Edgar Filing: CATELLUS DEVELOPMENT CORP

Prepared by R.R. Donnelley Financial -- Quarterly Report for period ended 6/30/02

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, 2002

Commission file number 0-18694

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

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

As of August 6, 2002, there were 87,150,243 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, 2002 and December 31, 2001	1
		Condensed Consolidated Statement of Operations for the three months and six months ended June 30, 2002 and 2001	2
		Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2002 and 2001	3
		Notes to Condensed Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial
		Condition and Results of Operations	16


	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40


PART II. OTHER INFORMATION			41

SIGNATURES			43

PART I

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

CATELLUS DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)

	June 30,			December 31,
	2002			2001

	(Unaudited)
Assets
Properties	$	2,346,916		$	2,276,508
Less accumulated depreciation		(371,301	)		(354,557	)

		1,975,615			1,921,951
Other assets and deferred charges, net		231,124			167,305
Notes receivable, less allowance		58,390			73,335
Accounts receivable, less allowance		15,044			22,663
Assets held for sale		2,230			—
Restricted cash and investments		26,160			7,566
Cash and cash equivalents		214,306			222,695

Total	$	2,522,869		$	2,415,515



Liabilities and stockholders’ equity

Mortgage and other debt	$	1,385,405		$	1,310,457
Accounts payable and accrued expenses		102,420			145,688
Deferred credits and other liabilities		154,302			177,656
Liabilities associated with assets held for sale		1,936			—
Deferred income taxes		314,496			290,658

Total liabilities		1,958,559			1,924,459


Commitments and contingencies (Note 8)

Minority interests		54,312			55,799



Stockholders’ equity
Common stock, 110,790 and 110,209 shares issued and 87,143 and 86,562 shares outstanding at June 30, 2002 and December 31, 2001, respectively		1,108			1,102
Paid-in capital		530,924			521,312
Treasury stock, at cost (23,647 shares at June 30, 2002 and December 31, 2001)		(401,082	)		(401,082	)
Accumulated earnings		379,048			313,925

Total stockholders’ equity		509,998			435,257

Total	$	2,522,869		$	2,415,515

See notes to condensed consolidated financial statements

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2002			2001			2002			2001

Rental properties	(Unaudited)						(Unaudited)
Rental revenue	$	64,982		$	56,600		$	127,979		$	111,754
Property operating costs		(17,249	)		(13,882	)		(32,976	)		(27,710	)
Equity in earnings of operating joint ventures, net		2,324			2,669			5,845			5,833

		50,057			45,387			100,848			89,877

Property sales and fee services
Sales revenue		43,998			67,966			98,692			125,862
Cost of sales		(28,167	)		(41,824	)		(67,252	)		(76,875	)

Gain on property sales		15,831			26,142			31,440			48,987
Equity in earnings of development joint ventures, net		8,177			332			15,624			8,127

Total gain on property sales		24,008			26,474			47,064			57,114
Management and development fees		1,764			1,374			2,896			2,554
Selling, general and administrative expenses		(6,130	)		(6,932	)		(13,980	)		(15,580	)
Other, net		2,142			1,358			12,096			6,082

		21,784			22,274			48,076			50,170

Interest expense		(13,945	)		(14,656	)		(26,535	)		(28,939	)
Depreciation and amortization		(15,002	)		(12,833	)		(28,469	)		(25,656	)
Corporate administrative costs		(4,362	)		(5,062	)		(8,464	)		(10,607	)
Gain on non-strategic asset sales		7,059			1,389			6,821			3,136
Other, net		(297	)		2,479			(230	)		6,706

Income before minority interests, income taxes, and discontinued operations		45,294			38,978			92,047			84,687
Minority interests		(1,526	)		(1,841	)		(3,053	)		(3,712	)

Income before income taxes and discontinued operations		43,768			37,137			88,994			80,975

Income tax expense
Current		(11,531	)		(1,450	)		(19,127	)		(6,873	)
Deferred		(6,068	)		(13,416	)		(16,663	)		(25,529	)

		(17,599	)		(14,866	)		(35,790	)		(32,402	)

Income from continuing operations		26,169			22,271			53,204			48,573

Discontinued operations, net of income tax:
Gain from disposal of discontinued operations		7,550			—			12,055			—
Loss from discontinued operations		(80	)		(100	)		(136	)		(194	)

Gain (loss) from discontinued operations		7,470			(100	)		11,919			(194	)

Net income	$	33,639		$	22,171		$	65,123		$	48,379


Income per share from continuing operations
Basic	$	0.30		$	0.22		$	0.61		$	0.47

Assuming dilution	$	0.29		$	0.21		$	0.59		$	0.46

Income per share from discontinued operations
Basic	$	0.09		$	—		$	0.14		$	—

Assuming dilution	$	0.08		$	—		$	0.14		$	—

Net income per share
Basic	$	0.39		$	0.22		$	0.75		$	0.47

Assuming dilution	$	0.37		$	0.21		$	0.73		$	0.46

Average number of common shares outstanding – basic		86,976			100,469			86,815			102,649

Average number of common shares outstanding – diluted		89,864			103,324			89,508			105,522

See notes to condensed consolidated financial statements

CATELLUS DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)

	Six Months Ended
	June 30,
	2002			2001

	(Unaudited)


Cash flows from operating activities:
Net income	$	65,123		$	48,379
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		28,469			25,656
Deferred income taxes		16,663			25,529
Deferred gain recognized		(14,255	)		(4,744	)
Amortization of deferred loan fees and other costs		3,398			2,344
Equity in earnings of joint ventures		(21,469	)		(13,960	)
Operating distributions from joint ventures		62,098			20,265
Gain on sale of investment property		(20,165	)		(12,666	)
Cost of development property sold		59,621			56,924
Capital expenditures for development property		(26,071	)		(24,032	)
Other, net		10,107			(477	)
Change in deferred credits and other liabilities		8,660			101,218
Change in other operating assets and liabilities		(13,501	)		24,535

Net cash provided by operating activities		158,678			248,971

Cash flows from investing activities:
Proceeds from sale of investment property		25,011			21,006
Capital expenditures for investment property		(178,993	)		(145,712	)
Reimbursable construction costs		(30,382	)		—
Contributions to joint ventures		(9,180	)		—
Restricted cash		(18,594	)		(19,004	)

Net cash used in investing activities		(212,138	)		(143,710	)

Cash flows from financing activities:
Borrowings		165,319			297,891
Repayment of borrowings		(124,103	)		(183,755	)
Distributions to minority partners		(4,540	)		(4,790	)
Repurchase of common stock		—			(108,818	)
Proceeds from issuance of common stock		8,395			4,594

Net cash provided by financing activities		45,071			5,122

Net (decrease) increase in cash and cash equivalents		(8,389	)		110,383
Cash and cash equivalents at beginning of period		222,695			336,558

Cash and cash equivalents at end of period	$	214,306		$	446,941

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized)	$	27,215		$	27,545
Income taxes	$	16,692		$	673
Non-cash investing activities:
Reclassification of prior period land acquisition and improvement costs from investing to operating activities due to change in intended use	$	33,020		$	35,529
Non-cash financing activities:
Seller-financed acquisitions	$	—		$	10,000
Debt forgiveness-property reconveyance	$	—		$	(1,637	)

See notes to condensed consolidated financial statements

CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)

NOTE 1. DESCRIPTION OF BUSINESS

Catellus Development Corporation, together with its consolidated subsidiaries (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 (owned directly or through joint ventures) 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 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. In the opinion of management, the accompanying financial information includes all 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.

The Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”, effective January 1, 2002 (see Notes 4 and 10).

NOTE 3. RESTRICTED CASH AND INVESTMENTS

Of the total restricted cash and investments of $26.2 million at June 30, 2002, and $7.6 million at December 31, 2001, $19.0 million and $0.4 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. In addition, restricted investments of $7.2 million at June 30, 2002, and December 31, 2001, represent certificates of deposits used to guarantee lease performance for certain properties that secure debt.

