Quarterly Report for quarter ended 9/30/2002
Table of Contents
 
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 September 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. Yes  x No  ¨
 
As of October 24, 2002, there were 87,162,014 issued and outstanding shares of the Registrant’s Common Stock.
 

Table of Contents
 
CATELLUS DEVELOPMENT CORPORATION
 
INDEX
 
        
Page No.
PART I.    FINANCIAL INFORMATION
     
Item 1.
  
Financial Statements (Unaudited)
     
      
2
      
3
      
4
      
5
          
Item 2.
     
17
          
Item 3.
     
43
          
Item 4.
     
43
          
  
44
      
Item 1.
     
44
Item 2.
     
45
Item 3.
     
45
Item 4.
     
45
Item 5.
     
45
Item 6.
     
45
          
  
46

1

Table of Contents
 
PART I
 
PART I.   FINANCIAL INFORMATION
 
Item 1.   Financial Statements (Unaudited)
 
CATELLUS DEVELOPMENT CORPORATION
 
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
 
    
September 30, 2002
     
December 31, 2001
  
    
(Unaudited)
  
ASSETS
                  
Properties
   
$
2,415,846
 
   
$
2,276,508
 
Less accumulated depreciation
   
 
(385,413
)
   
 
(354,557
)
    
  
    
 
2,030,433
 
   
 
1,921,951
 
Other assets and deferred charges, net
   
 
236,886
 
   
 
167,305
 
Notes receivable, less allowance
   
 
58,268
 
   
 
73,335
 
Accounts receivable, less allowance
   
 
15,444
 
   
 
22,663
 
Assets held for sale
   
 
63
 
   
 
—  
 
Restricted cash and investments
   
 
35,622
 
   
 
7,566
 
Cash and cash equivalents
   
 
267,111
 
   
 
222,695
 
    
  
Total
   
$
2,643,827
 
   
$
2,415,515
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Mortgage and other debt
   
$
1,479,933
 
   
$
1,310,457
 
Accounts payable and accrued expenses
   
 
106,260
 
   
 
145,688
 
Deferred credits and other liabilities
   
 
155,969
 
   
 
177,656
 
Liabilities associated with assets held for sale
   
 
305
 
   
 
—  
 
Deferred income taxes
   
 
320,633
 
   
 
290,658
 
    
  
Total liabilities
   
 
2,063,100
 
   
 
1,924,459
 
    
  
Commitments and contingencies (Note 8)
                  
Minority interests
   
 
55,839
 
   
 
55,799
 
    
  
Stockholders’ equity
                  
Common stock, 110,805 and 110,209 shares issued and 87,158 and 86,562 shares outstanding at September 30, 2002 and December 31, 2001, respectively
   
 
1,108
 
   
 
1,102
 
Paid-in capital
   
 
531,159
 
   
 
521,312
 
Treasury stock, at cost (23,647 shares at September 30, 2002 and December 31, 2001)
   
 
(401,082
)
   
 
(401,082
)
Accumulated earnings
   
 
393,703
 
   
 
313,925
 
    
  
Total stockholders’ equity
   
 
524,888
 
   
 
435,257
 
    
  
Total
   
$
2,643,827
 
   
$
2,415,515
 
    
  
 
See notes to condensed consolidated financial statements

2

Table of Contents
 
CATELLUS DEVELOPMENT CORPORATION
 
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(Unaudited)
     
(Unaudited)
  
Rental properties
                                    
Rental revenue
   
$
66,184
 
   
$
58,642
 
   
$
194,132
 
   
$
170,359
 
Property operating costs
   
 
(18,130
)
   
 
(17,193
)
   
 
(51,099
)
   
 
(44,894
)
Equity in earnings of operating joint ventures, net
   
 
993
 
   
 
1,184
 
   
 
6,838
 
   
 
7,017
 
    
  
  
  
    
 
49,047
 
   
 
42,633
 
   
 
149,871
 
   
 
132,482
 
    
  
  
  
Property sales and fee services
                                    
Sales revenue
   
 
10,299
 
   
 
64,324
 
   
 
108,991
 
   
 
190,186
 
Cost of sales
   
 
(2,471
)
   
 
(36,609
)
   
 
(69,723
)
   
 
(113,484
)
    
  
  
  
Gain on property sales
   
 
7,828
 
   
 
27,715
 
   
 
39,268
 
   
 
76,702
 
Equity in earnings of development joint ventures, net
   
 
4,201
 
   
 
13,489
 
   
 
19,825
 
   
 
21,616
 
    
  
  
  
Total gain on property sales
   
 
12,029
 
   
 
41,204
 
   
 
59,093
 
   
 
98,318
 
Management and development fees
   
 
2,755
 
   
 
1,266
 
   
 
5,651
 
   
 
3,820
 
Selling, general and administrative expenses
   
 
(5,824
)
   
 
(6,373
)
   
 
(19,804
)
   
 
(21,953
)
Other, net
   
 
3,063
 
   
 
(127
)
   
 
15,159
 
   
 
5,955
 
    
  
  
  
    
 
12,023
 
   
 
35,970
 
   
 
60,099
 
   
 
86,140
 
    
  
  
  
Interest expense
   
 
(16,435
)
   
 
(13,617
)
   
 
(43,029
)
   
 
(42,638
)
Depreciation and amortization
   
 
(17,599
)
   
 
(12,781
)
   
 
(46,051
)
   
 
(38,435
)
Corporate administrative costs
   
 
(4,284
)
   
 
(4,685
)
   
 
(12,748
)
   
 
(15,292
)
Gain on non-strategic asset sales
   
 
421
 
   
 
765
 
   
 
7,242
 
   
 
3,901
 
Other, net
   
 
803
 
   
 
1,152
 
   
 
573
 
   
 
7,858
 
    
  
  
  
Income before minority interests, income taxes, and discontinued operations
   
 
23,976
 
   
 
49,437
 
   
 
115,957
 
   
 
134,016
 
Minority interests
   
 
(1,527
)
   
 
(1,604
)
   
 
(4,580
)
   
 
(5,316
)
    
  
  
  
Income before income taxes and discontinued operations
   
 
22,449
 
   
 
47,833
 
   
 
111,377
 
   
 
128,700
 
    
  
  
  
Income tax expense
                                    
Current
   
 
(3,743
)
   
 
(5,382
)
   
 
(22,844
)
   
 
(12,211
)
Deferred
   
 
(5,312
)
   
 
(13,747
)
   
 
(21,975
)
   
 
(39,276
)
    
  
  
  
    
 
(9,055
)
   
 
(19,129
)
   
 
(44,819
)
   
 
(51,487
)
    
  
  
  
Income from continuing operations
   
 
13,394
 
   
 
28,704
 
   
 
66,558
 
   
 
77,213
 
    
  
  
  
Discontinued operations, net of income tax:
                                    
Gain from disposal of discontinued operations
   
 
1,277
 
   
 
—  
 
   
 
13,332
 
   
 
—  
 
Loss from discontinued operations
   
 
(16
)
   
 
(58
)
   
 
(112
)
   
 
(188
)
    
  
  
  
Gain (loss) from discontinued operations
   
 
1,261
 
   
 
(58
)
   
 
13,220
 
   
 
(188
)
    
  
  
  
Net income
   
$
14,655
 
   
$
28,646
 
   
$
79,778
 
   
$
77,025
 
    
  
  
  
Income per share from continuing operations
                                    
Basic
   
$
0.15
 
   
$
0.29
 
   
$
0.77
 
   
$
0.76
 
    
  
  
  
Assuming dilution
   
$
0.15
 
   
$
0.28
 
   
$
0.74
 
   
$
0.74
 
    
  
  
  
Income per share from discontinued operations
                                    
Basic
   
$
0.02
 
   
$
—  
 
   
$
0.15
 
   
$
—  
 
    
  
  
  
Assuming dilution
   
$
0.01
 
   
$
—  
 
   
$
0.15
 
   
$
—  
 
    
  
  
  
Net income per share
                                    
Basic
   
$
0.17
 
   
$
0.29
 
   
$
0.92
 
   
$
0.76
 
    
  
  
  
Assuming dilution
   
$
0.16
 
   
$
0.28
 
   
$
0.89
 
   
$
0.74
 
    
  
  
  
Average number of common shares outstanding—basic
   
 
87,150
 
   
 
99,290
 
   
 
86,928
 
   
 
101,518
 
    
  
  
  
Average number of common shares outstanding—diluted
   
 
89,603
 
   
 
102,178
 
   
 
89,539
 
   
 
104,389
 
    
  
  
  
 
See notes to condensed consolidated financial statements

3

Table of Contents
 
CATELLUS DEVELOPMENT CORPORATION
 
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
 
    
Nine Months Ended September 30,
  
    
2002
     
2001
  
    
(Unaudited)
  
Cash flows from operating activities:
                  
Net income
   
$
79,778
 
   
$
77,025
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Depreciation and amortization
   
 
46,051
 
   
 
38,435
 
Deferred income taxes
   
 
21,975
 
   
 
39,276
 
Deferred gain recognized
   
 
(15,856
)
   
 
(6,149
)
Amortization of deferred loan fees and other costs
   
 
4,834
 
   
 
3,779
 
Equity in earnings of joint ventures
   
 
(26,663
)
   
 
(28,633
)
Operating distributions from joint ventures
   
 
72,770
 
   
 
29,781
 
Gain on sale of investment property
   
 
(22,305
)
   
 
(31,271
)
Cost of development property sold
   
 
66,304
 
   
 
83,594
 
Capital expenditures for development property
   
 
(43,220
)
   
 
(47,942
)
Other, net
   
 
10,366
 
   
 
1,739
 
Change in deferred credits and other liabilities
   
 
13,155
 
   
 
100,940
 
Change in other operating assets and liabilities
   
 
(45,381
)
   
 
24,231
 
    
  
Net cash provided by operating activities
   
 
161,808
 
   
 
284,805
 
    
  
Cash flows from investing activities:
                  
Proceeds from sale of investment property
   
 
29,390
 
   
 
48,259
 
Capital expenditures for investment property
   
 
(246,354
)
   
 
(233,451
)
Reimbursable construction costs
   
 
(32,497
)
   
 
—  
 
Contributions to joint ventures
   
 
(13,403
)
   
 
—  
 
Restricted cash
   
 
(28,056
)
   
 
16,920
 
    
  
Net cash used in investing activities
   
 
(290,920
)
   
 
(168,272
)
    
  
Cash flows from financing activities:
                  
Borrowings
   
 
381,386
 
   
 
369,873
 
Repayment of borrowings
   
 
(211,910
)
   
 
(211,483
)
Distributions to minority partners
   
 
(4,540
)
   
 
(4,965
)
Repurchase of common stock
   
 
—  
 
   
 
(151,920
)
Proceeds from issuance of common stock
   
 
8,592
 
   
 
14,678
 
    
  
Net cash provided by financing activities
   
 
173,528
 
   
 
16,183
 
    
  
Net increase in cash and cash equivalents
   
 
44,416
 
   
 
132,716
 
Cash and cash equivalents at beginning of period
   
 
222,695
 
   
 
336,558
 
    
  
Cash and cash equivalents at end of period
   
$
267,111
 
   
$
469,274
 
    
  
Supplemental disclosures of cash flow information:
                  
Cash paid during the period for:
                  
Interest (net of amount capitalized)
   
$
37,917
 
   
$
39,639
 
Income taxes
   
$
22,926
 
   
$
3,874
 
Non-cash investing activities:
                  
Reclassification of prior period land acquisition and improvement costs from investing to operating activities due to change in intended use
   
$
31,590
 
   
$
35,529
 
Non-cash financing activities:
                  
Seller-financed acquisitions
   
$
—  
 
   
$
10,000
 
Debt forgiveness-property reconveyance
   
$
—  
 
   
$
(1,637
)
 
See notes to condensed consolidated financial statements

4

Table of Contents
 
CATELLUS DEVELOPMENT CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 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 $35.6 million at September 30, 2002, and $7.6 million at December 31, 2001, $0.6 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. Approximately $20.3 million at September 30, 2002, represents funds held in pledge accounts at a bank until certain loan collateral pool requirements are met, and $5.4 million represents a reserve fund held by a lender in anticipation of substitution of real property collateral. In addition, restricted investments of $7.2 million at September 30, 2002, and December 31, 2001, represent certificates of deposits used to guarantee lease performance for certain properties that secure debt, and $2.1 million at September 30, 2002, was temporarily invested in short term deposits designated for the purchase of a Company-owned life insurance policy.

5

Table of Contents
 
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 September 30,
    
2002
   
2001
    
Income
   
Shares
   
Per Share Amount
   
Income
     
Shares
   
Per Share Amount
    
(In thousands, except per share data)
Income from continuing operations
   
$
13,394
   
87,150
   
$
0.15
   
$
28,704
 
   
99,290
   
$
0.29
                
                
Effect of dilutive securities: stock options
   
 
—  
   
2,453
          
 
—  
 
   
2,888
       
    
  
         
  
      
Income from continuing operations assuming dilution
   
$
13,394
   
89,603
   
$
0.15
   
$
28,704
 
   
102,178
   
$
0.28
    
  
  
  
  
  
Gain (loss) from discontinued operations
   
$
1,261
   
87,150
   
$
0.02
   
$
(58
)
   
99,290
   
$
—  
                
                
Effect of dilutive securities: stock options
   
 
—  
   
2,453
          
 
—  
 
   
2,888
       
    
  
         
  
      
Gain (loss) from discontinued operations assuming dilution
   
$
1,261
   
89,603
   
$
0.01
   
$
(58
)
   
102,178
   
$
—  
    
  
  
  
  
  
Net income
   
$
14,655
   
87,150
   
$
0.17
   
$
28,646
 
   
99,290
   
$
0.29
                
                
Effect of dilutive securities: stock options
   
 
—  
   
2,453
          
 
—  
 
   
2,888
       
    
  
         
  
      
Net income assuming dilution
   
$
14,655
   
89,603
   
$
0.16
   
$
28,646
 
   
102,178
   
$
0.28
    
  
  
  
  
  
 
    
Nine Months Ended September 30,
    
2002
   
2001
    
Income
   
Shares
   
Per Share
Amount
   
Income
     
Shares
   
Per Share Amount
    
(In thousands, except per share data)
Income from continuing operations
   
$
66,558
   
86,928
   
$
0.77
   
$
77,213
 
   
101,518
   
$
0.76
                
                
Effect of dilutive securities: stock options
   
 
—  
   
2,611
          
 
—  
 
   
2,871
       
    
  
         
  
      
Income from continuing operations assuming dilution
   
$
66,558
   
89,539
   
$
0.74
   
$
77,213
 
   
104,389
   
$
0.74
    
  
  
  
  
  
Gain (loss) from discontinued operations
   
$
13,220
   
86,928
   
$
0.15
   
$
(188
)
   
101,518
   
$
—  
                
                
Effect of dilutive securities: stock options
   
 
—  
   
2,611
          
 
—  
 
   
2,871
       
    
  
         
  
      
Gain (loss) from discontinued operations assuming dilution
   
$
13,220
   
89,539
   
$
0.15
   
$
(188
)
   
104,389
   
$
—  
    
  
  
  
  
  
Net income
   
$
79,778
   
86,928
   
$
0.92
   
$
77,025
 
   
101,518
   
$
0.76
                
                
Effect of dilutive securities: stock options
   
 
—  
   
2,611
          
 
—  
 
   
2,871
       
    
  
         
  
      
Net income assuming dilution
   
$
79,778
   
89,539
   
$
0.89
   
$
77,025
 
   
104,389
   
$
0.74
    
  
  
  
  
  

6

Table of Contents
 
NOTE 5.    MORTGAGE AND OTHER DEBT
 
Mortgage and other debt at September 30, 2002, and December 31, 2001, are summarized as follows:
 
    
September 30, 2002
   
December 31,
2001
    
(In thousands)
Fixed rate mortgage loans
   
$
1,052,764
   
$
842,296
Floating rate mortgage loans
   
 
209,573
   
 
272,288
Construction loans
   
 
64,837
   
 
98,321
Land acquisition and development loans
   
 
43,550
   
 
58,498
Assessment district bonds
   
 
80,903
   
 
34,456
Capital leases
   
 
19,549
   
 
3,981
Other loans
   
 
8,757
   
 
617
    
  
Mortgage and other debt
   
 
1,479,933
   
 
1,310,457
Liabilities of assets held for sale:
              
Floating rate mortgage loans
   
 
298
   
 
  —  
    
  
Total mortgage and other debt
   
$
1,480,231
   
$
1,310,457
    
  
Due within one year
   
$
69,435
   
$
176,723
    
  
 
During the nine months ended September 30, 2002, the Company accepted a commitment for a $285.3 million fixed rate mortgage loan of which $242.1 million was closed and funded as of September 30, 2002. The loan bears interest of 7.05% (7.16% 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 $43.2 million is expected to be funded in the fourth quarter of 2002.
 
In 2002, the Company recorded a $35.3 million 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.
 
During the third quarter of 2002, the Company closed a $20.4 million floating rate mortgage loan (LIBOR plus 1.80%) that has a 25-year amortization schedule and a maturity of 3 years. 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 has a yield maintenance premium if paid prior to maturity.
 
