Securities and Exchange Commission

FORM 10-Q

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

For the quarter ended September 30, 2004

Commission file number 000-30571

ARDEN REALTY LIMITED PARTNERSHIP

11601 Wilshire Boulevard,
4th Floor
Los Angeles, California 90025-1740
(Address and zip code of principal executive offices)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesx No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of November 4, 2004 there were 67,338,124 shares of the registrant’s operating partnership units issued and outstanding.

ARDEN REALTY LIMITED PARTNERSHIP
FORM 10-Q
TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Arden Realty Limited Partnership

See accompanying notes to consolidated financial statements.

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Arden Realty Limited Partnership

See accompanying notes to consolidated financial statements.

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Arden Realty Limited Partnership

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Arden Realty Limited Partnership

1. Description of Business

          The terms “us”, “we” and “our” as used in this report refer to Arden Realty Limited Partnership. The term “Arden Realty” refers to Arden Realty, Inc.

          Organization and Formation of the Company

          We are an operating partnership that owns, manages, leases, develops, renovates and acquires commercial office properties located in Southern California. Arden Realty, a real estate investment trust, or REIT, is our sole general partner and as of September 30, 2004, owned 97.5% of our common operating partnership units, or common OP Units. Arden Realty conducts substantially all of its operations through us and our subsidiaries. Commencing with its taxable year ended December 31, 1996, Arden Realty has operated and qualified as a REIT for federal income tax purposes.

          As of September 30, 2004, our portfolio was comprised of 127 primarily suburban office properties, consisting of 209 buildings with approximately 18.7 million net rentable square feet, excluding one building currently under renovation. As of September 30, 2004, our operating portfolio was 91.1% occupied.

          Arden Realty’s interest in us entitles it to share in our cash distributions, and in our profits and losses in proportion to its percentage ownership. Certain individuals and entities own our remaining common OP Units, including Messrs. Ziman and Coleman, Arden Realty’s Chairman and Chief Executive Officer and President and Chief Operating Officer, respectively, together with other entities and persons. Each limited partner holding common OP Units is entitled to cause us to redeem the limited partner’s common OP Units for cash. We may, however, elect to exchange those common OP Units for shares of Arden Realty’s common stock on a one-for-one basis, subject to certain limitations, instead of paying cash. With each redemption or exchange of common OP Units, Arden Realty’s percentage interest in us will increase.

          As our sole general partner, Arden Realty generally has the exclusive power under our partnership agreement to manage us and conduct our business, subject to limited exceptions. Arden Realty’s board of directors manages our affairs. Our existence as a limited partnership cannot be terminated until 2096 without the approval of a majority of our partners or in connection with the sale of all or substantially all of our assets, a business combination, a judicial decree or the redemption of all the common OP Units held by our limited partners.

          We are a Maryland limited partnership. Arden Realty is a Maryland corporation. Arden Realty’s common stock is listed on the New York Stock Exchange under the symbol “ARI.”

2. Summary of Significant Accounting Policies

          Basis of Presentation

          The accompanying consolidated financial statements include the accounts of Arden Realty and our subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

          We consolidate all entities for which we have controlling financial interest as measured by a majority of the voting interest. For entities in which the controlling financial interest is not clearly indicated by ownership of a majority of the voting interest, we would consolidate those entities that we control by agreement. We would also consolidate all variable interest entities for which we were the primary beneficiary.

          We and Arden Realty currently own 100% of all of our consolidated subsidiaries and we do not have any unconsolidated investments.

          Interim Financial Data

          The accompanying consolidated condensed financial statements should be read in conjunction with our 2003 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The accompanying financial information reflects all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year.

          Reclassifications

          We classified eight properties as held for disposition during the third quarter of 2004. Previously reported amounts in our balance sheet as of December 31, 2003 and operating results for the three and nine months ended September 30, 2003 were reclassified to conform with the classification of these eight properties.

