Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to
______________
Commission file number 1-12193
ARDEN REALTY, INC.
(Exact name of registrant as specified in its charter)
Maryland 95-4578533
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9100 Wilshire Boulevard 90212
East Tower, Suite 700 (Zip Code)
Beverly Hills, California
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 271-8600
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares of the registrant's common stock, $.01 par
value, outstanding as of November 10, 1997: 35,442,833 shares.
Part I - Financial Information
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
Arden Realty, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
<S> <C> <C>
September 30, 1997 December 31, 1996
Assets (Unaudited)
Commercial office properties:
Land $ 226,518 $ 116,513
Buildings and improvements 709,937 417,970
Tenant improvements 18,627 12,224
955,082 546,707
Less: accumulated depreciation (29,543) (17,139)
925,539 529,568
Cash and cash equivalents 6,945 7,632
Restricted cash 4,000 --
Rent and other receivables 3,932 2,293
Mortgage notes receivable - net 14,392 --
Deferred rent 8,033 6,069
Leasing commissions, net of accumulated
amortization of $1,381 and
$766, respectively 5,772 3,160
Prepaid financing costs, net of
accumulated amortization of
$591 and $93, respectively 5,224 853
Prepaid expenses and other assets 4,264 1,681
Total assets $ 978,101 $ 551,256
Liabilities
Mortgage loans payable $ 180,000 $ 104,000
Unsecured lines of credit 45,900 51,000
Accounts payable and accrued expenses 17,013 6,178
Security deposits 5,986 3,590
Dividends and distributions payable 14,177 8,844
Total liabilities 263,076 173,612
Minority interests in
Operating Partnership 47,178 45,667
Stockholders' Equity
Preferred stock, $.01 par value,
20,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value,
100,000,000 shares authorized,
35,442,833 and 21,679,500 issued
and outstanding 354 217
Additional paid-in capital 667,493 337,432
Accumulated deficit -- (5,672)
Total stockholders' equity 667,847 331,977
Total liabilities and
stockholders' equity $ 978,101 $ 551,256
</TABLE>
See accompanying notes.
<TABLE>
Arden Realty, Inc. Consolidated Statement of Operations
and
Arden Predecessors Combined Statement of Operations
(Unaudited)
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Arden Arden Arden Arden
Realty, Inc. Predecessors Realty, Inc. Predecessors
For the Three For the Nine
Months Ended Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
Revenues
Revenues from rental operations:
Rental $ 32,237 $ 11,926 $ 80,740 $ 31,330
Tenant reimbursements 1,704 834 3,593 2,259
Parking, net of expenses 2,045 1,087 5,267 2,838
Other rental operations 445 271 1,451 722
36,431 14,118 91,051 37,149
Other income 450 528 563 1,598
Total revenues 36,881 14,646 91,614 38,747
Expenses
Property expenses:
Repairs and maintenance 3,934 1,520 10,309 3,651
Utilities 3,956 1,573 9,325 3,459
Real estate taxes 2,139 716 5,152 2,007
Insurance 583 776 1,447 2,279
Ground rent 69 45 172 135
Marketing and other 1,056 437 2,770 1,418
Total property expenses 11,737 5,067 29,175 12,949
General and administrative 979 479 2,828 1,309
Interest 4,816 12,020 13,723 26,761
Loss on valuation of derivative 3,111 -- 3,111 --
Depreciation and amortization 5,241 2,064 13,261 5,100
Total expenses 25,884 19,630 62,098 46,119
Equity in net loss of
noncombined entities -- (114) -- (208)
Income (loss) before
minority interests 10,997 (5,098) 29,516 (7,580)
Minority interests' share of
loss of Arden Predecessors -- 1,228 -- 1,572
Minority interests in
Operating Partnership (881) -- (3,105) --
Net income (loss) $ 10,116 $ (3,870) $ 26,411 $ (6,008)
Net income per common share $ .31 $ 1.04
Cash dividends declared $ .40 $ 1.20
Weighted average common
shares outstanding 32,401 25,440
</TABLE>
See accompanying notes.
