003 in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation. We used the Black-Scholes option valuation model to estimate the fair
value of the stock options granted. During the three months ended March 31, 2005 and March 31,
2004, we expensed approximately $9,000 of stock option based employee compensation costs. The following table reflects pro forma net income and earnings per share had we elected to
expense all options granted prior to 2003 assuming the fair value method and using the
Black-Scholes option valuation model (in thousands, except per share amounts): Three Months EndedMarch 31,2005
    
    
    2004Net income available to common stockholders, as reported
    
    $
    9,041
    
    
    $
    18,861Stock based employee compensation costs for options granted
prior to 2003 assuming fair value method
    
    
    (11
    )
    
    
    (77
    )Net income available to common stockholders, as adjusted
    
    $
    9,030
    
    
    $
    18,784Earnings per share:Basic as reported
    
    $
    0.14
    
    
    $
    0.29Basic as adjusted
    
    $
    0.14
    
    
    $
    0.29Diluted as reported
    
    $
    0.14
    
    
    $
    0.29Diluted as adjusted
    
    $
    0.14
    
    
    $
    0.29
 10




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9. Comprehensive Income Comprehensive income for the three months ended March 31, 2005 and 2004, respectively,
consisted of net income, plus the results of changes in value of cash flow hedges not reflected in
the Consolidated Statements of Income. The components of comprehensive income are as follows (in
thousands): Three Months EndedMarch 31,2005
    
    
    2004Net income
    
    $
    9,041
    
    
    $
    18,861Other comprehensive income (loss):Unrealized derivative gain (loss) on cash flow hedges
    
    
    3,027
    
    
    
    (8,847
    )Reclassification adjustment for losses included in earnings
    
    
    380
    
    
    
    799Comprehensive income
    
    $
    12,448
    
    
    $
    10,813
 10. Commitments and Contingencies We are presently subject to various lawsuits, claims and proceedings arising in the ordinary
course of business, none of which if determined unfavorably to us is expected to have a material
adverse effect on our cash flows, financial condition or results of operations. There were no
material changes in our legal proceedings during the three months ended March 31, 2005. 11. Subsequent Events On April 13, 2005, we acquired 5670 Wilshire, an approximate 408,000 square foot, 92% leased
office property located in Los Angeles County for approximately $93 million. In conjunction with
this acquisition, we assumed an approximate $51.5 million mortgage loan, with an interest rate of
8.5%, that matures in September of 2008. On April 15, 2005,we
filed a Form 8-K with the Securities and Exchange Commission
outlining recent material agreements entered into by us. Included in
this report was information regarding restricted shares granted to
our directors and senior executives, directors fees and
retainers and approved salaries for certain executives for 2005, and
the provisions of a new four-year Outperformance Plan through which
certain executives can receive equity or cash awards if returns generated for
shareholders are in excess of threshold amounts. On
April 28, a 130,000 square foot tenant in San Diego County
defaulted on their lease agreement with us. Annual rents from this
tenant are approximately $1.8 million. All outstanding amounts
for this tenant were fully reserved as of March 31, 2005. 11




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview The following discussion relates to our unaudited consolidated financial statements included
herein, which should be read in conjunction with the financial statements and related notes thereto
included elsewhere in thisForm 10-Qand in our 2004 Annual Report onForm 10-K, as amended. This Form 10-Q, including the documents incorporated herein by reference, contains
forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E
of the Exchange Act pertaining to, among other things, our future results of operations, capital
resources, portfolio performance, cash available for distribution, acquisitions, lease renewals,
property development, property renovation, capital requirements, funds from operations, anticipated
market and demographic conditions and general business, industry and economic conditions applicable
to us. Forward-looking statements can be identified by the use of words such as may, will,
should, expect, anticipate, estimate, continue or comparable terminology. Although we believe the expectations reflected in any forward-looking
statements are based on reasonable assumptions, we can give no assurance that our expectations will
be attained. Forward-looking statements are inherently subject to certain risks, trends and
uncertainties, many of which we cannot predict with accuracy and some of which we might not even
anticipate. Future events and actual results, financial and otherwise, may differ materially from
the results discussed in the forward-looking statements. Factors that could cause actual results
to differ materially from our expectations include the availability and cost of capital for future
investments, our ability to lease or re-lease space at current or anticipated rents, changes in the
supply of and demand for our properties, changes in interest rate levels, risks associated with the
development, acquisition or disposition of properties, competition within the industry, real estate
and market conditions, and other risks detailed from time to time in our SEC filings. The risks
included here are not exhaustive, and additional factors could adversely affect our business and
financial performance, including risks and factors included in other sections of this Form 10-Q.
In addition, we discussed a number of material risks in our annual report on Form 10-K for the year
ended December 31, 2004. Those risks continue to be relevant to our performance and financial
condition. We also operate in a very competitive and rapidly changing environment. New risk
factors emerge from time to time and it is not possible for management to predict all such risk
factors, nor can it assess the impact of all such risk factors on our companys business or the
extent to which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking statements as a
prediction of actual results. In addition, we expressly disclaim any responsibility to update forward-looking
statements, whether as a result of new information, future events or otherwise. Accordingly,
investors should use caution in relying on past forward-looking statements, which are based on
results and trends at the time they were made, to anticipate future results or trends. We are a self-administered and self-managed real estate investment trust that owns, manages,
leases, develops, renovates and acquires commercial properties located in Southern California. We
are managed by 6 senior executive officers who have experience in the real estate industry ranging
from 14 to 35 years and who collectively have an average of 20 years experience. We perform all
property and development management, accounting, finance and acquisition, disposition activities
and a majority of our leasing transactions with our staff of approximately 300 employees. As of March 31, 2005, we were Southern Californias largest publicly traded office landlord as
measured by total net rentable square feet owned. As of that date, our portfolio was comprised of
121 primarily suburban office properties, consisting of 198 buildings with approximately 18.9
million net rentable square feet, including 8 properties and 12 building currently held for
disposition. As of March 31, 2005, our operating portfolio was 91.1% occupied, excluding the 8
properties currently held for disposition. Including these properties our portfolio was 90.4%
occupied. Our primary business strategy is to actively manage our portfolio to achieve gains in rental
rates and occupancy, control operating expenses and maximize income from ancillary operations and
services. When market conditions permit, we may also selectively develop, renovate or acquire new
properties in submarkets that add value and fit strategically into our portfolio. We may also sell
existing properties and use the net proceeds to repay outstanding indebtedness or place into
investments that we believe will generate higher long-term value. 12




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##### Table of Contents



Critical Accounting Policies Refer to our 2004 Annual Report on Form 10-K for a discussion of our critical accounting
policies. There were no material changes to these policies during the three months ended March 31,
2005. Off-Balance Sheet Arrangements As of March 31, 2005, we do not have off-balance sheet transactions, arrangements or
obligations (including contingent obligations) that have, or are reasonably likely to have a
current or future material effect on our financial condition, changes in our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 13




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##### Table of Contents



RESULTS OF OPERATIONS Our financial position and operating results primarily relate to our portfolio of commercial
properties and income derived from those properties. Therefore, the comparability of financial data
from period to period will be affected by the timing of property developments, acquisitions and
dispositions. Comparison of the three months ended March 31, 2005 to the three months ended March 31, 2004
(in thousands, except number of properties and percentages): Three Months EndedMarch 31,
    
    
    
    
    
    
    Percent2005
    
    
    2004
    
    
    Change
    
    
    ChangeTotal Portfolio:Revenue from rental operations:Scheduled cash rents
    
    $
    88,165
    
    
    $
    81,574
    
    
    $
    6,591
    
    
    
    8
    %Straight-line rents
    
    
    763
    
    
    
    956
    
    
    
    (193
    )
    
    
    (20
    )Tenant reimbursements
    
    
    5,089
    
    
    
    4,276
    
    
    
    813
    
    
    
    19Parking, net of expense
    
    
    5,947
    
    
    
    5,464
    
    
    
    483
    
    
    
    9Other rental operations
    
    
    2,156
    
    
    
    1,987
    
    
    
    169
    
    
    
    9Total revenue from rental operations
    
    
    102,120
    
    
    