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3. Property Dispositions

          On August 24, 2004, we sold an approximate 69,000 square foot office property located in San Diego County for a gross sales price of approximately $9.3 million. The net proceeds from this disposition were used to reduce the outstanding balance on our Wells Fargo unsecured line of credit.

4. Discontinued Operations

          Below is a summary of our combined results of operations from the properties disposed of or held for disposition during the periods presented. The summary includes the results of operations before gain on sale for the three and nine months ended September 30, 2004 and 2003, respectively (in thousands, except number of properties):

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5. Outstanding Indebtedness

          A summary of our outstanding indebtedness as of September 30, 2004 and December 31, 2003 is as follows:

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6. Interest Rate Swap Agreements

          We have entered into interest rate swap agreements to effectively convert floating rate debt into fixed rate debt, to convert fixed rate debt to floating rate debt and to lock the current Treasury rate in anticipation of future debt issuances. Net amounts received or paid under these agreements are recognized as an adjustment to interest expense when such amounts are incurred or earned. Our objective in using interest rate swap agreements is to manage our exposure to interest rate movements.

          During 2002, such agreements were used to fix the floating interest rate associated with $50 million of the Wells Fargo unsecured line of credit and the entire $125 million balance of the unsecured term loan. Since June of 2003, we also entered into $150 million of forward-starting swaps that effectively fixed the 10-year Treasury rate at an average rate of approximately 4.1% for borrowings that occurred in 2004 to refinance some of our scheduled debt maturities. The forward-starting interest rate swaps were entered into at current market rates and, therefore, had no initial cost. In August 2004, we settled the $150 million forward-starting swaps in conjunction with the issuance of $200 million of unsecured senior notes.

          In October and November of 2003, we also entered into reverse interest rate swap agreements to float $100 million of the fixed interest rate associated with the 7.00% senior unsecured notes due in November of 2007. Under these reverse swaps, we will receive interest at a fixed rate of 7.00% and pay interest at a variable rate averaging the six-month LIBOR rate in arrears plus 3.10%. The interest rate swaps mature at the same time the notes are due. These swaps qualify as fair value hedges for accounting purposes. Net semi-annual interest payments will be recognized as increases or decreases in interest expense. The fair value of the interest rate swaps will be recognized on our balance sheet and the carrying value of the senior unsecured notes will be increased or decreased by an offsetting amount.

          In August and September of 2004, we entered into $186 million of forward-starting swaps that effectively fixed the 10-year Treasury rate at an average rate of approximately 4.45% for borrowings that are anticipated to occur in 2005 to refinance some of our scheduled debt maturities. The forward-starting interest rate swaps were entered into at current market rates and therefore, had no initial cost.

          Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), as amended and interpreted, establishes accounting and reporting standards for derivative instruments and for hedging activities. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

          For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss), outside of earnings and subsequently recognized to earnings when the hedged transaction affects earnings.

          Under SFAS 133, our $175 million in floating-to-fixed swaps and our $186 million in forward-starting swaps outstanding as of September 30, 2004 are classified as cash flow hedges with their fair value of approximately $4.6 million reported in accumulated other comprehensive income on our balance sheet. The estimated fair value of these interest rate swap agreements are dependent on changes in market interest rates and other market factors that affect the value of such agreements. Consequently, the estimated current fair value may significantly change during the term of the agreements. Any estimated gain or loss from these agreements will be amortized into earnings as we recognize the interest expense for the underlying floating-rate loans at the fixed interest rate provided under our agreements in the case of the fixed-to-floating swaps or as part of interest expense for future borrowings in the case of the forward starting swaps. If the underlying debt related to these swaps were to be repaid prior to maturity, we would recognize into interest expense any unamortized gain or loss at the time of such early repayment.