During the third quarter of 2002, the Company acquired a corporate aircraft and financed it with an $8.3 million floating rate collateralized loan (LIBOR plus 2.42%) with a maturity of 10 years. There is a yield maintenance premium if paid prior to the first annual anniversary date. This loan is included in “Other loans” in the above schedule.
 
Also, during the third quarter of 2002, the Company extended the maturity of a $56.8 million floating rate mortgage loan for up to one year.

7

Table of Contents
 
Interest costs relating to mortgage and other debt for the three-month and nine-month periods ended September 30, 2002 and 2001, are summarized as follows:
 
    
Three Months Ended September 30,
     
Nine Months Ended September 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(In thousands)
     
(In thousands)
  
Total interest incurred
   
$
21,748
 
   
$
20,396
 
   
$
62,243
 
   
$
61,673
 
Interest capitalized
   
 
(5,313
)
   
 
(6,779
)
   
 
(19,214
)
   
 
(19,035
)
    
  
  
  
Interest expensed
   
$
16,435
 
   
$
13,617
 
   
$
43,029
 
   
$
42,638
 
    
  
  
  
 
NOTE 6.    PROPERTIES
 
Book value by property type at September 30, 2002, and December 31, 2001, consisted of the following:
 
    
September 30, 2002
     
December 31, 2001
  
    
(In thousands)
  
Rental properties:
                  
Industrial buildings
   
$
1,117,952
 
   
$
943,340
 
Office buildings
   
 
337,916
 
   
 
297,707
 
Retail buildings
   
 
100,592
 
   
 
96,263
 
Ground leases
   
 
141,454
 
   
 
142,913
 
Investment in operating joint ventures
   
 
(11,313
)
   
 
(13,026
)
    
  
    
 
1,686,601
 
   
 
1,467,197
 
    
  
Developable land:
                  
Commercial
   
 
200,068
 
   
 
188,527
 
Residential
   
 
52,206
 
   
 
52,108
 
Urban
   
 
274,736
 
   
 
261,206
 
Investment in development joint ventures
   
 
54,566
 
   
 
76,756
 
    
  
    
 
581,576
 
   
 
578,597
 
    
  
Work-in-process:
                  
Commercial
   
 
38,541
 
   
 
118,668
 
Commercial—capital lease
   
 
5,211
 
   
 
40,560
 
Urban
   
 
62,195
 
   
 
37,616
 
    
  
    
 
105,947
 
   
 
196,844
 
    
  
Furniture and equipment
   
 
37,273
 
   
 
28,818
 
Other
   
 
4,449
 
   
 
5,052
 
    
  
Gross book value
   
 
2,415,846
 
   
 
2,276,508
 
Accumulated depreciation
   
 
(385,413
)
   
 
(354,557
)
    
  
Net book value
   
$
2,030,433
 
   
$
1,921,951
 
    
  

8

Table of Contents
 
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, retail, and entertainment purposes—for the Company’s own account and for joint ventures. 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.

9

Table of Contents
 
Financial data by reportable segment is as follows:
 
    
Asset Management
     
Suburban
                          
Discontinued Operations
         
       
Commercial
     
Residential
     
Urban
     
Corporate
     
Subtotal
        
Total
  
    
(In thousands)
  
Three Months Ended September 30, 2002
                           
Rental properties:
                                                                        
Rental revenue
   
$
66,191
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
66,191
 
   
$
(7
)
   
$
66,184
 
Property operating costs
   
 
(18,156
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(18,156
)
   
 
26
 
   
 
(18,130
)
Equity in earnings of operating joint ventures, net
   
 
993
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
993
 
   
 
—  
 
   
 
993
 
    
  
  
  
  
  
  
  
    
 
49,028
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
49,028
 
   
 
19
 
   
 
49,047
 
    
  
  
  
  
  
  
  
Property sales and fee services:
                                                                        
Sales revenue
   
 
5,997
 
   
 
(83
)
   
 
8,871
 
   
 
—  
 
   
 
—  
 
   
 
14,785
 
   
 
(4,486
)
   
 
10,299
 
Cost of sales
   
 
(2,465
)
   
 
1,216
 
   
 
(3,508
)
   
 
—  
 
   
 
(60
)
   
 
(4,817
)
   
 
2,346
 
   
 
(2,471
)
    
  
  
  
  
  
  
  
Gain on property sales
   
 
3,532
 
   
 
1,133
 
   
 
5,363
 
   
 
—  
 
   
 
(60
)
   
 
9,968
 
   
 
(2,140
)
   
 
7,828
 
Equity in earnings of development joint ventures, net
   
 
—  
 
   
 
—  
 
   
 
5,028
 
   
 
—  
 
   
 
(827
)
   
 
4,201
 
   
 
—  
 
   
 
4,201
 
    
  
  
  
  
  
  
  
Total gain on property sales
   
 
3,532
 
   
 
1,133
 
   
 
10,391
 
   
 
—
 
   
 
(887
)
   
 
14,169
 
   
 
(2,140
)
   
 
12,029
 
Management and development fees
   
 
9
 
   
 
1,355
 
   
 
647
 
   
 
744
 
   
 
—  
 
   
 
2,755
 
   
 
—  
 
   
 
2,755
 
Selling, general and administrative expenses
   
 
(168
)
   
 
(2,455
)
   
 
(1,549
)
   
 
(1,652
)
   
 
—  
 
   
 
(5,824
)
   
 
—  
 
   
 
(5,824
)
Other, net(1)
   
 
1,822
 
   
 
(125
)
   
 
1,702
 
   
 
(336
)
   
 
—  
 
   
 
3,063
 
   
 
—  
 
   
 
3,063
 
    
  
  
  
  
  
  
  
    
 
5,195
 
   
 
(92
)
   
 
11,191
 
   
 
(1,244
)
   
 
(887
)
   
 
14,163
 
   
 
(2,140
)
   
 
12,023
 
    
  
  
  
  
  
  
  
Interest expense
   
 
(20,200
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
3,759
 
   
 
(16,441
)
   
 
6
 
   
 
(16,435
)
Depreciation and amortization
   
 
(16,017
)
   
 
(259
)
   
 
(79
)
   
 
(351
)
   
 
(894
)
   
 
(17,600
)
   
 
1
 
   
 
(17,599
)
Corporate administrative costs
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(4,284
)
   
 
(4,284
)
   
 
—  
 
   
 
(4,284
)
Gain on non-strategic asset sales
   
 
421
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
421
 
   
 
—  
 
   
 
421
 
Other, net
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
803
 
   
 
803
 
   
 
—  
 
   
 
803
 
    
  
  
  
  
  
  
  
Income (loss) before minority interests, income taxes, and discontinued operations
   
 
18,427
 
   
 
(351
)
   
 
11,112
 
   
 
(1,595
)
   
 
(1,503
)
   
 
26,090
 
   
 
(2,114
)
   
 
23,976
 
Minority interests
   
 
(1,527
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(1,527
)
   
 
—  
 
   
 
(1,527
)
    
  
  
  
  
  
  
  
Income (loss) before income taxes and discontinued operations
   
 
16,900
 
   
 
(351
)
   
 
11,112
 
   
 
(1,595
)
   
 
(1,503
)
   
 
24,563
 
   
 
(2,114
)
   
 
22,449
 
Income taxes
   
 
(6,816
)
   
 
141
 
   
 
(4,476
)
   
 
642
 
   
 
601
 
   
 
(9,908
)
   
 
853
 
   
 
(9,055
)
    
  
  
  
  
  
  
  
Income (loss) from continuing operations
   
 
10,084
 
   
 
(210
)
   
 
6,636
 
   
 
(953
)
   
 
(902
)
   
 
14,655
 
   
 
(1,261
)
   
 
13,394
 
    
  
  
  
  
  
  
  
Discontinued operations, net of tax:
                                                                        
Gain from disposal of discontinued operations
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
1,277
 
   
 
1,277
 
Loss from discontinued operations
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
(16
)
   
 
(16
)
    
  
  
  
  
  
  
  
Gain from discontinued operations
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
1,261
 
   
 
1,261
 
    
  
  
  
  
  
  
  
Net income (loss)
   
$
10,084
 
   
$
(210
)
   
$
6,636
 
   
$
(953
)
   
$
(902
)
   
$
14,655
 
   
$
—
 
   
$
14,655
 
    
  
  
  
  
  
  
  
(1)
 
Includes $0.8 million of lease termination fees in the Asset Management segment.

10

Table of Contents
 
    
Asset Management
     
Suburban
     
Urban
     
Corporate
     
Subtotal
       
Discontinued Operations
     
Total
  
       
Commercial
     
Residential
                   
    
(In thousands)
  
Three Months Ended September 30, 2001
                                                                          
Rental properties:
                                                                          
Rental revenue
   
$
59,116
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
59,116
 
     
$
(474
)
   
$
58,642
 
Property operating costs
   
 
(17,390
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(17,390
)
     
 
197
 
   
 
(17,193
)
Equity in earnings of operating joint ventures, net
   
 
1,184
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
1,184
 
     
 
—  
 
   
 
1,184
 
    
  
  
  
  
  
    
  
    
 
42,910
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
42,910
 
     
 
(277
)
   
 
42,633
 
    
  
  
  
  
  
    
  
Property sales and fee services:
                                                                          
Sales revenue
   
 
29,848
 
   
 
19,325
 
   
 
2,045
 
   
 
13,106
 
   
 
—  
 
   
 
64,324
 
     
 
—  
 
   
 
64,324
 
Cost of sales
   
 
(10,709
)
   
 
(13,406
)
   
 
(681
)
   
 
(11,598
)
   
 
(215
)
   
 
(36,609
)
     
 
—  
 
   
 
(36,609
)
    
  
  
  
  
  
    
  
Gain on property sales
   
 
19,139
 
   
 
5,919
 
   
 
1,364
 
   
 
1,508
 
   
 
(215
)
   
 
27,715
 
     
 
—  
 
   
 
27,715
 
Equity in earnings of development joint ventures, net
   
 
—  
 
   
 
—  
 
   
 
14,420
 
   
 
—  
 
   
 
(931
)
   
 
13,489
 
     
 
—  
 
   
 
13,489
 
    
  
  
  
  
  
    
  
Total gain on property sales
   
 
19,139
 
   
 
5,919
 
   
 
15,784
 
   
 
1,508
 
   
 
(1,146
)
   
 
41,204
 
     
 
—  
 
   
 
41,204
 
Management and development fees
   
 
108
 
   
 
766
 
   
 
(5
)
   
 
397
 
   
 
—  
 
   
 
1,266
 
     
 
—  
 
   
 
1,266
 
Selling, general and administrative expenses
   
 
(300
)
   
 
(3,024
)
   
 
(1,812
)
   
 
(1,237
)
   
 
—  
 
   
 
(6,373
)
     
 
—  
 
   
 
(6,373
)
Other, net(1)
   
 
846
 
   
 
(1,163
)
   
 
(786
)
   
 
976
 
   
 
—  
 
   
 
(127
)
     
 
—  
 
   
 
(127
)
    
  
  
  
  
  
    
  
    
 
19,793
 
   
 
2,498
 
   
 
13,181
 
   
 
1,644
 
   
 
(1,146
)
   
 
35,970
 
     
 
—  
 
   
 
35,970
 
    
  
  
  
  
  
    
  
Interest expense
   
 
(18,825
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
4,930
 
   
 
(13,895
)
     
 
278
 
   
 
(13,617
)
Depreciation and amortization
   
 
(11,918
)
   
 
(52
)
   
 
(124
)
   
 
(423
)
   
 
(360
)
   
 
(12,877
)
     
 
96
 
   
 
(12,781
)
Corporate administrative costs
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(4,685
)
   
 
(4,685
)
     
 
—  
 
   
 
(4,685
)
Gain on non-strategic asset sales
   
 
765
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
765
 
     
 
—  
 
   
 
765
 
Other, net
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
1,152
 
   
 
1,152
 
     
 
—  
 
   
 
1,152
 
    
  
  
  
  
  
    
  
Income (loss) before minority interests, income taxes, and discontinued operations
   
 
32,725
 
   
 
2,446
 
   
 
13,057
 
   
 
1,221
 
   
 
(109
)
   
 
49,340
 
     
 
97
 
   
 
49,437
 
Minority interests
   
 
(1,604
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(1,604
)
     
 
—  
 
   
 
(1,604
)
    
  
  
  
  
  
    
  
Income (loss) before income taxes and discontinued operations
   
 
31,121
 
   
 
2,446
 
   
 
13,057
 
   
 
1,221
 
   
 
(109
)
   
 
47,736
 
     
 
97
 
   
 
47,833
 
Income taxes
   
 
(12,443
)
   
 
(979
)
   
 
(5,223
)
   
 
(488
)
   
 
43
 
   
 
(19,090
)
     
 
(39
)
   
 
(19,129
)
    
  
  
  
  
  
    
  
Income (loss) from continuing operations
   
 
18,678
 
   
 
1,467
 
   
 
7,834
 
   
 
733
 
   
 
(66
)
   
 
28,646
 
     
 
58
 
   
 
28,704
 
    
  
  
  
  
  
    
  
Discontinued operations, net of tax:
                                                                          
Gain from disposal of discontinued operations
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
     
 
—  
 
   
 
—  
 
Loss from discontinued operations
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
     
 
(58
)
   
 
(58
)
    
  
  
  
  
  
    
  
Loss from discontinued operations
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
     
 
(58
)
   
 
(58
)
    
  
  
  
  
  
    
  
Net income (loss)
   
$
18,678
 
   
$
1,467
 
   
$
7,834
 
   
$
733
 
   
$
(66
)
   
$
28,646
 
     
$
—  
 
   
$
28,646
 
    
  
  
  
  
  
    
  
(1)
 
Includes $0.2 million of lease termination fees in the Asset Management segment.

11

Table of Contents
 
    
Asset
Management
     
Suburban
     
Urban
     
Corporate
     
Subtotal
     
Discontinued
Operations
     
Total
  
       
Commercial
     
Residential
                 
    
(In thousands)
  
Nine Months Ended September 30, 2002
                                                                        
Rental properties:
                                                                        
Rental revenue
   
$
194,750
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
194,750
 
   
$
(618
)
   
$
194,132
 
Property operating costs
   
 
(51,355
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(51,355
)
   
 
256
 
   
 
(51,099
)
Equity in earnings of operating joint ventures, net
   
 
6,838
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
6,838
 
   
 
—  
 
   
 
6,838
 
    
  
  
  
  
  
  
  
    
 
150,233
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
150,233
 
   
 
(362
)
   
 
149,871
 
    
  
  
  
  
  
  
  
Property sales and fee services:
                                                                        
Sales revenue
   
 
41,121
 
   
 
40,907
 
   
 
57,046
 
   
 
—  
 
   
 
—  
 
   
 
139,074
 
   
 
(30,083
)
   
 
108,991
 
Cost of sales
   
 
(13,919
)
   
 
(35,000
)
   
 
(28,006
)
   
 
—  
 
   
 
(576
)
   
 
(77,501
)
   
 
7,778
 
   
 
(69,723
)
    
  
  
  
  
  
  
  
Gain on property sales
   
 
27,202
 
   
 
5,907
 
   
 
29,040
 
   
 
—  
 
   
 
(576
)
   
 
61,573
 
   
 
(22,305
)
   
 
39,268
 
Equity in earnings of development joint ventures, net
   
 
—  
 
   
 
—  
 
   
 
22,585
 
   
 
—  
 
   
 
(2,760
)
   
 
19,825
 
   
 
—  
 
   
 
19,825
 
    
  
  
  
  
  
  
  
Total gain on property sales
   
 
27,202
 
   
 
5,907
 
   
 
51,625
 
   
 
—  
 
   
 
(3,336
)
   
 
81,398
 
   
 
(22,305
)
   
 
59,093
 
Management and development fees
   
 
60
 
   
 
3,018
 
   
 
1,102
 
   
 
1,471
 
   
 
—  
 
   
 
5,651
 
   
 
—  
 
   
 
5,651
 
Selling, general and administrative expenses
   
 
(878
)
   
 
(6,540
)
   
 
(7,315
)
   
 
(5,071
)
   
 
—  
 
   
 
(19,804
)
   
 
—  
 
   
 
(19,804
)
Other, net(1)
   
 
10,434
 
   
 
53
 
   
 
4,864
 
   
 
(192
)
   
 
—  
 
   
 
15,159
 
   
 
—  
 
   
 
15,159
 
    
  
  
  
  
  
  
  
    
 
36,818
 
   
 
2,438
 
   
 
50,276
 
   
 
(3,792
)
   
 
(3,336
)
   
 
82,404
 
   
 
(22,305
)
   
 
60,099
 
    
  
  
  
  
  
  
  
Interest expense
   
 
(58,083
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
14,659
 
   
 
(43,424
)
   
 
395
 
   
 
(43,029
)
Depreciation and amortization
   
 
(42,919
)
   
 
(534
)
   
 
(152
)
   
 
(820
)
   
 
(1,781
)
   
 
(46,206
)
   
 
155
 
   
 
(46,051
)
Corporate administrative costs
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(12,748
)
   
 
(12,748
)
   
 
—  
 
   
 
(12,748
)
Gain on non-strategic asset sales
   
 
7,242
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
7,242
 
   
 
—  
 
   
 
7,242
 
Other, net
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
573
 
   
 
573
 
   
 
—  
 
   
 
573
 
    
  
  
  
  
  
  
  
Income (loss) before minority interests, income taxes, and discontinued operations
   
 
93,291
 
   
 
1,904
 
   
 
50,124
 
   
 
(4,612
)
   
 
(2,633
)
   
 
138,074
 
   
 
(22,117
)
   
 
115,957
 
Minority interests
   
 
(4,580
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(4,580
)
   
 
—  
 
   
 
(4,580
)
    
  
  
  
  
  
  
  
Income (loss) before income taxes and discontinued operations
   
 
88,711
 
   
 
1,904
 
   
 
50,124
 
   
 
(4,612
)
   
 
(2,633
)
   
 
133,494
 
   
 
(22,117
)
   
 
111,377
 
Income taxes
   
 
(35,696
)
   
 
(766
)
   
 
(20,164
)
   
 
1,855
 
   
 
1,055
 
   
 
(53,716
)
   
 
8,897
 
   
 
(44,819
)
    
  
  
  
  
  
  
  
Income (loss) from continuing operations
   
 
53,015
 
   
 
1,138
 
   
 
29,960
 
   
 
(2,757
)
   
 
(1,578
)
   
 
79,778
 
   
 
(13,220
)
   
 
66,558
 
    
  
  
  
  
  
  
  
Discontinued operations, net of tax:
                                                                        
Gain from disposal of discontinued operations
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
13,332
 
   
 
13,332
 
Loss from discontinued operations
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(112
)
   
 
(112
)
    
  
  
  
  
  
  
  
Gain from discontinued operations
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
13,220
 
   
 
13,220
 
    
  
  
  
  
  
  
  
Net income (loss)
   
$
53,015
 
   
$
1,138
 
   
$
29,960
 
   
$
(2,757
)
   
$
(1,578
)
   
$
79,778
 
   
$
—  
 
   
$
79,778
 
    
  
  
  
  
  
  
  
(1)
 
Includes $8.2 million of lease termination fees in the Asset Management segment.

