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Article by DailyStocks_admin    (08-15-08 05:21 AM)

Thomas Properties Group Inc. CEO James A Thomas bought 20700 shares on 8-08-2008 at $10.48

BUSINESS OVERVIEW

General

The terms “Thomas Properties Group,” “we,” “us” and “our company” refer to Thomas Properties Group, Inc., together with our operating partnership, Thomas Properties Group, L.P. (the “Operating Partnership”). We are a full-service real estate company that owns, acquires, develops and manages primarily office, as well as mixed-use and residential properties on a nationwide basis. Our company’s primary areas of focus are the acquisition and ownership of premier properties, both on a consolidated basis and through strategic joint ventures, property development and redevelopment, and property management activities. Property operations comprise our primary source of cash flow and provide revenue through rental operations, property management, asset management, leasing and other fee income. Our acquisitions program targets properties purchased both for our own account and that of third parties, targeted at core, core plus, and value-add properties. We engage in property development and redevelopment as market conditions warrant. As part of our investment management activities, we earn fees for advising institutional investors on property portfolios.

Our properties are located in Southern California and Sacramento, California; Philadelphia, Pennsylvania; Northern Virginia; Houston, Texas; and Austin, Texas. As of December 31, 2007, we own interests in and asset manage 25 operating properties with 13.0 million rentable square feet and provide asset and/or property management services on behalf of third parties for an additional four operating properties with 2.2 million rentable square feet. We also have a development pipeline of approximately 7.5 million square feet of primarily office development and 3,200 residential units, including approximately 192,000 square feet of office space and 302 residential units currently under construction.

As of March 14, 2008, we had approximately 180 employees. Our executive management team is based in our Los Angeles and Philadelphia offices. None of our employees are currently represented by a labor union.

We were incorporated in the State of Delaware on March 9, 2004 .We maintain offices in Los Angeles, Newport Beach and Sacramento, California; Austin and Houston, Texas; Northern Virginia and Philadelphia, Pennsylvania. Our corporate headquarters are located at City National Plaza, 515 South Flower Street, Sixth Floor, Los Angeles, California 90071 and our phone number is (213) 613-1900. Our website is www.tpgre.com. We make available through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed with or furnished to the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after we file them with or furnish them to the SEC. You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room located at 100 F Street NE, Washington, DC 20549. Information on the operations of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. You may also download these materials from the SEC’s website at www.sec.gov.

Business Focus

Portfolio Enhancement : We focus on increasing net revenues from the properties in which we own an interest or which we manage for third parties through proactive management. As part of portfolio management, we maintain strong tenant relationships through our commitment to service in marketing, lease negotiations, building design and property management.

Property Acquisitions: We seek to acquire “core,” “core plus,” and “value-add” properties for our own account and/or in joint ventures with others where such acquisitions provide us with attractive risk-adjusted returns. Core plus properties consist of under-performing properties that we believe can be brought to market potential through improved management. Value-add properties are characterized by unstable net revenues for an extended period of time, occupancy less than 90% and/or physical or management problems which we believe can be improved by investing additional capital and/or improving management.

Partnerships and Joint Ventures : We leverage our property acquisition and development expertise through partnerships and joint ventures. These entities provide us with additional capital for investment, shared risk exposure, and earned fees for asset management, property management, leasing and other services. We are the general partner and hold an ownership interest of 25% in TPG/CalSTRS, LLC (“TPG/CalSTRS”), a joint venture with the California State Teachers’ Retirement System (“CalSTRS”), which owns 12 office properties. In addition, TPG/CalSTRS is the general partner and holds a 25% interest in a joint venture between TPG/CalSTRS, Lehman Brothers Holdings Inc. (“Lehman”) and another institutional investor (the “Austin Portfolio Joint Venture”), which owns ten office properties in Austin, Texas. We are also the general partner and hold an interest in the Thomas High Performance Green Fund, L.P. (the “Green Fund”), which will develop, redevelop and invest in high performance, sustainable commercial buildings.

Development and Redevelopment: We develop and redevelop projects in diversified geographic markets using pre-leasing, guaranteed maximum cost construction contracts and other measures to reduce development risk. We have development properties in Los Angeles and El Segundo, California; Philadelphia, Pennsylvania; and Houston and Austin, Texas.

Recent Developments

Partnerships and Joint Ventures: In January 2007, TPG/CalSTRS acquired two properties totaling approximately 601,000 square feet in Fairfax, Virginia for $166.5 million. The acquisition and closing costs were funded with $135.3 million of mortgage financing proceeds and approximately $43.1 million of equity provided by TPG/CalSTRS. In May 2007, TPG/CalSTRS sold Intercontinental Center located in Houston, Texas for $24.2 million and recognized a gain of $7.9 million from this sale. In June 2007, TPG/CalSTRS acquired its interest in the Austin Portfolio Joint Venture, which acquired ten office properties in Austin, Texas for a purchase price of $1.15 billion. The acquisition and closing costs and operating reserves were funded with $907.5 million of debt financing proceeds and $295 million of equity, with TPG/CalSTRS funding 25% of the equity, or approximately $74 million. TPG/CalSTRS has total capital commitments of $378.3 million, of which approximately $30 million was unfunded at March 14, 2008.

The Green Fund has received initial capital commitments of $150 million, $100 million and $50 million from CalSTRS and ourselves, respectively, to be used to develop, redevelop, and invest in high performance, sustainable commercial buildings.

Consolidated Properties: On December 31, 2007, we exercised our option to purchase the remaining 11% interest in One Commerce Square for $2.0 million, resulting in our 100% ownership of One Commerce Square. We intend to exercise our option to purchase the remaining 11% interest in Two Commerce Square in 2008.

Development Pipeline: The construction of Murano, a 302-unit high-rise residential condominium project in Philadelphia, commenced in the second quarter of 2006. We expect that approximately 50% of the condominium units will be completed in the second quarter of 2008 and the remaining units are expected to be completed in the third quarter of 2008.

We commenced construction of two office buildings totaling approximately 192,000 square feet at Four Points Centre in Austin, Texas in the second quarter of 2007. We expect construction to be substantially complete in the third quarter of 2008.

We are presently entitling approximately 14.4 acres in Los Angeles, California, for office, production facility, residential and retail uses. The project, called Metro Studio @ Lankershim, will include approximately 1.5 million square feet for office, production facility, residential and retail development. We expect to enter into a long-term ground lease with the Los Angeles Metropolitan Transportation Authority, which owns the land, upon completion of entitlements. We are pre-leasing the first phase of the development, which is expected to utilize approximately half of the project’s total square footage for the construction of office and entertainment production studio facilities.

We have been engaged by NBC/Universal to entitle 124 acres in Los Angeles, California, as a residential and retail town center, located adjacent to Universal City.

Competition

The real estate business is highly competitive. There are numerous other acquirers, developers, managers and owners of commercial and mixed-use real estate that compete with us nationally, regionally and locally, some of whom may have greater financial resources. They compete with us for acquisition opportunities, management and leasing revenues, land for development, tenants for properties and prospective investors in acquisition or development funds we may establish through our investment advisory business.

Our properties compete for tenants with similar properties primarily on the basis of property quality, location, total occupancy costs (including base rent and operating expenses), services provided, building quality and the design and condition of any planned improvements or tenant improvements we may negotiate. The number and type of competing properties or available rentable space in a particular market or submarket could have a material effect on our ability to lease space and maintain or increase occupancy or rents in our existing properties. We believe, however, that the quality services and individualized attention that we offer our tenants, together with our property management services on site, enhance our ability to attract and retain tenants for the office properties we own an interest in or manage.