          Under SFAS 133, our $100 million in fixed-to-floating hedges are classified as fair value hedges with their fair value of approximately $500,000 reported in both the unsecured senior notes and other assets line items on our balance sheet. The estimated fair value of these interest rate hedge agreements are dependent on changes in market interest rates and other market factors that affect the value of such agreements. Consequently, the estimated current fair value may significantly change during the term of the agreements. Any estimated gain or loss from these agreements will be amortized into earnings as we recognize the interest expense for the underlying fixed-rate loan at the floating interest rate provided under our agreements in the case of the floating-to-fixed hedges. If the underlying debt related to these hedges were to be repaid prior to maturity, we would recognize into interest expense any unamortized gain or loss at the time of such early repayment.

7. Partners’ Capital

          A common Operating Partnership unit, or common OP Unit, and a share of Arden Realty’s common stock have essentially the same economic characteristics as they share equally in the total net income or loss and distributions. A common OP Unit may be redeemed for cash or, at our election, for shares of Arden Realty’s common stock on a one-for-one basis.

          Our partners’ capital balance included $50 million of 8.625% Series B Cumulative Redeemable Preferred Operating Partnership Units, or Preferred OP Units. These Preferred OP Units were issued in September of 1999. On September 28, 2004, we redeemed the $50 million of Preferred OP Units at par plus accrued unpaid distributions. In conjunction with this redemption, we allocated approximately $1.1 million to the preferred partners relating to the original issuance costs of the Preferred OP Units.

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          On July 21, 2004, we made a distribution of $0.505 per common operating partnership unit. In addition, on September 30, 2004, we made a distribution of approximately $1.1 million to our preferred unit holders.

          During the three and nine months ended September 30, 2004, Arden Realty issued a total of 67,954 and 1,091,258 common shares respectively, relating to exercises of stock options.

          On August 23, 2004, Arden Realty issued a total of 4,500 restricted stock awards to several of our directors. Holders of these shares have full voting rights and will receive any dividend but are prohibited from selling or transferring unvested shares. The fair value on the date of the grant of these restricted shares was $31.66. These restricted shares vest equally over three years.

8. Income (Loss) from Taxable REIT Subsidiary

          Beginning in the first quarter of 2004, we have reclassified for financial presentation purposes the operating results of Nextedge, our taxable REIT subsidiary, or TRS, from general and administrative expenses to interest and other income (loss) in our consolidated statements of income. Nextedge provides energy consulting services to commercial real estate owners. The following is a breakdown of the components of interest and other income (loss) for each of the periods presented (in thousands):

9. Stock Option Plan

          Beginning on January 1, 2003, we adopted the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” under which we began expensing the costs of new stock options granted to employees in 2003 in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.” We used the Black-Scholes option valuation model to estimate the fair value of the stock options granted. During the three months ended September 30, 2004 and September 30, 2003, we expensed approximately $8,000 of stock option based employee compensation costs.

          The following table reflects pro forma net income and earnings per share had we elected to expense all options granted prior to 2003 assuming the fair value method and using the Black-Scholes option valuation model (in thousands, except per share amounts):

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10. Comprehensive Income

          Comprehensive income for the three and nine months ended September 30, 2004 and 2003, respectively, consisted of net income, plus the results of changes in value of cash flow hedges not reflected in the Consolidated Statements of Income. The components of comprehensive income are as follows (in thousands):

11. Commitments and Contingencies

          We are presently subject to various lawsuits, claims and proceedings arising in the ordinary course of business, none of which if determined unfavorably to us is expected to have a material adverse effect on our cash flows, financial condition or results of operations. There were no material changes in our legal proceedings during the three months ended September 30, 2004.

12. Subsequent Events

          On October 4, 2004, we acquired 30700 Russell Ranch Road, a 138,000 square foot, 100% leased office property located in the Westlake Village submarket of Los Angeles County for approximately $32.3 million.

          On October 11, 2004, we acquired Warner Corporate Center, a 253,000 square foot, 97.8% leased office property located in the Woodland Hills submarket of Los Angeles County for approximately $64.5 million.