12

Table of Contents
 
    
Asset Management
     
Suburban
                          
Discontinued Operations
         
       
Commercial
     
Residential
     
Urban
     
Corporate
     
Subtotal
        
Total
  
    
(In thousands)
  
Nine Months Ended September 30, 2001
                           
Rental properties:
                                                                        
Rental revenue
   
$
172,025
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
172,025
 
   
$
(1,666
)
   
$
170,359
 
Property operating costs
   
 
(45,598
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(45,598
)
   
 
704
 
   
 
(44,894
)
Equity in earnings of operating joint ventures, net
   
 
7,017
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
7,017
 
   
 
—  
 
   
 
7,017
 
    
  
  
  
  
  
  
  
    
 
133,444
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
133,444
 
   
 
(962
)
   
 
132,482
 
    
  
  
  
  
  
  
  
Property sales and fee services:
                                                                        
Sales revenue
   
 
66,670
 
   
 
45,102
 
   
 
28,621
 
   
 
49,793
 
   
 
—  
 
   
 
190,186
 
   
 
—  
 
   
 
190,186
 
Cost of sales
   
 
(28,279
)
   
 
(28,505
)
   
 
(19,148
)
   
 
(37,337
)
   
 
(215
)
   
 
(113,484
)
   
 
—  
 
   
 
(113,484
)
    
  
  
  
  
  
  
  
Gain on property sales
   
 
38,391
 
   
 
16,597
 
   
 
9,473
 
   
 
12,456
 
   
 
(215
)
   
 
76,702
 
   
 
—  
 
   
 
76,702
 
Equity in earnings of development joint ventures, net
   
 
—  
 
   
 
—  
 
   
 
22,896
 
   
 
—  
 
   
 
(1,280
)
   
 
21,616
 
   
 
—  
 
   
 
21,616
 
    
  
  
  
  
  
  
  
Total gain on property sales
   
 
38,391
 
   
 
16,597
 
   
 
32,369
 
   
 
12,456
 
   
 
(1,495
)
   
 
98,318
 
   
 
—  
 
   
 
98,318
 
Management and development fees
   
 
120
 
   
 
2,798
 
   
 
434
 
   
 
468
 
   
 
—  
 
   
 
3,820
 
   
 
—  
 
   
 
3,820
 
Selling, general and administrative expenses
   
 
(877
)
   
 
(9,086
)
   
 
(8,335
)
   
 
(3,655
)
   
 
—  
 
   
 
(21,953
)
   
 
—  
 
   
 
(21,953
)
Other, net(1)
   
 
2,918
 
   
 
868
 
   
 
(2,506
)
   
 
4,675
 
   
 
—  
 
   
 
5,955
 
   
 
—  
 
   
 
5,955
 
    
  
  
  
  
  
  
  
    
 
40,552
 
   
 
11,177
 
   
 
21,962
 
   
 
13,944
 
   
 
(1,495
)
   
 
86,140
 
   
 
—  
 
   
 
86,140
 
    
  
  
  
  
  
  
  
Interest expense
   
 
(56,763
)
   
 
(7
)
   
 
—  
 
   
 
(56
)
   
 
13,221
 
   
 
(43,605
)
   
 
967
 
   
 
(42,638
)
Depreciation and amortization
   
 
(35,417
)
   
 
(371
)
   
 
(244
)
   
 
(1,432
)
   
 
(1,279
)
   
 
(38,743
)
   
 
308
 
   
 
(38,435
)
Corporate administrative costs
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(15,292
)
   
 
(15,292
)
   
 
—  
 
   
 
(15,292
)
Gain on non-strategic asset sales
   
 
3,901
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
3,901
 
   
 
—  
 
   
 
3,901
 
Other, net
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
7,858
 
   
 
7,858
 
   
 
—  
 
   
 
7,858
 
    
  
  
  
  
  
  
  
Income (loss) before minority interests, income taxes, and discontinued operations
   
 
85,717
 
   
 
10,799
 
   
 
21,718
 
   
 
12,456
 
   
 
3,013
 
   
 
133,703
 
   
 
313
 
   
 
134,016
 
Minority interests
   
 
(4,812
)
   
 
—  
 
   
 
(504
)
   
 
—  
 
   
 
—  
 
   
 
(5,316
)
   
 
—  
 
   
 
(5,316
)
    
  
  
  
  
  
  
  
Income (loss) before income taxes and discontinued operations
   
 
80,905
 
   
 
10,799
 
   
 
21,214
 
   
 
12,456
 
   
 
3,013
 
   
 
128,387
 
   
 
313
 
   
 
128,700
 
Income taxes
   
 
(32,364
)
   
 
(4,321
)
   
 
(8,487
)
   
 
(4,984
)
   
 
(1,206
)
   
 
(51,362
)
   
 
(125
)
   
 
(51,487
)
    
  
  
  
  
  
  
  
Income (loss) from continuing operations
   
 
48,541
 
   
 
6,478
 
   
 
12,727
 
   
 
7,472
 
   
 
1,807
 
   
 
77,025
 
   
 
188
 
   
 
77,213
 
    
  
  
  
  
  
  
  
Discontinued operations, net of tax:
                                                                        
Gain from disposal of discontinued operations
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Loss from discontinued operations
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(188
)
   
 
(188
)
    
  
  
  
  
  
  
  
Loss from discontinued operations
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(188
)
   
 
(188
)
    
  
  
  
  
  
  
  
Net income
   
$
48,541
 
   
$
6,478
 
   
$
12,727
 
   
$
7,472
 
   
$
1,807
 
   
$
77,025
 
   
$
—  
 
   
$
77,025
 
    
  
  
  
  
  
  
  
(1)
 
Includes $0.2 million and $3.4 million of lease termination fees in the Asset Management and Urban segments, respectively.

13

Table of Contents
 
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 10-Q).
 
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 September 30, 2002, management estimates that future costs for remediation of environmental contamination on operating properties and properties previously sold approximate $9.4 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 $13.1 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 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 nine months ended September 30, 2002, totaled $4.5 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 September 30, 2002, the Company has outstanding $16.3 million of standby letters of credit and a total of $334.0 million of surety bonds in favor of local municipalities or financial institutions, commitments to guarantee performance on construction of real property improvements, and lease guarantees. The Company also has $0.4 million of standby letters of credit supporting financial obligations. The Company guarantees a portion of the debt and interest of certain of its unconsolidated joint ventures. As of September 30, 2002, these guarantees totaled $51.6 million. During the third quarter of 2002, the Company provided a repayment guarantee for 50% of the outstanding construction loan balance of one of its unconsolidated joint ventures. The maximum commitment amount guaranteed is $82.5 million of which $1.4 million was outstanding at September 30, 2002, and this amount is included in the $51.6 million above. In some cases, other parties have jointly and severally guaranteed these obligations.
 
As of September 30, 2002, $101.0 million of Community Facility District bonds were sold to finance public infrastructure improvements at several Company projects. The Company provided a letter of credit totaling $17.0 million in support of one of these bonds. The $17.0 million is not included in the standby letters of credit and surety bonds amounts disclosed above. Subsequent to September 30, 2002, an additional $23.4 million of CFD bonds were sold. The Company also provided a letter of credit totaling $23.4 million in support of the bond. 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.

14

Table of Contents
 
NOTE 9.    RELATED PARTY TRANSACTIONS
 
The Company provides development and management services and loan guarantees to various unconsolidated joint venture investments. Fees earned were $1.4 million and $2.5 million for the three and nine months ended September 30, 2002, respectively, and $0.4 million for the three and nine months ended September 30, 2001. Deferred fees of $1.9 million at September 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 $2.7 million were received and recognized as rental income during the three and nine months ended September 30, 2002, and $0.9 million for the same periods in 2001. Rent payments of $1.3 million of previously received rent was deferred at September 30, 2002, and will be recognized, together with annual rents, over the life of the lease.
 
The Company has a $4.6 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 September 30, 2002 and 2001, and $102,000 for each of the nine-month periods ended September 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 September 30, 2002 and 2001, and $0.3 million for each of the nine-month periods ended September 30, 2002 and 2001, and recorded a $1.7 million receivable associated with this lease.

15

Table of Contents
 
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 nine-month periods ended September 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 nine months ended September 30, 2002, the Company sold Investment Properties for $4.5 million and $30.1 million, respectively, with a gain from the disposal of discontinued operations of $1.3 million and $13.3 million, net of income taxes of $0.9 million and $9.0 million. Rents from these properties and properties under contract to be sold were $7,000 and $0.6 million for the three and nine month periods ended September 30, 2002, and $0.5 million and $1.7 million for the three and nine months ended September 30, 2001. Loss from discontinued operations from these properties was $16,000, net of income tax benefit of $10,000, and $58,000, net of income tax benefit of $39,000, for the three months ended September 30, 2002 and 2001, respectively, and $112,000, net of income tax benefit of $76,000, and $188,000, net of income tax benefit of $125,000, for the nine months ended September 30, 2002 and 2001, respectively.
 
Asset and liability balances of Investment Properties under contract to be sold at September 30, 2002, consist of the following:
 
      
September 30, 2002
  
      
(In thousands)
  
Assets
           
Properties
     
$
151
 
Accumulated depreciation
     
 
(91
)
      
Net
     
 
60
 
Other assets
     
 
3
 
      
Total assets
     
 
63
 
      
Liabilities
           
Mortgage and other debt
     
 
298
 
Payables
     
 
2
 
Other liabilities
     
 
5
 
      
Total liabilities
     
 
305
 
      
Net liabilities
     
$
242
 
      

16

Table of Contents
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The Company:
 
Catellus Development Corporation is one of the nation’s premier diversified real estate development companies. The Company specializes in developing, managing, and investing in a broad range of product types including industrial, office, residential, retail and major urban development projects. It owns a portfolio of rental properties totaling 36.5 million square feet and one of the largest supplies of developable land in the western United States capable of supporting more than 39 million square feet of new commercial development and an estimated 10,400 residential lots and units.
 
Following is a brief summary of the third quarter and year to date activity:
 
 
•
 
Construction completions during the quarter totaled 2.1 million square feet in four buildings, at a cost of $67.9 million and a projected return on cost, when fully occupied, of 10.4%. The occupancy rate of the four buildings, all of which have been added to Catellus’ rental portfolio, is currently 94.4%.
 
 
•
 
At September 30, 2002, the rental portfolio totaled 36.5 million square feet, a net increase of 2.0 million square feet from June 30, 2002. This increase consisted of 2.1 million square feet added to the portfolio through development, offset by the sale of a 70,000 square foot retail property that was 74.2% occupied.
 
 
•
 
At September 30, 2002, occupancy was 94.4%, as compared with 94.2% at the end of the second quarter 2002, and 94.4% at year end 2001.
 
 
•
 
For the third quarter, net operating income from the rental portfolio, including equity in earnings of operating joint ventures, increased 15.0% to $49.0 million, as compared to $42.6 million for the same period in the 2001.
 
 
•
 
For the third quarter, same space net operating income, adjusted for nonrecurring items, increased 3.9% over the same period in 2001. Year-to-date, same space net operating income increased 2.7% over the same period in 2001.
 
 
•
 
During the quarter, Catellus completed lease transactions on 1.8 million square feet of second-generation space. Year-to-date, lease transactions have been completed on 3.6 million square feet of second-generation space at an average rental rate increase of 7.7% on a GAAP basis.
 
 
•
 
Construction starts in the third quarter totaled 985,000 square feet, all of which will be added to the rental portfolio for a projected cost of $33.5 million and a projected return on cost, when fully occupied, of approximately 10.9%. Third quarter starts include a 346,000 square foot building for APL Logistics in Romeoville, IL, a 171,000 square foot building for Whirlpool Corporation in Denver, CO, and a 468,000 square foot speculative building in Rancho Cucamonga, CA.
 
 
•
 
Total construction in progress at quarter end was 3.2 million square feet, of which 1.8 million square feet will be added to the rental portfolio; 1.0 million square feet will be owned in joint ventures; 45,000 square feet will be sold upon completion; and 330,000 square feet is being developed for a fee on land sold to others.
 
 
•
 
The projected total cost of the 1.8 million square feet currently under construction and to be retained in the rental portfolio is $175.6 million. These buildings are 47.0% preleased and when fully leased and occupied are projected to yield a return on cost of approximately 12.0%.
 
 
•
 
Residential lot and home sales during the quarter, in direct sales and through joint ventures, totaled 341. This included 53 lots at Victoria by the Bay in Hercules, CA, 267 lots at Serrano, a suburb of Sacramento, CA, and 21 homes at Talega Village in San Clemente, CA.
 
 
•
 
At quarter end, the Company had cash totaling $302.7 million, including $35.6 million of restricted cash.
 
 
•
 
Fixed charge coverage ratio of 3.1x.
 
 
•
 
Debt to total market capitalization ratio of 47.9%.

17

Table of Contents
 
General
 
Our reportable segments are based on our method of internal reporting, which disaggregates its 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.
 
    
September 30,
         
    
2002
     
2001
     
Difference
  
    
(In thousands of square feet, except percentages)
  
Rental Building Occupancy:
                     
Owned(1)
   
36,477
 
   
30,254
 
   
6,223
 
Occupied(1)
   
34,450
 
   
28,483
 
   
5,967
 
Occupancy percentage
   
94.4
%
   
94.1
%
   
0.3
%
(1)
 
New buildings are added to our rental portfolio at the earlier of the twelve months after completion of the shell, or commencement of rent on 50% of the space. Space is considered “Occupied” upon commencement of rent.

