Edgar Filing: ARDEN REALTY INC

Arden Realty, Inc. Form 10-K 12/31/2002

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-K


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

For the fiscal year ended December 31, 2002

OR

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

For the transition period from to .

Commission File Number 1-12193

ARDEN REALTY, INC.

(Exact name of registrant as specified in its charter)


Maryland		95-4578533
(State or other jurisdiction of incorporation or organization)		(IRS Employer I.D. Number)

11601 Wilshire Boulevard Fourth Floor

Los Angeles, California 90025-1740

(address of principal executive office)

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

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


Title of each class		Name of each exchange on which registered

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

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

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

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

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

The aggregate market value of the shares of common stock held by non-affiliates was approximately $1.8 billion based on the closing price on the New York Stock Exchange for such shares on June 28, 2002.

The number of the Registrant’s shares of common stock outstanding was 63,066,851 as of March 21, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this report incorporates information by reference from the definitive Proxy Statement for the 2003 Annual Meeting of Stockholders.

TABLE OF CONTENTS


PART I
	ITEM 2.Properties
	ITEM 8.Financial Statements and Supplementary Data
	ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	ITEM 10.Directors and Executive Officers of the Registrant
	ITEM 11.Executive Compensation
	ITEM 12.Security Ownership of Certain Beneficial Owners and Management
	ITEM 13.Certain Relationships and Related Transactions
	ITEM 14.Controls and Procedures
PART IV
	ITEM 15.Exhibits, Financial Statements, and Reports on Form 8-K
ARDEN REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARDEN REALTY, INC.
EXHIBIT 12.1
EXHIBIT 23.1
EXHIBIT 99.1

ARDEN REALTY, INC.

TABLE OF CONTENTS


Item			Page
No.			No.

PART I
	1.	Business		1
	2.	Properties		6
	3.	Legal Proceedings		17
	4.	Submission of Matters to a Vote of Security Holders		18
PART II
	5.	Market for Registrant’s Common Equity and Related Stockholder Matters		18
	6.	Selected Financial Data		18
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
	7A.	Quantitative and Qualitative Disclosure about Market Risk		39
	8.	Financial Statements and Supplementary Data		48
	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		49
PART III
	10.	Directors and Executive Officers of the Registrant		49
	11.	Executive Compensation		49
	12.	Security Ownership of Certain Beneficial Owners and Management		49
	13.	Certain Relationships and Related Transactions		49
	14.	Controls and Procedures		49
PART IV
	15.	Exhibits, Financial Statements and Reports on Form 8-K		50
		Signatures		56
		Certifications		57

PART I

ITEM 1. Business

(a) GENERAL

The terms “Arden Realty”, “us”, “we” and “our” as used in this report refer to Arden Realty, Inc. We were incorporated in Maryland in May 1996 and completed our initial public offering in October 1996. Commencing with our taxable year ended December 31, 1996, we have operated and qualified as a real estate investment trust, or REIT, for federal income tax purposes. We are a self-administered and self-managed REIT that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. We are the sole general partner of Arden Realty Limited Partnership, or the operating partnership, and as of December 31, 2002, we owned approximately 97.3% of the operating partnership’s common partnership units. We conduct substantially all of our operations through the operating partnership and its consolidated subsidiaries.

(b) INDUSTRY SEGMENTS

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

(c) DESCRIPTION OF BUSINESS

We are a full-service real estate organization managed by 8 senior executive officers who have experience in the real estate industry ranging from 11 to 33 years and who collectively have an average of 19 years of experience. We perform all property management, construction management, accounting, finance and acquisition activities and a majority of our leasing transactions for our portfolio with our staff of approximately 300 employees.

As of December 31, 2002, we were Southern California’s largest publicly traded office landlord as measured by total net rentable square feet owned. As of December 31, 2002, our portfolio of primarily suburban office properties consisted of 137 properties and 223 buildings containing approximately 19.4 million net rentable square feet including one development property with approximately 283,000 net rentable square feet under lease-up. As of December 31, 2002, our properties were 90.1% occupied.

Portfolio Management

We perform all portfolio management activities, including management of all lease negotiations, construction management of tenant improvements or tenant build-outs, property renovations, capital expenditures and on-site property management for our portfolio. We directly manage these activities from approximately 44 management offices located throughout our portfolio. The activities of these management offices are supervised by four regional offices with oversight by our corporate office to ensure consistency of the application of our operating policies and procedures. Each regional office is strategically located within the Southern California submarkets where our properties are located and is managed by a regional First Vice President who is responsible for supervising the day-to-day activities of our management offices. Each regional office is staffed with leasing, property management, building engineering, construction and information systems specialists, our Regional Service Teams. By maintaining a regionally focused organizational structure led by seasoned managers, we are able to quickly respond to our tenants’ needs and market opportunities.

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

We currently lease approximately 70% of our portfolio’s net rentable space using our in-house staff. We employ outside brokers who are monitored by our Regional Service Teams for the remainder of our net rentable space. Our in-house leasing program allows us to closely monitor rental rates and lease terms for new and renewal leases and reduce third-party leasing commissions.

Business Strategies

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

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


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

	•	emphasizing quality service, tenant satisfaction and retention;

	•	employing intensive property marketing and leasing programs; and

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

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

Integrated Decision Making

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

Quality Service and Tenant Satisfaction

We strive to provide quality service through our multidisciplinary operating approach resulting in timely responses to our tenants’ needs. Our seasoned Regional Service Teams interact and resolve issues relating to tenant satisfaction and day-to-day operations. For portfolio-wide operational and administrative functions, our corporate office provides support to all regional offices and provides immediate response for critical operational issues.

Proactive Leasing

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

Cost Control and Operating Efficiencies

The size and geographic focus of our portfolio permits us to enhance portfolio value by controlling operating costs. We seek to capitalize on the economies of scale and concentration which result from the

geographic focus of our portfolio through the ownership and management of multiple properties within particular submarkets and the maintenance of standardized processes and systems for cost control at each of our properties. These cost controls and operating efficiencies allowed us to achieve a 68.5% ratio of property operating results to total property revenues in 2002.

Operating Strategies

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


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

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

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

Internal Operating Strategy

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


	•	stabilizing occupancy throughout our portfolio;

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

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

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

Stabilizing Portfolio Occupancy

Although our overall occupancy declined during 2002 by approximately 2.1% as a result of a continued downturn in the national and Southern California economic activity, we believe that we have been successful in attracting and retaining a diverse tenant base by actively managing our properties with an emphasis on tenant satisfaction and retention. Our in-house leasing teams, working with outside leasing brokers, continuously monitor each market to identify strong prospective tenants who are in need of new or additional space. We also strive to be responsive to the needs of existing tenants through our on-site professional management staff and by providing them with alternative space within our portfolio to accommodate their changing space requirements.

Cost Control Management and Systems

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


	•	lighting retrofits;

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

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

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


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

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

Capitalizing on Economies of Scale and Concentration

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

Sourcing Additional Revenue While Providing High Quality Services to Tenants

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

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

External Operating Strategy

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

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


	•	low vacancy rates;

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

	•	a minimal amount of developable land; and

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

Competition

We compete with other owners and developers of office properties to attract tenants to our properties and to obtain suitable land for development. Ownership of competing properties is currently diversified among many different types, from publicly traded companies and institutional investors, including other REITs, to small enterprises and individual owners. No one owner or group of owners currently dominate or significantly

influence the markets in which we operate. See “Risk Factors — Competition affects occupancy levels, rents and the cost of land which could adversely affect our revenues.”

California Electric Utility Deregulation

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

Approximately 28% of our properties and 21% of the total rentable square footage of our portfolio are subject to leases that require our tenants to pay all utility costs and the remainder provide that our tenants will reimburse us for utility costs in excess of a base year amount. See “Risk Factors — Rising energy costs and power outages in California may have an adverse effect on our operations and revenue.”

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

Employees

As of December 31, 2002, we had approximately 300 full-time employees that perform all of our property management, construction management, accounting, finance and acquisition activities and a majority of our leasing transactions.

Available Information

This annual report on Form 10-K and other periodic and current reports filed with the Securities and Exchange Commission, or SEC, are available, free of charge, by viewing the SEC Filings available in the Investor Information section of our website at www.ardenrealty.com as soon as reasonably practicable after we file them with the SEC.

(d) FOREIGN OPERATIONS

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

ITEM 2. Properties

Existing Portfolio

Our portfolio consists of 136 primarily office properties, containing approximately 19.1 million net rentable square feet, excluding a newly developed property with approximately 283,000 net rentable square feet currently under lease-up, that individually range from approximately 12,000 to 600,000 net rentable square feet. Of the 136 properties currently in service in our portfolio, 134 or 99% are office properties. All of our properties are located in Southern California and most are in suburban areas in close proximity to main thoroughfares. We believe that our properties are located within desirable and established business communities and are well maintained. Our properties offer an array of amenities including high-speed internet access, security, parking, conference facilities, on-site management, food services and health clubs.

Following is a summary of our property portfolio as of December 31, 2002:



																						Property Operating
																						Results(2),(3)

																Approximate Net
				Number of						Number of						Rentable Square						For the Year Ended
				Properties(1)						Buildings(1)						Feet(1)						December 31, 2002

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


																						($000’s and
																						unaudited)

Los Angeles County
	West(4)				31			23	%		33			15	%		5,021,715			26	%	$	108,411		38	%
	North				29			21	%		46			21	%		3,231,591			17	%		45,407		16	%
	South				16			12	%		21			9	%		3,057,925			16	%		33,181		12	%

		Subtotal			76			56	%		100			45	%		11,311,231			59	%		186,999		66	%
Orange County					24			18	%		57			25	%		3,708,926			19	%		47,722		17	%
San Diego County					25			18	%		40			18	%		2,857,195			15	%		33,384		12	%
Ventura/ Kern Counties					6			4	%		17			8	%		778,363			4	%		9,240		3	%
Riverside/ San Bernardino Counties(5)					5			4	%		8			4	%		476,461			3	%		4,986		2	%

			Total		136	(6)		100	%		222	(6)		100	%		19,132,176	(6)		100	%	$	282,331		100	%


(1)	Includes one property with approximately 140,000 net rentable square feet held for disposition.