In addition, in many of our submarkets, institutional investors and owners and developers of properties (including other real estate operating companies and REITs) compete for the acquisition and development, or redevelopment, of land and space. Many of these entities have substantial resources and experience. Competition in acquiring existing properties and land, both from institutional capital sources, other real estate operating companies and from REITs, has been very strong over the past several years. We may compete for investors in potential property acquisitions with other property investment managers with larger or more established operations. Additionally, our ability to compete depends upon trends in the economies of our markets in which we operate or own interests in properties, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost of capital and debt financing, construction and renovation costs, land availability, completion of construction approvals, taxes and governmental regulations.

Regulatory Issues

Environmental Matters

Under various federal, state and local environmental laws and regulations, a current or previous owner, manager or tenant of real estate may be required to investigate and clean up hazardous or toxic substances at the property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up and monitoring costs incurred by the parties in connection with the actual or threatened contamination.

Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos- containing materials and potentially asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potentially asbestos-containing materials. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potentially asbestos-containing materials when the materials are in poor condition or in the event of construction, remodeling or renovation of a building.

We are aware of potentially environmentally hazardous or toxic materials at three of the properties in which we hold an ownership interest. Prior to commencing construction at our Murano development property, we engaged in remediation efforts as a result of a gasoline spill that occurred on the premises in April 2002, due to an accident caused by the former tenant’s agent. All soil remediation work has been completed. We are operating under a regulatory requirement to monitor the ground water to achieve four consecutive quarters of acceptable sample results.

With respect to asbestos-containing materials present at our City National Plaza and Brookhollow properties, these materials have been removed or abated from certain tenant and common areas of the building structures. We continue to remove or abate asbestos-containing materials from various areas of the building structures and as of December 31, 2007, have accrued $2.6 million and $0.2 million for estimated future costs of such removal or abatement at City National Plaza and Brookhollow, respectively.

Americans with Disabilities Act

Our properties must comply with Title III of the Americans with Disabilities Act, or ADA, to the extent that the properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in public areas of our properties where the removal is readily achievable. The obligation to make readily achievable accommodations is an ongoing one, and we assess our properties and make alterations as appropriate.

Insurance

We carry comprehensive liability, fire, flood, extended coverage, wind, earthquake, terrorism, pollution legal liability, business interruption and rental loss insurance under our blanket policy covering all of the properties which we own an interest in or manage for third parties, including our development properties (although we carry only liability insurance for the California Environmental Protection Agency (“CalEPA”) headquarters building under our blanket policy because the tenant has the right to provide all other forms of coverage it deems necessary, and it has elected to do so). We believe the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice. In the opinion of our management team, the properties in our portfolio are adequately insured. Our terrorism insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants, and biological and chemical weapons. We carry earthquake insurance on our properties located in seismically active areas, which includes our Southern California properties, and terrorism insurance on all of our properties, in amounts and with deductibles which we believe are commercially reasonable.

Foreign Operations

We do not engage in any non-U.S. operations or derive any revenue from sources outside the United States.

Segment Financial Information

We operate in one business segment: the acquisition, development, ownership and management of commercial and mixed-use real estate. Additionally, we operate in one geographic area: the United States. Our office portfolio generates revenues from the rental of office space to tenants, parking, rental of storage space and other tenant services. Our management activities generate revenues from third parties from property and asset management fees, acquisition fees and disposition fees. For a further discussion of segment financial information, see the financial statements commencing on page 56.

CEO BACKGROUND

James A. Thomas. Mr. Thomas has served on our Board of Directors as Chairman of the Board since our company was organized in March 2004. Mr. Thomas founded our predecessor group of entities, and served as the Chairman of the Board and Chief Executive Officer of our predecessor group of entities from 1996 to the commencement of our operations in October 2004. Prior to 1996, Mr. Thomas served as a co-managing partner of Maguire Thomas Partners, a national full-service real estate operating company from 1983 to 1996. In 1996, Maguire Thomas Partners was divided into two companies with Mr. Thomas forming our predecessor group of entities with other key members of the former executive management at Maguire Thomas Partners. Mr. Thomas also served as Chief Executive Officer and principal owner of the Sacramento Kings NBA Basketball team and the ARCO Arena from 1992 until 1999. Mr. Thomas is the Chairman of the board of directors of Townhall Los Angeles, and serves on the board of directors of the SOS Coral Trees, Los Angeles Chamber of Commerce, Center Theatre Group, and the National Advisory Council of the Cleveland Marshall School of Law. He serves on the board of trustees of the Ralph M. Parsons Foundation and I Have a Dream Foundation in Los Angeles, Baldwin Wallace College in Cleveland, the Los Angeles County Museum of Art, and St. John’s Health Center Foundation in Santa Monica, California. Mr. Thomas also serves on the board of governors of the Music Center of Los Angeles County and is a member of the Rand Advisory Board. He is a member of the Chairman Council of the Weingart Center Association, and the Colonial Williamsburg National Council. Mr. Thomas received his Bachelor of Arts degree in economics and political science with honors from Baldwin Wallace College in 1959. He graduated magna cum laude with a juris doctorate degree in 1963 from Cleveland Marshall Law School.



R. Bruce Andrews. Mr. Andrews has been a member of our Board of Directors since October 2004. Until his retirement in April 2004, Mr. Andrews served as the President and Chief Executive Officer of Nationwide Health Properties, Inc., a real estate investment trust, which position he had held since September 1989. Mr. Andrews’ previous experience includes serving in various capacities including Chief Financial Officer, Chief Operating Officer and Director of American Medical International. He began his career as an auditor with Arthur Andersen and Company. Mr. Andrews currently serves on the board of directors for Nationwide Health Properties, Inc. Mr. Andrews graduated from Arizona State University with a Bachelor of Science degree in accounting.



Edward D. Fox. Mr. Fox has been a member of our Board of Directors since October 2004. Since January 2003, Mr. Fox has served as Chairman and Chief Executive Officer of Vantage Property Investors, LLC, a private real estate investment and development company. Prior to 2003, Mr. Fox was Chairman and Chief Executive Officer of Center Trust, a real estate investment trust, from 1998 to January 2003 when Center Trust was acquired by Pan Pacific Retail Properties. Mr. Fox co-founded and served as the Chairman of CommonWealth Partners, a fully integrated real estate operating company, from 1995 through October 2003. Prior to forming CommonWealth Partners, Mr. Fox was a senior partner with Maguire Thomas Partners. A certified public accountant, Mr. Fox started his career in public accounting specializing in real estate transactions. Mr. Fox serves on the Dean’s advisory council for the USC School of Architecture and the board of directors of the Orthopaedic Hospital Foundation and the Los Angeles Boy Scouts. He is a member of the International Council of Shopping Centers, Urban Land Institute and the American Institute of Certified Public Accountants. He received a bachelor’s degree in accounting and a master’s degree in business, both with honors, from the University of Southern California.



John L. Goolsby. Mr. Goolsby has been a member of the Board of Directors since May 2006. He is a private investor and from 1988 until his retirement in 1998, he served as the President and Chief Executive Officer of The Howard Hughes Corporation, a real estate development company. He currently serves as a director of Tejon Ranch Company.



Winston H. Hickox. Mr. Hickox has been a member of our Board of Directors since October 2004. Since September 2006 he has been a partner in the government affairs consulting firm California Strategies, LLC. From June 2004 to July 2006, he was a Senior Portfolio Manager for the California Public Employees Retirement System, responsible for the design and implementation of environmental investment initiatives. From January 1999 to November 2003, Mr. Hickox served as Secretary of the California Environmental Protection Agency, and was responsible for a broad range of programs created to protect California’s human and environmental health. From December 1994 to May 1998, Mr. Hickox was a partner in LaSalle Advisors, Ltd. Prior to joining LaSalle Advisors, Ltd., Mr. Hickox was a Managing Director with Alex, Brown Kleinwort Benson Realty Advisors Corp. From April 1997 to January 1999, Mr. Hickox served as an alternate Commissioner on the California Coastal Commission. He was President of the California League of Conservation Voters from 1990 to 1994. He is currently a member of the board of Cadiz, Inc. and the Sacramento County Employees’ Retirement System. Mr. Hickox is a graduate of the California State University at Sacramento with a bachelor of science degree in business administration in 1965, and obtained a master of business administration degree in 1972 from Golden Gate University.



