SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2005

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

For the transition period from ___to ___

ARDEN REALTY, INC.

(Exact name of registrant as specified in its charter)

Maryland		95-4578533
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

Title of each class		Name of each exchange on which registered
Common Stock, $0.01 par value		New York Stock Exchange
Preferred Stock Purchase Rights		New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

Indicate by checkmark 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. þ Yes o 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 the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

The aggregate market value of the shares of common stock held by non-affiliates was approximately $2.4 billion based on the closing price on the New York Stock Exchange for such shares on June 30, 2005.

The number of the Registrant’s shares of common stock outstanding was 67,331,215 as of March 15, 2006.

 

 

ARDEN REALTY, INC.
TABLE OF CONTENTS

ITEM NO.				PAGE NO.
		PART I
1.		Business			3
1A.		Risk Factors			7
1B.		Unresolved Staff Comments			15
2.		Properties			16
3.		Legal Proceedings			28
4.		Submission of Matters to a Vote of Security Holders			28
		PART II
5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			29
6.		Selected Financial Data			30
7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
7A.		Quantitative and Qualitative Disclosure about Market Risk			49
8.		Financial Statements and Supplementary Data			50
9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			51
9A.		Controls and Procedures			51
9B.		Other Information			51
		PART III
10.		Directors and Executive Officers of the Registrant			52
11.		Executive Compensation			55
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			60
13.		Certain Relationships and Related Transactions			63
14.		Principal Accountant Fees and Services			63
		PART IV
15.		Exhibits and Financial Statement Schedules			64
		Signatures			72
Exhibit 10.64
Exhibit 12.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

Forward-Looking Statements

     This Form 10-K, including the documents incorporated herein by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or 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 Securities and Exchange Commission, or 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 or incorporated in this Form 10-K generally. We caution you, however, that this list of factors may not be exhaustive, particularly with respect to future filings.

ITEM 1. BUSINESS

(a) GENERAL

     The terms “Arden Realty”, “us”, “we” and “our” as used in this report refer to Arden Realty, Inc. We were incorporated in Maryland in May 1996 and completed our initial public offering in October 1996. Commencing with our taxable year ended December 31, 1996, we have operated and qualified as a real estate investment trust, or REIT, for federal income tax purposes. We are a self-administered and self-managed REIT that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. We are the sole general partner of Arden Realty Limited Partnership, or the Operating Partnership, and as of December 31, 2005, we owned approximately 97.5% of the Operating Partnership’s common partnership units. We conduct substantially all of our operations through the Operating Partnership and its consolidated subsidiaries.

(b) INDUSTRY SEGMENTS

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

(c) DESCRIPTION OF BUSINESS

     We are a full-service real estate organization managed by 6 senior executive officers who have experience in the real estate industry ranging from 15 to 36 years and who collectively have an average of 21 years of experience. We perform all property management, construction management, accounting, finance and acquisition and disposition activities and a majority of our leasing transactions for our portfolio with our staff of approximately 300 employees.

     As of December 31, 2005, we were Southern California’s largest publicly traded office landlord as measured by total net rentable square feet owned. As of December 31, 2005, our portfolio of primarily suburban office properties consisted of 116 properties and 192 buildings containing approximately 18.5 million net rentable square feet and our operating portfolio was 91.9% occupied.

Proposed Merger

     On December 21, 2005, we, along with Arden Realty Limited Partnership, our operating partnership, and Atlas Partnership Merger Sub, Inc., referred to throughout as the partnership merger sub, a wholly-owned subsidiary of ours, entered into a definitive Agreement and Plan of Merger, referred to throughout as the merger agreement, with General Electric Capital Corporation, also referred to as GECC, Atlas Merger Sub, Inc., referred to as REIT merger sub, a wholly-owned subsidiary of GECC, Trizec Properties, Inc., and Trizec Holdings Operating LLC. Pursuant to the merger agreement, GECC will acquire us and our subsidiaries through a series of transactions including the merger of our company into the REIT Merger Sub, referred to as the REIT merger, as well as a merger of the Partnership Merger Sub into our operating partnership, referred to as the partnership merger.

     In the REIT merger, we will be merged with and into REIT merger sub, with REIT merger sub surviving, and shares of our common stock converted into the right to receive merger consideration of $45.25, plus an amount equal to a prorated portion of our normal $0.505 quarterly dividend. In the partnership merger, partnership merger sub will be merged with and into our operating partnership, and holders of our OP units, subject to certain eligibility requirements, may elect to either participate in the redemption and exchange of OP units for class B units of Trizec Holdings Operating LLC, plus an amount equal to a prorated portion of our $0.505 quarterly distribution, or have their OP units converted into the right to receive merger consideration of $45.25, plus an amount equal to a prorated portion of our $0.505 quarterly distribution.

     In connection with the mergers, we will sell to Trizec Operating Company a portfolio of certain of our properties, comprised of 13 office properties totaling 4.1 million square feet, certain undeveloped land parcels and other assets. Following the

consummation of the transactions, GECC or its affiliates will own or control the entity or entities which will succeed to the ownership of the remaining properties owned by us.

     Our board has unanimously approved the merger agreement and has recommended it for approval by our common stockholders. The parties expect to close the transaction in the second quarter of 2006. The closing of the merger is subject to, among other things, a number of customary conditions, including the approval by the affirmative vote of two-thirds of the holders of shares of our common stock. The transaction is not subject to any financing condition.

  Portfolio Management

     We perform all portfolio management activities, including on-site property management, management of all lease negotiations, construction management of tenant improvements or tenant build-outs, property renovations and capital expenditures for our portfolio. We directly manage these activities from approximately 48 management offices located throughout our portfolio. The activities of these management offices are supervised by four regional offices with oversight by our corporate office to ensure consistent application of our operating policies and procedures. Each regional office is strategically located within the Southern California submarkets where our properties are located and is managed by a regional First Vice President who is responsible for supervising the day-to-day activities of our management offices. Each regional office is staffed with leasing, property management, building engineering, construction and information systems specialists, referred to as our Regional Service Teams. By maintaining a regionally focused organizational structure led by seasoned managers, we are able to quickly respond to our tenants’ needs and market opportunities.

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

     We currently lease approximately 59% of our portfolio’s net rentable space using our in-house staff. We employ outside brokers who are monitored by our Regional Service Teams for the remainder of our net rentable space. Our in-house leasing program allows us to closely monitor rental rates and lease terms for new and renewal leases and reduce third-party leasing commissions.

  Business Strategies

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

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

	•		using integrated decision making to provide proactive solutions to the space needs of tenants in the markets where we have extensive real estate expertise and relationships;
	•		emphasizing quality service, tenant satisfaction and retention; · employing intensive property marketing and leasing programs; and
	•		implementing cost control management techniques and systems that capitalize on economies of scale and concentration arising from the size and geographic focus of our portfolio and our technical expertise in reducing energy consumption expenses.

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

     Integrated Decision Making

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

     Quality Service and Tenant Satisfaction

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

     Proactive Marketing and Leasing

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

     Cost Control and Operating Efficiencies

     The size and geographic focus of our portfolio provides us with the opportunity to enhance portfolio value by controlling operating costs. We seek to capitalize on the economies of scale and concentration which result from the geographic focus of our portfolio through the ownership and management of multiple properties within particular submarkets compared to the maintenance of standardized processes and systems for cost control at each of our properties. These cost controls and operating efficiencies allowed us to achieve a 66.4% ratio of property operating results to total property revenues in 2005.

