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 June 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
incorporation or organization) (Identification No.)
9100 Wilshire Boulevard,
East Tower Suite 700]
Beverly Hills, California 90212
(Address of principal executive offices) (Zip Code)
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 August 14, 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>
June 30, 1997 December 31, 1996
Assets (Unaudited)
Commercial office properties:
Land $ 177,050 $ 116,513
Buildings and improvements 601,984 417,970
Tenant improvements 16,204 12,224
795,238 546,707
Less: accumulated depreciation (24,731) (17,139)
770,507 529,568
Cash and cash equivalents 832 7,632
Restricted cash 4,000 --
Rent and other receivables 3,144 2,293
Deferred rent 7,288 6,069
Leasing commissions, net of
accumulated amortization of $1,194
and $766, respectively 4,513 3,160
Prepaid financing costs, net of
accumulated amortization of $282
and $93, respectively 5,369 853
Prepaid expenses and other assets 5,821 1,681
Total assets $ 801,474 $ 551,256
Liabilities
Mortgage loans payable $ 175,000 $ 104,000
Secured line of credit 26,700 --
Unsecured lines of credit 193,900 51,000
Accounts payable and accrued
expenses 13,483 6,178
Security deposits 4,982 3,590
Dividends and distributions
payable 8,677 8,844
Total liabilities 422,742 173,612
Minority interests in Operating
Partnership 47,475 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,
21,692,833 and 21,679,500
issued and outstanding 217 217
Additional paid-in capital 331,040 337,432
Accumulated deficit -- (5,672)
Total stockholders' equity 331,257 331,977
Total liabilities and
stockholders' equity $ 801,474 $ 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 Realty, Arden Arden Realty, Arden
Inc. Predecessors Inc. Predecessors
For the Three Months Ended For the Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
Revenues
Revenues from
rental operations:
Rental $ 26,611 $ 10,797 $ 48,503 $ 19,404
Tenant reimbursements 931 787 1,889 1,425
Parking, net of expenses 1,732 872 3,222 1,751
Other rental operations 430 316 1,006 451
29,704 12,772 54,620 23,031
Other income 59 510 113 1,070
Total revenues 29,763 13,282 54,733 24,101
Expenses
Property expenses:
Repairs and maintenance 3,534 1,201 6,375 2,131
Utilities 2,946 1,180 5,369 1,886
Real estate taxes 1,635 589 3,013 1,291
Insurance 480 722 864 1,503
Ground rent 52 46 103 90
Marketing and other 897 529 1,714 981
Total property expenses 9,544 4,267 17,438 7,882
General and administrative 931 466 1,849 830
Interest 5,883 8,079 8,907 14,741
Depreciation and amortization 4,458 1,454 8,020 3,036
Total expenses 20,816 14,266 36,214 26,489
Equity in net loss of
noncombined entities -- (10) -- (94)
Income (loss) before
minority interests 8,947 (994) 18,519 (2,482)
Minority interests'
share of loss of
Arden Predecessors -- 157 -- 344
Minority interests in
Operating Partnership (1,090) -- (2,224) --
Net income (loss) $7,857 $(837) $ 16,295 $ (2,138)
Net income per common share $ .36 $ .74
Weighted average common
shares outstanding 21,885 21,902
Cash dividends declared $ .40 $ .80
</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
Shares Amounts Paid-in Capital Accumulated Stockholders'
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 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 (unaudited) 13,333 -- 267 -- 267
Stock option
compensation
(unaudited) -- -- 92 -- 92
Secondary Offering
costs (unaudited) -- -- (20) -- (20)
Net income
(unaudited) -- -- -- 16,295 16,295
Dividend declared
and payable
(unaudited) -- -- (6,731) (10,623) (17,354)
Balance at June 30,
1997 (unaudited) 21,692,833 $217 $331,040 $ -- $331,257
</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, Inc. Arden Predecessors
For the Six Months Ended
June 30, 1997 June 30,1996
OPERATING ACTIVITIES:
Net income (loss) $16,295 $(2,138)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Minority interests in operating partnership 2,224 --
Equity in net loss of noncombined entities -- 94
Loss allocable to minority interests of
Arden Predecessors -- (344)
Depreciation and amortization 8,020 3,036
Amortization of loan costs and fees 189 102
Increase in rents and other receivables (851) (1,482)
Increase in deferred rent (1,219) (1,218)
Increase in prepaid financing and leasing costs (6,521) (575)
Increase in prepaid expenses and other assets (4,013) (1,709)
Increase in accounts payable and accrued expenses 7,305 1,328
Increase in deferred interest -- 4,434
Increase in security deposits 1,392 485
Net cash provided by operating activities 22,821 2,013
INVESTING ACTIVITIES:
Acquisitions of and improvements to commercial
office properties (247,769) (96,827)
FINANCING ACTIVITIES:
