Edgar Filing: CATELLUS DEVELOPMENT CORP

Form 10-Q for period ending 06/30/2003

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the fiscal quarter ended June 30, 2003

Commission file number 1-10622

CATELLUS DEVELOPMENT CORPORATION
(Exact name of Registrant as specified in its charter)



Delaware		94-2953477
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

201 Mission Street
San Francisco, California 94105
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code:
(415) 974-4500

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

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

As of August 11, 2003, there were 89,394,866 issued and outstanding shares of the Registrant’s Common Stock.

CATELLUS DEVELOPMENT CORPORATION

INDEX

		Page No

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheet as of June 30, 2003 and December 31, 2002	2
	Condensed Consolidated Statement of Operations for the three months and six months ended June 30, 2003 and 2002	3
	Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2003 and 2002	4
	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46

Item 4.	Controls and Procedures	46

PART II. OTHER INFORMATION		46

Item 1.	Legal Proceedings	46
Item 2.	Changes in securities and use of proceeds	48
Item 3.	Defaults upon senior securities	48
Item 4.	Submission of matters to a vote of Security Holders	48
Item 5.	Other information	48
Item 6.	Exhibits and reports on Form 8-K	48

SIGNATURES		49

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

CATELLUS DEVELOPMENT CORPORATION

Condensed Consolidated Balance Sheet
(In thousands)

	June 30, 2003			December 31, 2002

	(Unaudited)
Assets
Properties	$	2,490,887		$	2,448,081
Less accumulated depreciation		(427,716	)		(399,923	)

		2,063,171			2,048,158
Other assets and deferred charges, net		299,902			273,853
Notes receivable, less allowance		44,373			44,947
Accounts receivable, less allowance		16,723			14,211
Assets held for sale		—			2,760
Restricted cash and investments		34,064			36,593
Cash and cash equivalents		204,186			274,927

Total	$	2,662,419		$	2,695,449

Liabilities and stockholders’ equity
Mortgage and other debt	$	1,482,178		$	1,500,955
Accounts payable and accrued expenses		76,409			117,493
Deferred credits and other liabilities		175,680			151,466
Liabilities associated with assets held for sale		—			3,233
Deferred income taxes		315,630			318,970

Total liabilities		2,049,897			2,092,117

Commitments and contingencies (Note 8)
Minority interests		—			57,363

Stockholders’ equity
Common stock, 112,273 and 110,817 shares issued and 88,626 and 87,170 shares outstanding at June 30, 2003 and December 31, 2002, respectively		1,123			1,108
Paid-in capital		555,235			531,362
Treasury stock, at cost (23,647 shares at June 30, 2003 and December 31, 2002)		(401,082	)		(401,082	)
Accumulated earnings		457,246			414,581

Total stockholders’ equity		612,522			545,969

Total	$	2,662,419		$	2,695,449

See notes to Condensed Consolidated Financial Statements

CATELLUS DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,

	2003			2002			2003			2002

	(Unaudited)						(Unaudited)
Revenue
Rental revenue	$	74,447		$	64,725		$	148,567		$	127,600
Sales revenue		24,900			43,998			32,910			98,692
Management, development and other fees		4,863			1,764			6,947			2,896

		104,210			110,487			188,424			229,188

Costs and expenses
Property operating costs		(20,166	)		(17,192	)		(39,600	)		(32,880	)
Cost of sales		(20,281	)		(28,167	)		(23,253	)		(67,252	)
Selling, general and administrative expenses		(5,662	)		(6,130	)		(11,154	)		(13,980	)
Corporate administrative costs		(4,505	)		(4,362	)		(8,904	)		(8,464	)
Depreciation and amortization		(17,732	)		(14,934	)		(34,292	)		(28,349	)

		(68,346	)		(70,785	)		(117,203	)		(150,925	)

Operating income		35,864			39,702			71,221			78,263

Other income
Equity in earnings of operating joint ventures, net		2,136			2,324			4,659			5,845
Equity in earnings of development joint ventures, net		5,427			8,177			9,281			15,624
Gain on non-strategic asset sales		1,478			7,059			7,357			6,821
Interest income		1,796			2,556			3,713			5,145
Other		792			41			1,949			8,166

		11,629			20,157			26,959			41,601

Other expenses
Interest expense		(17,149	)		(13,898	)		(33,941	)		(26,442	)
REIT transition costs		(1,805	)		—			(3,363	)		—
Other		(196	)		(752	)		(196	)		(1,445	)

		(19,150	)		(14,650	)		(37,500	)		(27,887	)

Income before minority interests, income taxes, and discontinued operations		28,343			45,209			60,680			91,977
Minority interests		—			(1,526	)		—			(3,053	)

Income before income taxes and discontinued operations		28,343			43,683			60,680			88,924
Income tax expense		(10,846	)		(17,565	)		(22,585	)		(35,762	)

Income from continuing operations		17,497			26,118			38,095			53,162

Discontinued operations, net of income tax:
Gain from disposal of discontinued operations		1,780			7,550			4,419			12,055
Income (loss) from discontinued operations		(23	)		(29	)		151			(94	)

Net gain from discontinued operations		1,757			7,521			4,570			11,961

Net income	$	19,254		$	33,639		$	42,665		$	65,123

Income per share from continuing operations
Basic	$	0.20		$	0.30		$	0.44		$	0.61

Assuming dilution	$	0.19		$	0.29		$	0.42		$	0.59

Income per share from discontinued operations
Basic	$	0.02		$	0.09		$	0.05		$	0.14

Assuming dilution	$	0.02		$	0.08		$	0.05		$	0.14

Net income per share
Basic	$	0.22		$	0.39		$	0.49		$	0.75

Assuming dilution	$	0.21		$	0.37		$	0.47		$	0.73

Average number of common shares outstanding - basic		87,730			86,976			87,493			86,815

Average number of common shares outstanding - diluted		90,756			89,864			90,375			89,508

See notes to Condensed Consolidated Financial Statements

CATELLUS DEVELOPMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)

