Results of Operations
Real Estate Property Operations
Operating results and assets of real estate property operations are summarized as follows:

	For the Year Ended						Variance
	December 31,						2000 vs.			1999 vs.
(in millions)	2000		1999		1998		1999			1998
Real Estate Operations
Operating revenue	$	531.9	$	498.9	$	440.5	$	33.0		$	58.4
Segment expense		170.0		167.2		149.7		2.8			17.5
Interest expense		49.2		50.5		46.8		(1.3	)		3.7
Other income, net		14.5		8.9		8.2		5.6			0.7
	As of December 31,
	2000		1999		1998
Total assets	$	2,711.9	$	2,991.8	$	2,809.4	$	(279.9	)	$	182.4

Real estate operating revenues increased $33.0 million (6.6%) in 2000 as compared to 1999. This increase resulted from development properties being placed in service, "same store" rental growth and higher occupancies. Same store rental revenues grew by approximately 7.2% (approximately $25.6 million). This increase was due primarily to an increase in average rental rates in properties in the San Francisco Bay area due to strong demand for office space. The average occupancy rate, when compared on a same store basis, was 97.2% in 2000 and 96.8% in 1999. These increases were partially offset by dispositions of interests in properties, including the properties contributed to Carr Office Park, L.L.C. in August 2000.

Real estate operating revenues increased $58.4 million (13.3%) in 1999 as compared to 1998. This increase resulted from development properties being placed in service, "same store" rental growth and higher occupancies. Same store rental revenues grew by approximately 5.4% (approximately $16.6 million). This increase was due primarily to an increase in average rental rates in properties in the San Francisco Bay area due to strong demand for office space. The average occupancy rate, when compared on a same store basis, was 96.3% in 1999 and 96.1% in 1998.

Real estate operating expenses increased $2.8 million (1.7%) in 2000 as compared to 1999. This increase was due to development properties being placed in service and a slight increase in same store expenses. These increases were partially offset by dispositions of interests in properties, including the properties contributed to Carr Office Park, L.L.C. in August 2000.

Real estate operating expenses increased $17.5 million (11.7%) in 1999 compared to 1998. The increase in expenses was due primarily to development properties being placed in service. On a same store basis, operating expenses were $3.6 million higher in 1999 due principally to higher real estate taxes, costs incurred related to Year 2000 compliance and increased bad debt expense.

Real estate interest expense decreased $1.3 million (2.6%) in 2000 as compared to 1999. This decrease was principally the result of retirement of certain mortgages. In 1999, we refinanced properties to increase leverage. As a result of this refinancing, real estate interest expense increased $3.7 million in 1999 from 1998.

Real estate other income increased $5.6 million (62.9%) in 2000 as compared to 1999. This increase was primarily the result of equity in earnings from unconsolidated entities (excluding depreciation), primarily from the investment in Carr Office Park, L.L.C.

The primary cause of the decrease in real estate assets from 1999 to 2000 was the contribution of $332.1 million of property to Carr Office Park, L.L.C. These assets are not included in our consolidated financial statements but we retain a 35% interest in them.

Development Operations
Operating results and assets of development operations are summarized as follows:

	For the Year Ended						Variance
	December 31,						2000 vs.			1999 vs.
(in millions)	2000		1999		1998		1999			1998
Development Operations
Operating revenue	$	10.6	$	6.6	$	.4	$	4.0		$	2.2
Segment expense		4.5		4.6		3.1		(0.1	)		1.5
Interest expense		—		—		—		—			—
Other income, net		0.2		0.2		—		—			0.2
	As of December 31,
	2000		1999		1998
Total assets	$	96.3	$	220.1	$	466.4	$	(123.8	)	$	(246.3	)

Revenue from our development operations increased $4.0 million (60.6%) in 2000 as compared to 1999 and $2.2 million (50%) in 1999 as compared to 1998. These increases resulted primarily from our expanded operations in this area. In particular, in August 2000, we began providing services to Carr Office Park, L.L.C. and other joint ventures in connection with their development of new properties and, during 1999, we increased the number of development properties managed for unaffiliated companies.

The expenses for our development operations decreased $0.1 million in 2000 as compared to 1999 and increased $1.5 million in 1999 as compared to 1998. The decrease in expenses in 2000 from 1999 was primarily due to lower salary expense from a temporary reduction in headcount. The increase in expenses from 1998 to 1999 was principally related to more development projects.