Proceeds from mortgage loans 246,000 100,092
Repayment of mortgage loans (175,000) (4,238)
Proceeds from secured line of credit 26,700 --
Proceeds from unsecured lines of credit 142,900 3,657
Repayments of unsecured lines of credit -- (2,003)
Proceeds from issuance of Common Stock,
net of offering costs 267 --
Secondary Offering costs (20) --
Increase in restricted cash (4,000) (5,085)
Contributions from minority interests -- 1,000
Distributions to minority interests -- (38)
Owners' contributions -- 2,500
Owners' distributions -- (948)
Dividends paid (18,699) --
Net cash provided by financing activities 218,148 94,937
Net (decrease) increase in cash and cash equivalents (6,800) 123
Cash and cash equivalents at beginning of period 7,632 790
Cash and cash equivalents at end of period $ 832 $913
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest,
net of interest capitalized $ 6,675 $ 9,640
</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 June 30, 1997 the Company's portfolio
of properties included 45 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 fee 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 45 Properties (the "Initial Properties").
The Formation Transactions included the following:
o 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.
o 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.
o 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.
o The Company, through the Operating Partnership, borrowed,
from an affiliate of Lehman Brothers, $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.
o 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.
o 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 at June 30, 1997 represented a
limited partnership interest in the Operating Partnership of
approximately 12%.
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 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 fifteen 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.
On June 11, 1997, the Company amended its then-existing
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 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 unsecured investment grade 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 aggregate
outstanding balance on the Amended Credit Facility was
$183,900,000 as of June 30, 1997. 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 June 1, 2000. The LIBOR rate was 5.7% and 5.6% at June
30, 1997 and December 31, 1996, respectively.
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 (the "Secured Advance"). 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 Secured Advance with a $28.7 million draw on
the Amended Credit Facility. The Wells Fargo Prime Rate was 8.5%
at June 30, 1997.
The Company also has an unsecured line of credit with a
total commitment of $10,000,000 from City National Bank (the
"City National Credit Facility"). 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 is used, among other things, to
provide funds for tenant improvements and capital expenditures
and provide for working capital and other corporate purposes. At
June 30, 1997 the aggregate outstanding balance on the City
National Credit Facility was $10,000,000. The City National Bank
Prime Rate was 8.5% at June 30, 1997.
Effective January 2, 1997, the Company entered into interest
rate floor and cap transactions with a notional amount of $155
million (collectively, the "Swap Agreement"), to convert floating
rate liabilities to fixed rate liabilities. The Swap Agreement
enables the Company to fix the LIBOR portion of its floating rate
liabilities at 6.6% through March 2004.
Subsequent Event:
In July 1997, the Company assumed a $5,000,000 mortgage note
payable in connection with the acquisition of 299 Euclid. The
note bears interest of 7%, requires monthly payments of interest
only, and matures on July 1, 2002.
4. Commercial Office Properties and Furniture, Fixtures and
Equipment
In March 1997, the Company completed a series of
transactions to acquire four office properties located in
California, including a 109,187 square foot building located in
Glendale from a related party for $10.2 million, an 80,014 square
foot building in Woodland Hills for $7.5 million, a 135,415
square foot building in Whittier for $14.3 million, and a 155,189
square foot building in Bakersfield for $19.5 million. The
Company plans to spend approximately $4 million on renovations
over the next 15 months on the property located in Glendale.
These acquisitions were funded with existing working capital,
proceeds from the mortgage financing payable to Lehman Brothers
and draws from the City National Credit Facility. In addition,
26,880 OP Units valued at approximately $763,000 were issued in
conjunction with the purchase of the property located in
Bakersfield.