NOTE 4. INCOME PER SHARE

Income from continuing operations per share of common stock is computed by dividing income from continuing operations 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,

			2002						2001

				Per Share						Per Share
		Income	Shares	Amount		Income			Shares	Amount

	(In thousands, except per share data)

Income from continuing operations	$	26,169	86,976	$	0.30	$	22,271		100,469	$	0.22

Effect of dilutive securities: stock options		—	2,888				—		2,855

Income from continuing operations assuming dilution	$	26,169	89,864	$	0.29	$	22,271		103,324	$	0.21


Gain (loss) from discontinued operations	$	7,470	86,976	$	0.09	$	(100	)	100,469	$	—

Effect of dilutive securities: stock options		—	2,888				—		2,855

Gain (loss) from discontinued operations assuming dilution	$	7,470	89,864	$	0.08	$	(100	)	103,324	$	—


Net income	$	33,639	86,976	$	0.39	$	22,171		100,469	$	0.22

Effect of dilutive securities: stock options		—	2,888				—		2,855

Net income assuming dilution	$	33,639	89,864	$	0.37	$	22,171		103,324	$	0.21


	Six Months Ended June 30,

			2002						2001

				Per Share						Per Share
		Income	Shares	Amount		Income			Shares	Amount

	(In thousands, except per share data)

Income from continuing operations	$	53,204	86,815	$	0.61	$	48,573		102,649	$	0.47

Effect of dilutive securities: stock options		—	2,693				—		2,873

Income from continuing operations assuming dilution	$	53,204	89,508	$	0.59	$	48,573		105,522	$	0.46


Gain (loss) from discontinued operations	$	11,919	86,815	$	0.14	$	(194	)	102,649	$	—

Effect of dilutive securities: stock options		—	2,693				—		2,873

Gain (loss) from discontinued operations assuming dilution	$	11,919	89,508	$	0.14	$	(194	)	105,522	$	—


Net income	$	65,123	86,815	$	0.75	$	48,379		102,649	$	0.47

Effect of dilutive securities: stock options		—	2,693				—		2,873

Net income assuming dilution	$	65,123	89,508	$	0.73	$	48,379		105,522	$	0.46

NOTE 5. MORTGAGE AND OTHER DEBT

Mortgage and other debt at June 30, 2002, and December 31, 2001, are summarized as follows:

	June 30,		December 31,
	2002		2001

	(In thousands)

Fixed rate mortgage loans	$	915,736	$	842,296
Floating rate mortgage loans		199,304		272,288
Construction loans		107,103		98,321
Land acquisition and development loans		43,550		58,498
Assessment district bonds		70,965		34,456
Capital leases		48,167		3,981
Other loans		580		617

Mortgage and other debt		1,385,405		1,310,457

Liabilities of assets held for sale:
Fixed rate mortgage loans		1,866		—


Total mortgage and other debt	$	1,387,271	$	1,310,457

Due within one year	$	171,015	$	176,723

During the six months ended June 30, 2002, the Company accepted a commitment for a $268.7 million fixed rate mortgage loan of which $82.9 million was closed and funded as of June 30, 2002. The loan bears interest of 7.05% (7.29% effective rate considering financing costs) and is amortized over 30 years with a maturity of 10 years. Of the loan proceeds, $81.6 million was used to pay off existing variable rate debt, related interest, and fees at closing. The loan is collateralized by certain of the Company’s operating properties and by assignment of rents generated by the underlying properties. Under certain conditions, this loan may have a yield maintenance premium if paid prior to maturity. The remaining $185.8 million is expected to be funded in the third quarter of 2002.

During the second quarter of 2002, the Company recorded a $35.3 million revenue bond with an estimated weighted average variable interest rate of 3.5% and a series of maturities up to twenty years. Bond payments will be made from anticipated retail sales tax revenue, real estate taxes, and miscellaneous fees generated from property currently owned by one of the Company’s unconsolidated joint venture investments.

Interest costs relating to mortgage and other debt for the three-month and six-month periods ended June 30, 2002 and 2001, are summarized as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
		2002			2001			2002			2001

	(In thousands)						(In thousands)

Total interest incurred	$	20,499		$	20,630		$	40,436		$	41,195
Interest capitalized		(6,554	)		(5,974	)		(13,901	)		(12,256	)

Interest expensed	$	13,945		$	14,656		$	26,535		$	28,939

NOTE 6. PROPERTIES

Book value by property type at June 30, 2002, and December 31, 2001, consisted of the following:

	June 30,			December 31,
	2002			2001

	(In thousands)
Rental properties:
Industrial buildings	$	1,051,140		$	943,340
Office buildings		336,877			297,707
Retail buildings		100,561			96,263
Ground leases		141,638			142,913
Investment in operating joint ventures		(10,961	)		(13,026	)

		1,619,255			1,467,197

Developable land:
Commercial		180,298			188,527
Residential		53,166			52,108
Urban		268,406			261,206
Investment in development joint ventures		48,819			76,756

		550,689			578,597

Work-in-process:
Commercial		51,348			118,668
Commercial—capital lease		39,218			40,560
Urban		53,440			37,616

		144,006			196,844

Furniture and equipment		28,444			28,818
Other		4,522			5,052

Gross book value		2,346,916			2,276,508
Accumulated depreciation		(371,301	)		(354,557	)


Net book value	$	1,975,615		$	1,921,951

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. 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 development sites for the Company’s own account and for joint ventures, which includes development for residential, office, retail, and entertainment purposes. The Corporate segment consists of administrative services.

Inter-segment gains and losses, if any, 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.

Historically, the Company has measured and reported segment results using the supplemental performance measure Earnings Before Depreciation and Deferred Taxes (“EBDDT”). Starting with the first quarter 2002 results, the Company began to use net income, as defined by generally accepted accounting principles, as the primary earnings measure for purposes of discussing the results for each segment (see Notes 2 and 4). Prior year financial data by reportable segment have been reclassified to conform to current period presentation.

Financial data by reportable segment is as follows:

				Suburban
		Asset
	Management			Commercial			Residential			Urban			Corporate			Total

Three Months Ended June 30, 2002	(In thousands)
Rental properties:
Rental revenue	$	64,982		$	—		$	—		$	—		$	—		$	64,982
Property operating costs		(17,249	)		—			—			—			—			(17,249	)
Equity in earnings of operating joint ventures, net		2,324			—			—			—			—			2,324

		50,057			—			—			—			—			50,057

Property sales and fee services:
Sales revenue		9,074			14,752			20,172			—			—			43,998
Cost of sales		(5,760	)		(12,481	)		(9,760	)		—			(166	)		(28,167	)

Gain on property sales		3,314			2,271			10,412			—			(166	)		15,831
Equity in earnings of development joint ventures, net		—			—			9,597			—			(1,420	)		8,177

Total gain on property sales		3,314			2,271			20,009			—			(1,586	)		24,008
Management and development fees		26			1,114			169			455			—			1,764
Selling, general and administrative expenses		(574	)		(2,136	)		(1,598	)		(1,822	)		—			(6,130	)
Other, net		627			(295	)		1,737			73			—			2,142

		3,393			954			20,317			(1,294	)		(1,586	)		21,784

Interest expense		(18,899	)		—			—			5			4,949			(13,945	)
Depreciation and amortization		(14,246	)		(121	)		(36	)		(226	)		(373	)		(15,002	)
Corporate administrative costs		—			—			—			—			(4,362	)		(4,362	)
Gain on non-strategic asset sales		7,059			—			—			—			—			7,059
Other, net		—			—			—			—			(297	)		(297	)

Income (loss) before minority interests, income taxes, and discontinued operations		27,364			833			20,281			(1,515	)		(1,669	)		45,294
Minority interests		(1,526	)		—			—			—			—			(1,526	)

Income (loss) before income taxes and discontinued operations		25,838			833			20,281			(1,515	)		(1,669	)		43,768
Income taxes		(10,391	)		(334	)		(8,154	)		609			671			(17,599	)

Income (loss) from continuing operations		15,447			499			12,127			(906	)		(998	)		26,169

Discontinued operations, net of tax:
Gain from disposal of discontinued operations		7,550			—			—			—			—			7,550
Loss from discontinued operations		(80	)		—			—			—			—			(80	)

Gain from discontinued operations		7,470			—			—			—			—			7,470

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

				Suburban
		Asset
	Management			Commercial			Residential			Urban			Corporate			Total

Three Months Ended June 30, 2001	(In thousands)
Rental properties:
Rental revenue	$	56,600		$	—		$	—		$	—		$	—		$	56,600
Property operating costs		(13,882	)		—			—			—			—			(13,882	)
Equity in earnings of operating joint ventures, net		2,669			—			—			—			—			2,669

		45,387			—			—			—			—			45,387

Property sales and fee services:
Sales revenue		16,979			11,634			12,566			26,787			—			67,966
Cost of sales		(8,580	)		(5,928	)		(7,510	)		(19,806	)		—			(41,824	)

Gain on property sales		8,399			5,706			5,056			6,981			—			26,142
Equity in earnings of development joint ventures, net		—			—			681			—			(349	)		332

Total gain on property sales		8,399			5,706			5,737			6,981			(349	)		26,474
Management and development fees		—			986			388			—			—			1,374
Selling, general and administrative expenses		(172	)		(2,750	)		(2,869	)		(1,141	)		—			(6,932	)
Other, net		1,397			974			(1,242	)		229			—			1,358