	Six Months Ended June 30,

	2003			2002

	(Unaudited)
Cash flows from operating activities:
Net income	$	42,665		$	65,123
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		34,292			28,349
Deferred income taxes		274			16,663
Deferred gain recognized		(3,504	)		(14,255	)
Amortization of deferred loan fees and other costs		2,212			3,398
Equity in earnings of joint ventures		(13,940	)		(21,469	)
Operating distributions from joint ventures		14,838			62,098
Gain on sales of investment property		(7,365	)		(20,165	)
Cost of development property and non-strategic assets sold		34,640			59,621
Capital expenditures for development property		(45,047	)		(28,038	)
Other, net		(2,948	)		10,227
Change in deferred credits and other liabilities		31,671			8,660
Change in other operating assets and liabilities		(28,238	)		(11,008	)

Net cash provided by operating activities		59,550			159,204

Cash flows from investing activities:
Net proceeds from sale of investment property		27,800			25,011
Capital expenditures for investment property		(149,364	)		(179,519	)
Payment of reimbursable construction costs		(11,629	)		(30,382	)
Distributions from joint ventures		8,601			—
Contributions to joint ventures		(5,287	)		(9,180	)
Net decrease (increase) in restricted cash		2,529			(18,594	)

Net cash used in investing activities		(127,350	)		(212,664	)

Cash flows from financing activities:
Borrowings		11,339			165,319
Repayment of borrowings		(28,168	)		(124,103	)
Distributions to minority partners		(4,551	)		(4,540	)
Proceeds from issuance of common stock		18,439			8,395

Net cash (used in) provided by financing activities		(2,941	)		45,071

Net decrease in cash and cash equivalents		(70,741	)		(8,389	)
Cash and cash equivalents at beginning of period		274,927			222,695

Cash and cash equivalents at end of period	$	204,186		$	214,306

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized)	$	31,850		$	27,215
Income taxes	$	40,547		$	16,692
Non-cash financing activities:
Debt forgiveness-property reconveyance	$	(5,095	)	$	—

See notes to Condensed Consolidated Financial Statements

CATELLUS DEVELOPMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)

NOTE 1. DESCRIPTION OF BUSINESS

Catellus Development Corporation, together with its consolidated subsidiaries (“Catellus” or the “Company”), is a diversified real estate operating company, with a large portfolio of rental properties and developable land, that manages and develops real estate for its own account and those of others. Interests of third parties in entities controlled and consolidated by the Company are separately reflected as minority interests in the accompanying financial statements. The Company’s rental portfolio and developable land, consisting of industrial, residential, retail, office, and other projects are located mainly in major markets in California, Illinois, Texas, Colorado, and Oregon.

NOTE 2. INTERIM FINANCIAL DATA

The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 2002 Annual Report on Form 10-K/A as filed with the Securities and Exchange Commission. In the opinion of management, the accompanying financial information includes all normal and recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods presented. Certain prior period financial data have been reclassified to conform to the current period presentation.

Accounting for stock – based compensation

At June 30, 2003, the Company has five stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards Board (“FASB”) No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.

	Three Months Ended June 30,						Six Months Ended June 30,

	2003			2002			2003			2002

	(In thousands)						(In thousands)
Net income, as reported	$	19,254		$	33,639		$	42,665		$	65,123
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,206	)		(1,342	)		(2,620	)		(2,671	)

Pro forma net income	$	18,048		$	32,297		$	40,045		$	62,452

Earnings per share:
Basic—as reported	$	0.22		$	0.39		$	0.49		$	0.75

Basic—pro forma	$	0.21		$	0.37		$	0.46		$	0.72

Diluted—as reported	$	0.21		$	0.37		$	0.47		$	0.73

Diluted— pro forma	$	0.20		$	0.36		$	0.44		$	0.70

Income taxes

Income tax expense on income from continuing operations for the three and six months ended June 30, 2003 and 2002 consisted of the following:

	Three Months Ended June 30,						Six Months Ended June 30,

	2003			2002			2003			2002

	(In thousands)						(In thousands)
Current	$	(7,600	)	$	(11,497	)	$	(22,311	)	$	(19,099	)
Deferred		(3,246	)		(6,068	)		(274	)		(16,663	)

Total	$	(10,846	)	$	(17,565	)	$	(22,585	)	$	(35,762	)

Non – strategic asset sales

The Company’s sales of non-strategic assets are summarized as follows:

	Three Months Ended June 30,						Six Months Ended June 30,

	2003			2002			2003			2002

	(In thousands)						(In thousands)
Sales	$	1,735		$	7,683		$	7,938		$	7,813
Cost of sales		(257	)		(624	)		(581	)		(992	)

Gain	$	1,478		$	7,059		$	7,357		$	6,821

NOTE 3. RESTRICTED CASH AND INVESTMENTS

Of the total restricted cash and investments of $34.1 million at June 30, 2003, and $36.6 million at December 31, 2002, $0.7 million and $5.1 million, respectively, represent proceeds from property sales held in separate cash accounts at trust companies in order to preserve the Company’s option to reinvest the proceeds on a tax-deferred basis. Approximately $23.4 million and $24.6 million at June 30, 2003 and December 31, 2002, respectively, represents funds held in pledge accounts at a bank until certain loan collateral pool requirements are met, and $4.0 million at June 30, 2003, represents a reserve fund held by a lender in anticipation of substitution of real property collateral. In addition, restricted investments of $6.0 million and $6.9 million at June 30, 2003 and December 31, 2002, respectively, represent certificates of deposits used to guarantee lease performance for certain properties that secure debt.

NOTE 4. INCOME PER SHARE

Income from continuing and discontinued operations per share of common stock is computed by dividing respective income by the weighted average number of shares of common stock and equivalents outstanding during the period (see table below for effect of dilutive securities, and Notes 2 and 10).