Randall L. Scott. Mr. Scott has been a member of our Board of Directors since April 2004. Mr. Scott directed asset management operations nationally and East Coast development activity for our predecessor group of entities from its inception in 1996 until the commencement of our operations in October 2004. Prior to the formation of our predecessor group of entities, Mr. Scott was with Maguire Thomas Partners from 1986 to August 1996. As a senior executive at Maguire Thomas Partners, Mr. Scott worked on several large-scale development projects, including One Commerce Square in Philadelphia and The Gas Company Tower in Los Angeles. Mr. Scott was also on the pre-development team for the CalEPA project in Sacramento and served in a general business development capacity. Mr. Scott is currently involved in various civic and professional organizations and serves on the board of directors of the Center City District, a Philadelphia non-profit special services organization. Mr. Scott holds a bachelor’s degree in business administration and economics from Butler University in Indianapolis.



John R. Sischo. Mr. Sischo has been a member of our Board of Directors since April 2004. He is responsible for our investment management services, including oversight of our relationship with CalSTRS, acquisition efforts and our capital market relationships. He served as Chief Financial Officer of our predecessor group of entities from April 1998 until May 2004. Prior to joining our predecessor group of entities, Mr. Sischo was with Banker’s Trust from 1989 to 1998 where he was instrumental in developing Bankers Trust’s real estate investment management practice. Prior to 1989, Mr. Sischo was with Security Pacific Corporation’s real estate investment banking practice. He began his career at Merrill Lynch Capital Markets. Mr. Sischo is on the board of directors of the Center City Association, a Los Angeles non-profit special services organization. Mr. Sischo received a bachelor’s degree in political science from the University of California at Los Angeles.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview and Background

We are a full-service real estate operating company that owns, acquires, develops and manages office, retail and multi-family properties on a nationwide basis. We conduct our business through our Operating Partnership, of which we own 60.5% at December 31, 2007. We have control over the major decisions of the Operating Partnership.

Critical Accounting Policies and Estimates

Accounting estimates . The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the relevant reporting periods. Certain accounting policies are considered to be critical accounting estimates, as these policies require us to make assumptions about matters that are highly uncertain at the time the estimate is made and changes in the accounting estimate are reasonably likely to occur from period to period. We believe the following accounting policies reflect the more significant estimates used in the preparation of our financial statements. For a summary of significant accounting policies, see note 3 to our financial statements, included elsewhere in this report.

Investments in real estate . The price that we pay to acquire a property is impacted by many factors including the condition of the buildings and improvements, the occupancy of the building, the existence of above and below market tenant leases, the creditworthiness of the tenants, favorable or unfavorable financing, above or below market ground leases and numerous other factors. Accordingly, we are required to make subjective assessments to allocate the purchase price paid to acquire investments in real estate among the assets acquired and liabilities assumed based on our estimate of the fair values of such assets and liabilities. This includes determining the value of the buildings and improvements, land, any ground leases, tenant improvements, in-place tenant leases, tenant relationships, the value (or negative value) of above (or below) market leases and any debt assumed from the seller or loans made by the seller to us. Each of these estimates requires a great deal of judgment and some of the estimates involve complex calculations. Our calculation methodology is summarized in Note 3 to our consolidated financial statements. These allocation assessments have a direct impact on our results of operations because if we were to allocate more value to land there would be no depreciation with respect to such amount or if we were to allocate more value to the buildings as opposed to allocating to the value of tenant leases, this amount would be recognized as an expense over a much longer period of time, since the amounts allocated to buildings are depreciated over the estimated lives of the buildings whereas amounts allocated to tenant leases are amortized over the terms of the leases. Additionally, the amortization of value (or negative value) assigned to non-market rate leases is recorded as an adjustment to rental revenue as compared to amortization of the value of in-place leases and tenant relationships, which is included in depreciation and amortization in our consolidated statements of operations.

We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate we would depreciate such investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.

We evaluate a property for potential impairment when events or changes in circumstances indicate that the current book value of the property may not be recoverable. In the event that these periodic assessments result in a determination that the carrying amount of a property exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the property, we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of the property. Estimates of expected future net cash flows are inherently uncertain and are based on assumptions dependent upon future and current market conditions and events that affect the ultimate value of the property. These estimates require us to make assumptions relating to, among other things, future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, occupancy levels, and the estimated proceeds generated from the future sale of the property.

Revenue recognition . Leases with tenants are accounted for as operating leases. Rental income is recognized as earned based upon the contractual terms of the leases with tenants. Minimum annual rents are recognized on a straight-line basis over the lease term regardless of when the payments are made. The deferred rents asset on our balance sheets represents the aggregate excess rental revenue recognized on a straight-line basis over the cash received under the applicable lease provisions. Our leases generally contain provisions that require tenants to reimburse us for a portion of property operating expenses and real estate related taxes associated with the property. These reimbursements are recognized as revenues in the period the related expenses are incurred. Real estate commissions on leases we charge to third party owners of rental properties are generally recorded as income after we satisfy all obligations under the commission agreement. A typical commission agreement provides that we earn 50% of the lease commission upon the execution of the lease agreement by the tenant. The remaining 50% of the lease commission is earned at a later date, usually upon tenant occupancy. The existence of any significant future contingencies will delay recognition of commission revenue until those contingencies are satisfied. In addition, we eliminate lease commissions we charge on our ownership share of rental properties. Investment advisory, property management and development services fees are recognized when earned under the provisions of the related agreements.

Allowances for uncollectible current tenant receivables and unbilled deferred rents receivable . Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for estimated uncollectible tenant receivables and unbilled deferred rent. Our determination of the adequacy of these allowances requires significant judgments and estimates. Unbilled deferred rents receivable represents the amount that the cumulative straight-line rental revenue recorded to date exceeds cash rents billed to date under the lease agreements. Given the longer-term nature of these types of receivables, our determination of the adequacy of the allowance for unbilled deferred rents receivables is based primarily on historical loss experience. We evaluate the allowance for unbilled deferred rents receivable using a specific identification methodology for our company’s significant tenants, assessing a tenant’s financial condition and the tenant’s ability to meet its lease obligations. In addition, the allowance includes a reserve based upon our historical experience and current and anticipated future economic conditions that are not associated with any specific tenant.

Depreciable lives of leasing costs . We incur certain capital costs in connection with leasing our properties. These costs consist primarily of lease commissions and tenant improvements. Lease costs are amortized on the straight-line method over the shorter of the estimated useful life of the asset or the estimated remaining term of the lease, ranging from one to 15 years. We reevaluate the remaining useful life of these costs as the creditworthiness of our tenants changes. If we determine that the estimated remaining life of the respective lease has changed, we adjust the amortization period and, therefore, the amortization or depreciation expense recorded each period may fluctuate. If we experience increased levels of amortization or depreciation expense due to changes in the estimated useful lives of leasing costs, our results of operations may be adversely affected.

Income taxes . We are subject to federal income taxes in the United States, and also in states and local jurisdictions in which we operate. We account for income taxes according to Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. SFAS 109 requires the recognition of deferred tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences.

The standard requires recognition of a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied.

In accordance with the criteria of SFAS No. 5, “Accounting for Contingencies”, we record tax contingencies when the exposure item becomes probable and reasonably estimable. We assess the tax uncertainties on a quarterly basis and maintain the required tax reserves until the underlying issue is resolved or upon the expiration of the statute of limitations. Our estimate of potential outcome of any uncertain tax issue is highly judgmental and we believe we have adequately provided for any reasonable and foreseeable outcomes related to uncertain tax matters.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes,” which was effective for our company on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in tax positions and requires that we recognize the impact of a tax position in our financial statements if that position would more likely than not be sustained on audit, based on the technical merits of the position. We recorded the cumulative effect of this change in accounting principle as an adjustment to opening retained earnings at January 1, 2007.