<TABLE>
Arden Realty, Inc.
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
Common Stock Additional Total
Paid-in Accumulated Stockholders'
Shares Amounts Capital Deficit Equity
Balance at October 8, 1996 100
Retirement of originally
issued shares (100)
Common Stock bonus
to employees 5,000
Sale of Common Stock
net of offering
offering costs of
$36,181 21,674,500 $217 $397,092 $397,309
Distributions paid to
Arden Predecessors -- -- (16,554) (16,554)
Allocation of minority
interests in Operating
Partnership -- -- (35,301) (35,301)
Net loss -- -- -- $(5,672) (5,672)
Dividends declared and
payable -- -- (7,805) -- (7,805)
Balance at December 31, 1996 21,679,500 217 337,432 (5,672) 331,977
Common Stock issued in
connection with the
exercise of options 13,333 -- 267 -- 267
(unaudited)
Stock option compensation
(unaudited) -- -- 92 -- 92
Sale of Common Stock in
Secondary Offering net
of offering costs of
$18,588 (unaudited) 13,750,000 137 340,494 -- 340,631
Net income (unaudited) -- -- -- 26,411 26,411
Dividend declared and
payable (unaudited) -- -- (10,792) (20,739) (31,531)
Balance at September 30,
1997 (unaudited) 35,442,833 $354 $667,493 $ -- $667,847
</TABLE>
See accompanying notes.
<TABLE>
Arden Realty, Inc. Consolidated Statement of Cash Flows
and
Arden Predecessors Combined Statement of Cash Flows
(Unaudited)
(in thousands)
<S> <C> <C>
Arden Realty, Arden
Inc. Predecessors
For the Nine Months Ended
September 30, September 30,
1997 1996
OPERATING ACTIVITIES:
Net income (loss) $ 26,411 $ (6,008)
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Minority interests in operating
partnership 3,105 --
Equity in net loss of noncombined
entities -- 208
Loss allocable to minority interests
of Arden Predecessors -- (1,572)
Loss on valuation of derivative 3,111 --
Depreciation and amortization 13,261 5,100
Amortization of loan costs and fees 497 197
Increase in rents and other receivables (16,031) (2,337)
Increase in deferred rent (1,964) (1,735)
Increase in prepaid financing and
leasing costs (8,435) (1,174)
Increase in prepaid expenses and
other assets (2,393) (2,119)
Increase in accounts payable and
accrued expenses 7,724 1,972
Increase in deferred interest
-- 10,362
Increase in security deposits 2,396 573
Net cash provided by operating
activities 27,682 3,467
INVESTING ACTIVITIES:
Acquisitions of and improvements to
commercial office properties (407,613) (119,129)
FINANCING ACTIVITIES:
Proceeds from mortgage loans 251,000 120,485
Repayment of mortgage loans (175,000) (5,002)
Proceeds from secured line of credit 26,700 --
Repayment of secured line of credit (26,700) --
Proceeds from unsecured lines of
credit 233,900 4,839
Repayments of unsecured lines of
credit (239,000) (2,264)
Proceeds from issuance of Common
Stock, net of offering costs 267 --
Proceeds from Secondary Offering, net
of offering costs 340,631 --
Increase in restricted cash (4,000) (3,474)
Contributions from minority interests -- 1,000
Distributions to minority interests (3,395) (63)
Owners' contributions -- 2,700
Owners' distributions -- (1,545)
Dividends paid (25,159) --
Net cash provided by financing
activities 379,244 116,676
Net (decrease) increase in cash and
cash equivalents (687) 1,014
Cash and cash equivalents at beginning
of period 7,632 790
Cash and cash equivalents at end of
period $ 6,945 $ 1,804
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for
interest, net of interest capitalized $ 12,668 $ 14,856
</TABLE>
See accompanying notes.
Arden Realty, Inc.
and
Arden Predecessors
Notes to Financial Statements
(Unaudited)
The consolidated financial statements of Arden Realty, Inc.