  Operating Strategies

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

	•		the broad diversification and balance of the Southern California economy and our tenant base minimizes our dependence on any one industry segment or limited group of tenants;
	•		the relative resiliency of the Southern California real estate market, as measured by lower vacancy rates compared to the national average and flat or increasing rental rates in our key submarkets compared to the average decreases in rates reported for the nation since the beginning of the office real estate sector downturn in 2001; and
	•		the limited construction of new office properties in the Southern California region due to substantial building construction limitations and a minimal amount of developable land in many key submarkets.

     Internal Operating Strategy

     Our internal operating strategy seeks growth by:

	•		stabilizing occupancy throughout our portfolio and by increasing rental rates, as market conditions permit;
	•		maintaining or increasing the retention rate of expiring leases;
	•		capitalizing on economies of scale and concentration due to the size and geographic focus of our portfolio;
	•		controlling operating expenses through active cost control management techniques and systems; and
	•		sourcing new and innovative revenue streams while providing high quality services to our tenants.
			Stabilizing Occupancy and Increasing Rental Rates

     Various published reports noted that Southern California achieved approximately 10.5 million square feet of positive net absorption in 2005 with average rental rates increasing approximately 6.5%. Our in-house leasing teams, working with outside leasing brokers, continuously monitor each submarket to identify prospective tenants who are in need of new or additional space and to obtain the most favorable lease terms. We also strive to achieve growth in rental revenues by negotiating annual or mid-term increases in rental rates in a majority of our leases.

        Retaining Existing Tenants

     We also seek to retain our existing tenants when leases expire. Retention of existing tenants reduces the costs of lease rollover by eliminating the down-time required to find a replacement tenant and reducing build-out costs required for new tenants. We believe that we have been successful in attracting and retaining a diverse tenant base by actively managing our properties with an emphasis on tenant satisfaction and retention. During 2005, we retained approximately 67% of our leases prior to lease expiration.

        Capitalizing on Economies of Scale and Concentration

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

        Cost Control Management Techniques and Systems

     We strive to control our operating expenses through active management at all of our properties. We continuously monitor the operating performance of our properties and employ bulk or competitive purchasing techniques, energy-enhancing and expense recovery technologies when appropriate. These system enhancements include:

	•		lighting retrofits;
	•		replacement of inefficient heating, ventilation and air conditioning systems;
	•		computer-driven energy management systems that monitor and react to the climatic requirements of individual properties;
	•		automated and roving security systems that allow us to provide security services to our tenants at a lower cost;
	•		online competitive bid purchasing of supplies, building materials and construction services;
	•		enhancement of billing systems, which enables us to more efficiently recover operating expenses from our tenants; and
	•		on-going preventive maintenance programs to operate our building systems efficiently, thereby reducing operating costs.
			Sourcing Additional Revenue While Providing High Quality Services to Tenants

     We have invested in energy enhancement programs within our portfolio with the aim of reducing energy consumption, enhancing efficiency and lowering operating costs. We have also participated in the Environmental Protection Agency’s, or the EPA, Energy Star Program. This program involves top commercial real estate landlords throughout the United States and rigorous bench-marking procedures that track individual building energy efficiencies. Currently, of the 881 total Energy Star designated office buildings awarded nationally during 2005, 291were awarded in California; of those, we had 58 EPA Energy Star Certified buildings in our portfolio.

     We have a taxable REIT subsidiary, next>edge, that markets our expertise in energy solutions and facilities management. next>edge now assists companies outside of our portfolio in increasing their energy efficiency and reducing costs by employing the latest technologies and the most energy-efficient operational strategies developed to date. These technologies include lighting, heating, ventilation and air conditioning retrofits, energy management system installations, and on-site power generation such as cogeneration projects and solar photovoltaic systems.

     External Operating Strategy

     We believe in the diversity and balance of the Southern California economy and the commercial real estate market. We have a management team that has extensive experience and knowledge in this market which we believe provides us with a competitive advantage in identifying and capitalizing on selective development, renovation, acquisition and disposition opportunities.

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

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

	•		a minimal amount of developable land; and
	•		significant barriers to entry due to constraints on new development, including strict entitlement processes, height and density restrictions or other governmental requirements.

  Competition

     We compete with other owners of office properties to attract tenants to our properties, to acquire new properties and to obtain suitable land for development. Ownership of competing properties is currently diversified among many different types, from publicly traded companies and institutional investors, including other REITs, to small enterprises and individual owners. No one owner or group of owners currently dominate or significantly influence the markets in which we operate. See “Risk Factors — Competition affects occupancy levels, rents and the cost of land which could adversely affect our revenues.’’

  California Electric Utility Deregulation

     Problems associated with deregulation of the electric industry in California have resulted in significantly higher costs in some areas over the past few seasons. All of our properties are currently located in areas served by utilities that either produce their own electricity, or that have procured long-term, fixed-rate contracts with commercial electrical providers.

     Approximately 22% of our properties and 16% of the total rentable square footage of our portfolio are subject to leases that require our tenants to pay all utility costs and the remainder provide that our tenants will reimburse us for utility costs in excess of a base year amount. See “Risk Factors — Rising energy costs and power outages in California may have an adverse effect on our operations and revenue.’’

  Employees

     As of December 31, 2005, we had approximately 300 full-time employees that perform all of our property and construction management, accounting, finance, acquisition and disposition activities and a majority of our leasing transactions.

  Available Information

     We file with the SEC our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K (and all amendments to those reports), proxy statements and registration statements. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may also obtain public information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site at www.sec.gov that contains reports, proxy and information regarding registrants, including us, that file electronically. This annual report on Form 10-K and other periodic and current reports, and amendments to those reports, filed or furnished with the SEC, are also available, free of charge, by viewing the SEC filings available in the Investor Information section of our website at www.ardenrealty.com as soon as reasonably practicable after we file or furnish them with the SEC.

(d) FOREIGN OPERATIONS

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

ITEM 1A. RISK FACTORS

     In addition to the other information contained or incorporated by reference in this Form 10-K, readers should carefully consider the following risk factors.

Risks Related to the Proposed Merger

     On December 21, 2005, we, entered into a merger agreement with GECC and Trizec pursuant to which GECC will acquire us through the process set forth under the heading “Proposed Merger” in Item 1 above. In connection with the proposed merger, we have filed a definitive proxy statement with the SEC. The proxy statement contains important information about us, the proposed merger and other related matters. We urge all of our stockholders to read the proxy statement. In relation to the proposed merger, we are subject to certain risks including, but not limited to, those set forth below.

  Failure to complete the merger could negatively impact our stock price and our future business and financial results.

     Completion of the proposed merger is subject to the satisfaction or waiver of various conditions, including the receipt of approval from our stockholders, receipt of various approvals and authorizations, and the absence of any order, injunction or decree preventing the completion of the proposed merger. There is no assurance that all of the various conditions will be satisfied or waived.

If the proposed merger is not completed for any reason, we will be subject to several risks, including the following:

	•		being required, under certain circumstances, including if we sign a definitive agreement with respect to a superior proposal from another potential buyer, to pay a termination fee of $100.0 million;
	•		being required, under certain circumstances, including if we breach the merger agreement, to reimburse GECC for up to $10.0 million of its costs and expenses in connection with the merger agreement;
	•		having incurred certain costs relating to the proposed merger that are payable whether or not the merger is completed, including legal, accounting, financial advisor and printing fees; and
	•		having had the focus of management directed toward the proposed merger and integration planning instead of on our core business and other opportunities that could have been beneficial to us.

     In addition, we would not realize any of the expected benefits of having completed the proposed merger. If the proposed merger is not completed, we cannot assure our stockholders that these risks will not materialize or materially adversely affect our business, financial results, financial condition and stock price.