          On October 11, 2004, Arden Realty issued a total of 85,500 restricted stock awards to several key executive officers and several of our directors. Holders of these shares have full voting rights and will receive any dividend but are prohibited from selling or transferring unvested shares. The fair value on the date of the grant of these restricted shares was $32.66. These restricted shares vest equally over three years.

          In November, 2004, we entered into $70 million of forward-starting swaps that effectively fixed the 10-year Treasury rate at an average of approximately 4.19% for borrowings that are anticipated to occur in 2005 to refinance some of our scheduled debt maturities.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

          The following discussion relates to our unaudited consolidated financial statements included herein, which should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Form 10-Q and in our 2003 Annual Report on Form 10-K.

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

          We are an operating partnership that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. We are managed by 7 senior executive officers who have experience in the real estate industry ranging from 14 to 35 years and who collectively have an average of 19 years experience. We perform all property and development management, accounting, finance and acquisition, disposition activities and a majority of our leasing transactions with our staff of approximately 300 employees.

          As of September 30, 2004, Arden Realty, our general partner, was Southern California’s largest publicly traded office landlord as measured by total net rentable square feet owned. As of that date, our portfolio was comprised of 127 primarily suburban office properties, consisting of 209 buildings with approximately 18.7 million net rentable square feet excluding one building currently under renovation. As of September 30, 2004 and December 31, 2003, our operating portfolio was 91.1% and 90.4% occupied, respectively.

Business Strategy

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

          We continue to seek to build a tenant base of smaller, diverse companies that limits our exposure to any single tenant or industry. Smaller tenants typically translate into shorter-term leases. Shorter-term leases provide greater opportunity for renewing a substantial portion of our portfolio at higher rental rates each year during strong markets, but create challenges to maintain occupancy and rates when markets weaken. The average term of our leases is 4 to 5 years, resulting in approximately 15% to 20% of our leases expiring annually.

          We closely monitor our operating expenses and capital expenditures to sustain or improve operating margins and dividend coverage. We may defer discretionary operating expenses and capital expenditures until market conditions improve.

Impact of Economic Climate

          Our short and long-term liquidity, ability to refinance existing indebtedness, ability to issue long-term debt and equity securities at favorable rates and our dividend policy are significantly impacted by the operating results of our properties, all of which are located in Southern California. Our ability to lease available space and increase rates when leases expire is largely dependent on the demand for office space in the markets where our properties are located.

          The timing and extent of future changes in the national and local economy and their effects on our properties and results of operations are difficult to accurately predict. It is likely, however, that if national and regional economic conditions deteriorate they would directly affect our operating results in the future, making it more difficult for us to lease and renew available space, to increase or maintain rental rates as leases expire and to collect amounts due from our tenants. For additional information, see “Risk Factors – Further declines in the economic activity of Southern California will adversely affect our operating results,” “– The financial condition and solvency of our tenants may reduce our cash flow,” and “– Rising energy costs and power outages in California may have an adverse effect on our operations and revenue,” in our 2003 Annual Report on Form 10-K.

Critical Accounting Policies

          Refer to our 2003 Annual Report on Form 10-K for a discussion of our critical accounting policies, which include, among other things, revenue recognition, allowance for doubtful accounts and depreciation. There have been no material changes to these policies in 2004.

Off-Balance Sheet Arrangements

          As of September 30, 2004, we do not have any off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have a current or future material effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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RESULTS OF OPERATIONS

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

Comparison of the three months ended September 30, 2004 to the three months ended September 30, 2003
(in thousands, except number of properties and percentages):

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and constraints of the owner. The second factor is commonly eliminated because it may not accurately represent the actual change in value in real estate properties that results from use or changes in market conditions. We believe that eliminating these costs from net income gives investors an additional measure of operating performance that, when used as an adjunct to net income computed in accordance with GAAP, can be a useful measure of our operating results.

