UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

PRENTISS PROPERTIES TRUST

Maryland (State or Other Jurisdiction of Incorporation or Organization)		75-2661588 (I.R.S. Employer Identification No.)

     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 þ No o

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

     The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding as of August 4, 2005, was 46,315,843 and the number of outstanding Participating Cumulative Redeemable Preferred Shares of Beneficial Interest, Series D, was 2,823,585.

 

 

PRENTISS PROPERTIES TRUST

INDEX

		Page Number
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004 (unaudited)			5
Consolidated Statements of Income for the three and six months ended June 30, 2005 and 2004 (unaudited)			6
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2005 and 2004 (unaudited)			7
Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 (unaudited)			8
Notes to Consolidated Financial Statements			9-23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24-44
Item 3. Quantitative and Qualitative Disclosures about Market Risk			45
Item 4. Controls and Procedures			45
Part II: OTHER INFORMATION
Item 1. Legal Proceedings			46
Item 2. Changes in Securities and Use of Proceeds			46
Item 3. Default Upon Senior Securities			46
Item 4. Submission of Matters to a Vote of Security Holders			46-47
Item 5. Other Information			47
Item 6. Exhibits			48-49
SIGNATURE			50
2005 Share Incentive Plan
Promissory Note
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

FORWARD-LOOKING STATEMENTS

     This Form 10-Q and the documents incorporated by reference into this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project,” and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of our management as well as assumptions made by us and information currently available to us. These forward-looking statements are subject to certain risks, uncertainties and assumptions, including risks, uncertainties and assumptions related to the following:

	•		Our failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended;
	•		Possible adverse changes in tax and environmental laws, as well as the impact of newly adopted accounting principles on our accounting policies and on period-to-period comparison of financial results;
	•		Potential liability for uninsured losses and environmental contamination;
	•		Our properties are illiquid assets;
	•		Factors that could result in the poor operating performance of our properties including tenant defaults and increased costs such as taxes, insurance, utilities and casualty losses that exceed insurance limits;
	•		Changes in market conditions including market interest rates and employment rates;
	•		Our incurrence of debt and use of variable rate and derivative financial instruments;
	•		Our real estate acquisition, redevelopment, development and construction activities;
	•		The geographic concentration of our properties;
	•		Changes in market conditions including capitalization rates applied in real estate acquisitions;
	•		Competition in markets where we have properties;
	•		Our dependence on key personnel whose continued service is not guaranteed;
	•		Changes in our investment, financing and borrowing policies without shareholder approval;
	•		The effect of shares available for future sale on the price of common shares;
	•		Limited ability of shareholders to effect change of control;
	•		Conflicts of interest with management, our board of trustees and joint venture partners could impact business decisions;
	•		Our third-party property management, leasing, development and construction business and related services;
	•		Risks associated with an increase in the frequency and scope of changes in state and local tax laws and increases in the number of state and local tax audits; and
	•		Cost of compliance with the Americans with Disabilities Act and other similar laws related to our properties.

If one or more of these risks or uncertainties materialize, or if any underlying assumption proves incorrect, actual results may vary materially from those anticipated, expected or projected. Such forward-looking statements reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. A detailed discussion of risks is included, under the caption “Risk Factors” in our Form 10-K, filed on March 15, 2005. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Form 10-Q or the date of any document incorporated by reference into this Form 10-Q. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

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CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share amounts)

		June 30,				December 31,
		2005				2004
ASSETS
Operating real estate:
Land		$	369,160			$	341,321
Buildings and improvements			1,915,883				1,789,043
Less: accumulated depreciation			(257,923	)			(234,007	)
			2,027,120				1,896,357
Construction in progress			34,955				23,417
Land held for development			61,948				59,014
Deferred charges and other assets, net			287,405				260,283
Notes receivable			1,000				1,500
Accounts receivable, net			61,272				55,772
Cash and cash equivalents			10,570				8,586
Escrowed cash			8,830				9,584
Investments in securities and insurance contracts			5,014				3,279
Investments in unconsolidated joint ventures and subsidiaries			6,842				12,943
Interest rate hedges			3,286				2,804
Total assets		$	2,508,242			$	2,333,539
LIABILITIES AND SHAREHOLDERS’ EQUITY
Mortgages and notes payable		$	1,393,100			$	1,191,911
Interest rate hedges			1,254				3,850
Accounts payable and other liabilities			100,395				105,304
Distributions payable			28,224				28,103
Total liabilities			1,522,973				1,329,168
Minority interest in operating partnership			23,425				24,990
Minority interest in real estate partnerships			44,905				35,792
Commitments and contingencies
Preferred shares $.01 par value, 20,000,000 shares authorized, 3,773,585 shares issued and outstanding at June 30, 2005 and December 31, 2004			100,000				100,000
Common shares $.01 par value, 100,000,000 shares authorized, 48,444,049 and 48,268,845 (includes 3,269,444 and 3,286,957 in treasury) shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively			484				483
Additional paid-in capital			1,026,708				1,020,917
Common shares in treasury at cost 3,269,444 and 3,286,957 shares at June 30, 2005 and December 31, 2004, respectively			(82,379	)			(82,694	)
Unearned compensation			(5,700	)			(3,386	)
Accumulated other comprehensive income			2,599				(302	)
Distributions in excess of earnings			(124,773	)			(91,429	)
Total shareholders’ equity			916,939				943,589
Total liabilities and shareholders’ equity		$	2,508,242			$	2,333,539