18

Table of Contents
 
The table below provides the rental portfolio rental revenue less property operating costs for the three months ended September 30, 2002, and square feet by state (in thousands):
 
Property Type/State
          
Rental Revenue less Property Operating Expenses
     
% of Total
     
Owned Square Feet
   
% of Total
     
# Bldg’s
   
% of Total
  
Industrial—Distribution/Warehouse
Southern California
                                               
  
CA
     
$
12,618
 
   
25.7
%
   
12,196
   
33.5
%
   
99
   
40.1
%
Northern California
   
CA
     
 
7,143
 
   
14.6
%
   
5,667
   
15.5
%
   
38
   
15.5
%
Illinois
   
IL
     
 
4,634
 
   
9.5
%
   
5,921
   
16.3
%
   
18
   
7.3
%
Texas
   
TX
     
 
2,316
 
   
4.7
%
   
3,264
   
8.9
%
   
11
   
4.5
%
Colorado
   
CO
     
 
2,301
 
   
4.7
%
   
2,033
   
5.6
%
   
9
   
3.6
%
Maryland
   
MD
     
 
777
 
   
1.6
%
   
471
   
1.3
%
   
1
   
0.4
%
Ohio
   
OH
     
 
574
 
   
1.2
%
   
966
   
2.6
%
   
3
   
1.2
%
Oregon
   
OR
     
 
509
 
   
1.0
%
   
449
   
1.2
%
   
3
   
1.2
%
Arizona
   
AZ
     
 
455
 
   
0.9
%
   
1,133
   
3.1
%
   
9
   
3.6
%
Kentucky
   
KY
     
 
313
 
   
0.6
%
   
549
   
1.5
%
   
2
   
0.8
%
Oklahoma
   
OK
     
 
42
 
   
0.1
%
   
125
   
0.3
%
   
1
   
0.4
%
Kansas
   
KS
     
 
(6
)
   
0.0
%
   
70
   
0.2
%
   
1
   
0.4
%
           
  
  
  
  
  
Subtotal
          
$
31,676
 
   
64.6
%
   
32,844
   
90.0
%
   
195
   
79.0
%
           
  
  
  
  
  
Office
                                               
Northern California
   
CA
     
$
1,965
 
   
4.0
%
   
525
   
1.4
%
   
10
   
4.0
%
Texas
   
TX
     
 
1,523
 
   
3.1
%
   
868
   
2.4
%
   
4
   
1.6
%
Illinois
   
IL
     
 
1,311
 
   
2.7
%
   
468
   
1.3
%
   
2
   
0.8
%
Southern California
   
CA
     
 
1,303
 
   
2.7
%
   
574
   
1.6
%
   
11
   
4.5
%
Colorado
   
CO
     
 
703
 
   
1.4
%
   
273
   
0.7
%
   
2
   
0.8
%
Oregon
   
OR
     
 
87
 
   
0.2
%
   
57
   
0.2
%
   
1
   
0.4
%
           
  
  
  
  
  
Subtotal
          
$
6,892
 
   
14.1
%
   
2,765
   
7.6
%
   
30
   
12.1
%
           
  
  
  
  
  
Retail
                                               
Northern California
          
$
1,615
 
   
3.3
%
   
481
   
1.3
%
   
9
   
3.7
%
Southern California
          
 
697
 
   
1.4
%
   
176
   
0.5
%
   
6
   
2.4
%
Colorado
          
 
283
 
   
0.6
%
   
100
   
0.3
%
   
1
   
0.4
%
Arizona
          
 
127
 
   
0.3
%
   
74
   
0.2
%
   
4
   
1.6
%
Oregon
          
 
69
 
   
0.1
%
   
37
   
0.1
%
   
2
   
0.8
%
           
  
  
  
  
  
Subtotal
          
$
2,791
 
   
5.7
%
   
868
   
2.4
%
   
22
   
8.9
%
           
  
  
  
  
  
Land Development
          
$
1,864
 
   
3.8
%
                        
Ground Leases
          
 
4,812
 
   
9.8
%
                        
           
  
                       
Rental Revenue less
                                               
Property Operating Expenses
          
$
48,035
 
   
98
%
                        
Equity in Earnings of Joint Ventures
          
 
993
 
   
2.0
%
                        
           
  
  
  
  
  
           
$
49,028
 
   
100.0
%
   
36,477
   
100.0
%
   
247
   
100.0
%
           
  
  
  
  
  

19

Table of Contents
 
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 and construction management, developer and loan guarantee fees.
 
The table below provides the development potential, by square feet, of our Commercial Development Land Portfolio (In thousands):
 
Project Name
   
City
     
September 30, 2002
Square feet
Southern California
            
Kaiser Commerce Center
   
Ontario
     
4,392
Crossroads Business Park
   
Ontario
     
2,016
Rancho Pacific Distribution Centre
   
Rancho Cucamonga
     
318
Pacific Center
   
Anaheim
     
44
Northridge
   
Northridge
     
44
           
Subtotal Southern Calif.
          
6,814
           
Northern California
            
Pacific Commons
   
Fremont
     
3,671
Duck Creek
   
Stockton
     
2,000
Alameda FISC
   
Alameda
     
1,300
Spreckels Business Park
   
Manteca
     
686
Regatta Business Park
   
Richmond
     
89
           
Subtotal Northern Calif.
          
7,746
           
Total in California
          
14,560
           
Illinois
            
Minooka
   
Minooka
     
1,710
Internationale Centre
   
Woodridge
     
976
Prairie Glen Corporate Campus
   
Glenview
     
457
Joliet
   
Joliet
     
370
Internationale Centre West
   
Romeoville
     
102
           
Subtotal Illinois
          
3,615
           
Texas
            
Hobby Business Park
   
Houston
     
1,969
Gateway Corporate Center
   
Coppell
     
1,120
Stellar Way Business Park
   
Grand Prairie
     
814
Gateway East Business Park
   
Garland
     
763
Plano
   
Plano
     
403
Ft. Worth
   
Ft. Worth
     
104
           
Subtotal Texas
          
5,173
           
Other
            
South Shore Corp. Park
   
Portland, OR
     
848
Circle Point Corporate Center
   
Westminster, CO
     
685
Stapleton Business Park
   
Denver, CO
     
609
South Shore Corp. Park
   
Gresham, OR
     
547
Cedar Grove Business Park
   
Louisville, KY
     
545
Santa Fe Industrial Center
   
Oklahoma, OK
     
300
           
Total Outside of California
          
12,322
           
Total Suburban Commercial Inventory
          
26,882
           

20

Table of Contents
 
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 an interest in a joint venture that develops senior housing.
 
The table below provides the development potential, by lots/homes, of our Suburban-Residential land portfolio.
 
      
Ownership
Interest
     
Lots/Homes/Units at
September 30, 2002
Colorado
              
Vista Range, Commerce City
     
100
%
   
2,149
             
Northern California
              
Alameda—(controlled)
     
100
%
   
485
Hercules
     
100
%
   
154
Serrano, Sacramento
     
50
%
   
1,452
Parkway, Sacramento
     
50
%
   
874
             
             
2,965
             
Southern California
              
Talega Seniors, San Clemente
     
50
%
   
130
Talega, San Clemente
     
30
%
   
1,700
Westbluffs, Playa del Rey(1)
     
100
%
   
114
             
             
1,944
             
Total
            
7,058
             
(1)
 
We have entitlements for this project; however, individuals are challenging the entitlements under the California Environmental Quality Act and the California Coastal Act (see Legal Proceedings section).
 
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 table below provides the development potential by square feet, of our Urban Land Portfolio (in thousands):
 
    
R&D,
Biotech
& Office
   
CBD
Office
     
Retail/ Entertainment
   
Hotel
(rooms)
   
Residential (units)
Urban:
                           
Mission Bay (SF, CA)
   
4,537
   
—  
     
549
   
500
   
3,073
Union Station (LA, CA)
   
—  
   
5,175
     
675
   
—  
   
—  
Santa Fe Depot (SD, CA)
   
—  
   
1,485
     
270
   
—  
   
275
    
  
    
  
  
Total
   
4,537
   
6,660
     
1,494
   
500
   
3,348
    
  
    
  
  
 
Corporate:
 
Corporate consists primarily of administrative costs and 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.

21

Table of Contents
 
Critical Accounting Policies
 
Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 we believe 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 an 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. A change in circumstances that causes the estimate of future costs 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 price 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.

22

Table of Contents
 
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 the 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 affecting 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.

23

Table of Contents
 
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, before the adjustments for discontinued operations, based on a supplemental performance measure, Earnings Before Depreciation and Deferred Taxes (“EBDDT”). Commencing with the first quarter of 2002, we 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, reconciliation between net income and EBDDT is provided for the three and nine months ended September 30, 2002 and 2001.

24

Table of Contents
 
Below is a summary of Net income by segment and EBDDT for the Three Months Ended September 30, 2002:
 
    
Asset Management
     
Suburban
                       
       
Commercial
     
Residential
     
Urban
     
Corporate
     
Total
  
    
(In thousands)
  
Rental properties:
                                                      
Rental revenue
   
$
66,191
 
   
$
—  
 
   
$
 —  
 
   
$
—  
 
   
$
—  
 
   
$
66,191
 
Property operating costs
   
 
(18,156
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(18,156
)
Equity in earnings of operating joint ventures, net
   
 
993
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
993
 
    
  
  
  
  
  
    
 
49,028
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
49,028
 
    
  
  
  
  
  
Property sales and fee services:
                                                      
Gain on property sales
   
 
3,532
 
   
 
1,133
 
   
 
5,363
 
   
 
—  
 
   
 
(60
)
   
 
9,968
 
Equity in earnings of development joint ventures, net
   
 
—  
 
   
 
—  
 
   
 
5,028
 
   
 
—  
 
   
 
(827
)
   
 
4,201
 
Management and development fees
   
 
9
 
   
 
1,355
 
   
 
647
 
   
 
744
 
   
 
—  
 
   
 
2,755
 
Selling, general and administrative expenses
   
 
(168
)
   
 
(2,455
)
   
 
(1,549
)
   
 
(1,652
)
   
 
—  
 
   
 
(5,824
)
Other, net
   
 
1,822
 
   
 
(125
)
   
 
1,702
 
   
 
(336
)
   
 
—  
 
   
 
3,063
 
    
  
  
  
  
  
    
 
5,195
 
   
 
(92
)
   
 
11,191
 
   
 
(1,244
)
   
 
(887
)
   
 
14,163
 
    
  
  
  
  
  
Interest expense
   
 
(20,200
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
3,759
 
   
 
(16,441
)
Depreciation and amortization
   
 
(16,017
)
   
 
(259
)
   
 
(79
)
   
 
(351
)
   
 
(894
)
   
 
(17,600
)
Corporate administrative costs
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(4,284
)
   
 
(4,284
)
Gain on non-strategic asset sales
   
 
421
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
421
 
Other, net
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
803
 
   
 
803
 
Minority interests
   
 
(1,527
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(1,527
)
Income tax expense
   
 
(6,816
)
   
 
141
 
   
 
(4,476
)
   
 
642
 
   
 
601
 
   
 
(9,908
)
    
  
  
  
  
  
Net income (loss)
   
$
10,084
 
   
$
(210
)
   
$
6,636
 
   
$
(953
)
   
$
(902
)
   
 
14,655
 
    
  
  
  
  
        
Depreciation and amortization
                                                
 
17,600
 
Depreciation recapture
                                                
 
(1,901
)
Deferred income taxes
                                                
 
6,175
 
Gain on non-strategic asset sales
                                                
 
(421
)
                                                 
Earnings before depreciation and deferred taxes(1)
                                                
$
36,108
 
                                                 
Net income by segment and EBDDT for the Three Months Ended September 30, 2001:
Rental properties:
                                                      
Rental revenue
   
$
59,116
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
59,116
 
Property operating costs
   
 
(17,390
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(17,390
)
Equity in earnings of operating joint ventures, net
   
 
1,184
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
1,184
 
    
  
  
  
  
  
    
 
42,910
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
42,910
 
    
  
  
  
  
  
Property sales and fee services:
                                                      
Gain on property sales
   
 
19,139
 
   
 
5,919
 
   
 
1,364
 
   
 
1,508
 
   
 
(215
)
   
 
27,715
 
Equity in earnings of development joint ventures, net
   
 
—  
 
   
 
—  
 
   
 
14,420
 
   
 
—  
 
   
 
(931
)
   
 
13,489
 
Management and development fees
   
 
108
 
   
 
766
 
   
 
(5
)
   
 
397
 
   
 
—  
 
   
 
1,266
 
Selling, general and administrative expenses
   
 
(300
)
   
 
(3,024
)
   
 
(1,812
)
   
 
(1,237
)
   
 
—  
 
   
 
(6,373
)
Other, net
   
 
846
 
   
 
(1,163
)
   
 
(786
)
   
 
976
 
   
 
—  
 
   
 
(127
)
    
  
  
  
  
  
    
 
19,793
 
   
 
2,498
 
   
 
13,181
 
   
 
1,644
 
   
 
(1,146
)
   
 
35,970
 
    
  
  
  
  
  
Interest expense
   
 
(18,825
)
   
 
—  
 
   
 
  —  
 
   
 
—  
 
   
 
4,930
 
   
 
(13,895
)
Depreciation and amortization
   
 
(11,918
)
   
 
(52
)
   
 
(124
)
   
 
(423
)
   
 
(360
)
   
 
(12,877
)
Corporate administrative costs
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(4,685
)
   
 
(4,685
)
Gain on non-strategic asset sales
   
 
765
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
765
 
Other, net
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
1,152
 
   
 
1,152
 
Minority interests
   
 
(1,604
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(1,604
)
Income tax expense
   
 
(12,443
)
   
 
(979
)
   
 
(5,223
)
   
 
(488
)
   
 
43
 
   
 
(19,090
)
    
  
  
  
  
  
Net income (loss)
   
$
18,678
 
   
$
1,467
 
   
$
7,834
 
   
$
733
 
   
$
(66
)
   
 
28,646
 
    
  
  
  
  
        
Depreciation and amortization
                                                
 
12,877
 
Depreciation recapture
                                                
 
(8,176
)
Deferred income taxes
                                                
 
13,747
 
Gain on non-strategic asset sales
                                                
 
(765
)
                                                 
Earnings before depreciation and deferred taxes
                                                
$
46,329
 
                                                 
(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.

25

Table of Contents
 
Below is a summary of Net income by segment and EBDDT for the Nine Months Ended September 30, 2002:
 
    
Asset
Management
     
Suburban
     
Urban
     
Corporate
     
Total
  
       
Commercial
     
Residential
           
    
(In thousands)
  
Rental properties:
                                                      
Rental revenue
   
$
194,750
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
194,750
 
Property operating costs
   
 
(51,355
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(51,355
)
Equity in earnings of operating joint ventures, net
   
 
6,838
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
6,838
 
    
  
  
  
  
  
    
 
150,233
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
150,233
 
    
  
  
  
  
  
Property sales and fee services:
                                                      
Gain on property sales
   
 
27,202
 
   
 
5,907
 
   
 
29,040
 
   
 
—  
 
   
 
(576
)
   
 
61,573
 
Equity in earnings of development joint ventures, net
   
 
—  
 
   
 
—  
 
   
 
22,585
 
   
 
—  
 
   
 
(2,760
)
   
 
19,825
 
Management and development fees
   
 
60
 
   
 
3,018
 
   
 
1,102
 
   
 
1,471
 
   
 
—  
 
   
 
5,651
 
Selling, general and administrative expenses
   
 
(878
)
   
 
(6,540
)
   
 
(7,315
)
   
 
(5,071
)
   
 
—  
 
   
 
(19,804
)
Other, net
   
 
10,434
 
   
 
53
 
   
 
4,864
 
   
 
(192
)
   
 
—  
 
   
 
15,159
 
    
  
  
  
  
  
    
 
36,818
 
   
 
2,438
 
   
 
50,276
 
   
 
(3,792
)
   
 
(3,336
)
   
 
82,404
 
    
  
  
  
  
  
Interest expense
   
 
(58,083
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
14,659
 
   
 
(43,424
)
Depreciation and amortization
   
 
(42,919
)
   
 
(534
)
   
 
(152
)
   
 
(820
)
   
 
(1,781
)
   
 
(46,206
)
Corporate administrative costs
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(12,748
)
   
 
(12,748
)
Gain on non-strategic asset sales
   
 
7,242
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
7,242
 
Other, net
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
573
 
   
 
573
 
Minority interests
   
 
(4,580
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(4,580
)
Income tax expense
   
 
(35,696
)
   
 
(766
)
   
 
(20,164
)
   
 
1,855
 
   
 
1,055
 
   
 
(53,716
)
    
  
  
  
  
  
Net income (loss)
   
$
53,015
 
   
$
1,138
 
   
$
29,960
 
   
$
(2,757
)
   
$
(1,578
)
   
 
79,778
 
    
  
  
  
  
        
Depreciation and amortization
                                                
 
46,206
 
Depreciation recapture
                                                
 
(8,121
)
Deferred income taxes
                                                
 
30,948
 
Gain on non-strategic asset sales
                                                
 
(7,242
)
                                                 
Earnings before depreciation and deferred taxes
                                                
$
141,569
 
                                                 
Net income by segment and EBDDT for the Nine Months Ended September 30, 2001:
Rental properties:
                                                      
Rental revenue
   
$
172,025
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
172,025
 
Property operating costs
   
 
(45,598
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(45,598
)
Equity in earnings of operating joint ventures, net
   
 
7,017
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
7,017
 
    
  
  
  
  
  
    
 
133,444
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
133,444
 
    
  
  
  
  
  
Property sales and fee services:
                                                      
Gain on property sales
   
 
38,391
 
   
 
16,597
 
   
 
9,473
 
   
 
12,456
 
   
 
(215
)
   
 
76,702
 
Equity in earnings of development joint ventures, net
   
 
—  
 
   
 
—  
 
   
 
22,896
 
   
 
—  
 
   
 
(1,280
)
   
 
21,616
 
Management and development fees
   
 
120
 
   
 
2,798
 
   
 
434
 
   
 
468
 
   
 
—  
 
   
 
3,820
 
Selling, general and administrative expenses
   
 
(877
)
   
 
(9,086
)
   
 
(8,335
)
   
 
(3,655
)
   
 
—  
 
   
 
(21,953
)
Other, net
   
 
2,918
 
   
 
868
 
   
 
(2,506
)
   
 
4,675
 
   
 
—  
 
   
 
5,955
 
    
  
  
  
  
  
    
 
40,552
 
   
 
11,177
 
   
 
21,962
 
   
 
13,944
 
   
 
(1,495
)
   
 
86,140
 
    
  
  
  
  
  
Interest expense
   
 
(56,763
)
   