    94,257
    
    
    
    7,863
    
    
    
    8Property expenses:Repairs and maintenance
    
    
    11,761
    
    
    
    10,109
    
    
    
    1,652
    
    
    
    16Utilities
    
    
    7,372
    
    
    
    6,730
    
    
    
    642
    
    
    
    10Real estate taxes
    
    
    8,001
    
    
    
    7,349
    
    
    
    652
    
    
    
    9Insurance
    
    
    1,700
    
    
    
    1,813
    
    
    
    (113
    )
    
    
    (6
    )Ground rent
    
    
    303
    
    
    
    125
    
    
    
    178
    
    
    
    142Administrative
    
    
    4,412
    
    
    
    4,339
    
    
    
    73
    
    
    
    2Total property expenses
    
    
    33,549
    
    
    
    30,465
    
    
    
    3,084
    
    
    
    10Property Operating Results(1)
    
    
    68,571
    
    
    
    63,792
    
    
    
    4,779
    
    
    
    7General and administrative
    
    
    8,245
    
    
    
    4,484
    
    
    
    3,761
    
    
    
    84Interest expense
    
    
    22,926
    
    
    
    23,058
    
    
    
    (132
    )
    
    
    (1
    )Depreciation and amortization
    
    
    30,696
    
    
    
    27,127
    
    
    
    3,569
    
    
    
    13Interest and other loss (income)
    
    
    251
    
    
    
    (765
    )
    
    
    (1,016
    )
    
    
    (133
    )Minority interest
    
    
    164
    
    
    
    1,301
    
    
    
    (1,137
    )
    
    
    (87
    )Income from continuing operations
    
    $
    6,289
    
    
    $
    8,587
    
    
    $
    (2,298
    )
    
    
    (27
    )%Discontinued operations, net of minority interest
    
    $
    1,252
    
    
    $
    3,845
    
    
    $
    (2,593
    )
    
    
    (67
    )%Number of Properties:Disposed of during period
    
    
    (1
    )
    
    
    (2
    )Acquired during period
    
    
    2
    
    
    
    In service at end of period
    
    
    121
    
    
    
    127Net Rentable Square Feet:Disposed of during period
    
    
    (167
    )
    
    
    (295
    )Acquired during period
    
    
    778
    
    
    
    In service at end of period
    
    
    18,850
    
    
    
    18,341Same Property Portfolio(2):Revenue from rental operations
    
    $
    99,356
    
    
    $
    98,122
    
    
    $
    1,234
    
    
    
    1
    %Property expenses
    
    
    33,191
    
    
    
    31,885
    
    
    
    1,306
    
    
    
    4
    %$
    66,165
    
    
    $
    66,237
    
    
    $
    (72
    )
    
    
    
    %Straight-line rents
    
    $
    51
    
    
    $
    335
    
    
    $
    (284
    )
    
    
    (85
    )%Number of non-development properties
    
    
    116
    
    
    
    116Number of buildings
    
    
    188
    
    
    
    188Average occupancy
    
    
    90.8
    %
    
    
    89.4
    %Net rentable square feet
    
    
    17,266
    
    
    
    17,266
   (1)
    
    Property Operating Results is commonly used by investors to evaluate the
performance of REITs, to determine trends in earnings and to compute the fair value
of properties as it is not affected by (1) the cost of funds of the property owner or
(2) the impact of depreciation and amortization expenses as well as gains or losses
from the sale of operating real estate assets that are included in net income
computed in accordance with Generally Accepted Accounting Principles, or GAAP. The
first factor is commonly eliminated from net income because it is specific to the
particular financing capabilities and constraints of the owner. The second factor is
commonly eliminated because it may not accurately represent the actual change in
value in real estate properties that results from use or changes in market
conditions. We believe that eliminating these costs from net income gives investors
an additional measure of operating performance that, when used as an adjunct to net
income computed in accordance with GAAP, can be a useful measure of our 14




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operating results.Property Operating Results captures trends in occupancy rates, rental rates and
operating costs. However, Property Operating Results excludes
general and administrative costs, interest expense, interest income, depreciation and
amortization expense and gains or losses from the sale of properties,
changes in value in our real estate properties that result from use or permanent impairment to
carrying costs as stipulated by GAAP, the level of capital
expenditures and leasing costs necessary to maintain the operating performance of our
properties, all of which are significant economic costs.
Therefore, Property Operating Results may fail to capture significant trends which limits its
usefulness.Property Operating Results is a non-GAAP measure of performance. Property Operating
Results is not a substitute for net income as computed in accordance with GAAP. It
excludes significant expense components such as depreciation and amortization expense
and financing costs. This measure should be analyzed in conjunction with net income
and cash flow from operating activities as computed in accordance with GAAP. Other
companies may use different methods for calculating Property Operating Results or
similarly entitled measures and, accordingly, our Property Operating Results may not be
comparable to similarly entitled measures reported by other companies that do not
define the measure exactly as we do.The following is a reconciliation of net income computed in accordance with GAAP to
Property Operating Results (in thousands): Three Months Ended March 31,2005
    
    
    2004Net income
    
    $
    9,041
    
    
    $
    18,861Add:General and administrative expense
    
    
    8,245
    
    
    
    4,484Interest expense
    
    
    22,926
    
    
    
    23,058Depreciation and amortization
    
    
    30,696
    
    
    
    27,127Minority interest
    
    
    164
    
    
    
    1,301Interest and other loss
    
    
    251
    
    
    
    Loss from debt defeasance related to sale of discontinued property
    
    
    557
    
    
    
    Less:Gain on sale of discontinued properties
    
    
    2,057
    
    
    
    6,429Discontinued operations, net of minority interest
    
    
    1,252
    
    
    
    3,845Interest and other income
    
    
    
    
    
    
    765Property Operating Results
    
    $
    68,571
    
    
    $
    63,792
  (2)
    
    Consists of non-development properties classified as part of continuing operations
and owned for the entirety of the periods presented. VARIANCES FOR RESULTS OF OPERATIONS Our Property Operating Results for the three months ended March 31, 2005 compared to the same
period in 2004 were primarily affected by our acquisitions and development activities since January
1, 2004. As a result of these changes within our portfolio of properties since January 1, 2004, we do
not believe the Property Operating Results presented above are comparable from period to period.
Therefore, in the table above, we have also presented the Property Operating Results for our same
store portfolio. Revenue from Rental Operations Revenue from rental operations increased approximately $7.9 million, or 8% for the three
months ended March 31, 2005 compared to the same period in 2004. This increase was primarily due
to revenues from our 6100 Center Drive development property which was placed in service during the
second quarter of 2004, two office properties acquired in Los Angeles County in October of 2004
totaling approximately 391,000 square feet, two office properties acquired in San Diego County in
January of 2005 and March of 2005 totaling approximately 778,000 square feet and from overall
occupancy gains and scheduled rent increases in our properties. Revenue from rental operations for the same store portfolio increased approximately $1.2
million for the three months ended March 31, 2005 compared to the same period in 2004, primarily
due to an approximately $1.9 million increase in scheduled cash rents, partially offset by an
approximate $0.6 million decrease in other rental operations. The increase in scheduled cash rents
was primarily attributable to a 140 basis point increase in average occupancy and scheduled rent
increases in our existing leases. The decrease in other rental operations was primarily
attributable to lower lease termination fees in 2005. Property Expenses Property expenses increased approximately $3.1 million, or 10% for the three months ended
March 31, 2005 compared to the same period in 2004. This increase was primarily due to our
acquisition and development activities, gains in occupancy and increases in operating expenses for
the same store portfolio described below. Property expenses for the same store portfolio increased approximately $1.3 million, or 4% for
the three months ended March 31, 2005 compared to the same period in 2004, primarily due to higher
repairs and maintenance as a result of higher costs for contracted services and the timing of
certain projects. 15