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

     Property Operating Results is a non-GAAP measure of performance. Property Operating Results is not a substitute for net income as computed in accordance with GAAP. It excludes significant expense components such as depreciation and amortization expense and financing costs. This measure should be analyzed in conjunction with net income and cash flow from operating activities as computed in accordance with GAAP. Other companies may use different methods for calculating Property Operating Results or similarly entitled measures and, accordingly, our Property Operating Results may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

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

(2)

Consists of non-development properties classified as part of continuing operations and owned for the entirety of the periods presented.

VARIANCES FOR RESULTS OF OPERATIONS

          Our Property Operating Results for the three months ended September 30, 2004 compared to the same period in 2003 were primarily affected by our acquisitions, dispositions and development activities since June 30, 2003.

          As a result of these changes within our portfolio of properties since June 30, 2003, we do not believe the Property Operating Results presented above are comparable from period to period. Therefore, in the table above, we have also presented the Property Operating Results for our same store portfolio.

Revenue from Rental Operations

          Revenue from rental operations increased approximately $3.2 million, or 3%, for the three months ended September 30, 2004 compared to the same period in 2003. This increase was primarily due to our December 2003 acquisition of a 101,000 square foot office property in San Diego County, revenues from our 6100 Center Drive development property in Los Angeles County which was placed in service during the second quarter of 2004 and from overall occupancy gains and scheduled rent increases in our properties. Revenue from rental operations for the same store portfolio increased approximately $0.3 million for the three months ended September 30, 2004 compared to the same period in 2003. This increase was primarily due to a 1.3% increase in average occupancy in 2004.

Property Expenses

          Property expenses increased approximately $1.2 million, or 4%, for the three months ended September 30, 2004 compared to the same period in 2003. This increase was primarily due to a property acquired in December 2003 and the placement in service of our 6100 Center Drive development property in the second quarter of 2004 and overall occupancy gains within our portfolio. Property expenses for the same store portfolio increased approximately $0.4 million, or 1%, for the three months ended September 30, 2004 compared to the same period in 2003, primarily due to higher repairs and maintenance as a result of higher costs for contracted services and the timing of certain projects.

General and Administrative

          General and administrative expenses as a percentage of total revenues were approximately 4.5% for the three months ended September 30, 2004 compared to approximately 3.7% for the same period in 2003. The approximate $0.8 million increase in general and administrative expenses was primarily related to higher Section 404 implementation costs in 2004.

Interest Expense

          Interest expense decreased approximately $2.4 million, or 10%, for the three months ended September 30, 2004 compared to the same period in 2003. This decrease was primarily due to a lower cost of debt in 2004 due to the permanent refinancing of a $175 million,

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7.52% mortgage financing loan earlier this year with disposition proceeds and proceeds from the issuance of $200 million, 5.20% (5.45% effective rate) unsecured senior notes in August 2004.

Depreciation and Amortization

          Depreciation and amortization expense increased by approximately $1.7 million, or 6%, for the three months ended September 30, 2004 compared to the same period in 2003, primarily due to depreciation related to a property acquired in December 2003 and depreciation related to capital expenditures, tenant improvements and leasing commissions placed in service subsequent to the second quarter of 2003.

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Comparison of the nine months ended September 30, 2004 to the nine months ended September 30, 2003
(in thousands, except number of properties and percentages):

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

Property Operating Results is a non-GAAP measure of performance. Property Operating Results is not a substitute for net income as computed in accordance with GAAP. It excludes significant expense components such as depreciation and amortization expense and financing costs. This measure should be analyzed in conjunction with net income and cash flow from operating activities as computed in accordance with GAAP. Other companies may use different methods for calculating Property Operating Results or similarly entitled measures and, accordingly, our Property Operating Results may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

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

(2)

Consists of non-development properties classified as part of continuing operations and owned for the entirety of the periods presented.

VARIANCES FOR RESULTS OF OPERATIONS

     Our Property Operating Results for the nine months ended September 30, 2004 compared to the same period in 2003 were primarily affected by our acquisitions, dispositions and development activities since January 1, 2003.