 
(7
)
   
 
—  
 
   
 
(56
)
   
 
13,221
 
   
 
(43,605
)
Depreciation and amortization
   
 
(35,417
)
   
 
(371
)
   
 
(244
)
   
 
(1,432
)
   
 
(1,279
)
   
 
(38,743
)
Corporate administrative costs
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(15,292
)
   
 
(15,292
)
Gain on non-strategic asset sales
   
 
3,901
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
3,901
 
Other, net
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
7,858
 
   
 
7,858
 
Minority interests
   
 
(4,812
)
   
 
—  
 
   
 
(504
)
   
 
—  
 
   
 
—  
 
   
 
(5,316
)
Income tax expense
   
 
(32,364
)
   
 
(4,321
)
   
 
(8,487
)
   
 
(4,984
)
   
 
(1,206
)
   
 
(51,362
)
    
  
  
  
  
  
Net income
   
$
48,541
 
   
$
6,478
 
   
$
12,727
 
   
$
7,472
 
   
$
1,807
 
   
 
77,025
 
    
  
  
  
  
        
Depreciation and amortization
                                                
 
38,743
 
Depreciation recapture
                                                
 
(11,428
)
Deferred income taxes
                                                
 
39,276
 
Gain on non-strategic asset sales
                                                
 
(3,901
)
                                                 
Earnings before depreciation and deferred taxes
                                                
$
139,715
 
                                                 

26

Table of Contents
 
Variance Three Months Ended September 30, 2002 vs Three Months Ended September 30, 2001:
 
    
Asset Management
     
Suburban
                       
       
Commercial
     
Residential
     
Urban
     
Corporate
     
Total
  
    
(In thousands)
  
Rental properties:
                                                      
Rental revenue
   
$
7,075
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
7,075
 
Property operating costs
   
 
(766
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(766
)
Equity in earnings of operating joint ventures, net
   
 
(191
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(191
)
    
  
  
  
  
  
    
 
6,118
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
6,118
 
    
  
  
  
  
  
Property sales and fee services:
                                                      
Gain on property sales
   
 
(15,607
)
   
 
(4,786
)
   
 
3,999
 
   
 
(1,508
)
   
 
155
 
   
 
(17,747
)
Equity in earnings of development joint ventures, net
   
 
—  
 
   
 
—  
 
   
 
(9,392
)
   
 
—  
 
   
 
104
 
   
 
(9,288
)
Management and development fees
   
 
(99
)
   
 
589
 
   
 
652
 
   
 
347
 
   
 
—  
 
   
 
1,489
 
Selling, general and administrative expenses
   
 
132
 
   
 
569
 
   
 
263
 
   
 
(415
)
   
 
—  
 
   
 
549
 
Other, net
   
 
976
 
   
 
1,038
 
   
 
2,488
 
   
 
(1,312
)
   
 
—  
 
   
 
3,190
 
    
  
  
  
  
  
    
 
(14,598
)
   
 
(2,590
)
   
 
(1,990
)
   
 
(2,888
)
   
 
259
 
   
 
(21,807
)
    
  
  
  
  
  
Interest expense
   
 
(1,375
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(1,171
)
   
 
(2,546
)
Depreciation and amortization
   
 
(4,099
)
   
 
(207
)
   
 
45
 
   
 
72
 
   
 
(534
)
   
 
(4,723
)
Corporate administrative costs
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
401
 
   
 
401
 
Gain on non-strategic asset sales
   
 
(344
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(344
)
Other, net
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(349
)
   
 
(349
)
Minority interests
   
 
77
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
77
 
Income tax expense
   
 
5,627
 
   
 
1,120
 
   
 
747
 
   
 
1,130
 
   
 
558
 
   
 
9,182
 
    
  
  
  
  
  
Net income
   
$
(8,594
)
   
$
(1,677
)
   
$
(1,198
)
   
$
(1,686
)
   
$
(836
)
   
 
(13,991
)
    
  
  
  
  
        
Depreciation and amortization
                                                
 
4,723
 
Depreciation recapture
                                                
 
6,275
 
Deferred income taxes
                                                
 
(7,572
)
Gain on non-strategic asset sales
                                                
 
344
 
                                                 
Earnings before depreciation and deferred taxes
                                                
$
(10,221
)
                                                 
Variance Nine Months Ended September 30, 2002 vs Nine Months Ended September 30, 2001:
Rental properties:
                                                      
Rental revenue
   
$
22,725
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
22,725
 
Property operating costs
   
 
(5,757
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(5,757
)
Equity in earnings of operating joint ventures, net
   
 
(179
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(179
)
    
  
  
  
  
  
    
 
16,789
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
16,789
 
    
  
  
  
  
  
Property sales and fee services:
                                                      
Gain on property sales
   
 
(11,189
)
   
 
(10,690
)
   
 
19,567
 
   
 
(12,456
)
   
 
(361
)
   
 
(15,129
)
Equity in earnings of development joint ventures, net
   
 
—  
 
   
 
—  
 
   
 
(311
)
   
 
—  
 
   
 
(1,480
)
   
 
(1,791
)
Management and development fees
   
 
(60
)
   
 
220
 
   
 
668
 
   
 
1,003
 
   
 
—  
 
   
 
1,831
 
Selling, general and administrative expenses
   
 
(1
)
   
 
2,546
 
   
 
1,020
 
   
 
(1,416
)
   
 
—  
 
   
 
2,149
 
Other, net
   
 
7,516
 
   
 
(815
)
   
 
7,370
 
   
 
(4,867
)
   
 
—  
 
   
 
9,204
 
    
  
  
  
  
  
    
 
(3,734
)
   
 
(8,739
)
   
 
28,314
 
   
 
(17,736
)
   
 
(1,841
)
   
 
(3,736
)
    
  
  
  
  
  
Interest expense
   
 
(1,320
)
   
 
7
 
   
 
—  
 
   
 
56
 
   
 
1,438
 
   
 
181
 
Depreciation and amortization
   
 
(7,502
)
   
 
(163
)
   
 
92
 
   
 
612
 
   
 
(502
)
   
 
(7,463
)
Corporate administrative costs
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
2,544
 
   
 
2,544
 
Gain on non-strategic asset sales
   
 
3,341
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
3,341
 
Other, net
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(7,285
)
   
 
(7,285
)
Minority interests
   
 
232
 
   
 
—  
 
   
 
504
 
   
 
—  
 
   
 
—  
 
   
 
736
 
Income tax expense
   
 
(3,332
)
   
 
3,555
 
   
 
(11,677
)
   
 
6,839
 
   
 
2,261
 
   
 
(2,354
)
    
  
  
  
  
  
Net income
   
$
4,474
 
   
$
(5,340
)
   
$
17,233
 
   
$
(10,229
)
   
$
(3,385
)
   
 
2,753
 
    
  
  
  
  
        
Depreciation and amortization
                                                
 
7,463
 
Depreciation recapture
                                                
 
3,307
 
Deferred income taxes
                                                
 
(8,328
)
Gain on non-strategic asset sales
                                                
 
(3,341
)
                                                 
Earnings before depreciation and deferred taxes
                                                
$
1,854
 
                                                 

27

Table of Contents
 
The following is a schedule of the largest ten tenants of our rental portfolio, based on GAAP rents:
 
Customer Name
  
State
  
Type of Product
Leased
   
% of Total Base Rent
September 30, 2002
APL Logistics, Inc
  
CA, IL, KY, TX
  
Industrial
   
5.1%
Ford Motor Company
  
CA, CO, TX
  
Industrial
   
2.4%
Kellogg’s USA, Inc.
  
CA, IL, CO
  
Industrial
   
2.2%
J.C. Penney Company
  
TX
  
Office
   
2.1%
Exel Corporation
  
CA
  
Industrial
   
2.1%
Home Depot USA, Inc.
  
CA
  
Industrial/Retail
   
1.8%
Gillette Company
  
CA, IL
  
Industrial
   
1.6%
MCI Telecommunications (1)
  
CA, WA, IL, MN, TX, OK, OR
  
Office/Ground Leases
   
1.5%
Office Depot, Inc.
  
CA
  
Industrial/Retail
   
1.4%
CISCO Technology
  
CA
  
Ground Leases
   
1.4%
(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. Pursuant to an order of the United States Bankruptcy Court, the MCI Companies have until September 22, 2003 to assume or reject the leases, but they remain obligated under the Bankruptcy Code to continue to perform their obligations under each lease in a timely manner pending the assumption or rejection of that lease.
 
Rental Revenue less Property Operating Costs
 
Rental revenue less property operating costs increased for both the three and nine months ended September 30, 2002, mainly because of additions of buildings, new ground leases, and rental increases from renewals on Same Space (as defined below), partially offset by properties sold. From October 2001 to September 2002, we added a net 6.2 million square feet to our rental portfolio. Rental revenue less operating costs for the three and nine months ended September 30, 2002 and 2001, are summarized as follows:
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2002
     
2001
   
Difference
2002/2001
     
2002
   
2001
   
Difference
2002/2001
  
    
(In thousands)
     
(In thousands)
  
Rental revenue less property operating costs:
                                                
Same space(1)
   
$
33,223
 
   
$
31,354
   
$
1,869
 
   
$
102,844
   
$
99,065
   
$
3,779
 
Properties added to portfolio
   
 
9,086
 
   
 
4,196
   
 
4,890
 
   
 
21,777
   
 
7,414
   
 
14,363
 
Properties sold from portfolio
   
 
(35
)
   
 
430
   
 
(465
)
   
 
570
   
 
3,348
   
 
(2,778
)
Ground leases
   
 
5,761
 
   
 
5,746
   
 
15
 
   
 
18,204
   
 
16,600
   
 
1,604
 
    
  
  
  
  
  
    
$
48,035
 
   
$
41,726
   
$
6,309
 
   
$
143,395
   
$
126,427
   
$
16,968
 
    
  
  
  
  
  
(1)
 
Same Space properties were owned and operated for the entire current year and the entire immediate preceding year.
 
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 $6.3 million for the three months ended September 30, 2002, as compared to the same period in 2001, primarily attributable to $4.9 million from the additions of buildings and $1.9 million increases in revenue from Same Space, due to higher average rental rate from renewals, partially offset by $0.5 million from properties sold.
 
Rental revenue less operating costs increased $17.0 million for the nine months ended September 30, 2002, as compared to the same period in 2001, primarily attributable to $16.0 million from the additions of buildings and new ground leases, and $3.8 million from Same Space due to higher average rental rates from renewals. These increases were partially offset by a $2.8 million decrease in revenue from properties sold.

28

Table of Contents
 
Gain on Property Sales:
 
Three Months Ended September 30, 2002
 
    
Asset Management
     
Suburban
                     
       
Commercial
     
Residential
     
  Urban  
   
Corporate
     
Total
  
    
(In thousands)
  
Building/Home Sales
                                                    
Sales Proceeds
   
$
4,486
 
   
$
—  
 
   
$
—  
 
   
$
—  
   
$
—  
 
   
$
4,486
 
Cost of Sales
   
 
(2,346
)
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
(2,346
)
    
  
  
  
  
  
Gain
   
 
2,140
 
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
2,140
 
    
  
  
  
  
  
Land/Lot Sales
                                                    
Sales Proceeds
   
 
—  
 
   
 
(83
)
   
 
8,871
 
   
 
—  
   
 
—  
 
   
 
8,788
 
Cost of Sales
   
 
—  
 
   
 
708
 
   
 
(3,260
)
   
 
—  
   
 
—  
 
   
 
(2,552
)
    
  
  
  
  
  
Gain
   
 
—  
 
   
 
625
 
   
 
5,611
 
   
 
—  
   
 
—  
 
   
 
6,236
 
    
  
  
  
  
  
Ground Lease and Other Sales
                                                    
Sales Proceeds
   
 
1,511
 
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
1,511
 
Cost of Sales
   
 
(119
)
   
 
508
 
   
 
(248
)
   
 
—  
   
 
(60
)
   
 
81
 
    
  
  
  
  
  
Gain (loss)
   
 
1,392
 
   
 
508
 
   
 
(248
)
   
 
—  
   
 
(60
)
   
 
1,592
 
    
  
  
  
  
  
Total sales proceeds
   
 
5,997
 
   
 
(83
)
   
 
8,871
 
   
 
—  
   
 
—  
 
   
 
14,785
 
Total cost of sales
   
 
(2,465
)
   
 
1,216
 
   
 
(3,508
)
   
 
—  
   
 
(60
)
   
 
(4,817
)
    
  
  
  
  
  
Total gain (loss) on property sales
   
$
3,532
 
   
$
1,133
 
   
$
5,363
 
   
$
—  
   
$
(60
)
   
$
9,968
 
    
  
  
  
  
  
 
Three Months Ended September 30, 2001
 
    
Asset Management
     
Suburban
                       
       
Commercial
     
Residential
     
Urban
     
Corporate
     
Total
  
    
(In thousands)
  
Building/Home Sales
                                                      
Sales Proceeds
   
$
27,972
 
   
$
10,663
 
   
$
1,064
 
   
$
—  
 
   
$
—  
 
   
$
39,699
 
Cost of Sales
   
 
(9,367
)
   
 
(6,327
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(15,694
)
    
  
  
  
  
  
Gain
   
 
18,605
 
   
 
4,336
 
   
 
1,064
 
   
 
—  
 
   
 
—  
 
   
 
24,005
 
    
  
  
  
  
  
Land/Lot Sales
                                                      
Sales Proceeds
   
 
—  
 
   
 
8,662
 
   
 
981
 
   
 
13,106
 
   
 
—  
 
   
 
22,749
 
Cost of Sales
   
 
—  
 
   
 
(7,004
)
   
 
(831
)
   
 
(11,598
)
   
 
—  
 
   
 
(19,433
)
    
  
  
  
  
  
Gain
   
 
—  
 
   
 
1,658
 
   
 
150
 
   
 
1,508
 
   
 
—  
 
   
 
3,316
 
    
  
  
  
  
  
Ground Lease and Other sales
                                                      
Sales Proceeds
   
 
1,876
 
   
 
—  
 
            
 
—  
 
   
 
—  
 
   
 
1,876
 
Cost of Sales
   
 
(1,342
)
   
 
(75
)
   
 
150
 
   
 
—  
 
   
 
(215
)
   
 
(1,482
)
    
  
  
  
  
  
Gain (loss)
   
 
534
 
   
 
(75
)
   
 
150
 
   
 
—  
 
   
 
(215
)
   
 
394
 
    
  
  
  
  
  
Total sales proceeds
   
 
29,848
 
   
 
19,325
 
   
 
2,045
 
   
 
13,106
 
   
 
—  
 
   
 
64,324
 
Total cost of sales
   
 
(10,709
)
   
 
(13,406
)
   
 
(681
)
   
 
(11,598
)
   
 
(215
)
   
 
(36,609
)
    
  
  
  
  
  
Total gain (loss) on property sales
   
$
19,139
 
   
$
5,919
 
   
$
1,364
 
   
$
1,508
 
   
$
(215
)
   
$
27,715
 
    
  
  
  
  
  

29

Table of Contents
Nine Months Ended September 30, 2002
 
    
Asset Management
     
Suburban
     
  Urban  
   
Corporate
     
Total
  
       
Commercial
     
Residential
           
    
(In thousands)
  
Building/Home Sales
                                                    
Sales Proceeds
   
$
34,141
 
   
$
—  
 
   
$
—  
 
   
$
—  
   
$
—  
 
   
$
34,141
 
Cost of Sales
   
 
(12,411
)
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
(12,411
)
    
  
  
  
  
  
Gain
   
 
21,730
 
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
21,730
 
    
  
  
  
  
  
Land/Lot Sales
                                                    
Sales Proceeds
   
 
—  
 
   
 
40,519
 
   
 
54,993
 
   
 
—  
   
 
—  
 
   
 
95,512
 
Cost of Sales
   
 
—  
 
   
 
(35,470
)
   
 
(27,257
)
   
 
—  
   
 
—  
 
   
 
(62,727
)
    
  
  
  
  
  
Gain
   
 
—  
 
   
 
5,049
 
   
 
27,736
 
   
 
—  
   
 
—  
 
   
 
32,785
 
    
  
  
  
  
  
Ground Lease and Other Sales
                                                    
Sales Proceeds
   
 
6,980
 
   
 
388
 
   
 
2,053
 
   
 
—  
   
 
—  
 
   
 
9,421
 
Cost of Sales
   
 
(1,508
)
   
 
470
 
   
 
(749
)
   
 
—  
   
 
(576
)
   
 
(2,363
)
    
  
  
  
  
  
Gain (loss)
   
 
5,472
 
   
 
858
 
   
 
1,304
 
   
 
—  
   
 
(576
)
   
 
7,058
 
    
  
  
  
  
  
Total sales proceeds
   
 
41,121
 
   
 
40,907
 
   
 
57,046
 
   
 
—  
   
 
—  
 
   
 
139,074
 
Total cost of sales
   
 
(13,919
)
   
 
(35,000
)
   
 
(28,006
)
   
 
—  
   
 
(576
)
   
 
(77,501
)
    
  
  
  
  
  
Total gain (loss) on property sales
   
$
27,202
 
   
$
5,907
 
   
$
29,040
 
   
$
—  
   
$
(576
)
   