Factors That May Influence Future Results of Operations

The following is a summary of the more significant factors we believe may affect our results of operations. For a more detailed discussion regarding the factors that you should consider before making a decision to acquire shares of our common stock, see the information under the caption “Risk Factors” elsewhere in this report.

Rental income . The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space, to lease currently available space as well as space in newly developed or redeveloped properties and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in the submarkets where our properties are located.

Los Angeles, Philadelphia, Austin, and Houston—Submarket Information . A significant portion of our income is derived from properties located in Los Angeles, Philadelphia, Austin and Houston. The market conditions in these submarkets have a significant impact on our results of operations.

Information regarding significant tenants—Conrail . Currently, the largest tenant in our portfolio is Conrail. Conrail leased 753,000 rentable square feet of office space in Two Commerce Square as of December 31, 2007. This lease represents 16.8% of our consolidated annual rental and tenant reimbursements revenues for the year ended December 31, 2007. The lease has staggered expirations, with 375,000 square feet expiring in 2008 and the remaining 378,000 square feet expiring in 2009. We have entered into leases with tenants currently subleasing this space covering 163,000 square feet commencing 2008, and 378,000 square feet commencing 2009. Of the leases commencing 2008 and 2009, 1,800 square feet will expire in 2008, 57,000 square feet will expire in 2009, 73,000 square feet will expire in 2010, 14,000 square feet will expire in 2011, 33,000 square feet will expire in 2012, 6,000 square feet will expire in 2013, 339,000 square feet will expire in 2015 and 17,000 square feet will expire in 2016. A lease for 214,000 square feet expiring in 2015 has an early termination option in 2010. Because of these direct leases, we believe we have mitigated some of the risks associated with the Conrail tenant concentration.

Development and redevelopment activities . We believe that our development activities present growth opportunities for us over the next several years. We continually evaluate the size, timing and scope of our development and redevelopment initiatives and, as necessary, sales activity to reflect the economic conditions and the real estate fundamentals that exist in our submarkets. However, we may not be able to lease committed development or redevelopment properties at expected rental rates or within projected time frames or complete projects on schedule or within budgeted amounts. The occurrence of one or more of these events could adversely affect our financial condition, results of operations and cash flows. We currently own interests in four development projects, and TPG/CalSTRS includes six redevelopment properties and two development sites. As of December 31, 2007, we had incurred, on a consolidated basis, approximately $135.4 million in construction costs related to our development projects. To the extent that we, or joint ventures we are a partner in, do not proceed with projects as planned, development and/or redevelopment costs would need to be evaluated for impairment.

Results of Operations

The results of operations reflect the consolidation of the affiliates that own One Commerce Square (beginning June 1, 2004), Two Commerce Square, Murano, 2100 JFK Boulevard, Four Points Centre, Campus El Segundo and our investment advisory, property management, leasing and real estate development operations.

Comparison of the year ended December 31, 2007 to the year ended December 31, 2006.

Total revenues . Total revenues increased by $13.2 million, or 15.7%, to $97.5 million for the year ended December 31, 2007 compared to $84.3 million for the year ended December 31, 2006. The significant components of revenue are discussed below.

Rental revenues . Rental revenue remained consistent for each of the twelve month periods ended December 31, 2007 and 2006.

Tenant reimbursements. Tenant reimbursements remained consistent for each of the twelve month periods ended December 31, 2007 and 2006.

Parking and other revenues . Revenues from parking and other remained consistent for each of the twelve month periods ended December 31, 2007 and 2006.

Investment advisory, management, leasing and development services revenues . This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services increased by $5.6 million, or 70.9%, to $13.5 million for the year ended December 31, 2007 compared to $7.9 million for the year ended December 31, 2006. The increase was primarily due to a disposition fee of $5.5 million related to the sale of an unaffiliated fee managed property.

Investment advisory, management, leasing and development services revenues—unconsolidated real estate entities. This caption represents revenues earned from services provided to entities in which we use the equity method to account for our ownership interest since we have significant influence, but not control over the entities. Revenues from these services from unconsolidated real estate entities increased by $6.8 million, or 47.9%, to $21.0 million for the year ended December 31, 2007 compared to $14.2 million for the year ended December 31, 2006. This increase was primarily the result of an increase in fee income of $1.5 million related to the property investments in Fairfax, Virginia acquired on January 31, 2007 by TPG/CalSTRS and $4.4 million related to the properties in Austin, Texas acquired on June 1, 2007 by the Austin Portfolio Joint Venture. The increase was also due to an increase in fee income of $0.5 million relating to higher asset management fees from City National Plaza.

Total expenses . Total expenses increased by $5.5 million, or 6.3%, to $92.6 million for the year ended December 31, 2007 compared to $87.1 million for the year ended December 31, 2006. The significant components of expense are discussed below.

Rental property operating and maintenance expense. Rental property operating and maintenance expense increased by $1.9 million, or 9.1%, to $22.7 million for the year ended December 31, 2007 as compared to $20.8 million for the year ended December 31, 2006. The increase is primarily due to an increase in various operating expenses, such as professional services, engineering, utilities and business property taxes.

Real estate taxes . Real estate taxes remained consistent for each for the twelve month periods ended December 31, 2007 and 2006.

Investment advisory, management, leasing and development services expenses. These expenses increased by $5.6 million, or 57.1%, to $15.4 million for the year ended December 31, 2007 as compared to $9.8 million for the year ended December 31, 2006, primarily due to an increase in salaries and employment-related costs due to an increase in the number of personnel, and leasing expenses related to increased leasing volume in our Houston portfolio.

Interest expense . Interest expense decreased by $2.9 million or 14.1% to $17.7 million for the year ended December 31, 2007 as compared to $20.6 million for the year ended December 31, 2006. The decrease is primarily due to increased capitalized interest of $1.5 million in 2007 compared to 2006 related to our developments. In addition, there was a decrease in interest expense relating to Two Commerce Square of $0.8 million primarily due to the amortizing loan balances for the mortgage and mezzanine loans.

Depreciation and amortization expense. Depreciation and amortization expense decreased by $1.1 million or 8.7% to $11.6 million for the year ended December 31, 2007 compared to $12.7 million for the year ended December 31, 2006. The decrease primarily was due to assets which were fully depreciated during 2007.

General and administrative . General and administrative expense increased by $1.7 million, or 9.9%, to $18.9 million for the year ended December 31, 2007 compared to $17.2 million for the year ended December 31, 2006. The increase is primarily due to an increase in salaries and employment related costs due to an increase in the number of personnel.

Gain on sale of real estate . Gain on sale of real estate decreased by $6.2 million, or 58.5%, to $4.4 million for the year ended December 31, 2007 compared to $10.6 million for the year ended December 31, 2006. A 14.1 acre parcel at Campus El Segundo was sold in 2006 for $24.6 million resulting in a total gain of $18.4 million. We were obligated to fund certain infrastructure improvements of approximately $2.7 million with respect to the development of the sold parcel; therefore we recorded a deferred gain of $8.1 million. The remaining deferred gain as of December 31, 2007 was $3.4 million, which will be recognized on a percentage of completion basis as we complete the remaining infrastructure improvements of approximately $1.1 million.

Interest income . Interest income increased $3.0 million, or 100.0%, to $6.0 million for the year ended December 31, 2007 compared to $3.0 million for the year ended December 31, 2006, primarily due to higher average cash balances invested at higher rates.

Aggregate revenue attributable to, and operating and other expenses for unconsolidated real estate entities for the year ended December 31, 2007 compared to the year ended December 31, 2006 increased primarily due to the acquisition of our interests in City West Place in June 2006, the two properties in Fairfax, Virginia in January 2007 and the Austin Portfolio Properties in June 2007.