	Three Months Ended June 30,

	2003						2002

	Income		Shares		Per Share Amount		Income		Shares		Per Share Amount

	(In thousands, except per share data)
Income from continuing operations	$	17,497		87,730	$	0.20	$	26,118		86,976	$	0.30

Effect of dilutive securities: stock options		—		3,026				—		2,888

Income from continuing operations assuming dilution	$	17,497		90,756	$	0.19	$	26,118		89,864	$	0.29

Net gain from discontinued operations	$	1,757		87,730	$	0.02	$	7,521		86,976	$	0.09

Effect of dilutive securities: stock options		—		3,026				—		2,888

Net gain from discontinued operations assuming dilution	$	1,757		90,756	$	0.02	$	7,521		89,864	$	0.08

Net income	$	19,254		87,730	$	0.22	$	33,639		86,976	$	0.39

Effect of dilutive securities: stock options		—		3,026				—		2,888

Net income assuming dilution	$	19,254		90,756	$	0.21	$	33,639		89,864	$	0.37

	Six Months Ended June 30,

	2003						2002

	Income		Shares		Per Share Amount		Income		Shares		Per Share Amount

	(In thousands, except per share data)
Income from continuing operations	$	38,095		87,493	$	0.44	$	53,162		86,815	$	0.61

Effect of dilutive securities: stock options		—		2,882				—		2,693

Income from continuing operations assuming dilution	$	38,095		90,375	$	0.42	$	53,162		89,508	$	0.59

Net gain from discontinued operations	$	4,570		87,493	$	0.05	$	11,961		86,815	$	0.14

Effect of dilutive securities: stock options		—		2,882				—		2,693

Net gain from discontinued operations assuming dilution	$	4,570		90,375	$	0.05	$	11,961		89,508	$	0.14

Net income	$	42,665		87,493	$	0.49	$	65,123		86,815	$	0.75

Effect of dilutive securities: stock options		—		2,882				—		2,693

Net income assuming dilution	$	42,665		90,375	$	0.47	$	65,123		89,508	$	0.73

NOTE 5. MORTGAGE AND OTHER DEBT

Mortgage and other debt at June 30, 2003 and December 31, 2002, are summarized as follows:

	June 30, 2003		December 31, 2002

	(In thousands)
Fixed rate mortgage loans	$	1,066,579	$	1,080,655
Floating rate mortgage loans		203,015		207,212
Construction loans		83,604		78,244
Land acquisition and development loans		20,358		22,241
Assessment district bonds		100,148		103,935
Other loans		8,474		8,668

Mortgage and other debt		1,482,178		1,500,955
Liabilities of assets held for sale:
Fixed rate mortgage loans		—		2,849
Floating rate mortgage loans		—		298

Total mortgage and other debt	$	1,482,178	$	1,504,102

Due within one year	$	162,478	$	154,152

Interest costs relating to mortgage and other debt for the three and six months ended June 30, 2003 and 2002, are summarized as follows:

	Three Months Ended June 30,						Six Months Ended June 30,

	2003			2002			2003			2002

	(In thousands)						(In thousands)
Total interest incurred	$	21,772		$	20,735		$	43,711		$	40,884
Interest capitalized		(4,608	)		(6,554	)		(9,726	)		(13,901	)

Interest expensed		17,164			14,181			33,985			26,983
Less discontinued operations		(15	)		(283	)		(44	)		(541	)

Interest expense from continuing operations	$	17,149		$	13,898		$	33,941		$	26,442

NOTE 6. PROPERTIES

Book value by property type at June 30, 2003 and December 31, 2002, consisted of the following:

	June 30, 2003			December 31, 2002

	(In thousands)
Rental properties:
Industrial buildings	$	1,167,756		$	1,134,890
Office buildings		381,090			372,795
Retail buildings		99,066			100,882
Ground leases and other		178,594			176,430
Investment in operating joint ventures		(18,129	)		(10,920	)

		1,808,377			1,774,077

Developable land:
Commercial		174,273			171,924
Residential		54,530			52,850
Urban		275,174			279,495
Investment in development joint ventures		60,317			58,071

		564,294			562,340

Work-in-process:
Commercial		49,434			49,938
Urban		23,992			16,915

		73,426			66,853

Furniture and equipment		38,145			38,096
Other		6,645			6,715

Gross book value		2,490,887			2,448,081
Accumulated depreciation		(427,716	)		(399,923	)

Net book value	$	2,063,171		$	2,048,158

NOTE 7. SEGMENT REPORTING

The Company’s reportable segments are based on the Company’s method of internal reporting, which disaggregates its business by type and before the adjustments for discontinued operations. The Company has five reportable segments: Asset Management; Suburban, which includes two reportable segments, Commercial and Residential; Urban; and Corporate. The Asset Management segment leases and manages the Company-owned commercial buildings and ground leases. The Suburban Commercial segment develops real estate for the Company’s own account or for third parties and acquires and sells developable land and commercial buildings. The Suburban Residential segment acquires and develops suburban residential communities and sells finished lots to homebuilders via direct ownership or through joint ventures. The Urban segment develops major mixed-use sites — including development for residential, office, and retail purposes — for the Company’s own account and for joint ventures, and sells developable land. The Corporate segment consists of administrative services.

Inter-segment gains and losses are not recognized. Debt and interest-bearing assets are allocated to segments based upon the grouping of the underlying assets. All other assets and liabilities are specifically identified and allocated to the segments.

Financial data by reportable segment is as follows:

Three Months Ended June 30, 2003

	Asset Management			Suburban						Urban			Corporate			Subtotal			Discontinued Operations			Total

				Commercial			Residential

	(In thousands)
Revenue
Rental revenue	$	74,455		$	—		$	—		$	—		$	—		$	74,455		$	(8	)	$	74,447
Sales revenue		4,390			24,310			—			—			—			28,700			(3,800	)		24,900
Management, development and other fees		18			3,057			175			1,613			—			4,863			—			4,863

		78,863			27,367			175			1,613			—			108,018			(3,808	)		104,210

Costs and expenses
Property operating costs		(20,191	)		—			—			—			—			(20,191	)		25			(20,166	)
Cost of sales		(929	)		(20,045	)		(140	)		—			—			(21,114	)		833			(20,281	)
Selling, general and administrative expenses		(285	)		(2,775	)		(866	)		(1,736	)		—			(5,662	)		—			(5,662	)
Corporate administrative costs		—			—			—			—			(4,505	)		(4,505	)		—			(4,505	)
Depreciation and amortization		(16,815	)		(96	)		(29	)		(221	)		(577	)		(17,738	)		6			(17,732	)

		(38,220	)		(22,916	)		(1,035	)		(1,957	)		(5,082	)		(69,210	)		864			(68,346	)

Operating income		40,643			4,451			(860	)		(344	)		(5,082	)		38,808			(2,944	)		35,864

Other income
Equity in earnings of operating joint ventures, net		2,136			—			—			—			—			2,136			—			2,136
Equity in earnings of development joint ventures, net		—			—			5,427			—			—			5,427			—			5,427
Gain on non-strategic asset sales		1,478			—			—			—			—			1,478			—			1,478
Interest income		401			151			676			420			148			1,796			—			1,796
Other		91			31			—			(66	)		736			792			—			792