$
61,573
 
    
  
  
  
  
  
 
Nine Months Ended September 30, 2001
 
    
Asset Management
     
Suburban
     
Urban
     
Corporate
     
Total
  
       
Commercial
     
Residential
           
    
(In thousands)
  
Building/Home Sales
                                                      
Sales Proceeds
   
$
37,897
 
   
$
18,719
 
   
$
9,436
 
   
$
—  
 
   
$
—  
 
   
$
66,052
 
Cost of Sales
   
 
(13,245
)
   
 
(13,087
)
   
 
(7,127
)
   
 
—  
 
   
 
—  
 
   
 
(33,459
)
    
  
  
  
  
  
Gain
   
 
24,652
 
   
 
5,632
 
   
 
2,309
 
   
 
—  
 
   
 
—  
 
   
 
32,593
 
    
  
  
  
  
  
Land/Lot Sales
                                                      
Sales Proceeds
   
 
—  
 
   
 
26,383
 
   
 
19,185
 
   
 
49,793
 
   
 
—  
 
   
 
95,361
 
Cost of Sales
   
 
—  
 
   
 
(15,538
)
   
 
(12,194
)
   
 
(37,337
)
   
 
—  
 
   
 
(65,069
)
    
  
  
  
  
  
Gain(2)
   
 
—  
 
   
 
10,845
 
   
 
6,991
 
   
 
12,456
 
   
 
—  
 
   
 
30,292
 
    
  
  
  
  
  
Ground Lease and Other Sales
                                                      
Sales Proceeds
   
 
28,773
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
28,773
 
Cost of Sales
   
 
(15,034
)
   
 
120
 
   
 
173
 
   
 
—  
 
   
 
(215
)
   
 
(14,956
)
    
  
  
  
  
  
Gain (loss)
   
 
13,739
 
   
 
120
 
   
 
173
 
   
 
—  
 
   
 
(215
)
   
 
13,817
 
    
  
  
  
  
  
Total sales proceeds
   
 
66,670
 
   
 
45,102
 
   
 
28,621
 
   
 
49,793
 
   
 
—  
 
   
 
190,186
 
Total cost of sales
   
 
(28,279
)
   
 
(28,505
)
   
 
(19,148
)
   
 
(37,337
)
   
 
(215
)
   
 
(113,484
)
    
  
  
  
  
  
Total gain (loss) on property sales
   
$
38,391
 
   
$
16,597
 
   
$
9,473
 
   
$
12,456
 
   
$
(215
)
   
$
76,702
 
    
  
  
  
  
  

30

Table of Contents
 
Variance Three Months Ended September 30, 2002 vs Three Months Ended September 30, 2001
 
    
Asset Management
     
Suburban
                     
       
Commercial
     
Residential
     
Urban
     
Corporate
   
Total
  
    
(In thousands)
  
Building/Home Sales
                                                    
Sales Proceeds
   
$
(23,486
)
   
$
(10,663
)
   
$
(1,064
)
   
$
—  
 
   
$
—  
   
$
(35,213
)
Cost of Sales
   
 
7,021
 
   
 
6,327
 
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
13,348
 
    
  
  
  
  
  
Gain
   
 
(16,465
)
   
 
(4,336
)
   
 
(1,064
)
   
 
—  
 
   
 
—  
   
 
(21,865
)
    
  
  
  
  
  
Land/Lot Sales
                                                    
Sales Proceeds
   
 
—  
 
   
 
(8,745
)
   
 
7,890
 
   
 
(13,106
)
   
 
—  
   
 
(13,961
)
Cost of Sales
   
 
—  
 
   
 
7,712
 
   
 
(2,429
)
   
 
11,598
 
   
 
—  
   
 
16,881
 
    
  
  
  
  
  
Gain
   
 
—  
 
   
 
(1,033
)
   
 
5,461
 
   
 
(1,508
)
   
 
—  
   
 
2,920
 
    
  
  
  
  
  
Ground Lease and Other Sales
                                                    
Sales Proceeds
   
 
(365
)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
(365
)
Cost of Sales
   
 
1,223
 
   
 
583
 
   
 
(398
)
   
 
—  
 
   
 
155
   
 
1,563
 
    
  
  
  
  
  
Gain
   
 
858
 
   
 
583
 
   
 
(398
)
   
 
—  
 
   
 
155
   
 
1,198
 
    
  
  
  
  
  
Total sales proceeds
   
 
(23,851
)
   
 
(19,408
)
   
 
6,826
 
   
 
(13,106
)
   
 
—  
   
 
(49,539
)
Total cost of sales
   
 
8,244
 
   
 
14,622
 
   
 
(2,827
)
   
 
11,598
 
   
 
155
   
 
31,792
 
    
  
  
  
  
  
Total gain (loss) on property sales
   
$
(15,607
)
   
$
(4,786
)
   
$
3,999
 
   
$
(1,508
)
   
$
155
   
$
(17,747
)
    
  
  
  
  
  
 
Variance Nine Months Ended September 30, 2002 vs Nine Months Ended September 30, 2001
 
    
Asset Management
     
Suburban
                       
       
Commercial
     
Residential
     
Urban
     
Corporate
     
Total
  
    
(In thousands)
  
Building/Home Sales
                                                      
Sales Proceeds
   
$
(3,756
)
   
$
(18,719
)
   
$
(9,436
)
   
$
—  
 
   
$
—  
 
   
$
(31,911
)
Cost of Sales
   
 
834
 
   
 
13,087
 
   
 
7,127
 
   
 
—  
 
   
 
—  
 
   
 
21,048
 
    
  
  
  
  
  
Gain
   
 
(2,922
)
   
 
(5,632
)
   
 
(2,309
)
   
 
—  
 
   
 
—  
 
   
 
(10,863
)
    
  
  
  
  
  
Land/Lot Sales
                                                      
Sales Proceeds
   
 
—  
 
   
 
14,136
 
   
 
35,808
 
   
 
(49,793
)
   
 
—  
 
   
 
151
 
Cost of Sales
   
 
—  
 
   
 
(19,932
)
   
 
(15,063
)
   
 
37,337
 
   
 
—  
 
   
 
2,342
 
    
  
  
  
  
  
Gain
   
 
—  
 
   
 
(5,796
)
   
 
20,745
 
   
 
(12,456
)
   
 
—  
 
   
 
2,493
 
    
  
  
  
  
  
Ground Lease and Other Sales
                                                      
Sales Proceeds
   
 
(21,793
)
   
 
388
 
   
 
2,053
 
   
 
—  
 
   
 
—  
 
   
 
(19,352
)
Cost of Sales
   
 
13,526
 
   
 
350
 
   
 
(922
)
   
 
—  
 
   
 
(361
)
   
 
12,593
 
    
  
  
  
  
  
Gain (loss)
   
 
(8,267
)
   
 
738
 
   
 
1,131
 
   
 
—  
 
   
 
(361
)
   
 
(6,759
)
    
  
  
  
  
  
Total sales proceeds
   
 
(25,549
)
   
 
(4,195
)
   
 
28,425
 
   
 
(49,793
)
   
 
—  
 
   
 
(51,112
)
Total cost of sales
   
 
14,360
 
   
 
(6,495
)
   
 
(8,858
)
   
 
37,337
 
   
 
(361
)
   
 
35,983
 
    
  
  
  
  
  
Total gain (loss) on property sales
   
$
(11,189
)
   
$
(10,690
)
   
$
19,567
 
   
$
(12,456
)
   
$
(361
)
   
$
(15,129
)
    
  
  
  
  
  

31

Table of Contents
 
During the three months ended September 30, 2002, we sold a 70,000 square foot existing operating property, closed on the sale of improved land capable of supporting 107,000 square feet of commercial development and 112.7 acres of ground leases. During the same period in 2001, we sold five existing operating properties and a newly completed commercial building totaling 442,000 square feet, sold improved land capable of supporting 0.4 million square feet of commercial development, sold 308.71 acres of ground leases, and sold 1.4 acres of Urban land.
 
For the three months ended September 30, 2002, we closed on the sales of 53 residential lots. No residential lots or homes were sold for the three months ended September 30, 2001, but a $1.4 million gain on residential property sales was recognized, which represents our portion of profit participation related to certain properties that were sold in the prior year (see Variability in Results section).
 
During the nine months ended September 30, 2002, we sold six operating properties totaling 769,000 square feet of building space sold, closed on the sale of improved land capable of supporting 3.4 million square feet of commercial development, and closed on the sale of 569.4 acres of ground leases. During the same period in 2001, we sold seven existing operating properties and two newly completed commercial buildings totaling 729,000 square feet, sold improved land capable of supporting 5.0 million square feet of commercial development, and sold 959.9 acres of ground leases and 5.1 acres of Urban land.
 
For the nine months ended September 30, 2002, we also closed on the sales of 324 residential lots, as compared to 227 residential lots and 55 homes during the same period in 2001. In addition, the gain for the nine months ended September 30, 2002 and 2001, from Suburban-Residential segment included $2.1 million and $1.1 million, respectively, of our portion of profit participation related to certain properties that were sold in the prior year (see Variability in Results section).
 
Equity in Earnings of Development Joint Ventures, Net
 
Our Equity in Earnings of Development Joint Ventures is generated from our Suburban-Residential investments. The tables below summarize the activities of our shares from the Joint Ventures for the three and nine months ended September 30, 2002 and 2001. The decrease in our share of gain from sales is primarily because of the sale of our investment interest in the Brookfield joint venture during 2001. Also, see Variability in Results section. As we have not entered into any significant new joint ventures in 2002, nor are many new investments anticipated, the Equity in Earnings of Development Joint Ventures, Net will likely decline over time.
 
    
Three Months Ended
September 30, 2002
   
Three Months Ended
September 30, 2001
  
Projects
   
Lots/Homes Sold
   
Sales
     
Cost of
Sales
     
Gain (loss)
   
Lots/Homes
Sold
   
Sales
   
Cost of
Sales
     
Gain (loss)
  
    
(In thousands)
  
Brookfield
   
—  
   
$
—  
 
   
$
—  
 
   
$
—  
   
392
   
$
14,800
   
$
(6,601
)
   
$
8,199
 
Talega Village
   
21
   
 
10,325
 
   
 
(9,573
)
   
 
752
   
22
   
 
10,457
   
 
(9,964
)
   
 
493
 
Serrano
   
267
   
 
18,630
 
   
 
(16,664
)
   
 
1,966
   
5
   
 
12,126
   
 
(12,260
)
   
 
(134
)
Talega
   
—  
   
 
553
(1)
   
 
(319
)
   
 
234
   
1
   
 
9,480
   
 
(7,723
)
   
 
1,757
 
Parkway
   
—  
   
 
7,331
(1)
   
 
(6,082
)
   
 
1,249
   
190
   
 
15,069
   
 
(11,895
)
   
 
3,174
 
    
  
  
  
  
  
  
  
Total
   
288
   
$
36,839
 
   
$
(32,638
)
   
$
4,201
   
610
   
$
61,932
   
$
(48,443
)
   
$
13,489
 
    
  
  
  
  
  
  
  
 
    
Nine Months Ended
September 30, 2002
   
Nine Months Ended
September 30, 2001
Projects
   
Lots/Homes Sold
   
Sales
   
Cost of
Sales
     
Gain (loss)
   
Lots/Homes Sold
   
Sales
   
Cost of
Sales
     
Gain (loss)
    
(In thousands)
Brookfield
   
—  
   
$
—  
   
$
—  
 
   
$
—  
   
524
   
$
77,013
   
$
(62,611
)
   
$
14,402
Talega Village
   
53
   
 
27,634
   
 
(25,507
)
   
 
2,127
   
22
   
 
10,457
   
 
(10,110
)
   
 
347
Serrano
   
765
   
 
57,932
   
 
(52,598
)
   
 
5,334
   
51
   
 
33,641
   
 
(32,243
)
   
 
1,398
Talega
   
444
   
 
32,941
   
 
(30,676
)
   
 
2,265
   
108
   
 
22,155
   
 
(19,860
)
   
 
2,295
Parkway
   
570
   
 
53,171
   
 
(43,072
)
   
 
10,099
   
190
   
 
15,069
   
 
(11,895
)
   
 
3,174
    
  
  
  
  
  
  
  
Total
   
1,832
   
$
171,678
   
$
(151,853
)
   
$
19,825
   
895
   
$
158,335
   
$
(136,719
)
   
$
21,616
    
  
  
  
  
  
  
  
(1)
 
Deferred revenue on prior sales for the three months ended September 30, 2002.

32

Table of Contents
 
Management and Development Fees
 
Management and development fees primarily consist of fees earned related to development and construction management services provided to third parties as well as our joint venture projects, and loan guarantee fees. New fees included in the three and nine months ended September 30, 2002, were from development management activities commenced in September 30, 2001, related to a new joint venture development at the Mission Bay project of $0.7 million and $1.5 million, respectively, loan guarantee fees related to an investment in an unconsolidated joint venture in Colorado of $0.5 million and $0.8 million, respectively, management fees from two joint venture projects of $0.6 million and $0.9 million, respectively, and management fees related to a build-to-suit construction management contract of $0.2 million and $0.5 million, respectively.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses decreased $0.5 million and $2.1 million for the three and nine months ended September 30, 2002, respectively, as compared to the same periods in 2001, primarily due to employee-related expenses and the expense in 2001 of certain development costs previously capitalized.
 
Other
 
“Other” consists primarily of interest income, lease termination fees, expense of previously capitalized costs, and other miscellaneous expenses. For the three and nine months ended September 30, 2002, “Other” included interest income of $2.7 million and $7.7 million, respectively, which is $0.3 million and $0.1 million lower than that of the same periods in 2001 because of lower short-term investments and lower interest rates; also included in 2002, were $0.8 million and $8.2 million, respectively, in lease termination fees. For the three and nine months ended September 30, 2001, “Other” included interest income of $3.0 million and $7.8 million, lease termination fees of $0.2 million and $3.6 million, the expense of certain predevelopment costs previously capitalized of $1.8 million, and expenses related to costs overruns on a fixed price construction contract of $0.4 million and $2.9 million, respectively.
 
Interest
 
Following is a summary of interest:
 
    
Three Months Ended September 30,
          
Nine Months Ended September 30,
         
    
2002
     
2001
     
Difference
   
2002
     
2001
     
Difference
  
    
(In thousands)
          
(In thousands)
         
Total interest incurred
   
$
21,754
 
   
$
20,674
 
   
$
1,080
   
$
62,638
 
   
$
62,640
 
   
$
(2
)
Interest capitalized
   
 
(5,313
)
   
 
(6,779
)
   
 
1,466
   
 
(19,214
)
   
 
(19,035
)
   
 
(179
)
    
  
  
  
  
  
Interest expensed
   
$
16,441
 
   
$
13,895
 
   
$
2,546
   
$
43,424
 
   
$
43,605
 
   
$
(181
)
    
  
  
  
  
  
 
Interest expense increased $2.5 million and decreased $0.2 million for the three and nine months ended September 30, 2002, as compared to the same periods of 2001, primarily because of higher interest incurred due to higher average debt balance as a result of additional debt placed on the newly completed operating rental properties and lower capitalized interest because of lower development activities in current quarter.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expense increased by $4.7 million and $7.5 million for the three and nine months ended September 30, 2002, respectively, as compared to the same periods in 2001. The increases were because of an increase from new buildings added to the portfolio between October 2001 and September 2002 of $2.2 million and $4.9 million for the three and nine months ended September 30, 2002, respectively, and an increase in amortization of lease commissions of $0.5 million and $0.6 million for the three and nine months ended September 30, 2002, respectively. In addition, we recorded a charge of $2.1 million related to assets placed in service in prior periods but not depreciated.
 
Corporate Administrative Costs
 
Corporate administrative costs consist primarily of general and administrative expenses. General and administrative expenses decreased by $0.4 million and $2.5 million for the three and nine months ended September 30, 2002, respectively, as compared to the same periods in 2001, primarily due to decreases in employee related expenses and professional fees.

33

Table of Contents
 
Gain on Non-Strategic Asset Sales
 
Gain on sales of non-strategic assets for the three months ended September 30, 2002, approximated that of 2001. Gain on sales of non-strategic assets for the nine months ended September 30, 2002, increased $3.3 million, as compared to the same period of 2001, primarily because of higher sales of remaining desert property (see Variability in Results section).
 
Other
 
“Other” consists primarily of interest income, consulting fees, legal reserve, and other miscellaneous expenses. For the three and nine months ended September 30, 2002, “Other” included interest income of $43,000 and $0.2 million, respectively, which is $2.8 million and $11.5 million lower than that of the same periods in 2001 because of lower short-term investments as well as lower interest rates; “Other” also included a reduction in legal reserve of $1.0 million and $0.7 million for the three and nine months ended September 30, 2002. For the three and nine months ended September 30, 2001, “Other” included interest income of $2.8 million and $11.7 million, a $0.6 million expense for legal reserve, and consulting fees of $1.0 million and $3.0 million, respectively.
 
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. Minority interest for the three months ended September 30, 2002, approximated that of 2001. The decrease of $0.7 million for the nine months ended September 30, 2002, was primarily because of the 2001 sale of a 190-home site in Oxnard, California, by a consolidated joint venture.
 