(the "Company") and the combined financial statements of the
Arden Predecessors included herein have been prepared in
accordance with Securities and Exchange Commission Regulations
and therefore do not include all disclosures required under
generally accepted accounting principles. Reference is made to
the audited financial statements filed with Form 10-K for the
period October 9, 1996 to December 31, 1996 for the Company and
for the period January 1, 1996 to October 8, 1996 for the Arden
Predecessors with respect to significant accounting and financial
reporting policies as well as other pertinent information of the
Company and the Arden Predecessors. The financial statements
reflect all adjustments which are, in the opinion of management,
of a normal recurring nature and necessary for a fair statement
of the results for the interim periods. Interim results of
operations are not necessarily indicative of the results to be
expected for the full year.
1. Organization and Formation of the Company
Arden Realty, Inc., through its controlling interest in
Arden Realty Limited Partnership (the "Operating Partnership"),
is engaged in the ownership, acquisition, management, renovation,
operation, and leasing of commercial office properties located in
Southern California. As of September 30, 1997 the Company's
portfolio of properties included 58 office properties
(collectively the "Properties").
The Company was incorporated in Maryland in May 1996 and
formed to continue and expand the real estate business of Arden
Realty Group, Inc. and a group of affiliated entities (the "Arden
Predecessors"). On October 9, 1996, the Company completed an
initial public offering (the "Offering") of 18,847,500 shares of
$.01 par value common stock (the "Common Stock"). The Offering
price was $20.00 per share, resulting in gross proceeds of
$376,950,000. Also on October 9, 1996, the underwriters
exercised their overallotment option and, accordingly, the
Company issued an additional 2,827,000 shares of Common Stock and
received gross proceeds of $56,540,000. The aggregate proceeds
to the Company, net of underwriters' discount, advisory fees and
offering costs aggregating $36,181,000, were approximately
$397,309,000.
Concurrently with the consummation of the Offering, the
Company and the Operating Partnership, together with the partners
and members of the Arden Predecessors (collectively, the
"Participants"), engaged in certain formation transactions (the
"Formation Transactions") which, among other things, resulted in
the acquisition by the Company and Operating Partnership of 24 of
the 58 Properties (the "Initial Properties").
The Formation Transactions included the following:
Pursuant to separate option agreements (the "Option
Agreements"), the Company acquired for cash from certain
participants in the Formation Transactions (the "Cash
Participants") the interests owned by such Cash Participants in
certain of the Arden Predecessors and in certain of the Initial
Properties. The Company paid approximately $26.8 million from
the net proceeds of the Offering for such interests, which
represented 31.7% of the ownership interests in the Initial
Properties acquired by the Company.
The Company contributed (i) the interests in the Arden
Predecessors and in the Initial Properties acquired pursuant to
the Option Agreements and (ii) the net proceeds from the Offering
(after payment of the cash consideration to the Cash Participants
as described above) to the Operating Partnership in exchange for
an 88.2% general partner interest in the Operating Partnership,
representing the sole general partnership interest.
Pursuant to separate contribution agreements (the
"Contribution Agreements"), the following additional
contributions were made by certain other participants in the
Formation Transactions (the "Unit Participants") to the Operating
Partnership in exchange for limited partner interests in the
Operating Partnership ("OP Units"): (i) the remaining interests
in the Arden Predecessors and in certain of the Initial
Properties (i.e., all interests not acquired by the Company
pursuant to the Option Agreements) and (ii) certain assets,
including management contracts relating to certain of the Initial
Properties and the contract rights to purchase two properties
(303 Glenoaks and 12501 East Imperial Highway). The Unit
Participants making such contributions (a total of seven
individuals and entities including Arden Realty Group, Inc.,
Richard Ziman, Victor Coleman, and Arthur Gilbert), received an
aggregate of 2,889,071 OP Units, with a value of approximately
$57.8 million based on the initial public offering price of the
common stock.
The Company, through the Operating Partnership, borrowed,
from an affiliate of Lehman Brothers, a $57 million aggregate
principal amount under a one year interim loan (the "Interim
Financing") which was non-recourse to the Company and the
Operating Partnership and was secured by cross-collateralized and
cross-defaulted first mortgage liens on nine of the Initial Properties.
