<PAGE> 1
As filed pursuant to Rule 424(b)(2)
under the Securities Act of 1933
Registration No. 333-44141
PROSPECTUS SUPPLEMENT
(To Prospectus dated January 21, 1998)
1,303,965 SHARES [LOGO]
ARDEN REALTY, INC.
COMMON STOCK
---------------------------
Arden Realty, Inc., a Maryland corporation (the "Company"), is a
self-administered and self-managed real estate investment trust ("REIT") engaged
in owning, acquiring, managing, leasing and renovating commercial properties in
Southern California. As of January 31, 1998, the Company owned a portfolio of 77
office properties (the "Properties") containing approximately 11.2 million
rentable square feet. All of the Properties are located in Southern California.
In addition, the Company has entered into a contract to acquire a portfolio of
50 primarily office and R&D/industrial properties located in Southern California
(the "LBA Portfolio"), aggregating approximately 5.2 million rentable square
feet, for a purchase price of approximately $614.5 million. In connection with
the acquisition of the LBA Portfolio (the "LBA Acquisition"), the Company will
also issue warrants to purchase 2.5 million shares of the Company's common
stock, at a price of $29.59 per share, subject to adjustment. Upon completion of
the LBA Acquisition, the Company will be the largest publicly traded owner of
office space in Southern California, as measured by total net rentable square
feet owned.
All of the shares of the Company's common stock (the "Common Stock")
offered hereby are being sold by the Company. To assist the Company in complying
with certain qualification requirements applicable to REITs, the Company's
charter provides that no stockholder may actually or constructively own more
than 9.0% of the outstanding Common Stock, subject to certain specified
exceptions. See "Description of Capital Stock -- Restrictions on Transfer" in
the accompanying Prospectus.
The Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "ARI." On February 18, 1998, the last reported sales price of the
Common Stock on the NYSE was $28 3/8 per share.
---------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
A.G. Edwards & Sons, Inc. (the "Underwriter") has agreed, subject to the
terms and conditions of an Underwriting Agreement, to purchase the Common Stock
from the Company at a price of $26.960 per share, resulting in aggregate
proceeds to the Company of $35,154,896.40 before payment of expenses by the
Company estimated at $100,000. The Underwriter intends to sell the shares of
Common Stock to the sponsor of a newly-formed unit investment trust at an
aggregate purchase price of $35,524,961.67. See "Underwriting."
---------------------------
The shares of Common Stock offered hereby are being offered by the
Underwriter, subject to prior sale when, as and if issued by the Company and
delivered to and accepted by the Underwriter, subject to approval of certain
legal matters by counsel for the Underwriter and certain other conditions. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York on or about February 23, 1998.
---------------------------
A.G. Edwards & Sons, Inc.
The date of this Prospectus Supplement is February 18, 1998
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK PRIOR TO PRICING
OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK,
THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO
COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF
MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus or incorporated therein by reference. Unless indicated
otherwise, the information contained in this Prospectus Supplement assumes that
(i) the offering price for the Common Stock offered hereby is $28 3/8, (ii) the
sellers of the LBA Portfolio (defined below) do not elect to receive a portion
of their consideration in OP Units (defined below) and (iii) none of the limited
partnership interests ("OP Units") of Arden Realty Limited Partnership, a
Maryland limited partnership (the "Operating Partnership"), redeemable for cash
or, at the election of the Company, exchangeable for Common Stock have been so
redeemed or exchanged. Although the Company and the Operating Partnership are
separate entities, for ease of reference and unless the context otherwise
requires, all references in this Prospectus Supplement to the "Company" refer to
the Company, the Operating Partnership and their subsidiaries, collectively. All
references in this Prospectus Supplement to "Namiz" refer to NAMIZ, Inc., a
California corporation formerly known as Arden Realty Group, Inc. and the
Company's immediate predecessor. All references in this Prospectus Supplement to
the activities of the Company prior to October 9, 1996 refer to the activities
of the "Arden Predecessors" which include Namiz and certain of its affiliated
entities that were engaged in the real estate business in Southern California
prior to the Company's formation and the consummation of its initial public
offering (the "IPO").
THE COMPANY
The Company is a self-administered and self-managed REIT engaged in owning,
acquiring, managing, leasing and renovating commercial properties in Southern
California. As of January 31, 1998, the Company owned a portfolio of 77 office
properties containing approximately 11.2 million rentable square feet. All of
the Properties are located in Southern California, with 63 in suburban Los
Angeles County, six in Orange County, four in San Diego County, two in Ventura
County and two in Kern County. As of January 1, 1998, the Company's portfolio of
77 Properties was approximately 82.6% leased (86.1% leased if the four
properties under renovation are excluded).
In addition, the Company has entered into a contract to acquire a portfolio
of 50 primarily office and R&D/industrial properties located in Southern
California (the "LBA Portfolio"), aggregating approximately 5.2 million rentable
square feet, for a purchase price of approximately $614.5 million. In connection
with the acquisition of the LBA Portfolio, the Company will also issue warrants
to purchase 2.5 million shares of Common Stock at a price of $29.59 per share,
subject to adjustment. The LBA Portfolio consists of 34 office properties
containing approximately 3.6 million rentable square feet, 15 R&D/industrial
properties containing approximately 1.5 million rentable square feet, and one
retail property containing 144,225 rentable square feet. As of January 1, 1998,
the office and R&D/industrial properties in the LBA Portfolio were 86.6% and
94.2% leased, respectively.
Upon completion of the acquisition of the LBA Portfolio (the "LBA
Acquisition"), the Company will be the largest publicly traded owner of office
space in Southern California as measured by total net rentable square feet
owned, with a portfolio of 127 properties containing approximately 16.4 million
rentable square feet. The Company intends to fund the LBA Acquisition in part
with the proceeds of this Offering and expects to complete such acquisition in
the first quarter of 1998.
The Company's primary business and growth strategies are to actively manage
its portfolio and to acquire underperforming office and R&D/industrial
properties, properties in need of renovation or properties which provide
attractive yields with stable cash flow in submarkets where it can utilize its
local market expertise and extensive real estate experience. The Company
implements its business and growth strategies by seeking to:
- acquire properties in submarkets where the Company already has a
significant concentration of owned assets;
- enter selected new submarkets that the Company believes have strong
economic fundamentals and prospects for additional growth;
- capitalize on economies of scale resulting from the size and geographic
focus of its portfolio;
- maintain low operating expenses through active property management and
cost control systems;
- aggressively lease its portfolio to maintain and improve occupancy rates
and renew or re-lease space as leases expire at increased market rents;
and
- utilize to its advantage its long-standing relationships with local
tenants, real estate brokers, and institutional and other owners of
office and R&D/industrial properties.
S-1
<PAGE> 4
From January 1, 1997, through January 31, 1998, the Company acquired 43
office properties containing approximately 5.8 million rentable square feet in
Southern California for a Total Acquisition Cost (as defined below) of
approximately $792.9 million. The following table lists the acquisitions made by
the Company during such period, excluding the pending LBA Acquisition:
<TABLE>
<CAPTION>
TOTAL
APPROXIMATE ACQUISITION
NET RENTABLE COST(1) MONTH
PROPERTY NAME LOCATION SQUARE FEET (MILLIONS) ACQUIRED
- ---------------------------- ----------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
LOS ANGELES COUNTY
LOS ANGELES WEST
10780 Santa Monica Los Angeles 92,486 $ 10.6 April 1997
8383 Wilshire Beverly Hills 417,463 59.1 May 1997
Carlsberg Corporate Center Santa Monica 103,506 11.8 August 1997
120 Spalding Beverly Hills 60,656 11.3 August 1997
Northpoint Los Angeles 104,235 21.9 October 1997
145 South Fairfax Los Angeles 54,429 7.4 October 1997
Wilshire Pacific Plaza Los Angeles 100,122 15.3 December 1997
World Savings Center Los Angeles 469,115 83.2(2) December 1997
9201 Sunset Los Angeles 158,585 28.8 December 1997
9100 Wilshire Beverly Hills 326,227 65.1 January 1998
1100 Glendon(3) Los Angeles 282,013 49.9(4) January 1998
LOS ANGELES SOUTH
South Bay Centre Gardena 202,830 19.1 April 1997
Harbor Corporate Center Gardena 63,925 4.5 July 1997
Pacific Gateway II Torrance 223,731 25.2 July 1997
Mariner Court Torrance 105,436 11.8 July 1997
South Bay Technology Center Torrance 104,815 6.5 September 1997
LOS ANGELES NORTH
535 Brand(3) Glendale 109,187 15.1 March 1997
6800 Owensmouth Canoga Park 80,014 7.5 March 1997
Clarendon Crest Woodland Hills 43,063 5.2 April 1997
Noble Professional Center Sherman Oaks 51,828 6.7 April 1997
299 Euclid(3) Pasadena 73,400 8.1 July 1997
Renaissance Court Westlake Village 61,245 7.1 September 1997
Conejo Business Park Thousand Oaks 69,017 9.4 October 1997
Pennsfield Plaza Thousand Oaks 21,202 3.0 October 1997
Marin Corporate Center Thousand Oaks 51,360 7.5 October 1997
Rancho Plaza Thousand Oaks 24,057 2.8 October 1997
Thousand Oaks Plaza Thousand Oaks 13,434 1.7 October 1997
Evergreen Plaza Thousand Oaks 75,722 10.7 October 1997
Glendale Corporate Center Glendale 108,209 15.5 December 1997
Sunset Pointe Plaza Newhall 58,105 8.5 January 1998
Westlake Gardens Westlake Village 49,639 7.3 January 1998
LOS ANGELES CENTRAL
Whittier Financial Center Whittier 135,415 14.4 March 1997
1370 Valley Vista Diamond Bar 84,081 10.8 September 1997
ORANGE COUNTY
Centerpointe La Palma La Palma 597,550 80.2 June 1997
1821 Dyer Irvine 115,061 7.3 August 1997
Crown Cabot Laguna Niguel 172,900 28.3 August 1997
City Centre Fountain Valley 302,519 33.3 December 1997
SAN DIEGO COUNTY
Foremost Professional Center San Diego 60,534 8.3 September 1997
Bernardo Regency San Diego 47,916 6.6 October 1997
Activity Business Center San Diego 167,045 14.9 January 1998
KERN COUNTY
California Twin Center Bakersfield 155,189 19.6 March 1997
Parkway Center Bakersfield 61,333 7.5 May 1997
VENTURA COUNTY
1000 Town Center Oxnard 107,653 14.1 July 1997
-------------- -----------
Total 5,766,252 $ 792.9
============= ==========
</TABLE>
- ---------------
(1) "Total Acquisition Cost" includes all purchase costs, closing costs and
anticipated capital expenditures for, and carrying costs during, renovation.
(2) The Company currently owns a 75% interest in the property and has an option
to purchase the remaining 25% interest for $27,500,000 which may be
exercised beginning March 15, 1998.
(3) Property currently under renovation.
(4) The Company owns a 97.5% interest in the property.
S-2
<PAGE> 5
Based upon its evaluation of market conditions, the Company believes that
certain economic fundamentals are present in Southern California which enhance
the Company's ability to achieve its business objectives by providing an
attractive environment for owning, acquiring and operating suburban office
properties. Specifically, the Company believes that the limited construction of
new office properties in the Southern California region since 1992 coupled with
an improving Southern California economy will continue to result in increased
demand for office space and positive net absorption in the Southern California
region, particularly in the selected submarkets where most of the Properties and
the LBA Portfolio are located. Unemployment in Los Angeles and Orange Counties,
where 69 of the Company's 77 Properties are located, reached 6.6% and 3.5%,
respectively, in September 1997, as compared to 9.8% and 6.8% in 1992. These
positive employment trends have contributed to continued reductions in the
office vacancy rate for Southern California which, according to Cushman &
Wakefield of California, Inc. ("Cushman & Wakefield"), has decreased since 1992
from 19.1% to 15.0% as of September 1997.
The Company operates from its Beverly Hills, California headquarters and is
a fully integrated real estate company with in-house expertise in acquisitions,
finance, asset management, leasing and construction. The Company's founders,
Richard S. Ziman and Victor J. Coleman, along with the other eight senior
officers of the Company, have an average of more than 14 years of experience in
the real estate industry. See "Management."
RECENT DEVELOPMENTS
PENDING LBA ACQUISITION
The LBA Acquisition is expected to close by the end of the first quarter of
1998 at a purchase price of approximately $614.5 million (including up to $35.0
million in OP Units). In connection with the LBA Acquisition, the Company will
also issue warrants to purchase 2.5 million shares of Common Stock at a price of
$29.59 per share, subject to adjustment. The following table sets forth certain
data regarding the LBA Portfolio:
<TABLE>
<CAPTION>
APPROXIMATE NET RENTABLE PERCENT LEASED AT
SQUARE FEET JANUARY 1, 1998
--------------------------------------- --------------------------------
R&D/INDUSTRIAL R&D/INDUSTRIAL
LOCATION OFFICE AND RETAIL TOTAL OFFICE AND RETAIL TOTAL
----------------------------- --------- --------------- --------- ------ --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Los Angeles County........... 687,175 -- 687,175 76.3% -- 76.3%
Orange County................ 1,267,120 637,406 1,904,526 86.8% 98.5% 90.7%
San Diego County............. 1,077,098 437,942 1,515,040 97.7% 93.9% 96.6%
Ventura County............... 154,216 -- 154,216 78.9% -- 78.9%
Riverside and San Bernardino
Counties................... 447,114 532,200 979,314 77.6% 86.2% 82.3%
--------- --------- --------- ----- ----- -----
Total/Weighted
Average.......... 3,632,723 1,607,548 5,240,271 86.6% 93.2% 88.6%
========= ========= ========= ===== ===== =====
</TABLE>
The Company believes that the LBA Acquisition will be accretive to funds
from operations per share and will provide the Company with additional
opportunities to enhance long-term shareholder value.