Total development assets decreased $123.8 million in 2000 from $220.1 million in 1999. $76.9 million of this decrease was the result of our contribution of assets to Carr Office Park, L.L.C. and a higher portion of our development activity being for joint ventures. In 1998, total development assets were $466.4 million. The decline in assets from 1998 to 1999 was primarily the result of construction completions and properties placed in service. Our construction starts in 1999 were lower than in 1998.

Other Operations
Operating results and assets of other operations are summarized as follows:

	For the Year Ended									Variance
	December 31,									2000 vs.			1999 vs.
(in millions)	2000			1999			1998			1999			1998
Other Operations
Operating revenue	$	15.5		$	10.4		$	11.8		$	5.1		$	(1.4	)
Segment expense		41.6			34.3			29.3			7.3			5.0
Interest expense		49.1			38.6			24.6			10.5			14.0
Other income (expense), net		(3.5	)		(3.2	)		(0.3	)		(0.3	)		(2.9	)
	As of December 31,
	2000			1999			1998
Total assets	$	264.6		$	59.5		$	153.9		$	205.1		$	(94.4	)

Revenues from our other operations increased $5.1 million (49.0%) in 2000 as compared to 1999 and decreased $1.4 million (11.9%) in 1999 as compared to 1998. The increase in 2000 resulted primarily from expansion of our operations in the area of managing rental properties for affiliates and others. In particular, in August 2000, we began providing leasing and management services to Carr Office Park, L.L.C. The decrease in 1999 as compared to 1998 was due to reduced leasing fee revenue.

Expenses of our other operations increased $7.3 million (21.3%) in 2000 as compared to 1999 and $5.0 million (17.1%) in 1999 as compared to 1998. The increase in 2000 was due primarily to our expanded property management operations discussed above and professional fees associated with Project Excellence, an internal process improvement effort, and other initiatives. The increase in 1999 was due primarily to professional fees associated with Project Excellence and the effects of Year 2000 compliance work.

Interest expense for other operations is net of interest allocated to other segments, consisting primarily of interest capitalized on development projects at our average effective borrowing rate. Interest expense for our other operations increased $10.5 million (27.2%) in 2000 as compared to 1999 and $14.0 million (56.9%) in 1999 as compared to 1998. The increase in 2000 is due to a decrease in capitalized interest due primarily to a lower level of development activity. The increase in 1999 was primarily related to interest on an additional $150 million of senior unsecured notes outstanding during that year and additional borrowings on our unsecured credit line.

Depreciation and Amortization
Depreciation and amortization increased $8.8 million (7.4%) in 2000 compared to 1999 and $18.9 million (18.7%) in 1999 compared to 1998. These increases were due primarily to acquisitions of property and transitions of property from construction in progress to operations, partially offset by property dispositions and joint venture activity.

Gain on Sale of Assets and Other Provisions, Net
We dispose of assets (sometimes using tax-deferred exchanges) that are inconsistent with our long-term strategic or return objectives or where market conditions for sale are favorable. The proceeds from the sales are redeployed into other properties or used to fund development operations or to support other corporate needs. During 2000, we disposed of 16 properties (including one property in which we held an interest through an unconsolidated entity) and four parcels of land that were being held for development. We recognized a net gain of $24.1 million on these transactions, net of taxes of $5.6 million, including a net gain of $8.8 million relating to our share of gain on a sale of a property in which we held an interest through an unconsolidated entity.

On August 17, 2000, we closed on a joint venture transaction with New York State Teachers' Retirement System (NYSTRS). At closing, we and some affiliates contributed properties to the joint venture, Carr Office Park, L.L.C., and NYSTRS contributed cash of approximately $255.1 million. The joint venture encompasses five suburban office parks (including 26 rental properties and land held for development of additional properties) in four markets. We received approximately $249.6 million and a 35% interest in the joint venture in exchange for the properties contributed and recognized a gain on the partial sale of $20.1 million, net of taxes of $13.1 million.

During 1999, we disposed of 63 properties and two parcels of land being held for development. We recognized a gain of $54.8 million net of District of Columbia franchise tax of $0.6 million. During 1998, we disposed of 13 properties and one parcel of land being held for development. We recognized a gain of $38.2 million, net of taxes of $9.5 million.
Other provisions for 2000 include an impairment loss of $7.9 million for land held for development that we decided to sell. For various reasons, we determined that we would not proceed with planned development of rental properties on certain of our land holdings and decided to market the land for sale. As a result, we evaluated the recoverability of the carrying amounts of the land. We determined that the carrying amounts would not be recovered from estimated net sale proceeds in certain cases and, in those cases, we recognized impairment losses.