     As a result of these changes within our portfolio of properties since January 1, 2003, we do not believe the Property Operating Results presented above are comparable from period to period. Therefore, in the table above, we have also presented the Property Operating Results for our same property portfolio.

Revenue from Rental Operations

     Revenue from rental operations increased approximately $10.2 million, or 3%, for the nine months ended September 30, 2004 compared to the same period in 2003. This increase was primarily due to our December 2003 acquisition of a 101,000 square foot office property in San Diego County, revenues from our 6100 Center Drive development property which was placed in service during the second quarter of 2004 and from overall occupancy gains and scheduled rent increases in our properties.

     Revenue from rental operations for the same store portfolio increased approximately $3.0 million, or 1%, for the nine months ended September 30, 2004 compared to the same period in 2003. This increase was primarily due to an approximate $2.5 million increase in cash rents, an approximate $2.5 million increase in other rental operations and an approximate $1.4 million increase in parking income, all of which were partially offset by an approximate $3.0 million decrease in tenant reimbursements, and an approximate $0.4 million decrease in straight-line rents. The increase in cash rents was primarily related to scheduled rent increases in existing leases and by the 0.7% increase in average occupancy for these properties. The increase in other rental operations was primarily related to higher lease termination fees in 2004 and lower reserves for tenant receivables as a result of a reduced level of defaults in 2004. The increase in parking income is primarily due to an increase in occupancy in 2004 and higher special event parking in 2004. The decrease in tenant reimbursements was primarily due to resetting of base years for new leases in 2004. The decrease in straight-line rents was primarily due to older leases turning over throughout our portfolio.

Property Expenses

     Property expenses increased approximately $5.4 million, or 6%, for the nine months ended September 30, 2004 compared to the same period in 2003. This increase was partially due to a property acquired in December 2003 and placing our 6100 Center Drive development property in service in the second quarter of 2004 and overall occupancy gains within our portfolio.

     Property expenses for the same store portfolio increased approximately $3.3 million, or 3%, for the nine months ended September 30, 2004 compared to the same period in 2003. This increase was primarily due to an approximate $2.7 million increase in repairs and maintenance expense and an approximate $1.7 million increase in real estate taxes, all of which were partially offset by an approximate $1.1 million decrease in utility expenses. Repairs and maintenance expense increased primarily due to higher costs for contracted services and the timing of certain projects. Real estate taxes increased primarily due to the timing of final reassessments and property tax refunds received in 2003 for certain properties as well as new property tax measures implemented in Los Angeles County. Utility expenses decreased primarily due to lower than anticipated usage in 2004, partially offset by an increase in occupancy.

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General and Administrative

     General and administrative expenses as a percentage of total revenues were approximately 4.5% for the nine months ended September 30, 2004 compared to approximately 3.3% for the same period in 2003. The approximate $3.4 million increase in general and administrative expenses was primarily related to higher personnel costs associated with annual merit increases and non-cash compensation expense associated with restricted stock grants issued in 2004 and 2003 and higher Section 404 implementation costs in 2004.

Interest Expense

     Interest expense decreased approximately $4.2 million, or 6%, for the nine months ended September 30, 2004 compared to the same period in 2003. This decrease was primarily due to a lower cost of debt in 2004 due to the permanent refinancing of a $175 million, 7.52% mortgage financing loan earlier this year with disposition proceeds and proceeds from the issuance of $200 million, 5.20% (5.45% effective rate) unsecured senior notes in August 2004, partially offset by lower capitalized interest in 2004. Capitalized interest was lower in 2004 as we stopped capitalizing interest on our 6100 Center Drive development property in May 2003.

Depreciation and Amortization

     Depreciation and amortization expense increased by approximately $6.1 million, or 7%, for the nine months ended September 30, 2004 compared to the same period in 2003, primarily due to depreciation related to a property acquired in December 2003 and depreciation related to capital expenditures, tenant improvements and leasing commissions placed in service subsequent to the third quarter of 2003.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

     Cash provided by operating activities decreased by approximately $3.7 million to $137.8 million for the nine months ended September 30, 2004 compared to $141.5 million for the same period in 2003. This decrease was primarily due to the loss of operating cash flows from eleven properties sold since the beginning of 2003 as part of our capital recycling program, partially offset by the increased cash flows from a property acquired in the fourth quarter of 2003 and our 6100 Center Drive development property, which was placed in service during the second quarter of 2004.