Aggregate interest expense increased by $61.4 million, or 108.1%, to $118.2 million for the year ended December 31, 2007 compared to $56.8 million for the year ended December 31, 2006 primarily as a result of an increase in interest expense of $6.3 million relating to the debt obligations of City West Place, $8.9 million relating to the debt obligations of the Fairfax, Virginia properties and $35.8 million relating to the debt obligations of the Austin Portfolio Properties. The increase was also due to refinancing of the City National Plaza mortgage and mezzanine loans in July 2006, resulting in higher additional borrowings in 2007, which resulted in an increase in interest expense of $9.4 million.

Aggregate depreciation and amortization expense increased by $52.1 million, or 93.9%, to $107.6 million for the year ended December 31, 2007 compared to $55.5 million for the year ended December 31, 2006 primarily as a result of additional depreciation and amortization expense of $7.6 million due to the acquisition of City West Place in June 2006, $7.9 million due to the acquisition of the two Fairfax, Virginia properties in January 2007 and $38.7 million due to the acquisition of the Austin Portfolio Properties in June 2007. In addition, there was an increase of $4.0 million for City National Plaza due to additional capital expenditures in 2007, offset by a $5.7 million decrease in depreciation and amortization expense related to a previous operational building, which is now under redevelopment at our Brookhollow property.

(Provision) benefit for income tax es. Provision for income taxes increased $586,000, or 92.3%, to a provision of $1,221,000 for the year ended December 31, 2007 compared to a provision of $635,000 for the year ended December 31, 2006. Of this increase, approximately $335,000 is attributable to the interest on unrecognized benefits, which is recorded as a component of income tax expense, and the remainder is attributable to an increase in book income for the year ended December 31, 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Comparison of three months ended June 30, 2008 to three months ended June 30, 2007

Rental revenues. Rental revenue decreased $0.2 million, or less than 1%, to $8.0 million for the three months ended June 30, 2008 compared to $8.2 million for the three months ended June 30, 2007. The decrease was primarily related to a scheduled expiration in June 2008 of a significant tenant at Two Commerce Square representing approximately half of the tenant’s space.

Tenant reimbursements. Tenant reimbursements increased $0.6 million, or 9%, to $7.3 million for the three months ended June 30, 2008 compared to $6.7 million for the three months ended June 30, 2007 primarily related to electricity costs and janitorial costs resulting from a new collective bargaining agreement between the vendor and the union representing the vendor’s employees.

Parking and other revenues. Parking and other revenues remained consistent at $0.9 million for each of the three month periods ended June 30, 2008 and 2007.

Investment advisory, management, leasing and development services revenues. This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services remained consistent at approximately $2.3 million for each of the three month periods ended June 30, 2008 and 2007

Investment advisory, management, leasing and development services revenues – unconsolidated real estate entities. This caption represents revenues earned from services provided to entities in which we use the equity method to account for our ownership interest since we have significant influence, but not control over the entities. Revenues from these services from unconsolidated real estate entities increased by $1.0 million, or 19%, to $6.3 million for the three months ended June 30, 2008 compared to $5.3 million for the three months ended June 30, 2007. This increase was primarily a result of an increase in fee income of $1.6 million related to the Austin Portfolio Properties acquired in June 2007, which was partially offset by a decrease in acquisition fees of $1.1 million related to this same acquisition. The remaining increase is primarily attributable to recording property-related benefits. In 2008, we recorded revenue and corresponding expense related to benefits that were paid by the management company on behalf of the property for which the management company was subsequently reimbursed for by the property.

Condominium sales – percentage of completion. This caption represents the revenue recognized on the percentage of completion method of accounting of the Murano condominium units and parking spaces which closed or were under a binding sales contract as of June 30, 2008. We closed sale on 20 units and 17 parking spaces as of June 30, 2008, and we had 103 units and 97 parking spaces under contract of sale as of June 30, 2008, for which we recognized revenue of $76.1 million. Prior to the quarter ended June 30, 2008, we accounted for units and parking spaces under contract of sale based on the deposit method of accounting.

Rental property operating and maintenance expense. Rental property operating and maintenance increased by $1.4 million, or 25%, to $6.9 million for the three months ended June 30, 2008 compared to $5.5 million for the three months ended June 30, 2007. The increase was primarily a result of higher operating expenses, increased bad debt charges, wind-down costs related to the termination of a restaurant tenant at Commerce Square, and marketing and other expenses related to our development properties.

Real estate taxes. Real estate taxes remained consistent at $1.5 million for each of the three month periods ended June 30, 2008 and 2007.

Investment advisory, management, leasing and development services expenses. Expenses for these services increased by $2.1 million, or 47%, to $6.6 million for the three months ended June 30, 2008 compared to $4.5 million for the three months ended June 30, 2007, primarily as a result of an increase in salaries and employment related costs related to the Austin Portfolio Properties acquired in June 2007, an increase in the use of consultants for accounting software initiatives and consultants for our third party development services business and legal fees related to our Green Fund.

Cost of condominium sales – percentage of completion. This caption represents the cost recognized on the percentage of completion method of accounting for the Murano condominium units and parking spaces which closed or were under a binding sales contract as of June 30, 2008. We closed sale on 20 units and 17 parking spaces as of June 30, 2008, and we had 103 units and 97 parking spaces under contract of sale as of June 30, 2008, for which we recognized cost of sales of $59.1 million. Prior to the quarter ended June 30, 2008, we accounted for units and parking spaces under contract of sale based on the deposit method of accounting.

Rent – unconsolidated entities. Rent – unconsolidated entities remained consistent for each of the three month periods ended June 30, 2008 and 2007.

Interest expense. Interest expense remained consistent at $3.8 million for each of the three month periods ended June 30, 2008 and 2007.

Depreciation and amortization expense. Depreciation and amortization expense decreased to $0.2 million or 7% to $2.8 million for the three months ended June 30, 2008 compared to $3.0 million for the three months ended June 30, 2007. The decrease was primarily related to a scheduled expiration in June 2008 of a significant tenant at Two Commerce Square representing approximately half of the tenant’s space.

General and administrative. General and administrative expense increased by $0.8 million, or 18%, to $5.3 million for the three months ended June 30, 2008 compared to $4.5 million for the three months ended June 30, 2007. The increase was primarily a result of an increase in salaries and employment related costs for corporate personnel, an increase in the use of consultants for information technology-related projects, and an increase in new franchise taxes in the State of Texas.

Gain on sale of real estate. Gain on sale of real estate was $1.1 million for the three months ended June 30, 2008 related to recognition of deferred gain upon completion of infrastructure costs related to the sale of a 14.1 acre parcel at Campus El Segundo in 2006.

Interest income. Interest income decreased by $1.0 million, or 59%, to $0.7 million for the three months ended June 30, 2008 compared to $1.7 million for the three months ended June 30, 2007 primarily due to declining investment balances and lower interest rates.

Aggregate revenue, operating and other expenses, interest expense and depreciation and amortization for unconsolidated real estate entities for the three months ended June 30, 2008 compared to the three months ended June 30, 2007 increased primarily due to the acquisition of the Austin Portfolio Properties in June 2007 .

Comparison of six months ended June 30, 2008 to six months ended June 30, 2007

Rental revenues. Rental revenue decreased $0.6 million, or 4%, to $15.8 million for the six months ended June 30, 2008 compared to $16.4 million for the six months ended June 30, 2007. The decrease was primarily related to a scheduled expiration in June 2008 of a significant tenant at Two Commerce Square representing approximately half of the tenant’s space.

Tenant reimbursements. Tenant reimbursements increased by $0.9 million, or 7%, to $14.1 million for the six months ended June 30, 2008 compared to $13.2 million for the six months ended June 30, 2007 primarily related to electricity costs and janitorial costs resulting from a new collective bargaining agreement between the vendor and the union representing the vendor’s employees.

Parking and other revenues. Parking and other revenues remained consistent at $1.8 million for each of the six month periods ended June 30, 2008 and 2007.