In April 1997, the Company purchased four office properties
located in California, including a 43,063 square foot building
located in Woodland Hills for approximately $5.2 million, a
51,828 square foot building in Sherman Oaks for approximately
$6.7 million, a 92,486 square foot building in West Los Angeles
for approximately $10.6 million and a 202,830 square foot
building in Gardena for approximately $19.1 million. These
acquisitions were funded with proceeds from the mortgage
financing payable to Lehman Brothers and draws from the Credit
Facility.
In May 1997, the Company purchased two office properties
located in California, including a 417,463 square foot office
building in Beverly Hills for approximately $59.1 million and a
61,333 square foot office property in Bakersfield for
approximately $7.5 million. These acquisitions were funded with
proceeds from the Bridge Facility.
In June 1997, the Company purchased a 597,550 square foot
office property in La Palma, California for approximately $80.2
million. This acquisition was funded with proceeds from the
secured loan with Wells Fargo Bank.
Subsequent Events:
In July 1997, the Company purchased five office properties
located in California, including a 73,400 square foot office
property in Pasadena for approximately $7.3 million, a 63,925
square foot office property in Gardena for approximately $4.5
million, a 223,731 square foot office property in Torrance for
approximately $25.2 million, a 107,653 square foot office
property in Oxnard for
approximately $14.1 million, and a 105,436 square foot office
property in Torrance for approximately $11.8 million. These
acquisitions were funded with existing working capital, proceeds
from the Secured Advance with Wells Fargo Bank, the assumption of
a $5,000,000 mortgage note payable and proceeds from the
Secondary Offering (as defined in Note 5).
In August 1997, the Company purchased three office
properties located in California, including a 115,061 square foot
office property in Irvine for approximately $7.3 million, a
172,900 square foot office property in Laguna Niguel for
approximately $28.3 million, and a 103,506 square foot office
property in Santa Monica for approximately $11.8 million. These
acquisitions were funded with existing working capital, proceeds
from the Bridge Facility, and proceeds from the Secondary
Offering (as defined in Note 5).
5. Stockholders Equity
In March 1997, options to purchase 13,333 shares of Common
Stock were exercised.
On March 28, 1997, the Operating Partnership issued 26,880
OP Units valued at approximately $763,000 in connection with the
acquisition of the property located in Bakersfield, California.
Net income per share was calculated using the weighted
average number of shares outstanding of 21,885,073 and 21,901,655
for the three months and six months ended June 30, 1997,
respectively.
In February 1997, the Financial Accounting Standards Board
(FASB), issued Statement of Financial Accounting Standards No.
128 "Earnings Per Share" which is required to be adopted on
December 31, 1997. At that time the Company will be required to
change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of
stock options will be excluded. This will not have a material
impact on primary earnings per share for the six months and three
months ended June 30, 1997.
Subsequent Event:
On July 23, 1997, the Company completed a second public
offering (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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion relates to the consolidated
financial statements of the Company and the combined financial
statements of the Arden Predecessors, and should be read in
conjunction with the financial statements and related notes
thereto included in the 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.
During the first six months of 1997, the Company acquired 11
office properties for approximately $240 million, encompassing
approximately 1,946,000 square feet. Through these acquisitions,
the Company increased total assets to $801.5 million, including
real estate assets of $770.5 million (net of accumulated
depreciation) at June 30, 1997.
The Company expects that a significant part of its revenue
growth in the next one to two years will come from additional
property acquisitions. The Company also believes that, if the
Southern California office rental market continues to improve,
occupancy and rental rate increases will become a substantial
part of its revenue growth over time.
Results of Operations
Comparison of the six months ended June 30, 1997 to the six
months ended June 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 six months ended June 30,
1996 have been included as though they were combined in the
following analysis. Intercompany management fees relating to the
noncombined entities of $435,000 have been eliminated.