Approximately $33 million of the net proceeds of the
Offering were used by the Operating Partnership to purchase two
properties, 303 Glenoaks and 12501 East Imperial Highway.
The Company used a portion of the proceeds of the Offering
and the Interim Financing to repay approximately $370 million of
mortgage debt secured by the Initial Properties and indebtedness
outstanding under lines of credit assumed by the Operating
Partnership in the Formation Transactions.
2. Basis of Presentation and Summary of Other Significant Accounting Policies
Arden Realty, Inc.
The accompanying consolidated financial statements of the
Company include the accounts of the Company and the Operating
Partnership. All significant intercompany balances and
transactions have been eliminated in consolidation.
The minority interests for the nine months ended September
30, 1997 represented limited partnership interests in the
Operating Partnership of approximately 10.5%.
Arden Predecessors
The Arden Predecessors were not a legal entity but rather a
combination of partnerships and an affiliated real estate
management corporation. The properties and entities were all
managed by Messrs. Ziman and Coleman. In those instances where
the financial interests held by Messrs. Ziman, Coleman, Gilbert
and their affiliates were also controlling interests, the entities
have been combined in the accompanying financial statements.
Minority interests have been recorded for those entities that the
affiliated Participants controlled but were not wholly-owned.
Where controlling interests were not held by these affiliated
Participants, or the affiliated Participants did not have
unilateral right to refinance the debt on the property, the
entities were accounted for as investments in noncombined entities
utilizing the equity method of accounting.
3. Mortgage Note Receivable
In September 1997, the Company purchased two mortgage notes
receivable, secured by a single commercial office property, with
an aggregate balance of approximately $17,550,000, for
approximately $14,400,000. The notes bear interest at the
Eleventh District Cost of Funds plus 3.25% per annum, require
monthly payments of principal, interest, and an additional net
cash flow from the property, and mature on May 31, 2004. The
Eleventh District Cost of Funds at September 30, 1997 was
approximately 4.9%
4. Mortgage Loans Payable and Credit Facilities
On June 11, 1997, the Company refinanced, through a special
purpose subsidiary, its existing $175 million mortgage financing
with a new $175 million mortgage financing (the "Mortgage
Financing") from an affiliate of Lehman Brothers. The Mortgage
Financing is non-recourse and secured by fully cross-
collateralized and cross-defaulted first mortgage liens on 18 of
the Company's Properties (the "Mortgage Financing Properties") and
has a twenty year term. The Mortgage Financing bears interest at
a fixed rate of 7.52%, is anticipated to be repaid in seven years
and requires monthly payments of interest only with all principal
due in a balloon payment at maturity. If the Mortgage Financing
is not repaid or refinanced within seven years, the interest rate
increases by at least 2% and all excess cash flow from the
Mortgage Financing Properties must be used to pay down principal.
The Mortgage Financing documentation requires the Company to
maintain a reserve of $4 million and to comply with certain
customary financial covenants, ongoing operational restrictions,
and certain cash management procedures. In addition, the Mortgage
Financing prohibits prepayment for approximately three years from
its origination.
On May 5, 1997, the Company entered into a revolving credit
agreement with Wells Fargo Bank (the "Bridge Facility"). The
Bridge Facility was unsecured, with a total commitment of
$110,000,000. The Company repaid the entire balance on the Bridge
Facility with a draw on the Amended Credit Facility.
On June 11, 1997, the Company amended its then-existing
credit facility (the "Credit Facility") with a $300 million
unsecured line of credit (the "Amended Credit Facility") from a
group of banks led by Wells Fargo Bank (the "Lenders"). The
interest rate of the Amended Credit Faptember 30, 1996. Tenant
reimbursements from the properties
acquired in 1996 increased approximately $740,000 for the nine
months ended September 30, 1997 compared to the prior year.