  Provisions of the merger agreement may deter alternative business combinations and could negatively impact our stock price if the merger agreement is terminated in certain circumstances.

     Restrictions in the merger agreement on solicitation generally prohibit us from soliciting any acquisition proposal or offer for a merger or business combination with any other party, including a proposal that might be advantageous to our stockholders when compared to the terms and conditions of the proposed merger. If the merger is not completed, we may not be able to conclude another merger, sale or combination on as favorable terms, in a timely manner, or at all. If the merger agreement is terminated, we, in certain specified circumstances, may be required to pay a termination fee of up to $100.0 million to GECC. In addition, under certain circumstances, we may be required to pay GECC an expense fee of $10.0 million. These provisions may deter third parties from proposing or pursuing alternative business combinations that might result in greater value to our stockholders than the merger.

  Our stock price and businesses may be adversely affected if the merger is not completed.

     If the merger is not completed, the trading price of our common stock may decline, to the extent that the current market prices reflect a market assumption that the merger will be completed. In addition, our businesses and operations may be harmed to the extent that tenants, vendors and others believe that we cannot effectively operate in the marketplace on a stand-alone basis, or there is tenant or employee uncertainty surrounding the future direction of the strategy of our company on a stand-alone basis.

  Uncertainty regarding the merger may cause tenants, vendors and others to delay or defer decisions concerning their business with our company, which may harm our results of operations going forward if the merger is not completed.

     Because the merger is subject to several closing conditions, including the approval of the merger by our stockholders, uncertainty exists regarding the completion of the merger. This uncertainty may cause tenants, vendors and others to delay or defer decisions concerning their business with our company, which could negatively affect our business and results of operations.

  If the planned merger were not completed, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including the following:

	•		activities relating to the merger and related uncertainties may lead to a loss of revenue that we may not be able to regain if the merger does not occur;
	•		the market price of our common stock could decline following an announcement that the merger has been abandoned, to the extent that the current market price reflects a market assumption that the merger will be completed;
	•		we would remain liable for our costs related to the merger, such as legal fees and a portion of the investment banking fees;
	•		we may not be able to continue our present level of operations and therefore would have to scale back our present level of business and consider additional reductions; and
	•		we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures.

Real Estate Investment Risks

  An inability to retain tenants or rent space upon lease expirations may adversely affect our revenues and our ability to service our debt.

     Through 2010, 2,667 leases, including month-to-month leases, comprising approximately 75% of our leased net rentable square footage and approximately 72% of our annualized base rents at December 31, 2005 are scheduled to expire as follows:

						Percentage of				Percentage of
		Number of				Aggregate Portfolio				Aggregate Portfolio
Year		Leases Expiring				Leased Square Feet				Annualized Base Rent
Month-to-Month			135				2.1	%			1.8	%
2006			593				14.0	%			13.4	%
2007			576				14.3	%			13.4	%
2008			593				17.4	%			17.2	%
2009			395				13.1	%			12.6	%
2010			375				14.3	%			13.9	%

     If we are unable to promptly renew or relet leases for all or a substantial portion of this space, or if the rent upon renewal or reletting are significantly lower than expected, our cash flow and business could be adversely affected which would limit our ability to service our debt.

     Lack of non-farm job growth in Southern California or a deterioration of the local and national economy will adversely affect our operating results.

     All of our properties are located in Southern California. In 2005, the Southern California economy experienced a 1.3% increase in job growth representing approximately 86,000 non-farm jobs. We believe non-farm job growth to be a leading indicator of office demand for the region. During 2006, a total of approximately 2.8 million square feet of occupied space, representing approximately 16.0% of our total net rentable space, including month-to-month leases, will expire. Negative non-farm job growth in our submarkets or a deterioration of the local and/or national economy may result in a decline in occupancy and rental rates and may cause tenant concessions to increase and would most likely negatively affect our operating performance and property values.

  Competition affects occupancy levels, rents and cost of land which could adversely affect our revenues.

     Many office properties compete with our properties in attracting tenants to lease space. Some of the competing properties may be newer, better located or owned by parties better capitalized than we are. Although ownership of these competing properties is currently diversified among many different types of owners, from publicly traded companies and institutional investors to small enterprises and individual owners, and no one or group of owners currently dominate or significantly influence the market, consolidation of owners could create efficiencies and marketing advantages for the consolidated group that could adversely affect us. These competitive advantages, the number of competitors and the number of competitive commercial properties in a particular area could have a material adverse effect on the rents we can charge, our ability to lease space in our existing properties or at newly acquired or developed properties and the prices we have to pay for developable land.

  The financial condition and solvency of our tenants may reduce our cash flow.

     Tenants may experience a downturn in their business which may cause them to miss rental payments when due or to seek the protection of bankruptcy laws, which could result in rejection and termination of their leases or a delay in recovering possession of their premises. Although we have not experienced material losses from tenant bankruptcies, we cannot assure you that tenants will not file for bankruptcy protection in the future or, if any tenants file, that they will affirm their leases and continue to make rental payments in a timely manner.

  Because real estate investments are illiquid, we may not be able to sell properties when appropriate.

     Equity real estate investments are relatively illiquid. That illiquidity may tend to limit our ability to sell properties promptly in response to changes in economic or other conditions. In addition, the Internal Revenue Code of 1986, as amended, may under specified circumstances impose a 100% prohibited transaction tax on the profits derived from our sale of properties held for fewer than four years, which could affect our ability to sell our properties.

  Rising energy costs and power outages in California may have an adverse effect on our operations and revenue.

     Problems associated with deregulation of the electric industry in California have resulted in significantly higher costs in some areas. All of our properties are currently located in areas served by utilities that either produce their own electricity, or that have procured long-term, fixed rate contracts with commercial electrical providers. While we have no information suggesting that any

future service interruptions are expected, we believe that higher utility costs may continue as price increases are allowed by the California Public Utility Commission or other regulatory agencies.

     Approximately 22% of our buildings and 16% of the total rentable square footage of our portfolio are subject to leases that require our tenants to pay all utility costs. The remainder of our leases provide that tenants will reimburse us for utility costs in excess of a base year amount.

     Although we have not experienced any material losses resulting from electric deregulation, it is possible that some or all of our tenants will not fulfill their lease obligations and reimburse us for their share of any significant electric rate increases and that we will not be able to retain or replace our tenants if energy problems in California continue.

  Increases in taxes and regulatory compliance costs may reduce our revenue.

     Except for our triple net leases, we may not be able to pass all real estate tax increases through to some or all of our tenants. Therefore, any tax increases may adversely affect our cash flow and our ability to pay or refinance our debt obligations. Our properties are also subject to various federal, California and local regulatory requirements, such as requirements of the Americans with Disabilities Act, and California and local fire and life safety requirements. 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 these regulatory requirements. We cannot assure you, however, that these requirements will not be changed or that new requirements will not be imposed that would require significant unanticipated expenditures by us and could have an adverse effect on our cash flow, the amounts available for distributions and on our business.

  We may acquire properties through partnerships or joint ventures with third parties that could result in financial dependency and management conflicts.

     We may participate with other entities in property ownership through joint ventures or partnerships in the future. Depending on the characteristics and business objectives of the joint venture or partnership, we may not have voting control over the joint venture or partnership. Partnership or joint venture investments may, under certain circumstances, involve risks not otherwise present, including:

	•		our partners or co-venturers might become bankrupt;
	•		our partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals; and
	•		our partners or co-venturers may be in a position to take action contrary to our instructions or requests contrary to our policies or objectives.