Discontinued Operations
Our income from discontinued operations of the executive suites business was $0.5 million in 2000 versus a loss of $7.9 million in 1999. Income increased primarily due to the lease up of development properties placed into operations. In 1998, the executive suites business had income of $6.5 million. The $14.4 million decrease in net income from 1998 to 1999 was principally due to start-up costs incurred in 1999 for new executive suites centers and costs incurred to integrate the various acquired operations.

On January 20, 2000, we, along with HQ Global Workplaces, Inc. (HQ Global), VANTAS Incorporated (VANTAS) and FrontLine Capital Group, entered into several agreements that contemplated several transactions including (i) the merger of VANTAS with and into HQ Global, (ii) the acquisition by FrontLine Capital Group of shares of HQ Global common stock from us and other stockholders of HQ Global, and (iii) the acquisition by VANTAS of our debt and equity interests in OmniOffices (UK) Limited and OmniOffices LUX 1929 Holding Company S.A. On June 1, 2000, we consummated the transactions. We recognized an after tax gain of $31.9 million. Our investment in the merged entity at December 31, 2000 was $42.2 million and is accounted for using the cost method.

Consolidated Cash Flows
Consolidated cash flow information is summarized as follows:

	For the Year Ended								Variance
	December 31,								2000 vs.			1999 vs.
(in millions)	2000			1999			1998		1999			1998
Cash provided by
operating activities	$	173.5		$	175.0		$	239.8	$	(1.5	)	$	(64.8	)
Cash provided by (used in
investing activities		573.0			83.7			(985.3)		489.3			1,069.0
Cash (used in) provided by
financing activities		(773.7	)		(238.4	)		757.8		(535.3	)		(996.2	)

Operations generated $173.5 million in 2000 compared to $175.0 million in 1999 and $239.8 million in 1998. The changes in cash flow from operating activities were primarily the result of factors discussed above in the analysis of operating results. The level of net cash provided by operating activities is also affected by the timing of receipt of revenues and payment of expenses.

Our investing activities provided net cash of $573.0 million in 2000 and $83.7 million in 1999. We used net cash of $985.3 million in our investing activities in 1998. The increase in net cash provided by investing activities in 2000 is due to proceeds from the sale of discontinued operations and reduced property acquisition and development activity. The increase in net cash provided by investing activities in 1999 is due to higher net proceeds from sales of properties and substantially lower levels of property acquisitions.

In 2000, we decreased our debt significantly, resulting in a use of cash for financing activities of $773.7 million. Net debt repayments during 2000 totaled $546.3 million versus $13.5 million in 1999. We also repurchased $90.2 million of our common stock in 2000. Our financing activities used net cash of $238.4 million in 1999 and provided net cash of $757.8 million in 1998. In 1998, we sold stock, generating proceeds of $296.5 million, borrowed a net of $323.0 million on our unsecured credit facilities, primarily to finance acquisitions and issued $350.0 million of senior unsecured notes. In 1999, we repurchased $109.8 million of our common stock, borrowed a net of $1.0 million on our unsecured credit facilities and did not issue any unsecured notes.

Liquidity and Capital Resources
We seek to create and maintain a capital structure that will enable us to diversify our capital resources. This should allow us to obtain additional capital from a number of different sources. These sources could include additional equity offerings of common stock and/or preferred stock, public and private debt financings and possible asset dispositions. Our management believes that we will have access to the capital resources necessary to expand and develop our business, to fund our operating and administrative expenses, to continue to meet our debt service obligations, to pay dividends in accordance with REIT requirements, to acquire additional properties and land and to pay for construction in progress.

We have three investment grade ratings. As of December 31, 2000, Duff & Phelps Credit Rating Co. and Standard & Poors have assigned a BBB rating to our prospective senior unsecured debt offerings and their BBB- rating to our prospective cumulative preferred stock offerings. Moody's Investor Service has assigned its Baa3 rating to our prospective senior unsecured debt offerings and its Ba2 rating to our prospective cumulative preferred stock offerings.

Our total debt at December 31, 2000 was $1.2 billion. $176.0 million of the total debt (14.5%) bore a LIBOR-based floating rate. The weighted average interest rate on borrowings on our unsecured credit facility for 2000 was 7.32%. The interest rate of the unsecured credit facility is 70 basis points over 30-day LIBOR. Our fixed rate mortgage payable debt bore an effective weighted average interest rate of 8.09% at December 31, 2000. The weighted average term of this debt is seven years. At December 31, 2000, our debt represented 31.4% of our total market capitalization of $3.9 billion.