<TABLE>
Six months ended June 30, 1997 compared to six months ended June 30, 1996
(in thousands except percentage data)
<S> <C> <C> <C> <C>
Six Months Ended
June 30, Dollar Percent
1997 1996 Change Change
Revenue
Revenues from rental operations:
Rental $48,503 $27,341 $21,162 77%
Tenant reimbursements 1,889 1,732 157 9
Parking, net of expense 3,222 2,261 961 43
Other rental operations 1,006 567 439 77
54,620 31,901 22,719 71
Other income 113 686 (573) (84)
Total revenues $54,733 $32,587 $22,146 68%
Expenses
Property expenses:
Repairs and maintenance $ 6,375 3,178 3,197 101%
Utilities 5,369 2,858 2,511 88
Real estate taxes 3,013 1,832 1,181 64
Insurance 864 1,681 (817) (49)
Ground rent 103 97 6 6
Marketing and other 1,714 1,465 249 17
Total property expenses $17,438 11,111 6,327 57
General and administrative 1,849 830 1,019 123
Interest 8,907 19,058 (10,151) (53)
Depreciation and amortization 8,020 4,709 3,311 70
Total expenses $36,214 $35,708 $ 506 1%
</TABLE>
Rental revenue increased approximately $21.1 million or 77%
for the six months ended June 30, 1997 compared to the six months
ended June 30, 1996. Rental revenue from the properties acquired
in 1996 increased approximately $15.6 million for the six months
ended June 30, 1997 compared to the prior year, reflecting a full
six months of rental revenue from such properties. Rental
revenue from properties acquired in the first half of 1997 was
$4.7 million for the six months ended June 30, 1997. Rental
revenue from the properties owned for all of 1996 and 1997
increased approximately $800,000 for the six months ended June
30, 1997 compared to the prior year, primarily resulting from
increased occupancy.
Tenant reimbursements increased $157,000 or 9% for the six
months ended June 30, 1997 compared to the six months ended June
30, 1996. Tenant reimbursements from the properties acquired in
1996 increased approximately $428,000 for the six months ended
June 30, 1997 compared to the prior year. Tenant reimbursements
from the properties acquired in the first half of 1997 were
$70,000 for the six months ended June 30, 1997. Tenant
reimbursements from the properties owned for all of 1996 and 1997
decreased approximately $341,000 for the six months ended June
30, 1997 compared to the prior year, as a result of resetting
base years for leases that were renewed or retenanted, and
reductions in reimbursable property expenses.
Parking revenue increased by $961,000 or 43% for the six
months ended June 30, 1997 compared to the six months ended June
30, 1996. Parking revenue from the properties acquired in 1996
increased approximately $563,000 for the six months ended June
30, 1997 compared to the prior year. Parking revenue from the
properties acquired in the first half of 1997 was $213,000 for
the six months ended June 30, 1997. Parking revenue from the
properties owned for all of 1996 and 1997 increased approximately
$185,000 for the six months ended June 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 $439,000 or 77% for the six months ended
June 30, 1997 compared to the prior year. The increase in other
rental operations associated with the properties acquired in 1996
was $393,000. Other rental operations revenues from the
properties purchased in the first half of 1997 were $29,000.
Other rental operations revenues from the properties owned for
all of 1996 and 1997 decreased approximately $17,000.
Other income decreased by $573,000 due to decreases in
management fees from third party-owned properties and interest
income from restricted cash balances.
For the six months ended June 30, 1997, total property
expenses were $17.4 million, or 32% of revenues from rental
operations, compared with total property expenses of $11.1
million or 35% of revenues from rental operations for the six
months ended June 30, 1996. The increase in total property
expenses associated with the properties acquired in 1996 was $5.1
million, reflecting a full six months of property expenses from
such properties. Property expenses from properties acquired in
the first half of 1997 were $1.4 million. Property expenses from
the properties owned for all of 1996 and 1997 decreased
approximately $200,000 for the six months ended June 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 $1.0 million or 123% for the six months ended June
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 by approximately $10.2 million or
53% for the six months ended June 30, 1997 compared to the six
months ended June 30, 1996, primarily as a result of the decrease
in mortgage loans payable during 1997.
Depreciation and amortization increased by $3.3 million or
70%, 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 six months ended
June 30, 1997 and June 30, 1996 ("Same Store Properties") (in
thousands):
Six Months Ended
June 30, Dollar Percent
1997 1996 Change Change
Revenues from rental operations $25,128 $24,470 $658 3%
Property expenses 8,131 8,340 (209) (3)
Net $16,997 $16,130 $867 5%
Comparison of the three months ended June 30, 1997 to the
three months ended June 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
June 30, 1996 have been included as though they were combined in
the following analysis. Intercompany management fees relating to
the noncombined entities of $232,000 have been eliminated.