     Neither the partnership agreement of our operating partnership nor our governing documents prevent us from participating in joint ventures with our affiliates. Because a joint venture with an affiliate may not be negotiated in a traditional arm’s length transaction, terms of the joint venture may not be as favorable to us as we could obtain if we entered into a joint venture with an outside third party.

  We may not be able to successfully integrate or finance our acquisitions.

     As we acquire additional properties, we will be subject to risks associated with managing new properties, including building systems not operating as expected, delay in or failure to lease vacant space and tenants failing to renew leases as they expire. In addition, our ability to manage our growth effectively will require us to successfully integrate our new acquisitions into our existing accounting systems and property management structure. We cannot assure you that we will be able to succeed with that integration or effectively manage additional properties or that newly acquired properties will perform as expected. Changing market conditions, including competition from other purchasers of suburban office properties, may diminish our opportunities for attractive additional acquisitions. Moreover, acquisition costs of a property may exceed original estimates, possibly making the property uneconomical.

  Our acquisitions and renovations may not perform as expected.

     Although we currently have no plans to significantly expand or renovate our properties, we may do so in the future, subject to certain restrictions contained in the merger agreement. Expansion and renovation projects may inconvenience and displace existing tenants, require us to engage in time consuming up-front planning and engineering activities and expend capital, and require us to obtain various government and other approvals, the receipt of which cannot be assured. While our policies with respect to expansion and renovation activities are intended to limit some of the risks otherwise associated with these activities, we will nevertheless incur risks, including expenditures of funds on, and devotion of our time to, projects that may not be completed.

     Our development activities may be more expensive than anticipated and may not yield our anticipated results.

          We have preliminary architectural designs completed for an additional 475,000 net rentable square feet at the Howard Hughes Center in Los Angeles, California and have completed preliminary designs on a build-to-suit office building at our Long Beach Airport Business Park. We have entitlements for up to 600 hotel rooms at the Howard Hughes Center. We also have a 5-acre developable land parcel in Torrance, California that we are also marketing for a build-to-suit building. Certain restrictions contained in the merger agreement limit our ability to move forward on these developments without the approval of GECC. We also intend to review, from time to time, other opportunities for developing and constructing office buildings and other commercial properties in accordance with our development and underwriting policies.

          We expect to finance our development activities over the next 24 months, subject to certain restrictions contained in the merger agreement, through net cash provided by operating activities, proceeds from asset sales, proceeds from our lines of credit or other secured borrowings.

          Risks associated with our development activities may include:

	•		abandonment of development opportunities due to a lack of financing or other reasons;
	•		construction costs of a property exceeding original estimates, possibly making the property uneconomical;
	•		occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable;
	•		construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs; and
	•		development activities would also be subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations.

     We are not subject to any limit on the amount or percentage of our assets that may be invested in any single property or any single geographic area.

          Our governing documents do not restrict the amount or percentage of our assets that we may invest in a single property or geographic area. All of our properties are currently in Southern California and we have no immediate plans to invest outside of Southern California. Although the overall Southern California economy is diverse and well balanced, the geographic concentration of our portfolio may make us more susceptible to changes affecting the Southern California economy and real estate markets or damages from regional events such as earthquakes.

     We may not be able to expand into new markets successfully.

          While our business is currently limited to the Southern California market, it is possible that we will in the future expand our business to new geographic markets. We will not initially possess the same level of familiarity with new markets outside of Southern California, which could adversely affect our ability to manage, lease, develop or acquire properties in new localities.

Financing Risks

     Our amount of debt could limit our operational flexibility or otherwise adversely affect our financial condition.

          As of December 31, 2005, we had total debt of approximately $1.6 billion, consisting of approximately $419.6 million in secured debt and approximately $1.2 billion of unsecured debt. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

          Our indebtedness could:

	•		require us to dedicate a substantial portion of our cash flow to pay our debt, thereby reducing the availability of our cash flow to fund distributions, working capital, capital expenditures, acquisition and development activity and other business purposes;
	•		make it more difficult for us to satisfy our debt obligations;
	•		limit our ability to refinance our debt and obtain additional debt financing; and
	•		increase our vulnerability to general adverse economic and real estate industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and the real estate industry.

          Despite current indebtedness levels, we may still be able to incur substantially more debt in the future, which would increase the risks associated with our substantial leverage. Neither the partnership agreement of our operating partnership nor our governing documents limit the amount or the percentage of indebtedness that we may incur. We may borrow up to a maximum of $330 million under our two lines of credit. As of December 31, 2005, we had the ability to borrow an additional $70.5 million under these two lines of credit. If new debt is added to our current debt levels, the related risks that we now face could intensify and could increase the risk of default on our indebtedness.

     Scheduled debt payments could adversely affect our financial condition.

          Our cash flow could be insufficient to meet required payments of principal and interest when due. In addition, we may not be able to refinance existing indebtedness, which in virtually all cases requires substantial principal payments at maturity, and, if we can refinance, the terms of the refinancing might not be as favorable as the terms of our existing indebtedness. If principal payments cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow will not be sufficient in all years to repay all maturing debt and continue to service and repay our debt obligations.

     Rises in interest rates could adversely affect our financial condition.

          An increase in prevailing interest rates would have an immediate effect on the interest rates charged on our variable rate debt which rise and fall upon changes in interest rates. At December 31, 2005, approximately 14% of our debt was variable rate debt. Increases in interest rates would also impact the refinancing of our fixed rate debt. If interest rates are higher when our fixed debt becomes due, we may be forced to borrow at the higher rates. If prevailing interest rates or other factors result in higher interest rates, the increased interest expense would adversely affect our cash flow and our ability to service our debt. As a protection against rising interest rates, we may enter into agreements such as interest rate hedges, caps, floors and other interest rate exchange contracts. These agreements, however, increase our risks as to the other parties to the agreements not performing or that the agreements could be unenforceable.

     Many of our properties are subject to mortgage financing which could result in foreclosure if we are unable to pay or refinance the mortgages when due.

          We currently have four outstanding mortgage financings totaling approximately $358.2 million that are secured by 46 of our properties. The properties in each of these financings are fully cross-collateralized and cross-defaulted. To the extent two or more mortgages are cross-defaulted, a default in one mortgage will trigger a default in the other mortgages. The cross-defaults can give the lender a number of remedies depending on the circumstances such as the right to increase the interest rate, demand additional collateral, accelerate the maturity date of the mortgages or foreclose on and sell the properties. To the extent two or more mortgages are cross-collateralized, a default in one mortgage will allow the mortgage lender to foreclose upon and sell the properties that are not the primary collateral for the loan in default. Three additional properties are subject to single property mortgages totaling approximately $61.5 million at December 31, 2005. If we are unable to meet our obligations under these mortgages, we could be forced to pay higher interest rates or provide additional collateral or the properties subject to the mortgages could be foreclosed upon and sold, which could have a material adverse effect on us and our ability to pay or refinance our debt obligations.

Tax Risks

     Our desire to qualify as a REIT restricts our ability to accumulate cash that might be used in future periods to make debt payments or to fund future growth.

          In order to qualify as a REIT and avoid federal income tax liability, we must distribute to our stockholders at least 90% of our net taxable income, excluding net capital gain, and to avoid income taxation, our distributions must not be less than 100% of our net taxable income, including capital gains. To avoid excise tax liability, our distributions to our stockholders for the year must exceed the sum of 85% of its ordinary income, 95% of its capital gain net income, and any undistributed taxable income from prior years. As a result of these distribution requirements, we do not expect to accumulate significant amounts of cash. Accordingly, these distributions could significantly reduce the cash available to us in subsequent periods to make payments on our debt obligations and to fund future growth.

