<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________.
Commission File Number 1-12193
ARDEN REALTY, INC.
(Exact name of registrant as specified in its charter)
Maryland 95-4578533
(State or other jurisdiction of (IRS Employer I.D. Number)
incorporation or organization)
9100 Wilshire Boulevard
Suite 700, East Tower
Beverly Hills, CA 90212
(address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (310) 271-8600
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of each class Name of each Exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark whether the Registrant (1) has filed all
reports required to be filed by Section 12 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X]
-----
The aggregate market value of the shares of common stock held by
non-affiliates was approximately $1.7 billion based on the closing price on
the New York Stock Exchange for such shares on March 27, 1998.
The number of the Registrant's shares of common stock outstanding
was 61,209,499 as of March 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates information by reference from
the definitive Proxy Statement for the Annual Meeting of Stockholders, to be
held on May 7, 1998.
<PAGE> 2
ARDEN REALTY, INC.
TABLE OF CONTENTS
ITEM NO. PAGE
PART I
1. Business ................................................. 3
2. Properties ............................................... 16
3. Legal Proceedings ........................................ 24
4. Submission of Matters to a Vote of Security Holders ...... 24
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters .......................... 25
6. Selected Financial Data ................................. 27
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 29
8. Financial Statements and Supplementary Data ............. 38
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 38
PART III
10. Directors and Executive Officers of the Registrant ...... 39
11. Executive Compensation .................................. 39
12. Security Ownership of Certain Beneficial Owners
and Management ........................................ 39
13. Certain Relationships and Related Transactions .......... 39
PART IV
14. Exhibits, Financial Statements and Schedule,
and Reports on Form 8-K .............................. 40
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PART I
ITEM 1. BUSINESS
(a) General Development of Business.
BACKGROUND AND FORMATION
Arden Realty, Inc. (the "Company"), through its controlling interest
in Arden Realty Limited Partnership (the "Operating Partnership" or "OP"), is
engaged in owning, acquiring, managing, leasing and renovating commercial
properties in Southern California (the "Properties").
The Company was incorporated in Maryland in May 1996 and formed to
continue and expand the real estate business of Arden Realty Group, Inc. and a
group of affiliated entities (the "Arden Predecessors"). On October 9, 1996, the
Company completed an initial public offering (the "IPO") of $.01 par value
common stock (the "Common Stock"). Concurrent with consummation of the IPO, the
Company and the Operating Partnership, together with the partners and members of
the Arden Predecessors, engaged in certain formation transactions (the
"Formation Transactions") which, among other things, resulted in the acquisition
by the Company and Operating Partnership of 24 commercial properties from
certain members of the Arden Predecessors.
(b) Financial Information about Industry Segments.
The Company currently is involved in only one industry segment,
namely real estate. Therefore, all of the financial information contained herein
relate to this industry segment.
(c) Narrative Description of the Business
BUSINESS
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 March 1, 1998, the Company
owned a portfolio of 127 commercial properties containing approximately 16.4
million rentable square feet. All of the Properties are located in Southern
California, with 69 in suburban Los Angeles County, 21 in Orange County, 20 in
San Diego County, 12 in Riverside and San Bernardino Counties, three in Ventura
County and two in Kern County. As of January 1, 1998, this portfolio of 127
properties was approximately 84.5% leased (87.0% leased if the four properties
under renovation are excluded).
Included in the portfolio summary described above are 50 primarily office
and R&D/industrial properties located in Southern California (the "LBA
Portfolio"), aggregating approximately 5.2 million rentable square feet, that
the Company acquired on March 1, 1998, for a purchase price of approximately
$614.5 million. In connection with the acquisition of the LBA Portfolio, the
Company also issued 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.
Including acquisitions through the LBA Portfolio closing, the Company is
the largest publicly traded owner of office space in Southern California as
measured by total rentable square feet owned.
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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
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 commercial properties at attractive prices and develop office and
R&D/industrial 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.
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, as of December 31, 1997, 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.
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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 its 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 commercial 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. From January 1, 1997 through March 1, 1998, the Company acquired 93
commercial properties containing approximately 11.0 million rentable square feet
for a total acquisition cost of approximately $1.4 billion (includes all
purchase and closing costs and anticipated capital expenditures for, and
carrying costs during renovation).
The Company intends to continue to acquire commercial 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.
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 commercial 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 commercial 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 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
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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.