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Revenues:
Rental income		$	96,707			$	87,622			$	191,746			$	171,920
Service business and other income			3,506				2,928				6,556				6,416
			100,213				90,550				198,302				178,336
Operating expenses:
Property operating and maintenance			25,230				22,015				51,275				43,392
Real estate taxes			10,856				9,780				21,715				19,116
General and administrative and personnel costs			3,689				2,785				6,572				5,370
Expenses of service business			2,892				2,466				5,547				4,115
Depreciation and amortization			26,223				22,467				50,782				43,751
			68,890				59,513				135,891				115,744
Other expenses:
Interest expense			19,720				16,825				37,595				33,024
Amortization of deferred financing costs			572				568				1,290				1,133
Income from continuing operations before equity in (loss)/income of unconsolidated joint ventures and subsidiaries, loss on investment in securities, loss from impairment of mortgage loan and minority interests			11,031				13,644				23,526				28,435
Equity in (loss)/income of unconsolidated joint ventures and subsidiaries			(1,543	)			596				(845	)			1,174
Loss on investment in securities			—				(420	)			—				(420	)
Loss from impairment of mortgage loan			(500	)			—				(500	)			—
Minority interests			(172	)			(563	)			(677	)			(2,163	)
Income from continuing operations			8,816				13,257				21,504				27,026
Discontinued operations:
Income from discontinued operations			—				942				—				2,920
Gain from disposition of discontinued operations			2				10,185				17				10,185
Loss from debt defeasance related to sale of real estate			—				(5,316	)			—				(5,316	)
Minority interests related to discontinued operations			—				(182	)			—				(246	)
			2				5,629				17				7,543
Income before (loss)/gain on sale of land and an interest in a real estate partnership			8,818				18,886				21,521				34,569
(Loss)/gain on sale of land and an interest in a real estate partnership			—				(94	)			—				1,222
Net income		$	8,818			$	18,792			$	21,521			$	35,791
Preferred dividends			(2,113	)			(2,113	)			(4,226	)			(5,826	)
Net income applicable to common shareholders		$	6,705			$	16,679			$	17,295			$	29,965
Basic earnings per common share:
Income from continuing operations applicable to common shareholders		$	0.15			$	0.25			$	0.39			$	0.51
Discontinued operations			—				0.13				—				0.17
Net income applicable to common shareholders – basic		$	0.15			$	0.38			$	0.39			$	0.68
Weighted average number of common shares outstanding – basic			44,902				44,386				44,893				43,906
Diluted earnings per common share:
Income from continuing operations applicable to common shareholders		$	0.15			$	0.25			$	0.38			$	0.51
Discontinued operations			—				0.12				—				0.17
Net income applicable to common shareholders – diluted		$	0.15			$	0.37			$	0.38			$	0.68
Weighted average number of common shares and common share equivalents outstanding – diluted			45,122				44,527				45,116				44,094

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
Net income		$	8,818			$	18,792			$	21,521			$	35,791
Unrealized gains and losses on securities:
Unrealized gains/(losses) arising during the period			72				2				(18	)			28
Unrealized gains and losses on interest rate hedges:
Unrealized (losses)/gains arising during the period			(5,000	)			6,911				613				2,337
Reclassification of losses on qualifying cash flow hedges into earnings			932				2,827				2,306				5,397
Other comprehensive income			(3,996	)			9,740				2,901				7,762
Comprehensive income		$	4,822			$	28,532			$	24,422			$	43,553

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)