		9,624			4,916			2,014			6,069			(349	)		22,274

Interest expense		(18,192	)		(5	)		—			(76	)		3,617			(14,656	)
Depreciation and amortization		(11,533	)		(116	)		(60	)		(597	)		(527	)		(12,833	)
Corporate administrative costs		—			—			—			—			(5,062	)		(5,062	)
Gain on non-strategic asset sales		1,389			—			—			—			—			1,389
Other, net		—			—			—			—			2,479			2,479

Income before minority interests, income taxes, and discontinued operations		26,675			4,795			1,954			5,396			158			38,978
Minority interests		(1,604	)		—			(237	)		—			—			(1,841	)

Income before income taxes and discontinued operations		25,071			4,795			1,717			5,396			158			37,137
Income taxes		(10,037	)		(1,918	)		(688	)		(2,160	)		(63	)		(14,866	)

Income from continuing operations		15,034			2,877			1,029			3,236			95			22,271

Discontinued operations, net of tax:
Gain from disposal of discontinued operations		—			—			—			—			—			—
Loss from discontinued operations		(100	)		—			—			—			—			(100	)

Loss from discontinued operations		(100	)		—			—			—			—			(100	)

Net income	$	14,934		$	2,877		$	1,029		$	3,236		$	95		$	22,171

					Suburban
			Asset
	Management				Commercial				Residential				Urban			Corporate			Total

Six Months Ended June 30, 2002	(In thousands)
Rental properties:
Rental revenue		$	127,979			$	—			$	—		$	—		$	—		$	127,979
Property operating costs			(32,976	)			—				—			—			—			(32,976	)
Equity in earnings of operating joint ventures, net			5,845				—				—			—			—			5,845

			100,848				—				—			—			—			100,848

Property sales and fee services:
Sales revenue			9,527				40,990				48,175			—			—			98,692
Cost of sales			(6,022	)			(36,216	)			(24,498	)		—			(516	)		(67,252	)

Gain on property sales			3,505				4,774				23,677			—			(516	)		31,440
Equity in earnings of development joint
ventures, net			—				—				17,557			—			(1,933	)		15,624

Total gain on property sales			3,505				4,774				41,234			—			(2,449	)		47,064
Management and development fees			51				1,663				455			727			—			2,896
Selling, general and administrative expenses			(710	)			(4,085	)			(5,766	)		(3,419	)		—			(13,980	)
Other, net			8,612				178				3,162			144			—			12,096

			11,458				2,530				39,085			(2,548	)		(2,449	)		48,076

Interest expense			(37,435	)			—				—			—			10,900			(26,535	)
Depreciation and amortization			(26,765	)			(275	)			(73	)		(469	)		(887	)		(28,469	)
Corporate administrative costs			—				—				—			—			(8,464	)		(8,464	)
Gain on non-strategic asset sales			6,821				—				—			—			—			6,821
Other, net			—				—				—			—			(230	)		(230	)

Income (loss) before minority interests, income taxes, and discontinued operations			54,927				2,255				39,012			(3,017	)		(1,130	)		92,047
Minority interests			(3,053	)			—				—			—			—			(3,053	)

Income (loss) before income taxes and discontinued operations			51,874				2,255				39,012			(3,017	)		(1,130	)		88,994
Income taxes			(20,862	)			(907	)			(15,688	)		1,213			454			(35,790	)

Income (loss) from continuing operations			31,012				1,348				23,324			(1,804	)		(676	)		53,204

Discontinued operations, net of tax:
Gain from disposal of discontinued
operations			12,055				—				—			—			—			12,055
Loss from discontinued operations			(136	)			—				—			—			—			(136	)

Gain from discontinued operations			11,919				—				—			—			—			11,919

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

				Suburban
		Asset
	Management			Commercial			Residential			Urban			Corporate			Total

Six Months Ended June 30, 2001	(In thousands)
Rental properties:
Rental revenue	$	111,754		$	—		$	—		$	—		$	—		$	111,754
Property operating costs		(27,710	)		—			—			—			—			(27,710	)
Equity in earnings of operating joint ventures, net		5,833			—			—			—			—			5,833

		89,877			—			—			—			—			89,877

Property sales and fee services:
Sales revenue		36,822			25,777			26,576			36,687			—			125,862
Cost of sales		(17,570	)		(15,099	)		(18,467	)		(25,739	)		—			(76,875	)

Gain on property sales		19,252			10,678			8,109			10,948			—			48,987
Equity in earnings of development joint ventures, net		—			—			8,476			—			(349	)		8,127

Total gain on property sales		19,252			10,678			16,585			10,948			(349	)		57,114
Management and development fees		12			2,032			439			71			—			2,554
Selling, general and administrative expenses		(577	)		(6,062	)		(6,523	)		(2,418	)		—			(15,580	)
Other, net		2,072			2,031			(1,720	)		3,699			—			6,082

		20,759			8,679			8,781			12,300			(349	)		50,170

Interest expense		(37,167	)		(7	)		—			(56	)		8,291			(28,939	)
Depreciation and amortization		(23,289	)		(319	)		(120	)		(1,009	)		(919	)		(25,656	)
Corporate administrative costs		—			—			—			—			(10,607	)		(10,607	)
Gain on non-strategic asset sales		3,136			—			—			—			—			3,136
Other, net		—			—			—			—			6,706			6,706

Income before minority interests, income taxes, and discontinued operations		53,316			8,353			8,661			11,235			3,122			84,687
Minority interests		(3,208	)		—			(504	)		—			—			(3,712	)

Income before income taxes and discontinued operations		50,108			8,353			8,157			11,235			3,122			80,975
Income taxes		(20,051	)		(3,342	)		(3,264	)		(4,496	)		(1,249	)		(32,402	)

Income from continuing operations		30,057			5,011			4,893			6,739			1,873			48,573

Discontinued operations, net of tax:
Gain from disposal of discontinued operations		—			—			—			—			—			—
Loss from discontinued operations		(194	)		—			—			—			—			(194	)

Loss from discontinued operations		(194	)		—			—			—			—			(194	)

Net income	$	29,863		$	5,011		$	4,893		$	6,739		$	1,873		$	48,379

NOTE 8. COMMITMENTS AND CONTINGENCIES

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 position, 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 a party may 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. (See discussion of specific lawsuits in Part II, Item 1 Legal Proceedings of this Form 10Q.)

Inherent in the operation of a 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 in the past.

At June 30, 2002, management estimates that future costs for remediation of environmental contamination on operating properties and properties previously sold approximate $9.3 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 $14.1 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 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, 2002, totaled $3.9 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.

As of June 30, 2002, the Company has outstanding $22.6 million of standby letters of credit and a total of $243.8 million of surety bonds in favor of local municipalities or financial institutions, and commitments to guarantee performance on construction of real property improvements. The Company also has $28.6 million of standby letters of credit supporting financial obligations. The Company guarantees a portion of the debt and interest of certain of its joint ventures. As of June 30, 2002, these guarantees totaled $51.6 million. In some cases, other parties have jointly and severally guaranteed these obligations.

In 2001, $101 million of Community Facility District (“CFD”) bonds were sold to finance public infrastructure improvements at Mission Bay in San Francisco and Pacific Commons in Fremont. Bonds totaling $71 million were issued for Mission Bay, of which $17 million have a floating rate of interest initially set at 2.85% (1.25% at June 30, 2002) with the remaining $54 million at a fixed rate of 6.02%. The Company has issued a letter of credit totaling $17 million in support of the floating rate bond issued for Mission Bay. At Pacific Commons, $30 million of bonds were issued and have a weighted average fixed interest rate of 6.20%. These bonds have a series of maturities up to thirty years. At June 30, 2002, for Mission Bay, $2.4 million of the $17 million floating rate bonds and $10.9 million of the $54 million fixed rate bonds were used to reimburse costs the Company incurred on behalf of the district; for Pacific Commons, approximately $6.3 million was reimbursed. As of June 30, 2002, the Company has incurred, but has not been reimbursed, costs of $53.8 million for Mission Bay and $2.8 million for Pacific Commons.

Upon completion of the infrastructure improvements at Mission Bay and Pacific Commons, for which the $71 million and $30 million CFD bonds were issued, respectively, the improvements will be transferred to the respective cities. The expected reimbursement of the infrastructure costs from the bonds is reflected in Other Assets.

At Mission Bay, the landowners must satisfy any shortfall in annual debt service obligations for the CFD bonds, if incremental tax revenues generated by the projects are insufficient. At Pacific Commons, developed and designated developed property is taxed first, and any shortfall in annual debt service is paid by a tax on vacant land.