		4,106			182			6,103			354			884			11,629			—			11,629

Other expenses
Interest expense		(21,439	)		—			—			—			4,275			(17,164	)		15			(17,149	)
REIT transition costs		—			—			—			—			(1,805	)		(1,805	)		—			(1,805	)
Other		(31	)		(143	)		(1	)		138			(159	)		(196	)		—			(196	)

		(21,470	)		(143	)		(1	)		138			2,311			(19,165	)		15			(19,150	)

Income (loss) before minority interests, income taxes and discontinued operations		23,279			4,490			5,242			148			(1,887	)		31,272			(2,929	)		28,343
Minority interests		—			—			—			—			—			—			—			—

Income (loss) before income taxes and discontinued operations		23,279			4,490			5,242			148			(1,887	)		31,272			(2,929	)		28,343
Income tax (expense) benefit		(8,983	)		(1,685	)		(2,020	)		(52	)		722			(12,018	)		1,172			(10,846	)

Income (loss) from continuing operations		14,296			2,805			3,222			96			(1,165	)		19,254			(1,757	)		17,497

Discontinued operations, net of tax:
Gain from disposal of discontinued operations		—			—			—			—			—			—			1,780			1,780
Loss from discontinued operations		—			—			—			—			—			—			(23	)		(23	)

Net gain from discontinued operations		—			—			—			—			—			—			1,757			1,757

Net income (loss)	$	14,296		$	2,805		$	3,222		$	96		$	(1,165	)	$	19,254		$	—		$	19,254

Three Months Ended June 30, 2002

	Asset Management			Suburban						Urban			Corporate			Subtotal			Discontinued Operations			Total

				Commercial			Residential

	(In thousands)
Revenue
Rental revenue	$	65,279		$	—		$	—		$	—		$	—		$	65,279		$	(554	)	$	64,725
Sales revenue		25,360			14,752			20,172			—			—			60,284			(16,286	)		43,998
Management, development and other fees		26			1,114			169			455			—			1,764			—			1,764

		90,665			15,866			20,341			455			—			127,327			(16,840	)		110,487

Costs and expenses
Property operating costs		(17,391	)		—			—			—			—			(17,391	)		199			(17,192	)
Cost of sales		(9,417	)		(12,481	)		(9,760	)		—			(166	)		(31,824	)		3,657			(28,167	)
Selling, general and administrative expenses		(574	)		(2,136	)		(1,598	)		(1,822	)		—			(6,130	)		—			(6,130	)
Corporate administrative costs		—			—			—			—			(4,362	)		(4,362	)		—			(4,362	)
Depreciation and amortization		(14,299	)		(121	)		(36	)		(226	)		(373	)		(15,055	)		121			(14,934	)

		(41,681	)		(14,738	)		(11,394	)		(2,048	)		(4,901	)		(74,762	)		3,977			(70,785	)

Operating income		48,984			1,128			8,947			(1,593	)		(4,901	)		52,565			(12,863	)		39,702

Other income
Equity in earnings of operating joint ventures, net		2,324			—			—			—			—			2,324			—			2,324
Equity in earnings of development joint ventures, net		—			—			9,597			—			(1,420	)		8,177			—			8,177
Gain on non-strategic asset sales		7,059			—			—			—			—			7,059			—			7,059
Interest income		671			386			1,440			4			55			2,556			—			2,556
Other		20			(91	)		201			(73	)		(16	)		41			—			41

		10,074			295			11,238			(69	)		(1,381	)		20,157			—			20,157

Other expenses
Interest expense		(19,135	)		—			—			5			4,949			(14,181	)		283			(13,898	)
REIT transition costs		—			—			—			—			—			—			—			—
Other		(64	)		(590	)		96			142			(336	)		(752	)		—			(752	)

		(19,199	)		(590	)		96			147			4,613			(14,933	)		283			(14,650	)

Income (loss) before minority interests, income taxes and discontinued operations		39,859			833			20,281			(1,515	)		(1,669	)		57,789			(12,580	)		45,209
Minority interests		(1,526	)		—			—			—			—			(1,526	)		—			(1,526	)

Income (loss) before income taxes and discontinued operations		38,333			833			20,281			(1,515	)		(1,669	)		56,263			(12,580	)		43,683
Income tax (expense) benefit		(15,416	)		(334	)		(8,154	)		609			671			(22,624	)		5,059			(17,565	)

Income (loss) from continuing operations		22,917			499			12,127			(906	)		(998	)		33,639			(7,521	)		26,118

Discontinued operations, net of tax:
Gain from disposal of discontinued operations		—			—			—			—			—			—			7,550			7,550
Loss from discontinued operations		—			—			—			—			—			—			(29	)		(29	)

Net gain from discontinued operations		—			—			—			—			—			—			7,521			7,521

Net income (loss)	$	22,917		$	499		$	12,127		$	(906	)	$	(998	)	$	33,639		$	—		$	33,639

Six Months Ended June 30, 2003

	Asset Management			Suburban						Urban			Corporate			Subtotal			Discontinued Operations			Total

				Commercial			Residential

	(In thousands)
Revenue
Rental revenue	$	149,183		$	—		$	—		$	—		$	—		$	149,183		$	(616	)	$	148,567
Sales revenue		29,339			28,308			3,465			—			—			61,112			(28,202	)		32,910
Management, development and other fees		23			3,881			269			2,774			—			6,947			—			6,947

		178,545			32,189			3,734			2,774			—			217,242			(28,818	)		188,424

Costs and expenses
Property operating costs		(39,780	)		—			—			—			—			(39,780	)		180			(39,600	)
Cost of sales		(21,123	)		(22,376	)		(591	)		—			—			(44,090	)		20,837			(23,253	)
Selling, general and administrative expenses		(565	)		(5,402	)		(1,648	)		(3,539	)		—			(11,154	)		—			(11,154	)
Corporate administrative costs		—			—			—			—			(8,904	)		(8,904	)		—			(8,904	)
Depreciation and amortization		(32,646	)		(96	)		(59	)		(487	)		(1,149	)		(34,437	)		145			(34,292	)

		(94,114	)		(27,874	)		(2,298	)		(4,026	)		(10,053	)		(138,365	)		21,162			(117,203	)

Operating income		84,431			4,315			1,436			(1,252	)		(10,053	)		78,877			(7,656	)		71,221