		Six Months Ended
		June 30,
		2005				2004
Cash Flows from Operating Activities:
Net income		$	21,521			$	35,791
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interests			677				2,409
Gain from disposition			(17	)			(11,407	)
Loss on debt extinguishment/defeasance			2,207				5,316
Loss on investment in securities			—				420
Loss on impairment of mortgage loan			500				—
Provision for doubtful accounts			(229	)			(3,147	)
Depreciation and amortization			50,782				47,019
Amortization of deferred financing costs			1,290				1,133
Non-cash compensation			1,888				1,221
Gain on derivative financial instruments			(159	)			(171	)
Changes in assets and liabilities:
Deferred charges and other assets			1,109				(2,279	)
Accounts receivable			(4,515	)			(1,852	)
Escrowed cash			754				1,764
Accounts payable and other liabilities			(11,943	)			(9,978	)
Net cash provided by operating activities			63,865				66,239
Cash Flows from Investing Activities:
Development/redevelopment of real estate			(14,483	)			(2,888	)
Purchase of real estate			(154,691	)			(174,943	)
Capital expenditures for in-service properties			(29,564	)			(21,187	)
Distributions in excess of earnings of unconsolidated joint ventures			1,821				208
Proceeds from the sale of a joint venture interest in a real estate partnership			—				69,338
Proceeds received from repayments of notes receivable			—				9,962
Proceeds from the sale of investment			—				1,107
Proceeds from the sale of real estate			—				78,999
Investments in securities and insurance contracts			(841	)			(666	)
Investments in unconsolidated subsidiaries			(17,050	)			—
Net cash used in investing activities			(214,808	)			(40,070	)
Cash Flows from Financing Activities:
Net proceeds from sale of common shares			847				63,790
Net proceeds from sale of treasury shares			964				—
Redemption of series E preferred units			—				(10,000	)
Redemption of series B preferred units			—				(95,000	)
Repurchase of treasury shares			(275	)			—
Capital contribution from minority interest partners in consolidated joint ventures			25,146				9,334
Repurchase of operating partnership common units			—				(891	)
Distributions paid to limited partners			(17,972	)			(2,856	)
Distributions paid to common shareholders			(50,539	)			(48,695	)
Distributions paid to preferred shareholders			(4,226	)			(4,226	)
Distributions paid to preferred unitholders			—				(3,176	)
Proceeds from mortgages and notes payable			599,300				427,000
Payment of debt prepayment cost			(2,207	)			—
Repayments of mortgages and notes payable			(398,111	)			(357,359	)
Net cash provided used in financing activities			152,927				(22,079	)
Net change in cash and cash equivalents			1,984				4,090
Cash and cash equivalents, beginning of period			8,586				5,945
Cash and cash equivalents, end of period		$	10,570			$	10,035
Supplemental Cash Flow Information:
Cash paid for interest		$	38,318			$	33,878

The accompanying notes are an integral part of these consolidated financial statements.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)

1. The Organization

Organization

     We are a self-administered and self-managed Maryland REIT that acquires, owns, manages, leases, develops and builds primarily office properties throughout the United States. We are self-administered in that we provide our own administrative services, such as accounting, tax and legal, through our own employees. We are self-managed in that we provide all the management and maintenance services that our properties require through our own employees, such as, property managers, leasing professionals and engineers. We operate principally through our operating partnership, Prentiss Properties Acquisition Partners, L.P., and its subsidiaries, and two management service companies, Prentiss Properties Resources, Inc. and its subsidiaries and Prentiss Properties Management, L.P. The ownership of the operating partnership was as follows at June 30, 2005:

										Series D
										Convertible
		Common								Preferred
(units in thousands)		Units				%				Units				%
Prentiss Properties Trust			45,238	(1)			97.21	%			3,774				100.00	%
Third parties			1,297				2.79	%			—				0.00	%
Total			46,535				100.00	%			3,774				100.00	%

     As of June 30, 2005, we owned interests in a diversified portfolio of 128 primarily suburban Class A office and suburban industrial properties, the accounts of which were consolidated with and into the operations of our operating partnership.

		Number of				Net Rentable
		Buildings				Square Feet
						(in thousands)
Office properties			101				16,617
Industrial properties			27				2,203
Total			128				18,820

     As of June 30, 2005, our properties were 90% leased to approximately 980 tenants. In addition to managing properties that are wholly owned, we manage approximately 8.9 million net rentable square feet in office, industrial and other properties for third parties.

     We have determined that our reportable segments are those that are based on our method of internal reporting, which disaggregates our business by geographic region. As of June 30, 2005, our reportable segments include our five regions (1) Mid-Atlantic; (2) Midwest; (3) Southwest; (4) Northern California; and (5) Southern California.

     At June 30, 2005, our properties were located in 10 markets, which were included in our reportable segments as follows:

Reportable Segment		Market
Mid-Atlantic		Metropolitan Washington D.C.
Midwest		Chicago, Suburban Detroit
Southwest		Dallas/Fort Worth, Austin, Denver
Northern California		Oakland, Silicon Valley
Southern California		San Diego, Los Angeles

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)

Real Estate Transactions

     On May 2, 2005, using proceeds from our revolving credit facility, our operating partnership completed a transaction in which we effectively acquired for $103.2 million the remaining 75% interest in Tysons International Partners, a joint venture that prior to the transaction was owned 25% by our operating partnership and 75% by an unrelated third party. The joint venture, through its two wholly-owned subsidiaries (“subsidiaries”) owned two office properties totaling approximately 456,000 net rentable square feet in Tyson’s Corner, Virginia. Pursuant to the purchase agreement, our operating partnership acquired from Tysons International Partners 100% of the subsidiaries thereby giving us 100% ownership of the two office properties. Tysons International Partners distributed the proceeds from the sale and immediately thereafter redeemed the 75% partner’s interest in the joint venture. As a result of the redemption, Tysons International Partners terminated as a joint venture.

     In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations,” we allocated the purchase price of the properties acquired as follows:

		Three Months Ended
(in thousands)		June 30, 2005
Land		$	14,544
Buildings and improvements		$	70,784
Tenant improvements and leasing commissions		$	12,385
Above/(below) market lease value		$	(3,614	)
Other intangible assets		$	9,123

     On May 2, 2005, Tysons International Partners caused both Prentiss Properties Greensboro Drive, L.P. and Prentiss Properties International Drive, L.P. to pay off the outstanding mortgage loan on each property prior to the closing of our operating partnership’s acquisition of the remaining 75% interest in Tysons International Partners. The prepayment amount totaled $67.6 million of which $8.8 million represented a prepayment penalty. We recognized $2.2 million, or 25% of the prepayment penalty in the line item “equity in (loss)/income of unconsolidated joint ventures and subsidiaries” in our consolidated statements of income for the three and six months ended June 30, 2005.