     Our operating partnership intends to qualify as a partnership, but we cannot guarantee that it will qualify.

          Our operating partnership intends to qualify as a partnership for federal income tax purposes. However, if our operating partnership were a “publicly traded partnership,” it would be treated as a corporation instead of a partnership for federal income tax purposes unless at least 90% of its income is qualifying income as defined in the Internal Revenue Code. The income requirements applicable to REITs and the definition of “qualifying income” for purposes of this 90% test are similar in most respects. Qualifying income for the 90% test generally includes passive income, such as specified types of real property rents, dividends and interest. We believe that our operating partnership would meet this 90% test, but we cannot guarantee that it would. If our operating partnership

were to be taxed as a corporation, it would incur substantial tax liabilities and we would fail to qualify as a REIT for federal income tax purposes.

     We may suffer adverse tax consequences and be unable to attract capital if we fail to qualify as a REIT.

          We believe that since our taxable year ended December 31, 1996, we have been organized and operated, and intend to continue to operate, so as to qualify for taxation as a REIT under the Internal Revenue Code. Although we believe that we have been and will continue to be organized and have operated and will continue to operate so as to qualify for taxation as a REIT, we cannot assure you that we have been or will continue to be organized or operated in a manner so as to qualify or remain so qualified. For us to qualify as a REIT, we must satisfy numerous requirements established under highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations and tests regarding various factual matters and circumstances not entirely within our control. The complexity of these provisions and of the applicable Treasury Regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT, like us, that holds its assets through an investment in a partnership. No assurance can be given that legislation, new 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 qualification. We are, however, not aware of any pending legislation that would adversely affect our ability to qualify as a REIT. Our qualification and taxation as a REIT depends on our ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Internal Revenue Code, the results of which have not been and will not be reviewed by our tax counsel.

          If we failed to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. Moreover, unless entitled to relief under specific statutory provisions, we also would be disqualified as a REIT for the four taxable years following the year during which qualification was lost. If we were disqualified as a REIT, our ability to raise additional capital could be significantly impaired. This could reduce the funds we would have available to pay distributions to our stockholders and to service our debt.

          Even if we qualify for and maintain our REIT status, we will be subject to certain federal, state and local taxes on our income and property. For example, if we have net income from a prohibited transaction, specifically sales or other taxable dispositions of property held primarily for sale to customers in the ordinary course of business, that income will be subject to a 100% tax.

Other Risks

     We are subject to agreements and policies that may deter change in control offers that might be attractive to our stockholders.

          Certain provisions of our charter and bylaws may delay, defer or prevent a third party from making offers to acquire us or assume control over us. For example, such provisions may:

	•		deter tender offers for our common stock, which offers may be attractive to the stockholders; and
	•		deter purchases of large blocks of common stock, thereby limiting the opportunity for stockholders to receive a premium for their common stock over then-prevailing market prices.

          Our charter contains a provision designed to prevent a concentration of ownership among our stockholders that would cause us to fail to qualify as a REIT. Under the Internal Revenue Code, not more than 50% in value of our outstanding shares of common stock may be owned, actually or constructively, by five or fewer individuals, including specific kinds of entities, at any time during the last half of our taxable year. In addition, if we, or an owner of 10% or more of our common stock, actually or constructively owns 10% or more of a tenant of ours, or a tenant of any partnership in which we are a partner, the rent received by us from that tenant will not be qualifying income for purposes of the REIT gross income tests. In order to protect us against the risk of losing REIT status, the ownership limit included in our charter limits actual or constructive ownership of our outstanding shares of common stock by any single stockholder to 9.0%, by value or by number of shares, whichever is more restrictive, of the then outstanding shares of common stock. Actual or constructive ownership of shares of common stock in excess of the ownership limit will cause the violative transfer or ownership to be void with respect to the transferee or owner as to that number of shares in excess of the ownership limit and such shares will be automatically transferred to a trust for the exclusive benefit of one or more qualified charitable organizations. That transferee or owner will have no right to vote such shares or be entitled to dividends or other distributions with respect to such shares.

          Although our Board of Directors presently has no intention of doing so, except as described below, our Board of Directors could waive this restriction with respect to a particular stockholder if it were satisfied, based upon the advice of counsel or a ruling from the Internal Revenue Service, that ownership by such stockholder in excess of the ownership limit would not jeopardize our status as a REIT and our Board of Directors otherwise decided such action would be in our best interests. Our Board of Directors has waived our ownership limit with respect to Mr. Ziman, our Chairman and CEO, and certain family members and affiliates and has permitted these parties to actually and constructively own up to 13.0% of the outstanding shares of common stock.

          Our charter authorizes our Board of Directors to cause us to issue authorized but unissued shares of common stock or preferred stock and to reclassify any unissued shares of common stock or classify any unissued and reclassify any previously classified but unissued shares of preferred stock and, with respect to the preferred stock, to set the preferences, rights and other terms of such classified or unclassified shares. Although our Board of Directors has no such intention at the present time, it could establish a series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change in control that might involve a premium price for the common stock or otherwise be in the best interest of our stockholders.

          Our Board of Directors is divided into three classes of directors. Directors of each class are chosen for three-year terms upon the expiration of their current terms and each year one class of directors will be elected by the stockholders. The staggered terms of directors may reduce the possibility of a tender offer or an attempt to change control even though a tender offer or change in control might be in the best interest of our stockholders.

     Losses in excess of our insurance coverage or uninsured losses could adversely affect our cash flow.

          We carry comprehensive liability, fire, extended coverage, terrorism and rental loss insurance policies which currently cover all of our properties with specifications and insured limits that we believe are adequate and appropriate under the circumstances. Some losses, however, are generally not insured against because it is not economically feasible to do so. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital invested in the property, as well as the anticipated future revenue from the property and, in the case of debt which is recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the property. Any loss would adversely affect our cash flow with respect to the property subject to the loss. Moreover, we would generally be liable for any unsatisfied obligations other than non-recourse obligations with respect to the property subject to the loss.

     Lack of availability of insurance coverage for biological, chemical or nuclear terrorist attacks could adversely affect our financial condition.

          Our current terrorism insurance policy, which has been extended to March 2007, specifically excludes biological, chemical or nuclear terrorist acts. We have been notified by our insurance broker that in the aftermath of the September 11th attacks, insurance carriers will continue to exclude these types of attacks from terrorism insurance policies or offer coverage for biological, chemical or nuclear attacks coverages at prohibitive costs. Although we did not derive more than 3.5% of our 2005 net operating income from any one of the properties in our portfolio, a biological, chemical or nuclear terrorist attack damaging several of our properties or negatively impacting the financial condition of our tenants could materially deteriorate our operating results and overall financial condition.

     An earthquake could adversely affect our business.

          All of our properties are located in Southern California, which is a high risk geographical area for earthquakes. Depending upon its magnitude, an earthquake could severely damage our properties which would adversely affect our business. We maintain earthquake insurance for our properties and the resulting business interruption. We cannot assure you that our insurance will be sufficient if there is a major earthquake.

     Our properties may be subject to environmental liabilities.

          Under federal, state and local environmental laws, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at the property and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs in connection with the contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and the liability under these laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. These costs may be substantial, and the presence of these substances, or the failure to remediate the contamination on the property, may adversely affect the owner’s ability to sell or rent the property or to borrow against the property. Finally, third parties may have claims against the owner of the site based on damages and costs resulting from environmental contamination emanating from that site.