Tenant reimbursements from the properties acquired in the first
nine months of 1997 were $334,000 for the nine months ended
September 30, 1997. Tenant reimbursements from the properties
owned for all of 1996 and 1997 decreased approximately $193,000
for the nine months ended September 30, 1997 compared to the prior
year, as a result of resetting base years for leases that were
renewed or retenanted, offset in part by 1996 tenant reimbursement
revenue recognized in 1997.
Parking revenue increased approximately $1.7 million or 47%
for the nine months ended September 30, 1997 compared to the nine
months ended September 30, 1996. Parking revenue from the
properties acquired in 1996 increased approximately $801,000 for
the nine months ended September 30, 1997 compared to the prior
year. Parking revenue from the properties acquired in the first
nine months of 1997 was $625,000 for the nine months ended
September 30, 1997. Parking revenue from the properties owned for
all of 1996 and 1997 increased approximately $267,000 for the nine
months ended September 30, 1997 compared to the prior year,
primarily resulting from increased occupancy.
Other rental operations, consisting primarily of
miscellaneous tenant charges such as after hours utility and HVAC
charges, increased by $470,000 or 48% for the nine months ended
September 30, 1997 compared to the prior year. The increase in
other rental operations associated with the properties acquired in
1996 was $376,000. Other rental operations revenues from the
properties purchased in the first nine months of 1997 were
$178,000. Other rental operations revenues from the properties
owned for all of 1996 and 1997 decreased approximately $84,000 due
to a decrease in non-recurring tenant charges for the nine months
ended September 30, 1997 compared to the prior year.
Other income decreased $499,000 due to decreases in
management fees from third party-owned properties and interest
income from restricted cash balances.
For the nine months ended September 30, 1997, total property
expenses were $29.2 million, or 32% of revenues from rental
operations, compared with total property expenses of $18.1 million
or 35% of revenues from rental operations for the nine months
ended September 30, 1996. The increase in total property expenses
associated with the properties acquired in 1996 was $7.2 million,
reflecting a full nine months of property expenses from such
properties. Property expenses from properties acquired in the
first nine months of 1997 were $4.8 million. Property expenses
from the properties owned for all of 1996 and 1997 decreased
approximately $875,000 for the nine months ended September 30,
1997 compared to the prior year. This decrease in total property
expenses resulted from a decrease in insurance costs due to a more
favorable insurance policy.
General and administrative expenses increased approximately
$1.5 million or 116% for the nine months ended September 30, 1997
compared to the prior year, resulting from increased management
and administrative costs associated with the increased portfolio
size and the operations of the Company as a public real estate
investment trust.
Interest expense decreased approximately $19.6 million or 59%
for the nine months ended September 30, 1997 compared to the nine
months ended September 30, 1996, primarily as a result of the
decrease in mortgage loans payable during the fourth quarter of
1996.
Depreciation and amortization increased $5.5 million or 72%,
primarily due to 1996 and 1997 acquisitions.
The following is a comparison of property operating data for
17 of the properties which were owned for the nine months ended
September 30, 1997 and September 30, 1996 ("Same Store
Properties") (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Nine months Ended
September 30, Dollar Percent
1997 1996 Change Change
Revenues from rental operations $38,148 $37,266 $ 882 2%
Property expenses 12,270 13,145 (875) (7)
Net $25,878 $24,121 $1,757 7%
</TABLE>
Comparison of the three months ended September 30, 1997 to
the three months ended September 30, 1996. In order for a
meaningful analysis of the financial statements to be made, the
revenues and expenses for the noncombined entities for the three
months ended September 30, 1996 have been included as though they
were combined in the following analysis. Intercompany management
fees relating to the noncombined entities of $184,000 have been
eliminated.