     On June 6, 2005, using proceeds from our revolving credit facility, we acquired from an unrelated third party, a .65 acre tract of land in Oakland, California for gross consideration of $1.9 million. The land, which can accommodate approximately 200,000 net rentable square feet of future development, is located adjacent to one of our existing office properties.

Other Transactions

     On May 4, 2005, Prentiss Office Investors, L.P. completed a five-year $30.9 million loan, collateralized by two office buildings located in Herndon, Virginia. We may borrow an additional $1.9 million over the next 24 months if certain conditions are met. The interest rate on the loan is 115 basis points over 30-day LIBOR and the monthly payments are interest only, with the principal balance due at its maturity on May 4, 2010. Proceeds from the loan were used to fund a pro rata capital distribution to the joint venture partners based on their ownership interest in Prentiss Office Investors, L.P. Our operating partnership used proceeds from the capital distribution to repay a portion of the outstanding borrowings under our revolving credit facility.

     During the second quarter 2005, we formed Prentiss Properties Capital Trust II, a Delaware statutory trust, established to issue $25.0 million of trust preferred equity securities to Merrill Lynch International, in a private placement pursuant to an applicable exemption from registration. Prentiss Properties Limited, Inc., a wholly-owned affiliate of our operating partnership acquired for $774,000 a residual interest (common securities), of Prentiss Properties Capital Trust II, representing 3% of the overall equity of the trust. The preferred equity securities will mature on June 30, 2035, but may be redeemed by Prentiss Properties Capital Trust II beginning on June 30, 2010. The holders of both the preferred equity and common securities will receive quarterly distributions from Prentiss Properties Capital Trust II, at a variable rate equal to 90-day LIBOR plus 125 basis points. Distributions will be cumulative and will accrue from the date of original issuance but may be deferred for up to 20 consecutive quarterly periods.

     Prentiss Properties Capital Trust II used the proceeds from the issuance of the preferred and common securities to acquire $25.8 million of junior subordinated notes from our operating partnership pursuant to an indenture agreement.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)

     The notes will mature on June 30, 2035, but may be redeemed at our option, in whole or in part, beginning on June 30, 2010 in accordance with the provisions of the indenture agreement. The notes bear interest at a variable rate equal to 90-day LIBOR plus 125 basis points. Interest is cumulative and will accrue from the date of original issuance but may be deferred by us for up to 20 consecutive quarterly periods.

     The trust is a variable interest entity under paragraph 5(b)(1) of FIN 46, because the equity investors at risk hold no substantial decision-making rights. Prentiss Properties Limited, Inc.’s investment is financed directly by our operating partnership; and therefore, it is not considered at risk. Because Prentiss Properties Limited, Inc. lacks a significant variable interest in the trust and thus is not the primary beneficiary, the accounts of the trust are not consolidated with and into Prentiss Properties Limited, Inc. and therefore, are not consolidated with and into our operating partnership. Prentiss Properties Limited, Inc.’s investment in the trust is presented on our consolidated balance sheet as an investment in joint ventures and unconsolidated subsidiaries and is accounted for using the cost method of accounting, whereby distributions are recognized into income upon receipt.

     The proceeds received by the operating partnership in exchange for the notes were used to repay a portion of the outstanding borrowings under our revolving credit facility. The notes are presented on our consolidated balance sheet in the line item “mortgages and notes payable.”

2. Basis of Presentation

     The accompanying financial statements are unaudited; however, our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In our opinion, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. The December 31, 2004 comparative balance sheet information was derived from audited financial statements. The results for the three and six month periods ended June 30, 2005 are not necessarily indicative of the results to be obtained for the full fiscal year. These financial statements should be read in conjunction with our audited financial statements, and notes thereto, included in our annual report on Form 10-K for the fiscal year ended December 31, 2004.

3. Share-Based Compensation

     In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” The statement amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” expanding disclosure requirements and providing alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock or share-based employee compensation.

     On January 1, 2003, we adopted the fair value based method of accounting as prescribed by Statement of Financial Accounting Standards No. 123 as amended for our share-based compensation plans, and we elected to apply this method on a prospective basis as prescribed in Statement of Financial Accounting Standards No. 148. The prospective basis requires that we apply the fair value based method of accounting to all awards granted, modified or settled after the beginning of the fiscal year in which we adopt the accounting method.