Other income
Equity in earnings of operating joint ventures, net		4,659			—			—			—			—			4,659			—			4,659
Equity in earnings of development joint ventures, net		—			—			9,281			—			—			9,281			—			9,281
Gain on non-strategic asset sales		7,357			—			—			—			—			7,357			—			7,357
Interest income		812			305			1,563			643			395			3,718			(5	)		3,713
Other		1,161			50			—			—			738			1,949			—			1,949

		13,989			355			10,844			643			1,133			26,964			(5	)		26,959

Other expenses
Interest expense		(42,693	)		—			—			—			8,708			(33,985	)		44			(33,941	)
REIT transition costs		—			—			—			—			(3,363	)		(3,363	)		—			(3,363	)
Other		(31	)		(143	)		(1	)		138			(159	)		(196	)		—			(196	)

		(42,724	)		(143	)		(1	)		138			5,186			(37,544	)		44			(37,500	)

Income (loss) before minority interests, income taxes and discontinued operations		55,696			4,527			12,279			(471	)		(3,734	)		68,297			(7,617	)		60,680
Minority interests		—			—			—			—			—			—			—			—

Income (loss) before income taxes and discontinued operations		55,696			4,527			12,279			(471	)		(3,734	)		68,297			(7,617	)		60,680
Income tax (expense) benefit		(20,902	)		(1,699	)		(4,608	)		176			1,401			(25,632	)		3,047			(22,585	)

Income (loss) from continuing operations		34,794			2,828			7,671			(295	)		(2,333	)		42,665			(4,570	)		38,095

Discontinued operations, net of tax:
Gain from disposal of discontinued operations		—			—			—			—			—			—			4,419			4,419
Income from discontinued operations		—			—			—			—			—			—			151			151

Net gain from discontinued operations		—			—			—			—			—			—			4,570			4,570

Net income (loss)	$	34,794		$	2,828		$	7,671		$	(295	)	$	(2,333	)	$	42,665		$	—		$	42,665

Six Months Ended June 30, 2002

	Asset Management			Suburban						Urban			Corporate			Subtotal			Discontinued Operations			Total

				Commercial			Residential

	(In thousands)
Revenue
Rental revenue	$	128,559		$	—		$	—		$	—		$	—		$	128,559		$	(959	)	$	127,600
Sales revenue		35,124			40,990			48,175			—			—			124,289			(25,597	)		98,692
Management, development and other fees		51			1,663			455			727			—			2,896			—			2,896

		163,734			42,653			48,630			727			—			255,744			(26,556	)		229,188

Costs and expenses
Property operating costs		(33,199	)		—			—			—			—			(33,199	)		319			(32,880	)
Cost of sales		(11,454	)		(36,216	)		(24,498	)		—			(516	)		(72,684	)		5,432			(67,252	)
Selling, general and administrative expenses		(710	)		(4,085	)		(5,766	)		(3,419	)		—			(13,980	)		—			(13,980	)
Corporate administrative costs		—			—			—			—			(8,464	)		(8,464	)		—			(8,464	)
Depreciation and amortization		(26,902	)		(275	)		(73	)		(469	)		(887	)		(28,606	)		257			(28,349	)

		(72,265	)		(40,576	)		(30,337	)		(3,888	)		(9,867	)		(156,933	)		6,008			(150,925	)

Operating income		91,469			2,077			18,293			(3,161	)		(9,867	)		98,811			(20,548	)		78,263

Other income
Equity in earnings of operating joint ventures, net		5,845			—			—			—			—			5,845			—			5,845
Equity in earnings of development joint ventures, net		—			—			17,557			—			(1,933	)		15,624			—			15,624
Gain on non-strategic asset sales		6,821			—			—			—			—			6,821			—			6,821
Interest income		1,344			819			2,866			2			114			5,145			—			5,145
Other		7,332			633			201			—			—			8,166			—			8,166

		21,342			1,452			20,624			2			(1,819	)		41,601			—			41,601

Other expenses
Interest expense		(37,883	)		—			—			—			10,900			(26,983	)		541			(26,442	)
REIT transition costs		—			—			—			—			—			—			—			—
Other		(64	)		(1,274	)		95			142			(344	)		(1,445	)		—			(1,445	)

		(37,947	)		(1,274	)		95			142			10,556			(28,428	)		541			(27,887	)

Income (loss) before minority interests, income taxes and discontinued operations		74,864			2,255			39,012			(3,017	)		(1,130	)		111,984			(20,007	)		91,977
Minority interests		(3,053	)		—			—			—			—			(3,053	)		—			(3,053	)

Income (loss) before income taxes and discontinued operations		71,811			2,255			39,012			(3,017	)		(1,130	)		108,931			(20,007	)		88,924
Income tax (expense) benefit		(28,880	)		(907	)		(15,688	)		1,213			454			(43,808	)		8,046			(35,762	)

Income (loss) from continuing operations		42,931			1,348			23,324			(1,804	)		(676	)		65,123			(11,961	)		53,162

Discontinued operations, net of tax:
Gain from disposal of discontinued operations		—			—			—			—			—			—			12,055			12,055
Loss from discontinued operations		—			—			—			—			—			—			(94	)		(94	)

Net gain from discontinued operations		—			—			—			—			—			—			11,961			11,961

Net income (loss)	$	42,931		$	1,348		$	23,324		$	(1,804	)	$	(676	)	$	65,123		$	—		$	65,123

NOTE 8. COMMITMENTS AND CONTINGENCIES

The Company has surety bonds and standby letters of credit related to various development projects, lease payment guarantees, various debt and debt service guarantees, and capital contribution commitments related to certain unconsolidated real estate joint ventures. These surety bonds, standby letters of credit, guarantees and capital contribution commitments as of June 30, 2003, are summarized in the following categories (in thousands):

Off-balance sheet liabilities:
Surety bonds	$	211,939
Standby letters of credit		47,803
Debt service guarantees		53,913
Contribution requirements		14,590
Lease payment guarantee		756

Sub-total		329,001
Liabilities included in balance sheet:
Standby letters of credit		50,925

Total	$	379,926

Surety bonds are to guarantee the construction of infrastructure and public improvements as a requirement of entitlement. Surety bonds are commonly required by public agencies from developers in real estate development, are renewable, and expire upon completion of the required improvements. The typical development period of the Company’s development projects is approximately one to three years. An example of the type of event that would require the Company to perform under these surety bonds would be the failure of the Company to construct or complete the required improvements. At June 30, 2003, the Company has not been required to fund any of the surety bonds.