(2)

We define Property Operating Results as revenue (including rent, tenant reimbursements, parking income and all other property specific revenues) less property operating expenses (including property taxes, insurance, utilities, repairs and maintenance and all other property specific operating expenses but excluding depreciation and financing costs). This measure 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 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 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 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, 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 income from continuing operations before gain on sale of properties and minority interest to Property Operating Results (in thousands):



		Year Ended December 31,

		2002			2001			2000

Income from continuing operations before gain on sale of properties and minority interest		$	72,989		$	99,227		$	100,948
Add:
	General and administrative expense		13,166			12,143			9,336
	Interest expense		88,516			84,195			78,406
	Depreciation and amortization		110,202			100,775			85,947
Less:
	Interest and other income		(2,542	)		(2,941	)		(3,527	)

Property Operating Results		$	282,331		$	293,399		$	271,110


(3)	Excludes the operating results of one property classified as held for disposition. The operating results for this property are reported as part of discontinued operations in our consolidated statements of income.

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

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

(6)	Including one development property currently under lease-up, our total portfolio consists of 137 properties with 223 buildings and approximately 19.4 million rentable square feet.

The following is a summary of our occupancy and in-place rents as of December 31, 2002:



									Annualized Base Rent
									Per Leased Square Foot(1)

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

Los Angeles County
	West			90.2	%		91.4	%	$	28.46	$	28.60
	North			86.1	%		89.1	%		21.48		22.32
	South			87.7	%		89.3	%		19.34		20.43
Orange County				94.8	%		95.4	%		18.28		21.46
San Diego County				88.9	%		88.9	%		18.54		22.91
Ventura/ Kern Counties				96.2	%		96.7	%		18.46		18.70
Riverside/ San Bernardino Counties				93.9	%		94.6	%		17.29		19.85

		Total/ Weighted Average		90.1	%		91.4	%	$	21.67	$	23.68


(1)	Based on monthly contractual base rent under existing leases as of December 31, 2002, 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 38 properties and approximately 3.9 million square feet under triple net and modified gross leases.

Development Properties

In addition to the properties listed above, we currently have one development property containing approximately 283,000 net rentable square feet under lease-up. This property is located in the Howard Hughes Center, a 70-acre commercial development located two miles north of Los Angeles International Airport and immediately adjacent to the San Diego Freeway (I-405), with on- and off-ramps that directly serve the site.

The following table summarizes information about this property as of December 31, 2002:

Estimated

Year 1

Estimated

Percent

Stabilized

Year 1

Costs

Estimated

Leased

Shell

Estimated

Cash Property

Annual

Incurred

Total

Completion

Stabilization

Operating

Cash

GAAP

Property

To Date

Cost(1)

3/24/03

Date

Date(2)

Results(3)

Yield

Yield(4)

($000’s)

Howard Hughes Center:

6100 Center Drive

65,296

81,500

—

2nd Qtr 2002

4th Qtr 2003

6,450

7.9

8.9


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

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

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

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

In addition to the property above, we have entitlements and preliminary architectural designs completed for additional build-to-suit buildings at the Howard Hughes Center totaling an additional 425,000 net rentable square feet. We also have construction entitlements at the Howard Hughes Center for up to 600 hotel rooms. Build-to-suit buildings consist of properties constructed to the tenant’s specifications in return for the tenant’s long-term commitment to the property. We do not intend to commence construction on any additional build-to-suit buildings or hotels at the Howard Hughes Center until development plans and budgets are finalized and build-to-suit tenant leases are signed with terms allowing us to achieve yields commensurate with each project’s development risk.

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

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

Acquisitions

The following table summarizes our acquisition activity during 2002:

Property

County

Submarket

Date of Purchase

Property Type

Square Feet

Purchase Price

($000’s)

Gateway Towers

Los Angeles

Torrance

Aug. 7, 2002

Office

432,894

62,500

Gateway Land Parcel

Los Angeles

Torrance

Aug. 7, 2002

Developable Land

N/ A

3,500

Crossroads

San Diego

Mission Valley

Aug. 16, 2002

Office

133,566

16,900

Governor Executive Center

San Diego

Governor Park

Aug. 16, 2002

Office

52,195

11,200

Carmel Valley Center I & II

San Diego

Del Mar Heights

Aug. 30, 2002

Office

107,197

28,400

Carmel View Office Plaza

San Diego

Rancho Bernardo

Aug. 30, 2002

Office

77,460

12,500

Total

803,312

135,000

Dispositions

The following table summarizes our disposition activity during 2002:

Property

County

Submarket

Date of Sale

Property Type

Square Feet

Sales Price

($000’s)

Harbor Corporate Center

Los Angeles

Torrance

Mar. 7, 2002

Office

63,925

6,900

Renaissance Court

Los Angeles

Simi/Conejo Valley

April 16, 2002

Office

61,245

8,300

6800 Owensmouth

Los Angeles

West San Fernando Valley

May 1, 2002

Office

80,014

8,400

2730 Wilshire Apartments

Los Angeles

Santa Monica

Nov. 1, 2002

Apartment

—

(1)

2,300

Total

205,184

25,900


(1)	Consists of 16 apartment units.

The following table presents specific information regarding our 136 stabilized properties as of December 31, 2002:


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

Los Angeles County
Los Angeles West
9665 Wilshire		Beverly Hills/ Century City	Beverly Hills	1972/92-93		158,684
Beverly Atrium		Beverly Hills/ Century City	Beverly Hills	1989		59,650
8383 Wilshire		Beverly Hills/ Century City	Beverly Hills	1971/93		417,463
120 S. Spalding		Beverly Hills/ Century City	Beverly Hills	1984		60,656
9100 Wilshire Blvd		Beverly Hills/ Century City	Beverly Hills	1971/90		326,227
Century Park Center		Beverly Hills/ Century City	Los Angeles	1972/94		243,404
10350 Santa Monica		Beverly Hills/ Century City	Los Angeles	1979		42,292
10351 Santa Monica		Beverly Hills/ Century City	Los Angeles	1984		96,251
Westwood Terrace		Westwood/ West Los Angeles	Los Angeles	1988		135,943
1950 Sawtelle		Westwood/ West Los Angeles	Los Angeles	1988/95		103,106
10780 Santa Monica		Westwood/ West Los Angeles	Los Angeles	1984		92,486
Wilshire Pacific Plaza		Westwood/ West Los Angeles	Los Angeles	1976/87		100,122
World Savings Center(2)		Westwood/ West Los Angeles	Los Angeles	1983		469,115
11075 Santa Monica		Westwood/ West Los Angeles	Los Angeles	1983		35,696
2730 Wilshire		Westwood/ West Los Angeles	Santa Monica	1985		55,080
2800 28th Street		Westwood/ West Los Angeles	Santa Monica	1979		103,506
1919 Santa Monica		Westwood/ West Los Angeles	Santa Monica	1991		43,796
2001 Wilshire Blvd		Westwood/ West Los Angeles	Santa Monica	1980		101,125
Westwood Center		Westwood/ West Los Angeles	Santa Monica	1965/2000		313,000
400 Corporate Pointe		Marina Area/ Culver City/ LAX	Culver City	1987		164,598
600 Corporate Pointe		Marina Area/ Culver City/ LAX	Culver City	1989		273,339
Bristol Plaza		Marina Area/ Culver City/ LAX	Culver City	1982		84,014
Northpoint		Marina Area/ Culver City/ LAX	Los Angeles	1991		104,235
Howard Hughes Spectrum Club		Marina Area/ Culver City/ LAX	Los Angeles	1993		36,959
Howard Hughes Tower		Marina Area/ Culver City/ LAX	Los Angeles	1987		313,833
6060 Center Drive		Marina Area/ Culver City/ LAX	Los Angeles	2000		241,928
6080 Center Drive		Marina Area/ Culver City/ LAX	Los Angeles	2002		287,148
Univision-5999 Center Drive		Marina Area/ Culver City/ LAX	Los Angeles	2001		161,650
6100 Wilshire		Park Mile/ West Hollywood	Los Angeles	1986		202,704
145 South Fairfax		Park Mile/ West Hollywood	Los Angeles	1984		53,994
Beverly Sunset Medical Plaza(3)		Park Mile/ West Hollywood	Los Angeles	1963/92-95		139,711

	Subtotal/ Weighted Average — Los Angeles West					5,021,715

[Additional columns below]

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


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

Los Angeles County
Los Angeles West
9665 Wilshire			0.8	%		99.3	%	$	5,900		21	$	37.44
Beverly Atrium			0.3			94.1			1,578		14		28.10
8383 Wilshire			2.2			90.2			9,700		124		25.75
120 S. Spalding			0.3			100.0			2,408		14		38.27
9100 Wilshire Blvd			1.7			91.7			8,160		71		27.26
Century Park Center			1.3			91.3			5,131		92		23.08
10350 Santa Monica			0.2			83.9			828		15		23.32
10351 Santa Monica			0.5			87.7			1,929		15		22.86
Westwood Terrace			0.7			98.5			3,726		26		27.82
1950 Sawtelle			0.5			88.1			2,266		35		24.96
10780 Santa Monica			0.5			95.4			2,135		34		24.21
Wilshire Pacific Plaza			0.5			92.2			2,434		39		26.37
World Savings Center(2)			2.5			94.2			13,468		55		30.49
11075 Santa Monica			0.2			91.3			799		6		24.53
2730 Wilshire			0.3			100.0			1,496		32		26.57
2800 28th Street			0.5			82.3			2,328		37		27.32
1919 Santa Monica			0.2			70.9			910		3		29.32
2001 Wilshire Blvd			0.5			93.2			2,626		19		27.87
Westwood Center			1.7			83.1			9,818		36		37.75
400 Corporate Pointe			0.9			100.0			3,179		21		19.32
600 Corporate Pointe			1.4			91.1			5,736		21		23.05
Bristol Plaza			0.4			97.7			1,687		28		20.55
Northpoint			0.5			78.4			2,569		7		31.43
Howard Hughes Spectrum Club			0.2			100.0			909		1		24.60
Howard Hughes Tower			1.6			74.3			6,922		30		29.70
6060 Center Drive			1.3			100.0			8,473		8		34.14
6080 Center Drive			1.5			96.0			9,684		14		36.26
Univision-5999 Center Drive			0.9			100.0			4,247		2		25.53
6100 Wilshire			1.1			100.0			5,397		55		26.03
145 South Fairfax			0.3			90.0			1,066		13		21.92
Beverly Sunset Medical Plaza(3)			0.7			74.7			3,137		55		30.06

	Subtotal/ Weighted Average — Los Angeles West		26.2	%		91.4	%	$	130,646		943	$	28.46


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

Los Angeles North
Calabasas Commerce Center		Simi/ Conejo Valley	Calabasas	1990		126,771
Calabasas Tech		Simi/ Conejo Valley	Calabasas	1990/2001		273,526
Pennsfield Plaza		Simi/ Conejo Valley	Thousand Oaks	1989		21,202
Conejo Business Center		Simi/ Conejo Valley	Thousand Oaks	1991		69,017
Marin Corporate Center		Simi/ Conejo Valley	Thousand Oaks	1986		51,360
Hillside Corporate Center		Simi/ Conejo Valley	Westlake	1998		59,876
Westlake — 5601 Lindero		Simi/ Conejo Valley	Westlake	1989		105,830
Westlake Gardens		Simi/ Conejo Valley	Westlake	1998		49,639
Westlake Gardens II		Simi/ Conejo Valley	Westlake	1999		48,874
Woodland Hills		West San Fernando Valley	Woodland Hills	1972/95		224,955
Los Angeles Corporate Center		San Gabriel Valley	Monterey Park	1984/86		389,293
Clarendon Crest		West San Fernando Valley	Woodland Hills	1990		43,063
Lyons Plaza		Santa Clarita Valley	Santa Clarita	1990		61,203
Tourney Pointe		Santa Clarita Valley	Santa Clarita	1985/98-2000		219,991
16000 Ventura		Central San Fernando Valley	Encino	1980/96		174,841
15250 Ventura		Central San Fernando Valley	Sherman Oaks	1970/90-91		110,641
Noble Professional Center		Central San Fernando Valley	Sherman Oaks	1985/93		51,828
Sunset Point Plaza		Valencia	Newhall	1988		58,105
303 Glenoaks		East San Fernando Valley/ Tri-Cities	Burbank	1983/96		175,289
601 S. Glenoaks		East San Fernando Valley/ Tri-Cities	Burbank	1990		72,524
Burbank Executive Plaza		East San Fernando Valley/ Tri-Cities	Burbank	1983		60,395
California Federal Building		East San Fernando Valley/ Tri-Cities	Burbank	1978		81,243
425 West Broadway		East San Fernando Valley/ Tri-Cities	Glendale	1984		71,589
Glendale Corporate Center		East San Fernando Valley/ Tri-Cities	Glendale	1985		108,209
70 South Lake		East San Fernando Valley/ Tri-Cities	Pasadena	1982/94		100,133
150 East Colorado Boulevard		East San Fernando Valley/ Tri-Cities	Pasadena	1979/97		61,168
299 N. Euclid		East San Fernando Valley/ Tri-Cities	Pasadena	1983		73,522
5161 Lankershim		East San Fernando Valley/ Tri-Cities	North Hollywood	1985/97		178,317
535 N. Brand Blvd		East San Fernando Valley/ Tri-Cities	North Hollywood	1973/92/99		109,187

	Subtotal/ Weighted Average — Los Angeles North					3,231,591
Los Angeles South
Long Beach Airport Bldg D(2)		Long Beach	Long Beach	1987/95		121,610
Long Beach Airport Bldg F & G(2)		Long Beach	Long Beach	1987/95		150,403
5000 East Spring(2)		Long Beach	Long Beach	1989/95		163,358
100 Broadway		Long Beach	Long Beach	1987/96		191,727

[Additional columns below]

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


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

Los Angeles North
Calabasas Commerce Center			0.7	%		89.9	%	$	2,089		11	$	18.33
Calabasas Tech			1.3			100.0			4,846		16		17.31
Pennsfield Plaza			0.1			95.2			382		12		18.94
Conejo Business Center			0.4			80.5			1,131		25		20.34
Marin Corporate Center			0.3			97.7			1,101		31		21.96
Hillside Corporate Center			0.3			87.7			1,342		9		25.55
Westlake — 5601 Lindero			0.6			78.1			1,468		2		17.75
Westlake Gardens			0.3			87.6			1,204		16		27.69
Westlake Gardens II			0.3			100.0			1,243		4		25.44
Woodland Hills			1.2			87.5			4,616		68		23.45
Los Angeles Corporate Center			2.0			97.9			7,889		45		20.70
Clarendon Crest			0.2			89.5			801		16		20.76
Lyons Plaza			0.3			68.3			1,001		23		23.95
Tourney Pointe			1.1			84.8			3,638		32		19.51
16000 Ventura			0.9			95.7			3,746		46		22.39
15250 Ventura			0.6			89.9			2,271		39		22.83
Noble Professional Center			0.3			96.9			1,126		19		22.41
Sunset Point Plaza			0.3			97.6			1,436		27		25.31
303 Glenoaks			0.9			59.0			2,450		23		23.68

601 S. Glenoaks			0.4			83.6			1,307		14		21.56

Burbank Executive Plaza			0.3			74.3			1,112		13		24.80
California Federal Building			0.4			84.2			1,297		12		18.96
425 West Broadway			0.4			96.0			1,472		13		21.41

Glendale Corporate Center			0.6			85.6			1,926		19		20.79
70 South Lake			0.5			97.3			2,480		17		25.47

150 East Colorado Boulevard			0.3			94.0			1,306		19		22.71
299 N. Euclid			0.4			100.0			1,688		5		22.92

5161 Lankershim			0.9			83.6			3,358		7		22.53

535 N. Brand Blvd			0.6			88.1			2,113		40		21.96

	Subtotal/ Weighted Average — Los Angeles North		16.9	%		89.1	%	$	61,839		623	$	21.48
Los Angeles South
Long Beach Airport Bldg D(2)			0.6	%		100.0	%	$	1,211		1	$	9.96
Long Beach Airport Bldg F & G(2)			0.8			100.0			1,354		1		9.00
5000 East Spring(2)			0.9			85.4			3,407		33		24.43
100 Broadway			1.0			91.5			4,009		35		22.87


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

1501 Hughes Way		Long Beach	Long Beach	1983/97		77,060
3901 Via Oro		Long Beach	Long Beach	1986/97		53,195
Oceangate Tower		Long Beach	Long Beach	1971/93-94		210,907
Continental Grand Plaza		El Segundo	El Segundo	1986		235,926
Grand Avenue Plaza (1970)		El Segundo	El Segundo	1980		81,448
5200 West Century		Marina Area/ Culver City/ LAX	Culver City	1982/98-99		310,910
Skyview Center		Marina Area/ Culver City/ LAX	Los Angeles	1981/87/95		391,675
South Bay Centre		Torrance	Gardena	1984		202,830
Pacific Gateway		Torrance	Torrance	1982/90		223,731
Mariner Court		Torrance	Torrance	1989		105,436
South Bay Tech		Torrance	Torrance	1984		104,815
Gateway Towers		Torrance	Torrance	1984/86		432,894

	Subtotal/ Weighted Average — Los Angeles South					3,057,925
Orange County
Whittier		San Gabriel Valley	Whittier	1982		135,415
1370 Valley Vista		San Gabriel Valley	Diamond Bar	1988		84,081
5832 Bolsa		West County	Huntington Beach	1985		49,355
Huntington Beach Plaza		West County	Huntington Beach	1984/96		52,186
5702 Bolsa		West County	Huntington Beach	1987/97		27,731
5672 Bolsa		West County	Huntington Beach	1987		11,968
5632 Bolsa		West County	Huntington Beach	1987		21,568
Huntington Commerce Center		West County	Huntington Beach	1987		67,551
City Centre		West County	Fountain Valley	1982		302,519
Fountain Valley Plaza		West County	Fountain Valley	1982		107,252
3300 Irvine Avenue		Greater Airport Area	Newport Beach	1981/97		74,224
1821 Dyer		Greater Airport Area	Irvine	1980/88		115,061
Von Karman Corporate Center		Greater Airport Area	Irvine	1981/84		451,477
Norwalk		Long Beach	Norwalk	1978/94		122,175
91 Freeway Center		Mid-Cities	Artesia	1986/97		93,277
1503 South Coast		Greater Airport Area	Costa Mesa	1979/97		60,605
222 South Harbor(2)		Tri-Freeway Area	Anaheim	1986/91		175,391
Crown Cabot Financial		South County	Laguna Niguel	1989		172,900
625 The City		Tri-Freeway Area	Orange	1985/97		139,806
Orange Financial Center		Central County	Orange	1985/95		305,439
Centerpointe La Palma		North County	La Palma	1986/88/90		597,550
Lambert Office Plaza		North County	Brea	1986/97		32,807

[Additional columns below]

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


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

1501 Hughes Way			0.4			79.0			1,123		4		18.45
3901 Via Oro			0.3			90.1			868		4		18.12
Oceangate Tower			1.1			91.1			3,457		40		17.99
Continental Grand Plaza			1.2			73.4			4,679		29		27.01
Grand Avenue Plaza (1970)			0.4			82.6			1,225		4		18.20
5200 West Century			1.6			100.0			5,698		40		17.85
Skyview Center			2.0			77.3			5,182		53		17.12
South Bay Centre			1.1			94.9			3,594		35		18.67
Pacific Gateway			1.2			98.7			4,608		41		20.87
Mariner Court			0.6			96.7			2,017		37		19.78
South Bay Tech			0.5			68.0			1,228		8		17.22
Gateway Towers			2.3			91.1			9,144		66		23.19

	Subtotal/ Weighted Average — Los Angeles South		16.0	%		89.3	%	$	52,804		431	$	19.34
Orange County
Whittier			0.7	%		97.4	%	$	3,014		45	$	22.85
1370 Valley Vista			0.4			100.0			1,735		15		20.44
5832 Bolsa			0.3			100.0			740		1		15.00
Huntington Beach Plaza			0.3			73.5			644		15		16.79
5702 Bolsa			0.1			100.0			220		2		7.92
5672 Bolsa			0.1			100.0			98		1		8.16
5632 Bolsa			0.1			100.0			181		1		8.40
Huntington Commerce Center			0.4			81.2			500		20		9.11
City Centre			1.6			97.1			5,772		20		19.65
Fountain Valley Plaza			0.6			100.0			2,254		9		20.91
3300 Irvine Avenue			0.4			91.2			1,680		27		24.83
1821 Dyer			0.6			94.3			1,246		3		11.49
Von Karman Corporate Center			2.4			97.7			9,240		32		20.95
Norwalk			0.6			97.8			2,142		9		17.92
91 Freeway Center			0.5			93.3			1,763		29		20.25
1503 South Coast			0.3			79.2			899		21		18.74
222 South Harbor(2)			0.9			84.9			3,034		20		20.38
Crown Cabot Financial			0.9			94.9			4,699		39		28.65
625 The City			0.7			87.6			2,540		31		20.75
Orange Financial Center			1.6			98.1			6,506		37		21.72
Centerpointe La Palma			3.1			95.6			10,533		89		18.44
Lambert Office Plaza			0.2			95.3			677		11		21.64


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

Savi Tech Center		North County	Yorba Linda	1989		341,446
Yorba Linda Business Park		North County	Yorba Linda	1988		167,142

	Subtotal/ Weighted Average — Orange County					3,708,926
San Diego County
701 B Street(2)		Downtown	San Diego	1982/96		540,413
Foremost Professional Plaza		I-15 Corridor	San Diego	1992		60,534
Activity Business Center		I-15 Corridor	San Diego	1987		167,045
Bernardo Regency		I-15 Corridor	San Diego	1986		47,916
Carlsbad Corporate Center		North Coast	Carlsbad	1996		125,000
10180 Scripps Ranch		I-15 Corridor	San Diego	1978/96		43,560
Cymer Technology Center		I-15 Corridor	Rancho Bernardino	1986		155,612
Via Frontera		I-15 Corridor	Rancho Bernardino	1982/97		77,920
Poway Industrial		I-15 Corridor	Poway	1991/96		112,000
Balboa Corporate Center		Mission Valley/ Kearny Mesa	San Diego	1990		69,890
Panorama Corporate Center		Mission Valley/ Kearny Mesa	San Diego	1991		133,149
Ruffin Corporate Center		Mission Valley/ Kearny Mesa	San Diego	1990		45,059
Skypark Office Plaza		Mission Valley/ Kearny Mesa	San Diego	1986		202,164
Governor Park Plaza		North City	San Diego	1986		104,065
Westridge		North City	San Diego	1984/96		48,955
5120 Shoreham		North City	San Diego	1984		37,759
Morehouse Tech Center		North City	San Diego	1984		181,207
Torreyana Science Park		North City	La Jolla	1980/97		81,204
Waples Tech Center		North City	San Diego	1990		28,119
Genesee Executive Plaza		North City	San Diego	1984		155,820
10251 Vista Sorrento		North City	San Diego	1981/95		69,386
Carmel Valley Centre		Del Mar Heights	San Diego	1987/89		107,197
Governor Executive Center		Governor Park	San Diego	1988		52,195
Crossroads		Mission Valley	San Diego	1979		133,566
Carmel View Office Plaza		Rancho Bernardo/ Poway	San Diego	1985		77,460

	Subtotal/ Weighted Average — San Diego County					2,857,195

[Additional columns below]

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


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

Savi Tech Center			1.8			100.0			3,130		4		9.17
Yorba Linda Business Park			0.8			98.6			1,435		61		8.70

	Subtotal/ Weighted Average — Orange County		19.4	%		95.4	%	$	64,682		542	$	18.28
San Diego County
701 B Street(2)			2.8	%		86.8	%	$	10,110		78	$	21.56
Foremost Professional Plaza			0.3			88.5			1,373		30		25.62
Activity Business Center			0.8			92.8			2,217		40		14.30
Bernardo Regency			0.3			64.4			780		14		25.30
Carlsbad Corporate Center			0.7			100.0			1,207		1		9.36
10180 Scripps Ranch			0.2			100.0			445		1		10.22
Cymer Technology Center			0.8			100.0			1,813		2		11.65
Via Frontera			0.4			100.0			834		6		10.58
Poway Industrial			0.6			100.0			672		1		6.00
Balboa Corporate Center			0.4			100.0			843		1		12.06
Panorama Corporate Center			0.7			—			—		—		—
Ruffin Corporate Center			0.2			100.0			495		1		10.98
Skypark Office Plaza			1.1			99.6			4,023		19		19.98
Governor Park Plaza			0.5			93.1			2,334		20		24.10
Westridge			0.3			100.0			752		4		15.37
5120 Shoreham			0.2			94.9			750		6		20.94
Morehouse Tech Center			0.9			89.3			2,908		7		17.97
Torreyana Science Park			0.4			100.0			1,894		1		23.32
Waples Tech Center			0.1			91.9			364		3		14.07
Genesee Executive Plaza			0.8			75.1			3,178		18		27.17
10251 Vista Sorrento			0.4			100.0			1,193		1		17.20
Carmel Valley Centre			0.6			94.1			3,153		15		31.25
Governor Executive Center			0.3			97.0			1,291		11		25.50
Crossroads			0.7			100.0			2,680		12		20.07
Carmel View Office Plaza			0.4			95.5			1,785		14		24.11

	Subtotal/ Weighted Average — San Diego County		14.9	%		88.9	%	$	47,094		306	$	18.54


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

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

	Subtotal/ Weighted Average — Ventura & Kern Counties					778,363
Riverside and San Bernardino Counties
Centrelake Plaza		Inland Empire West	Ontario	1989		110,763
Tower Plaza Retail		Temecula	Temecula	1970/97		133,481
Chicago Avenue Business Park		Inland Empire East	Riverside	1986		47,482
Havengate Center		Inland Empire East	Rancho Cucamonga	1985		80,557
HDS Plaza		Inland Empire East	San Bernardino	1987		104,178

	Subtotal/ Weighted Average — Riverside and San Bernardino Counties					476,461

	Portfolio Total/ Weighted Average					19,132,176

[Additional columns below]

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


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

Ventura & Kern Counties
Parkway Center I			0.3	%		95.6	%	$	1,099		13	$	18.74
4900 California			0.8			95.5			2,583		18		17.43
Center Promenade			0.9			98.3			2,988		64		17.38
1000 Town Center			0.6			94.8			2,119		9		20.76
Solar Drive Business Center			0.7			100.0			2,300		37		17.64
Camarillo Business Park			0.8			91.9			2,809		24		19.82

	Subtotal/ Weighted Average — Ventura & Kern Counties		4.1	%		96.7	%	$	13,898		165	$	18.46
Riverside and San Bernardino Counties
Centrelake Plaza			0.6	%		98.5	%	$	2,530		22	$	23.21
Tower Plaza Retail			0.7			91.2			1,475		24		12.12
Chicago Avenue Business Park			0.3			92.7			660		8		14.99
Havengate Center			0.4			94.5			1,303		18		17.11
HDS Plaza			0.5			95.8			1,824		13		18.28

	Subtotal/ Weighted Average — Riverside and San Bernardino Counties		2.5	%		94.6	%	$	7,792		85	$	17.29

	Portfolio Total/ Weighted Average		100	%		91.4	%	$	378,755		3,095	$	21.67


(1)	Calculated as monthly contractual base rent under existing leases as of December 31, 2002, multiplied by 12 and divided by leased net rentable square feet, for those leases where rent has not yet commenced or which are in a free rent period, the first month in which rent is to be received is used to determine annualized base rent.

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

(3)	This property was sold on March 11, 2003 for approximately $32.5 million.

Tenant Information

As of December 31, 2002, we had over 3,000 tenants, with no one tenant representing more than 2.2% of the aggregate annualized base rent of our properties, and only 4 tenants individually representing more than 1.0% of our aggregate annualized base rent. Our properties are leased to local, national and foreign companies engaged in a variety of businesses including financial services, entertainment, health care services, accounting, law, education, publishing and local, state and federal government entities.

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

The following table presents information as of December 31, 2002 derived from our ten largest tenants based on the percentage of aggregate portfolio annualized base rent:


				Weighted		Percentage of			Percentage of
				Average		Aggregate			Aggregate
				Remaining		Portfolio			Portfolio					Annualized
		Number of		Lease Term		Leased			Annualized			Net Rentable		Base Rent
Tenant		Leases		in Months		Square Feet			Base Rent(1)			Square Feet		($000’s)

Vivendi Universal			4		88		1.32	%		2.14	%		231,681	$	8,111
State of California			41		46		1.99			1.93			347,626		7,322
University of Phoenix			20		22		1.44			1.32			251,293		4,982
Univision Television Group, Inc.			2		226		0.95			1.12			166,363		4,247
Ceridian Corporation			5		80		0.92			0.95			160,805		3,589
U.S. Government			24		43		0.78			0.84			136,158		3,192
SBC Communications, Inc.			8		28		0.83			0.83			144,927		3,140
Verizon Communications, Inc.			8		20		0.90			0.70			156,612		2,659
Atlantic Richfield			13		44		0.72			0.70			126,830		2,659
Boeing			2		34		1.56			0.68			272,013		2,565

	Total/ Weighted Average(2)		127		60		11.41	%		11.21	%		1,994,308	$	42,466


(1)	Annualized base rent is calculated as monthly contractual base rent under existing leases as of December 31, 2002, multiplied by 12; for those leases where rent has not yet commenced or which are in a free rent period, the first month in which rent is to be received is used to determine annualized base rent.

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

The following table presents the diversification of the tenants occupying space in our portfolio by industry as of December 31, 2002:


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

Professional, Scientific, and Technical Services:
	Legal Services			5411		1,232,234		7.15	%
	Accounting & Tax Preparation, Bookkeeping and Payroll Services			5412		665,891		3.86
	Management, Scientific and Technical Consulting Services			5416		716,168		4.15
	Other Services					1,792,026		10.40

		Subtotal		541		4,406,319		25.56
Finance and Insurance				521-525		2,740,244		15.90
Information				511-519		2,156,850		12.51
Manufacturing				311-339		1,446,481		8.39
Health Care and Social Assistance				621-624		1,296,418		7.52
Administrative and Support and Waste Management and Remediation Services				561-562		799,288		4.64
Public Administration				921-928		747,784		4.34
Educational Services				611		700,114		4.06
Real Estate, Rental and Leasing				531-533		715,417		4.15
Wholesale Trade				423-425		531,102		3.08
Transportation and Warehousing				481-493		388,299		2.25
Arts, Entertainment, and Recreation				711-713		327,520		1.90
Construction				236-238		236,908		1.37
Accommodation and Food Services				721-722		195,362		1.13
Other Services (except Public Administration)				811-814		171,012		0.99
Retail Trade				441-454		131,117		0.76
Mining				211-213		85,272		0.49
Management of Companies and Enterprises				551		21,970		0.13
Utilities				221		8,795		0.05
Agriculture, Forestry, Fishing and Hunting				111-115		6,065		0.04
Non-classified				Other		125,754		0.74

		Total Square Feet Occupied				17,238,091		100.00	%

Lease Distribution

The following table presents information relating to the distribution of the leases for our 136 stabilized properties, based on leased net rentable square feet, as of December 31, 2002:


										Percent							Percentage
										of			Annualized		Average		of
								Total		Aggregate			Base Rent		Annualized		Aggregate
			Number		Percent			Leased		Portfolio			of		Base Rent		Portfolio
			of		of All			Square		Leased			Leases(1)		per Leased		Annualized
Square Feet Under Lease			Leases		Leases			Feet		Square Feet			($000s)		Square Foot		Base Rent

	2,500 and under			1,558		50.34	%		2,154,167		12.32	%	$	51,758	$	24.03		12.68	%
	2,501 – 5,000			716		23.13			2,508,078		14.35			61,364		24.47		15.03
	5,001 – 7,500			274		8.85			1,668,800		9.55			41,384		24.80		10.14
	7,501 – 10,000			176		5.69			1,535,484		8.78			36,982		24.08		9.06
10,001 – 20,000				234		7.56			3,289,906		18.82			79,717		24.23		19.52
20,001 – 40,000				76		2.46			2,103,724		12.03			47,149		22.41		11.55
40,001 and over				61		1.97			4,220,717		24.15			89,948		21.31		22.02

		Total/ Weighted Average		3,095		100.00	%		17,480,876		100.00	%	$	408,302	$	23.36		100.00	%


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

Lease Expirations

The following table presents a summary schedule of the total lease expirations for our 136 stabilized properties for leases in place at December 31, 2002. This table assumes that none of the tenants exercise renewal options or termination rights, if any, at or prior to the scheduled expirations:


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

Month-to-Month				123		285,197		1.63	%		5,069	$	17.77		1.24	%
Q1 2003				147		545,036		3.12			11,182		20.52		2.74
Q2 2003				150		557,627		3.19			11,075		19.86		2.71
Q3 2003				175		782,242		4.47			16,032		20.50		3.93
Q4 2003				168		792,008		4.53			17,269		21.80		4.23

	2003 Sub-Total(2)			640		2,676,913		15.31			55,558		20.75		13.61
2004				665		3,487,812		19.96			73,346		21.03		17.96
2005				618		3,251,717		18.60			70,907		21.81		17.37
2006				368		2,203,854		12.61			51,955		23.57		12.72
2007				328		1,792,555		10.26			44,098		24.60		10.80
2008				114		1,149,101		6.57			29,789		25.92		7.30
2009				52		517,603		2.96			13,211		25.52		3.24
2010				58		741,905		4.24			20,010		26.97		4.90
2011				28		458,249		2.62			18,148		39.60		4.44
2012				33		457,171		2.62			12,958		28.34		3.17
2013+				68		458,799		2.62			13,253		28.89		3.25

		Total/ Weighted Average		3,095		17,480,876		100.00	%		408,302	$	23.36		100.00	%


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

(2)	Excludes month-to-month leases.

ITEM 3. Legal Proceedings

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

In December 2001, the owner of the entertainment center at our Howard Hughes Center project asserted a claim against us for indemnification arising out of a Los Angeles Superior Court judgment against them which invalidated a transfer of in-lieu credits that Arden Realty made in August of 1999 as part of our sale of the land for the entertainment center. The value of these in-lieu credits was approximately $6.0 million and were transferred to satisfy certain Transportation Impact Assessment fees related to the entertainment center. On January 17, 2003, the California Court of Appeal reversed the Superior Court’s judgment, rendering the indemnification claim moot. On January 23, 2003, the plaintiff in the original lawsuit filed a petition for rehearing with the California Court of Appeal. On February 8, 2003, the California Court of Appeal denied the petition for rehearing.

Based on our review of the current facts and circumstances and advice of our outside counsel, we are not able to express an opinion as to the ultimate outcome of this matter. However, we do not believe that the resolution of this matter or any of our ongoing legal proceedings will have a material adverse effect on our consolidated results of operations, cash flows or financial position.

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

No matters were submitted to a vote of our stockholders during the fourth quarter of the year ended December 31, 2002.

PART II

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock is traded on the New York Stock Exchange, or NYSE, under the symbol “ARI.” On March 21, 2003, the last reported sales price per share of common stock on the NYSE was $24.20 and there were approximately 193 registered holders of record of our common stock. The table below sets forth the quarterly high and low closing sales price per share of our common stock as reported on the NYSE and the cash dividends per share we declared with respect to each period.


					Dividends
	High		Low		Declared

2001
First Quarter	$	23.38	$	21.39	$	0.49
Second Quarter	$	25.87	$	21.68	$	0.49
Third Quarter	$	26.83	$	23.73	$	0.49
Fourth Quarter	$	26.50	$	23.55	$	0.49
2002
First Quarter	$	28.75	$	25.47	$	0.505
Second Quarter	$	29.56	$	26.04	$	0.505
Third Quarter	$	27.23	$	22.22	$	0.505
Fourth Quarter	$	22.99	$	20.52	$	0.505

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

ITEM 6. Selected Financial Data

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



		Year Ended December 31,

		2002			2001			2000			1999			1998


		(in thousands, except ratio and per share amounts)
Operating Data:
Revenues		$	414,596		$	417,426		$	384,149		$	336,514		$	280,497
Property operating expenses			129,723			121,086			109,512			100,303			85,622
General and administrative expense			13,166			12,143			9,336			7,393			6,665
Depreciation and amortization			110,202			100,775			85,947			69,215			51,420

			161,505			183,422			179,354			159,603			136,790
Interest expense			(88,516	)		(84,195	)		(78,406	)		(60,239	)		(43,403	)

Income from continuing operations before gain on sale of properties and minority interest			72,989			99,227			100,948			99,364			93,387
Gain on sale of properties			1,967			4,591			2,132			—			—

Income from continuing operations before minority interest			74,956			103,818			103,080			99,364			93,387
Minority interest			(6,198	)		(7,517	)		(7,572	)		(5,179	)		(5,256	)

Income from continuing operations			68,758			96,301			95,508			94,185			88,131
Discontinued operations, net of minority interest			1,417			1,458			1,202			2,441			2,544

Net income		$	70,175		$	97,759		$	96,710		$	96,626		$	90,675

Basic net income per common share:
	Income from continuing operations	$	1.07		$	1.51		$	1.51		$	1.49		$	1.50
	Income from discontinued operations		0.02			0.02			0.02		$	0.04		$	0.05

Net income per common share-basic		$	1.09		$	1.53		$	1.53		$	1.53		$	1.55

Weighed average number of common shares- basic			64,151			63,754			63,408			63,016			58,660

Diluted net income per common share:
	Income from continuing operations	$	1.07		$	1.51		$	1.50		$	1.49		$	1.50
	Income from discontinue operations		0.02			0.02			0.02		$	0.04		$	0.04

Net income per common share-diluted		$	1.09		$	1.53		$	1.52		$	1.53		$	1.54

Weighed average number of common shares- diluted		$	64,351		$	64,014		$	63,598		$	63,072		$	58,814

Cash dividends declared per common share		$	2.02		$	1.96		$	1.86		$	1.78		$	1.68

Other Data:
Cash provided by operating activities		$	214,167		$	204,667		$	192,152		$	170,354		$	152,273
Cash used in investing activities			(227,247	)		(115,854	)		(216,024	)		(283,574	)		(1,099,833	)
Cash (used in) provided by financing activities			(19,898	)		(57,204	)		22,248			115,698			946,838
Funds from Operations(1)			181,549			198,240			185,146			170,405			147,369
EBITDA(2)			274,377			286,747			267,864			231,998			191,347
Ratio of earnings to fixed charges(3)(4)			1.61			1.86			1.84			2.20			2.56
Ratio of EBITDA to interest expense(2)			3.10			3.41			3.42			3.85			4.41
Ratio of EBITDA to fixed charges(2)(3)			2.79			2.94			2.81			3.26			3.66


	Selected financial data continues on next page



	December 31,

	2002		2001		2000		1999		1998

Balance Sheet Data:
Net investment in real estate	$	2,741,624	$	2,622,980	$	2,603,566	$	2,479,111	$	2,260,433
Total assets		2,832,409		2,761,443		2,705,597		2,570,458		2,331,919
Total indebtedness		1,402,304		1,251,483		1,177,769		1,029,656		840,377
Other liabilities (5)		76,350		62,685		56,885		50,555		35,720
Minority interests		74,791		78,661		86,176		86,294		56,222
Total Stockholders’ Equity		1,247,377		1,337,206		1,355,171		1,375,758		1,373,390


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

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

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

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

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

(2)	Earnings before interest, taxes, depreciation and amortization, or EBITDA, is a non-GAAP measurement. EBITDA is presented because we believe this data is used by investors as an indication of our ability to meet our debt service requirements. We consider that EBITDA, when combined with other measures, can be a useful measure to determine our ability to service debt and fund future capital expenditure requirements. However, due to the significance of the net income components excluded from EBITDA, it should not be considered an alternative to net income, cash flow from operations, or any other operating or liquidity performance measure prescribed by GAAP.

	Because 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, which are not reflected in EBITDA, have been, will be or may be incurred by us, investors are cautioned to reflect our ability to finance our investments at competitive borrowing costs, successfully maintain our REIT status, acquire and dispose of real estate properties at favorable prices to us and 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.

	We present the ratio of EBITDA to interest expense and the ratio of EBITDA to fixed charges because these ratios are used in several financial covenants contained in our principal loan agreements. We are required to satisfy these financial covenants each fiscal quarter. We believe this information is useful to investors because investors can use this data to (1) confirm that we are in compliance with the ratio 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 that present similar ratios, including other REITs. These ratios should not be considered as alternatives to the ratio of earnings to fixed charges.

	The reader is cautioned that EBITDA, as calculated by us, may not be comparable to EBITDA as reported by other companies that do not define EBITDA exactly the same as we do.


	We calculate EBITDA as follows:



		Year Ended December 31,

		2002		2001		2000		1999		1998

Income from continuing operations before gain on sale of properties and minority interest		$	72,989	$	99,227	$	100,948	$	99,364	$	93,387
Add:
	Interest expense		88,516		84,195		78,406		60,239		43,403
	Depreciation and amortization		110,202		100,775		85,947		69,215		51,420
	Discontinued operations		1,417		1,458		1,202		2,441		2,544
	Minority interest from discontinued operations		38		48		41		117		191
	Depreciation from discontinued operations		1,215		1,044		1,320		622		402

EBITDA		$	274,377	$	286,747	$	267,864	$	231,998	$	191,347


(3)	Fixed charges consist of interest costs, whether expensed or capitalized, amortization of deferred financing costs, amortization of discounts or premiums related to indebtedness and preferred unit distributions.

(4)	The ratios of earnings to fixed charges were computed by dividing earnings by fixed charges. For this purpose, earnings have been calculated by adding fixed charges, excluding capitalization interest and preferred unit distributions, to income or loss before extraordinary items.

(5)	Excludes dividends payable.


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

Overview

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

We are a self-administered and self-managed real estate investment trust that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. We are a full-service real estate organization managed by 8 senior executive officers who have experience in the real estate industry ranging from 11 to 33 years and who collectively have an average of 19 years of experience. We perform all property management, construction management, accounting, finance and acquisition activities and a majority of our leasing transactions with our staff of approximately 300 employees.

As of December 31, 2002, we were Southern California’s largest publicly traded office landlord as measured by total net rentable square feet owned. As of that date, our portfolio consisted of 137 primarily suburban office properties and 223 buildings containing approximately 19.4 million net rentable square feet including one development property with approximately 283,000 net rentable square feet under lease-up. As of December 31, 2002, our properties were 90.1% occupied.

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

Critical Accounting Policies

Revenue Recognition

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

Allowance for Rents and Other Receivables

We periodically evaluate the collectibility of amounts due from tenants and maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under

lease agreements. We also maintain an allowance for deferred rent receivable that arises from the straight-lining of rents. We exercise judgment in establishing these allowances and consider payment history and current credit status in developing these estimates. If estimates differ from actual results this could impact our operating results.

Commercial Properties

Our properties are stated at depreciated cost. Write-downs to estimated fair value are recognized whenever a property’s estimated undiscounted future cash flows are less than its book value. We carry properties held for disposition at the lower of their depreciated cost or fair value less cost to sell. Based on our assessment, no write-downs to estimated fair value were necessary as of December 31, 2002 and 2001, respectively.

Upon acquisition of real estate, we assess the fair value of the acquired assets (including land, buildings, tenant improvements and operating leases adjusted for origination costs) and allocate purchase price based on these assessments.

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

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

Depreciation

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

Qualification as a REIT

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

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

Results Of Operations

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

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

(in thousands, except number of properties and percentages)



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

Revenue from rental operations:
	Scheduled cash rents			$	352,682		$	343,224		$	9,458			3	%
	Straight-line rents				5,348			9,120			(3,772	)		(41	)
	Tenant reimbursements				24,968			22,683			2,285			10
	Parking, net of expense				20,814			21,256			(442	)		(2	)
	Other rental operations				8,242			18,202			(9,960	)		(55	)

			Total revenue from rental operations		412,054			414,485			(2,431	)		(1	)

Property expenses:
	Repairs and maintenance				39,422			36,151			3,271			9
	Utilities				35,726			33,579			2,147			6
	Real estate taxes				29,921			29,089			832			3
	Insurance				8,116			5,685			2,431			43
	Ground rent				895			1,885			(990	)		(53	)
	Administrative				15,643			14,697			946			6

			Total property expenses		129,723			121,086			8,637			7

			Property operating results(2)		282,331			293,399			(11,068	)		(4	)
	General and administrative				13,166			12,143			1,023			8
	Interest				88,516			84,195			4,321			5
	Depreciation and amortization				110,202			100,775			9,427			9
	Interest and other income				(2,542	)		(2,941	)		(399	)		(14	)

	Income from continuing operations before gain on sale of properties and minority interest			$	72,989		$	99,227		$	(26,238	)		(26	)%

	Discontinued operations, net of minority interest(3)			$	1,417		$	1,458		$	(41	)		(3	)%

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


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

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

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

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

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

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

Interest expense increased approximately $4.3 million or 5%, in 2002 as compared to 2001. This increase was primarily due to an increase in borrowings in 2002 for property acquisitions and lower interest capitalized in 2002. Capitalized interest in 2002 was lower as we ceased capitalizing interest on our 6080 Center Drive property in May 2002. The increase in interest expense was partially offset by lower effective interest rates in 2002.

Depreciation and amortization expense increased by approximately $9.4 million or 9%, in 2002 as compared to 2001. The increase was primarily due to depreciation related to two newly developed properties placed in service since the fourth quarter of 2001, five properties acquired during 2002 and depreciation expense recorded in 2002 related to properties previously held for sale in 2001 for which no depreciation expense was recorded in 2001 while classified as held for sale.

Variances for Revenue from Rental Operations and Property Operating Expenses

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

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


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

Revenue from Rental Operations:
	Scheduled cash rents	$	9,458		$	7,729		$	1,729
	Straight-line rents		(3,772	)		919			(4,691	)
	Tenant reimbursements		2,285			1,829			456
	Parking, net of expense		(442	)		(76	)		(366	)
	Other rental operations		(9,960	)		(3,014	)		(6,946	)

		$	(2,431	)	$	7,387		$	(9,818	)

Property Expenses:
	Repairs and maintenance		3,271			1,551			1,720
	Utilities		2,147			581			1,566
	Real estate taxes		832			1,273			(441	)
	Insurance		2,431			168			2,263
	Ground rent		(990	)		—			(990	)
	Administrative		946			130			816

		$	8,637		$	3,703		$	4,934

Other Data:
	Number of properties					20			128
	Net rentable square feet					2,030			17,740

(1)

The components outlined above comprise our Property Operating Results. This measure 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 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 result 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 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 income from continuing operations before gain on sale of properties and minority interest to Property Operating Results:



		Year Ended December 31,

		2002			2001			2000


		($000’s)
Income from continuing operations before gain on sale of properties and interest		$	72,989		$	99,227		$	100,948
Add:
	General and administrative expense		13,166			12,143			9,336
	Interest expense		88,516			84,195			78,406
	Depreciation and amortization		110,202			100,775			85,947
Less:
	Interest and other income		(2,542	)		(2,941	)		(3,527	)

Property Operating Results		$	282,331		$	293,399		$	271,110


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

Discontinued Operations

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

The results of operations for one property held for disposition as of December 31, 2002 and classified as discontinued operations for the years ended December 31, 2002 and 2001 are as follows (in thousands, except number of properties):



		Year Ended
		December 31,
									Percent
		2002		2001		Change			Change

Discontinued Operations:
	Revenues	$	4,165	$	4,040	$	125			3	%
	Property operating expenses		1,495		1,490		5			—

			2,670		2,550		120			5
	Depreciation and amortization		1,215		1,044		171			16
	Minority interest		38		48		(10	)		(21	)

	Discontinued operations, net of minority interest	$	1,417	$	1,458	$	(41	)		(3	)%

Other Data:
	Number of properties		1		1
	Net rentable square feet		140		140

The operating results for discontinued operations are discussed as part of Properties Owned for all of 2001 and 2002 below.

Properties Owned for all of 2001 and 2002

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



	Year Ended
	December 31,
							Dollar			Percent
	2002			2001			Change			Change

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

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

Straight-line rents	$	3,412		$	8,074

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

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

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

Comparison of the year ended December 31, 2001 to the year ended December 31, 2000

(in thousands, except number of properties and percentages)



				Year Ended December 31,
													Percent
				2001			2000			Change(1)			Change

Revenue from rental operations:
	Scheduled cash rents			$	343,224		$	317,413		$	25,811			8	%
	Straight-line rents				9,120			7,920			1,200			15
	Tenant reimbursements				22,683			16,454			6,229			38
	Parking, net of expense				21,256			17,575			3,681			21
	Other rental operations				18,202			21,260			(3,058	)		(14	)

			Total revenue from rental operations		414,485			380,622			33,863			9

Property expenses:
	Repairs and maintenance				36,151			34,874			1,277			4
	Utilities				33,579			29,598			3,981			13
	Real estate taxes				29,089			26,362			2,727			10
	Insurance				5,685			4,171			1,514			36
	Ground rent				1,885			1,214			671			55
	Administrative				14,697			13,293			1,404			11

			Total property expenses		121,086			109,512			11,574			11

			Property operating results		293,399			271,110			22,289			8
	General and administrative				12,143			9,336			2,807			30
	Interest				84,195			78,406			5,789			7
	Depreciation and amortization				100,775			85,947			14,828			17
	Interest and other income				(2,941	)		(3,527	)		(586	)		(17	)

	Income from continuing operations before gain on sale of properties and minority interest			$	99,227		$	100,948		$	(1,721	)		(2	)%

	Discontinued operations, net of minority interest(2)			$	1,458		$	1,202		$	256			21	%

Other Data:
	Number of properties:
		Acquired during period			—			—
		Completed and placed in service during period			1			1
		Disposed of during period			(10	)		(1	)
		Owned at end of period			133	(3)		142
	Net rentable square feet:
		Acquired during period			—			—
		Completed and placed in service during period			162			242
		Disposed of during period			(573	)		(76	)
		Owned at end of period			18,247	(3)		18,658


(1)	Variances for Revenues from Rental Operations and Property Operating Expenses are discussed as part of Properties Owned for all of 2000 and 2001 below.

(2)	Discontinued operations for 2000 and 2001 are discussed below.

(3)	Excludes two development properties containing approximately 586,000 net rentable square feet.

Interest and other income decreased by approximately $586,000 or 17%, in 2001 as compared to 2000, primarily due to lower interest income earned in 2001 from our restricted cash balances required by mortgage loans on lower effective interest rates in 2001.

General and administrative expenses increased approximately $2.8 million or 30%, in 2001 as compared to 2000. This increase was primarily related to higher personnel costs in 2001, including approximately $1.3 million in non-cash compensation expense from restricted stock awards granted to key executives in July and December of 2000 and July of 2001 and approximately $850,000 in salaries for employees hired after January 1, 2001.

Interest expense increased approximately $5.8 million or 7%, in 2001 as compared to 2000. This increase was primarily due to higher outstanding balances in 2001, resulting from the funding of development, tenant improvements and leasing commission costs which was partially offset by lower effective interest rates in 2001.

Depreciation and amortization expense increased by approximately $14.8 million or 17%, in 2001 as compared to 2000, primarily due to depreciation related to newly developed and renovated properties, capital expenditures, tenant improvements and leasing commissions placed in service subsequent to January 1, 2000, net of a decrease of approximately $10.1 million in 2001 due to a change in the estimated useful lives of certain building and building improvements.

Variances for Revenue from Rental Operations and Property Operating Expenses

The increase in revenue from rental operations and property operating expenses in 2001 as compared to 2000 was partially due to a development project placed in service in 2000, a development project placed in service in 2001, a property sold in 2000, five properties sold in 2001 and three properties under renovation for all or a portion of the periods presented. Operating results for properties under renovation may significantly vary from period to period depending on the status of the renovation and occupancy levels maintained during the renovation.

Following is a summary of the increase in revenue from rental operations and property operating expenses that relates to the eleven properties that were either acquired, sold or placed in service after January 1, 2000 or were under renovation for all or a portion of the period beginning after January 1, 2000 and for the 132 non-

renovation/non-development properties we owned as part of continuing operations for all of 2000 and 2001 (in thousands, except number of properties).


								Non-Renovation/
					Properties Sold, Acquired,			Non-Development
					Placed in Service or			Properties Owned
					Under			for all of
					Renovation/Development			1999 and
		Total Variance			after January 1, 2000			2000(1)

Revenue from Rental Operations:
	Scheduled cash rents	$	25,811		$	11,504		$	14,307
	Straight-line rents		1,200			2,067			(867	)
	Tenant reimbursements		6,229			480			5,749
	Parking, net of expense		3,681			1,017			2,664
	Other rental operations		(3,058	)		(991	)		(2,067	)

		$	33,863		$	14,077		$	19,786

Property Expenses:
	Repairs and maintenance		1,277			1,157			120
	Utilities		3,981			837			3,144
	Real estate taxes		2,727			1,253			1,474
	Insurance		1,514			156			1,358
	Ground rent		671			386			285
	Administrative		1,404			302			1,102

		$	11,574		$	4,091		$	7,483

Other Data:
	Number of properties					11			132
	Net rentable square feet					1,447			17,233


(1)	The operating results for the properties included in continuing and discontinued operations that were owned for all of 2000 and 2001 are discussed below. These results also include the Temecula portfolio of five properties sold at the end of 2001 since these properties were owned for all of 2000 and 2001.

Discontinued Operations

We adopted SFAS 144 effective January 1, 2002, which requires, among other things, that the operating results of real estate properties classified as held for disposition subsequent to January 1, 2002 be included in discontinued operations in the statements of income for all periods presented. The table below summarizes the operating results of our one property currently classified as discontinued operations.

The results of operations for the property held for disposition as of December 31, 2002 classified as discontinued operations for the years ended December 31, 2001 and 2000 are as follows (in thousands, except number of properties):



		Year Ended
		December 31,
									Percent
		2001		2000		Change			Change

Discontinued Operations:
	Revenues	$	4,040	$	3,968	$	72			2	%
	Property operating expenses		1,490		1,405		85			6

			2,550		2,563		(13	)		(1	)
	Depreciation and amortization		1,044		1,320		(276	)		(21	)
	Minority interest		48		41		7			17

	Discontinued operations, net of minority interest	$	1,458	$	1,202	$	256			21	%

Other Data:
	Number of properties		1		1
	Net rentable square feet		140		140

The operating results for discontinued operations are discussed as part of Properties Owned for all of 2000 and 2001 below.

Properties Owned for all of 2000 and 2001

Following is a comparison of property operating data for the 133 non-renovation/non-development properties we owned for all of 2000 and 2001 reported in continuing and discontinued operations (in thousands, except number of properties and percentages):



	Year Ended December 31,
							Dollar		Percent
	2001			2000			Change		Change

Revenue from rental operations	$	378,137		$	358,279		$	19,858		6	%
Property expenses		113,619			106,051			7,568		7

	$	264,518		$	252,228		$	12,290		5	%

Straight-line rents	$	6,107		$	7,044

Number of properties		133			133
Average occupancy		93.8	%		94.5	%
Net rentable square feet		17,373			17,373

Revenue from rental operations for these properties increased by approximately $19.9 million, or 6%, in 2001 as compared to 2000. Approximately $14.5 million of this difference was related to higher rental revenue in 2001. The increase in rental revenue was primarily attributable to increases in rental rates in 2001. Revenue from rental operations was also higher due to an approximate $5.9 million increase in tenant reimbursements and an approximate $2.7 million increase in parking income offset by an approximate $2.3 million decrease in revenue from other rental operations. Tenant reimbursements increased primarily due to higher operating expenses in 2001, as discussed below. Parking income increased in 2001 primarily due to increases in parking rates, while revenue from other rental operations decreased due to the timing of revenues from non-scheduled sources. Revenue from other rental operations includes after-hour utility billings, signage and lease termination settlements.

Property expenses for these properties increased by approximately $7.6 million, or 7%, in 2001 as compared to 2000, primarily due to $3.2 million increase in utility expenses, a $1.3 million increase in real estate taxes, a $1.4 million increase in insurance expense and a $1.2 million increase in administrative expenses in 2001. The increase in utility expenses was primarily due to rate increases in 2001. Real estate taxes

increased in 2001 due to normal annual increases and final assessments on certain properties. Insurance expense increased due to increase in industry-wide insurance rates in 2001, while administrative expenses increased primarily due to higher personnel costs in 2001. As noted above, the increase in operating expenses was the primary reason for the $5.9 million increase in tenant reimbursements.

Liquidity and Capital Resources

Cash Flows

Cash provided by operating activities increased by approximately $9.5 million to $214.2 million in 2002 as compared to $204.7 million in 2001. This increase was primarily due to the increased cash flows on five properties acquired in the third quarter of 2002, a reduction in tenant receivables in 2002 as a result of our collection efforts and cash flows for two development properties placed in service subsequent to January 1, 2001, all of which were partially offset by the loss of operating cash flows on ten properties sold in 2001 and three office properties sold in 2002.

Cash used in investing activities increased by approximately $111.3 million to $227.2 million in 2002 as compared to $115.9 million in 2001. The increase was primarily due to the acquisition of five properties for approximately $135 million in the third quarter of 2002 which was partially offset by the decrease in our development activity in 2002.

Cash used in financing activities decreased by approximately $37.3 million to an outflow of $19.9 million in 2002 as compared to an outflow of $57.2 million in 2001. This decrease in outflow was primarily due to added borrowings in 2002 under the Wells Fargo unsecured line of credit made for purposes of funding our 2002 property acquisitions, which were partially offset by the decline in funds used in 2002 in our development activity.

Capital Commitments

As of December 31, 2002, we had approximately $3.9 million outstanding in capital commitments related to tenant improvements, development and property-related capital expenditures. We expect to fund short term capital commitments through cash flow generated by operating activities, proceeds from asset sales or our unsecured lines of credit.

Available Borrowings, Cash Balances and Capital Resources

We have an unsecured line of credit with a total commitment of $10 million from City National Bank. This line of credit accrues interest at the City National Bank Prime Rate less 0.875% and is scheduled to mature on August 1, 2003. Proceeds from this line of credit are used, among other things, to provide funds for tenant improvements and capital expenditures and provide for working capital and other corporate purposes. As of December 31, 2002, there was no outstanding balance on this line of credit and $10 million was available for additional borrowings.

Financing Activities

On June 13, 2002, our operating partnership closed on a $75 million unsecured term loan with Wells Fargo. This loan matures in June 2004, has a two year extension option and bears interest at LIBOR + 1.25% during the initial term and LIBOR + 1.45% during the extension period. The proceeds from this loan were used to repay the outstanding balance on the Lehman Brothers unsecured line of credit that was scheduled to mature in July 2002. On September 25, 2002, our operating partnership increased its $75 million unsecured term loan with Wells Fargo by an additional $50 million and repaid $50 million on the Wells Fargo unsecured line of credit.

On August 9, 2002, our operating partnership renewed and increased its unsecured line of credit with a group of banks led by Wells Fargo. The renewed line of credit provides for borrowings up to $310 million with an option to increase the amount to $350 million and bears interest at a rate ranging between LIBOR + 0.80% and LIBOR + 1.25% (including an annual facility fee ranging from 0.15% to 0.40% based on the aggregate

amount of the line of credit) depending on the operating partnership’s unsecured debt rating. This new line of credit amends the previous $275 million unsecured line of credit that was scheduled to mature in April 2003. This line of credit matures in April 2006. In addition, as long as the operating partnership maintains an unsecured debt rating of BBB-/ Baa3 or better, the agreement contains a competitive bid option, whereby the lenders may bid on the interest rate to be charged for up to $150 million of the unsecured line of credit. The operating partnership also has the option to convert the interest rate on this line of credit to the higher of Wells Fargo’s prime rate or the Federal Funds rate plus 0.5%.

During the fourth quarter of 2002, our operating partnership entered into interest rate swap agreements totaling $175 million that fixed the floating interest rates on $50 million of its unsecured line of credit and all of its $125 million unsecured term loan. As a result of these transactions, $50 million of our operating partnership’s line of credit will now bear fixed interest at 4.06% through the maturity of the line in April of 2006 and the $125 million term loan will now bear interest at 3.64% in 2003, 4.18% in 2004, 4.75% in 2005 and 4.9% from January through June of 2006. As of December 31, 2002, we have an accrued liability related to the mark-to-market adjustment for these swap agreements totaling approximately $2.8 million.

Capital Recycling Program

On March 7, 2002, we sold an approximate 64,000 square foot office property located in Torrance, California for $6.9 million. On April 16, 2002, we sold an approximate 61,000 square foot office building located in Westlake, California for $8.3 million. On May 1, 2002 we also completed the sale of an approximate 80,000 square foot office property located in Canoga Park, California for $8.4 million. The net proceeds from these dispositions were used to reduce the outstanding balance on our Wells Fargo unsecured line of credit.

On August 6, 2002, we acquired Gateway Towers, an office property located in Torrance, California containing approximately 433,000 net rentable square feet for approximately $66 million. Gateway Towers consists of two buildings that are approximately 93% leased and includes an additional 5-acre development parcel. The funds for this acquisition were attained from borrowing under the Wells Fargo unsecured line of credit.

On August 16, 2002, we acquired Governor Executive Center and Crossroads, two office properties located in San Diego County containing approximately 186,000 square feet for approximately $28 million. Governor Executive Center is a three story, 52,195 square foot, 97% leased office building located in the Governor Park submarket. Crossroads is a seven story, 133,566 square foot, 100% leased multi-tenant office building located in the Mission Valley submarket. On August 30, 2002, we acquired Carmel Valley Center I & II and Carmel View Office Plaza, two office properties located in San Diego County containing approximately 185,000 square feet for approximately $41 million. Carmel Valley Center is a three story, 77,460 square foot, 94% leased office building located in the master planned development of Camel Mountain Ranch within the Rancho Bernardo submarket. The funds for these acquisitions were attained from borrowings under the Wells Fargo unsecured line of credit.

On October 17, 2002, the borrower of our mortgage notes receivable repaid the outstanding balance on the notes totaling approximately $13.7 million. As a result of this redemption, we recognized as income the unamortized purchase discount on these notes at the time of repayment totaling approximately $750,000. The proceeds from this repayment were used to partially fund our stock repurchases described below.

Stock Repurchase Program

On July 24, 2002, our Board of Directors authorized a common stock repurchase program which authorized us to purchase up to $75 million of our common stock over the following 12 months. As part of this repurchase program, we have acquired a total of 1,796,000 shares as of the date of this report at an average price of approximately $22.66 per share. The funds for these repurchases were attained from the proceeds received from the repayment of the mortgage notes receivable described above and borrowings under the Wells Fargo unsecured line of credit.

Following is a summary of scheduled principal payments for our total outstanding indebtedness as of December 31, 2002 (in thousands):


Year	Amount

2003	$	5,461
2004		307,062	(1)
2005		207,678
2006		223,649	(2)
2007		158,681
2008		230,305
2009		111,980
2010		150,565
2011		710
2012		768
Thereafter		5,445

Total	$	1,402,304


(1)	Includes $125 million outstanding on the Wells Fargo term loan which has a two year extension option.

(2)	Consists primarily of $208.6 million outstanding on the Wells Fargo unsecured line of credit.

The following is other information related to our indebtedness as of December 31, 2002 (in thousands, except percentage and interest rate data):

Unsecured and Secured Debt:


						Weighted Average
	Balance		Percent			Interest Rate(1)

Unsecured Debt	$	831,650		59	%		6.56	%
Secured Debt		570,654		41	%		7.37	%

Total Debt	$	1,402,304		100	%		6.89	%

Floating and Fixed Rate Debt:


						Weighted Average
	Balance		Percent			Interest Rate(1)

Floating Rate Debt	$	158,587		11	%		3.42	%
Fixed Rate Debt(2)		1,243,717		89	%		7.33	%

Total Debt	$	1,402,304		100	%		6.89	%


(1)	Includes amortization of prepaid financing costs.

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

The following table summarizes our senior unsecured notes covenant compliance ratios as of December 31, 2002 (in thousands, except percentage and covenant ratio data):


Net investment in real estate		$	2,741,624
Cash and cash equivalents			4,063
Restricted Cash			20,498
Accumulated depreciation and amortization(1)			392,611

	Total Assets	$	3,158,796

	Total unencumbered assets	$	1,839,187

Mortgage loans payable		$	570,654
Unsecured lines of credit			208,587
Unsecured term loan			125,000
Unsecured senior notes, net of discount			498,063

	Total Outstanding Debt	$	1,402,304

Consolidated EBITDA(2)		$	274,377

Interest incurred(2)		$	94,162
Loan fee amortization(2)			3,807

Debt Service(2)		$	97,969


Covenant Ratios	Test	Actual

Total Outstanding Debt/ Total Assets	Less than 60%		44	%
Secured Debt/ Total Assets	Less than 40%		18	%
EBITDA to Debt Service	Greater than 1.5		2.8
Unencumbered Assets/ Unsecured Debt	Greater than 150%		221	%


(1)	Includes accumulated depreciation related to a property currently held for disposition.

(2)	Represent amounts for the most recent four consecutive quarters. See EBITDA discussion on our Selected Financial Data section included elsewhere in this report.

Total interest incurred and the amount capitalized was as follows (unaudited and in thousands):



	Year Ended December 31,

	2002			2001			2000

Total interest incurred	$	94,162		$	93,290		$	91,052
Amount capitalized		(5,646	)		(9,095	)		(12,646	)

Amount expensed	$	88,516		$	84,195		$	78,406

As of December 31, 2002, we had approximately $24.6 million in cash and cash equivalents, including $20.5 million in restricted cash. Restricted cash includes $13.7 million in interest-bearing cash deposits required by some of our mortgage loans payable and $6.8 million in cash impound accounts for real estate taxes and insurance as required by several of our mortgage loans payable.

We may sell assets over the next twelve to twenty-four months. Due to market conditions beyond our control, it is difficult to predict the actual period and amount of these asset sales. Also depending on market conditions, at the time any such sales proceeds are realized, we expect to redeploy such amounts into investments that we believe will generate higher long-term value, which may include development or redevelopment of office buildings, acquisitions of existing buildings or repurchase of our common stock. In

addition, we expect to use a portion of any proceeds to pay down portions of our debt in order to maintain our conservative leverage and coverage ratios.

We expect to continue meeting our short-term liquidity and capital requirements generally through net cash provided by operating activities, proceeds from our lines of credit or from asset sales. We believe that the net cash provided by operating activities will continue to be sufficient to pay any distributions necessary to enable us to continue qualifying as a REIT. We also believe the foregoing sources of liquidity will be sufficient to fund our short-terms liquidity needs over the next twelve months, including recurring non-revenue enhancing capital expenditures, tenant improvements and leasing commissions.

We expect to meet our long-term liquidity and capital requirements such as scheduled principal repayments, development costs, property acquisitions, if any, and other non-recurring capital expenditures through net cash provided by operations, refinancing of existing indebtedness, proceeds from asset sales and/or the issuance of long-term debt and equity securities.

Recurring non-revenue enhancing capital expenditures represent building improvements and leasing costs required to maintain current revenue. Recurring capital expenditures do not include immediate building improvements that were taken into consideration when underwriting the purchase of a building or which are being incurred to bring a building up to our operating standards or reach stabilization. We consider a property to be stabilized in the quarter when the property is at least 95% leased. Recurring capital expenditures consist primarily of replacement components such as new elevators, roof replacements and upgrade requirements required by new safety codes such as new fire-life-emergency systems.

Non-recurring capital expenditures represent improvement costs incurred to improve a property to our operating standards or reach stabilization. These costs are normally taken into consideration during the underwriting process for a given property’s acquisition. Non-recurring capital expenditures include improvements such as new building expansion and some renovation costs.

We capitalize both recurring capital expenditures and non-recurring capital expenditures due to the probable benefit derived in future years from both non-recurring as well as recurring capital expenditures.

Funds From Operations and Funds Available for Distribution

The following table reflects the calculation of our funds from operations and funds available for distribution for the years ended December 31, 2002, 2001, 2000, 1999 and 1998 (in thousands, except percentages):



				Year Ended December 31,

				2002			2001			2000			1999			1998

Funds from Operations(1):
		Income from continuing operations		$	68,758		$	96,301		$	95,508		$	93,738		$	87,510
		FFO from discontinued operations			2,670			2,550			2,563			3,627			3,758
		Depreciation and amortization			110,202			100,775			85,947			69,215			51,420
		Minority interest			6,198			7,517			7,572			5,179			4,681	(2)
		Gain on sale of properties			(1,967	)		(4,591	)		(2,132	)		—			—
		Distributions on Preferred Operating Partnership Units			(4,312	)		(4,312	)		(4,312	)		(1,354	)		—

Funds from Operations(3)					181,549			198,240			185,146			170,405			147,369
		Arden Realty’s percentage share(4)			97.3	%		96.8	%		96.7	%		96.2	%		95.3	%

	Arden Realty’s share of Funds from Operations			$	176,647		$	191,896		$	179,036		$	163,930		$	140,443

Funds Available for Distribution(5):
		Funds From Operations		$	181,549		$	198,240		$	185,146		$	170,405		$	147,369
		Non-cash compensation expense			1,199			1,938			—			—			—
		Amortization of prepaid financing costs			3,807			3,568			—			—			—
		Straight-line rent			(5,465	)		(9,208	)		(8,078	)		(7,680	)		(8,193	)
		Recurring capital expenditures			(3,747	)		(2,184	)		(7,437	)		(2,608	)		(1,481	)
		Second generation tenant improvements and leasing commissions			(24,711	)		(19,276	)		(23,057	)		(24,664	)		(20,006	)

Funds Available for Distribution				$	152,632		$	173,078		$	146,574		$	135.453		$	117,689

		Weighted average common shares and operating partnership units outstanding-
			Diluted		66,098			66,132			65,759			65,566			61,999


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

	We believe that FFO, by excluding depreciation costs, the gains or losses from the sale of operating real estate properties and 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. Therefore, FFO only provides investors with an additional performance measure that when combined with measures computed in accordance with GAAP such as net income, cash flow from operating activities, investing activities and financing activities provides investors with an indication of our ability to service debt and to fund acquisitions and other expenditures.

	FFO is used by investors to compare our performance with other REITs. Other REITs may use different methods for calculating FFO and, accordingly, our FFO may not be comparable to other REITs.

(2)	Excludes $575,000 in distributions made to the former minority interest partners in the World Savings office property.

(3)	Includes approximately $1.2 million, $1.9 million and $586,000 in non-cash compensation expense for the years ended December 31, 2002, 2001 and 2000, respectively.

(4)	Represents Arden Realty’s weighted average ownership percentage during the respective twelve month period.

(5)	Consists of FFO excluding non-cash compensation expense, amortization of prepaid financing costs, straight-line rents and less costs incurred for recurring capital expenditures, second generation tenant improvements and leasing commissions. Beginning in 2001, we revised our funds available for distribution presentation to adjust the calculation for non-cash items in FFO, including non-cash compensation expense and the amortization of prepaid financing costs. In addition, we adjusted our deduction for capital expenditures and second generation tenant improvements and leasing commissions for amounts spent during the period. Prior to 2001, our adjustment for capital expenditures, tenant improvements and leasing commissions was a reserve for first and second generation space based on expected leasing volume, transaction costs and capital expenditures.

Current Economic Climate

Our short and long-term liquidity, ability to refinance existing indebtedness, ability to issue long-term debt and equity securities at favorable rates and our dividend policy are significantly impacted by the operating results of our properties, all of which are located in Southern California. Our ability to lease available space is largely dependent on the demand for office space in the markets where our properties are located. We believe current uncertainty over the national and Southern California economic environment is exerting downward pressures on the demand for Southern California commercial office space. We are expecting continued downward pressures for office demand due to several factors as follows:


	•	Job growth in Southern California was negative in 2002 and is largely dependent on improved economic activity;

	•	Occupancy and rental rates have decreased in recent months, are expected to decrease further due to the state of the national and local economy and competition from other office landlords;

	•	Larger tenants are taking more time to make their leasing decisions reflecting the uncertainty in the economy;

	•	Some tenants are under-utilizing their existing space and can therefore expand internally before they need new space;

	•	Sublease space, although stabilizing, stands at about 2.5% of total inventory throughout Southern California; and

	•	Over-building has increased vacancy rates in some submarkets.

These factors have contributed to a decrease in the occupancy of our portfolio from 92.2% as of December 31, 2001 to 90.1% as of December 31, 2002.

Overall market rental rates in Southern California declined 3 to 4% during 2002. Given the current trends, including the expected continued occupancy pressures and more aggressive pricing for sublease space, we expect market rates will decline by up to an additional 5% in 2003. Concessions also rose during 2002. As occupancy pressures continue, we expect concessions in either free rent or higher tenant improvement allowances to rise.

The timing and extent of future changes in the national and local economy and their effects on our properties and results of operations are difficult to accurately predict. It is possible, however, that these national and regional issues may more directly affect us and our operating results in the future, making it more

difficult for us to lease and renew available space, to increase or maintain rental rates as leases expire and to collect amounts due from our tenants. For additional information, see “Risk Factors — Further declines in the economic activity