Income taxes
 
Currently for 2002, our projected current tax rate is 17.05% and deferred tax rate is 23.18% as compared to 9.41% and 30.60%, respectively, for 2001. Current tax rates increased in the third quarter of 2002, compared to the third 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 quarters of 2002. As expected, a similar high level of gain did not occur in the third quarter of 2002 and it is expected that a similar high level of gain from sales will not occur in the fourth quarter of this year. Consequently, the third quarter 2002 Net Income and Earnings Per Share were lower than those reported in the first and second quarters of 2002, and we expect that the fourth quarter 2002 Net Income and Earnings Per Share will also be lower than those reported in the first two quarters and will approximate the amount reported in the third quarter.

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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 ten unconsolidated real estate joint ventures. Four 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 to be funded from a construction loan, which was closed in September 2002, $62.5 million from our partners, and the remaining $25 million from us. As of September 30, 2002, we had contributed $15.4 million of the $25 million; no additional capital contribution is expected to be necessary.
 
We have also agreed with another of our unconsolidated joint ventures to fund up to $5.7 million for certain construction costs, if necessary. As of September 30, 2002, no additional funding is required.
 
Unconsolidated real estate joint ventures- debt and debt service guarantees
 
We have made certain debt service guarantees for five of our unconsolidated joint ventures. At September 30, 2002, based on the joint ventures’ outstanding debt balance, these debt service guarantees totaled $51.6 million. Of the total guarantees, $31.4 million relates to three unconsolidated residential development joint ventures, and $20.2 million relates to two unconsolidated commercial development joint ventures. 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 September 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 September 30, 2002, we have $350.7 million in surety bonds, outstanding standby letters of credit in favor of local municipalities or financial institutions, and commitments to guarantee leases, 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 September 30, 2002, we have open construction and development contracts with vendors totaling $237.6 million related to our various projects, as compared to $273.3 million at December 31, 2001.

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The following table summarizes our outstanding contractual obligations as of September 30, 2002, and the effect such obligations are expected to have on liquidity and cash flow in future periods:
 
    
Payments Due by Period
Contractual Obligations
   
Total
     
Due within 2002
   
Due in 2003-2005
   
Due in 2006-2007
   
Due Thereafter
    
(In thousands)
Mortgage and Other Debt
   
$
1,480,231
(1)
   
$
36,591
   
$
364,293
   
$
207,130
   
$
872,217
Operating Leases
   
 
7,548
 
   
 
649
   
 
6,446
   
 
228
   
 
225
Contracts
   
 
237,574
(2)
   
 
116,557
   
 
105,995
   
 
4,681
   
 
10,341
    
  
  
  
  
Total Contractual Obligations
   
$
1,725,353
 
   
$
153,797
   
$
476,734
   
$
212,039
   
$
882,783
    
  
  
  
  
(1)
 
Includes approximately $298,000 of mortgage notes associated with assets held for sale that is presented as “Liabilities associated with assets held for sale” on our condensed consolidated balance sheet.
(2)
 
A portion of these obligations is expected to be reimbursed by third parties, including bond proceeds.
 
The following table summarizes our outstanding commitments as of September 30, 2002, and the effect such commitments may have on liquidity and cash flow in future periods:
 
         
Amount of Commitment Expiration Per Period
Commitments
   
Total Amounts Committed
   
Due within 2002
   
Due in
2003-2005
   
Due in
2006-2007
   
Due Thereafter
    
(In thousands)
Standby Letters of Credit, Surety Bonds and Commitments
   
$
350,751
   
$
157,804
   
$
192,937
   
$
10
   
$
—  
Debt Guarantees
   
 
51,638
   
 
51,638
   
 
—  
   
 
—  
   
 
—  
    
  
  
  
  
Total Commitments
   
$
402,389
   
$
209,442
   
$
192,937
   
$
10
   
$
—  
    
  
  
  
  
 
Cash flows from operating activities
 
Cash provided by operating activities reflected in the statement of cash flows for the nine months ended September 30, 2002 and 2001, was $161.8 million and $284.8 million, respectively. The decrease of $123.0 million was primarily attributed to the receipt of a $104.8 million prepayment of rent associated with a 34-year ground lease in 2001. In addition, there were decreases of $34.6 million in cash received from sales proceeds and $11.8 million due to prepayments for various expenses, partially offset by an increase of $43.0 million from operating distributions, primarily from four of our consolidated residential joint ventures due to more homes and lots sold. The remaining decrease of $14.8 million was primarily due to the timing of payments for our accrued construction costs.
 
Cash flows from investing activities
 
Net cash used in investing activities reflected in the statement of cash flows for the nine months ended September 30, 2002 and 2001, was $290.9 million and $168.3 million, respectively. The increase in use of $122.6 million was attributed to the following: (1) an increase of $12.9 million was due to higher capital expenditures for investment properties in 2002; (2) an increase of $32.5 million due to the reimbursable predevelopment and infrastructure costs incurred at Mission Bay and Pacific Commons during the nine months ended September 30, 2002; (3) an increase of $13.4 million due to a capital contribution made to one of our unconsolidated joint ventures in 2002; (4) a reduction of $18.9 million in proceeds from the sale of investment properties; and (5) a $45.0 million increase in restricted cash and investments as of September 30, 2002.

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Capital expenditures reflected in the statement of cash flows include the following:
 
    
Nine Months Ended
September 30,
    
2002
   
2001
    
(In thousands)
Capital Expenditures from Operating Activities(1)
              
Capital expenditures for development properties
   
$
13,616
   
$
15,629
Predevelopment
   
 
3,501
   
 
1,021
Infrastructure and other
   
 
17,756
   
 
17,508
Residential property acquisitions
   
 
7,139
   
 
—  
Other property acquisitions
   
 
738
   
 
13,000
Capitalized interest and property tax
   
 
470
   
 
784
    
  
Capital expenditures in cash flows for operating activities
   
 
43,220
   
 
47,942
Seller-financed acquisitions
   
 
—  
   
 
10,000
    
  
Total capital expenditures in operating activities
   
 
43,220
   
 
57,942
    
  
Capital Expenditures from Investing Activities(2)
              
Construction and building improvements
   
 
130,182
   
 
106,244
Predevelopment
   
 
15,624
   
 
15,545
Infrastructure and other
   
 
40,036
   
 
42,995
Commercial property acquisitions
   
 
23,449
   
 
46,888
Other property acquisitions
   
 
9,354
   
 
1,032
Tenant improvements
   
 
5,912
   
 
1,832
Capitalized interest and property tax
   
 
21,797
   
 
18,915
    
  
Capital expenditures for investment properties
   
 
246,354
   
 
233,451
Reimbursable construction costs
   
 
32,497
   
 
—  
Contribution to joint ventures
   
 
13,403
   
 
—  
    
  
Total capital expenditures in investing activities
   
 
292,254
   
 
233,451
    
  
Total capital expenditures(3)
   
$
335,474
   
$
291,393
    
  
(1)
 
This category primarily includes capital expenditures for properties we intend to build and sell.
(2)
 
This category primarily includes capital expenditures for properties we intend to hold for our own account.
(3)
 
Total capital expenditures include capitalized general and administrative expenses of $11.8 million and $14.5 million for the nine months ended September 30, 2002 and 2001, respectively.
 
Capital expenditures for development properties—This item relates to the development of residential, urban, and commercial for-sale development properties. The decrease is primarily because of the decrease in commercial development activities partially offset by an increase in urban development activities for properties that we intend to build and sell.
 
Property acquisitions—For the nine months ended September 30, 2002, we invested approximately $40.7 million in property acquisitions; $16.5 million for the acquisition of two commercial buildings, which added approximately 488,000 square feet to our income producing portfolio; $7.0 million for the acquisition of commercial land, which added 2.4 million square feet of potential development; $7.1 million for the acquisition of land capable of supporting an estimated 2,149 residential units; $0.7 million for land to be sold; and $9.4 million for the acquisition of furniture, fixtures, and equipment, primarily consisting of a corporate aircraft.
 
Capitalized interest and property taxes—This item represents interest and property taxes capitalized as part of our development projects. The increase resulted from an increase in our construction activity primarily from our urban and commercial development projects as discussed under Construction and building improvements.

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Construction and building improvements—This item relates primarily to development of new properties held for lease. This development activity is summarized below (in square feet):
 
    
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(In thousands)
     
(In thousands)
  
Commercial Development
                     
Wholly owned:
                            
Under construction, beginning of period
   
2,927
 
   
2,583
 
   
6,143
 
   
3,474
 
Construction starts
   
985
 
   
2,688
 
   
1,567
 
   
3,062
 
Completed—retained in portfolio
   
(2,050
)
   
(192
)
   
(5,848
)
   
(1,304
)
Completed—design/build or sold
   
—  
 
   
(74
)
   
—  
 
   
(227
)
    
  
  
  
Subtotal under construction, end of period
   
1,862
 
   
5,005
 
   
1,862
 
   
5,005
 
    
  
  
  
Joint Venture Projects:
                            
Under construction, beginning of period
   
305
 
   
—  
 
   
—  
 
   
—  
 
Construction starts
   
—  
 
   
—  
 
   
305
 
   
—  
 
    
  
  
  
Subtotal under construction, end of period
   
305
 
   
—  
 
   
305
 
   
—  
 
    
  
  
  
                             
Total commercial development construction
   
2,167
 
   
5,005
 
   
2,167
 
   
5,005
 
    
  
  
  
Urban Development
                            
Wholly owned:
                            
Under construction, beginning of period(1)
   
361
 
   
283
 
   
361
 
   
283
 
Construction starts
   
—  
 
   
—  
 
   
—  
 
   
—  
 
    
  
  
  
Subtotal under construction, end of period
   
361
 
   
283
 
   
361
 
   
283
 
    
  
  
  
Joint Venture Projects:
                            
Under construction, beginning of period
   
695
 
   
—  
 
   
695
 
   
—  
 
Construction starts
   
—  
 
   
695
 
   
—  
 
   
695
 
    
  
  
  
Subtotal under construction, end of period
   
695
 
   
695
 
   
695
 
   
695
 
    
  
  
  
                             
Total urban development construction
   
1,056
 
   
978
 
   
1,056
 
   
978
 
    
  
  
  
                             
Total under construction, end of period
   
3,223
 
   
5,983
 
   
3,223
 
   
5,983
 
    
  
  
  
(1)
 
Includes approximately 45,000 square feet of residential units, which we intend to sell; excludes approximately 280,000 square feet of commercial space on which construction was started but stopped during 2001.
 
Predevelopment—This item relates to amounts incurred for our urban, commercial, and residential development projects, primarily the Mission Bay project in San Francisco, California, the Santa Fe Depot project in San Diego, California, the Vista Range project in Commerce City, Colorado, and the Westbluffs project in Playa Del Rey, California. The increase primarily resulted from the activity for the projects in San Francisco, California; Commerce City, Colorado; and Playa Del Rey, California. For the nine months ended September 30, 2002, approximately $13.3 million of predevelopment costs incurred at Mission Bay are reimbursable, as discussed in Reimbursable construction costs below.
 
Infrastructure and other—This item primarily represents infrastructure costs incurred in connection with our urban, commercial, and residential projects. Infrastructure costs relate primarily to the projects at Hercules, California; Woodridge, Illinois; Denver, Colorado; Ontario, California; Fremont, California; and Mission Bay, San Francisco, California. For the nine months ended September 30, 2002, approximately $51 million and $11.3 million of infrastructure and other costs incurred at Mission Bay and Pacific Commons, respectively, are reimbursable, as discussed in Reimbursable construction costs below.
 
Reimbursable construction costs—For the nine months ended September 30, 2002, approximately $75.6 million of total predevelopment and infrastructure costs incurred are reimbursable, pursuant to various Community Facility District (“CFD”) bonds issued in 2001. As of September 30, 2002, of the total $75.6 million reimbursable costs, approximately $42.0 million has been reimbursed, of which, approximately $36.2 million was from our CFD bonds and approximately $5.8 million was from a third party, and the remaining balance is recorded as Other Assets in the accompanying Condensed Consolidated Balance Sheet.

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Table of Contents
 
Cash flows from financing activities
 
Net cash provided by financing activities reflected in the statement of cash flows for the nine months ended September 30, 2002 and 2001, was $173.5 million and $16.2 million, respectively. The increase of $157.3 million in 2002 was attributed to the following: (1) an increase of $151.9 million due to no treasury stock purchases during the nine months ended September 30, 2002, as compared to $151.9 million expended for the purchase of 8,855,497 shares of our treasury stock under the share repurchase program during the same period in 2001 and (2) an increase of $11.1 million primarily attributable to higher net borrowings offset by (3) a decrease of $6.1 million due to lower proceeds from the issuance of common stock attributable to exercise of stock options.
 
Capital commitments
 
As of September 30, 2002, we had outstanding standby letters of credit, surety bonds and commitments in the amount of $350.7 million to guarantee performance on real property improvements or financial obligations.
 
As of September 30, 2002, we had approximately $237.6 million in total contractual obligations for capital expenditures to vendors. These commitments are primarily contracts to construct commercial, residential, and urban development projects, predevelopment costs, and re-leasing costs.
 
As a partner in certain joint ventures, we have made certain debt guarantees totaling $51.6 million at September 30, 2002 (see Note 8 of the accompanying Condensed Consolidated Financial Statements).
 
Cash balances, available borrowings, and capital resources
 
As of September 30, 2002, we had total cash of $302.7 million, of which $35.6 million is restricted cash. In addition to the $302.7 million cash balance, we had $54.8 million in borrowing capacity under our commercial construction facilities, available upon satisfaction of certain conditions.
 
Our short-term and long-term liquidity and capital resources requirements will be provided primarily from four sources: (1) cash on hand, (2) ongoing income from our rental portfolio, (3) proceeds from sales of developed properties, land and non-strategic assets, and (4) additional debt. As noted above, existing construction loan facilities are available for meeting certain short-term liquidity requirements. Our ability to meet our mid- and long-term capital requirements is, in part, dependent upon the ability to obtain additional financing for new construction, completed buildings, acquisitions, and currently unencumbered properties. There is no assurance that we can obtain this financing or obtain this financing on favorable terms.
 
Stock Repurchases—From October 1999 through July 2001, our Board of Directors authorized five separate stock repurchase programs; each had a limit of $50 million. Share purchases under these programs were made on the open market. We purchased a total of 13,047,097 shares at a total cost of $218.0 million under these programs. The remaining $32.0 million authorized expired or was terminated.
 
In December 2001, we purchased 10,600,000 shares of our common stock from the California Public Employees’ Retirement System (“CalPERS”) for $183.1 million in a privately negotiated transaction. An independent third party provided our Board of Directors with a written opinion confirming that the terms and conditions of this transaction were fair, from a financial point of view, to our stockholders other than CalPERS. Immediately prior to the transaction, CalPERS was the beneficial owner of 18.8 million shares, or approximately 19.3% of our issued and outstanding common stock. As a result of the transaction, CalPERS’ beneficial ownership was reduced to 8.2 million shares, or approximately 9.5% of our issued and outstanding common stock.
 
Debt covenants—Three of our credit agreements, totaling $135 million, contain corporate financial covenants including a minimum debt service coverage ratio of 1.6 to 1, a maximum leverage ratio of 60.0%, and a minimum tangible net worth of $419.6 million (subject to adjustment for stock buybacks), all terms as defined in those credit agreements. As of or for the period ending September 30, 2002, the actual results, were 1.96; 54.1%; and $524.9 million, respectively. Our partial guarantee of one of our joint venture’s construction loans of $165 million has the same debt service and tangible net worth covenants, but a different maximum leverage covenant definition. Under this definition our leverage ratio is 57.4% versus a covenant of 65%. Our performance against these covenants is measured on a quarterly basis, with debt service coverage being measured on a four-quarter trailing basis. In the event we were to breach any of these covenants and were unable to negotiate satisfactory waivers or amendments, our lenders in these credit facilities could declare amounts outstanding due and payable.

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Table of Contents
 
Bonds—At September 30, 2002, we have $80.9 million of assessment district bonds recorded as “Mortgage and other debt” in the accompanying Condensed Consolidated Balance Sheet. Approximately $35.3 million of bonds with an estimated weighted average variable interest rate of 3.5% were issued by Traer Creek Metropolitan District to fund one of our unconsolidated joint venture investments in Avon, Colorado, $11.9 million with an estimated weighted average variable interest rate of 6.42% were issued by Northwestern Business Center Metropolitan District to fund our development project in Westminster, Colorado, $12.0 million with an estimated weighted average variable interest rate of 4.0% were issued by Stapleton Business Center Metropolitan District to fund our development project in Denver, Colorado, and the remaining $21.7 million with estimated weighted average variable interest rates ranging from 5.42% to 8.7% were issued by various districts to fund other development projects (see Note 5 of the accompanying Condensed Consolidated Financial Statement for details).
 