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##### Table of Contents



General and Administrative General and administrative expenses as a percentage of total revenues were approximately 8%
for the three months ended March 31, 2005 compared to approximately 4% for the same period in 2004.
The approximate $3.8 million increase in general and
administrative expenses over 2004 was due to an approximate
$1.7 million in employee separation costs and $415,000 in
dead-deal costs for a proposed fee-development project. The remaining increase was primarily due to a
$500,000 increase in restricted stock expense related to grants made
since the first quarter of 2004, $450,000 increase in personnel costs
related to annual merit increases and the timing of bonuses and
various other expenses incurred in the first quarter of 2005,
including the on-going Section 404 Compliance costs. Depreciation and Amortization Depreciation and amortization expense increased by approximately $3.6 million, or 13% for the
three months ended March 31, 2005 compared to the same period in 2004, primarily due to
depreciation related to a development property placed in service in the second quarter of 2004, two
properties acquired in October 2004, one property acquired in January 2005 and depreciation related
to capital expenditures, tenant improvements and leasing commissions placed in service in 2004 and
2005. Interest and Other Loss (Income) Interest and other loss (income) decreased by approximately $1.0 million for the three months
ended March 31, 2005 compared to the same period in 2004, primarily due to net income recognized
from a consulting and installation project completed during the first quarter of 2004 by
Next>edge, our taxable REIT subsidiary that provides energy consulting services. LIQUIDITY AND CAPITAL RESOURCES Cash Flows Cash provided by operating activities decreased by approximately $13.0 million to $30.8
million for the three months ended March 31, 2005 compared to $43.8 million for the same period in
2004. This decrease was primarily due to the loss of operating cash flows from thirteen properties
sold since the beginning of 2004 as part of our capital recycling program, partially offset by the
increased operating cash flows from four properties acquired since the beginning of 2004 and our
6100 Center Drive development property which was placed in service during the second quarter of
2004. Cash used in investing activities increased by approximately $279.5 million to an outflow of
$236.4 million for the three months ended March 31, 2005 compared to an inflow of $43.1 million for
the same period in 2004. This increase was primarily due to the acquisitions of two properties in
the first quarter of 2005 totaling approximately $233 million and the sale of two assets totaling
approximately $67.5 million in the first quarter of 2004. Cash provided financing activities increased by approximately $276.0 million to an inflow of
$196.1 million for the three months ended March 31, 2005 compared to an outflow of $79.9 million
for the same period in 2004. This increase was primarily due to the issuance of $300 million of
unsecured senior notes in February 2005. The proceeds from these notes were used to redeem $200
million of unsecured senior notes that matured in March of 2005 and to partially fund our
acquisition activities. Cash Balances and Available Borrowings As of March 31, 2005, we had approximately $18.4 million in cash and cash equivalents,
including $14.9 million in restricted cash. Restricted cash consisted of $5.2 million in interest
bearing cash deposits required by four of our mortgage loans payable and $9.7 million in cash
impound accounts for real estate taxes and insurance as required by several of our mortgage loans
payable. Through our Operating Partnership, we have access to a total of $330 million under two
unsecured lines of credit. As of March 31, 2005, $259.0 million was outstanding and $71.0 million
was available under these unsecured lines of credit. Capital Recycling Program Under our capital recycling program, we evaluate our existing portfolio of properties and
current market opportunities to determine if the sale or purchase of properties would improve the
overall quality or return on invested capital of our existing portfolio. Proceeds from sales of
properties may be used to pay down our borrowings until we identify attractive properties to
purchase, renovate or develop. During the three months ended March 31, 2005, we sold one property
totaling approximately 167,000 square feet for approximately $16.6 million in gross sales proceeds.
During the three months ended March 31, 2005, we acquired two office properties consisting of
approximately 778,000 square feet for approximately $233.0 million. For additional information
regarding the properties acquired and sold, see the accompanying notes to our financial statements
elsewhere in this report. 16




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##### Table of Contents



Debt Summary Following is a summary of scheduled principal payments for our total debt outstanding as of
March 31, 2005 (in thousands): Year
    
    Amount2005
    
    $
    15,0192006
    
    
    256,297
    (1)2007
    
    
    156,0302008
    
    
    230,4392009
    
    
    112,0042010
    
    
    150,0192011
    
    
    200,2512012
    
    
    125,4812013
    
    
    5582014
    
    
    627Thereafter
    
    
    303,640Total
    
    $
    1,550,365
   (1)
    
    Includes $249 million outstanding on our Wells Fargo unsecured line of credit. Following is certain other information related to our outstanding indebtedness as of
March 31, 2005: Unsecured and Secured Debt: Weighted
    
    
    WeightedAverage
    
    
    AverageBalance
    
    
    Percent
    
    
    Interest Rate(1)
    
    
    Maturity (in years)(000s)Unsecured Debt
    
    $
    1,176,537
    
    
    
    76
    %
    
    
    5.73
    %
    
    
    5.6Secured Debt
    
    
    373,828
    
    
    
    24
    
    
    
    7.12
    
    
    
    3.2Total Debt
    
    $
    1,550,365
    
    
    
    100
    %
    
    
    6.07
    %
    
    
    5.7
 Floating and Fixed Rate Debt: Weighted
    
    
    WeightedAverage
    
    
    AverageBalance
    
    
    Percent
    
    
    Interest Rate(1)
    
    
    Maturity (in years)(000s)Floating Rate Debt(2)
    
    $
    309,000
    
    
    
    20
    %
    
    
    5.18
    %
    
    
    1.5Fixed Debt(3)
    
    
    1,241,365
    
    
    
    80
    
    
    
    6.29
    
    
    
    6.7Total Debt
    
    $
    1,550,365
    
    
    
    100
    %
    
    
    6.07
    %
    
    
    5.7
   (1)
    
    Includes amortization of prepaid financing costs.(2)
    
    Includes $100 million of fixed rate debt that has been converted to floating rate
through interest rate swap agreements.(3)
    
    Includes $175 million of floating rate debt that has been fixed through interest rate
swap agreements. Total interest incurred and the amount capitalized was as follows (in thousands): Three Months Ended March 31,2005
    
    
    2004Total interest incurred(1)
    
    $
    23,263
    
    
    $
    23,469Amount capitalized
    
    
    (235
    )
    
    
    (156
    )Amount expensed(1)
    
    $
    23,028
    
    
    $
    23,313
   (1)
    
    Includes interest expense for one property sold during the three months ended March 31,
2005 and one property classified as held for disposition at March 31, 2005. 17




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##### Table of Contents



Consolidated Income Available for Debt Service and Compliance with Principal Financial
Covenants Consolidated Income Available for Debt Service is a non-GAAP measurement of our performance
and liquidity. Consolidated Income Available for Debt Service is presented below because this data
is used by investors and our management as a supplemental measure to (a) evaluate our operating
performance and compare it to other real estate companies, (b) determine trends in earnings, (c)
determine our ability to service debt and (d) determine our ability to fund future capital
expenditure requirements. As discussed more fully below, Consolidated Income Available for Debt
Service is also used in several financial covenants we are required to satisfy each quarter under
the terms of our principal debt agreements. Consolidated Income Available for Debt Service permits investors and management to view income
from our operations on an unleveraged basis before the effects of non-cash depreciation and
amortization expense. By excluding interest expense, Consolidated Income Available for Debt
Service measures our operating performance independent of our capital structure and indebtedness
and, therefore, allows for a more meaningful comparison of our operating performance between
quarters as well as annual periods and to compare our operating performance to that of other
companies, and to more readily identify and evaluate trends in earnings. The usefulness of Consolidated Income Available for Debt Service is limited because it does
not reflect interest expense, taxes, gains or losses on sales of property, losses on valuations of
derivatives, asset impairment losses, cumulative effect of a change in accounting principle,
extraordinary items as defined by GAAP and depreciation and amortization costs. These costs have
been or may in the future be incurred by us, each of which affects or could effect our operating
performance and ability to finance our investments at competitive borrowing costs, successfully
maintain our REIT status, and acquire and dispose of real estate properties at favorable prices to
us. Some of these costs also reflect changes in value in our properties that result from use or
changes in market conditions and the level of capital expenditures and leasing costs necessary to
maintain the operating performance of our properties. Due to the significance of the net income
components excluded from Consolidated Income Available for Debt Service, this measure should not be
considered an alternative to (and should be considered in conjunction with) net income, cash flow
from operations, and other performance or liquidity measures prescribed by GAAP. This measure
should also be analyzed in conjunction with discussions elsewhere in Managements Discussion and
Analysis of Financial Condition and Results of Operations regarding the items eliminated in the
calculation of Consolidated Income Available for Debt Service. The reader is cautioned that Consolidated Income Available for Debt Service, as calculated by
us, may not be comparable to similar measures reported by other companies (under names such as or
similar to Consolidated Income Available for Debt Service, EBITDA or adjusted EBITDA) that do not
define this measure exactly the same as we do. 18