     Historically, we applied the intrinsic value based method of accounting as prescribed by APB Opinion 25 and related Interpretations in accounting for our share-based awards. Had we fully adopted Statement of Financial Accounting Standards No. 123 for awards issued prior to January 1, 2003 it would have changed our method for recognizing the cost of our plans. Had the compensation cost for our share-based compensation plans been determined consistent with Statement of Financial Accounting Standards No. 123, our net income applicable to common shareholders and net income per common share for the three and six months ended June 30, 2005 and 2004 would approximate the pro forma amounts below:

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(amounts in thousands, except per share data)		2005				2004				2005				2004
Net income applicable to common shareholders as reported		$	6,705			$	16,679			$	17,295			$	29,965
Add: Share-based employee compensation expense included therein			1,089				612				2,056				1,112
Deduct: Total share-based employee compensation expense determined under fair value method for all awards			(1,090	)			(633	)			(2,059	)			(1,154	)
Pro Forma net income applicable to common shareholders		$	6,704			$	16,658			$	17,292			$	29,923
Earnings per share:
Basic – as reported		$	0.15			$	0.38			$	0.39			$	0.68
Basic – pro forma		$	0.15			$	0.38			$	0.39			$	0.68
Diluted – as reported		$	0.15			$	0.37			$	0.38			$	0.68
Diluted – pro forma		$	0.15			$	0.37			$	0.38			$	0.68

     The effects of applying Statement of Financial Accounting Standards No. 123 in this pro forma disclosure are not necessarily indicative of future amounts.

4. Earnings per Share

     We calculate earnings per share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share,” which requires a dual presentation of basic and diluted earnings per share on the face of the income statement. Additionally, the statement requires a reconciliation of the numerator and denominator used in computing basic and diluted earnings per share. The table below presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share for the three and six month periods ended June 30, 2005 and 2004:

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands, except per share data)		2005				2004				2005				2004
Reconciliation of the numerator used for basic earnings per share
Income from continuing operations		$	8,816			$	13,257			$	21,504			$	27,026
Preferred dividends			(2,113	)			(2,113	)			(4,226	)			(5,826	)
(Loss)/gain on sale of land and an interest in a real estate partnership			—				(94	)			—				1,222
Income from continuing operations applicable to common shareholders		$	6,703			$	11,050			$	17,278			$	22,422
Discontinued operations			2				5,629				17				7,543
Net income applicable to common shareholders		$	6,705			$	16,679			$	17,295			$	29,965
Reconciliation of the denominator used for basic earnings per share
Weighted average common shares outstanding			44,902				44,386				44,893				43,906
Basic earnings per share		$	0.15			$	0.38			$	0.39			$	0.68
Reconciliation of the numerator used for dilutive earnings per share
Income from continuing operations		$	8,816			$	13,257			$	21,504			$	27,026
Preferred dividends			(2,113	)			(2,113	)			(4,226	)			(5,826	)
(Loss)/gain on sale of land and an interest in a real estate partnership			—				(94	)			—				1,222
Income from continuing operations applicable to common shareholders		$	6,703			$	11,050			$	17,278			$	22,422
Discontinued operations			2				5,629				17				7,543
Net income applicable to common shareholders		$	6,705			$	16,679			$	17,295			$	29,965
Reconciliation of the denominator used for dilutive earnings per share (1)
Weighted average common shares outstanding			44,902				44,386				44,893				43,906
Dilutive options			86				82				98				133
Dilutive share grants			134				59				125				55
Weighted average common shares and common share equivalents outstanding (1)			45,122				44,527				45,116				44,094
Diluted earnings per share		$	0.15			$	0.37			$	0.38			$	0.68

(1)		The following securities were not included in the diluted earnings per share computation because they would have had an antidilutive effect.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
Antidilutive Securities (in thousands)		2005				2004				2005				2004
Series D Convertible Preferred Shares			3,774				3,774				3,774				3,774

5. Deferred Charges and Other Assets, Net

     Deferred charges consisted of the following at June 30, 2005 and December 31, 2004:

		(in thousands)
		June 30,				December 31,
		2005				2004
Deferred leasing costs and tenant improvements		$	350,344			$	311,320
In-place lease values			39,852				27,910
Above market lease values			5,624				5,666
Deferred financing costs			15,535				14,568
Prepaids and other assets			8,787				11,610
			420,142				371,074
Less: accumulated amortization			(132,737	)			(110,791	)
		$	287,405			$	260,283

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)

     We record the amortization related to deferred leasing costs and tenant improvements and in-place lease values in the line item “depreciation and amortization.” We record above market lease value amortization in the line item “rental income.” Amortization for deferred financing cost is recorded in the line item “amortization of deferred financing costs,” and the amortization for prepaid items is recorded in the line items “property operating and maintenance” and “real estate taxes.”