Investment advisory, management, leasing and development services revenues. This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services remained consistent at approximately $4.4 million for each of the six month periods ended June 30, 2008 and 2007.

Investment advisory, management, leasing and development services revenues – unconsolidated real estate entities. This caption represents revenues earned from services provided to entities in which we use the equity method to account for our ownership interest since we have significant influence, but not control over the entities. Revenues from these services from unconsolidated real estate entities increased by $2.5 million, or 26%, to $12.2 million for the six months ended June 30, 2008 compared to $9.7 million for the six months ended June 30, 2007. This increase was primarily a result of an increase in fee income of $3.5 million related to the Austin Portfolio Properties acquired in June 2007, which was partially offset by a decrease in acquisition fees of $1.7 million related to the property investments in Fairfax, Virginia acquired in January 2007, and Austin, Texas acquired in June 2007. The remaining increase is primarily attributable to recording property-related benefits. In 2008, we recorded revenue and corresponding expense related to benefits that were paid by the management company on behalf of the property for which the management company was subsequently reimbursed for by the property.

Condominium sales – percentage of completion. This caption represents the revenue recognized on the percentage of completion method of accounting of the Murano condominium units and parking spaces which closed or were under a binding sales contract as of June 30, 2008. We closed sale on 20 units and 17 parking spaces as of June 30, 2008, and we had 103 units and 97 parking spaces under contract of sale as of June 30, 2008, for which we recognized revenue of $76.1 million. Prior to the quarter ended June 30, 2008, we accounted for units and parking spaces under contract of sale based on the deposit method of accounting.

Rental property operating and maintenance expense. Rental property operating and maintenance increased by $1.7 million, or 15%, to $12.9 million for the six months ended June 30, 2008 compared to $11.2 million for the six months ended June 30, 2007. The increase was primarily a result of higher operating expenses, increased bad debt charges, wind-down costs related to the termination of a restaurant tenant at Commerce Square, and marketing and other expenses related to our development properties.

Real estate taxes. Real estate taxes remained consistent at approximately $3.1 million for each of the six month periods ended June 30, 2008 and 2007.

Investment advisory, management, leasing and development services expenses. Expenses for these services increased by $3.9 million, or 49%, to $11.8 million for the six months ended June 30, 2008 compared to $7.9 million for the six months ended June 30, 2007, primarily as a result of an increase in salaries and employment related costs related to the Austin Portfolio Properties acquired in June 2007, an increase in the use of consultants for accounting software initiatives and consultants for our third party development services business and legal fees related to our Green Fund.

Cost of condominium sales – percentage of completion. This caption represents the cost recognized on the percentage of completion method of accounting for the Murano condominium units and parking spaces which closed or were under a binding sales contract as of June 30, 2008. We closed sale on 20 units and 17 parking spaces as of June 30, 2008, and we had 103 units and 97 parking spaces under contract of sale as of June 30, 2008, for which we recognized cost of sales of $59.1 million. Prior to the quarter ended June 30, 2008, we accounted for units and parking spaces under contract of sale based on the deposit method of accounting.

Rent – unconsolidated entities. Rent – unconsolidated entities remained consistent for each of the six month periods ended June 30, 2008 and 2007.

Interest expense. Interest expense remained consistent at $8.0 million for each of the six month periods ended June 30, 2008 and 2007.

Depreciation and amortization expense. Depreciation and amortization expense decreased by $0.5 million, or 8%, to $5.6 million for the six months ended June 30, 2008 compared to $6.1 million for the six months ended June 30, 2007. The decrease was primarily related to a scheduled expiration in June 2008 of a significant tenant at Two Commerce Square representing approximately half of the tenant’s space.

General and administrative. General and administrative expense increased by $0.9 million, or 11%, to $9.4 million for the six months ended June 30, 2008 compared to $8.5 million for the six months ended June 30, 2007. The increase was primarily a result of an increase in salaries and employment related costs for corporate personnel, an increase in the use of consultants for information technology-related projects, and an increase in new franchise taxes in the State of Texas.

Gain on sale of real estate. Gain on sale of real estate was $3.6 million for the six months ended June 30, 2008 related to recognition of deferred gain upon completion of infrastructure costs related to the sale of a 14.1 acre parcel at Campus El Segundo in 2006.

Interest income. Interest income decreased by $0.8 million, or 31%, to $1.8 million for the six months ended June 30, 2008 compared to $2.6 million for the six months ended June 30, 2007 primarily due to declining investment balances and lower interest rates.

CONF CALL

Diana M. Laing

Good morning everyone and thank you for joining Jim and me for our earnings conference call for the second quarter. Certain statements made by the company during this call that are not historical facts are forward-looking statements. These statements include management’s expectations with respect to future events and trends that may affect the company’s business and results of operations and are subject to risks and uncertainties. Actual results may differ materially from those expected in the forward-looking statements. Persons participating on this call are advised to review the reports filed by Thomas Properties Group, Inc. with the Securities and Exchange Commission for additional information regarding some of the factors that may affect the company’s business and results of operations.

Now Jim Thomas will discuss our business environment and initiatives.

James A. Thomas

Good morning. Just with respect to a business overview, the fundamentals of our business continue to be good. Occupancies and rental rates are basically strong. So at this point we’re not incurring the deteriorating leasing conditions that many have projected as a result of the weakening economy. Our investment advisory business and development businesses are performing well. However, the credit crunch continues to put pressure particularly on our acquisition business and may likely affect our disposition business.

I’ll talk about each of these starting with operations. Our overall occupancy rates fell slightly from 86.5% to 85.6% at the end of the second quarter. Of the 25 properties that we have 11 actually had increased occupancies, seven remained unchanged, and seven decreased. Of the seven properties where occupancies slipped, we have recovered or are in the process of recovering the slippage and in most cases have actually increased occupancy on these properties as I’ll point out later.

With respect to the Austin CBD it’s been about one year since we acquired this portfolio and it continues to outperform our underwriting both in terms of rent increases and occupancy. The downtown market has been especially strong. During the first half of 2008 the CBD absorbed approximately 150,000 square feet which puts this year on a pace to absorb more than in any one year in the past 10 years. Vacancies fell from 22.6% at the end of 2005 to 12% currently. In the TPG portfolio our average gross rents are approximately $41.00 per square foot as contrasted to $35.00 per square foot in mid-2007. We leased 72,000 square feet in the second quarter compared to 61,000 in the first quarter.

At Frost Bank we slipped to 77.8% in the second quarter but in July we leased another 27,000 square feet to move the current occupancy to about 83.5% and we anticipate reaching 90% by the end of the third quarter. At 300 West Sixth Street we slipped to 86.6% at the end of the second quarter but our current occupancy is 96% after we signed a 20,000 square foot lease for an average of $43.00 per square foot.

In the suburbs in the northwest market, this market has seen the most new development activity in 2008 with an additional 1.5 million square feet of office to be added by the end of the year. The overall vacancy rate is at 12.7% up from 11% at the end of the first quarter. But rental rates so far are holding firm at $29.00 to $31.00 gross for Class A. Westech 360 which is one of our properties in this market at the end of the second quarter slipped to 58.9% but in July we signed a lease for 15,000 square feet to take us to 67%.

In Houston as we’ve previously reported our rents in Houston have basically doubled since our acquisition. Year to date in Houston there’s been absorption of about a little over 1 million square feet whereas in 2007 the absorption was 5 million square feet. The CBD has actually had negative absorption year to date and all of the absorption has been in the suburbs where TPG assets are located.

At San Felipe we slipped slightly from 97.8% to 96.5% but since the close of the quarter we’ve gone back to 97.5%. This is a strong property with asking rents of $25.00 net and 3% annual bumps. At 2500 CityWest we’re asking for $26.00 net rents and 3% annual bumps and at CityWest Place we’re asking for $30.00 net rent and 3% annual bumps. At Brookhollow I and III we’re leasing up nicely. We had a major tenant, Sterling Bank, take a couple hundred thousand feet in Brookhollow II and they have expanded since they’ve moved in. We’re quoting rents at $14.00 net with 3% annual bumps. At Brookhollow I we’re about to complete a major renovation of the skin and our plan is to continue to market the space to a major user with our goal to prelease this space before we complete the renovations.