STRATEGIC BENEFITS. The LBA Portfolio provides the Company with a number of
strategic benefits including:
- Increased Size. The LBA Portfolio solidifies the Company's position as
the largest publicly traded owner of office space in Southern
California, as measured by total net rentable square feet owned. The
Company believes it would take several years to acquire an equivalent
concentration of similar properties in these markets through
single-property transactions.
- Concentration in Selected Markets. Through the LBA Acquisition, the
Company will expand its presence in Los Angeles and Ventura counties and
create a significant concentration of properties in each of Orange, San
Diego, Riverside and San Bernardino counties.
S-3
<PAGE> 6
- Economies of Scale. By increasing the size of its portfolio in Southern
California, the Company should further benefit from the competitive
advantages associated with economies of scale and submarket strength,
including negotiating discounts in the purchase of goods and services
from third parties, superior knowledge of local tenant space needs and
the potential for additional leverage in the landlord-tenant
relationship. Furthermore, the Company expects to integrate the LBA
Portfolio with minimal additions to senior management, allowing it to
take advantage of efficiencies associated with its existing
infrastructure.
- New Property Type. The LBA Portfolio includes 1.5 million rentable square
feet of R&D/industrial properties in markets where the Company already
owns office properties, allowing the Company to access new growth
opportunities and offer more space alternatives to meet tenant needs.
- Complementary Properties. The properties in the LBA Portfolio are similar
to the Company's existing portfolio in their average building size and
average lease size. Over 65% of the leases in the LBA Portfolio are less
than 5,000 rentable square feet.
MARKET FUNDAMENTALS. The Company believes that Orange and San Diego
counties, where over 65% of the total square footage of the LBA Portfolio is
located, exhibit strong economic and demographic trends which should lead to
increased revenues from property operations. Unemployment in Orange and San
Diego counties reached 3.5% and 4.6%, respectively, in September 1997, as
compared to 6.8% and 7.3% in 1992. These strong employment trends have
contributed to increased absorption and decreasing vacancies, with direct
vacancy rates in September 1997 of 14.3% and 9.5% in Orange and San Diego
counties, respectively, as compared to 17.0% and 15.9% in December 1993. With
the addition of the LBA Portfolio, 96% of the Company's square footage will be
located in four of the country's ten fastest growing metropolitan areas (as
measured by population growth projected for the period 1993 - 2005 by the U.S.
Department of Commerce in 1996).
HIGH QUALITY PROPERTIES AND LOCATIONS. The average age of the LBA
Properties is 11 years, with 21 of the 50 properties having been renovated since
1992. The Company believes the properties are generally in good condition with
no significant deferred maintenance. In addition, the Company believes the
properties are well located within their submarkets, with freeway access and
high visibility.
UPSIDE OPPORTUNITIES. The Company believes the LBA Portfolio presents
numerous opportunities to increase property value and cash flow through:
- Increasing Occupancy. As of January 1, 1998, the properties in the LBA
Portfolio were approximately 88.6% leased, providing the Company with
growth opportunities through increases in occupancy.
- Re-Leasing of Expiring Leases. The Company believes that in-place rents
for the properties in the LBA Portfolio are generally below the rates for
new leases in their markets, which allows for revenue growth as existing
leases expire and the space is renewed or re-leased at higher rental
rates.
PENDING FINANCING TRANSACTIONS
The Company is concurrently pursuing an underwritten offering of 23,000,000
shares of Common Stock (including 3,000,000 shares pursuant to the exercise of
the underwriters' overallotment option) and has issued 881,950 additional shares
of Common Stock to an institutional buyer. Each of these transactions (the
"Concurrent Offerings") were offered at a price to public of $28 5/16 per share.
The Company is negotiating a 12-month bridge loan facility to finance a
portion of the LBA Acquisition (the "Bridge Facility"). The Company's current
estimate is that the principal amount of the Bridge Facility will be $270
million, although the ultimate principal amount of the Bridge Facility may be
higher or lower. The Bridge Facility is expected to bear interest at a floating
rate based on the London Interbank Offered Rate plus 140 basis points. The
Company intends, as soon as it deems practicable, to repay the Bridge Facility
with proceeds from the issuance of long-term, fixed-rate debt. While the Company
is negotiating the terms of the Bridge Facility and has received preliminary
indications of interest to provide long-term, fixed rate debt, there
S-4
<PAGE> 7
can be no assurance as to when or whether such financings will occur. See "Risk
Factors -- Real Estate Financing Risks" in the accompanying Prospectus.
INTERIM AND ANNUAL FINANCIAL RESULTS
The Company reported funds from operations of approximately $21.4 million
for the fourth quarter of 1997 (compared to $19.3 million for the third quarter
of 1997) and $67.3 million for the year ended December 31, 1997. Revenue totaled
approximately $43.8 million for the fourth quarter of 1997 (compared to $36.9
million for the third quarter of 1997) and $135.4 million for the year ended
December 31, 1997. Net income was approximately $13.2 million for the fourth
quarter of 1997 (compared to $10.1 million for the third quarter of 1997) and
$39.6 million for the year ended December 31, 1997. On a same-store basis for
Properties owned by the Company at January 1, 1996, property net operating
income for 1997 increased approximately 7% over 1996.
PROPERTY OPERATIONS
The Company performs all property management for its portfolio. Since the
IPO, the Company has significantly increased the size of its property management
team to accommodate its recent and expected growth, including the addition of
three regional offices to bring its total to seven. Each regional office is run
by an asset or general manager who is responsible for the oversight of the
day-to-day operations of that region's properties. By maintaining a regionally
focused organizational structure, the Company believes it can achieve greater
economies of scale across its portfolio while continuing to improve its local
market expertise and knowledge of submarket trends.
In connection with the integration of the LBA Portfolio and other recent
acquisitions, the Company has upgraded its information and accounting systems
and hired a Chief Accounting Officer with over 12 years of experience in real
estate accounting. See "Management." The Company expects to hire additional
corporate and property level employees, including current on-site personnel
involved with the LBA Portfolio, to further facilitate the integration of the
LBA Acquisition. In addition, the Company's construction and development
department includes seven specialists devoted exclusively to renovations,
expansions, and improvements of the Properties.
Since the IPO, the Company has added ten leasing professionals and 80% of
its Properties are currently leased in-house. The Company believes that its
in-house leasing program will continue to generate cost savings and revenue
increases by reducing third-party leasing commissions and allowing the Company
to closely monitor its asking rents and leasing terms. Following the closing of
the LBA Acquisition, the Company expects to bring a substantial portion of the
third-party leasing of the LBA Portfolio in-house.
S-5
<PAGE> 8
The following chart shows the current management structure for the
Company's property operations:
<TABLE>
<S> <C>
--------------------------------
ANDREW J. SOBEL
Executive Vice President
Director of Property Operations
--------------------------------
|
|
-------------------------------------------------------------------------------------------
| | |
| | |
- ----------------------------- --------------------------------------- --------------------------------------------------
ROBERT C. PEDDICORD RANDY J. NOBLITT HERBERT L. PORTER
Senior Vice President-Leasing Senior vice President-Asset Management Senior Vice President-Construction and Development
- ----------------------------- --------------------------------------- --------------------------------------------------
| | |
| | |
- ----------------------------- --------------------------------------- --------------------------------------------------
Leasing Representatives Asset Managers Construction Managers
(10) (6) (5)
- ----------------------------- --------------------------------------- --------------------------------------------------
|
|
---------------------------------------
Property Level Employees
---------------------------------------
</TABLE>
THE OFFERING
All of the shares of Common Stock offered hereby are being sold by the
Company.
<TABLE>
<S> <C>
Common Stock offered........................... 1,303,965 shares
Common Stock outstanding after the Offering.... 61,209,499 shares (1)
Use of Proceeds................................ Purchase of the LBA Portfolio, repayment of
indebtedness and working capital. See "Use of
Proceeds."
New York Stock Exchange Symbol................. "ARI"
</TABLE>
- ---------------
(1) Includes the 23,881,950 shares of Common Stock expected to be issued in the
Concurrent Offerings. See "-- Recent Developments -- Pending Financing
Transactions." Does not include (i) 3,346,738 shares of Common Stock that
may be issued upon the exchange of OP Units which are issued and
outstanding, (ii) 1,302,667 shares of Common Stock subject to options
granted under the Company's Stock Incentive Plan, (iii) the 2,500,000 shares
that will be issuable upon exercise of the warrants to be issued in
connection with the LBA Acquisition or (iv) shares of Common Stock that may
be issued upon the exchange of up to $35.0 million of OP Units which may be
issued as part of the purchase price of the LBA Acquisition.
S-6
<PAGE> 9
THE COMPANY
GENERAL
The Company is a self-administered and self-managed REIT engaged in owning,
acquiring, managing, leasing and renovating commercial properties in Southern
California. As of January 31, 1998, the Company owned a portfolio of 77
Properties containing approximately 11.2 million rentable square feet. All of
the Properties are located in Southern California, with 63 in suburban Los
Angeles County, six in Orange County, four in San Diego County, two in Ventura
County and two in Kern County. As of January 1, 1998, the Company's portfolio of
77 Properties was approximately 82.6% leased (86.1% leased if the four
properties under renovation are excluded).
In addition, the Company has entered into a contract to acquire a portfolio
of 50 primarily office and R&D/industrial properties located in Southern
California, aggregating approximately 5.2 million rentable square feet, for a
purchase price of approximately $614.5 million (of which up to $35.0 million may
be paid, at the seller's option, in OP units). In connection with the
acquisition of the LBA Portfolio, the Company will also issue warrants to
purchase 2.5 million shares of Common Stock, at a price of $29.59 per share,
subject to adjustment. The LBA Portfolio consists of 34 office properties
containing approximately 3.6 million rentable square feet, 15 R&D/industrial
properties containing approximately 1.5 million rentable square feet, and one
retail property containing 144,225 rentable square feet. As of January 1, 1998,
the office and R&D/industrial properties in the LBA Portfolio were approximately
86.6% and 94.2% leased, respectively.
Management of the Company believes that the LBA Acquisition will provide a
number of important strategic benefits to the Company. Upon completion of the
LBA Acquisition, the Company will be the largest publicly traded owner of office
space in Southern California, as measured by total net rentable square feet
owned, with a portfolio of 127 properties containing approximately 16.4 million
rentable square feet. Many of the properties in the LBA Portfolio are located in
submarkets where the Company already has a significant concentration of owned
assets, allowing the Company to further benefit from the competitive advantages
associated with economies of scale and submarket strength, including superior
knowledge of local tenant space needs and the potential for additional leverage
in the landlord-tenant relationship. In addition, the LBA Portfolio provides the
Company with a significant concentration of R&D/industrial properties in markets
where it already owns office properties, allowing the Company to access new
growth opportunities in a complementary property sector and to offer more space
alternatives to meet tenant needs.
The Company intends to fund the LBA Acquisition with the proceeds of this
Offering, the Concurrent Offerings and the Bridge Facility and expects to
complete this acquisition in the first quarter of 1998. The completion of the
LBA Acquisition is subject to customary closing conditions and, therefore, there
can be no assurance that the LBA Acquisition will close.
From January 1, 1997, through January 31, 1998, the Company acquired 43
office properties consisting of approximately 5.8 million rentable square feet
in Southern California, for a Total Acquisition Cost of approximately $792.9
million.
Based upon its evaluation of market conditions, the Company believes that
certain economic fundamentals are present in Southern California which enhance
the Company's ability to achieve its business objectives by providing an
attractive environment for owning, acquiring and operating suburban office
properties. Specifically, the Company believes that the limited construction of
new office properties in the Southern California region since 1992 coupled with
an improving Southern California economy will continue to result in increased
demand for office space and positive net absorption in the Southern California
region, particularly in the selected submarkets where most of the Properties are
located.
The Company operates from its Beverly Hills, California headquarters and is
a fully integrated real estate company with in-house expertise in acquisitions,
finance, asset management, leasing and construction. The Company's founders,
Richard S. Ziman and Victor J. Coleman, along with the other eight senior
officers of the Company, have an average of more than 14 years of experience in
the real estate industry. See "Management."
S-7
<PAGE> 10
The following table sets forth certain information regarding the Properties
and the LBA Portfolio, combined by region:
<TABLE>
<CAPTION>
PERCENTAGE OF
APPROXIMATE PERCENTAGE OF TOTAL
NUMBER OF NET RENTABLE TOTAL NET RENTABLE ANNUALIZED ANNUALIZED
LOCATION PROPERTIES SQUARE FEET SQUARE FEET OCCUPANCY BASE RENT(1) BASE RENT
- --------------------------------- ------------ ------------------ --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Los Angeles County
Los Angeles West..... 26 4,536,913 27.6% 79.1% $ 77,722 32.9%
Los Angeles North.... 27 2,358,388 14.3% 83.2% 36,959 15.6%
Los Angeles South.... 13 1,664,765 10.1% 83.8% 21,957 9.3%
Los Angeles
Central........... 3 608,789 3.7% 88.6% 10,964 4.6%
Orange County.......... 21 3,317,302 20.2% 87.1% 41,067 17.4%
San Diego County....... 20 2,330,948 14.2% 93.1% 28,773 12.2%
Ventura County......... 3 436,706 2.7% 83.2% 5,747 2.4%
Riverside and San
Bernardino
Counties............. 12 979,314 5.9% 82.3% 8,770 3.7%
Kern County............ 2 216,522 1.3% 94.4% 4,444 1.9%
--- ---------- ----- ---- -------- -----
Total/Weighted
Average......... 127 16,449,647 100.0% 84.5% $236,403 100.0%
=== ========== ===== ==== ======== =====
</TABLE>
- ---------------
(1) Annualized base rent is calculated as monthly contractual base rent under
existing leases as of January 1, 1998, multiplied by 12; for those leases
where rent has not yet commenced or which are in a free rent period, the
first month in which rent is received is used to determine Annualized Base
Rent.