NOTE 9. RELATED PARTY TRANSACTIONS

The Company provides development and management services and loan guarantees to various unconsolidated joint venture investments. Fees earned, including loan guarantee fees, were $0.8 million and $1.1 million for the three and six months ended June 30, 2002, respectively. Deferred fees of $1.9 million at June 30, 2002, 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. Rent payments of $0.9 million and $1.8 million were received and recognized as rental income during the three and six months ended June 30, 2002. Rent payments of $1.3 million of previously received rent was deferred at June 30, 2002, 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 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, 2002 and 2001, and $68,000 for each of the six-month periods ended June 30, 2002 and 2001; 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, 2002 and 2001, and $0.2 million for each of the six-month periods ended June 30, 2002 and 2001, and recorded a $1.6 million receivable associated with this lease.

Note 10. DISCONTINUED OPERATIONS

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”, which addresses financial accounting and reporting for the impairment and disposal of long-lived assets. In general, sales of rental property, (a) not sold subject to an initial tenant purchase option or, (b) explicitly built with the intention of selling, but not sold within two years of completion, are referred to as “Investment Properties” and classified as discontinued operations. Therefore, as required, income or loss attributed to the operations and sale of Investment Properties sold or held for sale is presented in the statement of operations as discontinued operations, net of applicable income tax. Prior period statements of operations have been reclassified to reflect as discontinued operations the income or loss related to Investment Properties that were sold or held for sale and presented as discontinued operations during the three-month and six-month periods ended June 30, 2002. Additionally, all periods presented will likely require further reclassification in future periods as additional, similar sales of Investment Properties occur.

In the three and six months ended June 30, 2002, the Company sold Investment Properties for $16.3 million and $25.6 million, respectively, with a net gain of $7.6 million and $12.1 million, net of income taxes of $5.1 million and $8.1 million. Rents from these properties and properties under contract to be sold were $0.3 million and $0.6 million for the three and six months periods ended June 30, 2002, and $0.5 million and $1.2 million for the three and six months ended June 30, 2001. Loss from these properties was $80,000, net of income tax benefit of $54,000, and $100,000, net of income tax benefit of $68,000, for the three months ended June 30, 2002 and 2001, respectively, and $136,000, net of income tax benefit of $92,000, and $194,000, net of income tax benefit of $130,000, for the six months ended June 30, 2002 and 2001, respectively.

Asset and liability balances of Investment Properties under contract to be sold at June 30, 2002 consist of the following:

		June 30, 2002

		(In thousands)
Assets
Properties	$	4,076
Accumulated depreciation		(1,900	)

Net		2,176
Other assets		54

Total assets		2,230

Liabilities
Mortgage and other debt		1,866
Payables		23
Other liabilities		47

Total liabilities		1,936

Net assets	$	294

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

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, impairment of real estate assets, capitalization of costs, allowances for doubtful accounts, environmental and legal reserves, and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of the consolidated financial statements.

Revenue recognition

Our revenue is primarily derived from two sources: rental revenue from our rental portfolio and property sales.

Rental revenue is recognized when due from tenants. Revenue from leases with rent concessions or fixed escalations is recognized on a straight-line basis over the initial term of the related lease. The financial terms of leases are contractually defined. Rental revenue is not accrued when a tenant vacates the premises and ceases to make rent payments or files for bankruptcy.

Revenue from sales of properties is recognized using the accrual method. If a sale does not qualify for the accrual method of recognition, other deferral methods will be used as appropriate including the percentage-of-completion method. In certain cases, we retain the right to repurchase property from the buyer at a specified price. Profit on these sales is not recognized until our right to repurchase expires. In other instances, when we receive inadequate cash down payment and take a promissory note for the balance of the sale price, profit is deferred until such time as sufficient cash is received to meet minimum down payment requirements. Also, in general, specific identification and relative sales value methods are used to determine the cost of sales. Management estimates of future costs to complete infrastructure are included in cost of sales. Cost of sales recorded for each transaction is also affected by management’s estimate of future sales values. A change in circumstances that causes these estimates of future costs and/or sales values to increase or decrease significantly would affect the gain or loss recognized on future sales.

Impairment of real estate assets

We assess the impairment of a real estate asset when events or changes in circumstances indicate that the net book value may not be recoverable. Indicators we consider important which could trigger an impairment review include the following:

	•	a significant negative industry or economic trend;
	•	a significant underperformance relative to historical or projected future operating results;
	•	a significant change in the manner in which an asset is used; and
	•	an accumulation of costs significantly in excess of the amount originally expected to construct an asset.

Real estate is stated at the lower of cost or estimated fair value using the methodology described as follows: (a) for operating properties and properties held for investment, a write-down to estimated fair value is recognized when a property’s estimated undiscounted future cash flow, before interest charges, is less than its net book value; and (b) for properties held for sale, a write-down to estimated fair value is recorded when we determine that the net book value exceeds the estimated selling prices less cost to sell. These evaluations are made on a property-by-property basis. When we determine that the net book value of an asset may not be recoverable based upon the estimated undiscounted cash flow, we measure any impairment write-down based on a projected discounted cash flow method using an estimated discount rate. Value from comparable property sales will also be considered. The evaluation of future cash flows, discount rates, and fair value of individual properties requires significant judgment and assumptions, including estimates of market value, lease terms, development absorption, development costs, lease up costs, and financings. Significant adverse changes in circumstances affecting these judgments and assumptions in future periods could cause a significant impairment adjustment to be recorded.

Capitalization of costs

We capitalize direct construction and development costs, including predevelopment costs, property taxes, insurance, and certain indirect project costs, including a portion of our general and administrative costs that are associated with the acquisition, development, or construction of a project. Interest is capitalized in accordance with FAS 34. Costs previously capitalized related to any abandoned development opportunities are written off, if we determine such costs will not provide any future benefits. Should development activity decrease, a portion of interest, property taxes, insurance, and certain general and administrative costs would no longer be eligible for capitalization and would be expensed as incurred.

Allowance for doubtful accounts

We make estimates with respect to the collectability of our receivables and provide for doubtful accounts based on several factors, including our estimate of collectability and the age of the outstanding balances. Our estimate of collectability is based on our contacts with the debtors, collection agencies, our knowledge of the debtors’ credit and financial condition, debtors’ payment terms, and current economic trends. If a debtor becomes insolvent or files for bankruptcy, we provide an allowance for the entire outstanding amount. Significant judgments and estimates must be made and used in connection with establishing allowances in any accounting period. Material differences may result in the amount and timing of our allowances for any period if adverse general economic conditions cause widespread financial difficulties among our tenants.

Environmental and legal reserve

We incur ongoing environmental remediation costs, including clean up costs, consulting fees for environmental studies and investigations, monitoring costs, and legal costs relating to clean up, litigation defense, and the pursuit of responsible third parties. Costs incurred in connection with operating properties and properties previously sold are expensed. Costs relating to undeveloped land are capitalized as part of development costs. Costs incurred for properties to be sold are deferred and charged to cost of sales when the properties are sold.

We maintain a reserve for estimated costs of environmental remediation to be incurred in connection with operating properties and properties previously sold. The amounts for our properties to be developed or sold will be capitalized as components of development costs when incurred, which is anticipated to be over a period of twenty years, or will be deferred and charged to cost of sales when the properties are sold. Our estimates are developed based on reviews that took place over many years based upon then-prevailing law and identified site conditions. Because of the breadth of our portfolio, and past sales, we are 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. Should a previously undetected, substantial environmental hazard be found on our properties, significant liquidity could be consumed by the resulting clean up requirements, and a material expense may be recorded.

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. 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. Should the circumstances effecting these estimates change significantly, a material expense would be recognized.

Income taxes

As part of the process of preparing our consolidated financial statements, significant management judgment is required to estimate our income taxes. Our estimates are based on interpretation of tax laws. We estimate our actual current tax due and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Adjustments may be required by a change in assessment of our deferred tax assets and liabilities, changes due to audit adjustments by Federal and State tax authorities, and changes in tax laws. To the extent adjustments are required in any given period we would include the adjustments within the tax provision in the statement of operations and/or balance sheet. Any applicable interest charges would be recorded as an expense. These adjustments could materially impact our statement of operations and liquidity.

Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes appearing elsewhere in this Form 10-Q. This discussion and analysis covers our five business segments: Asset Management; Suburban, which includes a Commercial and Residential division; Urban; and Corporate. We have historically analyzed and discussed our financial condition and results of operations based on a supplemental performance measure, Earnings Before Depreciation and Deferred Taxes (“EBDDT”). Commencing with the first quarter of 2002, we have decided to use net income as our primary earnings measure and will present our analysis and discussion in that format. However, for comparative purposes only, a reconciliation between net income and EBDDT is provided below for the three and six months ended June 30, 2002, and 2001.