<TABLE>
Three months ended September 30, 1997 compared to three months
ended September 30, 1996
(in thousands except percentage data)
<S> <C> <C> <C> <C>
Three Months Ended
September 30, Dollar Percent
1997 1996 Change Change
Revenue
Revenues from
rental operations:
Rental $ 32,237 $ 16,396 $ 15,841 97%
Tenant reimbursements 1,704 980 724 74
Parking, net of
expense 2,045 1,313 732 56
Other rental operations 445 414 31 7
36,431 19,103 17,328 91
Other income 450 376 74 20
Total revenues 36,881 19,479 17,402 89%
Expenses
Property expenses:
Repairs and maintenance 3,934 2,159 1,775 82%
Utilities 3,956 2,287 1,669 73
Real estate taxes 2,139 949 1,190 125
Insurance 583 861 (278) (32)
Ground rent 69 48 21 44
Marketing and other 1,056 638 418 66
Total property expenses 11,737 6,942 4,795 69
General and aministrative 979 479 500 104
Interest 4,816 14,221 (9,405) (66)
Loss on derivative
valuation 3,111 -- 3,111 --
Depreciation and
amortization 5,241 3,015 2,226 74
Total expenses $25,884 $24,657 $ 1,227 5%
</TABLE>
Rental revenue increased approximately $15.8 million or 97%
for the three months ended September 30, 1997 compared to the
three months ended September 30, 1996. Rental revenue from the
properties acquired in 1996 increased approximately $5.5 million
for the three months ended September 30, 1997 compared to the
prior year, reflecting a full three months of rental revenue from
such properties. Rental revenue from properties acquired in the
first nine months of 1997 was $10.2 million for the three months
ended September 30, 1997. Rental revenue from the properties
owned for all of 1996 and 1997 increased approximately $90,000 for
the three months ended September 30, 1997 compared to the prior
year, primarily resulting from increased occupancy and rental
rates at certain properties.
Tenant reimbursements increased $724,000 or 74% for the three
months ended September 30, 1997 compared to the three months ended
September 30, 1996. Tenant reimbursements from the properties
acquired in 1996 increased approximately $311,000 for the three
months ended September 30, 1997 compared to the prior year.
Tenant reimbursements from the properties acquired in the first
nine months of 1997 were $265,000 for the three months ended
September 30, 1997. Tenant reimbursements from the properties
owned for all of 1996 and 1997 increased approximately $148,000
for the three months ended September 30, 1997 compared to the
prior year, due to additional 1996 tenant reimbursement income
recognized in 1997, partially offset by the resetting of base
years for leases that were renewed or retenanted.
Parking revenue increased $732,000 or 56% for the three
months ended September 30, 1997 compared to the three months ended
September 30, 1996. Parking revenue from the properties acquired
in 1996 increased approximately $238,000 for the nine months ended
September 30, 1997 compared to the prior year. Parking revenue
from the properties acquired in the first nine months of 1997 was
$413,000 for the three months ended September 30, 1997. Parking
revenue from the properties owned for all of 1996 and 1997
increased approximately $81,000 for the three months ended
September 30, 1997 compared to the prior year primarily resulting
from increased occupancy.
Other rental operations, consisting primarily of
miscellaneous tenant charges such as after hours utility and HVAC
charges, increased $31,000 or 7% for the three months ended
September 30, 1997 compared to the prior year. The decrease in
other rental operations associated with the properties acquired in
1996 was $22,000. Other rental operations revenues from the
properties purchased in the first nine months of 1997 were
$149,000. Other rental operations revenues from the properties
owned for all of 1996 and 1997 decreased approximately $96,000
primarily due to a decrease in non-recurring tenant charges for
the three months ended September 30, 1997 compared to the prior year.
Other income increased $74,000 due to increases in interest
income from the mortgage note receivable and increased cash
balances from the Company's Secondary Offering, offset in part by
decreases in management fees from third party-owned properties.
For the three months ended September 30, 1997, total property
expenses were $11.7 million, or 32% of revenues from rental
operations, compared with total property expenses of $6.9 million
or 36% of revenues from rental operations for the three months
ended September 30, 1996. The increase in total property expenses
associated with the properties acquired in 1996 was $2.2 million,
reflecting a full three months of property expenses from such
properties. Property expenses from properties acquired in the
first nine months of 1997 were $3.3 million. Property expenses
from the properties owned for all of 1996 and 1997 decreased
approximately $667,000 for the three months ended September 30,
1997 compared to the prior year. This decrease in total property
expenses resulted from a decrease in insurance costs due to a more
favorable insurance policy.