Standby letters of credit consist of two types: performance and financial. Performance standby letters of credit are similar in nature and term as the surety bonds described above. Financial standby letters of credit are a form of credit enhancement commonly required in real estate development when bonds are issued to finance public improvements; these financial standby letters of credit are scheduled to expire between December 2005 and May 2007. As of June 30, 2003, the Company has a total of $98.7 million in these standby letters of credit; $47.8 million of the total is off-balance sheet ($40.0 million in financial letters of credit and $7.8 million in performance letters of credit), while the remaining $50.9 million are related to obligations that are reflected in the Company’s Condensed Consolidated Balance Sheet ($47.5 million in “Mortgage and other debt” and $3.4 million in “Restricted cash and investments”). The $50.9 million of letters of credit were issued as additional security for liabilities already recorded on the balance sheet for separate accounting reasons (primarily assessment bond obligations of assessment districts whose operating boards the Company controls). This is different from the $47.8 million in letters of credit that are related to non-balance sheet items. When the assessment districts are consolidated, the balance sheet is fully consolidated, so there are several corresponding debits, the most significant of which is the associated improvements. An example of the type of event that would require the Company to perform under the performance standby letters of credit would be the failure of the Company to construct or complete the required improvements. An example of the type of event that would require the Company to perform under the financial standby letters of credit would be a debt service shortfall in the municipal district that issued the municipal bonds. At June 30, 2003, the Company has not been required to satisfy any of these standby letters of credit.

The Company has made debt service guarantees for certain of its unconsolidated joint ventures. At June 30, 2003, based on the joint ventures’ outstanding balance, these debt guarantees totaled $53.9 million. These debt service guarantees are scheduled to expire between January 2004 and September 2005. These debt service guarantees are typical business arrangements commonly required of developers in real estate development. An example of the types of event that would require the Company to provide a cash payment pursuant to a guarantee include a loan default, which would result from failure of the primary borrower to service its debt when due, or non-compliance of the primary borrower with financial covenants or inadequacy of asset collateral. At June 30, 2003, the Company has not been required to satisfy any amounts under these debt service guarantees.

The Company is required to make additional capital contributions to five of its unconsolidated joint ventures should additional capital contributions be necessary to fund development costs or operating shortfall. The Company agreed with an unconsolidated joint venture to make additional contributions should there be insufficient funds to meet its current or projected financial requirements. As of June 30, 2003, the Company cumulatively contributed $17.3 million to this unconsolidated joint venture, as additional contributions. The Company is also required to make additional capital contributions to another four of its unconsolidated joint ventures should additional capital contributions be necessary (see chart below). As of June 30, 2003, the Company does not expect to fund any additional capital contributions beyond the maximum capital requirements.

	Contribution Committed		Remaining Contribution Commitment

	(In thousands)
Talega Village, LLC	$	14,000	$	5,269
Talega Associates, LLC		20,000		4,773
Parkway Company, LLC		38,000		3,580
Third and King Investors, LLC		25,000		968

	$	97,000	$	14,590

Generally, any funding of off-balance sheet guarantees would result in the increase of Catellus’ ownership interest in a project or entity similar to the treatment of a unilateral additional capital contribution to an investee.

The Company has guaranteed $0.8 million of lease payments through September 2003 of a third party in connection with a development project. As of June 30, 2003, the Company has not been required to satisfy any amounts under this guarantee.

In addition to the contingent liabilities summarized in the table above, the Company also has the following contingencies:

The Company has recorded in its consolidated balance sheet $0.9 million estimated residual home warranty related liability from home-building activities prior to the selling of its home-building assets in 2000. The estimate is based on past claims and experience. These home warranty related reserves are charged to cost of sales when established.

As of June 30, 2003, $163.3 million of Community Facility District bonds were sold to finance public infrastructure improvements at several Company projects. The Company provided letters of credit totaling $40.0 million in support of some of these bonds. The $40.0 million is included in the standby letters of credit and surety bonds amounts disclosed above. The Company, along with other landowners, is required to satisfy any shortfall in annual debt service obligation for these bonds if incremental tax revenues generated by the projects are insufficient.

The Company is a party to a number of legal actions arising in the ordinary course of business. The Company cannot predict with certainty the final outcome of these proceedings. Considering current insurance coverages and the substantial legal defenses available, however, management believes that none of these actions, when finally resolved, will have a material adverse effect on the consolidated financial conditions, results of operations, or cash flows of the Company. Where appropriate, the Company has established reserves for potential liabilities related to legal actions or threatened legal actions. These reserves are necessarily based on estimates and probabilities of the occurrence of events and therefore are subject to revision from time to time.

Some of the legal actions to which the Company is party seek to restrain actions related to the development process or challenge title to or possession of the Company’s properties. Typically, such actions, if successful, would not result in significant financial liability for the Company but might instead prevent the completion of the development process originally planned, and therefore, impairment may occur in certain development assets.

Inherent in the operations of the real estate business is the possibility that environmental liability may arise from the current or past ownership, or current or past operation, of real properties. The Company may be required in the future to take action to correct or reduce the environmental effects of prior disposal or release of hazardous substances by third parties, the Company, or its corporate predecessors. Future environmental costs are difficult to estimate because of such factors as the unknown magnitude of possible contamination, the unknown timing and extent of the corrective actions that may be required, the determination of the Company’s potential liability in proportion to that of other potentially responsible parties, and the extent to which such costs are recoverable from insurance. Also, the Company does not generally have access to properties sold by it in the past.

At June 30, 2003, management estimates that future costs for remediation of environmental contamination on operating properties and properties previously sold approximate $9.1 million, and has provided a reserve for that amount. It is anticipated that such costs will be incurred over the next several years. Management also estimates approximately $12.0 million of similar costs relating to the Company’s properties to be developed or sold. The Company may incur additional costs related to management of excess contaminated soil from our projects; however, the necessity of this activity depends on the type of future development activities, and, therefore, the related costs are not currently determinable. These costs will be capitalized as components of development costs when incurred, which is anticipated to be over a period of approximately twenty years, or will be deferred and charged to cost of sales when the properties are sold. Environmental costs capitalized during the six months ended June 30, 2003, totaled $1.0 million. The Company’s estimates were developed based on reviews that took place over several years based upon then-prevailing law and identified site conditions. Because of the breadth of its portfolio, and past sales, the Company is unable to review each property extensively on a regular basis. Such estimates are not precise and are always subject to the availability of further information about the prevailing conditions at the site, the future requirements of regulatory agencies, and the availability and ability of other parties to pay some or all of such costs.