BUSINESS AND GROWTH STRATEGIES
The Company's primary business objectives are to maximize growth in cash
flow and to enhance the value of its portfolio in order to maximize total return
to its stockholders. The Company believes it can achieve these objectives by
continuing to implement its business strategies and by capitalizing on the
external and internal growth opportunities described below. The Company also
believes, based on its evaluation of market conditions, that a number of factors
will enhance its ability to achieve its business objectives, including (i) the
continuing improvement of the Southern California economy and (ii) the limited
construction of new office properties in the Southern California region due to
the substantial cost to develop new office properties compared to current
acquisition prices and substantial building construction limitations in many
submarkets, which provides opportunities to maximize occupancy rates, rental
rates and overall portfolio value.
BUSINESS STRATEGIES
The Company's primary business strategies are to actively manage its
portfolio and to acquire underperforming office and R&D/industrial properties,
properties in need of renovation or properties which provide attractive yields
with stable cash flow in submarkets where it can utilize its local market
expertise and extensive real estate experience. When market conditions permit,
the Company may also develop new properties in submarkets where it has local
market expertise.
Based on its historical activities and its knowledge of the local
marketplace, the Company believes that the Southern California region offers
opportunities for well-capitalized, experienced owners of real estate with
extensive local market expertise to take advantage of opportunities to acquire
additional office properties at attractive prices and develop office properties,
when feasible, at attractive returns. Through seven regional offices, the
Company implements its business strategies by: (i) emphasizing tenant
satisfaction and retention and employing intensive property marketing programs;
(ii) utilizing a multidisciplinary approach to acquisition, management, leasing
and renovation activities that is designed to coordinate decision-making and
enhance responsiveness to market opportunities and tenant needs; and (iii)
implementing cost control management and systems that capitalize on economies of
scale arising from the size and location of the Company's portfolio. The Company
believes that the implementation of these operating practices has led to the
increased occupancy rates and rental revenue of its existing portfolio.
S-8
<PAGE> 11
Aggressive Leasing. The concentration of many of the Properties within
certain office submarkets and the Company's relationships with a broad array of
tenants and brokers enable the Company to pursue aggressive leasing strategies,
to effectively monitor the office space requirements of existing and potential
tenants, and to offer tenants a variety of space alternatives across its
portfolio. In an effort to realize cost savings and exercise more control over
lease negotiations the Company has implemented in-house leasing programs for
approximately 80% of the Properties in selected submarkets in which it has a
substantial market presence. The Company continues, however, to employ
third-party broker listings in the submarkets in which it has a less significant
market presence.
Integrated Decision-making and Responsiveness. In addition to the location
and quality of the Properties, management generally credits its ability to
maintain its occupancy levels to the coordination of its decision-making team.
Acquisition, renovation, management and leasing activities are coordinated to
enhance responsiveness to market opportunities and tenant needs. The
acquisition, leasing and renovation teams work closely with the Company's senior
management, from the initial meetings with prospective tenants or sellers and
throughout the negotiation process. This integrated approach permits the Company
to analyze the economic terms and costs (including tenant build-out and
retrofitting costs) for each lease on a timely and efficient basis throughout
lease negotiations. With respect to acquisitions, the Company can quickly
analyze the costs of upgrades and lease-up potential. The Company is able to
commit to leasing and acquisition terms quickly, facilitate timely deal
execution and build-out of space for prospective tenants and minimize downtime
between lease rollovers.
Cost Control Operating Efficiencies. The size and geographic location of
the Company's portfolio permit it to enhance portfolio value by lowering
operating costs and expenses, in comparison to single-site ownership and
management. The Company seeks to capitalize on the economies of scale which
result from the geographic focus of the portfolio, the ownership of multiple
properties within certain submarkets and the maintenance of a centralized
accounting system for cost control at each of the Properties.
GROWTH STRATEGIES
External Growth: Based on its own historical activities and its knowledge
of the local marketplace, the Company believes that opportunities continue to
exist to acquire additional office properties that: (i) provide attractive
initial yields with significant potential for growth in cash flow; (ii) are in
desirable locations within submarkets which the Company believes have economic
growth potential; and/or (iii) are underperforming or need renovation, and
therefore provide opportunities for the Company to increase the cash flow and
value of such properties through renovation, active management and aggressive
leasing. Since January 1, 1997, the Company has acquired 43 office properties
containing approximately 5.8 million rentable square feet for a Total
Acquisition Cost of approximately $792.9 million.
The Company intends to continue to acquire office properties within
submarkets in Southern California which the Company believes present
opportunities for long-term stable and rising rental rates due to employment
growth, population movements within the region and restrictions on new
development. The Company generally targets properties which are underperforming
or need renovation and offer opportunities for the Company to implement its
value-added strategy to increase cash flow.
The Company believes it has certain competitive advantages which enhance
its ability to identify and capitalize on acquisition opportunities, including:
(i) management's significant local market expertise, experience and knowledge of
properties, submarkets and potential tenants within the Southern California
region; (ii) management's long-standing relationships with tenants, real estate
brokers and institutional and other owners of office and R&D/industrial
properties; (iii) its fully integrated real estate operations which allow the
Company to respond quickly to acquisition opportunities; (iv) its access to
capital as a public company; (v) its ability to acquire properties in exchange
for OP Units or Common Stock if the sellers so desire; and (vi) management's
reputation as an experienced purchaser of commercial properties in Southern
California which has the ability to effectively close transactions. The Company
may also seek to take advantage of management's development expertise to develop
office and R&D/industrial space in selected submarkets when market conditions
support such development.
S-9
<PAGE> 12
Internal Growth: The Company believes that opportunities exist to increase
cash flow from its existing portfolio and that such opportunities will be
enhanced as the Southern California office market continues to improve. The
Company intends to pursue internal growth by: (i) continuing to maintain and
improve occupancy rates through active management and aggressive leasing; (ii)
realizing fixed contractual base rental increases or increases tied to indices
such as the Consumer Price Index; (iii) re-leasing space as leases expire at
increasing market rents which are expected to result over time from increased
demand for office space in Southern California; (iv) controlling operating
expenses through its cost control management and systems; (v) capitalizing on
economies of scale arising from the size and geographic focus of its portfolio;
and (vi) increasing revenue generated from parking facilities at certain
Properties where the Company is currently offering free parking as an amenity or
charging below market rates.
(i) Maintaining and improving occupancy rates: The Company believes that
it has been successful in attracting, expanding and retaining a
diverse tenant base by actively managing its office properties with an
emphasis on tenant retention and satisfaction. The Company strives to
be responsive to the needs of individual tenants through its on-site
professional management staff and by providing tenants with
alternative space within the Company's portfolio to accommodate their
changing space requirements. The Company's success in maintaining and
improving occupancy rates is demonstrated, in part, by the number of
existing tenants which have renewed or released their space, leased
additional space to support their expansion needs, or moved to other
space within the Company's portfolio. The Company also seeks to
improve occupancies by aggressively marketing available space within
its portfolio. In 1997, the Company signed 315 leases for
approximately 1.1 million rentable square feet.
(ii) Re-leasing space as leases expire at increasing market rents:
Although there can be no assurances in this regard, the Company
believes that as the office space market in Southern California
continues to improve, there will be increasing demand for office
space and declining vacancies which are expected to result over time
in increasing market rents. The Company believes it will have
significant opportunities to increase cash flow during such periods
of increasing market rents by renewing or re-leasing space as leases
expire at the increased market rents.
(iii) Cost control management and systems: The Company seeks to lower
operating expenses through cost control management that capitalizes
on economies of scale opportunities resulting from the size and
location of the Company's portfolio. The Company focuses on cost
control in various areas of operations. For example, the Company is
seeking to significantly lower its utility costs, which constitute
over 25% of the operating costs of most of the Properties, through
the portfolio-wide installation of energy enhancement technologies,
which include lighting retrofit, replacement of heating, ventilation
and air conditioning systems, and computer-driven energy management
systems which monitor and react to the climatic requirements of
individual Properties.
(iv) Capitalizing on economies of scale: In order to capitalize on
economies of scale arising from the size and geographic focus of the
Company's portfolio, the Company's property and asset managers are
responsible for several Properties, which spreads administrative
costs over such Properties and reduces per square foot administrative
expense. In addition, the Company believes that parking operations,
building and other services and tenant improvements purchased on a
portfolio-wide basis will facilitate further economies of scale.
(v) Revenue from parking facilities: The Company owns or leases parking
facilities which are attached or adjacent to many of the Properties.
The Company currently provides free parking to tenants at several of
the Properties as an amenity, and charges tenants at the remaining
Properties at or below market rates for parking. If the demand for
Southern California office space increases and occupancy rates rise,
which the Company believes is the trend, the Company believes that
there may be opportunities to generate additional revenue from the
parking facilities associated with its Properties by charging for
parking which is currently provided for free, increasing below market
rates and maintaining its arrangements with a limited number of
third-party operators of the Company's parking facilities.
S-10
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting the
underwriting discounts and commissions and estimated expenses of the Offering,
are estimated to be approximately $35.1 million. The net proceeds to the Company
from the Concurrent Offerings, after deducting the underwriting discounts and
commissions and estimated expenses of the Concurrent Offerings are estimated to
be approximately $641.9 million. The Company intends to use all of the net
proceeds from the Offering and the Concurrent Offerings along with the proceeds
from the Bridge Facility to fund the purchase of the LBA Portfolio, to repay a
portion of the Company's indebtedness and for working capital.
Pending application of net proceeds, the Company will invest such portion
of the net proceeds in interest-bearing accounts and short-term,
interest-bearing securities, which are consistent with the Company's continuing
to qualify for taxation as a REIT.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
The Common Stock began trading on the NYSE on October 4, 1996 under the
symbol "ARI." On February 18, 1998, the last reported sales price per share of
Common Stock on the NYSE was $28 3/8, and there were approximately 142 holders
of record of the Common Stock. The table below sets forth the quarterly high and
low closing sales price per share of Common Stock reported on the NYSE and the
distributions declared per share by the Company with respect to each such
period.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
--- --- -------------
<S> <C> <C> <C>
1996
-----------------------------------------------------
Fourth Quarter (from October 9)...................... $27 5/8 $22 $0.36(1)
1997
-----------------------------------------------------
First Quarter........................................ 29 1/2 26 1/4 0.40
Second Quarter....................................... 27 3/8 23 3/4 0.40
Third Quarter........................................ 31 3/8 25 3/16 0.40
Fourth Quarter....................................... 32 1/4 28 5/8 0.40
1998
-----------------------------------------------------
First Quarter (through February 18).................. 30 7/8 27 9/16
</TABLE>
- ---------------
(1) The Company paid a distribution of $.36 per share of Common Stock on January
15, 1997, to stockholders of record on December 31, 1996, for the period
from October 9, 1996 (the closing of the IPO) through December 31, 1996,
which is approximately equivalent to a quarterly distribution of $.40 and an
annual distribution of $1.60 per share of Common Stock.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes, other than capital gain
dividends, will be taxable to stockholders as ordinary dividend income. Capital
gain dividends generally will be treated as long-term capital gain. The Company
has determined that for federal income tax purposes, approximately $1.45 per
share (or approximately 91%) of the $1.60 per share distribution paid for 1997
represented ordinary dividend income to stockholders in 1997, with the remainder
of the distribution to be attributed to 1998. In order to avoid corporate income
taxation of the earnings that it distributes, the Company must make annual
distributions to stockholders of at least 95% of its REIT taxable income
(determined by excluding any net capital gain), which the Company anticipates
will be less than its share of cash available for distribution. Under certain
circumstances, the Company may be required to make distributions in excess of
cash available for distribution in order to meet such distribution requirements.
In such a case, the Company may find it necessary to arrange for short-term (or
possibly long-
S-11
<PAGE> 14
term) borrowings or to raise funds through the issuance of preferred shares or
additional shares of Common Stock.
Future distributions by the Company will be at the discretion of the Board
of Directors and will depend on the actual funds from operations of the Company,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code of 1986, as
amended (see "Federal Income Tax Considerations -- Taxation of the Company" in
the accompanying Prospectus), economic conditions and such other factors as the
Board of Directors deems relevant. See "Risk Factors -- Changes in Policies
Without Stockholder Approval" in the accompanying Prospectus.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1997 on a historical basis. The information set
forth in the table should be read in connection with the financial statements
and notes thereto incorporated by reference in the accompanying Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
(IN THOUSANDS)
<S> <C>
Debt:
Mortgage loans............................................................ $180,000
Lines of credit........................................................... 45,900(1)
Minority interests.......................................................... 47,178
Stockholders' equity
Preferred stock, $.01 par value; 20,000,000 shares authorized; none issued
and outstanding........................................................ --
Common stock, $.01 par value; 100,000,000 shares authorized; 35,442,833
issued and outstanding................................................. 354
Additional paid-in capital................................................ 667,493
-------
Total stockholders' equity............................................. 667,847
-------
Total capitalization.............................................. $940,925
=======
</TABLE>
- ---------------
(1) Balance on the lines of credit as of January 31, 1998 was $287,950,000.
S-12
<PAGE> 15
SELECTED FINANCIAL DATA
The following table sets forth (i) selected consolidated historical
financial data for the Company as of and for the nine months ended September 30,
1997, as of December 31, 1996 and for the period October 9, 1996 (the date of
the Company's commencement of operations as a public REIT) to December 31, 1996,
and (ii) selected combined historical financial data for the Arden Predecessors
for the period January 1, 1996 to October 8, 1996.