At City National Plaza we have only about 175,000 square feet to reach stabilization of 93% and of that amount about 224,000 square feet is expansion space for existing tenants. So we only have unencumbered space of about 190,000 feet. To date we’ve leased a little over 76,000 square feet. Given the magnitude of our lease up we’ve been able to increase rents to the $28.00 net range and we believe we are getting the highest rents in the downtown market. Even so these rents pale in comparison to the $50.00+ net rents on the west side. We think this disparity bodes well for downtown. In the second quarter we leased 25,000 feet but lost 25,000 feet to a tenant who vacated the market.

In Philadelphia I’d like to direct your attention to a recent Green Street Advisory piece entitled Philadelphia Market Update: Rip Van Winkle Comes to Life and this is a nice article on what’s going on in Philadelphia both downtown and in the suburbs. With respect to the downtown market the article points out that the CBD vacancy rate tipped down slightly in the second quarter to 9.6% after reaching the lowest level since 2001 in the fourth quarter of 2007. The article goes on that the average Class A asking rents for high-quality assets such as Commerce Square is in the mid- to high $30s a rentable square foot. The article also points out that vacancies in the suburbs have picked up slightly.

The recent trend in suburban asking rents has been slowly but steady growth. In particular the submarkets such as King of Prussia where Walnut Hill and Oak Hill projects of TPG are located are commanding rent premiums. In the Philadelphia CBD, in 2 Commerce Square we lost the 90,000 square foot tenant to the suburbs and that loss coincided with the expiration of part of the Conrail lease of 375,000 square feet which leaves us with about 200,000+ rentable square feet. We have very strong activity for this space and we’re very optimistic that we’re going to be able to lease all or most of this space very quickly. In the Philadelphia suburbs as shown on page 15 in the supplemental package, we’ve increased occupancy at the end of the second quarter in all three of our suburban Philadelphia properties. At Walnut Hill and Oak Hill we’re doing deals at $21.00 per square foot; at Four Falls we’re doing deals at $28.50 per square foot. But after the end of the second quarter we lost a 22,000 square foot tenant that filed for bankruptcy.

In the Northern Virginia market, Centerpointe I and a portion of Centerpointe II was occupied by a single tenant who had announced its intention to move prior to the time we acquired the property. This leaves us with about 210,000 square feet vacant in Centerpointe I and 50,000 square feet in Centerpointe II. We have a letter of intent for 50,000 square feet on Centerpointe I and a number of other prospects for Centerpointe II.

Moving on to our acquisitions and disposition business. City National Plaza. On our last earnings call I indicated that we had approached a small group of selected potential purchasers to sell a 49% interest in City National Plaza. We took this approach rather than a full marketing approach because we were being advised by Estill Secured, our broker, that the market was such that it was not prudent to go out on a full-blown marketing effort. We and Estill Secured now believe the market is improved to the point where a full marketing effort is appropriate and we have commenced that effort. We got into the market about three weeks ago with our books, our war room, etc. to sell a 49% to 75% interest. We’ve received considerable investor interest and we’re in the process of holding investor tours and investor meetings and our target is to receive offers in September.

A couple of recent transactions in downtown Los Angeles bode well for City National Plaza transactions. We understand that Tishman Speyer is in the process of selling the O’Melveny building to Manufacturer’s Life for about $440.00 per square foot with a going-in cap rate of 5.6%. Heinz is in the process of purchasing the Citigroup building with a going-in cap rate of about 4.6% and $315.00 per square foot. The Citigroup building is encumbered with a couple of very large master leases at high rates that are about to expire in several years. The subtenants for these master leases are at rates considerably below the master rate and it’s expected that Heinz will have to spend substantial sums on capital improvements, TIs and leasing commissions which explains what we consider to be the low $315.00 per square foot price which when you add the money that Heinz will have to spend will make it pretty comparable to the O’Melveny $440.00 per square foot price.

Our Houston portfolio. We have also entered the market to sell a 50% to 75% interest in the Houston portfolio other than Brookhollow and we got into the market about three weeks ago. We’re receiving very strong interest and again we’re in the process of starting investor tours and meetings. As I reported at our last earnings call, there’s been strong institutional interest in the Houston market and we’ve seen several properties that we consider comparable selling at prices projected at $250.00 per square foot or so. Our basis in this portfolio is about $160.00 per square foot. Again we are expecting to receive offers in September.

We’re optimistic about both City National Plaza and Houston, but obviously there can be no assurance that we will be able to consummate a transaction that is suitable for us.

With respect to acquisitions, our primary focus is on our high performance Green Fund and our recent UBS Fund which I will speak to later except to mention now that these two funds have the combined buying power of about $1 billion.

Moving on to our development and construction business, let me speak just generally first. Some recent discussions with potential investors have indicated a lack of understanding of our development pipeline so I thought it was worth spending a couple of minutes to make sure everyone understands the conservative approach we take to development. We have an attractive well-positioned development pipeline which we have been able to assemble at a very low cost with high potential profits while minimizing our downside risk. Our basic approach is to acquire large tracts of land which we can develop over three to five year periods in phases. We minimize our land costs by buying at the right time and selling off pieces to reduce our remaining land costs. This allows us to not have pressure to develop until we’re satisfied with market conditions.

Currently we have three projects that are in the development or pre-development stage: Two in Los Angeles and one in Austin, Texas. These three properties total about 1.4 million square feet of which about 950,000 square feet is being preleased. So the remaining 6 million square feet is held at very attractive low prices and will not be developed without substantial preleasing.

With respect to our development projects we have the Metro Studios at Lankershim at Universal City that we’ve talked about before we continued to work on this project to complete the design and lease the entire first phase, we expect to be filing our EIR in the next couple of weeks. This is a terrific smart growth project that is transit oriented over subway stations and bus terminals with job/housing balance and a green gold lead USB rating that would preserve the natural resources and protect the environment. The project’s slated for our Green Fund once the entitlements are obtained.

In El Segundo we continue to position the first phase of this project of approximately 250,000 feet to be in a position to start construction as soon as we reach an acceptable level of preleasing. We’re in discussions with several major tenants that could kick off the project.

We’re also in negotiations with Marriott regarding their new Renaissance sports center hotel concept which would be a great amenity for the project. This project is also slated for the Green Fund and we’re in the process of making the appraisal and the transfer.

At Four Centers we anticipate completing the first phase 200,000 square foot office project very shortly. Preleasing as we’ve always said is difficult in Austin and the northwest market has been soft recently. Leasing activity is picking up as the building nears completion.

With respect to the Murano we’ve completed the first 38 floors of the 43-story building and as of August 1 we’ve closed 65 units paying down our construction loan by $34 million to slightly over an $89 million balance. As of July 31 we had over 50 buyers actually move into their condo units. Since June 30 we have obtained two additional contracts and we have three reservations, and keep in mind reservations require a deposit so those are very serious transactions. Now that the project is basically complete with the lobby and the landscaping and substantial occupancy, we expect to have a strong fall and spring selling season. Diana will talk about the fact that the earnings report will pick up again on the first 125 units that have been sold.

Our investment advisory business, we continue to focus on building our fee business. As you can see on page 14 of the supplemental package for the six months ended June 30 we had gross fees before accounting eliminations of $23 million up from $19 million for the same period in 2007. In May we finalized the joint venture with UBS Wealth Management - North American Property Fund whereby the Fund will invest up to $250 million under the initial mandate. TPG will invest 15% for transactions with leverage of less than 60% and will invest 25% for transactions over 60%. The venture will focus on acquiring core and core plus properties. The venture will have a nationwide platform focusing on Class A CBD and suburban assets in targeted markets consistent with the TPG strategy. We will receive an acquisition fee, an asset management fee, and a promote the package of which is more favorable than the existing TPG [cousters] fee package.