Net income (loss) by segments:

	Three Months Ended										Six Months Ended
	June 30,										June 30,
								Difference									Difference
		2002			2001			2002/2001			2002			2001			2002/2001

	(In thousands)										(In thousands)
Asset Management	$	22,917		$	14,934		$	7,983		$	42,931		$	29,863		$	13,068
Suburban-Commercial		499			2,877			(2,378	)		1,348			5,011			(3,663	)
Suburban-Residential		12,127			1,029			11,098			23,324			4,893			18,431
Urban		(906	)		3,236			(4,142	)		(1,804	)		6,739			(8,543	)
Corporate		(998	)		95			(1,093	)		(676	)		1,873			(2,549	)

Net income	$	33,639		$	22,171		$	11,468		$	65,123		$	48,379		$	16,744
Depreciation and amortization ⁽²⁾		15,055			12,932			2,123			28,606			25,866			2,740
Deferred taxes ⁽³⁾		11,147			13,416			(2,269	)		24,773			25,529			(756	)
Non-strategic asset sales		(7,059	)		(1,389	)		(5,670	)		(6,821	)		(3,136	)		(3,685	)
Depreciation recapture		(3,829	)		(512	)		(3,317	)		(6,220	)		(3,252	)		(2,968	)

EBDDT⁽¹⁾	$	48,953		$	46,618		$	2,335		$	105,461		$	93,386		$	12,075

⁽¹⁾	EBDDT is calculated by making various adjustments to net income. Depreciation, amortization, and deferred income taxes are added back to net income as they represent non-cash charges. Since depreciation expense is added back to net income in arriving at EBDDT, the portion of gain on property sales attributable to depreciation recapture is excluded from EBDDT. In addition, gains on the sale of non-strategic assets and extraordinary items, including their current tax effect, represent unusual and/or non-recurring items and are excluded from the EBDDT calculation.

⁽²⁾	The balances for three and six months ended June 30, 2002, included $53,000 and $137,000 respectively, of depreciation and amortization attributable to discontinued operations, while $99,000 and $210,000 were included in the balances for three and six months ended June 30, 2001.

⁽³⁾	The balances for three and six months ended June 30, 2002, included $5.1 million and $8.1 million, respectively, of deferred taxes attributable to discontinued operations.

Asset Management:

The Asset Management segment consists of the rental activities of our wholly owned 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. Net income consists of rental property operations and gains from the sale of rental properties. The following is a schedule of net income for the segment:

	Three Months Ended										Six Months Ended
	June 30,										June 30,
	2002			2001			Difference				2002			2001			Difference

	(In thousands)									(In thousands)
Rental properties:
Rental revenue	$	64,982		$	56,600		$	8,382			$	127,979		$	111,754		$	16,225
Property operating costs		(17,249	)		(13,882	)		(3,367	)			(32,976	)		(27,710	)		(5,266	)
Equity in earnings of operating joint ventures, net		2,324			2,669			(345	)			5,845			5,833			12

		50,057			45,387			4,670				100,848			89,877			10,971

Property sales and fee services:
Sales revenue		9,074			16,979			(7,905	)			9,527			36,822			(27,295	)
Cost of property sold		(5,760	)		(8,580	)		2,820				(6,022	)		(17,570	)		11,548

Gain on property sales		3,314			8,399			(5,085	)			3,505			19,252			(15,747	)
Management and development fees		26			—			26				51			12			39
Selling, general and administrative expenses		(574	)		(172	)		(402	)			(710	)		(577	)		(133	)
Other		627			1,397			(770	)			8,612			2,072			6,540

		3,393			9,624			(6,231	)			11,458			20,759			(9,301	)

Interest expense		(18,899	)		(18,192	)		(707	)			(37,435	)		(37,167	)		(268	)
Depreciation and amortization		(14,246	)		(11,533	)		(2,713	)			(26,765	)		(23,289	)		(3,476	)
Gain in non-strategic asset sales		7,059			1,389			5,670				6,821			3,136			3,685
Minority interests		(1,526	)		(1,604	)		78				(3,053	)		(3,208	)		155

Income before income taxes and discontinued
operations		25,838			25,071			767				51,874			50,108			1,766
Income taxes (see Income Taxes section)		(10,391	)		(10,037	)		(354	)			(20,862	)		(20,051	)		(811	)

Net income from continuing operations		15,447			15,034			413				31,012			30,057			955

Discontinued operations, net of tax:
Gain from disposal of discontinued operations		7,550			—			7,550				12,055			—			12,055
Loss from discontinued operations		(80	)		(100	)		20				(136	)		(194	)		58

Net gain (loss) from discontinued operations		7,470			(100	)		7,570				11,919			(194	)		12,113

Net income	$	22,917		$	14,934		$	7,983			$	42,931		$	29,863		$	13,068

Rental Building Occupancy:	June 30,
(In thousands of square feet, except percentages)	2002	2001	Difference

Owned	34,498	29,736	4,762
Occupied	32,510	28,033	4,477
Occupancy percentage	94.2%	94.3%	(0.11%	)

The following is a schedule of the top ten tenants of our rental portfolio, based on GAAP rents:

			% of Total
		Type of Product	Base Rent
Customer Name	State	Leased	June 30, 2002


APL Logistics, Inc.	CA, IL, KY, TX	Industrial	5.9%
J.C. Penney Company	TX	Office	2.1%
Home Depot USA, Inc.	CA	Industrial/Retail	1.8%
Gillette Company	CA, IL	Industrial	1.6%
Exel Corporation	CA	Industrial	1.6%
MCI Telecommunications (1)	CA, WA, IL, MN, TX, OK, OR	Office/Ground	1.5%
Saks	MD	Industrial	1.5%
Office Depot, Inc.	CA	Industrial/Retail	1.5%
Spicers/La Salle Paper	CA, OR	Industrial	1.4%
Central American Distribution	IL	Industrial	1.3%

(1) The Company has ten leases with MCI WORLDCOM Communications, Inc. or its affiliates (“MCI”). On July 21, 2002, a group of MCI companies filed for Chapter 11 reorganization. Under federal bankruptcy laws, the MCI companies have 60 days to assume or reject the leases.

Rental Revenue less Property Operating Costs

Rental revenue less property operating costs increased mainly because of additions of buildings, new ground leases, and rental increases from renewals on Same Space (properties that were owned and operated for the entire current year and the entire immediately preceding year are referred to as “Same Space”) partially offset by properties sold. From July 2001 to June 2002, we added a net 4.8 million square feet to our rental portfolio. Rental revenue less operating costs for the three and six months ended June 30, 2002 and 2001, are summarized as follows:

	Three Months Ended								Six Months Ended
	June 30,							June 30,
					Difference								Difference
	2002		2001		2002/2001				2002		2001		2002/2001

	(In thousands)								(In thousands)
Rental revenue less property operating costs:
Same space	$	34,286	$	33,490	$	796			$	69,492	$	67,228	$	2,264
Properties added to portfolio		7,140		2,026		5,114				12,691		3,217		9,474
Properties sold from portfolio		133		1,233		(1,100	)			378		2,745		(2,367	)
Ground leases		6,174		5,969		205				12,442		10,854		1,588

	$	47,733	$	42,718	$	5,015			$	95,003	$	84,044	$	10,959

We do not expect substantial changes in rental income from our Same Space rental portfolio. Rather, we expect growth in overall portfolio rental income will result primarily from new properties we add to our rental portfolio over time.

Rental revenue less operating costs increased $5.0 million for the three months ended June 30, 2002, as compared to the same period in 2001, primarily attributable to $5.1 million from the additions of buildings and $0.8 million and $0.2 million increases in revenue from Same Space and ground leases, respectively, partially offset by $1.1 million from properties sold.

Rental revenue less operating costs increased $11.0 million for the six months ended June 30, 2002, as compared to the same period in 2001, primarily attributable to $9.5 million from the additions of buildings and $2.3 million and $1.6 million increases in revenue from Same Space and ground leases, respectively, partially offset by $2.4 million from properties sold.

Equity in Earnings of Operating Joint Ventures

Equity in earnings of operating joint ventures, net, decreased by $0.3 million for the three months ended June 30, 2002, over the same period in 2001, primarily because of lower occupancy rate in a hotel owned by a joint venture. Equity in earnings of operating joint ventures, net, for the six months ended June 30, 2002, approximated that of the same period of 2001 (See Variability in Results section).