Three months ended June 30, 1997 compared to three months ended
June 30, 1996
(in thousands except percentage data)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended
June 30, Dollar Percent
1997 1996 Change Change
Revenue
Revenues from rental operations:
Rental $ 26,611 $ 14,870 $11,741 79%
Tenant reimbursements 931 974 (43) (4)
Parking, net of expense 1,732 1,119 613 55
Other rental operations 430 392 38 10
29,704 17,355 12,349 71
Other income 59 304 (245) (81)
Total revenues 29,763 17,659 12,104 69
Expenses
Property expenses:
Repairs and maintenance 3,534 1,738 1,796 103%
Utilities 2,946 1,721 1,225 71
Real estate taxes 1,635 875 760 87
Insurance 480 809 (329) (41)
Ground rent 52 50 2 4
Marketing and other 897 733 164 22
Total property expenses 9,544 5,926 3,618 61
General and administrative 931 466 465 100
Interest 5,883 10,266 (4,383) (43)
Depreciation and amortization 4,458 2,313 2,145 93
Total expenses $ 20,816 $18,971 $ 1,845 10%
</TABLE>
Rental revenue increased approximately $11.7 million or 79%
for the three months ended June 30, 1997 compared to the three
months ended June 30, 1996. Rental revenue from the properties
acquired in 1996 increased approximately $6.6 million for the
three months ended June 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
half of 1997 was $4.6 million for the three months ended June 30,
1997. Rental revenue from the properties owned for all of 1996
and 1997 increased approximately $500,000 for the three months
ended June 30, 1997 compared to the prior year, primarily
resulting from increased occupancy.
Tenant reimbursements decreased $43,000 or 4% for the three
months ended June 30, 1997 compared to the three months ended
June 30, 1996. Tenant reimbursements from the properties
acquired in 1996 increased approximately $127,000 for the three
months ended June 30, 1997 compared
to the prior year. Tenant reimbursements from the properties
acquired in the first half of 1997 were $70,000 for the three
months ended June 30, 1997. Tenant reimbursements from the
properties owned for all of 1996 and 1997 decreased approximately
$240,000 for the three months ended June 30, 1997 compared to the
prior year, as a result of resetting base years for leases that
were renewed or retenanted, and reductions in reimbursable
property expenses.
Parking revenue increased by $613,000 or 55% for the three
months ended June 30, 1997 compared to the three months ended
June 30, 1996. Parking revenue from the properties acquired in
1996 increased approximately $267,000 for the six months ended
June 30, 1997 compared to the prior year. Parking revenue from
the properties acquired in the first half of 1997 was $212,000
for the three months ended June 30, 1997. Parking revenue from
the properties owned for all of 1996 and 1997 increased
approximately $134,000 for the three months ended June 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 $38,000 or 10% for the three months ended
June 30, 1997 compared to the prior year. The increase in other
rental operations associated with the properties acquired in 1996
was $128,000. Other rental operations revenues from the
properties purchased in the first half of 1997 were $28,000.
Other rental operations revenues from the properties owned for
all of 1996 and 1997 decreased approximately $118,000 primarily
due to a decrease in non-recurring tenant charges for the three
months ended June 30, 1997 compared to the prior year.
Other income decreased by $245,000 due to decreases in
management fees from third party-owned properties and interest
income from restricted cash balances.
For the three months ended June 30, 1997, total property
expenses were $9.5 million, or 32% of revenues from rental
operations, compared with total property expenses of $5.9 million
or 34% of revenues from rental operations for the three months
ended June 30, 1996. The increase in total property expenses
associated with the properties acquired in 1996 was $2.4 million,
reflecting a full three months of property expenses from such
properties. Property expenses from properties acquired in the
first half of 1997 were $1.4 million. Property expenses from the
properties owned for all of 1996 and 1997 decreased approximately
$200,000 for the three months ended June 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 $465,000 or 100% for the three months ended June
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 by approximately $4.4 million or
43% for the three months ended June 30, 1997 compared to the
three months ended June 30, 1996, primarily as a result of the
decrease in mortgage loans payable during 1997.
Depreciation and amortization increased by $2.1 million or
93%, 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 six months ended
June 30, 1997 and June 30, 1996 ("Same Store Properties") (in
thousands):
Three Months Ended
June 30, Dollar Percent
1997 1996 Change Change
Revenue from rental operations $12,638 $12,379 $259 2%
Property expenses 4,117 4,305 (188) (4)
Net $ 8,521 $ 8,074 $447 6%
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
fifteen 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. 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%. As of June 30, 1997, approximately $14
million was available under the Amended Credit Facility. 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 June 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. One
June 30, 1997 the aggregate outstanding balance was $10,000,000.