NOTE 9. RELATED PARTY TRANSACTIONS

The entities below are considered related parties because the listed transactions are with entities in which the Company has an ownership interest. There are no affiliated persons involved with these entities.

The Company provides development and management services and loan guarantees to various unconsolidated joint venture investments. Fees earned were $1.9 million and $3.3 million for the three and six months ended June 30, 2003, respectively, of which $1.6 million and $2.8 million, respectively, were from Third and King Investors, LLC, with the remainder primarily from Traer Creek LLC, Serrano Associates, LLC, and Talega Village, LLC. Fees earned were $0.8 million and $1.1 million for the three and six months ended June 30, 2002, respectively, of which $0.5 million and $0.7 million, respectively, were from Third and King Investors, LLC, with the remainder primarily from Traer Creek LLC and Talega Village, LLC. Deferred fees primarily from Traer Creek LLC and Serrano Associates, LLC of $1.6 million at June 30, 2003, will be earned as completed projects are sold or the venture is sold or liquidated.

In 2001, the Company entered into a 99-year ground lease with one of its unconsolidated joint venture investments, Third and King Investors, LLC. Rent payments of $0.9 million were received and recognized as rental income during each of the three months ended June 30, 2003 and 2002 and $1.8 million in each of the six months ended June 30, 2003 and 2002. Rent payments of $1.3 million of previously received rent were deferred at June 30, 2003, and will be recognized, together with annual rents, over the life of the lease.

The Company has a $4.5 million collateralized 9.0% note receivable from an unconsolidated joint venture, East Baybridge Partners, LP, for project costs plus accrued interest. The note is collateralized by property owned by the venture and matures in October 2028. The Company entered into various lease agreements with this unconsolidated joint venture. As lessee, rent expense was $34,000 in each of the three-month periods ended June 30, 2003 and 2002 and $68,000 for each of the six-month periods ended June 30, 2003 and 2002; this lease will expire in November 2011. As lessor, the Company entered into a ground lease, which will expire in August 2054. The Company earned rental income of $0.1 million in each of the three-month periods ended June 30, 2003 and 2002, and $0.2 million for each of the six-month periods ended June 30, 2003 and 2002, and recorded a $2.0 million receivable associated with this lease.

NOTE 10. DISCONTINUED OPERATIONS

In general, sales of rental property are classified as discontinued operations. Therefore, income or loss attributed to the operations and sale of rental properties sold or held for sale is presented in the statement of operations as discontinued operations, net of applicable income taxes. Prior period statements of operations have been reclassified to reflect as discontinued operations the income or loss related to rental properties that were sold or held for sale and presented as discontinued operations during the period up to June 30, 2003. Additionally, all periods presented will likely require further reclassification in future periods as additional, similar sales of rental properties occur.

Discontinued operations activities for the three and six months ended June 30, 2003 and 2002 are summarized as follows:

	Three Months Ended June 30,						Six Months Ended June 30,

	2003			2002			2003			2002

	(In thousands)
Gain from disposal of discontinued operations
Sales revenue	$	3,800		$	16,286		$	28,202		$	25,597
Cost of sales		(833	)		(3,657	)		(20,837	)		(5,432	)

		2,967			12,629			7,365			20,165
Income tax expense		(1,187	)		(5,079	)		(2,946	)		(8,110	)

Net gain	$	1,780		$	7,550		$	4,419		$	12,055

Rental Revenue	$	8		$	554		$	616		$	959

Income (loss) from discontinued operations	$	(38	)	$	(49	)	$	252		$	(158	)
Income tax (expense) benefit		15			20			(101	)		64

Net income (loss)	$	(23	)	$	(29	)	$	151		$	(94	)

Asset and liability balances of rental properties under contract to be sold at December 31, 2002 (none at June 30, 2003), consist of the following:

	December 31, 2002

	(In thousands)
Assets
Properties	$	3,216
Accumulated depreciation		(744	)

Net		2,472
Other assets		288

Total assets		2,760

Liabilities
Mortgage and other debt		3,147
Payables		62
Other liabilities		24

Total liabilities		3,233

Net liabilities	$	473

NOTE 11. REAL ESTATE INVESTMENT TRUST (“REIT”) CONVERSION

On March 3, 2003, the Company announced that its Board of Directors has authorized it to restructure its business operations in order to qualify as a real estate investment trust (“REIT”), effective January 1, 2004. The REIT conversion is subject to a stockholder approval process, which is expected to conclude in the third quarter of 2003, as well as final Board approval. This announcement has no material effect on the financial statements, except for $1.8 million and $3.4 million of transition costs, which relates to the REIT conversion and was incurred and expensed during three and six months ended June 30, 2003, respectively; however, it will likely have an impact on future operating results in the following areas, if approved by the stockholder vote:

	•	a one-time distribution of pre-REIT earnings and profits, projected to be approximately $100 million in cash and $200 million in common stock, will be declared and paid in the fourth quarter; certain aspects of this distribution are subject to ruling by the Internal Revenue Service

	•	commencing after the third quarter of 2003, a quarterly dividend of approximately $0.30 per existing share of common stock will be paid

	•	conversion and related restructure costs are currently estimated to be $7.5 million

	•	one-time costs associated with the proposed stock option exchange offer estimated at $30 million to be recognized over three years

	•	certain deferred tax liabilities associated with assets in the REIT would be reversed through income and result in a one-time increase in income currently estimated in the $200 to $250 million range

Catellus SubCo, Inc., a wholly owned subsidiary, has filed a preliminary proxy statement/prospectus with the Securities and Exchange Commission that provides important information, including detailed risk factors, regarding the proposed REIT conversion.

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

The Company:

Catellus Development Corporation is a publicly traded real estate development company that owns and operates approximately 37.4 million square feet of predominantly industrial property in many of the country’s major distribution centers and transportation corridors. The company’s principal objective is sustainable, long-term growth in earnings, which it seeks to achieve by applying its strategic resources: a lower-risk/higher-return rental portfolio, a focus on expanding that portfolio through development, and the deployment of its proven land development skills to select opportunities where it can generate profits to recycle back into its business. More information on the company is available at www.catellus.com.