Property Sales

Gain on property sales was $3.3 million and $3.5 million for the three and six months ended June 30, 2002, respectively, as compared to $8.4 million and $19.3 million for the three and six months ended June 30, 2001, respectively, summarized as follows (see additional property sales in Discontinued Operations, Net of Income Tax section):

	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2002			2001			Difference			2002			2001			Difference

	(In thousands)									(In thousands)
Building sales:
Sales proceeds	$	7,508		$	—		$	7,508		$	7,508		$	9,925		$	(2,417	)
Cost of sales		(5,221	)		—			(5,221	)		(5,221	)		(3,961	)		(1,260	)

Gain		2,287			—			2,287			2,287			5,964			(3,677	)

Ground lease sales:
Sales proceeds		—			13,350			(13,350	)		—			21,769			(21,769	)
Cost of sales		(—	)		(6,285	)		6,285			(—	)		(10,346	)		10,346

Gain		—			7,065			(7,065	)		—			11,423			(11,423	)

Other sales:
Sales proceeds		1,566			3,629			(2,063	)		2,019			5,128			(3,109	)
Cost of sales		(539	)		(2,295	)		1,756			(801	)		(3,263	)		2,462

Gain		1,027			1,334			(307	)		1,218			1,865			(647	)

Total gain on property sales	$	3,314		$	8,399		$	(5,085	)	$	3,505		$	19,252		$	(15,747	)

Property sales for the three and six months ended June 30, 2002, include the sale of a 130,000 square foot existing operating building, as the tenant exercised its purchase option.

Property sales for the three months ended June 30, 2001, include the closings of 22.31 acres of ground leases. Property sales for the six months ended June 30, 2001, include the closings of 164.6 acres of ground leases and 134,000 square feet of existing operating properties.

“Other sales” in the table above include the sales of ground leases that we had acquired in 1998 with the intent to sell. These sales totaled 344.5 acres and 453.5 acres for the three and six months ended June 30, 2002, respectively, as compared to 373.3 acres and 486.6 acres for the three and six months ended June 30, 2001, respectively.

Selling, General and Administrative Expenses

The $0.4 million increase in selling, general and administrative expenses for the three months ended June 30, 2002, is primarily due to a $0.1 million increase in leasing costs and a $0.2 million increase in employee-related expenses. The expenses for the six months ended June 30, 2002, approximated those for the same period in 2001.

Other

“Other” decreased by $0.8 million for the three months ended June 30, 2002, as compared to the same period in 2001, because of lower interest income from restricted cash generated by tax-deferred exchanges and from short-term investment accounts. “Other” increased by $6.5 million for the six months ended June 30, 2002, as compared to the same period in 2001, because of $7.3 million in lease buyout proceeds from a major tenant, partially offset by lower interest income from restricted cash generated by tax-deferred exchanges and from short-term investment accounts.

Interest

Interest expense was $18.9 million and $37.4 million for the three and six months ended June 30, 2002, respectively, as compared to $18.2 million and $37.2 million for the three and six months ended June 30, 2001, respectively. The increases are primarily because of new debt associated with and collateralized by the newly completed and retained buildings.

Depreciation and Amortization Expense

Depreciation and amortization expense increased by $2.7 million and $3.5 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods in 2001. The increase for the three months ended June 30, 2002, is because of a $2.7 million increase from new buildings added to the portfolio between July 2001 and June 2002. The increase for the six months ended June 30, 2002, was because of a $3.2 million increase from new buildings added to the portfolio between July 2001 and June 2002 and a $0.3 million increase in amortization of lease commissions.

Gain on Non-Strategic Asset Sales

Gain on sales of non-strategic assets increased $5.7 million and $3.7 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods of 2001, primarily because of higher sales of remaining desert property.

Minority Interests

In 1999, we formed a subsidiary real estate investment trust (“REIT”) for financing purposes and sold 10% of this subsidiary’s stock to minority investors. This subsidiary is consolidated for financial reporting purposes.

Discontinued Operations, Net of Income Tax

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 144, “Accounting for Impairment or Disposal of Long Lived Assets”, which requires that all gains and losses from certain properties sold subsequent to January 1, 2002, and the operations of such properties be shown as discontinued operations (see Note 10 of the accompanying Condensed Consolidated Financial Statements for details).

Discontinued operations sales for the three months ended June 30, 2002, include 265,000 square feet of operating properties. No significant ground lease sales occurred during the three months ended June 30, 2002. For the six months ended June 30, 2002, discontinued operations sales include of 3.1 acres of ground leases and 569,000 square feet of operating properties.

	Three Months Ended										Six Months Ended
	June 30,										June 30,
	2002			2001			Difference			2002			2001			Difference

Sales:	(In thousands)										(In thousands)
Building sales:
Sales proceeds	$	16,286		$	—		$	16,286		$	22,147		$	—		$	22,147
Cost of sales		(3,657	)		—			(3,657	)		(4,885	)		—			(4,885	)

Gain		12,629			—			12,629			17,262			—			17,262

Gain, net of tax		7,550			—			7,550			10,320			—			10,320

Ground lease sales:
Sales proceeds		—			—			—			3,450			—			3,450
Cost of sales		—			—			—			(547	)		—			(547	)

Gain		—			—			—			2,903			—			2,903

Gain , net of tax		—			—			—			1,735			—			1,735

Loss from discontinued operations, net of tax		(80	)		(100	)		20			(136	)		(194	)		58

Total gain (loss) from discontinued operations, net of tax	$	7,470		$	(100	)	$	7,570		$	11,919		$	(194	)	$	12,113

Suburban-Commercial:

The Suburban-Commercial segment acquires and develops suburban commercial business parks for our own account and the account of others. Net income consists primarily of sales gains from development properties sold. The following is a schedule of net income for the segment:

	Three Months Ended									Six Months Ended
	June 30 ,									June 30,
	2002			2001			Difference			2002			2001			Difference

	(In thousands)									(In thousands)
Property sales and fee services:
Sales revenue	$	14,752		$	11,634		$	3,118		$	40,990		$	25,777		$	15,213
Cost of sales		(12,481	)		(5,928	)		(6,553	)		(36,216	)		(15,099	)		(21,117	)

Total gain on property sales		2,271			5,706			(3,435	)		4,774			10,678			(5,904	)
Management and development fees		1,114			986			128			1,663			2,032			(369	)
Selling, general and administrative expenses		(2,136	)		(2,750	)		614			(4,085	)		(6,062	)		1,977
Other		(295	)		974			(1,269	)		178			2,031			(1,853	)

		954			4,916			(3,962	)		2,530			8,679			(6,149	)
Interest expense		—			(5	)		5			—			(7	)		7
Depreciation and amortization		(121	)		(116	)		(5	)		(275	)		(319	)		44

Income before income taxes		833			4,795			(3,962	)		2,255			8,353			(6,098	)
Income taxes (see Income Taxes section)		(334	)		(1,918	)		1,584			(907	)		(3,342	)		2,435

Net income	$	499		$	2,877		$	(2,378	)	$	1,348		$	5,011		$	(3,663	)

Property Sales

Gain on property sales was $2.3 million and $4.8 million for the three and six months ended June 30, 2002, respectively, as compared to $5.7 million and $10.7 million for the three and six months ended June 30, 2001, respectively, summarized as follows:

	Three Months Ended									Six Months Ended
	June 30 ,									June 30,
	2002			2001			Difference			2002			2001			Difference

	(In thousands)									(In thousands)
Building sales (build-to-suit):
Sales proceeds	$	—		$	—		$	—		$	—		$	8,056		$	(8,056	)
Cost of sales		—			—			—			—			(6,649	)		6,649

Gain		—			—			—			—			1,407			(1,407	)

Land sales:
Sales proceeds		14,364			11,634			2,730			40,602			17,721			22,881
Cost of sales		(12,140	)		(5,928	)		(6,212	)		(35,875	)		(8,450	)		(27,425	)

Gain		2,224			5,706			(3,482	)		4,727			9,271			(4,544	)

Other sales:
Sales proceeds		388			—			388			388			—			388
Cost of sales		(341	)		(—	)		(341	)		(341	)		(—	)		(341	)

Gain		47			—			47			47			—			47

Total gain on property sales	$	2,271		$	5,706		$	(3,435	)	$	4,774		$	10,678		$	(5,904	)

The decreases in gain from land sales for the three and six month periods ended June 30, 2002, as compared to the same periods in 2001, were primarily attributable to lower sales volume and margins.

For the three months ended June 30, 2002, commercial sales include the closings of improved land capable of supporting 1.3 million square feet of commercial development, as compared to closings of improved land capable of supporting 0.8 million square feet of commercial development for the three months ended June 30, 2001. There were no build-to-suit sales during the three months ended June 30, 2002 and 2001.