The selected consolidated historical balance sheet and operating data of
the Company as of December 31, 1996 and for the period from October 9, 1996,
(the date of the Company's commencement of operations as a public REIT) to
December 31, 1996 and the selected combined historical operating data of the
Arden Predecessors for the period January 1, 1996 to October 8, 1996 have been
derived from the respective historical consolidated and combined financial
statements audited by Ernst & Young LLP, independent auditors. The selected
financial data as of and for the nine months ended September 30, 1997 was
derived from unaudited financial statements. The following data should be read
in conjunction with (i) the pro forma condensed consolidated financial
statements and notes thereto of the Company; (ii) the historical consolidated
and combined financial statements and related notes thereto for the Company and
the Arden Predecessors; and (iii) "Management's Discussion and Analysis of
Financial Condition and Results of Operations," each included in the Company's
filings under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which are incorporated by reference in the accompanying Prospectus.
S-13
<PAGE> 16
<TABLE>
<CAPTION>
COMPANY ARDEN PREDECESSORS
-------------------------------------- ------------------
NINE MONTHS OCTOBER 9, 1996 JANUARY 1, 1996
ENDED TO TO
SEPTEMBER 30, 1997 DECEMBER 31, 1996 OCTOBER 8, 1996
------------------ ----------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING DATA:
REVENUE:
Rental........................................... $80,740 $ 17,041 $32,287
Tenant reimbursements............................ 3,593 803 2,031
Parking, net of expenses......................... 5,267 1,215 3,692
Other............................................ 2,014 513 2,455
------- -------- -------
Total revenue............................. 91,614 19,572 40,465
------- -------- -------
EXPENSES:
Property expenses................................ 29,175 6,005 14,224
General and administrative....................... 2,828 753 1,758
Interest......................................... 13,723 1,280 24,521
Loss on valuation of derivative.................. 3,111 -- --
Depreciation and amortization.................... 13,261 3,108 5,264
------- -------- -------
Total expenses............................ 62,098 11,146 45,767
------- -------- -------
Equity in net (loss) income of noncombined
entities......................................... -- -- (336)
------- -------- -------
Income (loss) before minority interest and
extraordinary items.............................. 29,516 8,426 (5,638)
Minority interests' share of loss of Arden
Predecessors..................................... -- -- 721
Minority interest.................................. (3,105) (993) --
------- -------- -------
Income (loss) before extraordinary item............ 26,411 7,433 (4,917)
------- ------- --------
Extraordinary (loss) gain on early extinguishment
of debt, net of minority interests' share........ -- (13,105) 1,877
------- -------- -------
Net income (loss).................................. $26,411 $ (5,672) $(3,040)
======= ======== =======
Weighted average number of shares outstanding...... 25,440 21,680
======= ========
Net income (loss) per common share:
Income before extraordinary item................. $ 1.04 $ 0.34
Extraordinary item-loss on early extinguishment
of debt........................................ -- (0.60)
------- --------
Net income (loss) per common share............... $ 1.04 $ (0.26)
======= ========
Cash distributions declared per common share....... $ 1.20 $ 0.36
======= ========
</TABLE>
S-14
<PAGE> 17
<TABLE>
<CAPTION>
COMPANY
----------------------------------------
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Commercial office properties-net of accumulated depreciation.... $925,539 $ 529,568
Total assets.................................................... 978,101 551,256
Mortgage loans payable and unsecured lines of credit............ 225,900 155,000
Total liabilities............................................... 263,076 173,612
Minority interest............................................... 47,178 45,667
Total stockholders' equity...................................... 667,847 331,977
</TABLE>
<TABLE>
<CAPTION>
COMPANY ARDEN PREDECESSORS
-------------------------------------- ------------------
NINE MONTHS OCTOBER 9, 1996 JANUARY 1, 1996
ENDED TO TO
SEPTEMBER 30, 1997 DECEMBER 31, 1996 OCTOBER 8, 1996
------------------ ----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OTHER DATA:
Funds from Operations(1):
Income (loss) before minority interest and
extraordinary items........................... $ 29,516 $ 8,426 $ (5,638)
Loss on valuation of derivative................. 3,111 -- --
Depreciation and amortization................... 13,261 3,108 5,264
--------- --------- ---------
Funds from Operations........................... 45,888 11,534 (374)
Company's percentage share........................ 89.5% 88.2% --
--------- --------- ---------
Company's share of Funds from Operations.......... $ 41,070 $ 10,173 $ (374)
========= ========= =========
Weighted average number of shares outstanding (in
thousands)...................................... 25,440 21,680 N/A
Cash flows from operating activities.............. 27,682 8,665 5,221
Cash flows from investing activities.............. (407,613) (164,763) (119,083)
Cash flows from financing activities.............. 379,244 163,730 122,074
Number of Properties owned at period end.......... 58 34 22
Gross rentable square feet of Properties owned at
end of period (in thousands).................... 8,726 5,443 3,739
Leased percentage for Properties owned at end of
period.......................................... 85% 85% 88%
</TABLE>
- ---------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 (the "White Paper") defines Funds from Operations as net income
(loss) (computed in accordance with generally accepted accounting principles
("GAAP"), excluding gains (or losses) from debt restructuring, plus real
estate related depreciation and amortization. Management believes Funds from
Operations is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors with an
understanding of the ability of the Company to incur and service debt, to
make capital expenditures and to fund other cash needs. The Company's
computation of Funds from Operations may differ from the methodology for
calculating Funds from Operations utilized by other equity REITs and,
accordingly, may not be comparable to such other REITs. Funds from
Operations should not be considered as an alternative to net income
(determined in accordance with GAAP), as an indication of the Company's
financial performance or as an alternative to cash flows from operating
activities (determined in accordance with GAAP) as a measure of the
Company's liquidity.
S-15
<PAGE> 18
SOUTHERN CALIFORNIA ECONOMY AND OFFICE MARKETS
The Company believes that current and forecast trends affecting Southern
California have created and will continue to create a favorable economic
environment in the suburban Southern California office markets where
substantially all of the Properties are located. First, the Company believes
that the supply of office space in Southern California is unlikely to
significantly increase over the short term in large part because it is not
economically feasible to develop new office space based on rental rates
currently attainable in Southern California office markets. Second, the recent
economic restructuring of many of Southern California's primary office-using
sectors including the entertainment, export/import, managed health care, high
technology, telecommunications, and civilian and military aerospace and defense
industries has caused growth in demand for office space. Third, demand for
suburban office space relative to the level of supply has led to higher
occupancy rates and a trend towards higher rental rates which are supportable in
the office markets where the Properties and the LBA Portfolio are located.
Finally, patterns of residential relocation to suburban areas due in part to the
public perception of greater personal security and to the availability of
greater recreational and residential amenities in suburban areas, coupled with a
heightened preference for living in close proximity to work and employers'
resultant access to a broader, more skilled local labor force have fueled growth
of suburban office property demand. The Company believes that these factors and
other specific economic indicators discussed below suggest a continued
strengthening of the Southern California economy. Given the quality and location
of its Properties and the LBA Portfolio, the Company believes it is
competitively positioned to capitalize on these economic trends and the
resulting increasing demand for suburban office space.
SOUTHERN CALIFORNIA ECONOMY
Overview. The Company believes that the office markets in Southern
California, and particularly suburban Los Angeles County, Orange County and San
Diego County have improved and will be excellent markets in which to own and
operate office and R&D/industrial properties over the long term.
The seven counties in which the Properties and the LBA Portfolio are
located include Los Angeles, Orange, San Diego, Ventura, Kern, Riverside and San
Bernardino which collectively comprise over 50% of the statewide population and
employment base in California. Data from the U.S. Bureau of Labor Statistics
indicates that the unemployment rate in these counties peaked in 1993 during the
height of the 1990 to 1993 recessionary period in Southern California. Recently,
however, these counties experienced a gradual economic recovery marked by
falling unemployment rates beginning in 1994 which, according to The 1996
Economic Report of the Governor of California (the "1996 Economic Report"), was
precipitated by growth in the services and trade employment sectors, among
others, and a less pronounced rate of decline in defense related activities in
Southern California. Since 1993, the five-county Los Angeles area economy has
grown at an annual rate of over 3.9%, and, according to the Economic Development
Corporation of Los Angeles (the "LAEDC") is forecast to have grown at a 6.3%
rate during 1997 (as compared to 3.5% for the United States as a whole).
S-16
<PAGE> 19
GROSS DOMESTIC PRODUCT
FOR FIVE-COUNTY LOS ANGELES AREA
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1990 1991 1992 1993 1994 1995 1996 1997
372.6 376.4 389 296.2 405 471.5 445.2 473.4
</TABLE>
Source: California Department of Finance, LAEDC
According to the U.S. Bureau of Labor Statistics, Los Angeles County,
Orange County and San Diego County added 179,389 non-farm jobs between January
1, 1997, and September 30, 1997, bringing total employment in these three
counties to approximately 6.8 million. Accordingly, trends of decreasing
unemployment continued in Southern California during 1997. In Los Angeles County
the September 1997 unemployment rate was 6.6%, down 4.2% from its recessionary
high of 10.8% (not seasonally adjusted) in July 1992.
SOUTHERN CALIFORNIA UNEMPLOYMENT RATES
<TABLE>
<CAPTION>
MEASUREMENT PERIOD LOS ANGELES
(FISCAL YEAR COVERED) COUNTY ORANGE COUNTY SAN DIEGO COUNTY
<S> <C> <C> <C>
1992 9.8% 6.8% 7.3%
1993 9.8 6.8 7.7
1994 9.4 5.7 7.0
1995 7.9 5.1 6.4
1996 8.2 4.1 5.3
1997 6.6 3.5 4.6
</TABLE>
Source: Bureau of Labor Statistics
The LAEDC has forecast a total increase in non-farm employment for the
period from 1996 to 2005 of 19.9% and 19.5% for Los Angeles County and Orange
County, respectively, representing an average annual growth rate of 2.0% for
each. Overall, the five-county Los Angeles region is expected to experience
similar growth with an 18.6% increase in employment over the same time period.
The current economic expansion, in particular, differs from previous Southern
California expansions in that the defense industry is no longer the
S-17
<PAGE> 20
driving force for growth. Instead, employment growth has been driven primarily
by the service sectors of the economy. The following chart summarizes the
historical and projected employment growth for Southern California.
SOUTHERN CALIFORNIA EMPLOYMENT TRENDS
1980-1996 (ACTUAL)--1996-2000 (FORECASTS)
<TABLE>
<CAPTION>
'FINANCE,
INSURANCE
MEASUREMENT PERIOD WHOLESALE AND REAL
(FISCAL YEAR COVERED) SERVICES MANUFACTURING RETAIL TRADE TRADE ESTATE'
<S> <C> <C> <C> <C> <C>
1980 1700.00 1350.00 1150.00 400.00 625.00
1982 1970.00 1360.00 1220.00 425.00 660.00
1984 2240.00 1370.00 1290.00 450.00 695.00
1986 2510.00 1380.00 1360.00 475.00 730.00
1988 2780.00 1390.00 1430.00 500.00 765.00
1990 3050.00 1400.00 1500.00 525.00 800.00
1992 3116.67 1250.00 1475.00 512.50 775.00
1994 3183.33 1100.00 1450.00 500.00 750.00
1996 3250.00 1150.00 1475.00 525.00 766.67
1998 3350.00 1150.00 1487.50 525.00 783.33
2000 3450.00 1150.00 1500.00 525.00 800.00
</TABLE>
Source: Cushman & Wakefield
S-18
<PAGE> 21
As primary office employment grows, office demand is expected to increase.
According to America's Office Economy prepared by Cognetics, Inc., Metropolitan
Los Angeles (which includes Los Angeles County, Ventura County and Orange
County), in which 71 of the Company's 77 Properties are located, is projected to
be the number one market in the United States for primary office employment
growth from 1996 to 2005, and San Diego is ranked 17th.
TOP 20 MARKETS FOR PRIMARY OFFICE
EMPLOYMENT GROWTH (1996-2005)
<TABLE>
<S> <C>
1. LOS ANGELES 11. Minneapolis-St. Paul
2. San Francisco-Oakland-San Jose 12. Boston
3. Atlanta 13. Denver-Boulder
4. Dallas-Ft. Worth 14. Seattle
5. Washington, DC-MD-VA 15. Miami-Ft. Lauderdale
6. Chicago 16. Orlando
7. Phoenix 17. SAN DIEGO
8. New York 18. Detroit
9. Houston-Galveston 19. Las Vegas
10. Tampa-St. Petersburg 20. Austin
</TABLE>
Source: Cognetics, Inc.
In addition to becoming a more diversified economy with a stronger emphasis
on the services and government sectors, according to the LAEDC, Los Angeles
County is a major center of international trade. According to the 1996 Economic
Report, Los Angeles County is also the nation's leading manufacturing center.
The five-county Los Angeles area is home to 26 Fortune 500 companies, and Los
Angeles County itself comprises over 40% of the nondurable manufacturing
employment, 95% of the motion picture employment and 56% of the aerospace
employment in California. The Los Angeles PMSA is the largest PMSA in the United
States (larger than both the New York City PMSA and the Chicago PMSA) and
accounts for approximately 28% of California's population and employment base.
Demand for office space in Los Angeles County is expected to remain strong as a
result of these characteristics.
International trade is another major component of the Los Angeles economy,
and while growth in international trade is difficult to attribute to specific
employment sectors, it is an indicator of the general strength of the local
economy. In 1994 the Los Angeles Customs District (which is primarily comprised
of the Los Angeles/Long Beach port complex and the Los Angeles International
Airport) surpassed New York/New Jersey as the nation's leading port. According
to the U.S. Department of Commerce, international trade passing through the Los
Angeles Customs District has increased from approximately $90.0 billion in 1988
to approximately $167.6 billion in 1996, representing over 12.0% of the total
trading volume in the United States.