6. Notes Receivable

     Our notes receivable balance of $1.0 million at June 30, 2005 is the result of a real estate transaction that included a non-recourse promissory note totaling $4.4 million, collateralized by a real estate property sold, maturing March 1, 2005, bearing interest at 7.95% per annum and requiring interest only payments until maturity. On December 22, 2004, we received correspondence from the borrower indicating an inability to fulfill its total obligation under the note. Due to the fact that our note receivable is subordinate to a first mortgage totaling approximately $12.0 million, we initiated an evaluation of the underlying real estate. Our evaluation was to determine whether the fair value of the property, less cost to sell, would be sufficient to satisfy both the first mortgage and our note receivable. In our opinion, the fair value of the underlying real estate would not be sufficient to satisfy both the first mortgage and our note receivable and thus, in the preparation of our financial statements for the year ended December 31, 2004, we recognized a $2.9 million write-down of the note. On April 4, 2005, the borrower sent notice notifying us that they were attempting to restructure the first mortgage. Subsequent to quarter end, we were made aware by the borrower of his intent to abandon the property. On August 2, 2005, we completed the sale of our note receivable to an unrelated party for total proceeds of $1.0 million. In an effort to reflect the realizable value of the note in our June 30, 2005 consolidated balance sheet, effective June 30, 2005, we recognized a $500,000 write-down to the note.

7. Accounts Receivable, Net

     Accounts receivable consisted of the following at June 30, 2005 and December 31, 2004:

		(in thousands)
		June 30,				December 31,
		2005				2004
Rents and services		$	9,272			$	10,449
Accruable rental income			56,074				50,721
Other			575				809
			65,921				61,979
Less: allowance for doubtful accounts			(4,649	)			(6,207	)
		$	61,272			$	55,772

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)

8. Investments in Unconsolidated Joint Ventures and Subsidiaries

     The following information summarizes the financial position at June 30, 2005 and December 31, 2004 and the results of operations for the three and six month periods ended June 30, 2005 and 2004 for the investments in which we held a non-controlling interest during the period presented:

Summary of Financial Position:		Total Assets								Total Debt (4)								Total Equity								Company’s Investment
		June 30,				Dec. 31,				June 30,				Dec. 31,				June 30,				Dec. 31,				June 30,				Dec. 31,
(in thousands)		2005				2004				2005				2004				2005				2004				2005				2004
Broadmoor Austin Associates(1)		$	96,570			$	97,962			$	128,487			$	131,979			$	(34,030	)		$	(34,814	)		$	4,482			$	4,217
Tysons International Partners(2)			—				89,268				—				59,113				—				28,914				—				8,726
Other Investments(3)			—				—				—				—				—				—				2,360				—
																										$	6,842			$	12,943

Summary of Operations for the Three																		Company’s Share of
Months Ended June 30, 2005 and 2004:		Total Revenue								Net Income								Net Income/(Loss)
(in thousands)		2005				2004				2005				2004				2005				2004
Broadmoor Austin Associates		$	5,645			$	5,018			$	1,369			$	1,254			$	685			$	627
Tysons International Partners(2)			1,070				2,876				(8,912	)			(124	)			(2,228	)			(31	)
Total																		$	(1,543	)		$	596
Summary of Operations for the Six																		Company’s Share of
Months Ended June 30, 2005 and 2004:		Total Revenue								Net Income								Net Income/(Loss)
(in thousands)		2005				2004				2005				2004				2005				2004
Broadmoor Austin Associates		$	11,292			$	10,035			$	2,742			$	2,474			$	1,371			$	1,237
Tysons International Partners(2)			4,228				5,819				(8,864	)			(250	)			(2,216	)			(63	)
Total																		$	(845	)		$	1,174

(1)		We own a 50% non-controlling interest in Broadmoor Austin Associates, an entity, which owns a seven-building, 1.1 million net rentable square foot office complex in Austin, Texas.
(2)		At December 31, 2004, we owned a 25% non-controlling interest in Tysons International Partners, an entity, which owns two office properties containing 456,000 net rentable square feet in the Northern Virginia area. On May 2, 2005, we acquired the remaining 75% interest in the properties owned by the joint venture. Prior to our acquisition of the remaining 75% for $103.2 million, we contributed to the joint venture $14.7 million representing our pro rata share of the outstanding indebtedness on the properties. As a condition of closing, out of proceeds from the sale and our capital contribution, the joint venture prepaid the outstanding indebtedness collateralized by the properties. The prepayment amount totaled $67.6 million of which $8.8 million represented a prepayment penalty. Net income for Tysons International Partners includes the $8.8 million loss from debt prepayment but excludes the gain on sale resulting from our acquisition of the remaining 75% interest in the joint venture.
(3)		Represents an interest in Prentiss Properties Capital Trust I and Prentiss Properties Capital Trust II that we account for using the cost method of accounting.
(4)		The mortgage debt, all of which is non-recourse, is collateralized by the individual real estate property or properties within each venture.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)

9. Mortgages and Notes Payable

     At June 30, 2005, we had mortgages and notes payable of $1.4 billion, excluding our proportionate share of debt from our unconsolidated joint ventures.