For the six months ended June 30, 2002, commercial sales include the closings of improved land capable of supporting 3.3 million square feet of commercial development, as compared to closings of improved land capable of supporting 1.0 million square feet of commercial development for the six months ended June 30, 2001. No build-to-suit sales occurred during the six months ended June 30, 2002, as compared to the closing of the sale of 153,000 square feet of built-to-suit in the same period of 2001 (see Variability in Results section).

Management and Development Fees

Management and development fees for the three months ended June 30, 2002, approximated that of the same period in 2001. Management and development fees decreased by $0.4 million for the six months ended June 30, 2002, primarily because of the development and management fees related to a construction management contract with a ground lease lessee, partially offset by the management fees related to a build-to-suit construction management contract and the loan guarantee fees related to an investment in an unconsolidated joint venture (see Notes 8 and 9 of the accompanying Consolidated Financial Statements for details).

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $0.6 million and $2.0 million for the three and six months ended June 30, 2002, respectively, primarily due to decreases in employee-related expenses and expenses incurred in 2001 on investment transactions that did not materialize.

Other

“Other” income decreased by $1.3 million and $1.9 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods in 2001, primarily because of $0.9 million and $1.2 million higher real estate taxes and $0.2 million and $0.4 million lower interest income from restricted cash generated by tax-deferred exchanges, respectively.

Interest

Following is a summary of interest:

	Three Months Ended									Six Months Ended
	June 30 ,									June 30,
	2002			2001			Difference			2002			2001			Difference

	(In thousands)									(In thousands)
Total interest incurred	$	747		$	1,480		$	(733	)	$	1,729		$	2,501		$	(772	)
Interest capitalized		(747	)		(1,475	)		728			(1,729	)		(2,494	)		765

Interest expensed	$	—		$	5		$	(5	)	$	—		$	7		$	(7	)

The decrease in interest incurred and capitalized interest for the three and six months ended June 30, 2002, was the result of lower interest rates (see Interest (contra-expense) in Corporate segment).

Suburban-Residential:

The Suburban-Residential segment acquires and develops land primarily for single-family residential property, via direct investment or through joint ventures, and sells finished lots to homebuilders. This segment also owns interest in a joint venture that develops senior housing. The following is a schedule of net income for the segment:

	Three Months Ended								Six Months Ended
	June 30 ,								June 30,
	2002				2001		Difference			2002			2001			Difference

	(In thousands)								(In thousands)
Property sales and fee services:
Sales revenue	$	20,172		$	12,566		$	7,606		$	48,175		$	26,576		$	21,599
Cost of sales		(9,760	)		(7,510	)		(2,250	)		(24,498	)		(18,467	)		(6,031	)

Gain on property sales		10,412			5,056			5,356			23,677			8,109			15,568
Equity in earnings of development joint ventures, net		9,597			681			8,916			17,557			8,476			9,081

Total gain on property sales		20,009			5,737			14,272			41,234			16,585			24,649
Management and development fees		169			388			(219	)		455			439			16
Selling, general and administrative expenses		(1,598	)		(2,869	)		1,271			(5,766	)		(6,523	)		757
Other		1,737			(1,242	)		2,979			3,162			(1,720	)		4,882

		20,317			2,014			18,303			39,085			8,781			30,304
Depreciation and amortization		(36	)		(60	)		24			(73	)		(120	)		47
Minority interests		—			(237	)		237			—			(504	)		504

Income before income taxes		20,281			1,717			18,564			39,012			8,157			30,855
Income taxes (see Income Taxes section)		(8,154	)		(688	)		(7,466	)		(15,688	)		(3,264	)		(12,424	)

Net income	$	12,127		$	1,029		$	11,098		$	23,324		$	4,893		$	18,431

Property Sales

The $10.4 million gain on property sales for the three months ended June 30, 2002, included $10.3 million from the closings of 133 lots, compared to the $5.1 million gain from closings of 117 lots and 7 homes during the same period in 2001. The gain on property sales of $23.7 million for the six months ended June 30, 2002, included $22.1 million from the closings of 271 lots, as compared to the $8.1 million gain from closings of 227 lots and 55 homes during the same period in 2001. In addition, the gain also included $0.6 million and $2.1 million for the three and six months ended June 30, 2002, respectively, of our portion of profit participation related to certain properties that were sold in the prior year.

Equity in Earnings of Development Joint Ventures, Net

		Three Months Ended									Six Months Ended
		June 30,									June 30,
		2002			2001			Difference			2002			2001			Difference

		(In thousands)									(In thousands)
Sales proceeds-unconsolidated JVs	$	64,347		$	43,134		$	21,213		$	134,839		$	96,403		$	38,436
Cost of sales		(45,672	)		(40,827	)		(4,845	)		(91,047	)		(90,367	)		(680	)

Gain		18,675			2,307			16,368			43,792			6,036			37,756
Joint Venture partners interest		(9,078	)		(1,626	)		(7,452	)		(26,235	)		2,440			(28,675	)

Equity in earnings of development joint
ventures, net	$	9,597		$	681		$	8,916		$	17,557		$	8,476		$	9,081

Equity in earnings of development joint ventures, net, increased $8.9 million and $9.1 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods in 2001. The increase of $8.9 million for the three months ended June 30, 2002, was attributable to the increase in sales volume from the closing of 466 lots and 21 homes, compared to the closing of 28 lots and 67 homes for the three months ended June 30, 2001.

The increase of $9.1 million for the six months ended June 30, 2002, was attributable to the increase in sales volume from the closing of 1,512 lots and 32 homes compared to the closing of 153 lots and 132 homes for the six months ended June 30, 2001. The increase was partially offset by the decrease of $6.2 million from the sale of our interest in a joint venture managed by Brookfield Homes of California, Inc. in 2001 (see Variability in Results and Segment Reorganization sections).

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $1.3 million and $0.8 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods in 2001, primarily due to employee-related expenses. We anticipate the decline in selling, general and administrative expenses will continue (see Segment Reorganization section).

Other

“Other” income increased $3.0 million and $4.9 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods in 2001, because of $1.5 million and $2.5 million, respectively, of expenses related to cost overruns on a fixed price contract for a development project in 2001 and an increase in interest income of $1.0 million and $1.9 million, respectively, attributable to higher short-term investments.

Minority Interest

Minority interest for the three and six months ended June 30, 2002, decreased $0.2 million and $0.5 million, respectively, primarily because of the sale in 2001 of a 190-home site in Oxnard, California, by a consolidated joint venture.

Segment Reorganization

In mid-2001, we sold the homebuilding assets of the residential group, and at the beginning of 2002 the remaining residential development operations of the company were combined with the Suburban development group. Additionally, a number of residential sales were accelerated into the first two quarters of this year in order to take advantage of strong markets in certain projects. As a result of these events, future net income generated by residential activities are expected to decline significantly in future periods.

Urban:

The Urban segment entitles and develops urban mixed-use sites in San Francisco, Los Angeles, and San Diego. The principal active project of the segment is Mission Bay in San Francisco. The following is a schedule of net income for the segment:

	Three Months Ended June 30,									Six Months Ended June 30,
	2002			2001			Difference			2002			2001			Difference

	(In thousands)									(In thousands)
Property sales and fee services:
Sales revenue	$	—		$	26,787		$	(26,787	)	$	—		$	36,687		$	(36,687	)
Cost of sales		—			(19,806	)		19,806			—			(25,739	)		25,739

Total gain on property sales		—			6,981			(6,981	)		—			10,948			(10,948	)
Management and development fees		455			—			455			727			71			656
Selling, general and administrative expenses		(1,822	)		(1,141	)		(681	)		(3,419	)		(2,418	)		(1,001	)
Other		73			229			(156	)		144			3,699			(3,555	)

		(1,294	)		6,069			(7,363	)		(2,548	)		12,300			(14,848	)
Interest expense		5			(76	)		81			—			(56	)		56
Depreciation and amortization		(226	)		(597	)		371			(469	)		(1,009	)		540

Income (loss) before income taxes		(1,515	)		5,396			(6,911	)		(3,017	)		11,235			(14,252	)
Income (taxes) benefit (see Income Taxes
section)		609			(2,160	)		2,769			1,213			(4,496	)		5,709

Net income (loss)	$	(906	)	$	3,236		$	(4,142	)	$	(1,804	)	$	6,739		$	(8,543	)

Property Sales

The 2001 gains resulted from land sales of approximately 2.4 acres and 3.7 acres of land at Mission Bay, and San Diego, respectively. There were no land sales for the three and six months ended June 30, 2002 (See Variability in Results section).

Management and Development Fees

Management and development fees increased $0.5 million and $0.7 million for the three and six months ended June 30, 2002, primarily because of development management activities commenced in September 2001 related to a new joint venture development at Mission Bay.