          Specific federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos-containing materials when those materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. These laws may impose liability for release of asbestos-containing material and may provide for third parties to seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials. In connection with the ownership and operation of our properties, we may be potentially liable for those costs.

          In the past few years, independent environmental consultants have conducted or updated Phase I environmental assessments and other environmental investigations as appropriate at some of our properties. The environmental site assessments and investigations have identified 38 properties in our portfolio, representing approximately 43% of the total rentable square feet in the portfolio, affected by environmental concerns. These environmental concerns include properties that may be impacted by known or

suspected (a) contamination caused by third party sources or (b) soil and/or groundwater contamination which has been remediated, and (c) those containing underground storage tanks or asbestos.

          Of these properties, four are believed to be affected by contamination caused by third party sources and two of these also house an underground storage tank, two contain friable asbestos, twenty contain non-friable asbestos, and twelve house underground storage tanks only. The properties affected by contamination are primarily affected by petroleum and solvent substances, and in each case a third party has indemnified us for any and all problems associated with this contamination. With regard to those properties affected by asbestos, asbestos does not pose a health hazard if it is not disturbed in such a way to cause an airborne release of asbestos. Asbestos is friable when it can be crumbled, pulverized or reduced to powder by hand pressure, and non-friable when hand pressure cannot release encapsulated asbestos fibers. Friable asbestos is more likely to be released into the air than non-friable asbestos. We manage all asbestos in ways that minimize its potential to become airborne or otherwise threaten human health. Regarding underground storage tanks, subsurface leakage of the materials contained within the tank constitutes the primary risk posed by these devices. Of the fourteen underground storage tanks, two are currently being removed and no known UST-related regulatory violations or outstanding compliance issues exist with the remainder. We have also implemented a program to ensure appropriate double-wall construction, testing protocols, placement of tanks within bermed areas, and the installation of leak and spill detection equipment at relevant sites.

          Environmental site assessments and investigations completed to date have not, however, revealed any environmental liability that we believe would have a material adverse effect on our business, assets or results of operations taken as a whole, nor are we aware of any material environmental liability. Nevertheless, it is possible that our environmental site assessments do not reveal all environmental liabilities or that there are material environmental liabilities of which we are unaware.

          We believe that our properties are in compliance in all material respects with all federal, state and local laws regarding hazardous or toxic substances or petroleum products, except as noted above. We have not been notified by any governmental authority, and are not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our present properties, other than as noted above. It is possible that future laws will impose material environmental liabilities on us and that the current environmental condition of our properties will be affected by tenants, by the condition of land or operations in the vicinity of our properties, such as the presence of underground storage tanks, or by third parties unrelated to us.

     We may incur increased costs as a result of enacted and proposed changes in laws and regulations.

          Enacted and proposed changes in the law and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the SEC and by the New York Stock Exchange has resulted in significant increased compliance costs to us as we evaluate the implications of any new rules and comply to their requirements. The new rules could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. The compliance with and the provisions of the Sarbanes-Oxley Act in future years will result in significant continuing costs to us.

ITEM 1B. UNRESOLVED STAFF COMMENTS

          None.

ITEM 2. PROPERTIES

     Existing Portfolio

          As of December 31, 2005, our portfolio consists of 116 primarily office properties containing approximately 18.5 million net rentable square feet, which individually range from approximately 12,000 to 600,000 net rentable square feet. Of the 116 properties currently in service in our portfolio, 115, or 99%, are office properties. All of our properties are located in Southern California and most are in suburban areas in close proximity to main thoroughfares. We believe that our properties are located within desirable and established business communities and are well maintained. Our properties offer an array of amenities including high-speed internet access, security, parking, conference facilities, on-site management, food services and health clubs.

     Following is a summary of our property portfolio as of December 31, 2005:

																										Property Operating
																										Results(1), (2)
		Number of																Approximate Net								For the Year Ended
Location		Properties								Number of Buildings								Rentable Square Feet								December 31, 2005
																										($000’s and unaudited)
		Total				% of Total				Total				% of Total				Total				% of Total				Total				% of Total
Los Angeles County:
West(3)			30				26	%			32				16	%			5,415,813				29	%		$	115,240				39	%
North			29				25	%			46				24	%			3,573,218				20	%			53,883				18	%
South			11				9	%			15				8	%			2,454,951				13	%			30,978				11	%
Subtotal			70				60	%			93				48	%			11,443,982				62	%			200,101				68	%
Orange County			18				16	%			50				26	%			3,215,415				17	%			38,133				13	%
San Diego County			24				21	%			36				19	%			3,308,843				18	%			47,480				16	%
Ventura County			4				3	%			13				7	%			576,260				3	%			7,556				3	%
Total			116				100	%			192				100	%			18,544,500				100	%		$	293,270				100	%

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

		Year Ended December 31,
		2005				2004				2003
Net Income		$	65,499			$	73,775			$	58,509
Add:
General and administrative expense			33,571				19,503				16,931
Interest expense			98,184				88,502				92,736
Depreciation and amortization			137,385				115,806				106,893
Minority interest			570				5,159				5,231
Interest and other loss			1,593				509				403
Impairment on investment in securities			—				2,700				—
Loss from debt defeasance related to sale of discontinued properties			835				—				—
Less:
Gain on sale of discontinued properties			(40,653	)			(30,473	)			(5,937	)
Discontinued operations, net of minority interest			(3,714	)			(10,304	)			(18,310	)
Property Operating Results		$	293,270			$	265,177			$	256,456

     The following is a summary of our occupancy and in-place rents as of December 31, 2005:

		Percent				Percent				Annualized Base Rent
Location		Occupied				Leased				Per Leased Square Foot(1)
										Portfolio				Full Service
										Total				Gross Leases(2)
Los Angeles County:
West			95.0	%			95.8	%		$	28.25			$	28.27
North			92.4	%			95.1	%			22.79				23.46
South			90.6	%			92.3	%			19.24				20.75
Subtotal/Weighted Average			93.3	%			94.8	%			24.66				25.42
Orange County			93.5	%			95.0	%			19.80				22.48
San Diego County			85.0	%			86.3	%			22.84				25.44
Ventura County			94.3	%			94.3	%			19.32				19.32
Total/Weighted Average			91.9	%			93.3	%		$	23.33			$	24.76

          We have preliminary architectural designs completed for an additional 475,000 net rentable square feet of office space at the Howard Hughes Center in Los Angeles, California. We also have construction entitlements at the Howard Hughes Center for up to 600 hotel rooms/residential units. The merger agreement limits our ability to make any expenditures, transactions or agreements in connection with the Howard Hughes Center development except in accordance with a development plan and budget that we provide to GECC, which is subject to their reasonable approval.

          In addition to our development at the Howard Hughes Center, we have completed preliminary designs and are marketing an approximately 170,000 net rentable square foot build-to-suit office building at our Long Beach Airport Business Park. We also have a five-acre developable land parcel in Torrance, California that we intend to market for a build-to-suit building. The merger agreement limits our ability to commence, commit to or enter into any construction or development, other than construction or development that is in the ordinary course of business and has a cost that, in the aggregate, is not in excess of $5,000,000.

          We expect to finance our development/renovation activities over the next 24 months through net cash provided by operating activities, proceeds from asset sales, proceeds from our lines of credit or other secured borrowings. The merger agreement limits our ability to sell any assets without the written consent of GECC.