     The following table sets forth our consolidated mortgages and notes payable as of June 30, 2005 and December 31, 2004:

		(in thousands)
		June 30,				December 31,
Description		2005				2004		Amortization		Interest Rate(1)		Maturity
Revolving credit facility		$	255,000			$217,500		None		LIBOR+1.350%		February 19, 2007
PPREFI portfolio loan (2)			180,100			180,100		None		7.58%		February 26, 2007
High Bluffs construction loan			19,019			8,929		None		LIBOR+1.400%		September 1, 2007
Collateralized term loan — Union Bank of Calif.(3)			30,000			30,000		None		LIBOR+1.150%		September 30, 2007
Unsecured term loan — Eurohypo I			100,000			100,000		None		LIBOR+1.375%		May 22, 2008
Unsecured term loan — Commerzbank			75,000			75,000		None		LIBOR+1.350%		March 15, 2009
Unsecured term loan — Eurohypo II			13,620			13,760		30 yr		7.46%		July 15, 2009
Collateralized term loan — Mass Mutual (4)			85,000			85,000		None		LIBOR+0.850%		August 1, 2009
Prentiss Properties Capital Trust I Debenture			52,836			—		None		LIBOR+1.250%		March 30, 2035
Prentiss Properties Capital Trust II Debenture			25,774			—		None		LIBOR+1.250%		June 30, 2035
Variable rate mortgage notes payable (5)			61,600			96,700		None		(6)		(6)
Fixed rate mortgage notes payable (7)			495,151			384,922		(8)		(8)		(8)
		$	1,393,100			$1,191,911

(1)		All of our variable rate loans are based on 30-day LIBOR with the exception of our Prentiss Properties Capital Trust I & II Debentures which are based on 90-day LIBOR. 30-day and 90-day LIBOR were 3.34% and 3.52% at June 30, 2005, respectively.
(2)		The PPREFI portfolio loan is collateralized by 36 properties with an aggregate net book value of real estate of $233.9 million.
(3)		The term loan is collateralized by two properties with an aggregate net book value of real estate of $18.1 million.
(4)		The term loan is collateralized by 9 properties with an aggregate net book value of real estate of $106.7 million.
(5)		The variable rate mortgage loans are collateralized by 5 buildings with an aggregate net book value of $84.6 million.
(6)		Interest rates on our variable rate mortgages range from 30-day LIBOR plus 110 basis points to 30-day LIBOR plus 130 basis points. Maturity dates range from July 2009 through May 2010.
(7)		The fixed rate mortgage loans are collateralized by 23 buildings with an aggregate net book value of $553.7 million.
(8)		The payments on our fixed rate mortgages are based on amortization periods ranging between 18 and 30 years. The effective interest rates for our fixed rate mortgages range from 3.70% to 8.05% with a weighted average effective interest rate of 6.77% at June 30, 2005. Maturity dates range from November 2005 through April 2015 with a weighted average maturity of 6.0 years from June 30, 2005.

     Our mortgages and notes payable at June 30, 2005 consisted of $675.3 million of fixed rate, non-recourse, long-term mortgages, $13.6 million of fixed rate, recourse debt and $704.2 million of floating rate debt, $415.0 million of which was hedged at June 30, 2005 with variable to fixed rate hedges.

     Future scheduled principal repayments of our outstanding mortgages and notes payable are as follows:

		(in thousands)
2005		$	48,197
2006			9,704
2007			496,201
2008			107,094
2009			251,764
Thereafter			480,140
		$	1,393,100

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)

10. Interest Rate Hedges

     In the normal course of business, we are exposed to the effect of interest rate changes. We limit our interest rate risk by following established risk management policies and procedures including the use of derivatives. For interest rate exposures, derivatives are used to hedge against rate movements on our related debt.

     To manage interest rate risk, we may employ options, forwards, interest rate swaps, caps and floors or a combination thereof depending on the underlying exposure. We undertake a variety of borrowings from credit facilities, to medium- and long-term financings. To hedge against increases in interest cost, we use interest rate instruments, typically interest rate swaps, to convert a portion of our variable-rate debt to fixed-rate debt.

     On the date we enter into a derivative contract, we designate the derivative as a hedge of (a) a forecasted transaction or (b) the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (cash flow hedge). These agreements involve the exchange of amounts based on a variable interest rate for amounts based on fixed interest rates over the life of the agreement based upon a notional amount. The difference to be paid or received as the interest rates change is recognized as an adjustment to interest expense. The related amount payable to or receivable from counterparties is included in accounts payable and other liabilities. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction (e.g. until periodic settlements of a variable-rate asset or liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings. Changes in the fair value of non-hedging instruments are reported in current-period earnings.

     We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to (1) specific assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted transactions. We also formally assess (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting prospectively, as discussed below.

     We discontinue hedge accounting prospectively when (1) we determine that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument is no longer appropriate.

     When we discontinue hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, we will carry the derivative at its fair value on the balance sheet, recognizing changes in the fair value in current-period earnings.

     To determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For our derivatives, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

     Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings. This reclassification is consistent with when the hedged items are recognized in earnings. Within the next twelve months, we expect to reclassify to earnings approximately $1.4 million and $709,000 of unrealized gains and unrealized losses, respectively.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)

     The following table summarizes the notional values and fair values of our derivative financial instruments at June 30, 2005. The notional value provides an indication of the extent of our involvement in these instruments as of the balance sheet date, but does not represent exposure to credit, interest rate or market risks.