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##### Table of Contents



The following is a reconciliation of net cash provided by operating activities and net income
computed in accordance with GAAP to Consolidated Income Available for Debt Service (in thousands): Three Months Ended March 31,2005
    
    
    2004Net cash provided by operating activities
    
    $
    30,777
    
    
    $
    43,842Add:Interest expense including discontinued operations
    
    
    23,028
    
    
    
    23,313Loss from debt defeasance related to sale of discontinued property
    
    
    557
    
    
    
    Less:Amortization of loan costs and fees
    
    
    (870
    )
    
    
    (1,079
    )Straight-line rent
    
    
    (804
    )
    
    
    (893
    )Changes in operating assets and liabilities:Rent and other receivables
    
    
    1,462
    
    
    
    2,057Deferred rent
    
    
    2,162
    
    
    
    1,637Prepaid financing costs, expenses and other assets
    
    
    481
    
    
    
    533Accounts payable and accrued expenses
    
    
    6,556
    
    
    
    (1,641
    )Security deposits
    
    
    (583
    )
    
    
    (271
    )Consolidated Income Available for Debt Service
    
    $
    62,766
    
    
    $
    67,498
 Three Months Ended March 31,2005
    
    
    2004Net Income
    
    $
    9,041
    
    
    $
    18,861Add:Interest expense including discontinued operations
    
    
    23,028
    
    
    
    23,313Depreciation and amortization
    
    
    30,696
    
    
    
    27,127Amortization of deferred compensation
    
    
    519
    
    
    
    746Minority interest
    
    
    164
    
    
    
    1,301Loss from debt defeasance related to sale of discontinued property
    
    
    557
    
    
    
    Minority interest from discontinued operations
    
    
    71
    
    
    
    267Depreciation from discontinued operations
    
    
    1,551
    
    
    
    3,205Less:Gain on sale of discontinued properties
    
    
    (2,057
    )
    
    
    (6,429
    )Straight-line rent
    
    
    (804
    )
    
    
    (893
    )Consolidated Income Available for Debt Service
    
    $
    62,766
    
    
    $
    67,498
 Consolidated Income Available for Debt Service is also presented because it is used in
ratios contained in the principal financial covenants of the Indenture governing our publicly
traded senior unsecured notes and our Credit Agreement with a syndicate of banks led by Wells
Fargo. As of March 31, 2005, our senior unsecured notes represented approximately 51% of our total
outstanding debt and amounts outstanding under our Wells Fargo unsecured line of credit represented
approximately 16% of our total outstanding debt. The Consolidated Income Available for Debt
Service ratios and the other ratios reported below are part of financial covenants we are required
to satisfy each fiscal quarter. We believe information about these ratios is useful to (1) confirm
that we are in compliance with the financial covenants of our principal loan agreements, (2)
evaluate our ability to service our debt, (3) evaluate our ability to fund future capital
expenditures, and (4) compare our ratios to other real estate companies, including other REITs,
that present the same ratios. If we were to fail to satisfy these financial covenants, we would be in default under the
terms of the Indenture for the senior unsecured notes and/or the Wells Fargo Credit Agreement. A
default under those agreements could accelerate the obligation to repay such debt and could cause
us to be in default under our other debt agreements. Depending on the circumstances surrounding
such acceleration, we might not be able to repay the debt on terms that are favorable to us, or at
all, which would have a material adverse affect on our financial condition and our ability to raise
capital in the future. The reader is cautioned that these ratios, as calculated by us, may not be comparable to
similarly entitled ratios reported by other companies that do not calculate these ratios exactly
the same as we do. These ratios should not be considered as alternatives to the ratio of earnings
to fixed charges. 19




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##### Table of Contents



The following table summarizes the principal ratios contained in the financial covenants of
our senior unsecured notes and Wells Fargo unsecured line of credit as of March 31, 2005 (in
thousands, except percentage and covenant ratio data): Net investment in real estate
    
    $
    2,761,893Cash and cash equivalents
    
    
    3,524Restricted cash
    
    
    14,852Accumulated depreciation and amortization
    
    
    511,311Total Gross Assets
    
    $
    3,291,580Gross Value of Unencumbered Assets
    
    $
    2,336,815Mortgage loans payable(1)
    
    $
    373,828Unsecured lines of credit
    
    
    259,000Unsecured term loan
    
    
    125,000Unsecured senior notes, net of discount
    
    
    792,537Total Outstanding Debt
    
    $
    1,550,365Consolidated Income Available for Debt Service(2)
    
    $
    265,488Interest incurred(2)
    
    $
    90,245Loan fee amortization(2)
    
    
    (3,035
    )Debt Service(2)
    
    $
    87,210
 Senior Unsecured Notes Covenant Ratios
    
    Test

    
    ActualRatio of Consolidated Income Available for Debt Service to Debt
Service
    
    Greater than 1.5
    
    
    3.0Total Outstanding Debt/Total Gross Assets
    
    Less than 60%
    
    
    47
    %Secured Debt/Total Gross Assets
    
    Less than 40%
    
    
    11
    %Gross Value of Unencumbered Assets/Unsecured Debt
    

    Greater than 150%
    
    
    199
    %
 Wells Fargo Unsecured Line of Credit Covenant Ratios
    
    Test
    
    
    ActualRatio of Consolidated Income Available for Debt Service to interest expense(3)
    
    Greater than 2.0
    
    
    2.8Ratio of Consolidated Income Available for Debt Service to fixed charges (4)
    
    Greater than 1.75
    
    
    2.1
   (1)
    
    Represents 8 secured loans that are secured by 51 properties in our portfolio.(2)
    
    Represents amounts for the most recent four consecutive quarters. Loan fee
amortization excludes discount amortization on senior unsecured notes.(3)
    
    Interest expense consists of interest expense plus capitalized interest and less
amortization of loan fees and discounts.(4)
    
    Fixed charges consist of interest costs, whether expensed or capitalized, principal
payments on all debt, an amount equal to $0.3125 per quarter multiplied
by the weighted average gross leaseable square feet of the portfolio at the end of the
period and preferred unit distributions. 20




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##### Table of Contents



Funds from Operations The following table reflects the calculation of our funds from operations for the three months
ended March 31, 2005 and 2004 (in thousands): Three Months Ended March 31,2005
    
    
    2004Funds From Operations:(1)Net income
    
    $
    9,041
    
    
    $
    18,861Depreciation and minority interest from discontinued operations
    
    
    1,622
    
    
    
    3,472Gain on sale of discontinued properties
    
    
    (2,057
    )
    
    
    (6,429
    )Depreciation and amortization
    
    
    30,696
    
    
    
    27,127Minority interest
    
    
    164
    
    
    
    1,301Distribution on Preferred Operating Partnership Units
    
    
    
    
    
    
    (1,078
    )Funds From Operations(2)
    
    $
    39,466
    
    
    $
    43,254Weighted average common shares and Operating Partnership units outstanding  Diluted
    
    
    68,360
    
    
    
    66,910
   (1)
    