     Dispositions

          The following table summarizes our disposition activity during 2005:

Gross Sales

Date of

Price

Property

County

Submarket

Sale

Property Type

Square Feet

($000’s)

Activity Business Center

San Diego

Miramar

January 5, 2005

Office

167,170

$

16,650

5832 Bolsa

Orange

West County

June 29, 2005

Office

49,355

8,670

4900 California

Kern

Bakersfield

August 4, 2005

Office

153,181

(A

)

Parkway Center

Kern

Bakersfield

August 4, 2005

Office

60,885

(A

)

100 W. Broadway

Los Angeles

Downtown Long Beach

August 4, 2005

Office

192,975

(A

)

145 S. Fairfax

Los Angeles

Miracle Mile

August 11, 2005

Office

55,181

12,000

Irvine Corporate Center

Orange

Greater Airport

September 28, 2005

Office

127,561

17,840

(1)

Oceangate Tower

Los Angeles

Downtown Long Beach

September 28, 2005

Office

211,620

38,000

(1)

Sub-total

1,017,928

93,160

(A) Portfolio sale

—

55,600

(2)

1,017,928

$

148,760

     Acquisitions

          The following table summarizes our acquisition activity during 2005:

Gross

Purchase

Date of

Price

Property

County

Submarket

Purchase

Property Type

Square Feet

($000’s)

707 Broadway

San Diego

Downtown

January 5, 2005

Office

169,536

$

48,000

(1)

Arden Towers at Sorrento

San Diego

Sorrento Mesa

March 22, 2005

Office/Retail

608,253

184,850

5670 Wilshire Boulevard

Los Angeles

Miracle Mile

April 8, 2005

Office

409,118

92,650

(2)

Agoura Hills Business Park

Los Angeles

Agoura Hills

August 5, 2005

Office

115,227

23,175

1,302,134

$

348,675

     The following table presents specific information regarding our 116 properties as of December 31, 2005:

																														Annualized
														Percentage																Base Rent
														of Total																per Leased
						Year(s)				Approximate				Portfolio Net								Annualized								Net Rentable
						Built/				Net Rentable				Rentable				Percent				Base Rent				Number of				Square
Property Name		Major Area		Submarket		Renovated				Square Feet				Square Feet				Leased				($000s)				Leases				Feet(1)
Los Angeles County
Los Angeles West
6100 Wilshire		Hollywood/Wilshire Corridor		Miracle Mile			1986				207,658				1.1	%			97.0	%		$	4,957				51			$	24.62
5670 Wilshire Boulevard		Hollywood/Wilshire Corridor		Miracle Mile			1964/91				409,118				2.2				91.5			$	9,898				65				26.44
120 S. Spalding		West Los Angeles		Beverly Hills Triangle			1984				63,276				0.3				100.0				2,784				15				44.00
9665 Wilshire		West Los Angeles		Beverly Hills Triangle			1972/92-93				160,502				0.9				100.0				5,861				21				36.52
8383 Wilshire		West Los Angeles		Beverly Hills			1971/93				417,459				2.2				91.1				10,085				131				26.51
9100 Wilshire		West Los Angeles		Beverly Hills			1971/90				327,697				1.8				96.2				8,729				77				27.68
Beverly Atrium		West Los Angeles		Beverly Hills			1989				59,542				0.3				91.8				1,688				12				30.89
Wilshire Pacific Plaza		West Los Angeles		Brentwood			1976/87				103,529				0.6				100.0				2,694				45				26.03
World Savings Center (2)		West Los Angeles		Brentwood			1983				469,710				2.5				98.6				14,686				64				31.72
400 Corporate Pointe		West Los Angeles		Culver City/Fox Hills			1987				165,989				0.9				90.0				2,796				14				18.71
600 Corporate Pointe		West Los Angeles		Culver City/Fox Hills			1989				276,516				1.5				96.2				5,736				22				21.56
6060 Center Drive		West Los Angeles		Culver City/Fox Hills			2000				256,739				1.4				99.1				8,467				8				33.28
6080 Center Drive		West Los Angeles		Culver City/Fox Hills			2001				286,210				1.5				90.0				9,573				16				37.18
6100 Center Drive		West Los Angeles		Culver City/Fox Hills			2002				285,516				1.5				99.5				8,376				25				29.49
Bristol Plaza		West Los Angeles		Culver City/Fox Hills			1982				84,565				0.5				98.3				1,746				29				21.00
Howard Hughes Spectrum Club		West Los Angeles		Culver City/Fox Hills			1993				36,959				0.2				100.0				967				1				26.16
Howard Hughes Tower		West Los Angeles		Culver City/Fox Hills			1987				317,729				1.7				99.2				8,695				38				27.60
Northpoint		West Los Angeles		Culver City/Fox Hills			1991				103,015				0.6				100.0				2,520				9				24.46
1919 Santa Monica		West Los Angeles		Santa Monica			1991				43,628				0.2				100.0				1,158				9				26.53
2001 Wilshire Blvd.		West Los Angeles		Santa Monica			1980				104,528				0.6				96.7				2,601				23				25.73
2730 Wilshire		West Los Angeles		Santa Monica			1985				57,141				0.3				96.8				1,545				25				27.93
2800 28th Street		West Los Angeles		Santa Monica			1979				108,007				0.6				95.4				2,674				42				25.96
Westwood Center		West Los Angeles		Westwood			1965/2000				313,304				1.7				99.7				11,100				43				35.52
10350 Santa Monica		West Los Angeles		West Los Angeles			1979				42,967				0.2				90.8				926				16				23.75
10351 Santa Monica		West Los Angeles		West Los Angeles			1984				97,169				0.5				90.2				2,109				14				24.07
Century Park Center		West Los Angeles		West Los Angeles			1972/94				245,381				1.3				89.1				5,142				93				23.53
10780 Santa Monica		West Los Angeles		West Los Angeles			1984				93,257				0.5				100.0				2,361				34				25.31
1950 Sawtelle		West Los Angeles		West Los Angeles			1988/95				103,673				0.6				98.6				2,443				42				23.90
11075 Santa Monica		West Los Angeles		West Los Angeles			1983				35,822				0.2				95.0				852				7				25.04
Westwood Terrace		West Los Angeles		West Los Angeles			1988				139,207				0.8				94.8				3,412				28				25.87
Subtotal/Weighted Average – Los Angeles West											5,415,813				29.2	%			95.8	%		$	146,581				1,019			$	28.25