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
In March 1997, the Operating Partnership issued 26,880 OP
Units as partial consideration in the acquisition of the property
located in Bakersfield, California. Holders of the OP Units may
redeem part or all of their OP Units for cash, or at the election
of the Company, exchange such OP Units for shares of Common Stock
on a one-for-one basis. This redemption/exchange right may not
be exercised prior to January 2, 1998.
The issuance of OP Units pursuant to the above described
acquisitions constitutes a private placement of securities which
is exempt from the registration requirements of the Securities
act of 1933, as amended, pursuant to Section 4(2) and Rule 506 of
Regulation D promulgated thereunder.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a vote of Securities Holders - None
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.
10.1 Amended and Restated Agreement of Limited Partnership
of the Operating Partnership as filed as an exhibit to
Registration Statement on Form S-11 (No. 333-8163) and
incorporated herein by reference.
10.2 1996 Stock Option and Incentive Plan as filed as an
exhibit to Registration Statement on Form S-11 (No. 333-
8163) and incorporated herein by reference.
10.3 Form of Officers and Directors Indemnification
Agreement as filed as an exhibit to Registration
Statement on Form S-11 (No. 333-8163) and incorporated
herein by reference.
10.4 Employment Agreement between the Company and Mr. Ziman
as filed as an exhibit to Registration Statement on
Form S-11 (No. 333-8163) and incorporated herein by
reference.
10.5 Employment Agreement between the Company and Mr.
Coleman as filed as an exhibit to Registration
Statement on Form S-11 (No. 333-8163) and incorporated
herein by reference.
10.6 Employment Agreement between the Company and Ms. Laing
as filed as an exhibit to Registration Statement on
Form S-11 (No. 333-8163) and incorporated herein by
reference.
10.7 Miscellaneous Rights Agreement among the Company, the
Operating Partnership, NAMIZ, Inc. and Mr. Ziman as
filed as an exhibit to Registration Statement on Form S-
11 (No. 333-8163) and incorporated herein by reference.
10.8 Credit Facility documentation consisting of First Amended
and Restated Revolving Credit Agreement by and among the
Operating Partnership and Chase Manhattan Bank, Lehman
Brothers Realty Corporation and Wells Fargo Bank as filed as
an exhibit to Registration Statement on Form S-11 (No. 333-30059)
and incorporated herein by reference.
10.9 Mortgage Financing documentation consisting of Loan Agreement by
and between the Company's special purpose financing subisidary and
Lehman Brothers Realty Corporation (the Loan Agreement includes the
Mortgage Note, Dead of Trust, and form of Tenant Estoppel Certificate
and Agreement as exhibits) as filed as an exhibit to Registration
Statement of Form S-11 (No. 333-30059) 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 May 22, 1997 (as amended by Form
8-K/A dated July 8, 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 nine
suburban office properties.
A report on Form 8-K dated July 9, 1997 was filed which
included information regarding Items 2, 5, 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 two suburban office properties.
A report on Form 8-K dated July 31, 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: August 14, 1997
27
Exhibit 11.1
Computation of fully-diluted earnings per share, using
21,901,665 weighted average shares outstanding.
Amount Per Share
Net income $16,295,000 $.74
Calculation of number of weighted average
fully-diluted shares:
Proceeds from assumed exercise of options $18,012,948
Divided by quarter ended March 31, 1997
average closing price of common stock $26.65
Equals number of shares assumed purchased
under treasury stock method 675,908
Number of shares assumed purchased through
exercise of options 890,000
Less number of shares assumed purchased
under treasury stock method 675,908
Equals additional shares assumed outstanding
for fully-diluted earnings per share computation 214,092
Plus weighted average number of shares
outstanding, primary EPS calculation 21,687,573
Equals weighted average number of shares
outstanding, fully-diluted EPS calculations 21,901,665
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 832
<SECURITIES> 0
<RECEIVABLES> 3,144
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,797
<PP&E> 795,238
<DEPRECIATION> (24,731)
<TOTAL-ASSETS> 801,474
<CURRENT-LIABILITIES> 22,160
<BONDS> 395,600
0
0
<COMMON> 217
<OTHER-SE> 331,040
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 54,733
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 36,214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,907
<INCOME-PRETAX> 16,295
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,295
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
</TABLE>