Our consultant development role at NBC Universal back lot continues to go well. We expect to commence the EIR process for the vision plan in early 2009 for 3,000 residential units with a target to complete the entitlement process by 2010 and infrastructure by 2012. We anticipate being the master developer for the project when we complete the entitlements.

As we reported last earnings call, we activated the high performance Green Fund with $180 million in commitments and we have soft commitments for another $20 million. I pointed out earlier that we’re in the appraisal process to transfer the first phase of the El Segundo project into the Fund. In addition we’re actively seeking acquisitions for the Fund.

Our TPG [cousters] joint venture continues and is our main investment vehicle.

Finally, we have the Austin joint venture with Lehman Brothers which also generates investment management fees.

In summary, we believe we have adequate capital to fund our growth in the near term; we’re focused on executing our strategic initiatives; we acknowledge that the credit market is challenging now and likely to stay that way for some period of time; but the projects that we have underway today are fully financed and we’re making progress on our current value add and construction projects. We recently extended the City National Plaza loan maturity for a year with an option to extend it for an additional year and we expect to be able to extend any of our loan maturities that we have in the near future.

And with that I will turn it back over to Diana.

Diana M. Laing

As always we’ve made supplemental financial information available on our website for year to date and the second quarter ending June 30, 2008. In addition to the consolidated statements of operation and balance sheet which are presented under GAAP, we present a non-GAAP pro rata financial statement presentation as though our unconsolidated properties were consolidated at our ownership interests. These financials start on page 7 of the supplemental package and these are the operating statements that I’ll be referring to in my discussion comparing the quarter’s results with last year.

On page 7 to compare the second quarter of 2008 with the second quarter of 2007, revenue from our operating properties increased about 13% over the first quarter of 2007 primarily as a result of our acquisition of the Austin portfolio about a year ago. The property operating expenses increased 24% or $3.1 million again partly resulting from the acquisition of the Austin portfolio but also including approximately $750,000 in marketing and other expenses that are related to our development properties. The properties that we are currently marketing are Murano, Four Points and Campus El Segundo. If you exclude these development property expenses, our operating margin on the remaining properties was about 52% in the second quarter of 08 compared with 54% in the second quarter of 2007.

Our revenues from the investment management business are shown here on page 7 in two line items. If you’ll look at page 14 of the supplemental financial package, we’ve done a bit more analysis of the investment management business. Included in both revenues and expenses from this business is about a $1.5 million of reimbursed property level personnel costs in the second quarter of 2008 compared with about $800,000 of these reimbursed personnel costs in the second quarter of 2007. We don’t recognize any profit on this reimbursement and it serves to reduce our operating margin if you look at these revenues and expenses inclusive of those reimbursed items. So if you exclude the reimbursed expenses, our gross revenues from investment management were $10.2 million in the second quarter of this year compared to $8.8 million in the second quarter of 07. And on this basis our operating margin from the investment management business was 49% in the second quarter of 2008. That compares with an operating margin of 58% in the second quarter of 07. The decrease is primarily the result of the fact that we did not have any acquisition or disposition fees in 08 and we earned $1.4 million in acquisition fees during the second quarter of 2007.

Back to page 7, we have recorded $76.1 million in revenues from condominium sales at Murano and $59.1 million in cost of sales during the second quarter of 2008. We’re required to recognize these sales on the percentage of completion method of accounting under FAS 66 when certain conditions are met and we met those conditions during the second quarter. This includes that construction is beyond the preliminary stage, that buyers are committed to the extent of not being able to obtain a refund if they cancel except for the non-delivery of the unit, that sales proceeds are collectible, and that the total cost of the project can be reasonably estimated. Since we met all four of those conditions we are now recognizing revenues and cost of sales from the Murano unit. During the second quarter of 2008 we recognized revenue and cost of sales related to the 20 units that we’ve actually closed and 103 units that we had under contract at June 30, 2008. We based our recognition on our estimate of the percentage of completion of the project which was 95% at the end of the second quarter. In future periods we’ll be recognizing the remaining 5% of the gain on the 123 units when the project is complete and we expect that to happen during the third quarter, and we’ll recognize revenues and cost of sales on future unit sales as contracts are signed and nonrefundable deposits are collected. Jim mentioned that since the end of the second quarter we have two additional contracts and three reservations which involve a deposit but not a nonrefundable deposit yet.

General and administrative expense increased 14% for the second quarter of 08 compared to the second quarter of 07. About half of the increase in G&A is attributable to increased business taxes in Houston where we have a regional office. Our gain on sale of real estate represents the remaining deferred gain on the sale of the El Segundo land which occurred in the third quarter of 2006. We’ve now satisfied all of our obligations to the buyer to complete certain infrastructure improvements so the remainder of the deferred gain has now been recognized. One other small note, the gains from early extinguishment of debt is the result of the defeasance of our mortgage loan on One Commerce Square which we actually refinanced during the fourth quarter of 2005. At the time of the refinancing we purchased securities to produce a yield approximately matching the remaining mortgage payments for the original lender. Now that that original loan has matured we recognize gain to the extent of the remaining value of those securities that we bought for the defeasance.

To compare the first half of 2008 with the first half of 2007, revenues from operating properties increased 13% again primarily the result of our acquisition of the Austin portfolio. Property operating expenses increased 18% again resulting from the acquisition of the Austin portfolio. These expenses for the first half include about $1.1 million in marketing and other expenses related to the development properties.

Gross revenues from the investment management business were $19.7 million in the first half of 2008 compared to $17.3 million in the first half of 07. Our operating margin again excluding these reimbursed personnel expenses was 57% in 08 compared to 64% in 07. Again no acquisition fees or disposition fees so far in 2008.

General and administrative expenses for the first half increased 10% over 2007. Much of this increase is attributable to the business taxes in Houston.

If I could turn your attention now to page 12 where we calculate after-tax cash flow, which we believe is a meaningful measure of our operating performance. After-tax cash flow results tend not to be linear from quarter to quarter partly because our portfolios historically included assets that are stabilized and therefore property operating results are not comparable from period to period. We also generate lumpy earnings from the investment business and from gains on sales of assets where comparable fees and gains don’t occur every period. Acquiring underperforming assets for redevelopment and ground-up development are an important factor in our strategy so we believe that these gains should be included in our operating performance measurement. For the second quarter of 2008 after-tax cash flow per share was $0.50 compared with $0.30 for the second quarter of 2007 and year to date after-tax cash flow was $0.71 per share compared to $0.47 for the first half of 2007.

Starting on page 15 of the supplemental financial information we provide information about our portfolio properties and this is done to assist you in analyzing the value of these assets. The components of our net asset value are as follows: The existing portfolio which is shown on page 15 and we estimate stabilized in OI to which you could apply a cap rate to calculate the value of those assets. We also provide an estimate of the capital expenditures that we will spend to stabilize those assets that you could then apply as a reduction to that value.

The second piece of the NAV puzzle is the development assets which we show on page 17. With regard to Murano, since we’re currently recognizing revenues in excess of our costs by about 29% you may want to apply that percent to calculate a current value for the Murano. If you calculate a value that way then you’ll want to deduct the units that we’ve actually sold which would be the revenue number from our operations for the second quarter. The third piece is the investment management platform, we’ve generated on an annualized basis we’re on target to generate about $33 million in revenues and net revenues to which you could apply a multiple to value that piece of the business. Then finally, our net current assets, again on a pro rata balance sheet are shown on page nine of the supplemental financial package. So, those four components make up the asset value, that’s the operating properties, the development properties, the investment management business and the net current assets. Once you have that value you’ll need to reduce that by the amount of our mortgage debt which is also shown on page nine in our balance sheet and then divide all that by the number of shares and OP units outstanding which is about 38.3 million and we show the capitalization of the company on page 21.


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