Selling, General and Administrative Expenses

The increase of $0.7 million and $1.0 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods in 2001, was primarily attributable to employee-related expenses.

Other

The $0.2 million decrease in “other” for the three months ended June 30, 2002, was primarily due to decrease in interest income earned from short-term investments accounts. The $3.6 million decrease in “other” for the six months ended June 30, 2002, was primarily because the receipt of a lease termination payment related to the cancellation of a lease at the Mission Bay project in 2001.

Interest

Following is a summary of interest incurred:

	Three Months Ended June 30,									Three Months Ended June 30,
	2002			2001			Difference			2002			2001			Difference

	(In thousands)									(In thousands)
Total interest incurred	$	702		$	668		$	34		$	1,147		$	920		$	227
Interest capitalized		(707	)		(592	)		(115	)		(1,147	)		(864	)		(283	)

Interest expensed	$	(5	)	$	76		$	(81	)	$	—		$	56		$	(56	)

The increase in interest incurred and capitalized interest for the three and six months ended June 30, 2002, is the result of increased development activities at our Mission Bay project in San Francisco [see Interest (contra-expense) in Corporate segment].

Depreciation and Amortization Expense

Depreciation and amortization expense decreased by $0.4 million and $0.5 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods in 2001, because of demolished buildings in Mission Bay and San Diego were removed from service for development purposes.

Corporate:

Corporate consists primarily of administrative costs and interest contra-expense as shown in the following schedule:

	Three Months Ended									Six Months Ended
	June 30,									June 30
	2002			2001			Difference 2002/2001			2002			2001			Difference 2002/2001

	(In thousands)									(In thousands)
Interest (contra-expense)	$	4,949		$	3,617		$	1,332		$	10,900		$	8,291		$	2,609
Cost of sales		(1,586	)		(349	)		(1,237	)		(2,449	)		(349	)		(2,100	)
Corporate administrative costs		(4,362	)		(5,062	)		700			(8,464	)		(10,607	)		2,143
Depreciation and amortization		(373	)		(527	)		154			(887	)		(919	)		32
Other		(297	)		2,479			(2,776	)		(230	)		6,706			(6,936	)

Income (loss) before income taxes		(1,669	)		158			(1,827	)		(1,130	)		3,122			(4,252	)
Income (taxes) benefit		671			(63	)		734			454			(1,249	)		1,703

Net income (loss)	$	(998	)	$	95		$	(1,093	)	$	(676	)	$	1,873		$	(2,549	)

Interest (contra-expense)

Corporate interest (contra-expense) represents required capitalized interest, on qualifying assets in the Suburban and Urban segments, in excess of interest directly incurred by these segments. As these qualifying assets are sold, the corresponding capitalized interest is reflected as cost of sales in the Corporate segment. Or, for those assets transferred to Asset Management, as the assets are placed in service the corresponding interest capitalized is added to the cost basis of the asset and depreciated over the life of the building. The increase in interest (contra expense) for the three and six months ended June 30, 2002, is primarily because of the increase in qualifying assets in the operating segments.

Cost of Sales

As noted above, as the qualifying assets from other segments are sold, the corresponding capitalized interest is reflected as cost of sales. For the three and six months ended June 30, 2002, cost of sales were $1.6 million and $2.4 million, respectively, as compared to $0.3 million for the three and six months ended June 30, 2001. The increases were attributable to unit sales from the Residential segment.

Corporate Administrative Costs

Corporate administrative costs consist primarily of general and administrative expenses. General and administrative expenses decreased by $0.7 million and $2.1 million for the three and six months ended June 30, 2002, respectively, as compared to the same periods in 2001, primarily due to decreases in employee related expenses and professional fees.

Other

The decrease in “other” income for the three and six months ended June 30, 2002, is primarily attributable to lower interest income generated from a lower cash balance and lower interest rates on short-term investments.

Income taxes

Currently for 2002, our projected current tax rate is 17.47% and deferred tax rate is 22.55% as compared to 8.49% and 31.53%, respectively, for 2001. Current tax rates increased in the second quarter of 2002, compared to the second quarter of 2001, primarily due to decreased employee stock option exercises in 2002, timing differences related to residential land and building sales, and reduced tax deductible interest expense (due to lower interest rates) paid to a closely held mortgage real estate investment trust. The current tax rate is projected to increase in future periods.

Variability in Results

Although our rental properties provide relatively stable operating results, our earnings from period to period will be affected by the nature and timing of acquisitions and sales of property. Many of our projects require a lengthy process to complete the development cycle before they are sold. Also, sales of assets are difficult to predict given fluctuating economic conditions and are generally subject to lengthy negotiations and contingencies that need to be resolved before closing. These factors may tend to “bunch” income in particular periods rather than producing a more even pattern throughout the year or from year to year. In addition, gross margins may vary significantly as the mix of property varies. The cost basis of the properties sold varies because (i) properties have been owned for varying periods of time; (ii) properties are owned in various geographical locations; and (iii) development projects have varying infrastructure costs and build-out periods.

The variability of the timing of property sales, as noted above, has resulted in realization of a high level of gain from sales activity in the first and second quarter of 2002. It is expected that a similar high level of gains from sales will not occur in the third and fourth quarters of this year. Consequently, third and fourth quarter 2002 Net Income and Earnings Per Share will be lower than those reported in the first and second quarter.

Liquidity and Capital Resources

Off-balance sheet arrangements, contractual obligations, and commitments

We have the following off-balance sheet arrangements, contractual obligations, and commitments, which are disclosed in various sections of the Condensed Consolidated Financial Statements, Notes to Condensed Consolidated Financial Statements, and elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. They exist in the following areas:

•	Unconsolidated real estate joint ventures- capital contribution requirements
•	Debt and debt service guarantees
•	Surety bonds and standby letters of credit
•	Executed contracts for construction and development activity

Unconsolidated real estate joint ventures- capital contribution requirements

We have investments in eleven unconsolidated real estate joint ventures. Five of the joint ventures are involved in the operation of rental real estate properties, and the remaining six are involved in real estate development for investment or sale. We use the equity method of accounting for all of our investments in unconsolidated joint ventures.

We are required to make additional capital contributions to one of the unconsolidated joint ventures should additional capital contributions be necessary to fund cost overruns if actual development costs exceed the approved project development budget. The development budget is approximately $252.5 million, of which $165 million is anticipated to be funded from construction loan proceeds, $62.5 million from our partners and the remaining $25 million from us. We are currently negotiating the $165 million loan. As of June 30, 2002, no additional capital contribution is expected to be necessary.

As of June 30, 2002, we have also agreed with another of our unconsolidated joint ventures to fund up to $5.7 million for certain construction costs, if necessary.

Debt and debt service guarantees

We have made certain debt service guarantees with four of our unconsolidated joint ventures totaling $51.6 million. Of the total guarantees, $34.1 million relates to three unconsolidated residential development joint ventures, and $17.5 million relates to an unconsolidated commercial development joint venture. These debt service guarantees are typical business arrangements commonly required of developers in real estate development. Examples of events that would require us to provide a cash payment pursuant to a guarantee include a loan default, which would result from failure of the primary borrower to service the debt when due, or non-compliance of the primary borrower with financial covenants and inadequacy of asset collateral. Our guarantee exposure is generally limited to situations in which the value of the collateral is not sufficient to satisfy the outstanding indebtedness. At June 30, 2002, we have not been required to satisfy any amounts pursuant to these debt and debt service guarantees.

Surety bonds, standby letters of credit and commitments

As of June 30, 2002, we have $295.0 million in surety bonds, outstanding standby letters of credit in favor of local municipalities or financial institutions and commitments to guarantee the construction of real property improvements or financial obligations. Surety bonds and commitments are to guarantee the construction of public improvements, and infrastructure such as sewer, streets, traffic signals, grading, and wildlife preservations, in connection with our various development projects. Surety bonds are commonly required by public agencies from developers in real estate development. The surety bonds and standby letters of credit are renewable and expire upon completion of the required improvements. Standby letters of credit are a form of credit enhancement commonly required in real estate development when bonds are issued to finance public improvements.

Executed contracts for construction and development activity

At June 30, 2002, we have open construction and development contracts with vendors totaling $139.4 million related to our various projects, as compared to $273.3 million at December 31, 2001.

The following table summarizes our outstanding contractual obligations as of June 30, 2002, and the effect such obligations are expected to have on liquidity and cash flow in future periods:

Payments Due by Period

Contractual

Due within

Due in

Due

Obligations

Total

2002

2003-2005

2006-2007

Thereafter

(In thousands)

Mortgage and Other Debt

1,387,271

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