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RECENT DEVELOPMENTS
From January 1, 1997, through March 1, 1998, the Company acquired 93
commercial properties containing approximately 11.0 million rentable square feet
in Southern California for a Total Acquisition Cost (as defined below) of
approximately $1.4 billion. The following table lists the acquisitions made by
the Company during such period:
<TABLE>
<CAPTION>
TOTAL
APPROXIMATE NET ACQUISITION
RENTABLE COST(1)
PROPERTY NAME LOCATION SQUARE FEET (MILLIONS) MONTH 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 15.5 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 9.9 October 1997
Pennsfield Plaza Thousand Oaks 21,202 3.2 October 1997
Marin Corporate Center Thousand Oaks 51,360 7.9 October 1997
Rancho Plaza Thousand Oaks 24,057 2.9 October 1997
Thousand Oaks Plaza Thousand Oaks 13,434 1.8 October 1997
Evergreen Plaza Thousand Oaks 75,722 9.4 October 1997
Glendale Corporate Center Glendale 108,209 15.3 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
---------- --------
Sub-total 5,766,252 792.9
LBA Portfolio (5) 5,240,271 619.9 March 1998
---------- --------
TOTAL 11,006,523 $1,412.8
========== ========
</TABLE>
(1) "Total Acquisition Cost" includes all purchase costs, closing costs
and anticipated capital expenditures for, and carrying costs during,
renovation.
(2) At December 31, 1997 the Company owned a 75% interest in this property
and exercised an option to purchase the remaining 25% interest for
$27.5 million on March 25, 1998, resulting in a total acquisition
cost of approximately $110.7 million.
(3) Property currently under renovation.
(4) The Company owns a 97.5% interest in the property.
(5) The Company acquired the LBA Portfolio on March 1, 1998 for a total
acquisition cost of $619.9 million, including approximately $3.6
million related to warrants to purchase up to 2.5 million shares of
the Company's common stock. See "Properties" under Item 2 of this
Form 10-K for more information on the properties comprising the
LBA Portfolio.
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EMPLOYEES
As of December 31, 1997, the Company had 116 full-time employees.
(d) Foreign Operations.
The Company does not engage in any foreign operations or derive
revneues from foreign sources.
FORWARD LOOKING STATEMENTS
This Form 10-K, including the documents incorporated herein by reference,
contain forward-looking statements within the meaning of Section 27A of the
Securities Act. Also, documents subsequently filed by the Company with the
Commission and incorporated herein by reference will contain forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below and
the matters set forth or incorporated in this Form 10-K generally. The Company
cautions the reader, however, that this list of factors may not be exhaustive,
particularly with respect to future filings. Readers of this Form 10-K should
carefully consider, among other factors, the risk factors described below.
RISK FACTORS
In addition to the other information contained or incorporated by
reference in this Form 10-K readers should carefully consider the following
factors.
REAL ESTATE FINANCING RISKS
INABILITY TO REPAY OR REFINANCE INDEBTEDNESS AT MATURITY. The Company will
be subject to risks normally associated with debt financing, including the risk
that the Company's cash flow will be insufficient to meet required payments of
principal and interest, the risk that any indebtedness will not be able to be
refinanced or that the terms of any such refinancing will not be as favorable
as the terms of such current indebtedness. If the Company's indebtedness cannot
be refinanced at maturity, extended or paid with proceeds of other capital
transactions, such as the issuance of new equity capital, the Company expects
that its cash flow will not be sufficient in all years to pay distributions at
expected levels and to repay all maturing debt. Furthermore, if prevailing
interest rates or other factors at the time of refinancing result in higher
interest rates, the interest expense relating to such refinanced indebtedness
would increase, adversely affecting the Company's cash flow and the amounts
available for distributions to its stockholders.
RISK OF FAILURE TO COVER DEBT SERVICE OF CURRENT COLLATERALIZED DEBT UNDER
THE MORTGAGE FINANCING. The Company, through a special purpose entity,
currently has outstanding a $175 million mortgage financing (the "Mortgage
Financing"). The payment and other obligations under the Mortgage Financing are
secured by fully cross-collateralized and cross-defaulted first mortgage liens
on 18 of the Company's properties (collectively, the "Mortgage Financing
Properties") and $4 million in cash collateral. The Mortgage Financing requires
monthly payments of interest only, with all principal anticipated to be repaid
on the seventh anniversary of the Mortgage Financing (July 2009). If
the Mortgage Financing is not repaid or refinanced within seven years, the
interest rate increases by at least 2% and all excess cash flow from the
Mortgage Financing Properties must be used to pay down principal. If the Company
is unable to meet its obligations under the Mortgage Financing, the Mortgage
Financing Properties securing such debt could be foreclosed on, which would have
a material adverse effect on the Company and its ability to make expected
distributions. Similarly, any future indebtedness of the Company secured by any
of the properties will be subject to this risk of foreclosure.
POTENTIAL EFFECT OF RISING INTEREST RATES ON COMPANY'S VARIABLE RATE DEBT.
The Company currently has a $300 million unsecured line of credit (the "Amended
Credit Facility") from a group of banks led by Wells Fargo, under which
borrowings bear interest at a variable rate. In addition, the Company may incur
other variable rate indebtedness in the future. Increases in interest rates on
such indebtedness would increase the Company's interest expense, which could
adversely affect the Company's cash flow and the amounts available for
distributions to its stockholders.
NO LIMITATION ON DEBT. While the Company currently has a policy of
incurring debt only if, upon such incurrence, the debt to total market
capitalization ratio would be 50% or less, the organizational documents of the
Company contain no limitation on the amount of indebtedness the Company may
incur. