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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


/X/

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2004


/  /

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


For the transition period from __________ to __________


Commission file number 1-12222


BEDFORD PROPERTY INVESTORS, INC.

(Exact name of registrant as specified in our charter)

 

Maryland

68-0306514

(State or other jurisdiction

(I.R.S. Employer

of incorporation or organization)

Identification No.)


270 Lafayette Circle

Lafayette, CA


94549

(Address of principal executive offices)

(Zip Code)


Registrant’s telephone number, including area code:

(925) 283-8910


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

 

Name of each exchange

Title of each class

on which registered

Common stock, par value $0.02 per share

New York Stock Exchange

 

Pacific 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   .


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 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. [  ]


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


The aggregate market value of the voting and non-voting common stock held by non-affiliates of registrant as of June 30, 2004 was approximately $ 427,776,141 .. The number of shares of registrant’s common stock, par value $0.02 per share, outstanding as of February 28, 2005 was 16, 442,554 ..


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement to be mailed to the registrant’s stockholders in connection with the annual meeting of the registrant’s stockholders, scheduled to take place on May 11 , 2005 , are incorporated by reference in Items 10 through 14 of Part III of this report. Except as expressly incorporated by reference, the registrant’s proxy statement shall not be deemed to be part of this report.












INDEX

   

PART I

 

PAGE

 

Forward-Looking Statements


1

Item 1.

Business


1

Item 2.

Properties


9

Item 3.

Legal Proceedings


10

Item 4.

Submission of Matters to a Vote of Security Holders


10

   

PART II

  

Item 5.

Market for the Registrant’s Common Equity and Related

Stockholder Matters



11

Item 6.

Selected Financial Data


12

Item 7.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations



13

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


40

Item 8.

Financial Statements and Supplementary Data


41

Item 9.

Changes in and Disagreements with Accountants on

Accounting and Financial Disclosure



41

Item 9A.

Controls and Procedures


41

Item 9B.

Other Information


42

   

PART III

  

Item 10.

Directors and Executive Officers of the Registrant


43

Item 11.

Executive Compensation


43

Item 12.

Security Ownership of Certain Beneficial Owners and Management


43

Item 13.

Certain Relationships and Related Transactions


43

Item 14.

Principal Accounting Fees and Services


43

PART IV

  

Item 15.

Exhibits, Financial Statement Schedules


44

   









Forward-Looking Statements


When used in this Form 10-K, the words “ believe, ” “ expect, ” “ intend, ” “ anticipate ” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to risks and uncertainties and actual results could differ materially from those expressed, expected, or implied by the forward-looking statements. The risks and uncertainties that could cause our actual results to differ from our estimates and expectations are contained in our filings with the Securities and Exchange Commission and are set forth in the section below entitled “ Potential Factors Affecting Future Operating Results. ” Readers are cautioned not to place undue reliance on these forward-looking statements because they only reflect information available as of the date of this filing. We do not undertake to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information.


PART I


Item 1. Business


BEDFORD PROPERTY INVESTORS, INC.


We are the successor to ICM Property Investors, Incorporated (ICM), a real estate investment trust (REIT) incorporated in Delaware in 1984. In July 1993, ICM was reorganized in the state of Maryland under the name of Bedford Property Investors, Inc. Equipped with a new board of directors and a new management team, we became a self-administered and self-managed equity REIT, engaged in the business of owning, managing, acquiring and developing industrial and suburban office properties proximate to metropolitan areas in the western United States. As of December 31, 2004, we owned 91 operating properties totaling approximately 7.4 million rentable square feet and 11 parcels of land totaling approximately 46 acres. In addition, we owned three office properties and one research and development property currently under redevelopment.  Of the 91 operating properties, 61 are industrial properties and 30 are suburban office properties. Our propertie s are located in California, Arizona, Washington, Colorado, Nevada, and Oregon.


CORPORATE OBJECTIVE AND STRATEGIES


Our business objective is to increase stockholders’ long-term total return through increases in the dividend and the appreciation in value of our common stock. To achieve this objective, we focus on five strategies:


-

Occupancy:  aim to maintain an occupancy rate of 90% or more for the properties in our portfolio;

-

Asset Sales:  dispose of selected assets that have reached what we consider to be their full potential or which do not meet our goal of maintaining a multi-tenant property portfolio;

-

Development: develop properties with the goal of achieving the high rates of return we have historically generated from internally developed properties;

-

Acquisitions:  acquire quality multi-tenant industrial and suburban office properties, land parcels, and/or portfolios of such properties; and

-

Share Repurchases:  repurchase our common stock on an opportunistic basis.



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Occupancy


As of December 31, 2004, our operating portfolio was 91% occupied, a 2 percentage point decrease from the 93% occupancy as of December 31, 2003.  We expect our property portfolio will continue to be exposed to higher than usual lease expirations in 2005 similar to our experience in 2004. In response to this higher than projected turnover, we continue to place emphasis on the objective of retaining or, if required, replacing our tenant base. During the past two years, we have engaged in a strategy to negotiate lower rental rates with good credit tenants whose rent is substantially above market in exchange for extended lease terms, which we refer to as “blend and extend” leases. We engaged in these blend and extend leases in order to retain these good credit tenants in the difficult market conditions; however, we believe current market conditions are improving which may result in fewer negotiations of these blend and extend deals in 2005. We are also continuing to focus on the lease renewals of a selected group of our largest tenants, whose leases expire through the year 2007.  Our regional managers have developed strategies for the retention of each of these tenants. Our goal is to provide our best planning and attention to each prospective renewal in the group. In this way, we hope to move successfully through a period of higher lease expirations without a significant reduction in our retention rate. We continue to emphasize the importance of protecting occupancy in strategic planning sessions with our regional and property managers.



Asset Sales


In response to market conditions, we initiated an asset sales program in the fourth quarter of 2004, which resulted in the sale of assets with contract prices totaling approximately $175 million in December 2004 .. We intend to continue to sell selected properties in order to reposition our portfolio and to take advantage of the current low capitalization rates in the market. Properties that will be considered for sale include those that we believe have reached their full potential and can produce a significant gain on sale. We are also shifting our focus away from single - tenant properties to multi-tenant properties in an effort to reduce the vacancy risk associated with large, single-tenant buildings. In an effort to reposition ourselves as a multi-tenant REIT, we may sell properties that do not meet this criteria.


Development


In recent years, we have reduced our development activity due to the lack of demand in our markets.  However, given the current indications of economic recovery, we intend to increase our development activity to take advantage of what we anticipate will be higher rates of returns on properties we develop, which has been our experience in the past.  We currently own 46 acres of land with the potential for approximately 600,000 square feet of rentable space.  We will also seek to buy additional parcels of land as opportunities arise, with a goal of developing 500,000 square feet per year.


Acquisitions


In order to position ourselves as a multi-tenant REIT, we seek to acquire multi-tenant industrial and suburban office properties, parcels of land, and/or portfolios of such properties. We believe that we are able to effectively identify and capitalize on acquisition opportunities through:


-

the experience of our management team;

-

our existing $150 million credit facility, which contains a $50 million accordion feature that allows the facility to be expanded to $200 million;

-

our relationships with private and institutional real estate owners;

-

our relationships with the real estate brokerage community; and

-

our integrated asset management program.



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Each acquisition opportunity is reviewed to evaluate whether it meets the following criteria:


-

potential for higher occupancy levels and/or rents, as well as for lower turnover and/or operating expenses;

-

ability to generate returns in excess of our weighted average cost of capital, taking into account the estimated costs associated with tenant turnover (i.e., tenant improvements, leasing commissions and the loss of income due to vacancy); and

-

availability for purchase at a price at or below estimated replacement cost.


We have, however, in the past acquired, and in the future we may acquire, properties that do not meet one or more of these criteria. This may be particularly true with the acquisition of a portfolio of properties that may include individual properties that do not meet one or more of the foregoing criteria.


Following completion of an initial review of a property or portfolio of properties, we may make a purchase offer, subject to satisfactory completion of our due diligence process. The due diligence process enables us to refine our original estimate of the potential performance of the property or portfolio and typically includes a complete review and analysis of the physical structure, systems, environmental status and projected financial performance. The due diligence process also includes an evaluation of the local market, including competitive properties and relevant economic and demographic information. Typically, Peter Bedford, our chairman of the board and chief executive officer, and at least one other executive or senior officer visit each proposed acquisition property before the purchase is closed. After their evaluation and endorsement of a potential acquisition property, the proposed acquisition is presented either to the real estate investment committee of the board of directors for acquisitions under $25,000,000, or to the full board of directors for all other acquisitions, for their review and approval prior to our commitment to acquire the property or portfolio.


Share Repurchases


In July 1998, our board of directors approved a share repurchase program of 3 million shares of our common stock, which was increased first to 4.5 million shares in September 1999, then to 8 million shares in September 2000 and later to 10 million shares in January 2002.


In November 1998, we implemented our share repurchase program when we believed our stock price traded at a discount to our estimated net asset value, which was calculated based on current capitalization rates and earnings estimates. From November 1998 through the end of 2000, we repurchased 5,738,837 shares (or 71% of our repurchased shares) at an average cost of $17.49 per share. From 2001 through 2004, as the dividend rates on our average stock price yielded approximately 2% higher than our average borrowing costs, we continued to repurchase our common stock on an opportunistic basis. From November 1998 through the end of 2004, we have repurchased and retired approximately 8.5 million shares at an average cost of $19.24 per share. This represents 37% of the shares outstanding at November 30, 1998 when we implemented our share repurchase program. During the year ended December 31, 2004, we repurchased 453,655 shares of our common stock under o ur share repurchase program at an average cost of $27.98 per share. We intend to continue to opportunistically repurchase our shares in 2005.




3







TRANSACTIONS AND SIGNIFICANT EVENTS DURING 2004


Acquisitions


During 2004, we acquired 809,958 square feet of commercial real estate assets and 4.69 acres of land for total contract price s totaling approximately $103,641,000, which consisted of the following:


-

A 111,200 square-foot office building in Scottsdale, Arizona for $17,310,000 or approximately $156 per square foot. The property was fully leased at the time of the acquisition ..

-

A 63,785 square-foot office building and a 63,024 square-foot research and development building in Hillsboro, Oregon for a total price of $19,390,000 or approximately $153 per square foot. The properties were fully leased at the time of the acquisition ..

-

A 130,639 square-foot industrial building in Phoenix, Arizona for $9,145,000 or approximately $70 per square foot. At the time of acquisition, the property was 50% leased to a single tenant through July of 2004.  At the expiration of the lease, we redeveloped the property to accommodate the expansion requirements of one of our existing tenants.   O ccupancy by the new tenant is expected in the second quarter of 2005.

-

A 77,965 square-foot research and development building in Hillsboro, Oregon for $9,800,000 or approximately $126 per square foot. The property was fully leased to a single tenant at the time of acquisition ..

-

A 196,501 square-foot office complex in Phoenix, Arizona for $31,200,000 or approximately $159 per square foot. The two-building property was 78% leased at the time of the acquisition.

-

An 83,244 square-foot research and development building in Hillsboro, Oregon for $3,800,000 or approximately $46 per square foot.  The newly constructed property was shell complete at the time of acquisition and is currently in the lease-up phase.  

-

An 83,600 square-foot research and development building in Gilbert, Arizona for $11,200,000, or approximately $134 per square foot.  The property was 100% leased to a single tenant at the time of the acquisition ..

-

A 2.27 acre parcel of land in Las Vegas, Nevada for $700,000.

-

Two parcels of land totaling 2.42 acres in North Las Vegas, Nevada for $1,096,149.



Sales of Selected Assets


During 2004, we completed the sales of 11 operating properties in seven sales transactions comprising 995,727 square feet and a 4.3 acre parcel of land for contract prices totaling $175,110,000, net proceeds of approximately $169,307,000, and realized gain on sales of approximately $70,235,000 as follows:


-

Four industrial properties totaling 280,302 square feet in South San Francisco, California were sold for a contract price of $41,000,000, producing a gain of approximately $21,498,000.

-

A 67,869 square-foot service center/flex property in Santa Rosa, California was sold for a contract price of $10,344,000, producing a gain of approximately $3,588,000.

-

A 120,157 square-foot industrial property in Napa, California was sold for a contract price of $9,815,000, producing a gain of approximately $3,407,000.

-

Two office properties totaling 297,228 square feet in Seattle, Washington were sold for a contract price of $65,751,000, producing a gain of approximately $20,033,000.

-

A 54,584 square-foot office property in Phoenix, Arizona was sold for a contract price of $9,350,000, producing a gain of approximately $3,519,000.



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-

A 123,853 square-foot office property in San Diego, California was sold for a contract price of $23,850,000, producing a gain of approximately $10,788,000.

-

A 51,734 square-foot office property in Laguna Hills, California was sold for a contract price of $14,100,000, producing a gain of approximately $7,246,000.

-

A 4.3 acre parcel of land in San Diego, CA was sold for a contract price of $900,000, producing a gain of approximately $156,000.


Development and Redevelopment


In response to decreased demand for office and industrial space, our development activities over the past three years have been limited to our Jurupa Business Center project in Ontario, California. As of February 2005, the 41,726 square-foot Phase I was 100% leased, and the 41,390 square-foot Phase I I, which was shell complete in December 2002, was 91% leased. In October 2004, we completed construction on the final two phases.  Phases III and IV total 40,295 square feet and are currently 77% leased.  In total, the four phases of the Jurupa Business Center comprise 123,411 square feet and as of February 2005 are 89% leased.


As anticipated, one of our larger tenants vacated 334,000 square feet, or 100%, of our five-building property in Renton, Washington upon expiration of its lease on February 28, 2004. We have undertaken a multi-phase remodel of the project to reposition the project as a contemporary multi-tenant office campus. The first two new tenant leases have been secured and together comprise 19,685 square feet, or 13% of the Phase I square footage of 150,725. The Phase I remodel budget is approximately $11.4 million including tenant improvements and the addition of an amenity area comprised of a fitness and conference center and a mini-café. At year-end, a decision was made to position one of the five buildings as a medical office building. We expect to complete the remodel of the medical office building in 2005. The budget for Phase I I construction, expected to be completed in 2005, is approximately $4.0 million. This includes the medical building, the last Phase I building lobby, and the tenant improvements projected under the 2005 leasing goals in the Phase I I buildings.


In April 2004, we purchased a 130,639 square-foot industrial building in Phoenix, Arizona with the intent to redevelop the property to accommodate the expansion requirements of one of our existing tenants in another property.  The redevelopment began in August 2004 and has an expected completion date in the second quarter of 2005 and an estimated redevelopment cost of approximately $6.1 million, of which approximately $3.3 million will be funded by us and approximately $2.8 million will be funded by the tenant.  


In September 2004, we purchased an 83,244 square-foot office/research and development property in Hillsboro, Oregon.  The property was acquired in shell complete condition with the intent to complete the final build-out and lease-up of the building.  The expected cost of development in bringing this property to operating status is approximately $2.7 million over an 18-month period.


Marketing Programs


In response to soft market conditions and increasing lease expirations in several of our markets, we initiated a marketing program in 2003.  We designed the program to accomplish three broad objectives:


-

improving our vacant spaces to “ move-in ” condition;

-

ensuring high quality external communications and emphasizing the power of the Bedford brand; and

-

creating internal personnel recognition programs to recognize contributions at all levels of the organization.


These marketing initiatives have been implemented and incorporated into our regular operational activities.  An on-going Internal Recognition & Award Program recognizes commendable achievement by our employees in the creation of tenant appreciation and retention programs and marketing activities directed toward attracting tenants to fill property vacancies.  This program has enabled us to share best practices across all regions and to sustain a high



5







level of priority on this aspect of our operational activities.  We believe this effort has and will continue to keep us competitive and able to secure new leases in the marketplace. We also believe it supports our goal of renew ing as many expiring tenant leases as possible.


Operating Performance


For the year ended December 31, 2004, we reported income from continuing operations of $12,158,000 on rental revenues of $95,971,000, compared with net income from continuing operations of $20,264,000 on rental revenues of $88,267,000 for the year ended December 31, 2003. Income from discontinued operations was $6,452,000 for 2004 and $7,401,000 for 2003.  Gain on sales of real estate investments for the year ended December 31, 2004 totaled $70,235,000. There were no sales in 2003. Our funds from operations (FFO) for the year ended December 31, 2004 was $40,250,000 as compared to $49,723,000 for the year ended December 31, 2003. We provide a definition of FFO in Item 6 of this report and present a reconciliation of our FFO to our net income in Item 7 of this report.


Long-Term Debt


On March 31, 2004, we renewed our revolving credit facility with a six-bank lending group led by Bank of America. The facility, which matures on March 31, 2007, consists of a $150 million secured line of credit with an accordion feature that gives us the option to expand the facility to $200 million, if needed. Interest on the facility is at a floating rate equal to either the lender’s prime rate or LIBOR plus a margin ranging from 1.30% to 1.75%, depending on our leverage level as defined in the credit agreement.


In April 2004, we assumed a mortgage with an outstanding balance of approximately $3,070,000 in connection with the acquisition of a property. The mortgage with Thrivent Financial for Lutherans carried a fixed interest rate of 7.90% and had a maturity date of April 10, 2017. Subsequently, in July 2004, we renegotiated the mortgage with an outstanding balance of $3,036,000, resulting in an increased loan amount, an extended term, and a lower interest rate. The new mortgage contains provisions for two additional fundings, the first of which took place on July 29, 2004 for $2,464,000. The second funding of $2,500,000 will take place in 2005, bringing the total mortgage amount to $8,000,000. The new interest rate on this mortgage is currently 5.94% and will be reduced to 5.60% after the second funding in 2005. The mortgage matures on August 15, 2029.


In August 2004, we assumed a mortgage with an outstanding balance of approximately $7,066,000 in connection with the acquisition of a property. The mortgage with Woodmen of the World carries a fixed interest rate of 7.23% and has a maturity date of July 1, 2012.


As a result of property sales in December 2004, we paid down the outstanding balance on our line of credit, resulting in a zero balance as of December 31, 2004. We also partially paid down three mortgages and paid off one mortgage for a total aggregate repayment amount of approximately $22,686,000.


Sale of Preferred Stock


On April 6, 2004, we issued and sold 2,400,000 shares of our 7.625% Series B Cumulative Redeemable Preferred Stock in a public offering at a price of $25.00 per share for total gross proceeds of $60,000,000. The Series B preferred shares have no stated maturity, are not subject to any sinking fund or mandatory redemption, and are not convertible into any other securities.  The shares are redeemable at our option beginning in April 2009, or earlier if necessary in limited circumstances to preserve our status as a REIT.


The net proceeds of approximately $58 million from the sale of the Series B preferred stock were used to finance a portion of the approximately $103.6 million in property acquisitions made in 2004.





6















DIVIDENDS


Common Stock Dividends


We have made regular quarterly distributions to the holders of our common stock every quarter since the second quarter of 1993 and have increased the dividend seventeen times since then. Dividends have ranged from $0.10 per share in the second quarter of 1993 to $0.51 per share in the fourth quarter of 2004. In December 2004, we declared a special dividend of $3.28 per common share resulting from our gain on sales.


Preferred Stock Dividends


We pay cumulative dividends on the shares of our Series A preferred stock at the rate of 8.75% of the $50.00 liquidation preference per share per year, which is equivalent to $4.375 per share per year. We pay cumulative dividends on the shares of our Series B preferred stock at the rate of 7.625% of the $25.00 liquidation preference per share per year, which is equivalent to $1.90625 per share per year.  Dividends on both classes of preferred shares are paid quarterly in arrears and are recorded when declared.


TENANTS

 

Based on rentable square feet, as of December 31, 2004, our suburban office properties and industrial properties were approximately 91% occupied by a total of 480 tenants, of which 136 were suburban office property tenants and 344 were industrial property tenants. Our tenants include local, regional, national, and international companies engaged in a wide variety of businesses.


FINANCING

 

We expect cash flow from operations to be sufficient to pay operating expenses, real estate taxes, general and administrative expenses, and interest on indebtedness and to make distributions to stockholders required to maintain our REIT qualification.

 

We expect to fund the cost of acquisitions, capital expenditures, costs associated with lease renewals and re-leasing of space, repayment of indebtedness, share repurchases, development of properties, and dividends from:


-

cash flow from operations;

-

borrowings under our credit facility and, if available, other indebtedness, which may include indebtedness assumed in acquisitions or the refinancing of existing indebtedness;

-

the sale of certain real estate investments; and

-

the issuance of long-term debt and equity securities.


INSURANCE

 

We carry commercial general liability coverage with primary limits of $1 million per occurrence and $2 million in the aggregate, as well as $40 million of umbrella/excess liability coverage. This coverage protects us against liability claims as well as the cost of legal defense. We carry property “All Risks” insurance of $200 million on a replacement value basis covering both the cost of direct physical damage and the loss of rental income. This coverage is subject to certain exclusions, including contamination from hazardous materials and mold. We carry insurance for terrorism losses as defined under the Terrorism Risk Insurance Act of 2002 under our all risk policies, as well as for “non-certified” events in excess of $10 million up to the $200 million limit. Separate flood and earthquake insurance is provided with an annual aggregate limit of $10 million, subject to a deductible of the greater of $100,000 or 5% of total insurable value per building and respective rent loss with respect to the earthquake coverage. Additional excess earthquake coverage with an aggregate limit of $20 million is provided for properties located in California. We also carry director and officer liability insurance with an aggregate limit of $10 million and a fidelity bond in the amount of $1 million. This coverage protects our directors and officers against liability claims as well as the cost of legal defense.




7











COMPETITION AND OTHER FACTORS

 

Our success depends upon, among other factors, general economic conditions and trends, including real estate trends, interest rates, government regulations and legislation, income tax laws, and zoning laws. We typically compete in our markets with other REITs, institutional owners, and private operators of commercial property.


Our real estate investments are located in markets in which we face significant competition for rental revenues. Many of our investments, particularly office buildings, are located in markets in which there is a significant supply of available space, resulting in intense competition for tenants and low rents. For example, we own properties in the east side market in Seattle, Washington. This market has been negatively affected by job loss in that region and there is considerable inventory available. In addition, we own properties in Phoenix, Arizona and Denver, Colorado. In both of these cities, weak demand has resulted in excess direct and sublease inventory. Finally, we own and operate properties in the Silicon Valley, in the San Francisco Bay Area. This sub-market was particularly hard hit in the collapse of the tech-telecom boom earlier in the decade. In response to rapid, unsustainable job growth during the boom years, considerable invento ry was brought to market in this region, much of which is still vacant today, acting as a market depressant. Although the sub-lease inventory has declined significantly as a proportion of the total in most of these markets, there is still a substantial amount of space available, which provides tenants with more choices and weakens our negotiating strength.


We believe that our competitive strengths have lessened, and may continue to lessen, the adverse impact of these negative factors. These competitive strengths include brand acceptance, an experienced management team, a long history of operations in all of our current markets and a diversified tenant base.

 

GOVERNMENTAL REGULATIONS


Our properties are subject to various federal, state, and local regulatory requirements such as local building codes and other similar regulations. We believe our properties are currently in substantial compliance with all applicable regulatory requirements, although expenditures at our properties may be required to comply with changes in these laws and regulations. No material expenditures are contemplated at this time in order to comply with any such laws or regulations. Under various federal, state, and local laws, ordinances, and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances released on, above, under, or in such property. These laws and regulations often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of such removal or remediation could be subs tantial. Additionally, the presence of such substances or the failure to properly remediate such substances may adversely affect the owner’s ability to borrow using such real estate as collateral.


We believe that we are in compliance in all material respects with all federal, state, and local laws regarding hazardous or toxic substances, and we have not been notified by any governmental authority of any non-compliance or other claim in connection with any of our present or former properties. Accordingly, we do not currently anticipate that compliance with federal, state, and local environmental protection regulations will have any material adverse impact on our financial position, results of operations, or liquidity. There can be no assurance, however, that future discoveries or events at our properties, or changes to current environmental regulations, will not result in such a material adverse impact.


EMPLOYEES


As of December 31, 2004, we had 42 full-time employees and 3 part-time employees.


OTHER INFORMATION


We make our filings with the Securities and Exchange Commission (SEC), including this annual report, available on our website free of charge as soon as reasonably practicable after such filings are made. The address of our website is www.bedfordproperty.com . Other than the information expressly set forth in this annual report, the information contained, or referred to, on our website is not incorporated into this annual report.














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Item 2. Properties


REAL ESTATE SUMMARY


As of December 31, 2004, our real estate investments were diversified by geographic region and by product type as follows (dollars in thousands):


 


Number of

Properties


Investment

Cost

% of Total

Investment

Cost


Rentable

Square Feet


Percentage

Occupied

Industrial buildings

     

Northern California

24

$176,854

22%

1,861,238

82%

Arizona

19

120,282

15%

1,461,206

95%

Southern California

10

57,493

7%

939,938

94%

Northwest

5

36,284

5%

351,532

72%

Nevada

2

26,700

3%

224,543

98%

      

Total industrial buildings

60

417,613

52%

4,838,457

88%

      

Office buildings

     

Northern California

6

31,944

4%

225,889

94%

Arizona

6

74,894

9%

597,832

89%

Southern California

3

42,423

5%

277,799

99%

Northwest

6

57,402

7%

431,594

68%

Colorado

8

112,526

14%

783,000

92%

Nevada

1

13,506

2%

104,324

56%

      

Total office buildings

30

332,695

41%

2,420,438

86%

      

Properties under development

     

Arizona

1

8,812

1%

N/A

N/A

Northwest

3

20,904

3%

N/A

N/A

Total properties under

  development


4


29,716


4%


N/A


N/A

      

Land held for development

     

Northern California

4

5,928

1%

N/A

N/A

Arizona

1

637

*

N/A

N/A

Northwest

1

1,154

*

N/A

N/A

Colorado

2

3,950

*

N/A

N/A

Nevada

3

1,860

*

N/A

N/A

      

Total land held for development

11

13,529

2%

N/A

N/A

      

Operating property held for sale

     

Southern California

1

9,517

1%

109,780

100%

      

Total (1)

106

$803,070

100%

7,368,675

91%


* Less than 1%


(1)

The total occupancy percentage excludes two office and three industrial buildings, which were shell complete and under lease-up as of December 31, 2004.




9










LEASE EXPIRATIONS – REAL ESTATE PORTFOLIO


The following table presents lease expirations for each of the 10 years beginning on December 31, 2004 and thereafter. The table presents:  (i) the number of leases that expire each year, (ii) the square feet covered by such expiring leases, (iii) the 2004 annualized base rent of the expiring leases, and (iv) the percentage of total 2004 annualized base rent for expiring leases.





Year

Number of

Leases

Expiring



Square Feet

2004

Annualized

Base Rent

Percentage of

2004 Annualized

Base Rent

     

2005*

140

1,277,105

$19,404,093

22.9%

2006

110

1,024,500

12,663,471

14.9%

2007

91

1,249,825

12,426,308

14.6%

2008

65

1,091,141

18,755,339

22.1%

2009

40

805,870

9,957,393

11.7%

2010

24

598,807

6,353,875

7.5%

2011

4

197,979

2,391,373

2.8%

2012

4

220,269

2,679,232

3.2%

2013

2

9,062

221,661

0.3%

2014 and thereafter

-

-

-

0.0%

     

     Total

480

6,474,558

$84,852,745

100.0%


* Includes 31 leases expiring on December 31, 2004, representing 1.8% of 2004 annualized base rent.


Item 3. Legal Proceedings


We are not presently subject to any material litigation. Moreover, we are not aware of any threatened litigation against us, other than routine actions for negligence or other claims and proceedings arising in the ordinary course of our business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse impact on our liquidity, results of operations, business, or financial position.


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


Not applicable.
















10







PART II


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

 

As of February 15, 2005, we had 761 holders of record of our common stock. A significant number of these stockholders are also nominees holding stock in street name for individuals. Our common stock trades on the New York Stock Exchange and the Pacific Exchange under the symbol “ BED. ”  The following table shows the high and low sale prices per share reported on the New York Stock Exchange and the dividends declared per share on the common stock for each quarterly period during 2003 and 2004.


  


High

 


Low

 

Dividend

Per Share

 
        

2003

       
 

First Quarter

$27.87

 

$24.32

 

$ 0.50

 
 

Second Quarter

28.61

 

26.11

 

0.50

 
 

Third Quarter

29.00

 

25.31

 

0.51

 
 

Fourth Quarter

29.55

 

25.40

 

0.51

 
        

2004

       
 

First Quarter

$31.68

 

$27.88

 

$0.51

 
 

Second Quarter

30.68

 

26.15

 

0.51

 
 

Third Quarter

32.10

 

27.47

 

0.51

 
 

Fourth Quarter

31.85

 

27.24

 

3.79

(1)


(1) Includes a special dividend of $3.28 per share of common stock.


Limitations on our ability to pay dividends are described in the “ Potential Factors Affecting Future Operating Results ” section under Item 7 of this report.


The information relating to our equity compensation plans required by Item 5 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders scheduled to take place on May 11, 2005.





11







Item 6. Selected Financial Data


Following is a table of our selected financial data for the last five years (which should be read in conjunction with the discussion under the “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” section in Item 7 of this report and the financial statements and notes thereto contained herein):

  

 

2004

2003

2002

2001

2000

 

(in thousands of dollars, except per share data)


Operating Data:

  Rental income (1)



$  95,971



$  88,267



$  80,585



$  76,595



$   75,083

  Income from continuing

   operations


12,158


20,264


24,730


26,886


61,627

  Gain on sales of operating

   properties (2)


70,235


-


3,575


5,976


38,404

  Net income

88,845

27,665

36,003

34,950

68,307

  Net income available to common

   stockholders


$  80,897


$  26,980


$  36,003


$  34,950


$   68,307

  Per common share –

   assuming dilution:

     

   Income from continuing

     operations


$      0.26


$      1.20


$      1.49


$      1.58


$       3.33

   Income from discontinued operations

$      4.77

$      0.45

$      0.68

$      0.48

$       0.37

   Net income available to common

     stockholders


$      5.03


$      1.65


$      2.17


$      2.06


$       3.70


Balance Sheet Data:

  Real estate investments



$716,410



$722,669



$662,626



$605,078



$ 608,511

  Total assets

793,483

773,619

694,331

630,805

630,850

  Bank loans payable

-

68,978

124,681

80,925

77,320

  Mortgage loans payable

351,335

368,542

259,496

242,066

224,205

  Series A preferred stock

38,947

38,947

-

-

-

  Series B preferred stock

57,769

-

-

-

-

  Stockholders’ equity

350,458

303,899

276,057

275,880

296,199


Other Data:

  Net cash provided by

   operating activities




$  46,651




$  49,170




$  50,126




$  47,082




$   45,703

  Net cash provided by (used in)

   investing activities


47,949


(94,923)


(72,094)


(6,977)


70,127

  Net cash (used in) provided by

   financing activities


(77,980)


49,624


20,183


(37,753)


(114,254)

  Cash d ividends declared

   per common share


$      5.32


$      2.02


$      1.96


$      1.86


$      1.74


(1)

Rental income excludes amounts reported as discontinued operations.


(2)

Reported as a component of continuing operations for 2001 and 2000.





12











13










Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


GENERAL


We are the successor to ICM Property Investors, Incorporated (ICM), a real estate investment trust (REIT) incorporated in Delaware in 1984. In July 1993, ICM was reorganized in the state of Maryland under the name of Bedford Property Investors, Inc. Equipped with a new board of directors and a new management team, we became a self-administered and self-managed equity REIT, engaged in the business of owning, managing, acquiring and developing industrial and suburban office properties proximate to metropolitan areas in the western United States. As of December 31, 2004, we owned 91 operating properties totaling approximately 7.4 million rentable square feet and 11 parcels of land totaling approximately 46 acres. In addition, we owned three office properties and one research and development property currently under redevelopment.  Of the 91 operating properties, 61 are industrial properties and 30 are suburban office properties. Our propertie s are located in California, Arizona, Washington, Colorado, Nevada, and Oregon.


The following discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and notes to financial statements included in this report.


Market Conditions


The Northwest Region


We believe that the Puget Sound area is still experiencing the effects of significant job loss resulting from the technology and telecommunication industry slowdowns. We also believe that these economic conditions have affected most commercial real estate markets causing excess space, both in the direct leasing and sub-leasing markets, and weaker deal terms. At December 31, 2004, our Northwest operating portfolio, which includes three Oregon properties, was 93% occupied with 43,000 square feet vacant in three properties. We believe that this comparatively strong occupancy has insulated us from the worst effects of local market conditions. In February 2004, one of our largest tenants in this region vacated our 334,000 square-foot five-building complex upon expiration of its lease. We have transferred this property to our development portfolio and have commenced a program to re-position the complex as a campus-style office park. In 2004, we completed the first phase of this repositioning, and had signed two leases by year-end.


The Northern California Region


Our properties in Northern California are located throughout the San Francisco Bay Area and include one property in Reno, Nevada. The Bay Area market has also been impacted by the technology industry slowdown, particularly in the Silicon Valley area, where we own 14 properties totaling 1,217,207 square feet as of December 31, 2004. In this sub-market, we believe that the job loss associated with the earlier recession has been significant, resulting in increased vacancy and reduced rental rates. While the California employment situation has shown some improvement in recent months, the oversupply of space and reduced rental rates continue to be a challenge.  In addition, we expect higher than usual lease expirations in the Silicon Valley to continue during 2005, which creates the potential for increasing vacancy in our portfolio. In order to retain good credit tenants in the current market, we have engaged in a strategy to negotiate lower re ntal rates in exchange for extended lease terms, which we refer to as “ blend and extend ” leases.


Another Bay Area sub-market that has demonstrated weakness during the last few years is the South San Francisco industrial market. In December 2004, we sold four of our five properties in South San Francisco, leaving one 78% leased property remaining in this sub-market. Other Bay Area sub-markets have not been as dramatically affected as the South San Francisco industrial market and the Fremont, Milpitas, and San Jose markets in Silicon Valley. In Sonoma County, Napa County, and Contra Costa County sub-markets, while demand has slowed during the past three years, vacancy rates have not climbed to the extent they have in Silicon Valley.




13










14







The Southern California Region


In Southern California, we have properties in three relatively healthy sub-markets. These sub-markets are Orange County, San Diego, and the Inland Empire. We have two properties in Orange County and maintained them at, or close to, 100% occupancy during 2003 and 2004. In the Inland Empire, we have a bulk industrial property in Ontario, California, which was 100% leased as of December 31, 2004. We have two recently developed properties in the Inland Empire, the Jurupa Business Center Phase I , which was 95% leased as of December 31, 2004, and Jurupa Business Center Phase I I, which was 84% leased as of December 31, 2004. In addition, the Jurupa Business Center Phases III and IV became shell complete during the fourth quarter of 2004 and are currently 77% leased. Finally, in San Diego, our properties were 100% leased during the years 2003 and 2004.


The Arizona Region


Most of our properties in Arizona are in Phoenix, a market that has been characterized by the same weakness in demand for office, research and development, and industrial space that we have experienced in other regions. We have responded to these challenges by improving our marketing processes and the marketability of our vacant spaces. We are making capital improvements to our vacant spaces to render them near move-in condition for prospective tenants. Notwithstanding these efforts, however, re-leasing space in Phoenix remains challenging, and we expect our vacant suites to remain vacant for longer periods than we have previously experienced.  As of December 31, 2004, our properties in this region were 93% leased, with approximately 141,000 square feet of vacant space in eight properties.


The Colorado Region


All of our properties in Colorado are in the southeast Denver suburban office market. We believe that market conditions in Denver reflect the effects of the significant job losses experienced in this region during the last several years, similar to other markets. In July 2003, we were successful in executing a significant lease with a large insurance company for the top two floors of our 4601 DTC Boulevard property, representing 20% of the total square footage of the building. This ten-story office property was 80% leased to a single tenant under a lease that expired on January 31, 2005, which the tenant opted not to renew. During the last several years, we have made significant capital improvements to this property in preparation for this vacancy and are actively marketing the space to prospective tenants.


Future Trends and Events


Acquisitions and Dispositions


In September 2004, we announced that our board of directors would undertake a review of a broad range of strategic alternatives for our company. These alternatives included the potential sale or merger of our company, selling certain of our properties and either reinvesting these proceeds in other properties or dividending out the proceeds to our stockholders. On February 2, 2005, the board of directors announced the conclusion of its review of strategic alternatives. The board of directors determined that the interests of our stockholders would be best served by the company’s continuation as an independent, publicly traded REIT. As a result, we intend to continue to operate in the office, service and industrial space, with a shift in focus to properties with multi-tenant configurations.  


Capitalization rates continue to remain low as the result of the large amount of capital available in the marketplace and the low cost of debt. While we have, in the past, been successful at acquiring properties that we believe will enhance our portfolio, it has become increasingly challenging to find properties that meet our target capitalization rate of 9%.  However, we will continue to evaluate, and may capitalize on, opportunities to acquire attractive properties or portfolios of properties as and when they arise.  To accomplish our goal of continuing to reposition ourselves as a multi-tenant REIT, we may also enter into complementary acquisitions of other businesses.




14







In addition, we intend to continue to sell selected properties in order to reposition our portfolio and to take advantage of the current low capitalization rates in the market.  Properties that will be considered for sale include those that we believe have reached their full potential and can produce a significant gain on sale.  As part of continuing to reposition ourselves as a multi-tenant REIT, we are also shifting our focus away from single-tenant properties to multi-tenant properties in an effort to reduce the vacancy risk associated with large, single-tenant buildings. As a result, we may also sell properties that do not meet our multi-tenant configuration criteria, as and when appropriate opportunities arise.


Development and Redevelopment


In response to decreasing demand for office and industrial space, our development activities over the past two years have been limited to our Jurupa Business Center project in Ontario, California. As of February 2005, the 41,726 square-foot Phase I was 100% leased, and the 41,390 square-foot Phase I I, which was shell complete in December 2002, was 91% leased. In October 2004, we completed construction on the final two phases. Phases III and IV total 40,295 square feet and are currently 77% leased.  In total, the four phases of the Jurupa Business Center comprise 123,411 square feet and are 89% leased as of February 2005.


In March 2004, we also began our redevelopment of the recently vacated 334,000 square-foot five-building facility in Renton, Washington. The construction process for site work, shell enhancement, construction of lobbies, and the upgrade of common areas is expected to take place over a 48-month period. The construction will be completed in phases, with the completion and leasing of some of the buildings occurring prior to the end of the 48-month period. Phase I of exterior and common area construction of this redevelopment project was completed in September 2004. We hosted a well-attended open house celebration introducing the community to the re-positioned property. Shortly thereafter, the first two leases , which will commence in the first quarter of 2005, were secured for 19,649 square feet, or 13% of the Phase I square footage.


In April 2004, we purchased a 130,639 square-foot industrial building in Phoenix, Arizona with the intent to redevelop the property to accommodate the expansion requirements of one of our existing tenants in another property.  The redevelopment began in August 2004 and has an expected completion date in the second quarter of 2005 and an estimated redevelopment cost of approximately $6.1 million, of which approximately $3.3 million will be funded by us and approximately $2.8 million will be funded by the tenant.  


In September 2004, we purchased an 83,244 square-foot office/research and development property in Hillsboro, Oregon.  The property was acquired in shell complete condition with the intent to complete the final build-out and lease-up of the building.  The expected cost of development to bring this property to operating status is approximately $2.7 million over an 18-month period.


Capital Expenditures


We expect the higher than usual lease expirations in our portfolio that occurred during 2004 to continue throughout 2005. Prior to 2004, annual lease expirations in our portfolio ranged from approximately 12% to 15% of our annualized base rents. As of December 31, 2004, our expected lease expirations for 2005 were 21% of annualized base rents. As a result, we expect to incur significant capital expenditures in 2005, including the costs of leasing commissions and tenant improvements related to renewing or replacing the expiring leases. In several instances, these lease expirations may occur in markets that have experienced considerable weakness due to job loss and excess inventory. This market weakness, combined with a higher level of lease expirations, may require us to incur more capital expenditures than we have experienced historically to renew or re-lease these spaces.


In addition, we are renovating two properties that were leased by single tenants who did not renew their leases , which will also result in additional capital expenditures in 2005. We believe that these renovations are necessary to render the properties competitive in their respective markets.  





15







The combination of these two factors will require that we manage our capital resources carefully. We intend to closely monitor these situations and continually assess our actual expenditures against our planned expenditures. We believe that we will have sufficient funds to meet the needs of these situations. We plan to spend approximately $15 million in capital expenditures during the year 2005.


Share Repurchases


Since the inception of our share repurchase program in November of 1998, we have repurchased a total of 8,485,907 shares of our common stock at an average cost of $19.24 per share, which represents 37% of the shares of common stock outstanding at November 1998. We intend to continue to repurchase shares of our common stock on the open market when the opportunities exist. Our share repurchase strategy takes into consideration several factors, including the dividend yield on our stock price, the cost of capital and its alternative uses, existing yields on potential acquisitions, market trading volume, trading regulations, and debt covenants. We currently have board approval to repurchase up to a total of 10 million shares of our common stock. During the year ended December 31, 2004, we repurchased or acquired 453,655 shares of our common stock at an average price of $27.98. We acquired 341,300 shares in open market repurchases made pursuant to ou r share repurchase program and 112,355 shares from employees to satisfy payroll tax obligations upon the vesting of restricted stock or in connection with stock option exercises, which were not repurchased pursuant to our share repurchase program. We did not purchase any shares of our common stock pursuant to our share repurchase program during the second half of 2004.




16







Occupancy and Rental Rates


As of December 31, 2004, our operating portfolio occupancy was at 91%, a 2 percentage point decrease from the 93% occupancy as of December 31, 2003 .. Maintaining our occupancy rate has been our highest priority during this economic downturn. In order to retain tenants in the current market, we have sometimes found it necessary to negotiate lower rental rates in exchange for extended terms, which we refer to as “ blend and extend ” leases. While this has a negative impact on our income from operations, we believe the negative impact of losing good credit tenants would surpass the incremental loss due to reduced rental rates. During the year ended December 31, 2004, we renewed or re-leased 96 of 126 expiring leases or 74% of our expiring square footage and experienced a 16% decline in weighted average rental rates on these leases. We intend to continue this strategy in order to maximize our occupancy rate.


Leasing


Over the next three years, we will be facing significant lease rollovers. During the years 2005, 2006, and 2007, leases representing 21%, 15%, and 15% of annualized base rent, respectively, will expire. As of December 31, 2004, the expirations as a percentage of annualized base rent by region are as follows:



2005

2006

2007

Northern California

7%

5%

4%

Arizona

4%

3%

4%

Southern California

2%

4%

3%

Northwest

2%

1%

1%

Colorado

5%

1%

2%

Nevada

1%

1%

1%

     Total

21%

15%

15%


In order to manage the risk associated with higher lease expirations in weaker markets, we developed a plan to focus our attention on a group of our largest tenants. At its inception in June of 2003, this group consisted of 90 tenants, with lease expirations scheduled to occur through the year 2006. Although the 90 tenants represented 20% of our total tenant group, the revenue associated with these tenants represented over 50% of our portfolio annualized base rent. For each of these tenants, we have been pursuing a proactive approach by creating specific strategies for renewal. These approaches may involve blend and extend leases, early renewals, and other appropriate measures. We have recently begun focusing on additional tenants with leases expiring through the year 2007 and plan to continue our focus on this expanded group of tenants.




17







CRITICAL ACCOUNTING POLICIES AND ESTIMATES


The preparation of our financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that our critical accounting policies are those that require significant judgments and estimates such as those related to valuation of real estate investments, classification of discontinued operations, accounting for development costs, revenue recognition and allowance for doubtful accounts, stock compensation expense, and qualification as a REIT, each of which is discussed in more detail below. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could vary from those estimates, and those estimates could be different under different assumptions or conditions.


Valuation of Real Estate Investments


Real estate investments are recorded at cost less accumulated depreciation. The cost of real estate includes the purchase price and other related acquisition costs. In accordance with Statement of Financial Accounting Standards (SFAS) 141, “ Business Combinations, ” a portion of the purchase price is allocated to tenant improvements and identifiable intangible assets or liabilities. For acquired properties with rental guarantees from the seller, amounts received under the rental guarantee are recorded as a reduction to the basis of the asset upon receipt. Expenditures for maintenance and repairs that do not add to the value or prolong the useful life of the property are expensed. Expenditures for asset replacements or significant improvements that extend the life or increase the property’s value are capitalized. Real estate properties are depreciated using the straight-line method over estimated useful lives. When circumstances such as adverse market conditions indicate an impairment of a property, we will recognize a loss to the extent that the carrying value exceeds the fair value of the property. The fair value of a property is determined by using an internally developed discounted cash flow analysis. The evaluation of the fair value of individual properties re quires significant management judgments and assumptions that affect the amount of any impairment loss that we may recognize.  Significant changes in the facts and circumstances underlying these judgments and assumptions in future periods could cause significant impairment adjustments to be recorded.


The acquisition of real estate investments results in the allocation of a portion of the purchase price to tenant improvements and identifiable intangible assets or liabilities. Tenant improvements represent the tangible assets associated with the existing leases valued on a historical basis prorated over the remaining lease terms. They are classified as an asset under real estate investments and are depreciated over the remaining lease terms. Identifiable intangible assets and liabilities relate to the value of in-place operating leases as follows : (i) origination value, which represents the value associated with “ cost avoidance ” of acquiring in-place leases, such as lease commissions paid under terms generally experienced in our markets; (ii) value of in-place leases, which represents the estimated loss of revenue and of costs incurred for the period required to lease the “ assumed vacant ” property to the occupancy level when purchased; (iii) fair market value of acquired leases, which represents the difference between the contractual rents and market rents at the time of the acquisition, discounted for tenant credit risks; and (iv) value of tenant relationships, which reflects estimated future benefits from enhanced renewal probabilities and cost savings in lease commissions and tenant improvements. Origination value is recorded as an other asset and is amortized over the remaining lease terms. Value of in-place leases is recorded as an other asset and amortized over the average term of the acquired leases. Fair m arket value of acquired leases is classified as an other asset or liability, depending on whether the contractual terms are above or below market, and the asset or liability is amortized to rental revenue over the remaining terms of the leases. Value of tenant relationships is classified as an other asset and is amortized over the anticipated term of the customer relationship, not to exceed the remaining depreciable life of the building.




18







Classification of Discontinued Operations


We record real estate investments that are considered held for sale at the lower of carrying amount or fair value less estimated costs to sell, and such properties are no longer depreciated. We classify real estate assets as held for sale in the period in which both of the following criteria are met:


-

management has obtained board approval to sell the asset, and

-

a letter of intent has been signed by an officer of the c ompany and the buyer.


We present the net operating results of properties held for sale and sold during the year, less allocated interest expense, as income from discontinued operations for all periods presented. The gain on sale of operating properties sold, net of sale costs, is presented as income from discontinued operations. We allocate interest expense based on the percentage of the cost basis of each property held for sale and sold to the total cost basis of real estate assets as of the respective year-end, pro-rated for the number of days prior to sale.



Accounting for Development Costs


In accordance with SFAS 67, “ Accounting for Costs and Initial Rental Operations of Real Estate, ” costs associated with the development of real estate include acquisition and direct construction costs as well as capitalization of real estate taxes, insurance, incidental revenue and expenses, and a portion of salaries and overhead of personnel responsible for development activity.  In addition, we capitalize interest expense to the development projects according to SFAS 34, “ Capitalization of Interest Cost .”   The amount of interest capitalized during a period is determined by applying the weighted average rate of our borrowings to the average accumulated costs, excluding interest, of the project. The capitalization of interest, real estate taxes, insurance, and incidental revenue and expenses begins when construction of a project commences and ends when a project or a portion of the project is placed in service, not to exceed twelve months from the cessation of construction activities.  The capitalization of salaries and overhead of development personnel commences upon development approval from the prevailing governing authorities and ends with completion of the project.


Revenue Recognition and Allowance for Doubtful Accounts


Base rental income is recognized on a straight-line basis over the terms of the respective lease agreements. Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to rent receivable. The amount of straight-line rent receivable is charged against income upon early termination of a lease or as a reduction of gain on sale of the property. In the event a tenant downsizes into a smaller space with reduced rent, a pro-rated amount of the straight-line rent receivable is charged against income based on square footage.  Lease termination income is recorded when we have an executed lease termination agreement with no further contractual obligations that must be met before the fee is due to us .. If a tenant remains in the leased space following the execution of a definitive termination agreement, the applicable termination fees are deferred and recognized over the term of such tenant’s occupancy. In accordance with SFAS 141, “ Business Combinations, “ a portion of the purchase price of acquired properties is allocated to the market value of in-place leases. The market value of in-place leases is classified as an other asset or liability and is amortized to rental income over the remaining terms of the leases. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments, which results in a reduction to income. Management determines the adequacy of this allowance by continually evaluating individual tenant receivables, taking into account the tenant’s financial condition, security deposits, any letters of credit, any lease guarantees, and current economic conditions.  Significant judgments and estimates must be made by management and used in connection with establishing this allowance in any accounting period.  In the event that the allowance for doubtful accounts is insufficient to cover the actual amount of accounts that are subsequently written off in an accounting p eriod, additional bad debt expense would be recognized as a current period charge in our income statement.




19







Stock Compensation Expense


Beginning January 1, 2003, we voluntarily adopted the recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” using the modified prospective method as prescribed in SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123.” The modified prospective method provides for the calculation of the compensation expense as if the fair value based accounting method had been used to account for all stock options granted in fiscal years after December 15, 1994. Management is required to make certain assumptions in calculating the amount of any stock-based compensation expense, including assumptions relating to the fair value of options.  In determining the fair value of options, we make assumptions about the future volatility of our stock, the expected term to exercise the options, the expected dividend yields, and the risk-free interest rate.  The underl ying assumptions affect amounts reported in future periods.


Qualification as a REIT


We have elected to be taxed as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended. A REIT is generally not subject to federal income tax on that portion of real estate investment trust taxable income that is distributed to stockholders, provided that at least 90% of such taxable income is distributed and other requirements are met. If we were to fail to qualify as a REIT, we would be, among other things, required to provide for federal income taxes on our income and reduce the level of distributions made to our stockholders.





20







RESULTS OF OPERATIONS


Our operations consist of developing, owning and operating industrial and suburban office properties located primarily in the western United States.


Variances in net income and cash flows for the year ended December 31, 2004 when compared with the same period in 2003 were due primarily to the acquisition, sale, development and redevelopment of operating properties as follows:


 



Office Properties



Industrial Properties


Total Operating

Properties

 


Number of

Properties


Square

Feet


Number of

Properties


Square

Feet


Number of

Properties


Square

Feet


Total at January 1, 2003


30


2,592,000


56


4,565,000


86


7,157,000

Activity from January 1, 2003 through December 31, 2003:


     

     Acquisitions

1

205,000

4

454,000

5

659,000

     Development( 1)

-

-

1

41,000

1

41,000

Total at December 31, 2003

31

2,797,000

61

5,060,000

92

7,857,000

       

Activity from January 1, 2004 through December 31, 2004:

      

     Acquisitions (2)

3

371,000

5

439,000

8

810,000

     Sales

(5)

(527,000)

(6)

(468,000)

(11)

(995,000)

     Development (1)

-

-

2

40,000

2

40,000

     Redevelopment (3)

2

113,000

-

-

2

113,000

     Transfer to Redevelopment(3)

(1)

(334,000)

(1)

(131,000)

(2)

(465,000)

Total at December 31, 2004

30

2,420,000

61

4,940,000

91

7,360,000



(1)

Properties are included in development based on the date of shell completion.

(2)

One property was acquired on September 27, 2004 as a development project and is currently under lease-up.

(3)

One 334,000 square-foot five-building property was transferred from operating to development on March 1, 2004 as a redevelopment project, and one property was acquired on April 21, 2004 as a redevelopment project. Two of the buildings from the five-building property were transferred to operating as lease-up properties in November 2004 and are included as two properties in redevelopment in the above table.


Comparison of 2004 to 2003


Income from Operations


Income from operations, defined as rental income less rental expenses (which includes operating expenses, real estate taxes, depreciation and amortization, and general and administrative expenses), decreased $5,688,000 or 15% in 2004 compared to 2003. This decrease is attributable to an increase in rental income of $7,704,000, offset by an increase in rental expenses of $13,392,000.




21







The following table presents the change in income from operations for the twelve months ended December 31, 2004 compared with the same period in 2003, detailing amounts contributed by properties acquired, properties redeveloped, properties developed, and properties that remained stable during the period from January 1, 2003 to December 31, 2004 (in thousands):


 

Acquisitions

Redevelopment+

Development++

Stabilized (1)

Total

      

Rental income

$  14,977

$(2,844)

$  414

$(4,843)

$   7,704

Rental expenses:

   Operating expenses


(2,568)


(159)


(60)


(142)


(2,929)

   Real estate taxes

(1,221)

(120)

(5)

22

(1,324)

   Depreciation and

         amortization


(6,446)


427


(242)


(913)


(7,174)

   General and administrative  

         expenses


-


-


-


(1,965)


(1,965)


Income from operations


$    4,742


$(2,696)


$  107


$(7,841)


$(5,688)


+

Includes one five-building property transferred from operating to development on March 1, 2004, and one property acquired for redevelopment on April 21, 2004.

++

Includes one property with a shell completion date of January 1, 2003 and two properties with a shell completion date of October 18, 2004.

(1)

Stabilized properties includes properties that were fully operating during the years 2003 and 2004.




The increase in rental income of $7,704,000 is primarily attributable to property acquisitions, partially offset by decreases in rental income on redevelopment and stabilized properties. The decrease in rental income of $4,843,000 on the stabilized properties is generally attributable to decreased rental rates on new leases, renewed leases, and blend and extend leases, as well as decreased occupancy rates.




The increases in operating expenses of $2,929,000 or 20%, real estate taxes of $1,324,000 or 14%, and depreciation and amortization of $7,174,000 or 36% are primarily due to additional expenses incurred for properties acquired during 2003 and 2004. The increase in depreciation and amortization on the stabilized properties is primarily due to a greater level of capital improvement spending required to obtain tenants.


General and administrative expenses increased $1,965,000 or 34% in 2004 compared to 2003, primarily as a result of bonus accruals for 2004 of approximately $935,000, increased accounting fees of approximately $319,000, increased professional fees of approximately $435,000, and increased restricted stock vesting expense of $291,000.


Interest Expense


Interest expense, which includes amortization of loan fees, increased $2,399,000 or 13% in 2004 compared with 2003. The increase is attributable to the increase in mortgages used to finance property acquisitions in the fourth quarter of 2003 and mortgages assumed on properties acquired in 2004.  This increase is partially offset by a higher level of capitalized interest on development properties in 2004 due to increased development activity. The amortization of loan fees was $1,531,000 and $1,599,000 in 2004 and 2003, respectively.




22







Discontinued Operations


In December 2004, we sold four industrial properties in South San Francisco, California; one industrial property in Santa Rosa, California; one industrial property in Napa, California; two office properties in Seattle, Washington; one office property and a 4.3 acre parcel of land in San Diego, California; and an office building in Laguna Hills, California for net sale prices totaling $175,110,000, which resulted in an aggregate gain of $70,235,000. As of December 31, 2004, we classified one operating property as held for sale. Net operating income relating to these properties is classified as discontinued operations for all periods presented.


Dividends


Common stock dividends to stockholders declared for each quarter of 2004 were $0.51 per share. In addition, a special dividend of $3.28 per common share was declared in December 2004 as a result of gain on sales of properties.  Common stock dividends to stockholders declared for the first and second quarters of 2003 were $0.50 per share and $0.51 per share for the third and fourth quarters of 2003. Quarterly dividends on our Series A preferred stock of $1.09375 per share were declared for each quarter of 2004. In 2003, quarterly dividends on our Series A preferred stock were $0.8507 for the third quarter, and $1.09375 for the fourth quarter. Quarterly dividends on our Series B preferred stock of $0.5242 per share were declared for the second quarter of 2004 and $0.47656 per share for the third and fourth quarters of 2004.


Comparison of 2003 to 2002


Income from Operations


Income from operations, defined as rental income less rental expenses (which include operating expenses, real estate taxes, depreciation and amortization, and general and administrative expenses), decreased $2,838,000 or 7% in 2003 compared to 2002. This decrease is attributable to an increase in rental income of $7,682,000, offset by an increase in rental expenses of $10,520,000.


The following table presents the change in income from operations for the twelve months ended December 31, 2003 compared with the same period in 2002, detailing amounts contributed from properties acquired, properties developed, and properties that remained stable during the period from January 1, 2002 to December 31, 2003 (in thousands):


 

Acquisitions

Development+

Stabilized (1)

Total

     

Rental income

$  8,200

$  428

$  (946)

$  7,682

Rental expenses:

     Operating expenses


(638)


(44)


(1,573)


(2,255)

     Real estate taxes

(866)

(18)

(825)

(1,709)

     Depreciation and

           amortization


(3,456)


(196)


(1,778)


(5,430)

     General and administrative     

         expenses


-


-


(1,126)


(1,126)


Income from operations


$  3,240


$  170


$(6,248)


$(2,838)


+

Includes one property with a shell completion date of December 1, 2001.

(1)

Stabilized properties includes properties that were fully operating during the years 2002 and 2003.





23









The increase in rental income of $7,682,000 is primarily attributable to property acquisitions and, to a lesser extent, development activities. The decrease in rental income of $946,000 on the stabilized properties is generally attributable to decreased rental rates on new leases, renewed leases, and blend and extend leases, as well as decreased occupancy rates.




The increases in operating expenses of $2,255,000 or 19%, real estate taxes of $1,709,000 or 23%, and depreciation and amortization of $5,430,000 or 37% are primarily due to additional expenses incurred for properties acquired during 2002 and 2003 and increased rental expenses on stabilized properties. The increase of $1,573,000 in operating expenses on the stabilized properties is generally attributable to higher repairs and maintenance spending, which was increased in order to attract potential tenants in competitive markets.  The increase of $825,000 in real estate taxes on the stabilized properties is due to re-assessment of the value of properties developed in recent years, as well as overall increases in tax rates. The increase in depreciation and amortization of $1,778,000 on the stabilized properties is attributable to a greater level of capital improvement spending required to obtain tenants.


General and administrative expenses increased $1,126,000 or 24% in 2003 compared with 2002, primarily as a result of increased compensation expense associated with the hiring of the employees of Bedford Acquisitions, Inc., which increased compensation costs by approximately $500,000. The remaining increase is mainly due to higher legal and accounting fees.


Interest Expense


Interest expense, which includes amortization of loan fees, increased $1,535,000 or 9% in 2003 compared to 2002. The increase is attributable to a higher level of weighted average outstanding debt in 2003 due to share repurchases and the funding of property acquisitions in the third and fourth quarters of 2003, as well as increased amortization of loan fees. The amortization of loan fees was $1,599,000 and $1,361,000 in 2003 and 2002, respectively. The increase in amortization of loan fees is primarily due to loan fees paid in connection with the $137.6 million of mortgage financing obtained in 2003.


Discontinued Operations


In the second quarter 2002, we sold three industrial properties in Vista, California; one industrial property in San Diego, California; and one industrial property in Scottsdale, Arizona for net sale prices totaling $19,081,000, which resulted in an aggregate gain of $1,798,000. Net operating income relating to these properties is classified as discontinued operations for all periods presented.


In the third quarter 2002, we sold two industrial properties and one office property in Monterey, California for net sale prices totaling $12,391,000, which resulted in an aggregate gain of $1,777,000. Net operating income relating to these properties is classified as discontinued operations for all periods presented.


Dividends


Common stock dividends to stockholders declared for the first and second quarters of 2003 were $0.50 per share and $0.51 per share for the third and fourth quarters of 2003. Common stock dividends to stockholders declared for the first and second quarters of 2002 were $0.48 per share and $0.50 per share for the third and fourth quarters of 2002. Quarterly dividends on our Series A preferred stock of $0.8507 per share were declared for the third quarter of 2003 and $1.09375 for the fourth quarter of 2003.



24







LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows


Operating Activities


Net cash provided by operating activities decreased approximately $2,519,000 to $46,651,000 for the twelve months ended December 31, 2004 as compared to $49,170,000 for the same period in 2003. This decrease was primarily due to higher interest payments on our outstanding debt and increased payments for accounting and other professional fees. Interest payments increased in 2004 as a result of new mortgages obtained to finance 2003 acquisitions and mortgages assumed on 2004 acquisitions. Accounting and professional fees increased in 2004 as a result of services performed to document and test the company’s internal control over financial reporting.  


Investing Activities


Net cash provided by investing activities increased approximately $ 153,008 ,000 to $ 58,085 ,000 for the twelve months ended December 31, 2004 as compared to cash used in investing activities of $94,923,000 for the same period in 2003. The increase in cash provided by investing activities was primarily due to net proceeds from the sale of operating properties in 2004 of approximately $169,307,000. These proceeds were offset by an increase in property acquisitions in 2004 as well as increased spending on building improvements and tenant improvements on existing operating properties.


Financing Activities


Net cash used in financing activities increased approximately $ 137,740 ,000 to $ 88,116 ,000 for the twelve months ended December 31, 2004 as compared to net cash provided by financing activities of $49,624,000 for the same period in 2003. The increase in cash used in financing activities was primarily due to reduced proceeds from new mortgages in 2004 as compared to 2003, increased net payments on our credit facility with proceeds from the sale of operating properties , and increased dividend payments for the preferred shares issued in 2003 and 2004.  These increases in cash used were partially offset by additional cash provided by our Series B preferred stock offering in 2004.


Available Borrowings, Capital Resources, and Cash Balances


We expect to meet our long-term liquidity and capital requirements, such as funding capital expenditures, costs associated with lease renewals and re-leasing of space, the cost of acquisitions, repayment of indebtedness, share repurchases, development of properties, and dividends from:

-

cash flow from operations;

-

borrowings under our credit facility and, if available, other indebtedness which may include indebtedness assumed in acquisitions or the refinancing of existing indebtedness;

-

the sale of real estate investments; and

-

issuance of long-term debt and equity securities.


On April 6, 2004, we completed a public offering of 2,400,000 shares of our 7.625% Series B Cumulative Redeemable Preferred Stock at $25 per share. The net proceeds of approximately $58 million were used to finance the purchase of four operating properties, one redevelopment project and three parcels of land totaling 4.69 acres in the second and third quarters of 2004, which totaled approximately $57.4 million.


Our line of credit, which has a total commitment of $150 million plus an accordion feature for expansion of $50 million, had a zero outstanding balance and letters of credit issued and undrawn of $11,943,000 at December 31, 2004, leaving approximately $188,057,000 of available borrowing. We anticipate utilizing this available borrowing capacity and/or sale proceeds from real estate assets to fund our investing activities in 2005, including estimated development and redevelopment costs of approximately $22 million and capital expenditures of approximately $15 million.



25







As of December 31, 2004, we had approximately $24,218,000 in cash and cash equivalents, including approximately $22,000 of restricted cash.  Restricted cash represents security deposits held in interest bearing cash deposit accounts in accordance with tenant leases. Unrestricted cash includes approximately $3,776,000 held in a liquidity management investment account investing in money market instruments that are backed by U.S. government short-term securities and approximately $17,988,000 held in short-term U.S. Treasury Bills. The balance of the unrestricted cash is in a demand deposit account which is used to fund our disbursements.


We anticipate that the cash flow generated by our real estate investments and funds available under our credit facility will be sufficient to meet our short-term liquidity requirements.


Debt Financing


Our ability to continue to finance operations is subject to several uncertainties. For example, our ability to obtain mortgage loans on income producing property is dependent upon our ability to attract and retain tenants and the economics of the various markets in which the properties are located, as well as the willingness of mortgage-lending institutions to make loans secured by real property. Approximately 91% of our real estate investments served as collateral for our existing mortgage indebtedness and available borrowing under our credit facility as of December 31, 2004. Our ability to sell real estate investments is partially dependent upon the ability of purchasers to obtain financing at reasonable commercial rates.


We currently have a revolving credit facility with a bank group led by Bank of America. The facility, which matures on March 31, 2007, consists of a $150 million secured line with an accordion feature that allows us at our option to expand the facility to $200 million, if needed. Interest on the facility is at a floating rate equal to either the lender’s prime rate or LIBOR plus a margin ranging from 1.30% to 1.75%, depending on our leverage level. As of December 31, 2004, the facility did not have an outstanding balance.


In April 2004, we assumed a mortgage with an outstanding balance of approximately $3,070,000 in connection with the acquisition of a property. The mortgage with Thrivent Financial for Lutherans carried a fixed interest rate of 7.90% and had a maturity date of April 10, 2017. Subsequently, in July 2004, we renegotiated the mortgage with a then outstanding balance of $3,036,000, resulting in an increased loan amount, an extended term, and a lower interest rate. The new mortgage contains provisions for two additional fundings, the first of which took place on July 29, 2004 for $2,464,000. The second funding of $2,500,000 will take place in 2005, bringing the total mortgage amount to $8,000,000. The new interest rate on this mortgage is currently 5.94% and will be reduced to 5.60% after the second funding in 2005. The mortgage matures on August 15, 2029.


In August 2004, we assumed a mortgage with an outstanding balance of approximately $7,066,000 in connection with the acquisition of a property.  The mortgage with Woodmen of the World carries a fixed interest rate of 7.23% and has a maturity date of July 1, 2012.


As a result of property sales in December 2004, we paid down the outstanding balance on our line of credit, resulting in a zero balance as of December 31, 2004. We also partially paid down three mortgages and paid off one mortgage for a total aggregate repayment amount of approximately $22,686,000.




26







Mortgage loans payable at December 31, 2004 consist of the following (in thousands):


    

Collateral as of December 31, 2004



Lender



Maturity Date


Interest Rate at

December 31, 2004 +



Balance


Number of

Properties

% of Annualized

Base Rent

% of Gross

Real Estate

Investments

TIAA-CREF

June 1, 2005

7.17%

$  24,701

5

5.93%

4.34%

Security Life of Denver

 Insurance Company


September 1, 2005


3.00%(1)


11,518


3


1.46%


2.29%

Nationwide Life

 Insurance


November 1, 2005(2)


4.61%


16,987


3


3.75%


3.82%

Prudential Insurance

July 31, 2006

8.90%

7,450

1

1.41%

1.68%

Prudential Insurance

July 31, 2006

6.91%

12,517

2

4.81%

3.20%

Union Bank

November 19, 2006

4.14%(3)

20,097

9

4.19%

3.77%

TIAA-CREF

December 1, 2006

7.95%

20,427

5

4.07%

4.30%

TIAA-CREF

June 1, 2007

7.17%

33,596

5

8.02%

6.88%

John Hancock

December 1, 2008

4.60%

11,800

5

2.69%

3.08%

Sun Life Assurance Co.

April 1, 2009

7.00%

1,604

1

0.79%

0.79%

Sun Life Assurance Co.

April 1, 2009

7.25%

1,435

*

*

*

TIAA-CREF

June 1, 2009

7.17%

39,241

8

9.59%

9.31%

John Hancock

December 1, 2010

4.95%

27,900

2

5.56%

4.54%

Washington Mutual

August 1, 2011

3.98%(4)

16,156

5

-

4.36%

Woodmen of the World

July 1, 2012

7.23%

7,025

1

1.26%

1.06%

TIAA-CREF

April 1, 2013

5.60%

47,411

5

8.66%

6.76%

Bank of America

November 1, 2013

5.45%

9,900

1

2.07%

2.11%

Bank of America

December 1, 2013

5.55%

11,400

4

2.85%

2.72%

JP Morgan

December 1, 2013

5.74%

24,702

1

6.25%

4.31%

Thrivent Financial

August 15, 2029

5.94%

5,468

1

-

1.10%

 


Total

 


$351,335


67


73.36%


70.42%


+

Interest rates are fixed unless otherwise indicated by footnote.

(1)

Floating rate based on 30-day LIBOR plus 1.40% (adjusted monthly). Effective July 3, 2003, the floating 30-day LIBOR rate was swapped to a fixed rate of 1.595% for an all-in rate of 2.995% until maturity.

(2)

Maturity date of November 1, 2005 represents the first of two interest rate reset dates, at which time we may opt to reject the new rate and pay the outstanding balance on the mortgage. The second interest rate reset date is November 1, 2008 with a final maturity date of November 1, 2011.

(3)

Floating rate based on LIBOR plus 1.60%. The current rate of 4.14% is fixed until May 19, 2005, at which time we have the option of fixing the LIBOR rate for a period of 1 month, 3 months, 6 months, or 12 months.

(4)

Floating rate based on a 12-month average of U.S. Treasury security yields plus 2.60% (adjusted semi-annually).

*

The two Sun Life Assurance Company mortgages are collateralized by a single property.


The 67 operating properties that served as collateral for our mortgages had a net book value of approximately $501,550,000 as of December 31, 2004. We were in compliance with the covenants and requirements of our various mortgage loans payable during the years ended December 31, 2004 and 2003.

 



27








CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS


The following summarizes our contractual obligations and other commitments at December 31, 2004, and the effect such obligations could have on our liquidity and cash flow in future periods (in thousands):


 

Amount of Commitment Expiring by Period



Less

Than

1 Year



1-3

Years



4-5

Years



Over 5

Years




Total


Bank loan payable


$            -


$            -


$            -


$            -


$           -

Mortgage loans payable

58,675

98,922

56,656

137,082

351,335

Interest obligations on bank loan

  and mortgage loans


19,873


29,301


19,860


23,901


92,935

Construction contract

  commitments


5,211


-


-


-


5,211

Stand-by letters of credit

11,943

-

-

-

11,943


Total


$  95,702


$128,223


$  76,516


$160,983


$461,424



RELATED PARTY TRANSACTIONS


We occasionally use the services of the law firm Bartko, Zankel, Tarrant & Miller of which a member of our board of directors, Martin I. Zankel, is a Senior Principal. During the years ended December 31, 2004, 2003, and 2002, we paid Bartko, Zankel, Tarrant & Miller approximately $200, $81,000, and $17,000, respectively.


OFF-BALANCE SHEET ARRANGEMENTS


At December 31, 2004 and 2003, we did not have any relationships with unconsolidated entities or financial partnerships, including entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we were engaged in such relationships.


As of December 31, 2004, we had outstanding undrawn letters of credit against our credit facility of approximately $11,943,000. The letters of credit were required by our various lenders as substitution for insurance and real estate impound accounts, as temporary substitution of collateral for a sold property, and as security for a vacancy in a property serving as collateral for a mortgage.




28







POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS


Many factors affect our actual financial performance and may cause our future results to be different from past performance or trends. These factors include the following:


We could experience a reduction in rental income if we are unable to renew or re-lease space on expiring leases on current lease terms, or at all.


A significant portion of our leases is scheduled to expire in the near future. As of December 31, 2004, leases representing 21%, 15%, 15%, and 22% of our total annualized base rent were scheduled to expire during 2005, 2006, 2007, and 2008, respectively. If the rental rates upon re-leasing or renewal of leases were significantly lower than current rates, or if we were unable to lease a significant amount of space on economically favorable terms, or at all, our results of operations could suffer. We are subject to the risk that, upon expiration, some of these or other leases will not be renewed, the space may not be re-leased, or the terms of renewal or re-leasing, including the costs of required renovations or concessions to tenants, may be less favorable than current lease terms. We could face difficulties re-leasing our space on commercially acceptable terms when it becomes available. In addition, we expect to incur costs in making improvemen ts or repairs to our properties required by new or renewing tenants and expenses associated with brokerage commissions payable in connection with the re-leasing of space. Similarly, our rental income could be reduced by vacancies resulting from lease expirations or by rental rates that are less favorable than our current terms. If we are unable to promptly renew leases or re-lease space or if the expenses relating to tenant turnover are greater than expected, our financial results could be harmed.


Our leases with our 25 largest tenants generate approximately 41% of our base rent, and the loss of one or more of these tenants, as well as the inability to re-lease this space on equivalent terms, could harm our results of operations.


As of December 31, 2004, our 25 largest tenants accounted for approximately 41% of our total annualized base rent. In the event that one or more of our larger tenants were to vacate or not renew their lease with us, the re-leasing of the square footage previously leased by these tenants may require considerable capital expenditures and an indeterminate period of time. Losses of our larger tenants and our inability to re-lease vacated properties on favorable terms could limit our ability to make distributions to our stockholders.


A significant portion of our base rent is generated by properties in California, and our business could be harmed by an economic downturn in the California real estate market or a significant earthquake.


As of December 31, 2004, approximately 45% of our total annualized base rent was generated by our properties located in the State of California. As a result of this geographic concentration, a downturn in the performance of the commercial real estate markets and the local economies in various areas within California could adversely affect the value of these properties and the rental income from these properties and, in turn, our results of operations. In addition, the geographic concentration of our properties in California in close proximity to regions known for their seismic activity exposes us to the risk that our operating results could be harmed by a significant earthquake.


Future declines in the demand for commercial space in the greater San Francisco Bay Area could harm our results of operations and, consequently, our ability to make distributions to our stockholders.


Approximately 28% of our net operating income , including income from discontinued operations, for the year ended December 31, 2004 was generated by our properties located in the greater San Francisco Bay Area. As a result, our business is somewhat dependent on the condition of the San Francisco Bay Area economy. The market for commercial space in the San Francisco Bay Area is recovering from of one of the most severe downturns of the past several decades. This downturn was precipitated by the unprecedented collapse of many technology and so-called “ dot com ” businesses that, during the 1998-2001 period, had been chiefly responsible for generating demand



29







for, and increased prices of, local office properties. This downturn has harmed, and may continue to harm, our results of operations. In the event this downturn continues or economic conditions in the San Francisco Bay Area worsen, it could harm the market value of our properties, the results derived from such properties and our ability to make distributions to our stockholders.


Real estate investments are inherently risky, and many of the risks involved are beyond our ability to control.


Real property investments are subject to numerous risks. The yields available from an equity investment in real estate depend on the amount of income generated and costs incurred by the related properties. If the properties in which we invest do not generate sufficient income to meet costs, including debt service, tenant improvements, third-party leasing commissions, and capital expenditures, our results of operations and ability to make distributions to our stockholders could suffer. Revenues and values of our properties may also be harmed by a number of other factors, some of which are beyond our control, including:


-

the national economic climate;

-

the local economic climate;

-

local real estate conditions, including an oversupply of space or a reduction in demand for real estate in an area;

-

the attractiveness of our properties to tenants;

-

competition from other available space;

-

our ability to provide adequate maintenance and insurance to cover other operating costs, government regulations and changes in real estate, zoning or tax laws, and interest rate levels;

-

the availability of financing; and

-

potential liabilities under environmental and other laws.


If our tenants experience financial difficulty or seek the protection of bankruptcy laws, our cash from operating activities could suffer.


Our commercial tenants may, from time to time, experience downturns in their business operations and finances due to adverse economic conditions, which may result in their failure to make rental payments to us on a timely basis or at all. Missed rental payments, in the aggregate, could impair our cash flows and, as a result, our ability to make distributions to our stockholders.


At any time, a tenant could seek the protection of the bankruptcy laws, which might result in the modification or termination of the tenant’s lease and cause a reduction in our cash flow. During the twelve months ended December 31, 2004, none of our tenants had filed for bankruptcy. However, in the event of default by or bankruptcy of a tenant, we may experience delays in enforcing our rights as lessor and may incur substantial costs in protecting our investment. The default, bankruptcy, or insolvency of a few major tenants may harm us and our ability to pay dividends to our stockholders.


Our dependence on smaller businesses to rent office space could negatively affect our cash flow.


Many of the tenants in our properties operate smaller businesses that may not have the financial strength of larger corporate tenants. Smaller companies generally experience a higher rate of failure and are generally more susceptible to financial risks than large, well-capitalized enterprises. Dependence on these companies could create a higher risk of tenant defaults, turnover, and bankruptcies, all of which could harm our ability to pay dividends.




30







The acquisition and development of real estate is subject to numerous risks, and the cost of bringing any acquired property to standards for its intended market position could exceed our estimates.


A significant portion of our leases is scheduled to expire in 2005. To supplement the losses in net operating income caused by the leasing turnover, we expanded our acquisitions program in 2003 and during the first ten months of 2004. Acquisitions totaled approximately $85.1 million in 2003 and $103.6 million in 2004. The goal of our acquisitions program was to purchase additional properties the net operating income from which would supplement the declines in net operating income we have been experiencing, and will experience, from rental declines and from our high tenant turnover rate in 2004 and 2005.  Due to the fact that we were unable to acquire sufficient properties that met our targets for return on investment, we determined that we would de-emphasize our acquisitions program and focus, instead, on selling individual properties in the current seller-favorable market in order to supplement our net operating income. However, following the conclusion of our review of strategic alternatives, and as part of repositioning ourselves as a multi-tenant REIT, we may acquire additional properties as opportunities arise. We may acquire industrial and suburban office properties and portfolios of these properties, which may include the acquisition of other companies and business entities owning the properties. Although we engage in due diligence review for each new acquisition, we may not be aware of all potential liabilities and problems associated with a property. We may have limited contractual recourse, or no contractual recourse, against the sellers of a property.


We may abandon development opportunities resulting in direct expenses to us.


From time to time, we may invest significant time and resources exploring development opportunities that we subsequently decide are not in our best interest. The costs of investigating these opportunities will still be considered a direct expense and may harm our financial condition.


Our uninsured or underinsured losses could result in a loss in value of our properties.


We currently maintain general liability coverage with primary limits of $1 million per occurrence and $2 million in the aggregate, as well as $40 million of umbrella/excess liability coverage. This coverage protects us against liability claims as well as the cost of legal defense. We carry property “ All Risks ” insurance of $200 million on a replacement value basis covering both the cost of direct physical damage and the loss of rental income. Separate flood and earthquake insurance is provided with an annual aggregate limit of $10 million, subject to a deductible of the greater of $100,000 or 5% of total insurable value per building and respective rent loss with respect to earthquake coverage. Additional excess earthquake coverage with an aggregate limit of $20 million is provided for properties located in California, which represent approximately 45% of our portfolio’s annualized base rent as of December 31, 2004. Some losses, including those due to acts of war, nuclear accidents, pollution, mold, or terrorism, may be either uninsurable or not economically insurable. However, we do presently carry insurance for terrorism losses as defined under the Terrorism Risk Insurance Act of 2002 under our “ All Risks ” property policies, liability policies, primary and umbrella/excess policies. In addition, “ non-certified ” terrorism coverage is provided under our property policy for losses in excess of $10 million up to the $200 million limit.


Some losses could exceed the limits of our insurance policies or could cause us to bear a substantial portion of those losses due to deductibles under those policies. If we suffer an uninsured loss, we could lose both our invested capital in and anticipated cash flow from the property while being obligated to repay any outstanding indebtedness incurred to acquire the property. In addition, a majority of our properties are located in areas that are subject to earthquake activity. Although we have obtained earthquake insurance policies for all of our properties, if one or more properties sustain damage as a result of an earthquake, we may incur substantial losses up to the amount of the deductible under the earthquake insurance policy and, additionally, to the extent that the damage exceeds the policy’s maximum coverage, we would not have insurance compensation for that portion of the losses. Although we have obtained owner’s title insu rance policies for each of our properties, the title insurance may be in an amount less than the current market value of some of the properties. If a title defect results in a loss that exceeds insured limits, we could lose all or part of our investment in, and anticipated gains, if any, from, the property. Furthermore, the current insurance market is characterized by rising premium rates, increasing deductibles, and more restrictive coverage language. Continued increases in the costs of insurance coverage or increased limits or exclusions in insurance policy coverage could negatively affect our financial results.



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If we fail to maintain our qualification as a real estate investment trust, we could experience adverse tax and other consequences, including the loss of deductibility of dividends in calculating our taxable income and the imposition of federal income tax at regular corporate rates.


We have elected to qualify as a real estate investment trust (REIT) under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended. We believe that we have been organized and have operated in a manner so as to have satisfied the REIT qualification requirements since 1985. However, the IRS could challenge our qualification as a REIT for taxable years still subject to audit, and we may fail to qualify as a REIT in the future.


Qualification as a REIT involves the application of highly technical and complex tax provisions, and the determination of various factual matters and circumstances not entirely within our control may have an impact on our ability to maintain our qualification as a REIT. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources and we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. In addition, we cannot assure that new legislation, Treasury Regulations, administrative interpretations, or court decisions will not significantly change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of such qualification. We are not aware of any proposal to amend the tax laws that would significantly and negatively affect our ability to continue to operate as a REIT .


If we fail to maintain our qualification as a REIT, or are found not to have qualified as a REIT for any prior year, we would not be entitled to deduct dividends paid to our stockholders and would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. In addition, unless entitled to statutory relief, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. This treatment would reduce amounts available for investment or distribution to stockholders because of any additional tax liability for the year or years involved. In addition, we would no longer be required by the Internal Revenue Code to make any distributions. As a result, disqualification as a REIT would harm us and our ability to make distributions to our stockholders. To the extent that distributions to stockholders have been ma de in anticipation of our qualification as a REIT, we might be required to borrow funds or to liquidate investments to pay the applicable tax.


We must comply with strict income distribution requirements to maintain favorable tax treatment as a REIT. If our cash flow is insufficient to meet our operating expenses and the distribution requirements, we may need to incur additional borrowings or otherwise obtain funds to satisfy these requirements.


To maintain REIT status, we are required each year to distribute to our stockholders at least 90% of our REIT taxable income, excluding net capital gains. In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income and 95% of our capital gain net income for the calendar year plus any amount of such income not distributed in prior years. Although we anticipate that cash flow from operations will be sufficient to pay our operating expenses and meet the distribution requirements, we cannot assure you that this will occur, and we may need to incur borrowings or otherwise obtain funds to satisfy the distribution requirements associated with maintaining the REIT qualification. In addition, differences in timing between the receipt of income and payment of expenses in arriving at our taxable income could require us to incu r borrowings or otherwise obtain funds to meet the distribution requirements necessary to maintain our qualification as a REIT. We cannot assure you that we will be able to borrow funds or otherwise obtain funds if and when necessary to satisfy these requirements.




32







As a REIT, we are subject to complex constructive ownership rules that limit any holder to 9.8% in value of our outstanding common and preferred stock, taken together. Any shares transferred in violation of this rule are subject to redemption by us and any such transaction is voidable.


To maintain REIT qualification, our charter provides that no holder is permitted to own more than 9.8% in value of our outstanding common and preferred stock, taken together, or more than 9.8% (in value or number) of our outstanding common stock. In addition, no holder is permitted to own any shares of any class of our stock if that ownership would cause more than 50% in value of our outstanding common and preferred stock, taken together, to be owned by five or fewer individuals, would result in our stock being beneficially owned by less than 100 persons or would otherwise result in our failure to qualify as a REIT. Acquisition or ownership of our common or preferred stock in violation of these restrictions results in automatic transfer of the stock to a trust for the benefit of a charitable beneficiary or, under specified circumstances, the violative transfer may be deemed void or we may choose to redeem the violative shares. Peter B. Bed ford is subject to higher ownership limitations than our other stockholders. Specifically, Mr. Bedford is not permitted to own more than 15% of the lesser of the number or value of the outstanding shares of our common stock.


The ownership limitations described above are applied using the constructive ownership rules of the Internal Revenue Code. These rules are complex and may cause common or preferred stock owned beneficially or constructively by a group of related individuals and/or entities to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of our outstanding common or preferred stock or the acquisition of an interest in an entity that owns our common or preferred stock by an individual or entity could cause that individual or entity or another individual or entity to constructively own stock in excess of the limits and subject that stock to the ownership restrictions in our charter.


If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls over financial reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the trading price of our stock.


Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal controls. These evaluations may result in the conclusion that enhancements, modifications or changes to our internal controls are necessary or desirable. While management evaluates the effectiveness of our internal controls on a regular basis, we cannot provide absolute assurance that these controls will always be effective.  There are inherent limitations on the effectiveness of internal controls including collusion, management override, and breakdowns in human judgment. Because of this, control procedures are designed to reduce rather than eliminate business risks. If we fail to maintain an effective system of internal controls or if management or our independent registered public accounting firm were to discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud and it could harm our financial condition and results of operations and result in loss of investor confidence and a decline in our stock price.






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We rely on the services of our key personnel, and their expertise and knowledge of our business would be difficult to replace.


We are highly dependent on the efforts of our senior officers.  While we believe that we could find suitable replacements for these key personnel, the loss of their services could harm our business.  On April 20, 2004, our board of directors announced that they had launched a search to replace Peter Bedford as our c hief e xecutive o fficer upon his retirement.  After conducting this search for several months and as a result of subsequent developments in the real estate market, in September 2004, the board of directors determined that it would be in the best interests of our stockholders to pursue various strategic alternatives, including a possible sale or merger of our company to a third party or selling certain of our assets. Based on this shift in strategy, the board requested, and Peter Bedford agreed, to defer his retirement and remain as our CEO while we evaluated and pursued these strategic alternatives. In connection with the board's conclusion of its review of strategic alternatives in February 2005, the board decided to discontinue its previously suspended search for a successor candidate to serve as CEO and Peter Bedford's term of employment as CEO was extended until December 31, 2007. In addition, James Moore, our President and former c hief o perating o fficer, has also announced his intention to retire in July 2005. As a result, we have restructured our organization and Stephen M. Silla has assumed the position of c hief o perating o fficer, effective January 31, 2005. Changes in our senior management and any future departures of key employees or other members of senior management could have a material adverse effect on our ability to implement our business strategy and on our results of operations.


The commercial real estate industry is highly competitive, and we compete with companies, including REITs, that may be able to purchase properties at lower capitalization rates than would be accretive for us.


We have historically sought to grow our asset base through the acquisition of industrial and suburban office properties and portfolios of these properties, as well as through the development of new industrial and suburban office properties. Many real estate companies, including other REITs, compete with us in making bids to acquire new properties. The level of competition to acquire income-producing properties is largely measured by the capitalization rates at which properties are trading. The capitalization rate is the annual yield that property produces on the investment. Currently, capitalization rates are low due to the amount of capital available for investment and attractive debt financing terms. As a result, we may not be able to compete effectively with companies, including REITs, that may be able to purchase properties at lower capitalization rates than would be accretive for us.


Many of our properties are located in markets with an oversupply of space, and our ability to compete effectively with other properties to attract tenants may be limited to the extent that competing properties may be newer, better capitalized or in more desirable locations than our properties.


Numerous industrial and suburban office properties compete with our properties in attracting tenants. Some of these competing properties are newer, better located, or better capitalized than our properties. Many of our investments are located in markets that have a significant supply of available space, resulting in intense competition for tenants and lower rents. We believe the oversupply of available space relative to demand has increased in recent years due to the softened U.S. economy. The number of competitive properties in a particular area could negatively impact our ability to lease space in the properties or at newly acquired or developed properties.


We could incur costs from environmental liabilities even though we did not cause, contribute to, or know about them.


Under various federal, state, and local laws, ordinances and regulations, an owner or operator of real estate may be held liable for the costs of removal or remediation of hazardous or toxic substances released on, above, under or in a property. These laws often impose liability regardless of whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. In addition, environmental laws often impose liability on a previous owner of property for hazardous or toxic substances present during the prior ownership period. A transfer of the property may not relieve an owner of all liability. Accordingly, we could be liable for properties previously sold or otherwise divested. The costs of removal or remediation could be substantial. Additionally, the presence of the substances, or the failure to properly remove them, may harm our ability to borrow using the real estate as collateral.



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All of our properties have had Phase I environmental site assessments, which involve inspection without soil sampling or groundwater analysis, by independent environmental consultants and have been inspected for hazardous materials as part of our acquisition inspections. None of the Phase I assessments has revealed any environmental problems requiring material costs for clean up. The Phase I assessment for Milpitas Town Center, however, indicates that the groundwater under that property either has been or may in the future be, impacted by the migration of contaminants originating off-site. According to information available to us, the responsible party for this offsite source has been identified and has begun clean up. We do not believe that this environmental matter will impair the future value of Milpitas Town Center in any significant respect or that we will be required to fund any portion of the cost of remediation. We cannot assure you, however, that these Phase I assessments or our inspections have revealed all environmental liabilities and problems relating to this or any other of our properties.


We believe that we are in compliance in all material respects with all federal, state, and local laws regarding hazardous or toxic substances. To date, compliance with federal, state, and local environmental protection regulations has not had a material effect on us. However, we cannot assure you that costs relating to the investigation and remediation of environmental issues for properties currently or previously owned by us, or properties that we may acquire in the future, or other expenditures or liabilities, including claims by private parties, resulting from hazardous substances present in, on, under, or above the properties or resulting from circumstances or other actions or claims relating to environmental matters, will not harm us and our ability to pay dividends to our stockholders.


Costs associated with moisture infiltration and resulting mold remediation may be significant.


Concern about indoor exposure to mold, fungi, and mycotoxins has been increasing because this exposure is allegedly linked to various adverse effects on health. Increasingly, insurance companies are excluding mold-related risks from their policy coverage, and it is now excluded from our coverage. Costs and potential liability stemming from tenant exposure to mold and the increased costs of renovating and remodeling buildings with exposure to mold could harm our financial position and results. We have in the past incurred costs for mold remediation in certain of our properties and may incur such costs in the future.


We could incur unanticipated costs to comply with the Americans with Disabilities Act, and any non-compliance could result in fines.


Under the Americans with Disabilities Act (the ADA), all public accommodations and commercial facilities are required to meet federal requirements related to access and use by disabled persons. Compliance with the ADA requires removal of access barriers, and any non-compliance may result in the imposition of fines by the U.S. government or an award of damages to private litigants. Although we believe that our properties are substantially in compliance with these requirements, in the future we may incur costs to comply with the ADA with respect to both existing properties and properties acquired in the future, which could limit our ability to make distributions to stockholders.


We are subject to numerous federal, state, and local regulatory requirements, and any changes to existing regulations or new laws may result in significant, unanticipated costs.


Our properties are, and any properties we may acquire in the future will be, subject to various other federal, state, and local regulatory requirements, including local building codes. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We believe that our properties are currently in substantial compliance with all applicable regulatory requirements, although expenditures at properties owned by us may be necessary to comply with changes in these laws. Although no material expenditures are contemplated at this time to comply with any laws or regulations, we cannot assure you that these requirements will not be changed or that new requirements will not be imposed that would require significant unanticipated expenditures by us, which could harm us and our ability to make distributions to our stockholders. Similarly, changes in laws increasing the p otential liability for environmental conditions existing on our properties could result in significant unanticipated expenditures.



35







Our $150 million credit agreement and our mortgage loans are collateralized by approximately 91% of our total real estate assets, and in the event of default under any of these debt instruments, our lenders could foreclose on the collateral securing this indebtedness.


As of December 31, 2004, our $150 million credit facility was collateralized by mortgages on 20 properties that accounted for approximately 22% of our annualized base rent and approximately 21% of our total real estate assets. All of our mortgage loans were collateralized by 67 properties that accounted for approximately 73% of our annualized base rent and approximately 70% of our total real estate assets. If we fail to meet our obligations under the credit facility, the mortgage loans, or any other debt instruments we may enter into from time to time, including failure to comply with financial covenants, the holders of this indebtedness generally would be entitled to demand immediate repayment of the principal and to foreclose upon any collateral securing this indebtedness. In addition, default under or acceleration of any debt instrument could, pursuant to cross-default clauses, cause or permit the acceleration of other indebtedness. Any defa ult or acceleration would harm us, jeopardizing our qualification as a REIT and threatening our continued viability. In addition, upon the sale of any property subject to a mortgage loan or which forms part of the collateral for our credit facility, we would be required to apply the proceeds of any such sale first to pay off any mortgage loan on the property or (to the extent the total value of the collateral securing our credit facility after such sale is less than the total amount outstanding under the credit facility) to pay down our credit facility, as applicable.


Our $150 million credit agreement and some of our mortgage loans carry floating interest rates, and increases in market interest rates could harm our results of operations.


As of December 31, 2004, our $150 million credit facility did not have an outstanding balance. However, the average outstanding balance during 2004 was $81.2 million, and we had other outstanding floating rate loans of $36.2 million as of December 31, 2004. Borrowings under our credit facility bear interest at a floating rate, and we may from time to time incur or assume other indebtedness also bearing interest at a floating rate. In that regard, our results of operations for 2003 and 2004 have benefited from low levels of interest rates. Should this trend in interest rates reverse itself, our operating results could be harmed ..


We use borrowings to finance the acquisition, development and operation of properties and to repurchase our common stock, and we cannot assure you that financing will be available on commercially reasonable terms, or at all, in the future.


We borrow money to pay for the acquisition, development, and operation of our properties, to repurchase our common stock, and for other general corporate purposes. Our credit facility currently expires on March 31, 2007, when the principal amount of all outstanding borrowings must be paid. Since the term of our credit facility is limited, our ability to fund acquisitions and provide funds for working capital and other cash needs following the expiration or utilization of the credit facility will depend primarily on our ability to obtain additional private or public equity or debt financing.  Such financing may not be available to us on commercially reasonable terms, or at all, at the time we may require such financing.


A downturn in the economy could make it difficult for us to borrow money on favorable terms. If we are unable to borrow money on favorable terms, we may need to sell some of our assets at unfavorable prices in order to pay our loans. We could encounter several problems, including:


-

insufficient cash flow to meet required payments of principal and interest;

-

an increase on variable interest rates on indebtedness; and

-

an inability to refinance existing indebtedness on favorable terms or at all.




36







Our leverage could harm our ability to operate our business and fulfill our debt obligations.


We have significant debt service obligations. As of December 31, 2004, we had total liabilities of approximately $443.0 million, excluding unused commitments under our credit facility, and total stockholders’ equity of approximately $350.5 million. Payments to service our outstanding debt obligations during the year totaled approximately $33.2 million for 2004. Our debt level increases the possibility that we could be unable to generate cash sufficient to pay the principal of, interest on, or other amounts due in respect of our indebtedness. In addition, we may incur additional debt from time to time to fund our stock buy back program, finance strategic acquisitions, investments, or for other purposes, subject to the restrictions contained in our debt instruments.


We have not used derivatives extensively to mitigate our interest rate risks.


Historically, we have not used interest rate swaps, caps and floors, or other derivative transactions extensively to help us mitigate our interest rate risks because we have determined that the cost of these transactions outweighed their potential benefits and could have, in some cases, jeopardized our status as a REIT. We have entered into a swap agreement to hedge our exposure to the variable interest rate on a mortgage with a remaining principal balance of approximately $11.5 million as of December 31, 2004. Even if we were to use derivative transactions more extensively, we would not be fully insulated from the prepayment and interest rate risks to which we are exposed. However, we do not have any policy that prohibits us from using derivative transactions or other hedging strategies more extensively in the future. If we do engage in additional derivative transactions in the future, we cannot assure you that a liquid secondary market will e xist for any instruments purchased or sold in those transactions, and we may be required to maintain a position until exercise or expiration, which could result in losses.


An increase in market interest rates could cause the respective prices of our common stock and preferred stock to decrease.


One of the factors that may influence the respective market prices of our shares of common stock and preferred stock will be the annual dividend yield on the price paid for shares of our common stock or preferred stock as compared to yields on other financial instruments. An increase in market interest rates may lead prospective purchasers of our stock to seek a higher annual yield from their investments, which may adversely affect the respective market prices of our common stock and preferred stock. As of December 31, 2004, interest rates in the U.S. remained relatively low.


We may incur additional indebtedness, which may harm our financial position and cash flow and potentially impact our ability to pay dividends.


Our existing debt instruments permit us to incur additional indebtedness and other liabilities, subject to the restrictions contained in those debt instruments. As of December 31, 2004, we had approximately $351.3 million of indebtedness outstanding. We may incur additional indebtedness and become more highly leveraged, which could harm our financial position and potentially limit our cash available to pay dividends. As a result, we may not have sufficient funds to satisfy our dividend obligations relating to our preferred stock or pay dividends on our common stock, if we assume additional indebtedness.


We cannot assure you that we will be able to pay dividends regularly although we have done so in the past.


Our ability to pay dividends in the future is dependent on our ability to operate profitably and to generate cash from our operations. Although we have done so in the past, we cannot guarantee that we will be able to pay dividends on a regular quarterly basis in the future. Furthermore, any new shares of common stock issued will substantially increase the cash required to continue to pay cash dividends at current levels. Any common stock or preferred stock that may in the future be issued to finance acquisitions, upon exercise of stock options or otherwise would have a similar effect. In addition, our existing credit facility covenants have specific limits regarding our ability to pay quarterly dividends to stockholders.




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Our ability to pay dividends is further limited by the requirements of Maryland law.


Our ability to pay dividends on our common stock and preferred stock is further limited by the laws of Maryland. Under the Maryland General Corporation Law, a Maryland corporation may not make a distribution if, after giving effect to the distribution, either the corporation would not be able to pay indebtedness of the corporation as the indebtedness becomes due in the usual course of business or the corporation’s total assets would be less than the sum of the corporation’s total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. Accordingly, we cannot make a distribution, except by dividend, on our common stock or preferred stock if, after giving effect to the distribution, our total assets would be less than the sum of our l iabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of any shares of preferred stock then outstanding, or if we would not be able to pay our indebtedness as it became due.


 



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FINANCIAL PERFORMANCE


Our Funds from Operations (FFO) during the three and twelve months ended December 31, 2004 was $5,316,000 and $40,250,000, respectively. During the same periods in 2003, FFO was $12,151,000 and $49,723,000, respectively. Although FFO is not a financial measure calculated in accordance with U.S. generally accepted accounting principles (GAAP), we believe that FFO may be an appropriate alternative measure of the performance of an equity REIT. Presentation of this information provides the reader with an additional measure to compare the performance of equity REITs. FFO is generally defined by the National Association of Real Estate Investment Trusts as net income (loss) (computed in accordance with GAAP), excluding extraordinary items and gains (losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We computed our FFO in accordance with this definition. FFO doe s not represent cash generated by operating activities in accordance with GAAP; it is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income (loss) as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity. Furthermore, FFO as disclosed by other REITs may not be comparable to our presentation. The most directly comparable financial measure calculated in accordance with GAAP to FFO is net income available to common stockholders. The following table sets forth a reconciliation of the differences between our FFO and our net income available to common stockholders for each of the three and twelve months ended December 31, 2004 and 2003.



 

Three Months Ended

December 31,

Twelve Months Ended

December 31,

 

2004

2003

2004

2003


Funds From Operations

    (in thousands, except share amounts):

    

    Net income available to common stockholders

$  67,909

$  5,287

$  80,897

$26,980

    Adjustments:

       Depreciation and amortization:

            Continuing operations

            Discontinued operations

       Gain on sales of operating properties



7,278

364

(70,235)



6,181

683

-



27,225

2,363

(70,235)



20,051

2,692

-


    Funds From Operations


$    5,316


$12,151


$  40,250


$49,723


    Weighted average number of shares – diluted


15,923,104


16,156,283


16,078,939


16,336,369




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Item 7A. Quantitative and Qualitative Disclosures about Market Risk


We are exposed to interest rate changes primarily as a result of our line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of our real estate investment portfolio and operations. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we balance our borrowings between fixed and variable rate debt. While we have in the past entered into interest swap agreements from time to time to minimize our exposure to interest rate fluctuations, we do not enter into derivative or interest rate transactions for speculative purposes.


We monitor our interest rate risk using a variety of techniques. The table below presents the principal amounts and related weighted average annual interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in thousands):


 

Twelve Month Period Ending December 31,

 


2005


2006


2007


2008


2009


Thereafter


Total

Fair

Value


Variable rate debt


$  1,269


$20,251


$    755


$    786


$    817


$  12,375


$  36,253


$  36,253

Weighted average

  interest rate


4.05%


4.13%


3.98%


3.98%


3.98%


3.98%


4.07%


4.07%


Fixed rate debt


$57,405


$42,934


$34,983


$15,114


$39,939


$124,707


$315,082


$312,108

Weighted average

  interest rate


5.56%


7.70%


7.09%


4.97%


7.08%


5.56%


6.19%


6.25%


As the table incorporates only those exposures that existed as of December 31, 2004, it does not consider those exposures or positions which could arise after that date. Moreover, because firm commitments are not presented in the table above, the information presented therein has limited predictive value. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period, our hedging strategies at that time, and interest rates. If interest rates were to increase by 10%, or an average of 27 basis points, interest expense on our outstanding variable rate debt would increase by approximately $146,000 annually.


In July 2003, we entered into an interest swap agreement with Bank of America, N.A. on our two floating-rate mortgages with Security Life of Denver Insurance Company. The agreement, which commenced on July 3, 2003 and terminates on September 1, 2005, exchanges a floating rate of 30-day LIBOR for a fixed rate of 1.595% on a notional amount of $24.5 million for the first 6 months and $23.5 million in 2004. As a result of the paydown of a portion of one of the mortgages and the pay off of the other mortgage in December 2004, the agreement was amended to reduce the notional amount to $11 million with no other term changes.  Interest rate pay differentials that arise under this swap agreement are recognized on an accrual basis in interest expense over the term of the contract. This interest rate swap agreement was considered to be fully effective in hedging the variable rate risk associated with the mortgages.


The following summarizes the notional value and fair value of our interest swap contract. The notional value below provides an indication of the amount that has been hedged in this contract but does not represent an obligation or exposure to credit risk at December 31, 2004 (dollars in thousands):    




Notional

Amount



Fixed

Rate



Contract

Maturity



Cumulative

Cash Paid, Net

Fair Value of

Derivative Financial

Instrument at

December 31, 2004

$11,000

2.995%

September 1, 2005

$114

$98



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To determine the fair values of derivative instruments in accordance with SFAS 133, we use the discounted cash flow method, which requires the use of assumptions about market conditions and risks existing at the balance sheet date. Judgment is required in interpreting market data to develop estimates of market value. Accordingly, estimated fair value is a general approximation of value, and such value may or may not actually be realized.


Item 8. Financial Statements and Supplementary Data


The response to this Item is submitted as a separate section of this Form 10-K. See Item 15.


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


On March 13, 2003, our board of directors, upon the recommendation of the audit committee, authorized the dismissal of KPMG LLP and the appointment of PricewaterhouseCoopers LLP as our new independent auditors for the fiscal year ended December 31, 2003.  The dismissal of KPMG LLP was not a result of disagreements between KPMG LLP and us on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.  Additional information relating to the change in independent auditors is contained in the current report on Form 8-K that we filed with the SEC on March 20, 2003.


Item 9A. Controls and Procedures


Evaluation of Disclosure Controls and Procedures.


Our management, with the participation of our chief executive officer and chief financial officer, has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2004. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Management’s Report on Internal Control Over Financial Reporting.


Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  


Based on management’s assessment, we have determined that as of December 31, 2004, the company’s internal control over financial reporting was effective.  


As described by the Public Company Accounting Oversight Board in Auditing Standards No. 2, internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations.  Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.  Internal control over financial reporting also can be circumvented by collusion or improper management override.  Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  However, these inherent limitations are known features of the financial reporting process.  Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.



41







Our management’s assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.




Item 9B. Other Information


None .




42







PART III


Item 10. Directors and Executive Officers of the Registrant


The information required by Item 10 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders, scheduled to take place on May 11, 2005.


Item 11. Executive Compensation


The information required by Item 11 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders, scheduled to take place on May 11, 2005.


Item 12. Security Ownership of Certain Beneficial Owners and Management


The information required by Item 12 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders, scheduled to take place on May 11, 2005.


Item 13. Certain Relationships and Related Transactions


The information required by Item 13 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders, scheduled to take place on May 11, 2005.


Item 14. Principal Accounting Fees and Services


The information required by Item 14 of this report is incorporated by reference from the proxy statement that we will mail to our stockholders in connection with the solicitation of proxies for the annual meeting of our stockholders, scheduled to take place on May 11, 2005.







43







PART IV



Item 15. Exhibits, Financial Statement Schedules


A. 1.

Financial Statements

  
   

Page

    
 

Reports of Independent Registered Public Accounting Firms

 

F1

    
 

Consolidated Balance Sheets as of December 31, 2004 and 2003

 

F4

    
 

Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002

 

F5

    
 

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2003 and 2002

 

F6

    
 

Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002

 

F7

    
 

Notes to Consolidated Financial Statements

 

F8


2.

Financial Statement Schedule


 

Schedule III – Real Estate and Accumulated Depreciation

 

F30


All other schedules have been omitted as they are not applicable, not required or because the information is given in the Financial Statements or related Notes to Financial Statements.


3.

Exhibits


Exhibit No.

List of Exhibits


3.1(d)

Articles of Amendment and Restatement of Bedford Property Investors, Inc., filed on May 27, 2003, is incorporated herein by reference to Exhibit 3.1(d) to our Form 10-Q for the quarter ending June 30, 2003.


3.1(e)

Articles Supplementary relating to the Series A Cumulative Redeemable Preferred Stock of Bedford Property Investors, Inc., filed on August 4, 2003, is incorporated herein by reference to Exhibit 3.1(e) to our Form 10-Q for the quarter ending June 30, 2003.


3.1(f)

Articles Supplementary relating to the Series B Cumulative Redeemable Preferred Stock of Bedford Property Investors, Inc., filed on April 5, 2004, is incorporated herein by reference to Exhibit 4.2 to our Registration Statement on Form 8-A filed with the SEC on April 5, 2004.


3.2(b)

Second Amended and Restated Bylaws of Bedford Property Investors, Inc. are incorporated herein by reference to Exhibit 3.2(b) to our Form 10-Q for the quarter ending June 30, 2003.


4.4

Series A Cumulative Redeemable Preferred Stock Registration Rights Agreement, dated August 5, 2003, between Bedford Property Investors, Inc. and RBC Dain Rauscher Inc. is incorporated herein by reference to Exhibit 4.4 to our Form 10-Q for the quarter ending June 30, 2003.





44







10.13

Promissory Note, dated as of March 20, 1996, by and between Bedford Property Investors, Inc. and Prudential Insurance Company of America, is incorporated herein by reference to Exhibit 10.13 to our Amendment No. 1 to our Registration Statement on Form S-2 (File No. 333-00921) filed on March 29, 1996.


10.14

Employment Agreement, dated February 17, 1993, by and between ICM Property Investors, Inc., and Peter B. Bedford, is incorporated herein by reference to Exhibit 10.14 to our Form 10-K for the year ended December 31, 1994.



10.15

Our Dividend Reinvestment and Stock Purchase Plan is incorporated herein by reference to our post-effective Amendment No. 1 to our Registration Statement on Form S-3 (File No. 333-33795) filed on November 20, 1997.



10.16

Our Amended and Restated Employee Stock Plan is incorporated herein by reference to Exhibit 10.16 to our Form 10-K for the year ended December 31, 1997.



10.22

Promissory Note, dated as of May 28, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.22 to our Form 10-Q for the quarter ended June 30, 1999.



10.23

Promissory Note, dated as of May 28, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.23 to our Form 10-Q for the quarter ended June 30, 1999.



10.24

Promissory Note, dated as of May 28, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.24 to our Form 10-Q for the quarter ended June 30, 1999.



10.28

Promissory Note, dated as of November 22, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.28 to our Form 10-K for the year ended December 31, 1999.



10.30

Loan Agreement, dated as of July 27, 2000, by and between Bedford Property Investors, Inc. and Security Life of Denver Insurance Company, is incorporated herein by reference to Exhibit 10.30 to our Form 10-Q for the quarter ended June 30, 2000.



10.31

Amended and Restated Promissory Note, dated as of May 24, 1996, by and between Bedford Property Investors, Inc. and Prudential Insurance Company of America, is incorporated herein by reference to Exhibit 10.13 to our Form 10-Q for the quarter ended June 30, 1996.



10.32

Loan Agreement, dated as of January 30, 1998, by and between Bedford Property Investors, Inc. and Prudential Insurance Company of America, is incorporated herein by reference to Exhibit 10.15 to our Form 10-K for the year ended December 31, 1997.



10.36

Promissory Note, dated as of July 23, 2001, by and between Bedford Property Investors, Inc. and Washington Mutual Bank, is incorporated herein by reference to Exhibit 10.36 to our Form 10-Q for the quarter ended June 30, 2001.



10.40

Amended and Restated Promissory Note, dated as of November 19, 2001, by and between Bedford Property Investors, Inc. and Union Bank of California, N.A., is incorporated herein by reference to Exhibit 10.40 to our Form 10-K for the year ended December 31, 2001.





45







10.41

Purchase Agreement and Escrow Instructions, Financial Agreement, and Holdback Escrow Agreement, each dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and Dared 80, LLC, are incorporated herein by reference to Exhibit 10.41 to our Form 8-K filed on September 24, 2002.



10.42

Real Estate Sale Agreement dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and EOP-Industrial Portfolio, LLC, is incorporated herein by reference to Exhibit 10.42 to our Form 8-K filed on September 24, 2002.



10.43

First Amendment, dated as of August 6, 2002, to the Real Estate Sale Agreement, dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and EOP-Industrial Portfolio, LLC, is incorporated herein by reference to Exhibit 10.43 to our Form 8-K filed on September 24, 2002.



10.44

Second Amendment, dated as of August 14, 2002, to the Real Estate Sale Agreement, dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and EOP-Industrial Portfolio, LLC, is incorporated herein by reference to Exhibit 10.44 to our Form 8-K filed on September 24, 2002.



10.45

Purchase Agreement and Escrow Instructions, dated as of July 26, 2002, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.45 to our Form 8-K filed on September 24, 2002.



10.47

Note, dated as of October 7, 2002, by and between Bedford Property Investors, Inc. and Nationwide Life Insurance Company, is incorporated herein by reference to Exhibit 10.47 to our Form 10-Q for the quarter ended September 30, 2002.



10.48

Promissory Note, dated as of March 28, 2003, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.48 to our Form 10-Q for the quarter ending March 31, 2003.


10.49

Form of Retention Agreement is incorporated herein by reference to Exhibit 10.49 to our Form 10-Q for the quarter ending June 30, 2003.


10.50

Interest Rate Protection Agreement, dated as of July 3, 2003, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.50 to our Form 10-Q for the quarter ending June 30, 2003.


10.51

Master Agreement, dated as of March 15, 2002, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.51 to our Form 10-Q for the quarter ending June 30, 2003.


10.52

Second Amendment to Employment Agreement, dated as of July 15, 2003, by and between Peter B. Bedford and Bedford Property Investors, Inc., is incorporated herein by reference to Exhibit 10.52 to our Form 10-Q for the quarter ending June 30, 2003.



10.53

2003 Employee Stock Plan of Bedford Property Investors, Inc., dated May 13, 2003, as amended on August 6, 2003, is incorporated herein by reference to Exhibit 10.53 to our Form 10-Q for the quarter ending June 30, 2003.



10.54

Promissory Note, dated as of October 30, 2003, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.54 to our Form 10-Q for the quarter ending September 30, 2003.


10.55

Promissory Note, dated as of November 3, 2003, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.55 to our Form 10-Q for the quarter ending September 30, 2003.





46










10.56

Fixed Rate Note, dated as of November 3, 2003, by and between Bedford Property Investors, Inc. and J.P. Morgan Chase Bank, is incorporated herein by reference to Exhibit 10.56 to our Form 10-Q for the quarter ending September 30, 2003.



10.57

Purchase and Sale Agreement, dated as of June 16, 2003, by and between Bedford Property Investors, Inc. and Roosevelt Commons Limited Partnership, is incorporated herein by reference to Exhibit 10.57 to our Form 8-K filed on December 12, 2003.



10.58

Amendment, dated as of July 16, 2003, to the Purchase and Sale Agreement, dated as of June 16, 2003, by and between Bedford Property Investors, Inc. and Roosevelt Commons Limited Partnership, is incorporated herein by reference to Exhibit 10.58 to our Form 8-K filed on December 12, 2003.


10.59

Second Amendment, dated as of July 31, 2003, to the Purchase and Sale Agreement, dated as of June 16, 2003, by and between Bedford Property Investors, Inc. and Roosevelt Commons Limited Partnership, is incorporated herein by reference to Exhibit 10.59 to our Form 8-K filed on December 12, 2003.





10.60

Purchase Agreement and Escrow Instructions, dated as of June 9, 2003, by and between Bedford Property Investors, Inc. and Arville & Russell, LLC, is incorporated herein by reference to Exhibit 10.60 to our Form 8-K filed on December 12, 2003.



10.61

Amendment, dated as of August 18, 2003, to the Escrow Instructions, dated as of June 9, 2003, by and between Bedford Property Investors, Inc. and Arville & Russell, LLC, is incorporated herein by reference to Exhibit 10.61 to our Form 8-K filed on December 12, 2003.



10.62

Purchase Agreement and Escrow Instructions, dated as of October 2, 2003, by and between Bedford Property Investors, Inc. and Foothill-Operon I, LLC, is incorporated herein by reference to Exhibit 10.62 to our Form 8-K filed on December 12, 2003.



10.63

Purchase Agreement and Escrow Instructions, dated as of August 29, 2003, by and between Bedford Property Investors, Inc. and CWA Acquisition, LLC, is incorporated herein by reference to Exhibit 10.63 to our Form 8-K filed on December 12, 2003.



10.64

Purchase Agreement and Escrow Instructions, dated as of November 4, 2003, by and between Bedford Property Investors, Inc. and Jackson-Shaw/Northport Limited Partnership, is incorporated herein by reference to Exhibit 10.64 to our Form 8-K filed on December 12, 2003.



10.65

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Laguna Hills Square SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.65 to our Form 10-K for the year ended December 31, 2003.



10.66

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Petaluma SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.66 to our Form 10-K for the year ended December 31, 2003.


10.67

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Philips Business Center SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.67 to our Form 10-K for the year ended December 31, 2003.


10.68

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Phoenix Tech Center SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.68 to our Form 10-K for the year ended December 31, 2003.






47












10.69

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Rio Salado SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.69 to our Form 10-K for the year ended December 31, 2003.



10.70

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Village Green SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.70 to our Form 10-K for the year ended December 31, 2003.



10.71

Sixth Amended and Restated Credit Agreement, dated March 31, 2004, by and among Bedford Property Investors, Inc., Bank of America, N.A., as Administrative Agent for the Banks, Swing Line Lender and L/C Issuer, and Union Bank of California, N.A., as Syndication Agent, is incorporated herein by reference to Exhibit 10.71 to our Form 10-Q for the quarter ending March 31, 2004.



10.72

Amended and Restated 2002 Directors' Stock Plan of Bedford Property Investors, Inc., dated May 13, 2004, is incorporated herein by reference to Exhibit 10.72 to our Form 10-Q for the quarter ending June 30, 2004.



10.73

Third Amendment to Employment Agreement, dated as of February 4, 2005, between Bedford Property Investors, Inc. and Peter B. Bedford, is incorporated herein by reference to Exhibit 10.73 to our Form 8-K filed on February 10, 2005.




10.74*

Promissory Note Secured by Deed of Trust, dated December 17, 2004, by and among Bedford Property Investors, Inc., as Holder, and Metzger Mountain Pointe, LLC, Mountain Pointe Office Investments, LLC, and RCH Mountain Pointe, LLC, as Maker.


16.1

Letter from KPMG LLP to the Securities and Exchange Commission re : Change in Certifying Accountant is incorporated herein by reference to Exhibit 16.1 to our Form 8-K filed on March 20, 2003.



21*

List of Subsidiaries.



23.1*

Consent of KPMG LLP.



23.2*

Consent of PricewaterhouseCoopers LLP.



24*

Power of Attorney (see signature page).


31.1*

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2*

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


32.1*

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.


32.2*

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.



* Filed herewith






48
















F1







Report of Independent Registered Public Accounting Firm


To the Board of Directors and Stockholders of Bedford Property Investors, Inc.:


We have completed an integrated audit of Bedford Property Investors, Inc.’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Our opinions, based on our audits, are presented below.


Consolidated financial statements and financial statement schedule


In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Bedford Property Investors, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and the financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and fin ancial statement schedule based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.  The consolidated financial statements of the Company for the year ended December 31, 2002 were audited by other auditors whose report dated February 10, 2003 expressed an unqualified opinion on those statements.



As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock Based Compensation – Transition and Disclosure – an amendment of SFAS 123, using the modified prospective method effective January 1, 2003.












Internal control over financial reporting


Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria.  Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO.  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and oper ating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions.  





F1







A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ PricewaterhouseCoopers LLP

San Francisco, California

March 9, 2005

   













F2







Report of Independent Registered Public Accounting Firm




The Board of Directors
Bedford Property Investors, Inc.:


We have audited the accompanying statements of income, stockholders’ equity, and cash flows for the year ended December 31, 2002. In connection with our audit of the financial statements, we also audited the 2002 information included in Footnote A to the financial statement schedule, Real Estate and Accumulated Depreciation. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.


We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provided a reasonable basis for our opinion.


In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Bedford Property Investors, Inc. for the year ended December 31, 2002, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the 2002 information in Footnote A to the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the 2002 information set forth therein.



/s/ KPMG LLP




San Francisco, California

February 10, 2003





F3







BEDFORD PROPERTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2004 AND 2003

(in thousands, except share and per share amounts)

 

 

December 31, 2004

December 31, 2003

Assets:

Real estate investments:

  

  Industrial buildings

$417,613

$414,392

  Office buildings

332,695

375,844

  Properties under development

29,716

-

  Land held for development

13,529

14,071

 

793,553

804,307

  Less accumulated depreciation

85,436

81,638

 

708,117

722,669

  Operating property held for sale, net

8,293

-

Total real estate investments

716,410

722,669


Cash and cash equivalents


24,218


7,598

Accounts receivable, net

679

923

Notes receivable, net

6,820

-

Other assets

45,356

42,429


Total assets


$793,483


$773,619


Liabilities and Stockholders' Equity:

  

Bank loan payable

$           -

$  68,978

Mortgage loans payable

351,335

368,542

Accounts payable and accrued expenses

13,135

8,874

Dividends payable

63,898

8,319

Other liabilities

14,657

15,007


  Total liabilities


443,025


469,720

Commitments and contingencies (Note 17 )

  

Stockholders' equity:

 Preferred stock, $0.01 par value; authorized

    6,795,000 shares; issued none



-



-

 Series A 8.75% cumulative redeemable preferred stock,

    $0.01 par value; authorized and issued 805,000

    shares at December 31, 2004 and December 31, 2003;

    stated liquidation preference of $40,250    




38,947




38,947

 Series B 7.625% cumulative redeemable preferred stock, $0.01

    par value; authorized and issued 2,400,000 shares at December

    31, 2004; stated liquidation preference of $60,000



57,769



-

 Common stock, $0.02 par value; authorized 50,000,000 shares;

    issued and outstanding 16,325,584 shares at December 31,

    2004 and 16,311,955 shares at December 31, 2003



326



326

 Additional paid-in capital

289,132

289,734

 Deferred stock compensation

(10,114)

(5,476)

 Accumulated dividends in excess of net income

(25,700)

(19,721)

 Accumulated other comprehensive income

98

89


      Total stockholders' equity


350,458


303,899


Total liabilities and stockholders' equity


$793,483


$773,619


See accompanying notes to consolidated financial statements.



F4







BEDFORD PROPERTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(in thousands, except share and per share amounts)


 

2004

 

2003

 

2002

      

 Rental income

$95,971

 

$88,267

 

$80,585

 Rental expenses:

     

   Operating expenses

17,354

 

14,425

 

12,170

   Real estate taxes

10,574

 

9,250

 

7,541

   Depreciation and amortization

27,225

 

20,051

 

14,621

   General and administrative expenses

7,707

 

5,742

 

4,616

      

Income from operations

33,111

 

38,799

 

41,637

      

Other income (expense)

     

   Interest income

87

 

106

 

199

   Interest expense

(21,040)

 

(18,641)

 

(17,106)

      

Income from continuing operations

12,158

 

20,264

 

24,730

      

Discontinued operations:

     

   Income from discontinued operations

6,452

 

7,401

 

7,698

   Gain on sales of operating properties

70,235

 

-

 

3,575

Income from discontinued operations

76,687

 

7,401

 

11,273

      

Net income

88,845

 

27,665

 

36,003

Preferred dividends – Series A

(4,402)

 

(685)

 

-

Preferred dividends – Series B

(3,546)

 

-

 

      -

      

Net income available to common stockholders

$80,897

 

$26,980

 

$36,003

      

Income per common share – basic (Note 16) :

     

  Income from continuing operations

$    0.26

 

$    1.23

 

$    1.52

  Income from discontinued operations

4.85

 

0.46

 

0.70

Net income available to common stockholders

$    5.11

 

$    1.69

 

$    2.22

      

Weighted average number of shares - basic

15,827,734

 

16,010,659

 

16,240,722

      

Income per common share – diluted (Note 16) :

     

  Income from continuing operations

$    0.26

 

$    1.20

 

$    1.49

  Income from discontinued operations

4.77

 

0.45

 

0.68

Net income available to common stockholders

$    5.03

 

$    1.65

 

$    2.17

      

Weighted average number of shares – diluted

16,078,939

 

16,336,369

 

16,604,069

      

Dividends declared per common share

$    5.32

 

$    2.02

 

$    1.96


See accompanying notes to consolidated financial statements.



F5







BEDFORD PROPERTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(in thousands, except per share amounts)


 


Series A

Preferred

Stock


Series B

Preferred

Stock



Common

Stock


Additional

Paid-in

Capital


Deferred

Stock

Compensation

Accumulated

Dividends

in Excess of

Net Income

Accumulated

Other

Comprehensive

Income


Total

Stockholders'

Equity

Balance, December 31, 2001

$            -

$            -

$330

$297,343

$(4,612)

$(16,871)

$(310)

$275,880

         

Issuance of common stock

-

-

5

4,272

-

-

-

4,277

Repurchase and retirement of

   common stock


-


-


(8)


(9,829)


-


-


-


(9,837)

Issuance of restricted stock

-

-

2

2,315

(2,317)

-

-

-

Forfeiture of restricted stock

-

-

-

(237)

237

-

-

-

Amortization of restricted stock

-

-

-

-

2,070

-

-

2,070

Dividends to common

   stockholders ($1.96 per share)


-


-


  -


      -


-


(32,646)


   -


(32,646)

Subtotal

-

-

329

293,864

(4,622)

(49,517)

(310)

239,744

Net income

-

-

-

-

-

36,003

-

36,003

Unrealized gain on derivative

   instruments


-


-


  -


      -


-


      -


 310


    310

Comprehensive income

-

-

  -

      -

-

 36,003

 310

 36,313

  

-

      

Balance, December 31, 2002

    -

-

329

293,864

(4,622)

(13,514)

   -

276,057

         

Issuance of preferred stock, net

  of issuance costs


38,947


-


-


-


-


-


-


38,947

Issuance of common stock

-

-

4

5,398

-

-

-

5,402

Repurchase and retirement of

  common stock


-


-


(10)


(12,993)


-


-


-


(13,003)

Stock option expense

-

-

-

195

-

-

-

195

Issuance of restricted stock

-

-

3

3,291

(3,294)

-

-

-

Forfeiture of restricted stock

-

-

-

(21)

21

-

-

-

Amortization of restricted stock

-

-

-

-

2,419

-

-

2,419

Dividends to common

  stockholders ($2.02 per share)


-


-


-


-


-


(33,187)


-


(33,187)

Dividends to preferred

  stockholders ($0.8507 per share)


-


-


-


-


-


(685)


-


(685)

Subtotal

38,947

-

326

289,734

(5,476)

(47,386)

-

276,145

Net income

-

-

-

-

-

27,665

-

27,665

Unrealized gain on derivative

  instruments


-


-


-


-


-


-


89


89

Comprehensive income

-

-

-

-

-

27,665

89

27,754

         

Balance, December 31, 2003

38,947

         -

326

289,734

(5,476)

(19,721)

  89

303,899


Issuance of preferred stock


-


57,769


-


-


-


-


-


57,769

Issuance of common stock

-

-

4

4,555

-

-

-

4,559

Repurchase and retirement of

  common stock


-


-


(9)


(12,682)


-


-


-


(12,691)

Stock option expense

-

-

-

101

-

-

-

101

Issuance of restricted stock

-

-

5

7,449

(7,454)

-

-

-

Forfeiture of restricted stock

-

-

-

(25)

25

-

-

-

Amortization of restricted stock

-

-

-

-

2,791

-

-

2,791

Dividends to common

 stockholders ($5.32 per share)


-


-


-


-


-


(86,876)


-


(86,876)

Dividends to Series A preferred

 stockholders ($5.46875 per share)


-


-


-


-


-


(4,402)


-


(4,402)

Dividends to Series B preferred

 stockholders ($1.47732 per share)


-


-


-


-


-


(3,546)


-


(3,546)

Subtotal

38,947

57,769

326

289,132

(10,114)

(114,545)

89

261,604


Net income


-


-


-


-


-


88,845


-


88,845

Other comprehensive income

-

-

-

-

-

-

9

9

Comprehensive income

-

-

-

-

-

88,845

9

88,854


Balance, December 31, 2004


$38,947


$57,769


$326


$289,132


$(10,114)


$(25,700)


$98


$350,458



See accompanying notes to consolidated financial statements.



F6







BEDFORD PROPERTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(in thousands)


 

2004

 

2003

 

2002

Operating Activities:

     

 Net income

$   88,845

 

$  27,665

 

$  36,003

 Adjustments to reconcile net income to net cash

    provided by operating activities:

    


      Depreciation and amortization, including amounts for

       deferred loan costs and discontinued operations

31,339

 


24,588

 


19,288

      Gain on sales of operating properties

(70,235)

 

-

 

(3,575)

      Amortization of deferred compensation

2,791

 

2,419

 

2,070

      Stock compensation expense

101

 

195

 

-

      Uncollectible accounts expense

232

 

53

 

322

      Change in receivables and other assets

(9,155)

 

(3,492)

 

(4,582)

      Change in accounts payable and accrued expenses

3,902

 

(1,143)

 

(1,056)

      Change in other liabilities

(1,169)

 

(1,115)

 

1,656

      

 Net cash provided by operating activities

46,651

 

49,170

 

50,126

      

Investing Activities:

     

 Investments in real estate

( 111,222 )

 

(94,923)

 

(103,566)

 Proceeds from sales of real estate investments, net

169,307

 

-

 

   31,472

      

 Net cash provided by (used in) investing activities

58,085

 

(94,923)

 

(72,094)

      

Financing Activities:

     

 Proceeds from bank loans payable

131,126

 

109,857

 

125,616

 Repayments of bank loans payable

(200,104)

 

(165,561)

 

(81,860)

 Proceeds from mortgage loans payable

2,464

 

137,627

 

22,600

 Repayments of mortgage loans payable

(29,807)

 

(28,582)

 

(5,170)

 Payment of loan costs, net

(2,187)

 

(1,288)

 

(1,372)

 Issuance of preferred stock, net of issuance costs

57,769

 

38,947

 

-

 Issuance of common stock

4,559

 

5,402

 

2,794

 Repurchase and retirement of common stock

(12,691)

 

(13,003)

 

(9,837)

 Redemption of Operating Partnership Units

-

 

-

 

(202)

 Payment of dividends and distributions

(39,245)

 

(33,775)

 

 (32,386)

      

 Net cash (used in) provided by financing activities

( 88,116 )

 

49,624

 

   20,183

      

Net increase (decrease) in cash and cash equivalents

16,620

 

3,871

 

(1,785)

Cash and cash equivalents at beginning of year

7,598

 

3,727

 

    5,512

      

Cash and cash equivalents at end of year

$   24,218

 

$    7,598

 

$    3,727

      

Supplemental disclosure of cash flow information

     

Cash paid during the year for interest, net of amounts

  capitalized


$   22,971

 


$  20,109

 


$  19,567

      

Cash paid during the year for income taxes

$          15

 

$       300

 

$       162

      

Non-cash investing and financing transactions:

     
     

Redemption of Operating Partnership Units paid in

  common stock


$             -

 


$            -

 


$  (1,483)

Investment in real estate assets

$             -

 

$            -

 

$       550

Minority interest in consolidated partnership

$             -

 

$            -

 

$       933

      

Assumption of debt

$   10,136

 

$    3,128

 

$           -

See accompanying notes to consolidated financial statements.



F7







BEDFORD PROPERTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2004 AND 2003


Note 1 - Organization and Summary of Significant Accounting Policies and Practices

 

The Company

Bedford Property Investors, Inc. is a real estate investment trust (REIT) incorporated in 1993 as a Maryland corporation. We are a self-administered and self-managed equity REIT engaged in the business of owning, managing, acquiring, and developing industrial and suburban office properties concentrated in the western United States. Our common stock, par value $0.02 per share, trades under the symbol “ BED ” on both the New York Stock Exchange and the Pacific Exchange.


Basis of Consolidation

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). Our consolidated financial statements include the financial information of Bedford Property Investors, Inc., six wholly-owned corporations, and three wholly-owned limited liability companies. All significant inter-entity balances have been eliminated in consolidation.


Use of Estimates

The preparation of these financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could vary from those estimates, and those estimates could be different under different assumptions or conditions.


Real Estate Investments

Real estate investments are recorded at cost less accumulated depreciation. The cost of real estate investments includes the purchase price and other related acquisition costs. For acquired properties with rental guarantees from the seller, amounts received under the rental guarantee are recorded as a reduction to the basis of the asset upon receipt. Expenditures for maintenance and repairs that do not add to the value or prolong the useful life of the property are expensed. Expenditures for asset replacements or significant improvements that extend the life or increase the property’s value are capitalized. Real estate investment costs are depreciated using the straight-line method over estimated useful lives as follows: building s and improvements - 45 years; tenant improvements – the lesser of the life of the asset or the term of the related lease. When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we initiate a review of the recoverability of the property’s carrying value. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value of the property. As of December 31, 2004 and 2003, none of our real estate assets were considered to be impaired.


The acquisition of real estate investments results in the allocation of a portion of the purchase price to tenant improvements and identifiable intangible assets or liabilities. Tenant improvements represent the tangible assets associated with the existing leases valued on a historical basis prorated over the remaining lease terms. They are



F8







classified as an asset under real estate investments and are depreciated over the remaining lease terms. Identifiable intangible assets and liabilities relate to the value of in-place operating leases as follows : (i) origination value, which represents the value associated with “ cost avoidance ” of acquiring in-place leases, such as lease commissions paid under terms generally experienced in our markets; (ii) value of in-place leases, which represents the estimated loss of revenue and of costs incurred for the period required to lease the “ assumed vacant ” property to the occupancy level when purchased; (iii) fair market value of acquired leases, which represents the difference between the contractual rents and market rents at the time of the acquisition, discounted for tenant credit risks; and (iv) value of tenant relationships, which reflects estimated future benefits from enhanced renewal probabilities and cost savings in lease commissions and tenant improvements. Origination value is recorded as an other asset and is amortized over the remaining lease terms. Value of in-place leases is recorded as an other asset and amortized over the average term of the acquired leases. Fair m arket value of acquired leases is classified as an other asset or liability, depending on whether the contractual terms are above or below market, and the asset or liability is amortized to rental revenue over the remaining terms of the leases. Value of tenant relationships is classified as an other asset and is amortized over the anticipated term of the customer relationship, not to exceed the remaining depreciable life of the building. For the year ended December 31, 2004, we allocated a portion of the purchase of acquisitions of approximately $10,189,000 to other assets and approximately $2,907,000 to other liabilities representing the identified inta n gibles. For the year ended December 31, 2003, we allocated approximately $16,045,000 to other assets and approximately $420,000 to other liabilities.


Accounting for Development Costs

Costs associated with the development of real estate include acquisition and direct construction costs as well as capitalization of real estate taxes, insurance, incidental revenue and expenses, and a portion of salaries and overhead of personnel responsible for development activity.  In addition, we capitalize interest expense to the development project. The amount of interest capitalized during a period is determined by applying the weighted average rate of our borrowings to the average accumulated costs, excluding interest, of the project. The capitalization of interest, real estate taxes, insurance, and incidental revenue and expenses begins when construction of a project commences and ends when a project or a portion of the project is placed in service, not to exceed twelve months from the cessation of construction activities.  The capitalization of salaries and overhead of development personnel commences upon development approva l from the prevailing governing authorities and ends with completion of the project.


Real Estate Investments Held for Sale and Discontinued Operations

We record real estate investments that are considered held for sale at the lower of carrying amount or fair value less estimated costs to sell, and such properties are no longer depreciated. We classify real estate assets as held for sale in the period in which both of the following criteria are met:


-

management has obtained board approval to sell the asset, and

-

a letter of intent has been signed by an officer of the c ompany and the buyer.


We present the net operating results of properties held for sale and sold during the year, less allocated interest expense, as income from discontinued operations for all periods presented. The gain on sale of operating properties sold, net of sale costs, is presented as income from discontinued operations. We allocate interest expense based on the percentage of the cost basis of each property held for sale and sold to the total cost basis of real estate assets as of the respective year-end, pro-rated for the number of days prior to sale.


Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments, which results in a reduction to income. Management determines the adequacy of this allowance by continually evaluating individual tenant receivables, taking into account the tenant’s financial condition, security deposits, any letters of credit, any lease guarantees, and current economic conditions.  As of December 31, 2004 and 2003, our allowance for doubtful accounts related to accounts receivable was approximately $20,000 and $14,000, respectively. As of December 31, 2004, our allowance for doubtful accounts related to a note receivable was approximately $127,000. Accounts and note receivable amounts are presented net of these allowances for doubtful accounts in the consolidated balance sheets.



F9









Revenue Recognition

Base rental income is recognized on a straight-line basis over the terms of the respective lease agreements. Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to straight-line rent receivable. The difference between straight-line rental income and contractual rental income decreased revenue by $28,000 and $31,000 in 2004 and 2003, respectively, and increased revenue by $968,000 in 2002. Straight-line rent receivable is included in other assets in the accompanying balance sheets and is charged against income upon early termination of a lease or as a reduction of gain on sale upon the sale of the property. Rental payments received before they are recognized as income are recorded as a prepaid income liability. Lease termination income is recorded when we have an executed lease termination agreement with no further contractual obligations that must be met b efore the fee is due to us. If a tenant remains in the leased space following the execution of a definitive termination agreement, the applicable termination fees are deferred and recognized over the term of such tenant’s occupancy. Leases for both industrial and office space generally contain provisions under which the tenants reimburse us for a portion of property operating expenses, real estate taxes, and other recoverable costs. The expected recovery of these reimbursable expenses from tenants is recorded as revenue when the associated expenses are incurred.


Gain on Sales of Real Estate Investments

Gain on sales of real estate investments are recognized using the full accrual method provided that we meet various criteria relating to the terms of the transactions and any subsequent involvement by us with the properties sold. Gains or revenues relating to transactions which do not meet the established criteria would be deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances.


Deferred Financing and Leasing Costs

Costs incurred for debt financing and property leasing are capitalized as other assets. Deferred loan costs include amounts paid to lenders and others to obtain financing. Such costs are amortized over the term of the related loan, which approximates the effective interest method. Amortization of deferred financing costs is included in interest expense in our consolidated statements of income. The remaining balance of unamortized deferred financing costs is expensed upon early payoff of the related debt obligation. Deferred leasing costs include leasing commissions that are amortized using the straight-line method over the term of the related lease. Unamortized deferred leasing costs are included with the basis when a property is sold and therefore reduce the gain on sale. Unamortized financing and leasing costs are charged to expense in the event of debt prepayment or early termination of the lease.


Federal Income Taxes

We have elected to be taxed as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the Code). A REIT is generally not subject to federal income tax on that portion of real estate investment trust taxable income that is distributed to stockholders, provided that at least 90% of such taxable income is distributed and other requirements are met. We believe we are in compliance with the Code.


As of December 31, 2004, for federal income tax purposes, we had an ordinary loss carryforward of approximately $11 million. As we do not expect to incur income tax liabilities, there may be little or no value realized from such carryforwards.


For federal income tax purposes, common stock dividend distributions made were classified as follows:



Year

Ordinary

Income

Long-Term

Capital

Gain

Unrecaptured

Section

1250 Gain


Return of

Capital

     

2002

82%

10%

8%

-

2003

81%

-

-

19%

2004

25%

53%

22%

-




F10







For federal income tax purposes, dividend distributions made in 2003 were classified as 100% ordinary income for our Series A redeemable preferred stock. For federal income tax purposes, dividend distributions made in 2004 for both our Series A and Series B redeemable preferred stock were classified as 25% ordinary income, 53% long-term capital gain, and 22% unrecaptured section 1250 gain.


The determination of the tax treatment for dividend distributions is based on our earnings and profits. Income reported for financial reporting purposes will differ from earnings and profits for federal income tax purposes primarily due to differences in the estimated lives used to calculate depreciation.


Derivative Instruments and Hedging Activities

We recognize all derivatives as either assets or liabilities in the consolidated balance sheets and measure those instruments at fair value. Additionally, the fair value adjustments will affect either other comprehensive income or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.


We require that our derivative instruments are effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet the hedging criteria are formally designated as hedges at the inception of the derivative contract and changes in the fair value of the instrument are included in other comprehensive income until the instrument matures. When the terms of an underlying transaction are modified or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are included in net income each period until the instrument matures. Any portion of a derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market with changes in value included in net income for each period.


Stock-Based Compensation

Prior to 2003, we accounted for our stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) 25 and all related interpretations. As of January 1, 2003, we adopted S tatement of F inancial Accounting Standards (SFAS) 148, “ Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS 123, ” on a modified prospective basis. SFAS 148 amends SFAS 123, “ Accounting for Stock-Based Compensation, ” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The impact of adopting SFAS 148 in accordance with the modified prospective method was an increase in compensation expense of $102,000 and $195,000 for the years ended December 31, 2004 and 2003, respectively.


If we had determined compensation costs for the stock options granted to employees consistent with SFAS 123 , as amended by SFAS 148, during the year ended December 31, 2002, our net income and earnings per share would have been reduced to the pro forma amounts as follows (in thousands, except per share amounts):


  

2002

Net income:

  

  As reported

 

$36,003

  Less: compensation expense per SFAS 123

 

   223

  Pro forma

 

$35,780

   

Earnings per share – basic:

  

  As reported

 

$    2.22

  Less: compensation expense per SFAS 123

 

   0 ..02

  Pro forma

 

$    2.20

   

Earnings per share – diluted:

  

  As reported

 

$    2.17

  Less: compensation expense per SFAS 123

 

    0 ..02

  Pro forma

 

$    2.15




F11







The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2003 and 2002, respectively:


  

2003

 

2002

Weighted average fair value of options granted

  during the year

 


$1.45

 


$1.94

     

Assumptions:

    

  Risk-free interest rate

 

2.5%

 

4.0%

  Dividend yield

 

7.3%

 

7.2%

  Volatility factors of the expected market price

    of the common shares

 


0.18

 


0.18

  Weighted average expected life of the options

 

4.3 years

 

4.3 years


No stock options were granted during the year 2004.


We record deferred compensation when we make restricted stock awards to employees. The amount of deferred compensation initially recorded is the difference between the exercise price (which is zero for restricted stock awards) and fair market value of the common stock on the date of grant. Such deferred compensation is fixed and remains unchanged for subsequent increases or decreases in the market value of our common stock. We record deferred compensation as a reduction to stockholders’ equity and an offsetting increase to additional paid-in capital. We then amortize deferred compensation into stock based compensation expense, a component of general and administrative expenses, over the service period, which typically coincides with the vesting period of the restricted stock award.


During the years ended December 31, 2004, 2003, and 2002, we recorded compensation expense relating to our stock compensation plans of approximately $2,892,000, $2,614,000, and $2,070,000, respectively.


Per Share Data

Per share data are based on the weighted average number of common shares outstanding during the year. We include stock options issued under our stock option plans and non-vested restricted stock in the calculation of diluted per share data if, upon exercise or vestiture, they would have a dilutive effect. The dilutive shares are calculated using the treasury stock method.


Common Stock Repurchases

We currently have board approval to repurchase up to a total of 10 million shares of our common stock under our share repurchase program. Our share repurchase strategy takes into consideration several factors, including the dividend yield on our stock price, the cost of capital and its alternative uses, existing yields on potential acquisitions, market trading volume, trading regulations, and debt covenants.


Cash and Cash Equivalents

We consider all demand deposits, money market accounts, and temporary cash investments to be cash equivalents. We maintain our cash and cash equivalents at financial institutions. The combined account balances at each institution periodically exceed the Federal Depository Insurance Corporation (FDIC) insurance coverage, and, as a result, there is a credit risk related to amounts on deposit in excess of FDIC insurance coverage. We do not believe that this credit risk is significant as we do not anticipate non-performance by the corresponding financial institutions.

 

Recent Accounting Pronouncements

In December 2004, the FASB revised SFAS 123R, “ Share-Based Payment. ” This Statement is a revision of SFAS 123, “ Accounting for Stock-Based Compensation. ” This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment



F12







transactions. SFAS 123R is effective for public companies for interim and annual periods beginning after June 15, 2005. Due to our adoption of the fair value based method of accounting for stock-based employee compensation effective January 1, 2003, we do not expect this pronouncement to have a material impact on our financial position or results of operations.


Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation, with no effect on our financial position, cash flows, or net income.


Note 2 - Real Estate Investments

As of December 31, 2004, our real estate investments were diversified by property type as follows (dollars in thousands):


 

Number of

Properties

 

Gross

Cost

 

Percent

of Total

      

Industrial buildings (1)

60

 

$417,613

 

52%

Office buildings (2)

30

 

332,695

 

41%

Properties under development

4

 

29,716

 

4%

Land held for development

11

 

13,529

 

2%

      
 

105

 

793,553

 

99%

Operating property held for sale*

1

 

9,517

 

1%

      

Total

106

 

$803,070

 

100%


(1) Three of these industrial properties were in the lease-up phase at December 31, 2004.

(2) Two of these office properties were in the lease-up phase at December 31, 2004.


* Shown net of accumulated depreciation of $1,224 on the Consolidated Balance Sheet at December 31, 2004.




F13







Note 2 - Real Estate Investments (continued)


The following table sets forth our real estate investments as of December 31, 2004 (in thousands):

 



Land



Building


Development

In-Progress


Total

Cost

Less

Accumulated

Depreciation


Net

Total


Industrial buildings

Northern California



$55,528



$121,326



$         -



$176,854



$22,867



$153,987

Arizona

28,533

91,749

-

120,282

14,576

105,706

Southern California

16,493

41,000

-

57,493

7,749

49,744

Northwest

9,418

26,866

-

36,284

4,650

31,634

Nevada

7,783

18,917

-

26,700

1,371

25,329


Total industrial buildings


117,755


299,858


-


417,613


51,213


366,400


Office buildings

Northern California



6,073



25,871



-



31,944



5,318



26,626

Arizona

23,609

51,285

-

74,894

4,030

70,864

Southern California

8,818

33,605

-

42,423

2,313

40,110

Northwest

11,018

46,384

-

57,402

5,603

51,799

Colorado

13,706

98,820

-

112,526

14,688

97,838

Nevada

2,102

11,404

-

13,506

2,271

11,235


Total office buildings


65,326


267,369


-


332,695


34,223


298,472


Properties under development











 







Arizona

-

-

8,812

8,812

-

8,812

Northwest

-

-

20,904

20,904

-

20,904


Total properties under

  development



-



-



29,716



29,716



-



29,716


Land held for development











 







Northern California

5,928

-

-

5,928

-

5,928

Arizona

637

-

-

637

-

637

Northwest

1,154

-

-

1,154

-

1,154

Colorado

3,950

-

-

3,950

-

3,950

Nevada

1,860

-

-

1,860

-

1,860


Total land held for development



13,529



-



-


13,529



-



13,529


Operating property held for sale

Southern California



2,228



7,289



-



9,517



1,224




8,293


Total as of December 31, 2004



$198,838



$574,516



$29,716


$803,070



$86,660



$716,410


Total as of December 31, 2003


$200,836


$603,471


$          -


$804,307


$81,638


$722,669




F14







Our personnel directly manage all but six of our properties from regional offices in Lafayette, California; Tustin, California; Phoenix, Arizona; Denver, Colorado; and Seattle, Washington. We have retained outside managers to assist in some of the management functions for U.S. Bank Centre in Reno, Nevada; Russell Commerce Center in Las Vegas, Nevada; Northport Business Center in North Las Vegas, Nevada; and SunTech Corporate Park 1 , SunTech Corporate Park 2 , and Tanasbourne Corporate Park in Hillsboro, Oregon. All financial record keeping is centralized at our corporate office in Lafayette, California.



During 2004, 2003, and 2002, we capitalized interest costs relating to properties under development totaling $1,685,000, $131,000, and $633,000, respectively


.


Note 3 - Consolidated Entities


During 2003, we entered into several mortgage financing agreements with three separate lenders. Our lenders required that we place each collateral property into separate legal entities. As a result, we created six corporations and three limited liability companies. Each of the legal entities maintains a separate loan that is collateralized by the property owned by the entity.  All of the entities are 100% subsidiaries of the REIT and are consolidated with Bedford Property Investors, Inc. in the financial statements presented.


In December 1996, we formed Bedford Realty Partners, L.P. (the Operating Partnership), with Bedford Property Investors, Inc. as the sole general partner, for the purpose of acquiring real estate. In exchange for contributing a property into the Operating Partnership, the owners of the property received limited partnership units (OP Units). A limited partner had the ability to redeem the OP Units at any time. We, at our option, had the ability to redeem the OP Units by either (i) issuing common stock at the rate of one share of common stock for each OP Unit, or (ii) paying cash to a limited partner based on the average trading price of our common stock. Each OP Unit was allocated partnership income and cash flow at a rate equal to the dividend being paid by Bedford Property Investors, Inc. on a share of common stock. Additional partnership income and cash flow was allocated approximately 99% to Bedford Property Investors, Inc. and 1% to the limi ted partners.


Effective January 15, 2002, we exercised our option to redeem the remaining outstanding 72,060 OP Units of the limited partners of the Operating Partnership. The OP Units were redeemed by issuing 63,437 shares of common stock at the rate of one share of common stock for each OP Unit and by paying cash of $202,000 for 8,623 shares based on the closing trading price of our common stock. Upon redemption of the remaining OP Units, the operating property, Diablo Business Center, a nine building service center flex complex which was held in the Operating Partnership, was transferred to us. Bedford Realty Partners, L.P. was dissolved as of January 15, 2002.


Note 4 - Leases


Minimum future lease payments to be received as of December 31, 2004 are as follows (in thousands):


 

2005

 

$  76,483

 

2006

 

65,939

 

2007

 

54,110

 

2008

 

39,243

 

2009

 

21,980

 

Thereafter

 

29,324

 

Total

 

$287,079


The total minimum future lease payments shown above do not include tenants’ obligations for reimbursement of operating expenses or taxes as provided by the terms of certain leases.




F15










F16







Note 5 - Related Party Transactions


In prior years, we used Bedford Acquisitions, Inc. (BAI), a corporation wholly owned by our chairman of the board and chief executive officer, Peter Bedford, to provide services for our acquisition, disposition, financing, and development activities. These services were provided under an agreement that was terminated on July 1, 2002. Upon termination of the agreement, we hired the employees of BAI.


Prior to the termination of the agreement, fees incurred for services provided during the six months ended June 30, 2002 were expensed to the extent that such fees did not represent payments to BAI for direct and incremental development costs or independent third party costs incurred by BAI on our behalf.  During the six months ended June 30, 2002, we paid BAI approximately $1,785,000 for acquisition, disposition, financing, and development activities provided pursuant to the agreement. As of December 31, 2002, we had a receivable of $590,000 for excess fees paid to BAI, which was subsequently paid in January 2003 by BAI.


We occasionally use the services of the law firm Bartko, Zankel, Tarrant & Miller of which a member of our board of directors, Martin I. Zankel, is a Senior Principal. During the years ended December 31, 2004, 2003, and 2002, we paid Bartko, Zankel, Tarrant & Miller approximately $200, $81,000, and $17,000, respectively.


Note 6 - Stock Compensation Plans


In May 2003, the stockholders approved a replacement for the expiring Amended and Restated 1993 Employee Stock Option Plan (the Expiring Employee Plan). The approved 2003 Employee Stock Option Plan (the Employee Plan) is identical to the Expiring Employee Plan except that the term has been extended to March 12, 2013 and the number of shares reserved for future issuance was modified to 1,500,000 shares. The Employee Plan provides for grants of non-qualified stock options, incentive stock options, and restricted stock.


The Employee Plan is administered by the compensation committee of the board of directors, which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the exercisability of the options. Options granted to employees are exercisable upon vesting, and typically vest over a four-year period.

 

The Employee Plan requires that the exercise price of incentive stock options be at least equal to the fair market value of such shares on the date of grant and that the exercise price of non-qualified stock options be equal to at least 85% of the fair market value of such shares on the date of the grant. The maximum term of options granted is ten years.


We may grant restricted stock to employees pursuant to the Employee Plan. These shares generally vest over five or seven years and are subject to forfeiture under certain conditions. From 1997 through 2004, we granted 913,105 shares of restricted stock net of forfeitures. Deferred compensation associated with unvested restricted stock was $8,325,000 and $5,476, 000 as of December 31, 2004 and 2003, respectively.


In September 2004, the board of directors approved a program to offer all employees and directors the election to exchange vested stock options outstanding as of September 22, 2004 for restricted stock on an equivalent value basis. This election applied to vested stock options only; unvested stock options were unchanged and remained outstanding. A total of 297,000 stock options ranging in price from a high of $27.415 and a low of $14.22 with a weighted average exercise price of $21.7845 were converted. A total of 90,974 of restricted stock awards were issued with a five-year vesting period to replace the vested options.  


In September 1995, we established a Management Stock Acquisition program which was subsequently modified by the board in 1999. Under the program, certain options may be exercised by option holders with a recourse note payable to us. Such notes bear interest at 7.5% which approximated the market rate at the time of issuance. The note is due on the first of nine years and nine months after the date of the grant or within ninety days from termination of employment, with interest payable quarterly. Under this program, options for 316,000 shares of common stock were exercised in exchange for notes payable to us. The unpaid balance of the notes was $583,000 (40,250 shares) and $706,000 (55,250 shares) at December 31, 2004 and 2003, respectively, and is included in the accompanying



F16












F17







balance sheets as a reduction of additional paid-in capital. In accordance with the Sarbanes-Oxley Act of 2002, which prohibits new loans to directors and executive officers, we no longer allow options to be exercised with a recourse note.


In May 2004, the stockholders approved an amendment to the 2002 Directors’ Stock Plan.  The approved Amended and Restated 2002 Directors’ Stock Plan replaced annual awards of stock options with annual awards of restricted stock to directors and reduced the number of shares of common stock for future issuance from 750,000 shares to 175,000 shares. The Directors’ Plan contains an automatic grant feature whereby a director receives a one-time initial grant of 2,000 shares of restricted stock upon a director’s appointment to the board of directors and thereafter receives automatic annual grants of 1,000 shares of restricted stock upon re-election to the board of directors. The restricted stock vests at the rate of 20% per year on each anniversary of the date of the grant and are subject to forfeiture under certain conditions.  


During 2004, we granted to the directors 62,870 shares of restricted stock ..  Deferred compensation associated with unvested restricted stock was $1,789,000 as of December 31, 2004.  No shares of restricted stock were awarded to directors prior to 2004.


A reconciliation of our stock options outstanding as of December 31, 2004, 2003, and 2002 and changes during the years ended on those dates is presented below:


 

2004

 

2003

 

2002

         
 




Number of Stock Options



Weighted

Average

Exercise

Price

 




Number of Stock Options



Weighted

Average

Exercise

Price

 




Number of Stock Options



Weighted

Average

Exercise

Price

         

Employee Plan

        

Outstanding at beginning

  of year


369,500


$21.33

 


538,250


$20.47

 


529,250


$18.67

Granted

-

-

 

-

-

 

119,000

26.58

Exercised

(162,250)

20.06

 

(168,750)

18.58

 

(98,500)

18.25

Forfeited and cancelled

(117,000)

21.18

 

-

-

 

(11,500)

19.89

         

Outstanding at end of year

90,250

$23.83

 

369,500

$21.33

 

538,250

$20.47

         

Options exercisable

2,500

  

195,000

  

277,000

 
         

Directors’ Plan

        

Outstanding at beginning

 of year


230,000


$22.08

 


250,000


$19.97

 


280,000


$18.11

Granted

-

-

 

50,000

27.42

 

50,000

26.58

Exercised

(50,000)

21.70

 

(70,000)

18.37

 

(80,000)

17.61

Forfeited and cancelled

(180,000)

22.18

 

-

-

 

      -

    -

         

Outstanding at end of year

-

$       -

 

230,000

$22.08

 

250,000

$19.97

         

Options exercisable

-

  

230,000

  

250,000

 




F17







The following table summarizes information about stock options outstanding on December 31, 2004:


 

Options Outstanding

 

Options Exercisable


Range of

Exercise Price


Number

Outstanding

Weighted Avg.

Remaining

Contractual Life


Weighted Avg.

Exercise Price

 


Number

Exercisable


Weighted Avg.

Exercise Price

       

Employee Plan

      

$17.63 to 18.87

31,750

6.06

$18.77

 

2,500

$17.63

 26.58

58,500

7.38

26.58

 

-

-

$17.63 to 26.58

90,250

6.91

$23.83

 

2,500

$17.63

       


There were no options outstanding as of December 31, 2004 for the Directors' Plan.



Note 7 - Bank Loans Payable


On March 31, 2004, we renewed our revolving credit facility with a six-bank lending group led by Bank of America. The facility, which matures on March 31, 2007, consists of a $150 million secured line of credit with an accordion feature that gives us the option to expand the facility to $200 million, if needed. Interest on the facility is at a floating rate equal to either the lender’s prime rate or LIBOR plus a margin ranging from 1.30% to 1.75%, depending on our leverage level as defined in the credit agreement. As of December 31, 2004, the facility did not have an outstanding balance. The facility is collateralized by our interests in 20 properties with a net book value at December 31, 2004 of approximately $150,747,000. These properties collectively accounted for approximately 22% of our annualized base rent as of December 31, 2004 and approximately 21% of our total real estate assets at December 31, 2004.


Including both the current $150 million revolving credit facility and the $40 million unsecured bridge facility that existed during the year ended December 31, 2003, the daily weighted average outstanding balances were $81,248,000 and $98,489,000 for the twelve months ended December 31, 2004 and 2003, respectively. The weighted average annual interest rates under the credit facilities in each of these periods were 3.14% and 3.19%, respectively.


The credit facilities contain or contained various restrictive covenants including, among other things, a covenant limiting quarterly dividends to 95% of our average Funds From Operations (FFO). Due to the gain on sales realized in the fourth quarter of 2004, we made dividend distributions in excess of 95% of FFO in order to remain in compliance with the tax regulations that require a REIT to distribute 90% of its taxable income. Such distributions are specifically permitted under our credit agreement. We were in compliance with the various covenants and requirements of our credit facilities during the years ended December 31, 2004 and 2003.


Note 8 - Mortgage Loans Payable


In April 2004, we assumed a mortgage with an outstanding balance of approximately $3,070,000 in connection with the acquisition of a property. The mortgage with Thrivent Financial for Lutherans carried a fixed interest rate of 7.90% and had a maturity date of April 10, 2017. Subsequently, in July 2004, we renegotiated the mortgage with a then outstanding balance of $3,036,000, resulting in an increased loan amount, an extended term, and a lower interest rate. The new mortgage contains provisions for two additional fundings, the first of which took place on July 29, 2004 for $2,464,000. The second funding of $2,500,000 will take place in 2005, bringing the total mortgage amount to $8,000,000. The new interest rate on this mortgage is currently 5.94% and will be reduced to 5.60% after the second funding in 2005. The mortgage matures on August 15, 2029.


In August 2004, we assumed a mortgage with an outstanding balance of approximately $7,066,000 in connection with the acquisition of a property. The mortgage with Woodmen of the World carries a fixed interest rate of 7.23% and has a maturity date of July 1, 2012.



F18








As a result of property sales in December 2004, we partially paid down three mortgages and paid off one mortgage for a total amount of approximately $22,686,000.  Prepayment penalties of approximately $461,000 are included in interest expense in the 2004 statement of income.



Mortgage loans payable at December 31, 2004 consist of the following (in thousands):


    

Collateral as of December 31, 2004



Lender



Maturity Date


Interest Rate at

December 31, 2004 +



Balance


Number of

Properties

% of Annualized

Base Rent

% of Gross

Real Estate

Investments

TIAA-CREF

June 1, 2005

7.17%

$  24,701

5

5.93%

4.34%

Security Life of Denver

 Insurance Company


September 1, 2005


3.00%(1)


11,518


3


1.46%


2.29%

Nationwide Life

 Insurance


November 1, 2005(2)


4.61%


16,987


3


3.75%


3.82%

Prudential Insurance

July 31, 2006

8.90%

7,450

1

1.41%

1.68%

Prudential Insurance

July 31, 2006

6.91%

12,517

2

4.81%

3.20%

Union Bank

November 19, 2006

4.14%(3)

20,097

9

4.19%

3.77%

TIAA-CREF

December 1, 2006

7.95%

20,427

5

4.07%

4.30%

TIAA-CREF

June 1, 2007

7.17%

33,596

5

8.02%

6.88%

John Hancock

December 1, 2008

4.60%

11,800

5

2.69%

3.08%

Sun Life Assurance Co.

April 1, 2009

7.00%

1,604

1

0.79%

0.79%

Sun Life Assurance Co.

April 1, 2009

7.25%

1,435

*

*

*

TIAA-CREF

June 1, 2009

7.17%

39,241

8

9.59%

9.31%

John Hancock

December 1, 2010

4.95%

27,900

2

5.56%

4.54%

Washington Mutual

August 1, 2011

3.98%(4)

16,156

5

-

4.36%

Woodmen of the World

July 1, 2012

7.23%

7,025

1

1.26%

1.06%

TIAA-CREF

April 1, 2013

5.60%

47,411

5

8.66%

6.76%

Bank of America

November 1, 2013

5.45%

9,900

1

2.07%

2.11%

Bank of America

December 1, 2013

5.55%

11,400

4

2.85%

2.72%

JP Morgan

December 1, 2013

5.74%

24,702

1

6.25%

4.31%

Thrivent Financial

August 15, 2029

5.94%

5,468

1

-

1.10%

 


Total

 


$351,335


67


73.36%


70.42%


+

Interest rates are fixed unless otherwise indicated by footnote.

(1)

Floating rate based on 30-day LIBOR plus 1.40% (adjusted monthly). Effective July 3, 2003, the floating 30-day LIBOR rate was swapped to a fixed rate of 1.595% for an all-in rate of 2.995% until maturity.

(2)

Maturity date of November 1, 2005 represents the first of two interest rate reset dates, at which time we may opt to reject the new rate and pay the outstanding balance on the mortgage. The second interest rate reset date is November 1, 2008 with a final maturity date of November 1, 2011.

(3)

Floating rate based on LIBOR plus 1.60%. The current rate of 4.14% is fixed until May 19, 2005, at which time we have the option of fixing the LIBOR rate for a period of 1 month, 3 months, 6 months, or 12 months.

(4)

Floating rate based on a 12-month average of U.S. Treasury security yields plus 2.60% (adjusted semi-annually).

*

The two Sun Life Assurance Company mortgages are collateralized by a single property.


The 67 operating properties that served as collateral for our mortgages had a net book value of approximately $501,550,000 as of December 31, 2004. We were in compliance with the covenants and requirements of our various mortgage loans payable during the years ended December 31, 2004 and 2003.


The following table presents scheduled principal payments on mortgage loans for each of the twelve-month periods ending December 31 (in thousands):


2005

$  58,675

2006

63,185

2007

35,737

2008

15,900

2009

40,756

Thereafter

137,082

  Total

$351,335



F19







Note 9 – Stockholders’ Equity


Series A Preferred Stock

On August 5, 2003, we issued and sold 805,000 shares of our 8.75% Series A Cumulative Redeemable Preferred Stock at a price of $50.00 per share for total gross proceeds of $40,250,000. The offering was made only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. We pay cumulative dividends on the shares from the date of original issuance at the rate of 8.75% of the $50.00 liquidation preference per share per year, which is equivalent to $4.375 per share per year. Dividends on the shares are paid quarterly in arrears and are recorded when declared. The initial dividend of $685,000 was declared on October 1, 2003 and paid on October 15, 2003 for the period from August 5, 2003 through October 14, 2003. The fourth quarter 2004 preferred dividends included the dividends declared by our Board of Directors on October 1 and December 9, 2004. These dividends on our Series A Preferred Stock totaling $1,7 61,000 were both recorded in the fourth quarter of 2001. Quarterly dividends were declared in 2004 as follows:


 

Amount

1st Quarter

$  880,000

2nd Quarter

  881,000

3rd Quarter

880,000

4th Quarter

1,761,000

     Total

$4,402,000


 


The Series A preferred shares have no stated maturity, are not subject to any sinking fund or mandatory redemption, and are not convertible into any other securities. The shares are redeemable at our option beginning in August 2008, or earlier if necessary in limited circumstances to preserve our status as a REIT.


Series B Preferred Stock

On April 6, 2004, we issued and sold 2,400,000 shares of our 7.625% Series B Cumulative Redeemable Preferred Stock in a public offering at a price of $25.00 per share for total gross proceeds of $60,000,000. We pay cumulative dividends on the shares from the date of original issuance at the rate of 7.625% of the $25.00 liquidation preference per share per year, which is equivalent to $1.90625 per share per year.  Dividends on the shares are paid quarterly in arrears beginning on July 15, 2004 and are recorded when declared.  The initial dividend of $1,258,000 was declared on July 1, 2004 and paid on July 15, 2004 for the period from April 6, 2004 through July 14, 2004. The fourth quarter 2004 preferred dividends included the dividends declared by our Board of Directors on October 1 and December 9, 2004. These dividends on our Series B Preferred Stock totaling $2,288,000 were both recorded in the fourth quarter of 2004. Quarterly dividends were declared in 2004 as follows:


 

Amount

1st Quarter

$               -

2nd Quarter

-

3rd Quarter

1,258,000

4th Quarter

2,288,000

     Total

$3,546,000



The Series B preferred shares have no stated maturity, are not subject to any sinking fund or mandatory redemption, and are not convertible into any other securities.  The shares are redeemable at our option beginning in April 2009, or earlier if necessary in limited circumstances to preserve our status as a REIT.





F20







The following schedule presents changes in the number of outstanding shares of common stock and preferred stock during the period from January 1, 2002 through December 31, 2004:


 


Common

Stock

 

Series A

Preferred

Stock

 

Series B

Preferred

Stock

      

Balance, December 31, 2001

16,515,200

 

-

 

-

Issuance of common stock

242,601

 

-

 

-

Repurchase and retirement of

   common stock


 (401,667)

 


-

 


-

Issuance of restricted stock

99,650

 

-

 

-

Forfeiture of restricted stock

(12,120)

 

-

 

-

Balance, December 31, 2002

16,443,664

 

-

 

-

      

Issuance of preferred stock

-

 

805,000

 

-

Issuance of common stock

239,798

 

-

 

-

Repurchase and retirement of

   common stock


 (497,730)

 


-

 


-

Issuance of restricted stock

127,175

 

-

 

-

Forfeiture of restricted stock

(952)

 

-

 

-

Balance, December 31, 2003

16,311,955

 

805,000

 

-

      

Issuance of preferred stock

-

 

-

 

2,400,000

Issuance of common stock

215,444

 

-

 

-

Repurchase and retirement of

   common stock


(453,655)

 


-

 


-

Issuance of restricted stock

161,899

 

-

 

-

Issuance of restricted stock due

    to stock option conversion


90,974

 


-

 


-

Forfeiture of restricted stock

(1,033)

 

-

 

-

Balance, December 31, 2004

16,325,584

 

805,000

 

2,400,000


In July 1998, our board of directors approved a share repurchase program of 3 million shares which was increased first to 4.5 million shares in September 1999, then to 8 million shares in September 2000 and later to 10 million shares in January 2002. The share repurchase program does not require us to purchase a specified number of shares and it does not have an expiration date. During the years 2004, 2003, and 2002, we repurchased 453,655, 497,730, and 401,667, shares respectively, for annual average prices of $27.98, $26,12, and $24.49, respectively.  


Note 10 - Derivative Instruments and Hedging Activities


In the normal course of business, we are exposed to the effects of interest rate changes on our floating rate debt. We limit these risks by following established risk management policies and procedures, including the occasional use of derivatives. For interest rate exposures, interest rate swaps are used primarily to hedge the cash flow risk of our variable rate borrowing obligations.


We do not use derivatives for trading or speculative purposes. Further, we have a policy of only entering into contracts with major financial institutions. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, we have not sustained a material loss from those instruments, and we do not anticipate any material adverse effect on our net income, cash flows, or financial position in the future from the use of derivatives.




F21







Interest rate swaps that convert variable payments to fixed payments are cash flow hedges. Hedging relationships that are fully effective have no effect on net income. The unrealized gains and losses in the fair value of these interest rate swaps are reported on the balance sheet, as a component of other assets or other liabilities as appropriate, with a corresponding adjustment to accumulated other comprehensive income (loss).




In July 2003, we entered into an interest swap agreement with Bank of America, N.A. on our two floating-rate mortgages with Security Life of Denver Insurance Company. The agreement, which commenced on July 3, 2003 and terminates on September 1, 2005, exchanges a floating rate of 30-day LIBOR for a fixed rate of 1.595% on a notional amount of $24.5 million for the first 6 months and $23.5 million in 2004. As a result of the paydown of a portion of one of the mortgages and the pay off of the other mortgage in December 2004, the agreement was amended to reduce the notional amount to $11 million with no other term changes.  Interest rate pay differentials that arise under this swap agreement are recognized on an accrual basis in interest expense over the term of the contract. This interest rate swap agreement was considered to be fully effective in hedging the variable rate risk associated with the mortgages.


The following summarizes the notional value and fair value of our interest swap contract. The notional value below provides an indication of the amount that has been hedged in this contract but does not represent an obligation or exposure to credit risk at December 31, 2004 (dollars in thousands):    




Notional

Amount



Fixed

Rate



Contract

Maturity



Cumulative

Cash Paid, Net

Fair Value of

Derivative Financial

Instrument at

December 31, 2004

$11,000

2.995%

September 1, 2005

$114

$98



To determine the fair values of derivative instruments in accordance with SFAS 133, we use the discounted cash flow method, which requires the use of assumptions about market conditions and risks existing at the balance sheet date. Judgment is required in interpreting market data to develop estimates of market value. Accordingly, estimated fair value is a general approximation of value, and such value may or may not actually be realized.


At December 31, 2004, $98,000 is included in other assets and accumulated other comprehensive income, a stockholders’ equity account, reflecting the estimated market value of the swap contract at that date.






Note 11 – Discontinued Operations


Income from properties held for sale and sold is presented in the income statement as discontinued operations for all periods presented. Income from discontinued operations includes allocation s of interest expense based on the percentage of the cost basis of each property held for sale and sold to the cost basis of total real estate assets as of the respective balance sheet date. The following schedule presents a summary of income from discontinued operations (in thousands):


 

2004

 

2003

 

2002


Rental income


$18,148

 


$19,688

 


$21,317

Rental expenses:

    Operating expenses


4,770

 


4,958

 


5,225

    Real estate taxes

1,265

 

1,321

 

1,506

    Depreciation and amortization

2,363

 

2,692

 

3,033

Interest expense

3,298

 

3,316

 

3,855


Income from discontinued operations


$  6,452

 


$  7,401

 


$  7,698



F22







As of December 31, 2004 and 2003, assets and liabilities related to the property held for sale were as follows (in thousands):


 

2004

 

2003


Other assets


$358



$505

Other liabilities

$  71

 

$180


Note 12 - - Segment Disclosure


We view our operations as several geographic segments reflecting the regional management structure of our operating portfolio. We have five operating segments organized by the regions in which we own properties as follows: Northern California (includes Reno, Nevada), Arizona, Southern California (includes Las Vegas, Nevada), Northwest (greater Seattle, Washington and Portland, Oregon) and Colorado. The corporate and other segment includes amounts associated with general business activities not specifically related to our properties.


The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based upon income from operations from the combined properties in each segment.


 

For the year ended December 31, 2004 (in thousands)

 

Northern

California


Arizona

Southern

California


Northwest


Colorado

Corporate

& Other


Total


Rental income


$  31,140


$  22,847


$  18,405


$    9,655


$  13,924


$            -


$  95,971

Rental expenses:

       

    Operating expenses and

      real estate taxes


7,865


6,762


4,285


2,945


6,071


-


27,928

    Depreciation and

      amortization


7,055


6,385


6,344


3,066


4,375


-


27,225

    General and administrative

      expenses


-


-


-


-


-


7,707


7,707


Income from operations


16,220


9,700


7,776


3,644


3,478


(7,707)


33,111

        

Other income (expense)

       

    Interest income (1)

20

-

-

11

6

50

87

    Interest expense

-

-

-

-

-

(21,040)

(21,040)

        

Income (loss) from continuing

  operations


16,240


9,700


7,776


3,655


3,484


(28,697)


12,158


Discontinued operations:

  Income from discontinued

    operations




2,005




311




2,326




1,810




-




-




6,452

  Gain on sales of operating

    properties


28,494


3,518


18,190


20,033


-


-


70,235


Income from discontinued

  operations



30,499



3,829



20,516



21,843



-



-



76,687


Net income (loss)


$  46,739


$  13,529


$  28,292


$  25,498


$    3,484


$(28,697)


$  88,845


Real estate investments


$228,232


$204,625


$137,993


$115,744


$116,476


$            -


$803,070

(Dispositions) additions of

  real estate investments


$(28,152)


$  58,656


$(16,081)


$(16,875)


$    1,215


$            -


$ (1,237)


Total assets


$257,266


$177,776


$144,738


$116,796


$  86,544


$  10,363


$793,483


(1)  The interest income in the Northern California, Northwest and Colorado segments represents interest earned from tenant notes receivables.




F23








 

For the year ended December 31, 2003 (in thousands)

 

Northern

California


Arizona

Southern

California


Northwest


Colorado

Corporate

& Other


Total


Rental income


$  35,233


$  17,786


$  10,674


$  10,424


$  14,150


$            -


$  88,267

Rental expenses:

       

    Operating expenses and

      real estate taxes


8,143


5,043


2,124


2,191


6,174


-


23,675

    Depreciation and

      amortization


6,704


4,506


2,394


2,718


3,729


-


20,051

    General and administrative

      expenses


-


-


-


-


-


5,742


5,742


Income from operations


20,386


8,237


6,156


5,515


4,247


(5,742)


38,799

        

Other income (expense)

       

    Interest income (1)

27

1

-

19

-

59

106

    Interest expense

-

-

-

-

-

(18,641)

(18,641)

        

Income (loss) from continuing

  operations


20,413


8,238


6,156


5,534


4,247


(24,324)


20,264


Discontinued operations:

  Income from discontinued

    operations




2,854




363




2,250




1,934




-




-




7,401

  Gain on sales of operating

    properties


-


-


-


-


-


-


-


Income from discontinued

  operations



2,854



363



2,250



1,934



-



-



7,401


Net income (loss)


$  23,267


$    8,601


$    8,406


$    7,468


$    4,247


$(24,324)


$  27,665


Real estate investments


$256,384


$145,969


$154,074


$132,619


$115,261


$            -


$804,307

(Dispositions) additions of

  real estate investments


$    (569)


$  13,191


$  62,119


$       500


$    3,878


$            -


$  79,119


Total assets


$273,706


$133,257


$157,211


$116,578


$  88,524


$    4,343


$773,619


(1)  The interest income in the Northern California, Arizona, and Northwest segments represents interest earned from tenant notes receivables.







F24







 

For the year ended December 31, 2002 (in thousands)

 

Northern

California


Arizona

Southern

California


Northwest


Colorado

Corporate

& Other


Total


Rental income


$  31,940


$  14,774


$    8,867


$  10,625


$  14,379


$            -


$  80,585

Rental expenses:

       

    Operating expenses and

      real estate taxes


6,856


4,007


1,702


2,129


5,017


-


19,711

    Depreciation and

      amortization


4,922


2,888


1,347


2,674


2,790


-


14,621

    General and administrative

      expenses


-


-


-


-


-


4,616


4,616


Income from operations


20,162


7,879


5,818


5,822


6,572


(4,616)


41,637

        

Other income (expense)

       

    Interest income (1)

37

1

-

28

1

132

199

    Interest expense

-

-

-

-

-

(17,106)

(17,106)

        

Income (loss) from continuing

  operations


20,199


7,880


5,818


5,850


6,573


(21,590)


24,730


Discontinued operations:

  Income from discontinued

    operations




3,121




397




2,453




1,727




-




-




7,698

  Gain on sales of operating

    properties


1,777


1,475


323


-


-


-


3,575


Income from discontinued

  operations



4,898



1,872



2,776



1,727



-



-



11,273


Net income (loss)


$  25,097


$    9,752


$    8,594


$    7,577


$    6,573


$(21,590)


$  36,003


Real estate investments


$256,953


$132,778


$  91,955


$132,119


$111,383


$            -


$725,188

Additions (dispositions) of

  real estate investments


$  49,000


$  23,888


$ (7,071)


$    1,353


$    3,956


$            -


$  71,126


Total assets


$266,747


$118,304


$106,493


$119,057


$  80,604


$    3,126


$694,331


(1)  

The interest income in the Northern California, Arizona, Northwest and Colorado segments represents interest earned from tenant notes receivables.






F25







Note 13 – Fair Value of Financial Instruments


The carrying values of cash and cash equivalents, trade accounts payable, and receivables approximate fair value due to the short-term maturity of these instruments. Management has determined that the market value of the $315,082,000 of fixed rate debt at December 31, 2004 is approximately $312,108,000 based on the terms of existing debt compared to those available in the marketplace. At December 31, 2003, the fixed rate debt of $331,036,000 had an approximate market value of $334,436,000. The carrying value of variable rate debt approximates fair value, as the interest rates and other terms are comparable to current market terms.


Note 14 – Notes Receivable


In connection with the sale of a property in December 2004, we currently hold a note receivable from the buyer and other related entities for $6,545,000. The note carries an interest rate of 6% and matures on March 17, 2005. The note is secured by a deed of trust on the property.


We hold a note from one of our former tenants in the amount of $402,000, of which $127,000 was reserved against as an allowance for doubtful accounts as of December 31, 2004.


Note 15 – Acquisitions and Pro Forma Financial Information (unaudited)


During 2004, we acquired six operating properties, one redevelopment project, one development project, and three parcels of land for contract prices totaling approximately $103,641,000. Pro forma amounts include estimates for rental income, rental expenses, and interest expense, and are presented as if these properties had been acquired at the beginning of each year presented below. The following table presents pro forma financial information for the twelve months of 2004 and 2003 (dollars in thousands, except share and per share amounts):


 

2004

 

2003

    

Rental income

$101,221

 

$  99,476

Income from continuing operations

12,199

 

21,717

Income from discontinued operations

76,687

 

7,401

Net income

88,886

 

29,118

Net income available to common

  stockholders


$  79,510

 


$  24,028

    

Income per common share – basic:

   

  Income from continuing operations

$      0.18

 

$      1.04

  Income from discontinued operations

4.84

 

0.46

Net income available to common

  stockholders


$      5.02

 


$      1.50


Weighted average number of

  shares – basic



15,827,734

 



16,010,659

    

Income per common share – diluted:

  Income from continuing operations


$      0.17

 


$      1.02

  Income from discontinued operations

4.77

 

0.45

Net income available to common

  stockholders


$      4.94

 


$      1.47


Weighted average number of

  shares – diluted



16,078,939

 



16,336,369




F26







During 2003, we acquired five operating properties for total contract prices totaling approximately $85,125,000.  Pro forma amounts include estimates for rental income, rental expenses, and interest expense, and are presented as if these properties had been acquired at the beginning of each year presented below. The following table presents pro forma financial information for the twelve months of 2003 and 2002 (dollars in thousands, except share and per share amounts):


 

2003

 

2002

    

Rental income

$  96,785

 

$  90,977

Income from continuing operations

20,681

 

25,491

Income from discontinued operations

7,401

 

11,273

Net income

28,082

 

36,764

Net income available to common

  stockholders


$  24,885

 


$  33,356

    

Income per common share – basic:

   

  Income from continuing operations

$      1.09

 

$      1.36

  Income from discontinued operations

0.46

 

0.69

Net income available to common

  stockholders


$      1.55

 


$      2.05


Weighted average number of

  Shares – basic



16,010,659

 



16,240,722

    

Income per common share – diluted:

  Income from continuing operations


$      1.07

 


$      1.33

  Income from discontinued operations

0.45

 

0.68

Net income available to common

  stockholders


$      1.52

 


$      2.01


Weighted average number of

  shares – diluted



16,336,369

 



16,604,069



The actual operating results of the acquired properties are included in the statements of income from the date of acquisition. The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results would have been under the assumed circumstances.



F27







Note 16 – Earnings per Share


Following is a reconciliation of earnings per share (in thousands, except share and per share amounts):


 

                        Year Ended December 31,

 

2004

2003

2002

Basic:

   

Income from continuing operations

$  12,158

$  20,264

$  24,730

  Less:  Preferred dividends – Series A

(4,402)

(685)

-

  Less:  Preferred dividends – Series B

(3,546)

-

-

Income available to common stockholders

  from continuing operations


4,210


19,579


24,730

Income from discontinued operations

76,687

7,401

  11,273


Net income available to common stockholders


$80,897


$ 26,980


$ 36,003


Weighted average number of shares – basic


15,827,734


16,010,659


16,240,722


Income per common share - basic:

  Income from continuing operations



$      0.26



$      1.23



$      1.52

  Income from discontinued operations

4.85

0.46

   0.70


  Net income available to common stockholders

$      5.11


$      1.69


$      2.22


Diluted:

   


Income from continuing operations


$  12,158


$   20,264


$  24,730

  Less:  Preferred dividends – Series A

(4,402)

(685)

-

  Less:  Preferred dividends – Series B

(3,546)

-

-

Income available to common stockholders

  from continuing operations


4,210


19,579


24,730

Income from discontinued operations

76,687

7,401

11,273


Net income available to common stockholders


$  80,897


$  26,980


$  36,003


Weighted average number of shares – basic


15,827,734


16,010,659

16,240,722

Weighted average shares of dilutive stock

    options using average period stock price

    under the treasury stock method



96,006



156,681



186,997

Weighted average shares issuable upon the

    conversion of Operating Partnership Units


-


-


2,764

Weighted average shares of non-vested

    restricted stock using average period

    stock price under the treasury stock method



155,199



169,029



173,586


Weighted average number of shares – diluted


16,078,939


16,336,369


16,604,069


Income per common share – diluted:

  Income from continuing operations



$     0.26



$     1.20



$    1.49

  Income from discontinued operations

4.77

0.45

   0.68


  Net income available to common stockholders


$     5.03


$     1.65


$    2.17


Stock option grants and restricted stock awards with an exercise or issuance price on the date of grant that is above market price as of December 31, 2004 are considered antidilutive and have been excluded from the weighted average share calculations. For the years ended December 31, 2004, 2003, and 2002, stock options and restricted stock awards of 24,660, 149,089 and 105,436, respectively, have been excluded from the “ weighted average number of shares – diluted. ”




F28








Note 17 - - Commitments and Contingencies


As of December 31, 2004, we had outstanding contractual construction commitments of approximately $5,211,000 relating to development in progress and tenant improvements on recently developed properties. We had outstanding undrawn letters of credit against our credit facility of approximately $11,943,000 at December 31, 2004.


From time to time, we are subject to legal claims in the ordinary course of business. We are not aware of any legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, prospects, financial condition, operating results, or cash flows.


Note 18 – Subsequent Event


On January 20, 2005, we sold an industrial property in San Diego, California, which was considered held for sale as of December 31, 2004, for a sale price of $15,800,000, resulting in a gain on sale of approximately $6,700,000.


Note 19 - - Quarterly Financial Data-Unaudited


The following is a summary of quarterly results of operations for 2004 and 2003 (in thousands, except per share amounts):


2004 Quarters Ended

3/31

6/30

9/30

12/31

     

Rental income

$23,303

$23,925

$24,242

$24,501

     

Income from operations

9,229

8,882

8,795

6,205

     

Income from continuing operations

4,001

3,972

3,754

431

     

Income from discontinued operations

1,615

1,784

1,761

71,527

     

Net income

5,616

5,756

5,515

71,958

     

Earnings per share – basic

$    0.30

$    0.31

$    0.21

$    4.31

     

Earnings per share – diluted

$    0.29

$    0.30

$    0.21

$    4.26

     

2003 Quarters Ended

3/31

6/30

9/30

12/31

     

Rental income

$22,039

$21,632

$21,671

$22,925

     

Income from operations

10,299

10,122

9,502

8,876

     

Income from continuing operations

5,696

5,544

5,064

3,960

     

Income from discontinued operations

1,976

1,758

1,655

2,012

     

Net income

7,672

7,302

6,719

5,972

     

Earnings per share – basic

$    0.48

$    0.45

$    0.42

$    0.33

     

Earnings per share – diluted

$    0.47

$    0.44

$    0.41

$    0.33


Quarterly amounts reflect discontinued operations for properties sold in 2004.





F29






BEDFORD PROPERTY INVESTORS, INC.

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2004

(in thousands of dollars)


  

Initial Cost to Company (1)

Cost Capitalized


Gross Amount

 


 
   

Buildings &

Subsequent to

Carried at Close of Period

Accumulated

Date

Date

Description

Location

Land

Improvement

Acquisition

Land

Building

Total

Depreciation (2)

Constructed

Acquired

Industrial buildings:

Northern California

Building #3 at Contra Costa Diablo

 Industrial Park*




Concord




$   495




$  1,159




$   128




$   495




$ 1,287




$ 1,782




$  395




1983




12/90

Building #8 at Contra Costa Diablo

 Industrial Park *


Concord


877


1,548


212


877


1,760


2,637


632


1981


12/90

Building #18 at Mason Industrial

 Park *


Concord


610


1,265


152


610


1,417


2,027


450


1984


12/90

Milpitas Town Center

Milpitas

1,400

4,421

819

1,400

5,240

6,640

1,160

1983

08/94

598 Gibraltar Drive *

Milpitas

535

2,522

3

535

2,525

3,060

1,198

1996

05/96

Auburn Court *

Fremont

1,391

2,473

793

1,415

3,242

4,657

759

1983

12/95

47650 Westinghouse Drive*

Fremont

267

893

66

271

955

1,226

190

1982

12/95

Fourier Avenue *

Fremont

2,120

7,018

1,623

2,120

8,641

10,761

1,456

1982

05/96

Lundy Avenue *

San Jose

2,055

2,184

1,154

2,055

3,338

5,393

597

1982

07/96

115 Mason Circle *

Concord

697

854

255

697

1,109

1,806

274

1971

09/96

47600 Westinghouse Drive*

Fremont

356

1,067

276

356

1,343

1,699

308

1982

09/96

860-870 Napa Valley Corporate Way*

Napa

933

3,515

856

933

4,371

5,304

995

1984

09/96

47633 Westinghouse Drive*

Fremont

1,051

3,239

702

1,051

3,941

4,992

650

1983

10/96

47513 Westinghouse Drive*

Fremont

1,624

-

4,093

1,624

4,093

5,717

1,662

1998

10/96

Bordeaux Centre*

Napa

1,151

-

6,733

1,151

6,733

7,884

2,230

1998

12/96

O’Toole Business Park*

San Jose

3,933

5,748

1,431

3,933

7,179

11,112

1,537

1984

12/96

6500 Kaiser Drive*

Fremont

1,556

6,411

28

1,556

6,439

7,995

1,144

1990

01/97

Bedford Fremont Business Center*

Fremont

3,598

9,004

620

3,598

9,624

13,222

1,838

1990

03/97

Spinnaker Court*

Fremont

2,548

5,989

454

2,548

6,443

8,991

1,245

1986

05/97

2277 Pine View Way*

Petaluma

1,861

7,074

3

1,861

7,077

8,938

1,192

1989

06/97

2180 S. McDowell Blvd.*

Petaluma

769

2,989

141

769

3,130

3,899

564

1990

07/98

2190 S. McDowell Blvd.*

Petaluma

584

2,270

9

584

2,279

2,863

329

1996

07/98

South San Francisco Business

 Center*


S. San Francisco


9,459


10,415


412


9,459


10,827


20,286


751


1986


08/02

Philips Business Center*

San Jose

15,627

18,335

1

15,627

18,336

33,963

1,309

1983

09/02



F30







  


Initial Cost to Company (1)

Cost Capitalized

 

Gross Amount

 


 
   

Buildings &

Subsequent to

 

Carried at Close of Period

Accumulated

Date

Date

Description

Location

Land

Improvement

Acquisition

 

Land

Building

Total

Depreciation (2)

Constructed

Acquired

Industrial buildings (continued):

           

Arizona

           

Westech Business Center *

Phoenix

3,531

4,422

1,171

 

3,531

5,593

9,124

1,486

1985

04/96

Westech II *

Phoenix

1,033

-

4,143

 

1,033

4,143

5,176

1,543

1998

07/96

2601 W. Broadway

Tempe

1,127

2,348

119

 

1,127

2,467

3,594

404

1977

07/97

Building #2 at Phoenix Airport

 Center *


Phoenix


723


3,278


30

 


723


3,308


4,031


543


1990


07/97

Building #3 at Phoenix Airport

 Center *


Phoenix


682


3,163


206

 


682


3,369


4,051


603


1990


07/97

Building #4 at Phoenix Airport

 Center *


Phoenix


517


1,732


18

 


517


1,750


2,267


287


1990


07/97

Building #5 at Phoenix Airport

 Center *


Phoenix


1,507


3,860


150

 


1,507


4,010


5,517


685


1990


07/97

Butterfield Business Center *

Tucson

905

4,211

208

 

905

4,419

5,324

750

1986

11/97

Butterfield Tech Center II *

Tucson

100

-

1,821

 

100

1,821

1,921

632

1999

11/97

Greystone Business Park *

Tempe

1,216

-

4,588

 

1,216

4,588

5,804

1,544

1999

12/97

Rio Salado Corporate Center *

Tempe

1,704

2,850

4,925

 

1,704

7,775

9,479

1,398

1982-84

07/98

Phoenix Tech Center *

Phoenix

1,314

939

882

 

1,314

1,821

3,135

619

1985

08/98

4645 S. 35th Street

Phoenix

1,561

1,602

79

 

1,561

1,681

3,242

219

1988-95

06/99

Diablo Business Center

Phoenix

991

6,242

1,262

 

1,067

7,428

8,495

813

1986

12/99

Cotton Center I *

Phoenix

2,742

11,157

(256)

+

2,600

11,043

13,643

1,127

2000

07/02

Cotton Center II *

Phoenix

2,609

8,928

(284)

+

2,545

8,708

11,253

1,129

2000

07/02

Roosevelt Commons*

Tempe

1,606

5,549

99

 

1,606

5,648

7,254

227

1986

08/03

Superstition Springs Commerce
Center*


Mesa


1,886


4,448


2

 


1,886


4,450


6,336


467


2001


11/03

1150 N. Fiesta Blvd.

Gilbert

2,908

7,728

-

 

2,908

7,728

10,636

100

1997

10/04

            

Southern California

           

Dupont Industrial Center *

Ontario

3,588

6,162

1,829

 

3,588

7,991

11,579

1,736

1989

05/94

3002 Dow Business Center *

Tustin

4,209

7,291

1,738

 

4,305

8,933

13,238

2,489

1987-89

12/95

Carroll Tech I *

San Diego

511

1,372

192

 

511

1,564

2,075

397

1984

10/96

Carroll Tech II *

San Diego

1,022

2,129

843

 