General and administrative expenses increased by
approximately $500,000 or 104% for the three months ended
September 30, 1997 compared to the prior year, resulting from
increased management and administrative costs associated with the
increased portfolio size and the operations of the Company as a
public real estate investment trust.
Interest expense decreased approximately $9.4 million or 66%
for the three months ended September 30, 1997 compared to the
three months ended September 30, 1996, primarily as a result of
the decrease in mortgage loans payable during the fourth quarter of 1996.
Depreciation and amortization increased $2.2 million or 74%,
primarily due to 1996 and 1997 acquisitions.
The following is a comparison of property operating data for
17 of the properties which were owned for the nine months ended
September 30, 1997 and September 30, 1996 ("Same Store Properties")
(in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended
September 30, Dollar Percent
1997 1996 Change Change
Revenue from rental operations $13,020 $12,797 $223 2%
Property expenses 4,137 4,804 (667) (14)
Net $ 8,883 $ 7,993 $890 11%
</TABLE>
Liquidity and Capital Resources
On June 11, 1997, the Company refinanced, through a special
purpose subsidiary, its existing $175 million mortgage financing
with the new $175 million Mortgage Financing from an affiliate of
Lehman Brothers. The Mortgage Financing is non-recourse and
secured by fully cross-collateralized and cross-defaulted first
mortgage liens on 18 Mortgage Financing Properties and has a
twenty year term. The Mortgage Financing bears interest at a
fixed rate of 7.52%, is anticipated to be repaid in seven years
and requires monthly payments of interest only with all principal
due in a balloon payment at maturity. If the Mortgage Financing
is not repaid or refinanced within seven years, the interest rate
increases by at least 2% and all excess cash flow from the
Mortgage Financing Properties must be used to pay down principal.
The Mortgage Financing documentation requires the Company to
comply with certain customary financial covenants, ongoing
operational restrictions, and certain cash management procedures.
In addition, the Mortgage Financing prohibits prepayment for
approximately three years from its origination.
On May 5, 1997, the Company entered into its Bridge Facility
with Wells Fargo Bank. The Bridge Facility was unsecured, with a
total commitment of $110,000,000. The Company repaid the entire
balance on the Bridge Facility with a draw from the Amended Credit
Facility. On June 11, 1997, the Company amended its then existing
credit facility with the Amended Credit Facility from a group of
banks led by Wells Fargo (the "Lenders"). The interest rate of
the Amended Credit Facility ranges between LIBOR plus 1.2% and
LIBOR plus 1.45% depending on the leverage ratio of the Company.
Once the Company achieves an investment grade unsecured debt
rating, the interest rate may be lowered to between LIBOR plus
0.9% and LIBOR plus 1.15% depending on such debt rating. Under
certain circumstances, the Company has the option to convert the
interest rate from LIBOR to the prime rate plus 0.5%. The Amended
Credit Facility has been and will be used, among other things, to
finance the acquisition of properties, provide funds for tenant
improvements and capital expenditures and provide for working
capital and other corporate purposes. The outstanding principal
balance is due on September 1, 2000. In July 1997, proceeds of
$212,600,000 from the Company's Secondary Offering were used to
pay down the aggregate outstanding balance on the Amended Credit Facility.
The Amended Credit Facility is subject to customary
conditions to borrowing, contains representations and warranties
and defaults customary in REIT financings, and contains financial
covenants, including requirements for a minimum tangible net
worth, maximum liabilities to asset values, and minimum interest,
unsecured interest and fixed charge coverage ratios (all
calculated as defined in the Amended Credit Facility
documentation) and requirements to maintain a pool of unencumbered
properties which meet certain defined characteristics and are
approved by the Lenders. The Amended Credit Facility also
contains restrictions on, among other things, indebtedness,
investments, distributions, liens and mergers.
Pursuant to a separate agreement, Wells Fargo advanced $28.7
million, of which $2 million was advanced subsequent to June 30,
1997, to the Company. This advance, which was secured by two
Properties, accrued interest at the Wells Fargo Prime Rate and
matured on July 10, 1997 at which time the Company repaid the
advance with a $28.7 million draw on the Amended Credit Facility.