    We believe that funds from operations, or FFO, is a useful supplemental measure
of our operating performance. We compute FFO in accordance with standards established
by the White Paper on FFO approved by the Board of Governors of the National Association
of Real Estate Investment Trusts, or NAREIT, in April 2002. The White Paper defines FFO
as net income or loss computed in accordance with generally accepted accounting
principles, or GAAP, excluding extraordinary items, as defined by GAAP, and gains and
losses from sales of depreciable operating property plus real estate-related
depreciation and amortization and after adjustments for unconsolidated partnerships and
joint ventures.We believe that FFO, by excluding depreciation costs, the gains or losses from the sale of
operating real estate properties and the extraordinary items as defined by GAAP, provides
an additional perspective on our operating results. However, because these excluded items
have a real economic effect, FFO is a limited measure of performance.FFO captures trends in occupancy rates, rental rates and operating costs. FFO excludes
depreciation and amortization costs and it does not capture the changes in value in our
properties that result from use or changes in market conditions or the level of capital
expenditures and leasing costs necessary to maintain the operating performance of our
properties, all of which are significant economic costs. Therefore, its ability to measure
performance is limited.Because FFO excludes significant economic components of net income determined in
accordance with GAAP, FFO should be used as an adjunct to net income and not as an
alternative to net income. FFO should also not be used as an indicator of our financial
performance, or as a substitute for cash flow from operating activities determined in
accordance with GAAP or as a measure of our liquidity. FFO is not by itself indicative of
funds available to fund our cash needs, including our ability to pay dividends or service
our debt.FFO is used by investors to compare our performance with other REITs. Other REITs may use
different methods for calculating FFO and, accordingly, our FFO may not be comparable to
other REITs.(2)
    
    Includes $519,000 and $746,000 in non-cash compensation expense for the three months
ended March 31, 2005 and 2004, respectively. 21




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##### Table of Contents



Portfolio and Lease Information The following tables set forth certain information regarding our properties as of March 31,
2005. PORTFOLIO SUMMARY
As of March 31, 2005 Property Operating ResultsNumber of
    
    
    Number of
    
    
    Approximate
    
    
    Three Months EndedProperties
    
    
    Buildings
    
    

Net Rentable (Sq. Ft.)
    
    
    March 31, 2005(in thousands and unaudited)Location
    
    Total
    
    
    % of Total
    
    
    Total
    
    
    % of Total
    
    
    Total
    
    
    % of Total
    
    
    Total
    
    
    % of TotalLos Angeles CountyWest(1)
    
    
    29
    
    
    
    24
    %
    
    
    31
    
    
    
    16
    %
    
    
    4,996,531
    
    
    
    27
    %
    
    $
    26,744
    
    
    
    37
    %North
    
    
    28
    
    
    
    23
    %
    
    
    44
    
    
    
    22
    %
    
    
    3,452,844
    
    
    
    18
    %
    
    
    13,658
    
    
    
    19
    %South
    
    
    11
    
    
    
    9
    %
    
    
    15
    
    
    
    8
    %
    
    
    2,449,485
    
    
    
    13
    %
    
    
    7,617
    
    
    
    11
    %Subtotal
    
    
    68
    
    
    
    56
    %
    
    
    90
    
    
    
    46
    %
    
    
    10,898,860
    
    
    
    58
    %
    
    
    48,019
    
    
    
    67
    %Orange County
    
    
    17
    
    
    
    14
    %
    
    
    47
    
    
    
    24
    %
    
    
    2,913,987
    
    
    
    15
    %
    
    
    8,757
    
    
    
    12
    %San Diego County
    
    
    24
    
    
    
    20
    %
    
    
    36
    
    
    
    18
    %
    
    
    3,309,858
    
    
    
    18
    %
    
    
    9,877
    
    
    
    14
    %Ventura/Kern Counties
    
    
    4
    
    
    
    3
    %
    
    
    13
    
    
    
    6
    %
    
    
    574,630
    
    
    
    3
    %
    
    
    1,918
    
    
    
    3
    %Subtotal(2)
    
    
    113
    
    
    
    93
    %
    
    
    186
    
    
    
    94
    %
    
    
    17,697,335
    
    
    
    94
    %
    
    $
    68,571
    
    
    
    96
    %Properties Held for Disposition
    
    
    8
    
    
    
    7
    %
    
    
    12
    
    
    
    6
    %
    
    
    1,152,963
    
    
    
    6
    %
    
    
    2,976
    
    
    
    4
    %Total (Incl Properties Held for Disposition)
    
    
    121
    
    
    
    100
    %
    
    
    198
    
    
    
    100
    %
    
    
    18,850,298
    
    
    
    100
    %
    
    $
    71,547
    
    
    
    100
    %
   (1)
    
    Includes a retail property with approximately 37,000 net rentable square feet.(2)
    
    Excludes eight properties currently classified as held for disposition. PORTFOLIO OCCUPANCY AND IN-PLACE RENTS
As of March 31, 2005 Percent
    
    
    Percent
    
    
    Annualized Base RentOccupied
    
    
    Leased
    
    
    Per Leased Square Foot(1)Portfolio
    
    
    Full ServiceLocation
    
    
    
    
    
    
    
    
    
    Total
    
    
    Gross Leases(2)Los Angeles CountyWest
    
    
    92.6
    %
    
    
    94.3
    %
    
    $
    28.00
    
    
    $
    28.02North
    
    
    94.8
    %
    
    
    95.7
    %
    
    
    22.24
    
    
    
    22.88South
    
    
    89.6
    %
    
    
    92.3
    %
    
    
    18.98
    
    
    
    20.31Subtotal/Weighted Average
    
    
    92.6
    %
    
    
    94.3
    %
    
    $
    24.16
    
    
    $
    24.92Orange County
    
    
    88.5
    %
    
    
    89.2
    %
    
    
    19.15
    
    
    
    22.17San Diego County
    
    
    87.2
    %
    
    
    88.6
    %
    
    
    22.15
    
    
    
    25.05Ventura/Kern Counties
    
    
    96.6
    %
    
    
    96.6
    %
    
    
    19.12
    
    
    
    19.12Subtotal/Weighted Average(3)
    
    
    91.1
    %
    
    
    92.4
    %
    
    $
    22.84
    
    
    $
    24.35Properties Held for Disposition
    
    
    80.0
    %
    
    
    81.2
    %
    
    
    18.11
    
    
    
    20.10Total/Weighted Average
    
    
    90.4
    %
    
    
    91.8
    %
    
    $
    22.58
    
    
    $
    24.18
   (1)
    
    Based on monthly contractual base rent under existing leases as of March 31,
2005, multiplied by 12 and divided by leased net rentable square feet; for those leases
where rent has not yet commenced or which are in a free rent period, the first month in
which rent is to be received is used to determine annualized base rent.(2)
    
    Excludes 30 properties and approximately 3.3 million square feet under triple net
and modified gross leases.(3)
    
    Excludes eight properties classified as held for disposition at March 31, 2005. 22




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##### Table of Contents



TEN LARGEST TENANTS(1)
As of March 31, 2005 Weighted
    
    
    Percentage of
    
    
    Percentage ofAverage
    
    
    Aggregate
    
    
    AggregateRemaining
    
    
    Portfolio
    
    
    Portfolio
    
    
    
    
    
    
    AnnualizedNumber of
    
    
    Lease Term
    
    
    Leased
    
    
    Annualized
    
    
    Net Rentable
    
    
    Base RentTenant
    
    Locations
    
    
    in Months
    
    
    Square Feet
    
    
    Base Rent(2)
    
    
    Square Feet
    
    
    (in thousands)Vivendi Universal
    
    
    2
    
    
    
    61
    
    
    
    1.42
    %
    
    
    2.14
    %
    
    
    231,681
    
    
    $
    7,980State of California
    
    
    15
    
    
    
    48
    
    
    
    1.58
    %
    
    
    1.52
    %
    
    
    258,957
    
    
    
    5,685Atlantic Richfield
    
    
    1
    
    
    
    18
    
    
    
    0.88
    %
    
    
    0.93
    %
    
    
    143,885
    
    
    
    3,465University of Phoenix
    
    
    5
    
    
    
    47
    
    
    
    0.88
    %
    
    
    0.89
    %
    
    
    144,498
    
    
    
    3,303Pepperdine University
    
    
    1
    
    
    
    164
    
    
    
    0.69
    %
    
    
    0.87
    %
    
    
    113,488
    
    
    
    3,251Homestore.com, Inc.
    