S-19
<PAGE> 22
INTERNATIONAL TRADE THROUGH LOS ANGELES CUSTOMS DISTRICT
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997E 1998E
90 101.4 106 112.7 121.6 128.5 145.9 164.7 167.6 173.5 179.1
</TABLE>
SOUTHERN CALIFORNIA OFFICE MARKETS
In the past five years the underlying fundamentals of supply and demand in
the Southern California office markets have improved. The peak in available
supply occurred at the midpoint of the recession in 1991. Since that time, the
local economies have been recovering and the relationship between supply and
demand has resulted in declining direct vacancy rates in these markets. In each
of 1995 and 1996, net office absorption has more than doubled in the region, and
in the first two quarters of 1997 net office absorption was greater than the
average annual absorption for the last five years. With virtually no new office
construction in the region between 1994 and 1996, an influx of new companies and
growth of existing companies has led directly to lower vacancy rates and higher
absorption.
S-20
<PAGE> 23
The following chart illustrates absorption and vacancy rates in the
Southern California market between 1992 and September 1997:
SOUTHERN CALIFORNIA OFFICE MARKET
<TABLE>
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1997
1150 2550 275 975 3200 3200
</TABLE>
Source: Cushman & Wakefield
The current trend of net absorption and declining vacancy rates followed a
period during the late 1980s which was characterized by excess supply of
commercial real estate due, in part, to over-building. A variety of factors,
including the real estate recession and new federal banking regulations that
caused a reduction in available capital for real estate development, virtually
halted new office construction in Southern California for nearly five years. The
following chart illustrates the total office construction in Southern California
between 1987 and 1996.
SOUTHERN CALIFORNIA OFFICE CONSTRUCTION
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
19.4 13.6 15.1 12.9 11.9 2.7 0.2 0 0.4 0.3
</TABLE>
Source: Cushman & Wakefield
S-21
<PAGE> 24
PROPERTIES
GENERAL
The Company's Properties consist of 77 office properties containing
approximately 11.2 million rentable square feet. The Properties consist
primarily of suburban office properties and individually range from
approximately 13,400 to 598,000 rentable square feet. All of the Properties are
located in Southern California, with 63 located in suburban Los Angeles County,
six in Orange County, four in San Diego County, two in Ventura County, and two
in Kern County. The Company believes that the Properties have desirable
locations within established business communities and are well maintained. Of
the Company's 77 Properties, 58 have been built since 1980 and 18 have been
substantially renovated within the last five years. The average age of the
buildings is approximately 15 years. The Properties offer an array of amenities
including security, parking, conference facilities, on-site management, food
services and health clubs.
In addition, the Company has executed a contract to acquire the LBA
Portfolio, consisting of 50 properties including 34 office properties containing
approximately 3.6 million square feet, 15 R&D/industrial properties containing
approximately 1.5 million rentable square feet, and one retail property
containing 144,225 rentable square feet. All the properties in the LBA Portfolio
are located in Southern California, with six in Los Angeles County, 15 in Orange
County, 16 in San Diego County, one in Ventura County, and 12 in Riverside and
San Bernardino Counties. The properties included in the LBA Portfolio range from
approximately 12,000 to 451,000 rentable square feet and have an average age of
11 years. Of the 50 properties included in the LBA Portfolio, 45 have been built
since 1980 and 21 have been substantially renovated within the last five years.
Upon closing of the LBA Acquisition the Company will own a total of 127
primarily office and R&D/industrial properties consisting of approximately 16.4
million rentable square feet.
Management believes that the location, quality of construction and building
amenities, as well as the Company's reputation for providing a high level of
tenant service, have enabled the Company to attract and retain a diverse tenant
base. As of January 1, 1998, the Properties were 82.6% leased (86.1% leased if
the four properties under renovation are excluded) to approximately 2,050
tenants and the LBA Portfolio was 88.6% leased to approximately 570 tenants. As
of January 1, 1998, no one tenant represented more than 1.5% of the aggregate
Annualized Base Rent (as defined herein) of the Properties and the LBA Portfolio
combined and only four tenants individually represented more than 1.0% of such
aggregate Annualized Base Rent.
The Properties and LBA Portfolio are leased to a variety of local, national
and foreign businesses. Leases are typically structured for terms of three, five
or 10 years. Most of the leases are full service, gross leases under which
tenants typically pay for all real estate taxes and operating expenses above
those for an established base year or expense stop. Leases typically contain
provisions permitting tenants to renew at prevailing market rates. Under the
lease, the landlord is generally responsible for structural repairs. Most leases
do not permit early termination, however, certain leases permit the tenant to
terminate upon six months' notice after the third year of a five-year lease or
the fifth year of a 10-year lease, subject to the tenant's obligation to pay all
unamortized tenant improvements and leasing commissions, a penalty of three to
six months of additional rent, and any rent concessions provided, depending on
the lease terms. Finally, tenants generally pay directly (without regard to a
base year or expense stop) for overtime use of air conditioning and for on site
monthly employee and visitor parking.
Although the leases at the Properties and the LBA Portfolio primarily
consist of gross leases (which represented approximately 82% of the total
portfolio leased square footage as of January 1, 1998), they also include triple
net leases with a number of tenants. In general, the triple net leases require
the tenants to pay all real property taxes, insurance and expenses of
maintaining the leased space or property and have renewal and termination
provisions similar to those described above.
The Company's Properties are regionally managed under active central
control. All administration (including the formation and implementation of
policies and procedures), leasing, capital expenditures and construction
decisions are centrally administered at the Company's corporate office. The
Company employs asset managers to oversee and direct the day-to-day operations
of the Properties, as well as the on-site personnel, which may include a
manager, assistant manager and other necessary staff. Asset managers communicate
frequently with the Company's corporate offices to implement the Company's
policies and procedures.
The on-site staffing of each property is dictated by the property's size,
tenant profile, number of tenants and location. The Company contracts with third
parties for cleaning services, day porters, engineers and any other personnel
necessary to operate the Properties.
S-22
<PAGE> 25
The following table sets forth certain information regarding the Properties
and the LBA Portfolio as of January 1, 1998:
<TABLE>
<CAPTION>
PERCENTAGE
APPROXIMATE OF TOTAL
YEAR(S) NET PORTFOLIO
BUILT/ RENTABLE NET RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET SQUARE FEET
- ---------------------------------- ------------------------------------- ----------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
OFFICE
LOS ANGELES COUNTY
LOS ANGELES WEST
9665 Wilshire Beverly Hills/Century City Beverly Hills 1972/92-93 158,684 1.0%
Beverly Atrium Beverly Hills/Century City Beverly Hills 1989 61,314 0.4%
8383 Wilshire Beverly Hills/Century City Beverly Hills 1971/93 417,463 2.5%
120 Spalding Beverly Hills/Century City Beverly Hills 1984 60,656 0.4%
9100 Wilshire Beverly Hills/Century City Beverly Hills 1971/90 326,227 2.0%
Century Park Center Beverly Hills/Century City Los Angeles 1972/94 243,404 1.5%
10350 Santa Monica Beverly Hills/Century City Los Angeles 1979 42,292 0.3%
10351 Santa Monica Beverly Hills/Century City Los Angeles 1984 96,251 0.6%
Westwood Terrace Westwood/West Los Angeles Los Angeles 1988 135,943 0.8%
1950 Sawtelle Westwood/West Los Angeles Los Angeles 1988/95 103,772 0.6%
10780 Santa Monica Westwood/West Los Angeles Los Angeles 1984 92,486 0.6%
Wilshire Pacific Plaza Westwood/West Los Angeles Los Angeles 1976/1987 100,122 0.6%
World Savings Center(2)(3) Westwood/West Los Angeles Los Angeles 1983 469,115 2.8%
1100 Glendon(4)(5) Westwood/West Los Angeles Los Angeles 1965 282,013 1.7%
2730 Wilshire(6) Westwood/West Los Angeles Santa Monica 1985 55,080 0.3%
Carlsberg Corporate Center Westwood/West Los Angeles Santa Monica 1979 103,506 0.6%
1919 Santa Monica* Westwood/West Los Angeles Santa Monica 1991 44,096 0.3%
400 Corporate Pointe Marina Area/Culver City/LAX Culver City 1987 164,598 1.0%
600 Corporate Pointe* Marina Area/Culver City/LAX Culver City 1989 273,339 1.7%
Bristol Plaza Marina Area/Culver City/LAX Culver City 1982 84,014 0.5%
Skyview Center Marina Area/Culver City/LAX Los Angeles 1981,87/95 391,675 2.4%
5200 West Century(5) Marina Area/Culver City/LAX Los Angeles 1982 310,910 1.9%
Northpoint Marina Area/Culver City/LAX Los Angeles 1991 104,235 0.6%
The New Wilshire Park Mile/West Hollywood Los Angeles 1986 202,704 1.2%
145 South Fairfax Park Mile/West Hollywood Los Angeles 1984 54,429 0.3%
9201 Sunset Park Mile/West Hollywood Los Angeles 1963/92-95 158,585 1.0%
---------- ----
Subtotal/Weighted Average -- Los 4,536,913 27.6%
Angeles West
<CAPTION>
ANNUALIZED
BASE RENT
PERCENT LEASED ANNUALIZED PER LEASED
AS OF BASE RENT(1) NUMBER SQUARE
PROPERTY NAME JANUARY 1, 1998 ($000S) OF LEASES FOOT
- ---------------------------------- --------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
OFFICE
LOS ANGELES COUNTY
LOS ANGELES WEST
9665 Wilshire 90.4% $ 4,151 22 $ 28.95
Beverly Atrium 89.1% 1,341 10 24.55
8383 Wilshire 80.8% 6,668 124 19.78
120 Spalding 45.5% 1,054 12 38.22
9100 Wilshire 84.9% 5,289 73 19.10
Century Park Center 84.6% 4,326 79 21.01
10350 Santa Monica 93.6% 700 16 17.68
10351 Santa Monica 94.9% 1,584 16 17.33
Westwood Terrace 88.4% 3,117 23 25.94
1950 Sawtelle 92.2% 1,863 32 19.46
10780 Santa Monica 90.4% 1,610 30 19.26
Wilshire Pacific Plaza 68.1% 1,218 29 17.86
World Savings Center(2)(3) 86.1% 11,277 43 27.93
1100 Glendon(4)(5) 42.5% 2,974 136 24.81
2730 Wilshire(6) 78.9% 924 27 21.25
Carlsberg Corporate Center 94.6% 1,889 40 19.30
1919 Santa Monica* 96.3% 941 6 22.14
400 Corporate Pointe 95.4% 3,435 16 21.87
600 Corporate Pointe* 86.3% 4,293 20 18.21
Bristol Plaza 82.5% 1,213 22 17.52
Skyview Center 89.5% 5,699 42 16.25
5200 West Century(5) 30.2% 1,096 17 11.68
Northpoint 99.0% 3,261 6 31.62
The New Wilshire 84.7% 3,607 33 21.02
145 South Fairfax 96.7% 992 12 18.85
9201 Sunset 63.8% 3,200 57 31.64
----- ------- ----- -----
Subtotal/Weighted Average -- Los 79.1% 77,722 943 21.67
Angeles West
</TABLE>
S-23
<PAGE> 26
<TABLE>
<CAPTION>
PERCENTAGE
APPROXIMATE OF TOTAL
YEAR(S) NET PORTFOLIO
BUILT/ RENTABLE NET RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET SQUARE FEET
- ---------------------------------- ------------------------------------- ----------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
LOS ANGELES NORTH
Calabasas Commerce Center Simi/Conejo Valley Calabasas 1990 123,121 0.7%
Thousand Oaks Plaza Simi/Conejo Valley Thousand Oaks 1988 13,434 0.1%
Rancho Plaza Simi/Conejo Valley Thousand Oaks 1987 24,057 0.1%
Pennsfield Plaza Simi/Conejo Valley Thousand Oaks 1989 21,202 0.1%
Conejo Business Park Simi/Conejo Valley Thousand Oaks 1991 69,017 0.4%
Marin Corporate Center Simi/Conejo Valley Thousand Oaks 1986 51,360 0.3%