						Swap Rate Received
Notional		Swap Rate Paid				(Variable) at
Amount		(Fixed)				June 30, 2005				Swap Maturity				Fair Value
														(in thousands)
$25 million			4.345	%			3.34	%		July 2005				$	(7	)
$15 million			4.345	%			3.34	%		July 2005					(4	)
$20 million			5.985	%			3.34	%		March 2006					(304	)
$30 million			5.990	%			3.34	%		March 2006					(456	)
$50 million			2.270	%			3.34	%		August 2007					1,619
$25 million			2.277	%			3.34	%		August 2007					806
$70 million(1)			4.139	%			3.34	%		August 2008					(470	)
$30 million			3.857	%			3.34	%		September 2008					58
$30 million			3.819	%			3.34	%		October 2008					93
$20 million			3.819	%			3.34	%		October 2008					62
$50 million			3.935	%			3.34	%		May 2009					23
$30 million			3.443	%			3.34	%		October 2009					625
$20 million (1)			4.000	%			3.34	%		February 2010					(13	)
Total														$	2,032

(1)		The interest rate swap agreement was executed by Prentiss Office Investors, L.P., a partnership which is 51% owned by our operating partnership.

     Cash payments made under our interest rate swap agreements exceeded cash receipts from our interest rate swap agreements by $1.1 million and $2.7 million for the three months ended June 30, 2005 and 2004, respectively and $2.6 million and $5.3 million for the six months ended June 30, 2005 and 2004, respectively.

11. Accounts Payable and Other Liabilities

     Accounts payable and other liabilities consisted of the following at June 30, 2005 and December 31, 2004:

		(in thousands)
		June 30,				December 31,
		2005				2004
Accrued interest expense		$	6,454			$	5,685
Accrued real estate taxes			25,132				28,178
Advance rents and deposits			20,424				20,010
Deferred compensation liability			7,435				6,516
Below market lease values, net of amortization(1)			11,156				8,319
Other liabilities			29,794				36,596
		$	100,395			$	105,304

(1)		Accumulated amortization for below market lease values as of June 30, 2005 and December 31, 2004 was $3.0 million and $2.0 million, respectively. We record below market lease value amortization in the line item “rental income.”

12. Distributions

     On June 8, 2005, we declared a cash distribution for the second quarter of 2005 in the amount of $0.56 per share, payable on July 8, 2005 to common shareholders of record on June 30, 2005. Additionally, we determined that a distribution of $0.56 per common unit would be made to the partners of the operating partnership and the holders of our Series D Convertible Preferred Shares. The distributions totaling $28.2 million were paid July 8, 2005.

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)

13. Supplemental Disclosure of Non-Cash Activities

     During the three months ended June 30, 2005, we declared cash distributions totaling $28.2 million payable to holders of common shares, operating partnership units and Series D Convertible Preferred Shares. The distributions were paid July 8, 2005.

     Pursuant to our long-term incentive plan, during the six months ended June 30, 2005, we issued 110,250 restricted common shares to various key employees. The shares, which had a market value of approximately $3.8 million based upon the per share price on the date of grant, were classified as unearned compensation and recorded in the shareholders’ equity section of the consolidated balance sheet. The unearned compensation is amortized quarterly as compensation expense over the three-year vesting period.

     During the six months ended June 30, 2005, 37,733 common shares were issued pursuant to the conversion of 37,733 common units of our operating partnership. The common shares had a market value of approximately $1.4 million on the conversion date.

     We marked-to-market our investments in securities and our interest rate hedges. During the six months ended June 30, 2005, we recorded unrealized gains of $613,000 and unrealized losses of $18,000 on our interest rate hedges and investments in securities, respectively.

     In connection with the acquisitions and the consolidation of the Tysons International joint venture during the six months ended June 30, 2005, we recorded and assumed liabilities of approximately $2.3 million and receivables of approximately $756,000.

14. Segment Information

     The tables below present information about segment assets, our investments in equity method investees, expenditures for additions to long-lived assets and revenues and income from continuing operations used by our chief operating decision maker as of and for the three and six month periods ended June 30, 2005 and 2004:

For the Three Months Ended June 30, 2005
(in thousands)

																										Corporate
																										Not
		Mid-												Northern				Southern				Total				Allocable To				Consolidated
		Atlantic				Midwest				Southwest				California				California				Segments				Segments				Total
Revenues		$	28,064			$	16,681			$	32,053			$	12,287			$	10,338			$	99,423			$	790			$	100,213
Income from continuing operations		$	9,433			$	4,241			$	10,982			$	3,799			$	4,043			$	32,498			$	(23,682	)		$	8,816
Additions to long-lived assets:
Development/redevelopment		$	55			$	589			$	725			$	991			$	6,058			$	8,418			$	—			$	8,418
Purchase of real estate			103,222				—				—				1,885				—				105,107				—				105,107
Capital expenditures for in-service properties			4,630				763				6,863				514				1,749				14,519				—				14,519
Total additions		$	107,907			$	1,352			$	7,588			$	3,390			$	7,807			$	128,044			$	—			$	128,044
Investment balance in equity method investees		$	—			$	—			$	4,482			$	—			$	—			$	4,482			$	—			$	4,482
Assets		$	780,343			$	432,473			$	700,319			$	280,518			$	285,347			$	2,479,000			$	29,242			$	2,508,242