																														Annualized
														Percentage																Base Rent
														of Total																per Leased
						Year(s)				Approximate				Portfolio Net								Annualized				Number				Net Rentable
						Built/				Net Rentable				Rentable				Percent				Base Rent				of				Square
Property Name		Major Area		Submarket		Renovated				Square Feet				Square Feet				Leased				($000s)				Leases				Feet(1)
Los Angeles North
303 Glenoaks		Glendale/Tri-Cities		Burbank			1983/96				176,675				1.0	%			98.1	%		$	4,041				27			$	23.32
601 S. Glenoaks		Glendale/Tri-Cities		Burbank			1990				74,654				0.4				94.8				1,474				19				20.84
Burbank Executive Plaza		Glendale/Tri-Cities		Burbank			1983				62,717				0.3				100.0				1,457				19				23.24
333 N. Glenoaks		Glendale/Tri-Cities		Burbank			1978/83				84,263				0.5				88.9				1,685				17				22.49
425 West Broadway		Glendale/Tri-Cities		Glendale			1984				72,426				0.4				98.4				1,526				14				21.41
535 N. Brand Blvd.		Glendale/Tri-Cities		Glendale			1973/92/99				106,657				0.6				99.7				2,269				44				21.33
5161 Lankershim		Glendale/Tri-Cities		North Hollywood			1985/97				181,757				1.0				100.0				4,056				9				22.31
150 East Colorado Boulevard		Glendale/Tri-Cities		Pasadena			1979/97				61,803				0.3				100.0				1,467				20				23.73
299 N. Euclid		Glendale/Tri-Cities		Pasadena			1983/99				74,689				0.4				100.0				1,908				4				25.54
70 South Lake		Glendale/Tri-Cities		Pasadena			1982/94				102,726				0.6				95.4				2,596				22				26.49
Agoura Hills Business Park		San Fernando Valley		Agoura Hills			1988				115,227				0.6				95.8				2,589				12				23.47
Calabasas Commerce Center		San Fernando Valley		Calabasas			1990				126,771				0.7				100.0				2,396				10				18.90
Calabasas Tech		San Fernando Valley		Calabasas			1990/2001				284,822				1.5				87.1				4,856				18				19.58
16000 Ventura		San Fernando Valley		Encino			1980/96				175,242				0.9				98.2				3,974				46				23.08
Noble Professional Center		San Fernando Valley		Sherman Oaks			1985/93				52,929				0.3				93.1				1,157				19				23.48
15250 Ventura		San Fernando Valley		Sherman Oaks			1970/90-91				112,838				0.6				100.0				2,525				43				22.38
Sunset Pointe Plaza		San Fernando Valley		Valencia			1988				59,258				0.3				75.6				1,185				27				26.46
Tourney Pointe		San Fernando Valley		Valencia			1985/98-2000				212,021				1.1				96.6				4,410				37				21.53
Westlake – 5601 Lindero		San Fernando Valley		Westlake Village			1989				105,854				0.6				95.5				1,774				5				17.54
Homestore		San Fernando Valley		Westlake Village			2000				137,762				0.7				100.0				3,158				1				22.92
Clarendon Crest		San Fernando Valley		Woodland Hills			1990				44,317				0.2				100.0				949				18				21.42
Woodland Hills Financial Center		San Fernando Valley		Woodland Hills			1972/95				228,687				1.2				95.9				5,108				73				23.29
Warner Corporate Center		San Fernando Valley		Woodland Hills			1988				253,032				1.4				99.0				6,644				33				26.53
Los Angeles Corporate Center		San Gabriel Valley		Monterey Park			1984/86				390,028				2.1				88.3				7,898				46				22.94
Conejo Business Center		Ventura		Newbury Park/Thousand Oaks			1991				68,328				0.4				95.5				1,469				28				22.52
Hillside Corporate Center		Ventura		Newbury Park/Thousand Oaks			1998				60,803				0.3				100.0				1,654				11				27.21
Marin Corporate Center		Ventura		Newbury Park/Thousand Oaks			1986				50,656				0.3				70.1				842				25				23.68
Westlake Gardens		Ventura		Westlake Village			1998				47,440				0.3				100.0				1,302				19				27.45
Westlake Gardens II		Ventura		Westlake Village			1999				48,836				0.3				100.0				1,104				5				22.61
Subtotal/Weighted Average — Los Angeles North											3,573,218				19.3	%			95.1	%		$	77,473				671			$	22.79

     

																														Annualized
														Percentage																Base Rent
														of Total																per Leased
						Year(s)				Approximate				Portfolio Net								Annualized								Net Rentable
						Built/				Net Rentable				Rentable				Percent				Base Rent				Number of				Square
Property Name		Major Area		Submarket		Renovated				Square Feet				Square Feet				Leased				($000s)				Leases				Feet(1)
Los Angeles South
Pacific Gateway		South Bay		190th Corridor			1982/90				229,505				1.2	%			94.6	%		$	4,579				36			$	21.08
South Bay Centre		South Bay		190th Corridor			1984				204,617				1.1				96.3				4,079				31				20.71
Gateway Towers		South Bay		190th Corridor			1984/86				439,084				2.4				94.7				9,702				75				23.32
Continental Grand Plaza		South Bay		El Segundo			1986				235,246				1.3				100.0				5,773				41				24.55
Grand Avenue Plaza		South Bay		El Segundo			1980/98				81,593				0.4				96.0				1,574				18				20.10
5200 West Century		South Bay		LAX			1982/98-99				321,608				1.7				77.2				4,418				34				17.79
Skyview Center		South Bay		LAX			1981/87/95				399,318				2.1				84.0				5,331				65				15.89
Long Beach Airport Bldg D (2)		South Bay		Suburban Long Beach			1987/95				121,610				0.7				100.0				1,167				1				9.60
Long Beach Airport Bldg F & G (2)		South Bay		Suburban Long Beach			1987/95				150,403				0.8				100.0				1,047				1				6.96
5000 East Spring (2)		South Bay		Suburban Long Beach			1989/95				167,149				0.9				97.2				3,744				44				23.05
Mariner Court		South Bay		Torrance			1989				104,818				0.6				100.0				2,197				38				20.96
Subtotal/Weighted Average — Los Angeles South											2,454,951				13.2	%			92.3	%		$	43,611				384			$	19.24

     

																														Annualized
														Percentage																Base Rent
														of Total																per Leased
						Year(s)				Approximate				Portfolio Net								Annualized								Net Rentable
						Built/				Net Rentable				Rentable				Percent				Base Rent				Number of				Square
Property Name		Major Area		Submarket		Renovated				Square Feet				Square Feet				Leased				($000s)				Leases				Feet(1)
Orange County
1370 Valley Vista		LA Central		Diamond Bar			1988				86,298				0.5	%			100.0	%		$	1,859				14			$	21.54
City Centre I		Orange County		Central County			1985/97				146,698				0.8				100.0				2,996				34				20.42
Anaheim City Centre (2)		Orange County		Central County			1986/91				182,521				1.0				100.0				3,607				28				19.76
Orange Financial Center		Orange County		Central County			1985/95				310,020				1.7				99.8				6,953				42				22.48
Fountain Valley City Centre		Orange County		Greater Airport			1982				303,072				1.6				99.0				6,747				25				22.48
Fountain Valley Plaza		Orange County		Greater Airport			1982				107,498				0.6				66.6				1,468				7				20.52
Newport Irvine Center		Orange County		Greater Airport			1981/97				73,310				0.4				98.2				1,800				31				25.00
South Coast Executive Center		Orange County		Greater Airport			1979/97				61,994				0.3				95.8				1,194				25				20.10
Von Karman Corporate Center		Orange County		Greater Airport			1981/84				444,968				2.4				96.2				9,325				37				21.78
Centerpointe La Palma		Orange County		North County			1986/88/90				602,516				3.2				98.9				11,582				97				19.43
Savi Tech Center		Orange County		North County			1989/2005				372,119				2.0				80.5				4,532				4				15.13
Yorba Linda Business Park		Orange County		North County			1988				165,772				0.9				95.8				1,508				63				9.50
Crown Cabot Financial Center		Orange County		South County			1989				174,173				0.9				98.3				4,941				42				28.86
5632 Bolsa		Orange County		West County			1987				21,568				0.1				100.0				189				1				8.76
5672 Bolsa		Orange County		West County			1987				12,110				0.1				100.0				106				1				8.76
5702 Bolsa		Orange County		West County			1987/97				27,731				0.1				100.0				232				2				8.38
Huntington Beach Plaza		Orange County		West County			1984/96				54,254				0.3				78.9				787				16				18.39
Huntington Commerce Center		Orange County		West County			1987				68,793				0.4				100.0				662				22				9.63
Subtotal/Weighted Average — Orange County											3,215,415				17.3	%			95.0	%		$	60,488				491			$	19.80