Evergreen Plaza Simi/Conejo Valley Thousand Oaks 1979/96 75,722 0.5%
5601 Lindero Canyon Simi/Conejo Valley Westlake 1989 105,830 0.6%
Renaissance Court Simi/Conejo Valley Westlake 1981/92 61,245 0.4%
Westlake Gardens Simi/Conejo Valley Westlake 1998 49,639 0.3%
6800 Owensmouth West San Fernando Valley Canoga Park 1986 80,014 0.5%
Woodland Hills Financial Center West San Fernando Valley Woodland Hills 1972/95 224,955 1.3%
Clarendon Crest West San Fernando Valley Woodland Hills 1990 43,063 0.3%
16000 Ventura Central San Fernando Valley Encino 1980/96 174,841 1.1%
Sumitomo Bank Building Central San Fernando Valley Sherman Oaks 1970/90-91 110,641 0.7%
Noble Professional Center Central San Fernando Valley Sherman Oaks 1985/93 51,828 0.3%
Sunset Pointe Plaza Valencia Newhall 1988 58,105 0.4%
303 Glenoaks East San Fernando Valley/Tri-Cities Burbank 1983/96 175,449 1.0%
Burbank Executive Plaza East San Fernando Valley/Tri-Cities Burbank 1983 60,395 0.4%
California Federal Building East San Fernando Valley/Tri-Cities Burbank 1978 82,467 0.5%
425 West Broadway East San Fernando Valley/Tri-Cities Glendale 1984 71,589 0.4%
535 Brand(5) East San Fernando Valley/Tri-Cities Glendale 1973/92 109,187 0.7%
Glendale Corporate Center East San Fernando Valley/Tri-Cities Glendale 1985 108,209 0.7%
70 South Lake East San Fernando Valley/Tri-Cities Pasadena 1982/94 100,133 0.6%
299 Euclid(5) East San Fernando Valley/Tri-Cities Pasadena 1983 73,400 0.4%
150 East Colorado* East San Fernando Valley/Tri-Cities Pasadena 1979/97 61,168 0.4%
5161 Lankershim* East San Fernando Valley/ North Hollywood 1985/97 178,317 1.1%
Tri-Cities ---------- ----
Subtotal/Weighted Average -- 2,358,388 14.3%
Los Angeles North
<CAPTION>
ANNUALIZED
BASE RENT
PERCENT LEASED ANNUALIZED PER LEASED
AS OF BASE RENT(1) NUMBER SQUARE
PROPERTY NAME JANUARY 1, 1998 ($000S) OF LEASES FOOT
- ---------------------------------- --------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
LOS ANGELES NORTH
Calabasas Commerce Center 100.0% $ 1,499 13 $ 12.17
Thousand Oaks Plaza 100.0% 208 6 15.46
Rancho Plaza 95.8% 344 19 14.93
Pennsfield Plaza 100.0% 375 11 17.67
Conejo Business Park 83.3% 1,024 24 17.80
Marin Corporate Center 98.6% 998 31 19.70
Evergreen Plaza 80.3% 1,066 37 17.52
5601 Lindero Canyon 100.0% 1,206 2 11.39
Renaissance Court 61.1% 710 13 18.97
Westlake Gardens 22.1% 262 3 23.85
6800 Owensmouth 84.1% 1,173 19 17.42
Woodland Hills Financial Center 88.1% 4,472 60 22.57
Clarendon Crest 84.7% 677 8 18.56
16000 Ventura 89.6% 2,917 45 18.62
Sumitomo Bank Building 89.4% 1,933 48 19.54
Noble Professional Center 92.3% 1,063 17 22.22
Sunset Pointe Plaza 95.7% 1,171 27 21.06
303 Glenoaks 98.3% 3,601 24 20.88
Burbank Executive Plaza 83.8% 1,090 9 21.54
California Federal Building 96.3% 1,661 9 20.91
425 West Broadway 95.2% 1,321 13 19.38
535 Brand(5) 33.6% 293 6 8.00
Glendale Corporate Center 72.6% 1,462 13 18.60
70 South Lake 94.4% 1,971 16 20.87
299 Euclid(5) 29.4% 402 1 18.60
150 East Colorado* 75.3% 796 15 17.29
5161 Lankershim* 83.5% 3,263 5 21.93
----- ------- ----- -----
Subtotal/Weighted Average -- 83.2% 36,958 494 18.84
Los Angeles North
</TABLE>
S-24
<PAGE> 27
<TABLE>
<CAPTION>
PERCENTAGE
APPROXIMATE OF TOTAL
YEAR(S) NET PORTFOLIO
BUILT/ RENTABLE NET RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET SQUARE FEET
- ---------------------------------- ------------------------------------- ----------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
LOS ANGELES SOUTH
4811 Airport Plaza(3) Long Beach Long Beach 1987/95 121,610 0.7%
4900/10 Airport Plaza(3) Long Beach Long Beach 1987/95 150,403 0.9%
5000 Spring(3) Long Beach Long Beach 1989/95 163,358 1.0%
100 West Broadway Long Beach Long Beach 1987/96 191,727 1.2%
1501 Hughes Way* Long Beach Long Beach 1983/97 77,060 0.5%
3901 Via Oro* Long Beach Long Beach 1986/97 53,195 0.3%
12501 East Imperial Highway Long Beach Norwalk 1978/94 122,175 0.7%
Grand Avenue Plaza El Segundo El Segundo 1979,80 84,500 0.5%
South Bay Centre Torrance Gardena 1984 202,830 1.3%
Harbor Corporate Center Torrance Gardena 1985 63,925 0.4%
Pacific Gateway II Torrance Torrance 1982/90 223,731 1.4%
Mariner Court Torrance Torrance 1989 105,436 0.6%
South Bay Technology Center Torrance Torrance 1984 104,815 0.6%
---------- ----
Subtotal/Weighted Average 1,664,765 10.1%
-- Los Angeles South
LOS ANGELES CENTRAL
Los Angeles Corporate Center San Gabriel Valley Monterey Park 1984,86 389,293 2.4%
Whittier Financial Center San Gabriel Valley Whittier 1967,82 135,415 0.8%
1370 Valley Vista San Gabriel Valley Diamond Bar 1988 84,081 0.5%
---------- ----
Subtotal/Weighted Average 608,789 3.7%
-- Los Angeles Central
ORANGE COUNTY
5832 Bolsa West County Huntington Beach 1985 49,355 0.3%
Huntington Beach Plaza I & II* West County Huntington Beach 1984/96 52,186 0.3%
City Centre West County Fountain Valley 1982 302,519 1.7%
Fountain Valley Plaza* West County Fountain Valley 1982 107,252 0.7%
3300 Irvine Avenue* Greater Airport Area Newport Beach 1981/97 74,224 0.5%
1821 Dyer Greater Airport Area Irvine 1980/88 115,061 0.7%
Von Karman Corporate Center* Greater Airport Area Irvine 1981/84 451,477 2.7%
1503 South Coast* Greater Airport Area Costa Mesa 1979/97 60,605 0.4%
Crown Cabot South County Laguna Niguel 1989 172,900 1.1%
One Venture* South County Irvine 1990/97 43,324 0.3%
Anaheim City Centre(3) Tri-Freeway Area Anaheim 1986/91 175,391 1.1%
625 The City* Tri-Freeway Area Orange 1985/97 139,806 0.8%
Orange Financial Center* Central County Orange 1985/95 305,439 1.9%
Centerpointe La Palma North County La Palma 1986,88,90 597,550 3.6%
Lambert Office Plaza* North County Brea 1986/97 32,807 0.2%
---------- ----
Subtotal/Weighted Average -- 2,679,896 16.3%
Orange County
<CAPTION>
ANNUALIZED
BASE RENT
PERCENT LEASED ANNUALIZED PER LEASED
AS OF BASE RENT(1) NUMBER SQUARE
PROPERTY NAME JANUARY 1, 1998 ($000S) OF LEASES FOOT
- ---------------------------------- --------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
LOS ANGELES SOUTH
4811 Airport Plaza(3) 100.0% $ 1,051 1 $ 8.64
4900/10 Airport Plaza(3) 100.0% 1,173 1 7.80
5000 Spring(3) 95.5% 3,010 28 19.30
100 West Broadway 94.4% 3,677 29 20.31
1501 Hughes Way* 59.5% 592 2 12.91
3901 Via Oro* 9.9% 71 1 13.44
12501 East Imperial Highway 99.6% 2,081 6 17.10
Grand Avenue Plaza 88.2% 1,106 5 14.84
South Bay Centre 82.4% 2,910 32 17.40
Harbor Corporate Center 80.2% 721 17 14.07
Pacific Gateway II 69.9% 2,953 29 18.87
Mariner Court 84.5% 1,523 31 17.09
South Bay Technology Center 71.5% 1,089 7 14.54
----- ------- ----- -----
Subtotal/Weighted Average 83.8% 21,957 189 15.74
-- Los Angeles South
LOS ANGELES CENTRAL
Los Angeles Corporate Center 85.3% 7,085 37 21.33
Whittier Financial Center 89.1% 2,395 39 19.86
1370 Valley Vista 88.8% 1,484 14 19.88
----- ------- ----- -----
Subtotal/Weighted Average 86.6% 10,964 90 20.79
-- Los Angeles Central
ORANGE COUNTY
5832 Bolsa 100.0% 679 1 13.75
Huntington Beach Plaza I & II* 87.9% 607 13 13.25
City Centre 90.3% 3,921 24 14.36
Fountain Valley Plaza* 100.0% 1,732 4 16.15
3300 Irvine Avenue* 88.7% 1,129 24 17.15
1821 Dyer 0.0% -- -- --
Von Karman Corporate Center* 82.7% 4,905 21 13.13
1503 South Coast* 95.1% 838 23 14.55
Crown Cabot 78.4% 2,704 32 19.95
One Venture* 39.4% 351 5 20.57
Anaheim City Centre(3) 94.6% 2,745 13 16.54
625 The City* 100.0% 2,412 33 17.18
Orange Financial Center* 84.9% 5,001 35 19.29
Centerpointe La Palma 90.0% 8,914 74 16.58
Lambert Office Plaza* 99.8% 583 8 17.81
----- ------- ----- -----
Subtotal/Weighted Average -- 84.4% 36,521 310 16.15
Orange County
</TABLE>
S-25
<PAGE> 28
<TABLE>
<CAPTION>
PERCENTAGE
APPROXIMATE OF TOTAL
YEAR(S) NET PORTFOLIO
BUILT/ RENTABLE NET RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET SQUARE FEET
- ---------------------------------- ------------------------------------- ----------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
SAN DIEGO COUNTY
Imperial Bank Tower(3) Downtown San Diego 1982/96 540,413 3.3%
Foremost Professional Plaza I-15 Corridor San Diego 1992 60,534 0.4%
Activity Business Center I-15 Corridor San Diego 1987 167,045 1.0%
Bernardo Regency I-15 Corridor San Diego 1986 47,916 0.3%
Carlsbad Corporate Center* North Coast Carlsbad 1996 125,000 0.8%
Balboa Corporate Center* Mission Valley/Kearny Mesa San Diego 1990 69,890 0.4%
Panorama Corporate Center* Mission Valley/Kearny Mesa San Diego 1991 133,245 0.8%
Ruffin Corporate Center* Mission Valley/Kearny Mesa San Diego 1990 45,059 0.3%
Skypark Office Plaza* Mission Valley/Kearny Mesa San Diego 1986 202,164 1.2%
Governor Park Plaza* North City San Diego 1986 104,065 0.6%
5120 Shoreham* North City San Diego 1984 37,759 0.2%
Sorrento Valley Science Park* North City San Diego 1984 181,207 1.1%
Torreyanna Science Park* North City La Jolla 1980/97 81,204 0.5%
Uniden Building* North City San Diego 1990 28,119 0.2%
10251 Vista Sorrento* North City San Diego 1981/95 69,386 0.4%
---------- ----
Subtotal/Weighted Average -- 1,893,006 11.5%
San Diego County
VENTURA COUNTY
Center Promenade West County Ventura 1982 174,837 1.1%
1000 Town Center West County Oxnard 1989 107,653 0.7%
Camarillo Business Center* West County Camarillo 1984/1997 154,216 0.9%
---------- ----
Subtotal/Weighted Average -- 436,706 2.7%
Ventura County
<CAPTION>
ANNUALIZED
BASE RENT
PERCENT LEASED ANNUALIZED PER LEASED
AS OF BASE RENT(1) NUMBER SQUARE
PROPERTY NAME JANUARY 1, 1998 ($000S) OF LEASES FOOT
- ---------------------------------- --------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
SAN DIEGO COUNTY
Imperial Bank Tower(3) 81.4% $ 7,437 50 $ 16.90
Foremost Professional Plaza 93.9% 1,094 53 19.25
Activity Business Center 97.7% 1,691 44 10.36
Bernardo Regency 95.1% 743 19 16.31
Carlsbad Corporate Center* 100.0% 819 1 6.55
Balboa Corporate Center* 100.0% 693 1 9.92
Panorama Corporate Center* 99.9% 2,157 1 16.20
Ruffin Corporate Center* 100.0% 387 1 8.60
Skypark Office Plaza* 99.7% 2,712 11 13.45
Governor Park Plaza* 91.2% 1,342 18 14.14
5120 Shoreham* 84.5% 476 1 14.93
Sorrento Valley Science Park* 95.2% 2,447 9 14.17
Torreyanna Science Park* 100.0% 1,633 1 20.11
Uniden Building* 100.0% 321 2 11.40
10251 Vista Sorrento* 100.0% 1,029 1 14.83
----- ------- ----- -----
Subtotal/Weighted Average -- 92.9% 24,981 213 14.21
San Diego County
VENTURA COUNTY
Center Promenade 76.7% 1,939 46 14.46
1000 Town Center 100.0% 2,041 13 18.96
Camarillo Business Center* 78.9% 1,767 16 14.51
----- ------- ----- -----
Subtotal/Weighted Average -- 83.2% 5,747 75 15.81
Ventura County
RIVERSIDE AND SAN BERNARDINO
COUNTIES
Centrelake Plaza* Inland Empire West Ontario 1989 110,763 0.7%
Tower Plaza I* Temecula Temecula 1988 72,350 0.4%
Tower Plaza II* Temecula Temecula 1983 19,301 0.1%
Tower Plaza III* Temecula Temecula 1983 12,483 0.1%
Chicago Avenue Business Park* Inland Empire East Riverside 1986 47,482 0.3%
Havengate Center* Inland Empire East Rancho Cucamonga 1985 80,557 0.5%
HDS Plaza* Inland Empire East San Bernardino 1987 104,178 0.6%
---------- ----
Subtotal/Weighted Average -- 447,114 2.7%
Riverside and San Bernardino
Counties
KERN COUNTY
Parkway Center Bakersfield Bakersfield 1992,95 61,333 0.4%
California Twin Center Bakersfield Bakersfield 1983 155,189 0.9%
---------- ----
Subtotal/Weighted Average --Kern 216,522 1.3%
County
Total/Weighted Average -- Office 14,842,099 90.2%
---------- ----
Total -- Office (Excluding 14,066,589 85.5%
properties
under renovation) ---------- ----
<CAPTION>
RIVERSIDE AND SAN BERNARDINO
Centrelake Plaza* 63.2% 1,166 14 16.65
Tower Plaza I* 78.8% 853 15 14.95
Tower Plaza II* 76.7% 153 17 10.32
Tower Plaza III* 69.1% 90 18 10.45
Chicago Avenue Business Park* 76.3% 489 6 13.49
Havengate Center* 92.7% 1,142 12 15.29
HDS Plaza* 82.2% 1,395 13 16.29
---- -------- ----- -------
Subtotal/Weighted Average -- 77.6% 5,288 95 15.24
Riverside and San Bernardino
Counties
KERN COUNTY
Parkway Center 99.5% 1,092 10 17.88
California Twin Center 92.4% 3,352 9 23.39
---- -------- ----- -------
Subtotal/Weighted Average --Kern 94.4% 4,444 19 21.75
County