     Cash provided by investing activities decreased by approximately $9.9 million to $7.0 million for the nine months ended September 30, 2004 compared to $16.9 million for the same period in 2003. This decrease was primarily due to an increased level of tenant improvement and leasing commission expenditures attributable to our higher level of occupancy in 2004.

     Cash used in financing activities decreased by approximately $10.2 million to $134.0 million for the nine months ended September 30, 2004 compared to $144.2 million for the same period in 2003. This decrease was primarily due to the release of restricted cash associated with the payoff of our $175 million loan in 2004 and lower net borrowings in 2004.

Cash Balances, Available Borrowings and Capital Resources

     As of September 30, 2004, we had approximately $31.4 million in cash and cash equivalents, including $15.8 million in restricted cash. Restricted cash consisted of $9.7 million in interest bearing cash deposits required by four of our mortgage loans payable and $6.1 million in cash impound accounts for real estate taxes and insurance as required by several of our mortgage loans payable.

     We have an unsecured line of credit with a total commitment of $20 million from City National Bank. This line of credit accrues interest at LIBOR + 1.00% or the City National Bank Prime Rate – 1.875% and is scheduled to mature in August 2005. On October 4, 2004, we amended this line of credit to reduce the interest rate to LIBOR + 0.90% or the City National Bank Prime Rate – 1.975%. As of September 30, 2004, there was $10 million outstanding on this line of credit and $10 million was available for additional borrowings.

     We also have an unsecured line of credit with a group of banks led by Wells Fargo. In June 2004, this line of credit was amended to reduce the interest rates by approximately 10 to 15 basis points depending on our secured debt rating and revise certain covenants. As a result of this amendment, this line of credit provides for borrowings up to $310 million with an option to increase the amount to $350 million and bears interest at a rate ranging between LIBOR + 0.65% and LIBOR + 1.15% (including an annual facility fee ranging from 0.15% to 0.40% based on the aggregate amount of the line of credit) depending on our unsecured debt rating. This line of credit matures in April 2006. In addition, as long as we maintain an unsecured debt rating of BBB-/Baa3 or better, we may exercise a competitive bid option, whereby the lenders may bid on the interest rate to be charged for up to $150 million of the unsecured line of credit. We also have the option to convert the interest rate on this line of credit to the higher of Wells Fargo’s prime rate or the Federal Funds rate plus 0.5%. As of September 30, 2004, $126.5 million was outstanding on this line of credit and $183.5 million was available for additional borrowings.

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     From time to time we enter into interest rate swaps, caps, floors and other interest rate exchange contracts to effectively manage our exposure to changes in interest rates.

     We also have a capital recycling program under which we sell existing properties and reinvest the proceeds into new acquisitions that we believe will yield a higher long-term return on invested capital. In August 2004 we sold one property for approximately $9.3 million and used the proceeds to pay down our unsecured line of credit. In October 2004 we acquired two properties for an aggregate of approximately $96.8 million.

     We expect to continue meeting our short-term liquidity and capital requirements generally through net cash provided by operating activities and proceeds from our unsecured lines of credit. We believe the foregoing sources of liquidity will be sufficient to fund our short-term liquidity needs over the next twelve months, including recurring non-revenue enhancing capital expenditures, tenant improvements and leasing commissions.

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

Debt Summary

     Following is a summary of scheduled principal payments for our total debt outstanding as of September 30, 2004 (in thousands):

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     Following is certain other information related to our outstanding indebtedness as of September 30, 2004:

Unsecured and Secured Debt:

Floating and Fixed Rate Debt:

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