We have a $450.0 million unsecured credit facility. As of December 31, 2000, $176.0 million was drawn on the credit facility, $3.7 million in letters of credit were outstanding and we had $270.3 million available for borrowing. This credit facility matures in August 2001 and we are in the process of negotiating the terms of renewal. Based on the progress of the negotiations, we expect that we will continue to have credit available to meet our needs on satisfactory terms.

Rental revenue and real estate service revenue have been our principal sources of funds to pay our operating expenses, debt service and capital expenditures, excluding non-recurring capital expenditures. We believe that our current sources of revenue will continue to provide the necessary funds for our operating expenses and debt service.

We and our affiliates also require capital to invest in our existing portfolio of operating assets for capital projects. These capital projects can be such things as large-scale renovations, routine capital expenditures, deferred maintenance on properties we have recently acquired and tenant related matters, including tenant improvements, allowances and leasing commissions.We will require a substantial amount of capital for development projects currently underway and in the future. As of December 31, 2000, we had approximately 0.6 million square feet of office space in six development projects in progress. Our total expected investment on these projects is $94.7 million. Through December 31, 2000 we had invested $48.3 million or 51.0% of the total expected investment for these projects. As of December 31, 2000, we also had 1.2 million square feet of office space under construction in seven projects in which we own minority interests. These projects are expected to cost $255.7 million of which, our total investment is expected to be approximately $98.9 million. Through December 31, 2000, approximately $97.9 million or 38.3% of the total project costs had been expended. We have financed our investment in projects under construction at December 31, 2000, primarily from the proceeds of asset dispositions and borrowings under our credit facility. We expect that these sources and project-specific financing of selected assets will provide additional funds required to complete the development and to finance the costs of additional projects.

Prior to the second quarter of 1998, we primarily met our capital requirements by accessing the public debt and equity markets. As a general matter, conditions in the public equity markets for most REITs have not been favorable since that time. In response to these unfavorable conditions, we have curtailed our acquisition program and satisfied our capital requirements through the disposition of selected assets, the refinancing of selected assets, prudent use of joint ventures to reduce our investment requirements and use of our credit facility.

In the future, if the debt and equity markets are not favorable, if we cannot raise the expected the sale of properties and/or if we are unable to obtain capital from other sources, we believe that we would continue to have sufficient funds to pay our operating and debt service expenses and our regular quarterly dividends and to make necessary routine capital improvements with respect to our existing portfolio of operating assets. However, our ability to continue to fund all of our current development projects could be adversely affected. If we determine that it is in our best interest to continue to fund all of our current development projects, we may have to access either the public equity or debt markets at a time when those markets may not be the best source of capital for us.

As of December 31, 2000, our portfolio of rental properties in Phoenix (exclusive of one property) and three parcels of land were under contracts for sale for purchase prices of $97.9 million and $5.3 million, respectively. The sale of the Phoenix portfolio closed on February 15, 2001, producing net proceeds of $85.2 million that will be used to fund development projects and meet other corporate needs. We recognized a gain of $2.7 million, net of tax of $1.7 million. We also repaid a $ 7.3 million mortgage on one of the properties sold.

Our Board of Directors has authorized us to spend up to $225 million to repurchase our common shares. During 2000, we acquired approximately 3.2 million shares for $90.2 million, an average price of $28.41 per share.

We pay dividends quarterly. Funds, which we accumulate for the distribution, are invested primarily in short-term investments collateralized by securities of the United States Government or one of its agencies.

Funds from Operations
We believe that funds from operations is helpful to investors as a measure of the performance of an equity REIT. Based on our experience, funds from operations, along with information about cash flows from operating activities, investing activities and financing activities, provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. Funds from operations is defined by the National Association of Real Estate Investment Trusts (NAREIT) as follows:

• Net income (loss)—computed in accordance with generally accepted accounting principles (GAAP);
• Less gains (or plus losses) from sales of depreciable operating properties and items that are classified as extraordinary items under GAAP;
• Plus depreciation and amortization of assets uniquely significant to the real estate industry;
• Plus or minus adjustments for unconsolidated partnerships and joint ventures (to reflect funds from operations on the same basis).