In addition to the above bonds, $101 million of Community Facility District bonds were sold in 2001 to finance public infrastructure improvements at Mission Bay in San Francisco and Pacific Commons in Fremont, California. The bonds related to the Mission Bay and Pacific Commons were not required to be recorded in our accompanying Condensed Consolidated Balance Sheet. These bonds have a series of maturities up to thirty years. Bonds totaling $71 million were issued for Mission Bay, of which $17 million have a floating rate of interest initially set at 2.85% and currently at 1.65%, with the remaining $54 million at a fixed rate of 6.02%. We provided 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 6.2%. 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 September 30, 2002, for Mission Bay, $2.5 million of the $17 million floating rate bonds and $24.6 million of the $54 million fixed rate bonds were used to reimburse costs we incurred on behalf of the district. For Pacific Commons, approximately $9.1 million of the bonds were used to reimburse costs we incurred on the district’s behalf as of September 30, 2002. As of September 30, 2002, we have incurred costs of $43.9 million for Mission Bay and $2.2 million for Pacific Commons that have not been reimbursed. In addition, we have also incurred $12.6 million of public infrastructure improvement costs at Mission Bay in anticipation of reimbursement from additional CFD bonds to be sold in the fourth quarter of 2002. Subsequent to September 30, 2002, $23.4 million of additional CFD bonds were sold with a floating rate of 1.85%, and secured by a letter of credit.
 
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.
 
Insurance—Changes in the insurance industry over the last year have caused the availability of certain types of coverage to decrease and the cost of available coverage to increase. In renewing our policies, we were able to essentially obtain all of our historical levels and types of insurance (although at a higher cost and, in certain instances, a higher deductible level and/or more restrictive conditions), except: (1) terrorism coverage is now excluded from all policies (with one exception noted below) and (2) liability coverage for our residential business, which now has a higher deductible and a much lower policy limit. There can be no assurance that significant losses in excess of insurance proceeds will not occur.
 
The Company has elected not to obtain terrorism insurance for most of its portfolio at this time because: (1) the majority of our properties consist of warehouse/distribution and suburban office and retail which we consider to be relatively low-risk, and (2) available terrorism coverage is extremely limited at unreasonably high costs which renders the coverage economically unjustifiable. However we have placed terrorism coverage for a single asset located near downtown San Francisco and are exploring coverage on several other properties located near major urban centers.
 
The Company has entered into various loan documents containing customary covenants requiring the Company to maintain insurance. One or more of our lenders may take the position that a terrorism exclusion from property and casualty insurance coverage is a breach of these loans and require the Company to obtain terrorism-specific insurance. We do not believe such a demand would be commercially reasonable because of the inability to obtain coverage at economically justifiable prices, and we would vigorously defend our position. If any of our lenders insist on coverage for these risks, the Company could be required to obtain terrorism insurance on certain assets or it could adversely affect the Company’s ability to refinance certain loans.

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Table of Contents
 
Tax Audit—In 2002, the State of California Franchise Tax Board (“FTB”) began auditing two of our joint ventures for the years 1999 and 2000. Both audits are in process and no audit adjustments have been proposed. In early July, the FTB notified us that it will audit the Company’s tax returns for the years 1999 and 2000. The audit has not yet commenced. The last state audit of our tax returns was in 1991. Any adjustments as a result of these audits could result in accelerated deferred tax liabilities and additional tax payments.
 
Related party transactions
 
In 2001, we formed Third and King Investors, LLC, an unconsolidated joint venture. The joint venture is building a large mixed-use project at Mission Bay in San Francisco, California, consisting of approximately 595 apartments, 127,000 square feet of commercial space, and 945 parking stalls. As part of the transaction, a subsidiary entered into a 99-year ground lease with the venture, and we recognized $0.9 million and $2.7 million in rental income from this ground lease for the three and nine months ended September 30, 2002, respectively, and $0.9 million for the three and nine months ended September 30, 2001. In September 2002, the joint venture closed and secured a $165 million construction loan for the project. We have also agreed with the venture to fund, on a pro-rata basis, the balance of equity capital required and certain cost overruns, if actual construction costs exceed the guaranteed maximum price as set forth in the construction contract. As of September 30, 2002, no additional capital funding is required.
 
We also provide development and management services and loan guarantees to several of our unconsolidated joint venture investments. Fees earned were $1.4 million and $2.5 million for the three and nine months ended September 30, 2002, respectively, and $0.4 million for the three and nine months ended September 30, 2001.
 
We have a $4.6 million note receivable from an unconsolidated joint venture for project costs plus accrued interest at 9.0%. This note is collateralized by property owned by the venture and matures in October 2028. We also have entered into various lease agreements with this unconsolidated joint venture. We incurred rent expense of $34,000 in each of the three-month periods ended September 30, 2002 and 2001, and $102,000 for the nine months ended September 30, 2002 and 2001; this lease will expire in November 2011.
 
As lessor, we entered into a ground lease, which will expire in August 2054. We recognized rental income of $0.1 million in each of the three-month periods ended September 30, 2002 and 2001, and $0.3 million for each of the nine-month periods ended September 30, 2002 and 2001; and recorded a $1.7 million receivable associated with this lease. The venture’s current projection reflects approximately $0.5 million available funds, per year, from its operations to pay down our receivables.
 
Trading
 
Our executives from time to time in the future may enter into so-called “Rule 10b5-1 Plans.” Under an appropriate Rule 10b5-1 Plan, an executive may instruct a third party, such as a brokerage firm, to engage in specified securities transactions in the future based on a formula without further action by the executive, provided that the plan satisfies the legal requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 as amended.
 
Environmental Matters
 
Many of our properties and our subsidiaries’ properties are in urban and industrial areas and may have been leased to or previously owned by commercial and industrial companies that discharged hazardous materials. We and our subsidiaries incur ongoing environmental remediation and disposal costs and legal costs relating to clean up, defense of litigation, and the pursuit of responsible third parties. Costs incurred by the consolidated group in connection with operating properties and with properties previously sold are expensed. Costs incurred for properties to be sold by us or our subsidiaries are capitalized and will be charged to cost of sales when the properties are sold (see Note 8 of the accompanying Condensed Consolidated Financial Statements for further discussion).
 
In recent years, certain of our subsidiaries have acquired properties with known environmental problems for cleanup and redevelopment, and we expect that we may continue to form subsidiaries to acquire such properties (or that existing subsidiaries will acquire such properties) when the potential benefits of development warrant. When our subsidiaries acquire such properties, they undertake due diligence to determine the nature of the environmental problems and the likely cost of remediation, and they manage the risk with undertakings from third parties, including the sellers and their affiliates, remediation contractors, third party sureties, or insurers. The costs associated with environmental remediation are included in the costs estimates for properties to be developed.

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Forward-Looking Information and Risk Factors
 
Except for historical matters, the matters discussed in this quarterly report are forward-looking statements that involve risks and uncertainties. We have tried, wherever practical, to identify these forward-looking statements by using words like “anticipate”, “believe”, “estimate”, “project”, “expect”, “plan”, “prospects”, and similar expressions. Forward-looking statements include, but are not limited to, statements about plans; opportunities; negotiations; markets and economic conditions; development, construction, rental, and sales activities; availability of financing; and property values.
 
We caution you not to place undue reliance on these forward-looking statements, which reflect our current beliefs and are based on information currently available to us. We do not undertake any obligation to revise these forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs.
 
These forward-looking statements are subject to risks and uncertainties that could cause our actual results, performance (including, without limitation, return on cost), or achievements to differ materially from those expressed in or implied by these statements. In particular, among the factors that could cause actual results to differ materially are:
 
 
•
 
Changes in the real estate market or in general economic conditions in the areas in which we own property, including the possibility of a worsening economic slowdown or recession. Such changes may result in higher vacancy rates for commercial property and lower prevailing rents, lower sales prices or slower sales, lower absorption rates, more tenant defaults and bankruptcies, and the like
 
 
•
 
Product and geographical concentration
 
 
•
 
Competition in the real estate industry
 
 
•
 
Unavailability of financing to meet our capital needs, the variability of interest rates, and our inability to use our collateral to secure loans
 
 
•
 
Changes in insurance markets, including the increased cost or unavailability of particular insurance products
 
 
•
 
Exposure of our assets to damage from natural occurrences such as earthquakes, and weather conditions that affect the progress of construction
 
 
•
 
Delay in receipt of or denial of government approvals and entitlements for development projects, other political and discretionary government decisions affecting the use of or access to land, or legal challenges to the issuance of approvals or entitlements
 
 
•
 
Changes in the management team
 
 
•
 
Changes in income taxes due because of audit adjustments required by Federal and State income tax authorities, and changes in tax laws and other circumstances that affect our ability to control the timing and recognition of deferred tax liabilities
 
 
•
 
Liability for environmental remediation at properties owned, managed, or formerly owned or managed by us, our subsidiaries, or the predecessors of either, and changes in environmental laws and regulations
 
 
•
 
Failure to reach agreement with third parties on definitive terms or failure to close transactions, and failure or inability of third parties to perform their obligations under agreements, including tenants under lease or other agreements with us
 
 
•
 
Availability of properties for future development
 
 
•
 
Increases in the cost of land and building materials
 
 
•
 
Limitations on or challenges to title to our properties
 
 
•
 
Risks related to the performance, interests, and financial strength of the co-owners of our joint venture projects, such as the need to satisfy debt service guaranties upon a default by one of our co-owners
 
 
•
 
Changes in policies and practices of organized labor groups who may work on our projects
 
 
•
 
Issues arising from shortages in electrical power to us or to our customers, or higher prices for power, which could affect our ability to rent or sell properties, the ability of tenants or buyers to pay for our properties or for the use of our properties, or our ability to conduct our business
 
 
•
 
Other risks inherent in the real estate business

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Item
 
3.    Quantitative and Qualitative Disclosures about Market Risk
 
Our primary market risk exposure is interest rate risk as our financial instruments are not subject to foreign exchange rate risk or commodity price risk. We continuously and actively monitor and manage interest costs on our debt and may enter into interest rate-protection contracts based on changing market conditions. At September 30, 2002, we did not have any interest rate protection contracts outstanding.
 
As of September 30, 2002, approximately 77% of our debt bore interest at fixed rates and had a weighted average maturity of 7.8 years and a weighted average coupon rate of 6.59%, compared to an estimated current market rate of 5.75%. The remainder of our debt bears interest at variable rates with a weighted average maturity of 2.2 years and a weighted average coupon rate of 3.97%. To the extent that we incur additional variable rate indebtedness, we increase our exposure to increases in interest rates. Since our $337 million of floating rate debt is largely offset by $303 million of cash and restricted cash balances which are invested in floating rate money market investments, our exposure to short-term interest rate movements is not considered significant. We believe that moderate increases in interest expense as a result of inflation will not materially affect our financial position, results of operations, or cash flow.
 
Item 4.    Controls and Procedures
 
As of October 31, 2002, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of October 31, 2002. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to October 31, 2002.

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PART II.    OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
On March 12, 2002, the Department of Toxics and Substance Control of the State of California (“DTSC”) notified the Company of an investigation of the Company, its general contractors, and sub-contractors working for such general contractors, concerning the Mission Bay project. The investigation, which is ongoing, focuses on whether individuals and companies hauling soil within and from Mission Bay satisfied certain hazardous waste license/certification hauling requirements. The DTSC issued notices of violation, without fines or penalties, to the Company and one subcontractor on May 23, 2002, citing the subcontractor’s failure to qualify as a registered hazardous waste hauler. The Company, including its subsidiaries, is cooperating fully with the investigation, which is still continuing. The Company does not anticipate that this investigation or any proceeding that may result from this investigation will have a material adverse impact on the Mission Bay Project.
 
The Company owns approximately 47 acres located in the Westchester-Playa Del Rey area of Los Angeles, California adjacent to the Pacific Ocean and Ballona Wetlands (“West Bluffs”), which are entitled for the development of 114 single-family homes but subject to two legal actions. On October 6, 2000, a lawsuit (the “Coastal Act Lawsuit”) was filed by the Sierra Club et al, against the Coastal Commission and the Company as a real party in interest in San Francisco Superior Court challenging approvals of the Coastal Commission for the development of the project. This suit was subsequently consolidated with an additional suit filed on February 9, 2001. On December 13, 2000, the trial court denied petitioner’s request for a preliminary injunction. On January 11, 2001, petitioners appealed the trial court’s ruling, which resulted in the Court of Appeal enjoining any construction activity in the portion of the project within the coastal zone. This stay was dissolved on October 10, 2001, when the case was remanded to the trial court. On June 7, 2002, the trial court ruled in favor of the Company on the merits denying the petitioner’s request for writ of mandate and for injunction. The petitioners subsequently filed a motion to stay construction in the coastal zone pending petitioner’s filing of an appeal of the trial court’s decision, which was granted on August 13, 2002. The petitioners filed an appeal and have obtained a stay from the Court of Appeal pending resolution of the appeal after oral argument. The Court of Appeal has ordered expedited briefing.
 
On October 26, 2000, the Coalition for Concerned Communities, Inc. et al. filed a lawsuit (“CEQA Lawsuit”) against the Company and The City of Los Angeles in the Los Angeles Superior Court alleging land use and California Environmental Quality Act violations. On January 18, 2001, the trial court denied the petition, on the merits, which was appealed by the petitioners on March 23, 2001. All appellate briefs have been filed. The Court of Appeal has heard argument. A ruling is expected soon. On July 15, 2002, the petitioners filed a motion in the Court of Appeal to stop the development of the West Bluffs project until the final decision, which was denied by the Court on July 30, 2002.
 
The litigation process will delay the previously planned start of infrastructure construction, and the Company is unable to predict the length of such delay at this time. The Company does not believe that the litigation process will permanently prevent the Company from completing the West Bluffs project; however, there can be no assurance in that regard or that further delays will not result.
 
Also see Note 8, “Commitments and Contingencies”.

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Item 2.    Changes in Securities and Use of Proceeds
 
None.
 
Item 3.    Defaults Upon Senior Securities
 
None.
 
Item 4.    Submission of Matters to a Vote of Security Holders
 
None
 
Item 5.    Other Information
 
On August 1, 2002, the Audit Committee of the Board of Directors approved the Company’s request to engage the Company’s independent auditors, PricewaterhouseCoopers, to perform certain tax service in 2002.
 
Item 6.    Exhibits and Reports on Form 8-K
 
(a)  Exhibits:
 
None
 
(b)  Reports on Form 8-K
 
None

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Catellus Development Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
       
CATELLUS DEVELOPMENT CORPORATION
Date: November 1 , 2002
      
By:
  
/s/    C. WILLIAM HOSLER        
               
C. William Hosler
Senior Vice President
Chief Financial Officer
Principal Financial Officer
 
 
 
 
Dated: November 1, 2002
      
By:
  
/s/        PAUL A. LOCKIE           
               
Paul A. Lockie  
Vice President and Controller
Principal Accounting Officer

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I, Nelson C. Rising, certify that:
 
1.  I have reviewed this quarterly report on Form 10-Q of Catellus Development Corporation;
 
2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Catellus Development Corporation as of, and for, the periods presented in this quarterly report;
 
4.  Catellus Development Corporation’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Catellus Development Corporation and we have:
 
a)  designed such disclosure controls and procedures to ensure that material information relating to Catellus Development Corporation, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
b)  evaluated the effectiveness of Catellus Development Corporation’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.  Catellus Development Corporation’s other certifying officers and I have disclosed, based on our most recent evaluation, to Catellus Development Corporation’s auditors and the Audit Committee of Catellus Development Corporation’s Board of Directors (or persons performing the equivalent functions):
 
a)  all significant deficiencies in the design or operation of internal controls which could adversely affect Catellus Development Corporation’s ability to record, process, summarize and report financial data and have identified for Catellus Development Corporation’s auditors any material weaknesses in internal controls; and
 
b)  any fraud, whether or not material, that involves management or other employees who have a significant role in Catellus Development Corporation’s internal controls; and
 
6.  Catellus Development Corporation’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Dated: November 1, 2002
          
/s/        NELSON C. RISING           
               
    NELSON C. RISING   
Senior Vice President
Chairman and Chief Executive Officer

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I, C. William Hosler, certify that:
 
1.  I have reviewed this quarterly report on Form 10-Q of Catellus Development Corporation;
 
2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Catellus Development Corporation as of, and for, the periods presented in this quarterly report;
 
4.  Catellus Development Corporation’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Catellus Development Corporation and we have:
 
a)  designed such disclosure controls and procedures to ensure that material information relating to Catellus Development Corporation, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
b)  evaluated the effectiveness of Catellus Development Corporation’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.  Catellus Development Corporation’s other certifying officers and I have disclosed, based on our most recent evaluation, to Catellus Development Corporation’s auditors and the Audit Committee of Catellus Development Corporation’s Board of Directors (or persons performing the equivalent functions):
 
a)  all significant deficiencies in the design or operation of internal controls which could adversely affect Catellus Development Corporation’s ability to record, process, summarize and report financial data and have identified for Catellus Development Corporation’s auditors any material weaknesses in internal controls; and
 
b)  any fraud, whether or not material, that involves management or other employees who have a significant role in Catellus Development Corporation’s internal controls; and
 
6.  Catellus Development Corporation’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Dated: November 1, 2002
          
/s/        C. WILLIAM HOSLER        
               
    C. WILLIAM HOSLER
Senior Vice President
Chief Financial Officer

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