    
    1
    
    
    
    34
    
    
    
    0.84
    %
    
    
    0.81
    %
    
    
    137,762
    
    
    
    3,036Walt Disney Pictures and Television
    
    
    1
    
    
    
    40
    
    
    
    0.79
    %
    
    
    0.73
    %
    
    
    128,258
    
    
    
    2,741Haight, Brown & Bonesteel, LLP
    
    
    2
    
    
    
    74
    
    
    
    0.39
    %
    
    
    0.73
    %
    
    
    63,262
    
    
    
    2,737Westfield Corporation
    
    
    1
    
    
    
    97
    
    
    
    0.59
    %
    
    
    0.73
    %
    
    
    96,876
    
    
    
    2,725State Compensation Insurance Fund
    
    
    1
    
    
    
    36
    
    
    
    0.69
    %
    
    
    0.71
    %
    
    
    113,513
    
    
    
    2,656Total/Weighted Average(3).
    
    
    30
    
    
    
    58
    
    
    
    8.75
    %
    
    
    10.06
    %
    
    
    1,432,180
    
    
    $
    37,579
   (1)
    
    Excludes tenants occupying the eight properties classified as held for
disposition at March 31, 2005. Including these properties, Ceridian, a 152,612 square
foot tenant with annualized base rent of $3.7 million, would rank as the third
largest tenant in the portfolio.(2)
    
    Annualized base rent is calculated as monthly contractual base rent under
existing leases as of March 31, 2005 multiplied by 12; for those leases where rent has
not yet commenced or which are in a free rent period, the first month in which rent is
to be received is used to determine annualized base rent.(3)
    
    The weighted average calculation is based on net rentable square footage leased
by each tenant. 23




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##### Table of Contents



LEASING ACTIVITY(1) Three Months EndedMarch 31, 2005Net Absorption (square feet)
    
    
    34,744Gross New Leasing Activity (square feet)(2)
    
    
    442,633Gross Renewal Leasing Activity (square feet)
    
    
    480,995Retention Rate
    
    
    63
    %Cash Rent Growth(3):Expiring Rate
    
    $
    22.22New / Renewed Rate
    
    $
    21.62Decrease
    
    
    (3
    )%GAAP Rent Growth(4):Expiring Rate
    
    $
    21.32New / Renewed Rate
    
    $
    22.15Increase
    
    
    4
    %Weighted
Average Lease Term in Months - New
    
    
    51Weighted
Average Lease Term in Months - Renewal
    
    
    37Tenant Improvements and Commissions (per square foot):New(2)
    
    $
    18.70Renewal
    
    $
    7.74Capital Expenditures (per square foot):Recurring
    
    $
    0.17Non-recurring
    
    $
    0.01
   (1)
    
    The information presented above excludes leasing activity for the eight
properties classified as held for disposition at March 31, 2005, except for recurring
and non-recurring capital expenditures.(2)
    
    Excludes development/renovation space.(3)
    
    Represents the difference between initial market rents on new and renewed leases
as compared to the expiring cash rents on the same space.(4)
    
    Represents cash rent growth adjusted for straight-line rents. 24




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##### Table of Contents



PORTFOLIO DIVERSIFICATION
As of March 31, 2005 Percentage ofOccupied
    
    
    TotalNAICS
    
    
    Square
    
    
    OccupiedNorth American Industrial Classification System Description
    
    Code
    
    
    Feet
    
    
    PortfolioProfessional, Scientific, and Technical Services
    
    
    541
    
    
    
    3,997,282
    
    
    
    24.80
    %Finance and Insurance
    
    
    521-525
    
    
    
    2,846,953
    
    
    
    17.66
    %Information
    
    
    511-519
    
    
    
    1,574,607
    
    
    
    9.77
    %Manufacturing
    
    
    311-339
    
    
    
    1,269,983
    
    
    
    7.88
    %Health Care and Social Assistance
    
    
    621-624
    
    
    
    955,463
    
    
    
    5.93
    %Real Estate, Rental and Leasing
    
    
    531-533
    
    
    
    844,758
    
    
    
    5.24
    %Educational Services
    
    
    611
    
    
    
    722,796
    
    
    
    4.48
    %Administrative and Support and Waste Management and Remediation Services
    
    
    561-562
    
    
    
    697,314
    
    
    
    4.33
    %Public Administration
    
    
    921-928
    
    
    
    600,409
    
    
    
    3.72
    %Wholesale Trade
    
    
    423-425
    
    
    
    419,269
    
    
    
    2.60
    %Construction
    
    
    236-238
    
    
    
    330,404
    
    
    
    2.05
    %Transportation and Warehousing
    
    
    481-493
    
    
    
    278,869
    
    
    
    1.73
    %Arts, Entertainment, and Recreation
    
    
    711-713
    
    
    
    247,729
    
    
    
    1.54
    %Other Services (except Public Administration)
    
    
    811-814
    
    
    
    231,757
    
    
    
    1.44
    %Accommodation and Food Services
    
    
    721-722
    
    
    
    192,902
    
    
    
    1.20
    %Retail Trade
    
    
    441-454
    
    
    
    110,569
    
    
    
    0.69
    %Management of Companies and Enterprises
    
    
    551
    
    
    
    34,410
    
    
    
    0.21
    %Utilities
    
    
    221
    
    
    
    8,975
    
    
    
    0.06
    %Agriculture, Forestry, Fishing and Hunting
    
    
    111-115
    
    
    
    3,595
    
    
    
    0.02
    %Mining
    
    
    211-213
    
    
    
    2,894
    
    
    
    0.02
    %Other  Uncategorized
    
    
    
    
    
    
    745,685
    (1)
    
    
    4.63
    %16,116,623
    (2)
    
    
    100.00
    %
   (1)
    
    Includes square footage for tenants occupying the two properties acquired during the three
months ended March 31, 2005 which have not yet been categorized.(2)
    
    Excludes square footage for tenants occupying the eight properties classified as held for
disposition at March 31, 2005. 25




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##### Table of Contents



LEASE EXPIRATIONS - ANNUAL
As of March 31, 2005 2010 and2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLos Angeles County:West
    
    Expiring SF (1)
    
    
    353,919
    
    
    
    547,902
    
    
    
    655,445
    
    
    
    583,105
    
    
    
    683,005
    
    
    
    1,853,888% of Leased SF (2)
    
    
    2.16
    %
    
    
    3.35
    %
    
    
    4.01
    %
    
    
    3.56
    %
    
    
    4.18
    %
    
    
    11.33
    %Rent per SF (3)
    
    $
    27.94
    
    
    $
    28.71
    
    
    $
    28.79
    
    
    $
    29.98
    
    
    $
    27.51
    
    
    $
    34.74North
    
    Expiring SF (1)
    
    
    382,261
    
    
    
    517,174
    
    
    
    268,498
    
    
    
    779,719
    
    
    
    391,380
    
    
    
    536,747% of Leased SF (2)
    
    
    2.34
    %

    
    
    3.16
    %
    
    
    3.47
    %
    
    
    4.77
    %
    
    
    2.39
    %
    
    
    3.28
    %Rent per SF (3)
    
    $
    23.55
    
    
    $
    23.90
    
    
    $
    23.39
    
    
    $
    24.73
    
    
    $
    24.91
    
    
    $
    23.11South
    
    Expiring SF (1)
    
    
    285,226
    
    
    
    210,242
    
    
    
    219,256
    
    
    
    325,292
    
    
    
    291,255
    
    
    
    884,191% of Leased SF (2)
    
    
    1.75
    %
    
    
    1.29
    %
    
    
    1.34
    %
    
    
    1.99
    %
    
    
    1.78
    %
    
    
    5.41
    %Rent per SF (3)
    
    $
    19.42
    
    
    $
    22.51
    
    
    $
    22.91
    
    
    $
    22.52
    
    
    $
    20.59
    
    
    $
    18.56Subtotal Los Angeles County
    
    Expiring SF (1)
    
    
    1,021,406
    
    
    
    1,275,318
    
    
    
    1,443,199
    
    
    
    1,688,116
    
    
    
    1,365,640
    
    
    
    3,274,826% of Leased SF (2)
    
    
    6.25
    %
    
    
    7.80
    %
    
    
    8.82
    %
    
    
    10.32
    %
    
    
    8.35
    %
    
    
    20.02
    %Rent per SF (3)
    
    $
    23.92
    
    
    $
    25.74
    
    
    $
    25.77
    
    
    $
    26.12
    
    
    $
    25.29
    
    
    $
    28.46Orange County
    
    Expiring SF (1)
    