Our funds from operations may not be comparable to funds from operations reported by other REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than us. We continue to exclude the gain (loss) on settlement of treasury locks for funds from operations. Funds from operations does not represent net income or cash flow generated from operating activities in accordance with GAAP. As such, it should not be considered an alternative to net income as an indication of our performance or to cash flows as a measure of our liquidity or our ability to make distributions.

The following table provides the calculation of our funds from operations for the years presented:

(in thousands)	2000			1999			1998
Income from continuing operations
before minority interest	$	163,308		$	168,678		$	136,051
Adjustments to derive funds
from operations:
Add:
Depreciation and
amortization		128,861			117,829			99,274
(Gain) loss on settlement
of treasury locks		—			(4,489	)		13,729
Deduct:
Minority interests (non-
Unitholders share of
depreciation, amortization
and net income)		(1,084	)		(609	)		(380	)
Gain on sale of assets
and other provisions, net		(36,371	)		(54,822	)		(37,580	)
Funds from operations before
allocation to the minority
unitholders		254,714			226,587			211,094
Less funds from operations allocable
to the minority unitholders		(16,342	)		(16,545	)		(15,507	)
Funds from operations allocable
to Carramerica Realty Corporation		238,372			210,042			195,587
Less preferred stock dividends		(35,206	)		(35,448	)		(35,571	)
Funds from operations attributable
to common shareholders:	$	203,166		$	174,594		$	160,016

Changes in funds from operations are largely attributable to the effects of property acquisitions and dispositions and new developments as discussed above.

Forward-Looking Statements
Certain statements contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our, and our affiliates, or the industry's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:

• National and local economic, business and real estate conditions that will, among other things affect:
  • Demand for office properties
  • Availability and creditworthiness of tenants
  • Level of lease rents
  • Availability of financing for both tenants and us;
• Adverse changes in the real estate markets, including, among other things:
  • Competition with other companies
  • Risks of real estate acquisition and development
  • Failure of pending developments to be completed on time and on budget;
• Actions, strategies and performance of affiliates that we may not control;
• Governmental actions and initiatives;
• Environmental/safety requirements.

Quantitative and Qualitative Disclosures about Market Risk
Increases in interest rates, or the loss of benefits from any hedging agreements would increase our interest expense. These events would adversely affect cash flow. As of December 31, 2000, we had $176.0 million outstanding under our line of credit that bears a floating interest rate. In addition, we had $560.2 million of fixed rate mortgage debt. Our unsecured credit facilities mature in August 2001. The mortgage loans mature at various dates through 2019. We also have $475.0 million senior unsecured notes, which mature between 2004 and 2008.

Our future earnings, cash flow and fair values relevant to financial instruments are dependent upon prevailing market rates. Market risk associated with financial instruments and derivative and commodity instruments is the risk of loss from adverse changes in market prices or rates. We manage our risk by matching projected cash inflows from operating activities, financing activities and investing activities with projected cash outflows to fund debt payments, acquisitions, capital expenditures, distributions and other cash requirements. We may also use derivative financial instruments at times to limit market risk. Interest rate protection agreements may be used to convert floating rate debt to a fixed rate basis or to hedge anticipated financing transactions. We use derivative financial instruments only for hedging purposes, and not for speculation or trading purposes.

If the market rates of interest on our variable rate debt change by 10% (or approximately 66 basis points), our interest expense would change by approximately $1.2 million. This assumes the amount outstanding under our variable rate credit facility remains at $176.0 million, our balance at December 31, 2000. The book value of our variable interest credit facility approximates market value at December 31, 2000.

A change in interest rates generally does not impact future earnings and cash flows for fixed rate debt instruments. As fixed rate debt matures, and additional debt is incurred to fund the repayments of maturing facilities, future earnings and cash flows may be impacted by changes in interest rates. This impact would be realized in the periods subsequent to debt maturities. The following is a summary of the fixed rate mortgages and senior unsecured debt maturities at December 31, 2000 (in thousands):

2001	$	78,483
2002		44,435
2003		49,980
2004		171,352
2005		118,439
2006 & thereafter		572,469
	$	1,035,158

If we assume the repayments of fixed rate borrowings are made in accordance with the terms and conditions of the respective credit arrangements, a 10 percent change in the market interest rate for the respective fixed rate debt instruments would change the fair market value of our fixed rate debt by approximately $18 million. The estimated fair market value of the fixed rate debt instruments and the senior unsecured notes at December 31, 2000 was $582.3 million and $468.7 million, respectively.