The Company also has an unsecured line of credit with a total
commitment of $10,000,000 from City National Bank. On September
30, 1997 the aggregate outstanding balance was $8,100,000. The
City National Credit Facility accrues interest at the City
National Bank Prime Rate less 0.875%, and is scheduled to mature
on August 1, 1998. The City National Credit Facility has and will
be used, among other things, to provide funds for tenant
improvements and capital expenditures and provide for working
capital and other corporate purposes. On July 23, 1997 the Company
repaid the outstanding balance of $10,000,000 on the City National
Credit Facility with proceeds from the Company's Secondary Offering.
On July 23, 1997, the Company completed the Secondary
Offering of 12,000,000 shares of Common Stock. The Secondary
Offering price was $26.125 per share resulting in gross proceeds
of $313,500,000. Also, on July 23, 1997, the underwriters
exercised their overallotment option and, accordingly, the Company
issued an additional 1,750,000 shares of Common Stock and received
gross proceeds of $45,718,750. The aggregate proceeds to the
Company, net of underwriters' discount and offering costs
aggregating $18,588,000 were approximately $340,631,000. Proceeds
from the Company's Secondary Offering were used to pay down the
Company's Amended Credit Facility, City National Credit Facility,
and to acquire additional office properties.
The Company expects to continue meeting its short-term
liquidity requirements generally through its working capital and
net cash provided by operating activities. The Company believes
that its net cash provided by operating activities will continue
to be sufficient to allow the Company to make any distributions
necessary to enable the Company to continue quality as a REIT.
The Company also believes that the foregoing sources of liquidity
will be sufficient to fund its short-term liquidity needs for the
foreseeable future, including recurring non-revenue enhancing
capital expenditures, tenant improvements and leasing commissions.
The Company expects to meet certain long-term liquidity
requirements such as property acquisitions, scheduled debt
maturates, renovations, expansions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness
and the issuance of additional equity securities. The Company
also expects to use the remaining funds available under the
Amended Credit Facility to fund acquisitions, development
activities and capital improvements on an interim basis.
PART II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a vote of Securities Holders:
On July 8, 1997, the Company held its annual meeting of
shareholders. The following directors were elected to serve until
the annual meeting of shareholders in the year 2000: Carl D.
Covitz, Larry S. Flax, and Kenneth B. Roath. Directors whose
terms of office as a director continued after the meeting are as
follows: Richard S. Ziman, Victor J. Coleman, Steven C. Good.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation as filed
as an exhibit to Registration Statement on Form S-11
(No. 333-8163) and incorporated herein by reference.
3.2 By-Laws of Registrant as filed as an exhibit to
Registration Statement on Form S-11 (No. 333-8163) and
incorporated herein by reference.
11.1 Computation of Fully-Diluted Earnings Per Share.
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated August 13, 1997 was filed which
included information regarding Items 2 and 7. Included in Item 7
were financial statements, pro forma information and exhibits.
The Form 8-K was filed in connection with the Company's
acquisition of eight suburban office properties.
Signatures
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
ARDEN REALTY, INC.
By: /s/ Diana M. Laing
Diana M. Laing
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 12, 1997
Exhibit 11.1
Computation of fully-diluted earnings per share, using
25,531,420 weighted average shares outstanding.
Amount Per Share
Net income $26,411,000 $1.03
Calculation of number of weighted average
fully-diluted shares:
Proceeds from assumed exercise of options $18,623,125
Divided by quarter ended September 30, 1997
average closing price of common stock $31.375
Equals number of shares assumed purchased
under treasury stock method 593,566
Number of shares assumed purchased through
exercise of options 910,000
Less number of shares assumed purchased
under treasury stock method 593,566
Equals additional shares assumed outstanding
for fully-diluted earnings per share computation 316,434
Plus weighted average number of shares
outstanding 25,214,986
Equals weighted average number of shares
outstanding, fully-diluted EPS calculations 25,531,420
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