    
    273,436
    
    
    
    605,548
    
    
    
    570,766
    
    
    
    331,595
    
    
    
    299,548
    
    
    
    476,700% of Leased SF (2)
    
    
    1.67
    %
    
    
    3.70
    %
    
    
    3.49
    %
    
    
    2.03
    %
    
    
    1.83
    %
    
    
    2.91
    %Rent per SF (3)
    
    $
    21.88
    
    
    $
    20.96
    
    
    $
    18.20
    
    
    $
    19.77
    
    
    $
    21.05
    
    
    $
    23.15San Diego County
    
    Expiring SF (1)
    
    
    395,090
    
    
    
    500,274
    
    
    
    357,100
    
    
    
    466,691
    
    
    
    349,590
    
    
    
    828,104% of Leased SF (2)
    
    
    2.41
    %
    
    
    3.06
    %
    
    
    2.18
    %
    
    
    2.85
    %
    
    
    2.14
    %
    
    
    5.06
    %Rent per SF (3)
    
    $
    19.20
    
    
    $
    24.19
    
    
    $
    26.38
    
    
    $
    27.62
    
    
    $
    25.11
    
    
    $
    24.75All Others
    
    Expiring SF (1)
    
    
    120,922
    
    
    
    144,447
    
    
    
    40,234
    
    
    
    58,627
    
    
    
    91,016
    
    
    
    78,324% of Leased SF (2)
    
    
    0.74
    %
    
    
    0.88
    %
    
    
    0.25
    %
    
    
    0.36
    %
    
    
    0.55
    %
    
    
    0.48
    %Rent per SF (3)
    
    $
    20.05
    
    
    $
    21.18
    
    
    $
    21.08
    
    
    $
    22.52
    
    
    $
    18.03
    
    
    $
    23.13Total Portfolio(4)
    
    Expiring SF (1)
    
    
    1,810,854
    
    
    
    2,525,587
    
    
    
    2,411,299
    
    
    
    2,545,029
    
    
    
    2,105,794
    
    
    
    4,657,954% of Leased SF (2)
    
    
    11.07
    %
    
    
    15.44
    %
    
    
    14.74
    %
    
    
    15.56
    %
    
    
    12.87
    %
    
    
    28.47
    %Rent per SF (3)
    
    $
    22.32
    
    
    $
    24.02
    
    
    $
    23.99
    
    
    $
    25.48
    
    
    $
    24.34
    
    
    $
    27.17
   (1)
    
    Represents the square footage of expiring leases, not including month-to-month
tenants.(2)
    
    Percentage of total rentable square footage expiring during the period.(3)
    
    Represents annualized ending cash rents of expiring leases.(4)
    
    Excludes eight properties currently classified as held for disposition. QUARTERLY LEASE
EXPIRATIONS - NEXT FOUR QUARTERS
As of March 31, 2005 Q2-05
    
    
    Q3-05
    
    
    Q4-05
    
    
    Q1-06Los Angeles County:West
    
    Expiring SF (1)
    
    
    119,989
    
    
    
    85,730
    
    
    
    148,200
    
    
    
    217,307% of Leased SF (2)
    
    
    0.73
    %
    
    
    0.52
    %
    
    
    0.91
    %
    
    
    1.33
    %Rent per SF (3)
    
    $
    28.24
    
    
    $
    26.02
    
    
    $
    28.81
    
    
    $
    27.37North
    
    Expiring SF (1)
    
    
    94,867
    
    
    
    140,080
    
    
    
    147,314
    
    
    
    119,526% of Leased SF (2)
    
    
    0.58
    %
    
    
    0.86
    %
    
    
    0.90
    %
    
    
    0.73
    %Rent per SF (3)
    
    $
    24.27
    
    
    $
    22.54
    
    
    $
    24.05
    
    
    $
    23.46South
    
    Expiring SF (1)
    
    
    118,545
    
    
    
    86,510
    
    
    
    80,171
    
    
    
    32,890% of Leased SF (2)
    
    
    0.73
    %
    
    
    0.53
    %
    
    
    0.49
    %
    
    
    0.20
    %Rent per SF (3)
    
    $
    19.55
    
    
    $
    17.09
    
    
    $
    21.73
    
    
    $
    21.59Subtotal Los Angeles County
    
    Expiring SF (1)
    
    
    333,401
    
    
    
    312,320
    
    
    
    375,685
    
    
    
    369,723% of Leased SF (2)
    
    
    2.04
    %
    
    
    1.91
    %
    
    
    2.30
    %
    
    
    2.26
    %Rent per SF (3)
    
    $
    24.02
    
    
    $
    21.99
    
    
    $
    25.43
    
    
    $
    25.59Orange County
    
    Expiring SF (1)
    
    
    51,430
    
    
    
    103,682
    
    
    
    118,324
    
    
    
    79,122% of Leased SF (2)
    
    
    0.31
    %
    
    
    0.64
    %
    
    
    0.72
    %
    
    
    0.48
    %Rent per SF (3)
    
    $
    19.39
    
    
    $
    23.68
    
    
    $
    21.39
    
    
    $
    15.18San Diego County
    
    Expiring SF (1)
    
    
    113,803
    
    
    
    125,123
    
    
    
    156,164
    
    
    
    87,301% of Leased SF (2)
    
    
    0.70
    %
    
    
    0.76
    %
    
    
    0.95
    %
    
    
    0.53
    %Rent per SF (3)
    
    $
    22.90
    
    
    $
    24.65
    
    
    $
    12.15
    
    
    $
    26.12All Others
    
    Expiring SF (1)
    
    
    11,740
    
    
    
    49,563
    
    
    
    59,619
    
    
    
    31,689% of Leased SF (2)
    
    
    0.07
    %
    
    
    0.30
    %
    
    
    0.37
    %
    
    
    0.20
    %Rent per SF (3)
    
    $
    18,.84
    
    
    $
    20.03
    
    
    $
    20.30
    
    
    $
    20.08Total Portfolio(4)
    
    Expiring SF (1)
    
    
    510,374
    
    
    
    590,688
    
    
    
    709,792
    
    
    
    567,835% of Leased SF (2)
    
    
    3.12
    %
    
    
    3.61
    %
    
    
    4.34
    %
    
    
    3.47
    %Rent per SF (3)
    
    $
    23.18
    
    
    $
    22.68
    
    
    $
    21.40
    
    
    $
    23.91
   (1)
    
    Represents the square footage of expiring leases, not including month-to-month
tenants.(2)
    
    Percentage of total rentable square footage expiring during the period.(3)
    
    Represents annualized ending cash rents of expiring leases.(4)
    