Total/Weighted Average -- Office 83.6% $224,584 2,428 $ 18.10
---- -------- ----- -------
Total -- Office (Excluding 86.3% $219,818 2,268 $ 18.12
properties
under renovation) ---- -------- ----- -------
<CAPTION>
COUNTIES
</TABLE>
S-26
<PAGE> 29
<TABLE>
<CAPTION>
PERCENTAGE
APPROXIMATE OF TOTAL
YEAR(S) NET PORTFOLIO
BUILT/ RENTABLE NET RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET SQUARE FEET
- ---------------------------------- ------------------------------------- ----------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
R&D/INDUSTRIAL
ORANGE COUNTY
5602 Bolsa* West County Huntington Beach 1987/97 27,731 0.2%
5672 Bolsa* West County Huntington Beach 1987 11,968 0.1%
5632 Bolsa* West County Huntington Beach 1987 21,568 0.1%
Huntington Commerce Center* West County Huntington Beach 1987 67,551 0.4%
Savi Tech Center* North County Yorba Linda 1989 341,446 2.0%
Yorba Linda Business Park* North County Yorba Linda 1988 167,142 1.0%
---------- ----
Subtotal/Weighted Average --
Orange County 637,406 3.8%
SAN DIEGO COUNTY
Cymer Technology Center* I-15 Corridor Rancho Bernardo 1986 155,612 0.9%
Poway Industrial* I-15 Corridor Poway 1991/96 112,000 0.7%
10180 Scripps Ranch* I-15 Corridor San Diego 1978/96 43,560 0.3%
10965-93 Via Frontera* I-15 Corridor Rancho Bernardo 1982/97 77,920 0.5%
Westridge* North City San Diego 1984/96 48,850 0.3%
---------- ----
Subtotal/Weighted Average -- San
Diego County 437,942 2.7%
RIVERSIDE AND SAN BERNARDINO
COUNTY
Ontario Airport Commerce Center* Inland Empire West Ontario 1987/97 213,127 1.3%
Highlands I* Temecula Temecula 1988 26,856 0.2%
Highlands II* Temecula Temecula 1990 41,210 0.3%
Hunter Business Park* Inland Empire East Riverside 1990 106,782 0.6%
---------- ----
Subtotal/Weighted Average --
Riverside and San Bernardino
County 387,975 2.4%
Total/Weighted Average --
R&D/Industrial 1,463,323 8.9%
---------- ----
RETAIL
SAN DIEGO AREA
Tower Plaza Retail* Temecula Temecula 1970/97 144,225 0.9%
---------- ----
Total/Weighted Average -- Retail 144,225 0.9%
---------- ----
Portfolio Total 16,449,647 100.0%
========== =====
Portfolio Total (excluding
properties under renovation) 15,674,137 95.3%
========== =====
<CAPTION>
ANNUALIZED
BASE RENT
PERCENT LEASED ANNUALIZED PER LEASED
AS OF BASE RENT(1) NUMBER SQUARE
PROPERTY NAME JANUARY 1, 1998 ($000S) OF LEASES FOOT
- ---------------------------------- --------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
R&D/INDUSTRIAL
ORANGE COUNTY
5602 Bolsa* 100.0% $ 189 2 $ 6.81
5672 Bolsa* 100.0% 75 1 6.24
5632 Bolsa* 100.0% 155 1 7.20
Huntington Commerce Center* 94.1% 413 19 6.50
Savi Tech Center* 100.0% 2,556 4 7.48
Yorba Linda Business Park* 96.5% 1,158 60 7.18
----- ------- ----- -----
Subtotal/Weighted Average --
Orange County 98.5% 4,546 87 7.24
SAN DIEGO COUNTY
Cymer Technology Center* 88.1% 1,742 2 12.71
Poway Industrial* 100.0% 605 1 5.40
10180 Scripps Ranch* 100.0% 366 1 8.40
10965-93 Via Frontera* 89.4% 529 4 7.59
Westridge* 100.0% 550 4 11.25
----- ------- ----- -----
Subtotal/Weighted Average -- San
Diego County 93.9% 3,792 12 9.22
RIVERSIDE AND SAN BERNARDINO
COUNTY
Ontario Airport Commerce Center* 97.7% 1,189 44 5.71
Highlands I* 94.7% 218 8 8.57
Highlands II* 84.9% 387 12 11.06
Hunter Business Park* 65.8% 436 12 6.21
----- ------- ----- -----
Subtotal/Weighted Average --
Riverside and San Bernardino
County 87.3% 2,230 76 6.58
Total/Weighted Average --
R&D/Industrial 94.2% $ 10,568 175 $ 7.67
----- ------- ----- -----
RETAIL
SAN DIEGO AREA
Tower Plaza Retail* 83.3% 1,252 21 10.41
----- ------- ----- -----
Total/Weighted Average -- Retail 83.3% $ 1,252 21 $ 10.41
----- ------- ----- -----
Portfolio Total 84.5% $236,403 2,624 $ 17.00
===== ======= ===== =====
Portfolio Total (excluding
properties under renovation) 87.0% $231,638 2,464 $ 16.99
===== ======= ===== =====
</TABLE>
- ---------------
* Indicates LBA Portfolio property
(1) Annualized base rent is calculated as monthly contractual base rent under
existing leases as of January 1, 1998, multiplied by 12; for those leases
where rent has not yet commenced or which are in a free rent period, the
first month in which rent is received is used to determine Annualized Base
Rent.
(2) The Company currently owns a 75% interest in the property and has an option
to purchase the remaining 25% interest for $27,500,000 which may be
exercised beginning March 15, 1998.
(3) The land underlying these Properties and/or their parking structures is
leased by the Company pursuant to long term ground leases.
(4) The Company owns a 97.5% interest in the property.
(5) Property is currently under renovation.
(6) Above amounts for 2730 Wilshire exclude the 100%-occupied 12,740 square
foot, 16-unit apartment complex which is also owned by the Company.
S-27
<PAGE> 30
TENANT INFORMATION
The Properties and LBA Portfolio are leased to over 2,600 tenants which are
engaged in a variety of businesses, including financial services, entertainment,
health care services, accounting, law, computer technology, education and
publishing. The following table sets forth the Annualized Base Rent as of
January 1, 1998 derived from the 20 largest tenants at the Properties and LBA
Portfolio:
<TABLE>
<CAPTION>
WEIGHTED PERCENTAGE
AVERAGE PERCENTAGE OF
REMAINING OF AGGREGATE
NUMBER LEASE AGGREGATE AGGREGATE ANNUALIZED PORTFOLIO
OF TERM RENTABLE LEASED BASE RENT ANNUALIZED
TENANT LEASES IN MONTHS SQUARE FEET SQUARE FEET ($000S) BASE RENT
- ------------------------------------- ------ --------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
State of California.................. 25 131 214,860 1.53% $ 3,581 1.46%
Chevron USA, Inc..................... 1 45 103,887 0.74% 2,755 1.12%
State Compensation Insurance Fund.... 1 2 113,513 0.81% 2,634 1.07%
Eastman Kodak Company................ 1 48 69,536 0.50% 2,462 1.00%
Foote, Cone & Belding -- Honig,
Inc................................ 1 71 62,003 0.44% 2,325 0.95%
Atlantic Richfield Company........... 2 106 125,609 0.90% 2,266 0.92%
Walt Disney Pictures & Television,
Inc................................ 1 68 98,802 0.71% 2,241 0.91%
McDonnell Douglas Corp............... 1 95 272,013 1.94% 2,224 0.90%
Community Healthcare Alliance........ 1 69 133,149 0.95% 2,157 0.88%
Pepperdine University................ 1 61 89,752 0.64% 2,075 0.84%
Sony Pictures Entertainment, Inc..... 4 70 114,211 0.82% 2,037 0.83%
Needham Harper & Steers/USA, Inc..... 1 71 50,814 0.36% 2,028 0.83%
Southern Pacific Transportation...... 1 15 83,017 0.59% 1,942 0.79%
Donnelley Information Publishing,
Inc................................ 1 9 71,946 0.51% 1,856 0.76%
GTE Directories Sales, Inc........... 2 21 113,124 0.81% 1,772 0.72%
Aurora Biosciences Corp.............. 1 131 81,204 0.58% 1,633 0.66%
Cymer, Inc........................... 1 146 137,164 0.98% 1,610 0.66%
Logicon, Inc......................... 1 55 74,174 0.53% 1,575 0.64%
Systems Tax Service.................. 3 53 87,958 0.63% 1,262 0.51%
Computer & Equipment Leasing Corp.... 1 27 63,604 0.45% 1,250 0.51%
--- --- --------- ------ ------- ------
Total/Weighted Average(1)....... 51 52 2,160,340 15.42% $ 41,685 16.96%
=== === ========= ====== ======= ======
</TABLE>
- ---------------
(1) Weighted average calculation based on rentable square footage leased by each
tenant.
LEASE DISTRIBUTIONS
The following table sets forth information relating to the distribution of
the leases for the Properties and LBA Portfolio, based on rentable square feet
under lease, as of January 1, 1998:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF AGGREGATE ANNUALIZED AVERAGE BASE OF AGGREGATE
PERCENTAGE SQUARE PORTFOLIO BASE RENT OF RENT PER PORTFOLIO
SQUARE FEET UNDER NUMBER OF OF ALL FOOTAGE OF LEASED LEASES SQUARE FOOT ANNUALIZED
LEASE LEASES LEASES LEASES SQUARE FEET ($000S) OF LEASES BASE RENT
- ----------------- --------- ---------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
2,500 or less... 1,461 55.68% 1,890,317 13.60% $ 36,061 $19.08 14.13%
2,501-5,000..... 529 20.16% 1,822,145 13.11% 34,039 18.68 13.34%
5,001-7,500..... 204 7.77% 1,257,125 9.04% 23,240 18.49 9.10%
7,501-10,000.... 143 5.45% 1,235,202 8.88% 21,525 17.43 8.43%
10,001-20,000.... 169 6.44% 2,324,244 16.72% 44,792 19.27 17.55%
20,001-40,000.... 68 2.59% 1,881,925 13.53% 33,531 17.82 13.14%
40,001 and
over........... 50 1.91% 3,492,770 25.12% 62,063 17.77 24.31%
----- ------ ---------- ------ -------- ------ ------
Total....... 2,624 100.00% 13,903,728 100.00% $255,251 $18.36 100.00%
===== ====== ========== ====== ======== ====== ======
</TABLE>
S-28
<PAGE> 31
LEASE EXPIRATIONS
The following table sets forth a summary schedule of the total lease
expirations for the Properties and LBA Portfolio for leases in place as of
January 1, 1998, assuming that none of the tenants exercise renewal options or
termination rights, if any, at or prior to the scheduled expirations:
<TABLE>
<CAPTION>
PERCENTAGE ANNUALIZED AVERAGE BASE PERCENTAGE
SQUARE OF AGGREGATE BASE RENT OF RENT PER OF AGGREGATE
NUMBER OF FOOTAGE OF PORTFOLIO EXPIRING SQUARE FOOT PORTFOLIO
YEAR OF LEASE LEASES EXPIRING LEASED LEASES OF EXPIRING ANNUALIZED
EXPIRATION EXPIRING LEASES SQUARE FEET ($000S)(2) LEASES BASE RENT
------------- --------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1998(1)................. 835 2,394,079 17.22% $ 40,076 $16.74 15.70%
1999.................... 463 1,913,648 13.76% 31,292 16.35 12.26%
2000.................... 453 1,769,745 12.73% 33,249 18.79 13.02%
2001.................... 300 1,658,704 11.93% 33,004 19.90 12.92%
2002.................... 288 1,942,068 13.97% 36,667 18.88 14.35%
2003.................... 96 1,170,055 8.42% 25,310 21.63 9.93%
2004.................... 62 894,246 6.43% 16,203 18.12 6.35%
2005.................... 47 849,659 6.11% 12,471 14.68 4.89%
2006.................... 29 416,567 3.00% 9,210 22.11 3.62%
2007.................... 29 263,586 1.90% 5,492 20.84 2.15%
2008.................... 8 260,948 1.88% 6,017 23.06 2.36%
2009.................... 4 130,648 0.94% 2,024 15.49 0.79%
2010+................... 10 239,775 1.71% 4,236 17.67 1.66%
----- ---------- ------ -------- ------ ------
Total........... 2,624 13,903,728 100.00% $255,251 $18.36 100.00%
===== ========== ====== ======== ====== ======
</TABLE>
- ---------------
(1) All month-to-month leases are assumed to expire during 1998.
(2) Base rent is as of the date of lease expiration, including all fixed
contractual base rent increases; increases tied to indices such as the
Consumer Price Index are not included.
S-29
<PAGE> 32
MANAGEMENT
DIRECTORS AND EXECUTIVE AND SENIOR OFFICERS
The following table sets forth certain current information with respect to
the directors and executive and senior officers of the Company:
<TABLE>
<CAPTION>
EXPIRATION
OF TERM AS
NAME AGE POSITION DIRECTOR
- -------------------- --- ------------------------------------------------------ ----------
<S> <C> <C> <C>
Richard S. Ziman 55 Chairman of the Board and Chief Executive Officer 1999
Victor J. Coleman 36 President, Chief Operating Officer and Director 1999
Diana M. Laing 43 Chief Financial Officer and Secretary
Executive Vice President and Director of Property
Andrew J. Sobel 38 Operations
Jeffrey A. Berger 35 Senior Vice President -- Acquisitions
Daniel S. Bothe 32 Senior Vice President -- Finance
Richard S. Davis 39 Chief Accounting Officer
Randy J. Noblitt 41 Senior Vice President -- Asset Management
Robert C. Peddicord 36 Senior Vice President -- Leasing
Herbert L. Porter 59 Senior Vice President -- Construction and Development
Carl D. Covitz 58 Director 2000
Larry S. Flax 55 Director 2000
Steven C. Good 55 Director 1998
Kenneth B. Roath 62 Director 2000
</TABLE>
The following is a biographical summary of the experience of the directors
and executive and senior officers of the Company:
RICHARD S. ZIMAN. Mr. Ziman is a founder of the Company and has served as
the Chairman of the Board and Chief Executive Officer since its inception. He
has been involved in the real estate industry for over 25 years. In 1990, Mr.