Recent Developments

On March 3, 2003, we announced that our Board of Directors (“Board”) has authorized us to restructure our business operations to qualify as a real estate investment trust, effective January 1, 2004, subject to stockholder and Board approvals. We have spent the past several years successfully transforming what was one of the country’s largest land portfolios into predominantly industrial rental property and capital that has been reinvested back into our business. We are now embarking upon a transition period to restructure our operations and change our business strategy to focus increasingly on industrial development and to reduce focus on other product types.

In anticipation of the REIT conversion, we will take steps during 2003 to better position our businesses for operation as a REIT. This will include looking for ways to operate more efficiently, consistent with a focus of new development on industrial product. We plan to continue our Urban mixed–use projects that are underway, but do not plan to seek new ones. Since the Urban Group (see Urban Group below) will no longer be pursuing new activities, and given the considerable progress made on existing projects, it is also anticipated that the scope of activities will be reduced, resulting in a reduction in work force over 2003 and 2004. It is anticipated that Doug Gardner, President, and Mark Schuh, Executive Vice President, both of the Urban Group, will continue to lead their group during the transition for the balance of 2003, after which they will leave Catellus. The Urban Group currently reports to the chief executive officer of Catellus, and this reporting relationship will continue. The Urban Group projects will be operated in a taxable REIT subsidiary (“TRS”), and we expect to recycle surplus capital from the Urban Group projects through continuing development with greater emphasis on third party parcel sales, land leases, and joint ventures. During 2003, the Suburban Residential Group (see Suburban Residential Group below) projects will be positioned for sale and any remaining assets will be operated in a TRS upon REIT conversion.

We plan to present the REIT conversion to our stockholders for approval at our annual meeting, which is expected to be held in the third quarter of 2003. If the REIT conversion is consummated, Catellus will operate as an umbrella partnership real estate investment trust, with wholly-owned taxable REIT subsidiaries. As part of the REIT conversion, we will provide to stockholders a one-time distribution of pre-REIT earnings and profits, in compliance with the requirements to elect REIT status. Furthermore, subject to final Board approval, we anticipate that we will begin paying a quarterly dividend commencing with a payment of $0.30 per common share for the third quarter of 2003. Catellus SubCo, Inc., a wholly owned subsidiary, filed a Form S-4 registration statement, which contains a preliminary proxy statement/prospectus, with the Securities and Exchange Commission on May 2, 2003, as amended by Amendment No. 1, Amendment No. 2, and Amendment No. 3, filed on June 17, 2003, July 28, 2003, and August 12, 2003, respectively. The preliminary proxy statement/prospectus provides important information, including detailed risk factors, regarding the proposed REIT conversion. A copy of the preliminary proxy statement/prospectus and other relevant documents are available free of charge at the SEC’s website (www.sec.gov) or can be obtained free of charge by directing a request to us at 201 Mission Street, Second Floor, San Francisco, California 94105, Attn.: Director of Investor Relations, or by telephone at (415) 974-4649, or by email at InvestorRelations@catellus.com or through our website (www.Catellus.com) as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. There is no assurance that the proposed REIT conversion will be consummated or that the terms of the REIT conversion or the timing or effects thereof will not differ materially from those described in the preliminary proxy statement/prospectus and other relevant documents.

General

Our reportable segments are based on our method of internal reporting, which disaggregates our business by type and before the adjustments for discontinued operations. We have five reportable segments: Asset Management; Suburban, which includes two reportable segments, Commercial and Residential; Urban; and Corporate.

Business Segment Descriptions:

Asset Management:

The Asset Management segment consists of the rental activities of our assets, our share of income from operating joint ventures, and activity related to our desert portfolio. Growth in this segment is attributed primarily to the transfer of property developed by the Suburban Commercial and Urban segments that we intend to hold and operate. Revenue consists of rental property operations and gains from the sale of rental properties (see Note 10 of the accompanying Condensed Consolidated Financial Statements for a discussion of discontinued operations).

Rental Building Occupancy:

	June 30,						Difference

	2003			2002

	(In thousands of square feet, except percentages)
Owned ⁽¹⁾		37,403			34,498			2,905
Occupied ⁽¹⁾		35,298			32,510			2,788
Occupancy percentage		94.4	%		94.2	%		0.2	%

⁽¹⁾New buildings are added to our rental portfolio at the earlier of twelve months after completion of the building shell or commencement of rent on 50% of the space. Space is considered “occupied” upon commencement of rent.

The table below provides the rental portfolio rental revenue less property operating costs for the three months ended June 30, 2003, (in thousands):

Rental Revenue less Property Operating Costs by State

	Industrial					Office					Retail					Total

	Rental Revenue less Property Operating Expenses		% of Total			Rental Revenue less Property Operating Expenses		% of Total			Rental Revenue less Property Operating Expenses		% of Total			Rental Revenue less Property Operating Expenses		% of Total

Southern California	$	12,964		23.0	%	$	1,362		2.4	%	$	644		1.1	%	$	14,970		26.5	%
Northern California		7,579		13.4	%		5,146		9.1	%		1,627		2.9	%		14,352		25.4	%
Illinois		5,288		9.4	%		1,220		2.2	%		—		0.0	%		6,508		11.5	%
Texas		2,458		4.4	%		1,700		3.0	%		—		0.0	%		4,158		7.4	%
Colorado		2,428		4.3	%		919		1.6	%		254		0.5	%		3,601		6.4	%
Arizona		690		1.2	%		—		0.0	%		181		0.3	%		871		1.5	%
Maryland		772		1.4	%		—		0.0	%		—		0.0	%		772		1.4	%
Oregon		656		1.2	%		140		0.2	%		99		0.2	%		895		1.6	%
Ohio		590		1.0	%		—		0.0	%		—		0.0	%		590		1.0	%
Other		363		0.6	%		—		0.0	%		—		0.0	%		363		0.6	%

Subtotal	$	33,788		59.9	%	$	10,487		18.6	%	$	2,805		5.0	%	$	47,080		83.5	%
Ground leases and other																	5,176		9.2	%
Other properties																	2,008		3.6	%

																	54,264
Equity in earnings of operating JV’s																	2,136		3.8	%

Total																$	56,400		100.0	%

Less: discontinued operations																	17

Rental revenue less property operating costs from continuing operations																$	56,417

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