    Excludes eight properties currently classified as held for disposition. 26




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##### Table of Contents



Development / Renovation We completed the renovation of a 100,000 square foot building in Orange County which was
expanded to 130,000 square feet during the first quarter of 2005. We delivered the building in
February pursuant to a 10-year lease signed with an existing tenant. The year 1 cash yield on this
renovation is estimated at approximately 9.6% and 11.2% on a GAAP basis after including an
adjustment for straight-line rents. In addition, we have preliminary architectural designs completed for additional build-to-suit or multi-tenant projects at the Howard Hughes Center
 totaling approximately 475,000 net rentable square feet of
office space. We also have construction entitlements at the Howard
Hughes Center for a combination of up to 600 hotel rooms, apartments or condominiums. Build-to-suit projects consist of properties constructed to the tenants specifications in return for the tenants long-term commitment to the property. Based
on improving office trends in the West Los Angeles submarket and lack
of new office supply scheduled to be delivered in the surrounding
submarkets over the next 18-to-24 months, we intend to
begin constructing a 160,000 square foot multi-tenant office
building at our Howard Hughes Center later this year. We anticipate
the permitting process to take approximately 4-to-6 months and
the construction of the core and shell of the building an additional
18 months before the building is ready for occupancy. In addition to our development at the Howard Hughes Center, we have completed preliminary
designs and are marketing an approximate 170,000 square foot build-to-suit office building at our
Long Beach Airport Business Park. Also, as part of our Gateway Towers acquisition in August 2002,
we acquired a 5-acre developable land parcel in Torrance, California that we intend to market for a
build-to-suit office building. We currently do not intend to commence construction on these
projects until build-to-suit tenant leases are signed with terms allowing us to achieve yields
commensurate with the projects development risk. We expect to finance our development/renovation activities over the next 24 months through net
cash provided by operating activities, proceeds from asset sales, proceeds from our unsecured lines
of credit or other secured borrowings. 
 Item 3. Quantitative and Qualitative Disclosure about Market Risk Market risk is the exposure or loss resulting from changes in interest rates, foreign currency
exchange rates, commodity prices and equity prices. The primary market risk to which we are
exposed is interest rate risk, which is sensitive to many factors, including governmental monetary
and tax policies, domestic and international economic and political considerations and other
factors that are beyond our control. Interest Rate Risk In order to modify and manage the interest characteristics of our outstanding debt and limit
the effects of interest rates on our operations, we use a variety of financial instruments,
including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of
these types of instruments to hedge our exposure to changes in interest rates carries additional
risks such as counter-party credit risk. We do not enter into any transactions for speculative or
trading purposes. During 2002, we entered into interest rate swap agreements fixing the interest
rates on variable debt with notional amounts totaling $175.0 million. In August 2004, we settled
$150 million of forward-starting swaps we entered into in 2003 in conjunction with a forecasted
$200 million issuance of unsecured senior notes. In 2003, we also entered into reverse interest
rate swap agreements to float $100 million of the fixed interest rate associated with the 7.00%
senior unsecured notes due in November 2007. In February 2005, we settled $300 million of forward-starting swaps we entered into in 2004 in
conjunction with a forecasted $300 million issuance of unsecured senior notes. In conjunction with the extension of our $125 million unsecured term loan in February 2005, we
also entered into a series of interest rate swap agreements to fix the interest rate through the
extension period. Under these interest rate swap agreements, the interest rate on this loan is
effectively fixed at 5.29% from June of 2006 through May of 2007, 5.55% from June of 2007 through
November of 2008, 5.76% from December of 2008 through May of 2010 and 5.99% from June of 2010
through February of 2012. Some of our future earnings, cash flows and fair values relating to financial instruments are
dependent upon prevailing market rates of interest, such as LIBOR. Based on interest rates and
outstanding balances as of March 31, 2005, a 1% increase in interest rates on our $309.0 million of
floating rate debt, including $100 million of fixed rate debt swapped to floating through interest
rate hedges, would decrease annual future earnings and cash flows by approximately $3.1 million and
would not have an impact on the fair value of the floating rate debt. Conversely, a 1% decrease in
interest rates on our $309.0 million of floating rate debt would increase annual future earnings
and cash flows by approximately $3.1 million and would not have an impact on the fair value of the
floating rate debt. The weighted average interest rate on our floating debt as of March 31, 2005
was 5.18%. Our fixed rate debt, including $175.0 million of floating rate debt swapped to fixed through
interest rate hedges, totaled $1,241.4 million as of March 31, 2005 with a weighted average
interest rate of 6.29% and a total fair value of approximately $1,227.3 million. A 1% decrease in
interest rates would increase the fair value of our fixed rate debt by approximately $61.2 million
and would not have an impact on future earnings and cash flows. A 1% increase in interest rates
would decrease the fair value of our fixed rated debt by approximately $57.2 million and would not
have an impact on future earnings and cash flows. 27




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##### Table of Contents



These amounts are determined by considering the impact of hypothetical interest rates on our
borrowing cost. These analyses do not consider the effects of the reduced level of overall
economic activity that could exist in that environment. Further, in the event of a change of this
magnitude, we would consider taking actions to further mitigate our exposure to the change. Due to
the uncertainty of the specific actions that would be taken and their possible effects, however,
this sensitivity analysis assumes no changes in our capital structure. 
 Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, our management was required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our disclosure controls and procedures are designed to provide a reasonable level of assurance of
reaching our desired disclosure control objectives. As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as of the end of the first quarter of 2005 covered by this report. Based on the foregoing, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective and were operating at the reasonable assurance level. There has been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting. 28




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##### Table of Contents



Part II OTHER INFORMATION 
 Item 1. Legal Proceedings We are presently subject to various lawsuits, claims and proceedings arising in the ordinary
course of business, none of which if determined unfavorably to us is expected to have a material
adverse effect on our cash flows, financial condition or results of operations. There were no
material changes in our legal proceedings during the three months ended March 31, 2005. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  (c)
    On January 5, 2005, our Operating Partnership issued 54,950 common OP Units
valued at approximately $2.0 million as a portion of the total consideration to acquire
an office property located in San Diego County. The common OP Units are redeemable for
cash equal to the then-current market value of one share of our common stock or, at our
Operating Partnerships option, on a one-for-one basis for shares of our common stock.The issuance was effected in reliance upon an exemption from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended. 
 Item 3. Defaults Upon Senior Securities  None 
 Item 4. Submission of
Matters to a Vote of Security Holders - None 
 Item 5. Other
Information - None 
 Item 6. Exhibits Exhibit Number
    
    Description4.1
    
    Amendment No. 3 to Term Loan Agreement between Arden Realty Limited Partnership and Wells Fargo
Bank, National Association, as administrative agent, sole lead arranger and lender, relating to
the $75 million term loan, dated as of February 14, 2005, incorporated herein by reference to
Exhibit 10.1 to Arden Realty Limited Partnerships current report on Form 8-K filed with the
Commission on February 18, 2005.4.2
    
    Amendment No. 3 to Term Loan Agreement between Arden Realty Limited Partnership and Wells Fargo
Bank, National Association, as administrative agent, sole lead arranger and lender and Wachovia
Bank, N.A., as lender, relating to the $50 million term loan, dated as of February 14, 2005,
incorporated herein by reference to Exhibit 10.2 to Arden Realty Limited Partnerships current
report on Form 8-K filed with the Commission on February 18, 2005.4.3
    
    Form of Arden Realty Limited Partnerships 5.25% Note due 2015, dated February 28, 2005,
incorporated herein by reference to Exhibit 4.1 to Arden Realty Limited Partnerships current
report on Form 8-K filed on March 1, 2005.4.4
    
    Officers certificate dated February 28, 2005 with respect to the terms of Arden Realty Limited
Partnerships 5.25% Note due 2015, incorporated herein by reference to Exhibit 4.2 to Arden
Realty Limited Partnerships current report on Form 8-K filed with the Commission on March 1,
2005.10.1
    
    Summary of Cash Bonus Plan available to certain senior executives of the Registrant,
incorporated herein by reference to Item 1.01 of the Registrants current report on Form 8-K
filed with the Commission on February 22, 2005.10.2
    
    Form of Restricted Stock Agreement under the Second Amended and Restated 1996 Stock Option and
Incentive Plan of the Registrant and Arden Realty, Inc., incorporated herein by reference to
Exhibit 10.1 to the Registrants current report on Form 8-K filed with the Commission on
February 22, 2005.10.3
    
    Confidential Resignation Agreement and General Release dated as of March 4, 2005 by and between
Arden Realty, Inc. and Arden Realty Limited Partnership and Andrew J. Sobel, incorporated herein
by reference to Exhibit 10.49 to Arden Realty, Inc.s annual report on Form 10-K filed with the
Commission on March 14, 2005.31.1
    
    Officers certifications pursuant to Rule 13a14(a) or Rule 15d14(a).31.2
    
    Officers certifications pursuant to Rule 13a14(a) or Rule 15d14(a).32.1
    
    Officers certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)32.2
    
    Officers certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)
   (1)
    
    In accordance with SEC Release No. 33-8212, the following exhibit is being
furnished, and is not being filed as part of this Report or as a separate
disclosure document, and is not being incorporated by reference into any
Securities Act of 1933 registration statement. 29




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARDEN REALTY, INC.Date: May 6, 2005
    
    By:
    
    /s/ Robert C. Peddicord

Robert C. Peddicord
Executive Vice President,
Leasing and Property OperationsDate: May 6, 2005
    
    By:
    
    /s/ Richard S. Davis

Richard S. Davis
Executive Vice President and
Chief Financial Officer
 30