Ziman formed Namiz and served as its Chairman of the Board and Chief Executive
Officer from its inception until the formation of the Company. In 1979 he
co-founded Pacific Financial Group, a diversified real estate investment and
development firm headquartered in Beverly Hills, of which he was the Managing
General Partner. Mr. Ziman received his Bachelor's Degree and his Juris Doctor
Degree from the University of Southern California and practiced law as a partner
of the law firm of Loeb & Loeb from 1971 to 1980, specializing in transactional
and financing aspects of real estate.
VICTOR J. COLEMAN. Mr. Coleman is a founder of the Company and has served
as the President and Chief Operating Officer and as a Director of the Company
since its inception. He was the President, Chief Operating Officer and cofounder
of Namiz from 1990 to 1996. From 1987 to 1989, Mr. Coleman was Vice President of
Los Angeles Realty Services, Inc. and earlier in his career from 1985 to 1987
was Director of Marketing/Investment Advisor of Development Systems
International and an associate at Drexel Burnham Lambert specializing in private
placements with institutional and individual investors. Mr. Coleman received his
Bachelor's Degree from the University of California at Berkeley and received his
Master of Business Administration from Golden Gate University.
DIANA M. LAING. Ms. Laing has served as Chief Financial Officer of the
Company since August 1996 and as Secretary of the Company since February 1997.
Prior to joining the Company, Ms. Laing served, from 1985 to 1996, as Executive
Vice President and Chief Financial Officer of South West Property Trust, Inc., a
publicly traded apartment properties real estate investment trust, and its
predecessor Southwest Realty, Ltd. Ms. Laing also served from 1982 to 1985 as
Controller, Treasurer and Vice President -- Finance of Southwest Realty, Ltd.
From 1981 to 1982, Ms. Laing was Controller of Crawford Energy, Inc. and she
served as a member of the audit staff of Arthur Andersen & Company from 1978 to
1981. Ms. Laing is a Certified Public
S-30
<PAGE> 33
Accountant and a member of the American Institute of CPAs and the Texas Society
of Public Accountants. Ms. Laing received her Bachelor of Science in Accounting
from Oklahoma State University.
ANDREW J. SOBEL. Mr. Sobel served as Executive Vice President and Director
of Leasing of the Company since its formation through July 1997 and Executive
Vice President, Director of Property Operations since August 1997. He served as
Director of Leasing for Namiz from 1992 to 1996. Mr. Sobel is an attorney
admitted to the State Bar of California in 1985 with 11 years experience in the
practice of real estate law. From 1990 to 1992, Mr. Sobel was a sole
practitioner. From 1987 to 1990 he was an attorney with the law firm of Pircher,
Nichols & Meeks specializing in all aspects of its real estate transactional
practice including acquisitions, leasings and financings. Mr. Sobel received his
Bachelor's Degree from State University of New York at Oswego and his Juris
Doctor Degree from the University of California, Berkeley (Boalt Hall).
JEFFREY A. BERGER. Mr. Berger has served as Senior Vice
President -- Acquisitions of the Company since October 1997. Prior to joining
the Company, Mr. Berger served as Vice President and Director of Berger Realty
Group, a privately held real estate company in Chicago, Illinois. Berger Realty
Group managed and leased approximately 1,000 apartments, and over two million
rentable square feet of office, retail, and R&D/industrial properties. Mr.
Berger was responsible for all acquisitions and finance and for managing a staff
of 75 people. Prior to joining Berger Realty Group, Mr. Berger served as
Assistant Vice President of Real Estate Acquisitions for Heitman Financial.
DANIEL S. BOTHE. Mr. Bothe served as Vice President -- Finance of the
Company from December 1996 to December 1997 and Senior Vice President -- Finance
since January 1998. From 1993 to 1996, Mr. Bothe was a management consultant
with the E&Y Kenneth Leventhal Real Estate Group of Ernst & Young LLP. From 1988
to 1991, Mr. Bothe served as a member of the audit staff of KPMG Peat Marwick
LLP specializing in real estate. Mr. Bothe is a Certified Public Accountant in
the State of California and a member of the America Institute of CPAs. Mr. Bothe
received his Bachelor of Science in Accounting from San Diego State University
and his Master of Business Administration from the University of Southern
California.
RICHARD S. DAVIS. Mr. Davis has served as Chief Accounting Officer of the
Company since January 1998. From 1996 to 1997, Mr. Davis was with Catellus
Development Corporation where he was responsible for accounting and finance of
the asset management and development divisions. From 1985 to 1996, Mr. Davis
served as a member of the audit staff of both KPMG Peat Marwick LLP and Price
Waterhouse LLP specializing in real estate. Mr. Davis is a Certified Public
Accountant in the states of California and Missouri and a member of the American
Institute of CPAs. Mr. Davis received his Bachelor of Science in Accounting from
the University of Missouri at Kansas City.
RANDY J. NOBLITT. Mr. Noblitt has served as Senior Vice President -- Asset
Management of the Company since November 1997. From 1995 to 1997, Mr. Noblitt
established a management consulting practice serving the real estate industry.
From 1993 to 1995, Mr. Noblitt served as Senior Vice President of Tishman West
in charge of the Southern California operation. In 1992 and 1993 Mr. Noblitt
served as Senior Portfolio Manager and Director of Management Services for
Cushman & Wakefield in Southern California. Mr. Noblitt's career includes
extensive experience in asset management, leasing and development of all
commercial property types. Mr. Noblitt received his Bachelor of Science degree
in Business Administration from California State University, Northridge.
ROBERT C. PEDDICORD. Mr. Peddicord has served as Vice President -- Leasing
of the Company from December 1996 to September 1997 and Senior Vice
President -- Leasing since October 1997. From 1987 to 1996, Mr. Peddicord was a
Managing Director in the West Los Angeles office of Julien J. Studley,
representing landlords and tenants in the leasing of office space. From 1984 to
1986, Mr. Peddicord served as a branch Vice President for Great Western
Financial Corporation. Mr. Peddicord received his Bachelor's Degree in Economics
from the University of California at Los Angeles.
HERBERT L. PORTER. Mr. Porter has served as Senior Vice
President -- Construction and Development of the Company since its formation. He
served as Director of Construction and Capital Improvements for Namiz from 1993
to 1996. From 1973 to 1992, Mr. Porter was a partner/owner in his own real
estate development and property management company specializing in medium to
high-rise commercial office buildings.
S-31
<PAGE> 34
Mr. Porter's over 24 years in commercial office development include planning,
financing, acquisition, entitlements and approvals, design, construction,
marketing, leasing, tenant improvements and outright sale. Mr. Porter received
his Bachelor's Degree from the University of Southern California.
CARL D. COVITZ. Mr. Covitz has served as a member of the Board of Directors
of the Company since its inception as a public company in October 1996. For 18
of the past 23 years, Mr. Covitz has served as the owner and President of
Landmark Capital, Inc., a national real estate development and investment
company involved in the construction, financing, ownership and management of
commercial, residential and warehouse properties. Mr. Covitz has also previously
served, from 1990 to 1993, as Secretary of the Business, Transportation &
Housing Agency of the State of California as well as Under Secretary and Chief
Operating Officer of the U.S. Department of Housing and Urban Development from
1987 to 1989. Mr. Covitz is currently the Chairman of the Board of Directors of
Century Housing Corporation and is the past Chairman of the Board of several
organizations including the Federal Home Loan Bank of San Francisco and the Los
Angeles City Housing Authority. Mr. Covitz received his Bachelor's Degree from
the Wharton School at the University of Pennsylvania and his Master of Business
Administration from the Columbia University Graduate School of Business.
LARRY S. FLAX. Mr. Flax has served as a member of the Board of Directors of
the Company since December 1996. Mr. Flax is Co-Founder and Co-Chairman of the
Board of California Pizza Kitchen. Prior to becoming a restaurateur in 1985, Mr.
Flax served in Los Angeles as Assistant U.S. Attorney from 1968 to 1972, Chief
of Civil Rights from 1970 to 1971 and Assistant Chief of the Criminal Division
for the United States Department of Justice from 1971 to 1972. Mr. Flax attended
the University of Washington as an undergraduate and received his Juris Doctor
from the University of Southern California Law School in 1967.
STEVEN C. GOOD. Mr. Good has served as a member of the Board of Directors
of the Company since its inception as a public company in October 1996. Mr. Good
is the senior partner in the firm of Good Swartz & Berns, an accountancy
corporation founded in 1993 which evolved from the firm of Block, Good and
Gagerman, which he founded in 1976. Prior to 1976, Mr. Good was a partner first
at Laventhol & Horwath, a national accounting firm, and later at Horowitz &
Good. Mr. Good is a founder and past Chairman of CU Bancorp, where he directed
the bank's operations from 1982 through 1989. For the past seven years he has
been a member of the Board of Directors of Opto Sensors, Incorporated. Mr. Good
received his Bachelor of Science in Business Administration from the University
of California at Los Angeles and attended UCLA's Graduate School.
KENNETH B. ROATH. Mr. Roath has served as a member of the Board of
Directors of the Company since its inception as a public company in October
1996. Mr. Roath is currently Chairman, President and Chief Executive Officer of
Health Care Property Investors, Inc., a leader in the health care REIT industry.
Mr. Roath is past Chairman of the National Association of Real Estate Investment
Trusts ("NAREIT") and also serves as a member of the Board of Governors and
Executive Committee of NAREIT. He is a director of Franchise Finance Corporation
of America. Mr. Roath received his Bachelor's Degree in accounting from San
Diego State University.
S-32
<PAGE> 35
UNDERWRITING
Pursuant to the terms and subject to the conditions of the Underwriting
Agreement (the "Underwriting Agreement") between the Company, the Operating
Partnership and A.G. Edwards & Sons, Inc. (the "Underwriter"), the Underwriter
has agreed to purchase from the Company, and the Company has agreed to sell to
the Underwriter, 1,303,965 shares of Common Stock.
The Underwriter intends to sell the shares of Common Stock to Nike
Securities L.P., which intends to deposit such shares, together with shares of
common stock of other entities also acquired from the Underwriter, into a
newly-formed unit investment trust (the "Trust") registered under the Investment
Company Act of 1940, as amended, in exchange for units in the Trust. The
Underwriter is not an affiliate of Nike Securities L.P. or the Trust. The
Underwriter intends to sell the shares of Common Stock to Nike Securities L.P.
at an aggregate purchase price of $35,524,961.67. It is anticipated that the
Underwriter will also participate in the distribution of units of the Trust and
will receive compensation therefor.
Pursuant to the Underwriting Agreement, the Company has agreed to indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the Underwriter
may be required to make in respect thereof.
Until the distribution of the shares of Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriter
to bid for and purchase shares of Common Stock. As an exception to these rules,
the Underwriter is permitted to engage in certain transactions that stabilize
the price of the Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Common Stock.
It is not currently anticipated that the Underwriter will engage in any such
transactions in connection with this offering.
If the Underwriter creates a short position in the Common Stock in
connection with this offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement, the
Underwriter may reduce that short position by purchasing shares in the open
market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the shares. In addition, neither the
Company nor the Underwriter makes any representation that the Underwriter will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
The Underwriter is also acting as an underwriter in the Concurrent Offering
of 23,000,000 shares of Common Stock for which it will receive customary
compensation.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Latham &
Watkins and certain legal matters, including the validity of the shares of
Common Stock offered hereby, will be passed upon for the Company by Ballard
Spahr Andrews & Ingersoll. In addition, the description of federal income tax
consequences contained in the accompanying Prospectus under the heading "Federal
Income Tax Considerations" is based upon the opinion of Latham & Watkins. Latham
& Watkins will rely upon the opinion of Ballard Spahr Andrews & Ingersoll as to
certain matters of Maryland law. Certain legal matters will be passed upon for
the Underwriters by Hogan & Hartson L.L.P.
S-33
<PAGE> 36
======================================================
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus Supplement or the accompanying
Prospectus in connection with the offer made by this Prospectus Supplement and
the Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or the Underwriter.
Neither this Prospectus Supplement nor the accompanying Prospectus constitutes
an offer to sell, or a solicitation or an offer to buy, to any person in any
jurisdiction where such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus Supplement nor the accompanying Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
the information contained herein or therein is correct as of any time subsequent
to the date hereof.
---------------------------
SUMMARY TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Supplement Summary........ S-1
The Company.......................... S-7
Use of Proceeds...................... S-11
Price Range of Common Stock and
Distribution History............... S-11
Capitalization....................... S-12
Selected Financial Data.............. S-13
Southern California Economy and
Office Markets..................... S-16
Properties........................... S-22
Management........................... S-30
Underwriting......................... S-33
Legal Matters........................ S-33
PROSPECTUS
Available Information................ 2
Incorporation of Certain Information
by Reference....................... 3
Risk Factors......................... 4
The Company.......................... 12
Description of Capital Stock......... 15
Use of Proceeds...................... 18
Partnership Agreement................ 18
Certain Provisions of Maryland Law
and the Company's Charter and
Bylaws............................. 22
Federal Income Tax Considerations.... 24
Plan of Distribution................. 35
Experts.............................. 36
Legal Matters........................ 37
</TABLE>
======================================================
======================================================
1,303,965 SHARES
[ARDEN LOGO]
COMMON STOCK
---------------------------
PROSPECTUS SUPPLEMENT
---------------------------
[LOGO]
FEBRUARY 18, 1998
======================================================