1,022

2,972

3,994

679

1984

10/96

Canyon Vista Center *

San Diego

1,647

4,598

608

 

1,647

5,206

6,853

790

1986

04/99

6325 Lusk Blvd. *

San Diego

2,202

3,444

794

 

2,202

4,238

6,440

494

1991

07/99

Jurupa Business Center Phase I *

Ontario

841

-

3,812

 

841

3,812

4,653

869

2001

12/00

Jurupa Business Center Phase I I*

Ontario

889

-

3,476

 

889

3,476

4,365

296

2003

12/00

Jurupa Business Center Phase I II

Ontario

558

-

932

 

446

1,044

1,490

-

2004

12/00

Jurupa Business Center Phase I V

Ontario

928

-

1,877

 

1,041

1,764

2,805

-

2004

12/00



F31








  

Initial Cost to Company (1)

Cost Capitalized

 

Gross Amount

   
   

Buildings &

Subsequent to

 

Carried at Close of Period

Accumulated

Date

Date

Description

Location

Land

Improvement

Acquisition

 

Land

Building

Total

Depreciation (2)

Constructed

Acquired

Industrial Buildings (continued):

Washington

           

Highlands Campus Building B *

Bothell

1,762

-

5,944

 

1,762

5,944

7,706

2,488

1999

06/98

Highlands Campus Building C *

Bothell

1,646

-

5,057

 

1,646

5,057

6,703

1,700

2000

06/98

            

Nevada

           

Russell Commerce Center*

Las Vegas

3,479

6,500

279

 

3,445

6,813

10,258

598

2002

08/03

Northport Business Center*

North Las Vegas

4,348

12,009

86

 

4,339

12,104

16,443

774

2001

12/03

            

Oregon

           

SunTech Corporate Park 2 *

Hillsboro

1,634

7,794

-

 

1,634

7,794

9,428

287

2001

04/04

Tanasbourne Corporate Park I*

Hillsboro

2,872

5,633

-

 

2,872

5,633

8,505

175

2001

08/04

SunTech Corporate Park 3

Hillsboro

1,503

2,364

73

 

1,503

2,437

3,940

-

2001

09/04

            

Office buildings:

Northern California

           

Village Green *

Lafayette

547

1,245

681

 

743

1,730

2,473

471

1983

07/94

Carneros Commons Phase I *

Napa

500

-

4,273

 

500

4,273

4,773

870

2000

12/96

Canyon Park *

San Ramon

1,916

3,072

3,834

 

1,916

6,906

8,822

1,262

1971-72

12/97

Crow Canyon Centre *

San Ramon

767

-

5,316

 

767

5,316

6,083

1,342

1999

12/97

3380 Cypress Drive *

Petaluma

1,684

3,704

2

 

1,685

3,705

5,390

535

1989

07/98

Carneros Commons Phase I I*

Napa

461

-

3,942

 

461

3,942

4,403

837

2001

12/96

            

Arizona

           

Executive Center at Southbank *

Phoenix

4,943

7,134

428

 

4,943

7,562

12,505

1,414

1989

03/97

Building #1 at Phoenix Airport

 Center*


Phoenix


944


1,541


179

 


944


1,720


2,664


299


1990


07/97

Phoenix Airport Center Parking *

Phoenix

1,369

81

-

 

1,369

81

1,450

13

1990

07/97

Cabrillo Executive Center *

Phoenix

475

5,552

710

 

475

6,262

6,737

1,085

1983

02/98

1355 S. Clearview Avenue*

Mesa

2,023

5,383

-

 

2,023

5,383

7,406

668

1998

06/99

Via Linda Corporate Center *

Scottsdale

5,109

10,869

18

 

5,109

10,887

15,996

253

1985

04/04

Airport Technology Center *

Phoenix

8,747

19,390

-

 

8,747

19,390

28,137

298

1999

08/04



F32








  

Initial Cost to Company (1)

Cost Capitalized

 

Gross Amount

   
   

Buildings &

Subsequent to

 

Carried at Close of Period

Accumulated

Date

Date

Description

Location

Land

Improvement

Acquisition

 

Land

Building

Total

Depreciation (2)

Constructed

Acquired

Office Buildings (continued):


           

Southern California

           

Building #3 at Carroll Tech Center *

San Diego

716

1,400

231

 

716

1,631

2,347

280

1984

10/96

Building #4 at Carroll Tech Center *

San Diego

2,028

3,192

251

 

2,028

3,443

5,471

423

1986

03/99

Towne Centre Plaza*

Foothill Ranch

6,117

27,927

560

 

6,073

28,531

34,604

1,611

2000

11/03

            

Colorado

           

Oracle Building*

Denver

1,838

13,094

1,381

 

1,838

14,475

16,313

2,223

1996

10/97

Texaco Building*

Denver

3,648

31,193

3,666

 

3,648

34,859

38,507

5,024

1981

05/98

WaterPark @ Briarwood

 Building 1*


Centennial


271


-


2,853

 


271


2,853


3,124


815


2000


04/99

Belleview Corporate Plaza II Office

Denver

2,533

-

11,545

 

2,472

11,606

14,078

1,639

2001

10/98

WaterPark @ Briarwood Bldg. 2*

Centennial

716

-

6,055

 

716

6,055

6,771

1,290

2000

04/99

WaterPark @ Briarwood Bldg. 3*

Centennial

716

-

7,852

 

716

7,852

8,568

1,117

2001

04/99

WaterPark @ Briarwood Bldg. 4*

Centennial

285

-

3,129

 

285

3,129

3,414

824

2001

04/99

Bedford Center at Rampart*

Englewood

3,757

17,777

217

 

3,757

17,994

21,751

1,756

1998

11/00

            

Washington

           

Highlands Campus Building A *

Bothell

1,989

-

7,876

 

1,989

7,876

9,865

2,786

1999

06/98

The Federal Way Building *

Federal Way

2,178

6,915

29

 

2,179

6,943

9,122

874

1999

06/99

Federal Way II*

Federal Way

2,465

14,105

374

 

2,480

14,464

16,944

1,734

1999

09/99

Time Square Building 600*

Renton

1,776

4,135

757

 

1,776

4,892

6,668

-

1986

07/97

Time Square Building 660*

Renton

1,785

4,136

1,506

 

1,785

5,642

7,427

-

1986

07/97

            

Nevada

           

U.S. Bank Centre*

Reno

2,102

10,264

1,140

 

2,102

11,404

13,506

2,271

1989

05/97

            

Oregon

           

SunTech Corporate Park 1 *

Hillsboro

809

6,568

-

 

809

6,568

7,377

209

2001

04/04

            

Operating property held for sale :

           

Signal Systems Building *

San Diego, CA

2,228

7,264

25

 

2,228

7,289

9,517

1,224

1990

12/96

            

Properties under development :

           

Time Square Building 500*

Renton, WA

1,759

4,135

(25)

^

1,759

4,110

5,869

-

1986

07/97

Time Square Building 700*

Renton, WA

2,903

6,433

(54)

^

2,903

6,379

9,282

-

1986

07/97

Time Square Building 800*

Renton, WA

1,798

4,136

(180)

^

1,798

3,956

5,754

-

1986

07/97

3809 E. Watkins Street*

Phoenix, AZ

2,853

6,320

(361)

2,853

5,959

8,812

-

1996

04/04



F33








  

Initial Cost to Company (1)

Cost Capitalized

Gross Amount

   
   

Buildings &

Subsequent to

Carried at Close of Period

Accumulated

Date

Date

Description

Location

Land

Improvement

Acquisition

Land

Building

Total (2)

Depreciation (3)

Constructed

Acquired

Land held for development:

          

Mondavi Land, Napa Lot 12G

Napa, CA

1,137

-

253

1,390

-

1,390

-

N/A

03/98

West Tempe Lots 30 and 31

Tempe, AZ

543

-

94

637

-

637

-

N/A

07/98

210 Lafayette Circle

Lafayette, CA

513

-

42

555

-

555

-

N/A

11/98

Belleview Corporate Plaza III, IV

Denver, CO

2,094

-

28

2,122

-

2,122

-

N/A

10/99

Belleview Corporate Plaza V

Denver, CO

1,561

-

267

1,828

-

1,828

-

N/A

10/98

Napa Lots 9B & 8D

Napa, CA

2,133

-

33

2,166

-

2,166

-

N/A

11/00

Napa Lot 10C

Napa, CA

  1,809

      -

      7

  1,816

      -

  1,816

     -

N/A

10/01

Southshore Corporate Park Land

Portland, OR

   956

      -

    198

1,154

      -

1,154

     -

N/A

09/02

Russell Land

Las Vegas, NV

719

-

38

757

-

757

-

N/A

04/04

Northport Pad I

N. Las Vegas, NV

581

-

2

583

-

583

-

N/A

05/04

Northport Pad II

N. Las Vegas, NV

520

-

1

521

-

521

-

N/A

05/04

           
  

$207,119

$459,111

$136,840

$208,142

$594,928

$803,070

$86,660

  
       

(A)

(A)

  



(1) Includes adjustments for SFAS 141, “ Business Combinations, ” for properties acquired in 2002 and thereafter.


(2) Total aggregate cost basis for federal income tax purposes was approximately $804,953,000 at December 31, 2004.


(3) Depreciation is calculated using depreciable lives as stated in Note 1 to the financial statements under “ Real Estate Investments. ”


* Property is encumbered, see footnotes 7 and 8 to the financial statements.


+ Decrease due to cash received from seller for rent subsidies.

^ Decrease due to allocation of accumulated depreciation on property transferred to redevelopment at net book value.

“ Decrease due to reimbursement of tenant portion of improvements in excess of amounts spent to date.


See accompanying independent auditors’ report.




F34







NOTES TO SCHEDULE III

(in thousands of dollars)


(A)

An analysis of the activity in real estate investments for the years ended December 31, 2003, 2002, and 2001 is presented below in accordance with U.S. generally accepted accounting principles.


 

Investment

 

Accumulated Depreciation

Depreciation

2004

2003

2002

 

2004

2003

2002

        

BALANCE AT BEGINNING OF YEAR

$804,307

$725,188

$654,062

 

$81,638

$62,562

$48,984

Add (deduct):

       

  Acquisition of Cotton Center I

-

-

14,681

 

-

-

-

  Acquisition of Cotton Center II

-

-

12,169

 

-

-

-

  Acquisition of So. San Francisco Business
    Center

-

-

21,020

 

-

-

-

  Acquisition of Philips Business Center

-

-

35,707

 

-

-

-

  Acquisition of Southshore Corp. Park Land

-

-

956

 

-

-

-

  Sale of Vista I (B)

-

-

(2,845)

 

-

-

(250)

  Sale of Vista II (B)

-

-

(2,398)

 

-

-

(210)

  Sale of Oakridge Way (B)

-

-

(2,964)

 

-

-

(215)

  Sale of Flanders Drive (B)

-

-

(3,419)

 

-

-

(200)

  Sale of Cimarron Business Park (C)

-

-

(6,476)

 

-

-

(466)

  Sale of Monterey Commerce Center #1 (D)

-

-

(6,241)

 

-

-

(673)

  Sale of Monterey Commerce Center #2 (D)

-

-

(2,697)

 

-

-

(185)

  Sale of Monterey Commerce Center #3 (D)

-

-

(2,522)

 

-

-

(237)

  Acquisition of Roosevelt Commons

-

7,155

-

 

-

-

-

  Acquisition of Russell Commerce Center

-

9,979

-

 

-

-

-

  Acquisition of Towne Centre Plaza

-

34,044

-

 

-

-

-

  Acquisition of Superstition Springs Commerce
    Center

-

6,334

-

 

-

-

-

  Acquisition of Northport Business Center

-

16,357

-

 

-

-

-

  Acquisition of Via Linda Corporate Center

15,978

-

-

 

-

-

-

  Acquisition of SunTech Corporate Park 1

7,377

-

-

 

-

-

-

  Acquisition of SunTech Corporate Park 2

9,428

-

-

 

-

-

-

  Acquisition of Russell Land

719

-

-

 

-

-

-

  Acquisition of E. Watkins Street

9,173

-

-

 

-

-

-

  Acquisition of Northport Pad 1

581

-

-

 

-

-

-

  Acquisition of Northport Pad 2

520

-

-

 

-

-

-

  Acquisition of Tanasbourne Corporate Park I

8,505

-

-

 

-

-

-

  Acquisition of Airport Technology Center

28,137

-

-

 

-

-

-

  Acquisition of SunTech Corporate Park 3

3,867

-

-

 

-

-

-

  Acquisition of 1150 N. Fiesta Blvd.

10,636

-

-

 

-

-

-

  Sale of 410 Allerton Bldg. (E)

(2,604)

-

-

 

(182)

-

-

  Sale of 400 Grandview (E)

(8,949)

-

-

 

(1,047)

-

-

  Sale of 342 Allerton Bldg. (E)

(4,541)

-

-

 

(469)

-

-

  Sale of 301 East Grand (E)

(3,352)

-

-

 

(240)

-

-

  Sale of Parkpoint Business Center (E)

(7,364)

-

-

 

(953)

-

-

  Sale of Mondavi Bldg. (E)

(6,529)

-

-

 

(830)

-

-

  Sale of Adobe I (E)

(25,973)

-

-

 

(3,701)

-

-

  Sale of Adobe II (E)

(22,230)

-

-

 

(3,248)

-

-

  Sale of Mountain Pointe Office Park (E)

(5,788)

-

-

 

(886)

-

-

  Sale of Scripps Wateridge (E)

(16,654)

-

-

 

(2,034)

-

-

  Sale of Scripps Wateridge Land (E)

(710)

-

-

 

-

-

-

  Sale of Laguna Hills Square (E)

(7,380)

-

-

 

(1,235)

-

-

  Capitalized costs

15,916

5,250

16,155

 

-

-

-

  Depreciation

-

      -

      -

 

19,847

19,076

16,014

        

BALANCE AT END OF YEAR

$803,070

$804,307

$725,188

 

$86,660

$81,638

$62,562

        


(B)

The properties were sold in April 2002.

(C)

The property was sold in May 2002.

(D)

The properties were sold in September 2002.

(E)

The property was sold in December 2004.




F35







SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.


BEDFORD PROPERTY INVESTORS, INC.


By:

/s/ Peter B. Bedford      

Peter B. Bedford

Chairman of the Board and

Chief Executive Officer


Dated: March 11, 2005


POWER OF ATTORNEY


Know all persons by these presents, that each person whose signature appears below constitutes and appoints Peter B. Bedford and Hanh Kihara, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the date indicated.


/s/ Peter B. Bedford                     

March 11, 2005

Peter B. Bedford, Chairman of the Board

Date

and Chief Executive Officer (principal executive officer)


/s/ Peter Linneman                        

March 11, 2005

Peter Linneman, Director

Date


/s/ Bowen H. McCoy                    

March 11, 2005

Bowen H. McCoy, Director

Date


/s/ Thomas H. Nolan, Jr.                

March 11, 2005

Thomas H. Nolan, Jr., Director

Date


/s/ Martin I. Zankel                        

March 11, 2005

Martin I. Zankel, Director

Date


/s/ Hanh Kihara                              

March 11, 2005

Hanh Kihara, Senior Vice President

Date

and Chief Financial Officer (principal financial officer)


/ s/ Krista K. Rowland                        

March 11, 2005

Krista K. Rowland, Vice President and

Date

Controller (principal accounting officer)

















 


   


 



 



 



 



 



 



 



 



 



 












LIST OF EXHIBITS

Exhibit No.

Exhibit


3.1(d)

Articles of Amendment and Restatement of Bedford Property Investors, Inc., filed on May 27, 2003, is incorporated herein by reference to Exhibit 3.1(d) to our Form 10-Q for the quarter ending June 30, 2003.


3.1(e)

Articles Supplementary relating to the Series A Cumulative Redeemable Preferred Stock of Bedford Property Investors, Inc., filed on August 4, 2003, is incorporated herein by reference to Exhibit 3.1(e) to our Form 10-Q for the quarter ending June 30, 2003.


3.1(f)

Articles Supplementary relating to the Series B Cumulative Redeemable Preferred Stock of Bedford Property Investors, Inc., filed on April 5, 2004, is incorporated herein by reference to Exhibit 4.2 to our Registration Statement on Form 8-A filed with the SEC on April 5, 2004.


3.2(b)

Second Amended and Restated Bylaws of Bedford Property Investors, Inc. are incorporated herein by reference to Exhibit 3.2(b) to our Form 10-Q for the quarter ending June 30, 2003.


4.4

Series A Cumulative Redeemable Preferred Stock Registration Rights Agreement, dated August 5, 2003, between Bedford Property Investors, Inc. and RBC Dain Rauscher Inc. is incorporated herein by reference to Exhibit 4.4 to our Form 10-Q for the quarter ending June 30, 2003.


10.13

Promissory Note, dated as of March 20, 1996, by and between Bedford Property Investors, Inc. and Prudential Insurance Company of America, is incorporated herein by reference to Exhibit 10.13 to our Amendment No. 1 to our Registration Statement on Form S-2 (File No. 333-00921) filed on March 29, 1996.


10.14

Employment Agreement, dated February 17, 1993, by and between ICM Property Investors, Inc., and Peter B. Bedford, is incorporated herein by reference to Exhibit 10.14 to our Form 10-K for the year ended December 31, 1994.


10.15

Our Dividend Reinvestment and Stock Purchase Plan is incorporated herein by reference to our post-effective Amendment No. 1 to our Registration Statement on Form S-3 (File No. 333-33795) filed on November 20, 1997.


10.16

Our Amended and Restated Employee Stock Plan is incorporated herein by reference to Exhibit 10.16 to our Form 10-K for the year ended December 31, 1997.


10.22

Promissory Note, dated as of May 28, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.22 to our Form 10-Q for the quarter ended June 30, 1999.


10.23

Promissory Note, dated as of May 28, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.23 to our Form 10-Q for the quarter ended June 30, 1999.


10.24

Promissory Note, dated as of May 28, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.24 to our Form 10-Q for the quarter ended June 30, 1999.


10.28

Promissory Note, dated as of November 22, 1999, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.28 to our Form 10-K for the year ended December 31, 1999.











10.30

Loan Agreement, dated as of July 27, 2000, by and between Bedford Property Investors, Inc. and Security Life of Denver Insurance Company, is incorporated herein by reference to Exhibit 10.30 to our Form 10-Q for the quarter ended June 30, 2000.


10.31

Amended and Restated Promissory Note, dated as of May 24, 1996, by and between Bedford Property Investors, Inc. and Prudential Insurance Company of America, is incorporated herein by reference to Exhibit 10.13 to our Form 10-Q for the quarter ended June 30, 1996.


10.32

Loan Agreement, dated as of January 30, 1998, by and between Bedford Property Investors, Inc. and Prudential Insurance Company of America, is incorporated herein by reference to Exhibit 10.15 to our Form 10-K for the year ended December 31, 1997.


10.36

Promissory Note, dated as of July 23, 2001, by and between Bedford Property Investors, Inc. and Washington Mutual Bank, is incorporated herein by reference to Exhibit 10.36 to our Form 10-Q for the quarter ended June 30, 2001.


10.40

Amended and Restated Promissory Note, dated as of November 19, 2001, by and between Bedford Property Investors, Inc. and Union Bank of California, N.A., is incorporated herein by reference to Exhibit 10.40 to our Form 10-K for the year ended December 31, 2001.


10.41

Purchase Agreement and Escrow Instructions, Financial Agreement, and Holdback Escrow Agreement, each dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and Dared 80, LLC, are incorporated herein by reference to Exhibit 10.41 to our Form 8-K filed on September 24, 2002.


10.42

Real Estate Sale Agreement dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and EOP-Industrial Portfolio, LLC, is incorporated herein by reference to Exhibit 10.42 to our Form 8-K filed on September 24, 2002.


10.43

First Amendment, dated as of August 6, 2002, to the Real Estate Sale Agreement, dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and EOP-Industrial Portfolio, LLC, is incorporated herein by reference to Exhibit 10.43 to our Form 8-K filed on September 24, 2002.


10.44

Second Amendment, dated as of August 14, 2002, to the Real Estate Sale Agreement, dated as of July 17, 2002, by and between Bedford Property Investors, Inc. and EOP-Industrial Portfolio, LLC, is incorporated herein by reference to Exhibit 10.44 to our Form 8-K filed on September 24, 2002.


10.45

Purchase Agreement and Escrow Instructions, dated as of July 26, 2002, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.45 to our Form 8-K filed on September 24, 2002.


10.47

Note, dated as of October 7, 2002, by and between Bedford Property Investors, Inc. and Nationwide Life Insurance Company, is incorporated herein by reference to Exhibit 10.47 to our Form 10-Q for the quarter ended September 30, 2002.


10.48

Promissory Note, dated as of March 28, 2003, by and between Bedford Property Investors, Inc. and Teachers Insurance and Annuity Association of America, is incorporated herein by reference to Exhibit 10.48 to our Form 10-Q for the quarter ending March 31, 2003.


10.49

Form of Retention Agreement is incorporated herein by reference to Exhibit 10.49 to our Form 10-Q for the quarter ending June 30, 2003.










10.50

Interest Rate Protection Agreement, dated as of July 3, 2003, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.50 to our Form 10-Q for the quarter ending June 30, 2003.


10.51

Master Agreement, dated as of March 15, 2002, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.51 to our Form 10-Q for the quarter ending June 30, 2003.


10.52

Second Amendment to Employment Agreement, dated as of July 15, 2003, by and between Peter B. Bedford and Bedford Property Investors, Inc., is incorporated herein by reference to Exhibit 10.52 to our Form 10-Q for the quarter ending June 30, 2003.


10.53

2003 Employee Stock Plan of Bedford Property Investors, Inc., dated May 13, 2003, as amended on August 6, 2003, is incorporated herein by reference to Exhibit 10.53 to our Form 10-Q for the quarter ending June 30, 2003.


10.54

Promissory Note, dated as of October 30, 2003, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.54 to our Form 10-Q for the quarter ending September 30, 2003.


10.55

Promissory Note, dated as of November 3, 2003, by and between Bedford Property Investors, Inc. and Bank of America, N.A., is incorporated herein by reference to Exhibit 10.55 to our Form 10-Q for the quarter ending September 30, 2003.


10.56

Fixed Rate Note, dated as of November 3, 2003, by and between Bedford Property Investors, Inc. and J.P. Morgan Chase Bank, is incorporated herein by reference to Exhibit 10.56 to our Form 10-Q for the quarter ending September 30, 2003.


10.57

Purchase and Sale Agreement, dated as of June 16, 2003, by and between Bedford Property Investors, Inc. and Roosevelt Commons Limited Partnership, is incorporated herein by reference to Exhibit 10.57 to our Form 8-K filed on December 12, 2003.


10.58

Amendment, dated as of July 16, 2003, to the Purchase and Sale Agreement, dated as of June 16, 2003, by and between Bedford Property Investors, Inc. and Roosevelt Commons Limited Partnership, is incorporated herein by reference to Exhibit 10.58 to our Form 8-K filed on December 12, 2003.


10.59

Second Amendment, dated as of July 31, 2003, to the Purchase and Sale Agreement, dated as of June 16, 2003, by and between Bedford Property Investors, Inc. and Roosevelt Commons Limited Partnership, is incorporated herein by reference to Exhibit 10.59 to our Form 8-K filed on December 12, 2003.


10.60

Purchase Agreement and Escrow Instructions, dated as of June 9, 2003, by and between Bedford Property Investors, Inc. and Arville & Russell, LLC, is incorporated herein by reference to Exhibit 10.60 to our Form 8-K filed on December 12, 2003.


10.61

Amendment, dated as of August 18, 2003, to the Escrow Instructions, dated as of June 9, 2003, by and between Bedford Property Investors, Inc. and Arville & Russell, LLC, is incorporated herein by reference to Exhibit 10.61 to our Form 8-K filed on December 12, 2003.


10.62

Purchase Agreement and Escrow Instructions, dated as of October 2, 2003, by and between Bedford Property Investors, Inc. and Foothill-Operon I, LLC, is incorporated herein by reference to Exhibit 10.62 to our Form 8-K filed on December 12, 2003.











10.63

Purchase Agreement and Escrow Instructions, dated as of August 29, 2003, by and between Bedford Property Investors, Inc. and CWA Acquisition, LLC, is incorporated herein by reference to Exhibit 10.63 to our Form 8-K filed on December 12, 2003.


10.64

Purchase Agreement and Escrow Instructions, dated as of November 4, 2003, by and between Bedford Property Investors, Inc. and Jackson-Shaw/Northport Limited Partnership, is incorporated herein by reference to Exhibit 10.64 to our Form 8-K filed on December 12, 2003.


10.65

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Laguna Hills Square SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.65 to our Form 10-K for the year ended December 31, 2003.


10.66

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Petaluma SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.66 to our Form 10-K for the year ended December 31, 2003.


10.67

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Philips Business Center SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.67 to our Form 10-K for the year ended December 31, 2003.


10.68

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Phoenix Tech Center SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.68 to our Form 10-K for the year ended December 31, 2003.


10.69

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Rio Salado SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.69 to our Form 10-K for the year ended December 31, 2003.


10.70

Deed of Trust Note, dated as of November 25, 2003, by and between Bedford Village Green SPE, Inc. and John Hancock Life Insurance Company, is incorporated herein by reference to Exhibit 10.70 to our Form 10-K for the year ended December 31, 2003.


10.71

Sixth Amended and Restated Credit Agreement, dated March 31, 2004, by and among Bedford Property Investors, Inc., Bank of America, N.A., as Administrative Agent for the Banks, Swing Line Lender and L/C Issuer, and Union Bank of California, N.A., as Syndication Agent, is incorporated herein by reference to Exhibit 10.71 to our Form 10-Q for the quarter ending March 31, 2004.


10.72

Amended and Restated 2002 Directors' Stock Plan of Bedford Property Investors, Inc., dated May 13, 2004, is incorporated herein by reference to Exhibit 10.72 to our Form 10-Q for the quarter ending June 30, 2004.


10.73

Third Amendment to Employment Agreement, dated as of February 4, 2005, between Bedford Property Investors, Inc. and Peter B. Bedford, is incorporated herein by reference to Exhibit 10.73 to our Form 8-K filed on February 10, 2005.


10.74*

Promissory Note Secured by Deed of Trust, dated December 17, 2004, by and among Bedford Property Investors, Inc., as Holder, and Metzger Mountain Pointe, LLC, Mountain Pointe Office Investments, LLC, and RCH Mountain Pointe, LLC, as Maker.


16.1

Letter from KPMG LLP to the Securities and Exchange Commission re: Change in Certifying Accountant is incorporated herein by reference to Exhibit 16.1 to our Form 8-K filed on March 20, 2003.












21*

List of Subsidiaries.


23.1*

Consent of KPMG LLP.


23.2*

Consent of PricewaterhouseCoopers LLP.


24*

Power of Attorney (see signature page).


31.1*

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2*

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


32.1*

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.


32.2*

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.



* Filed herewith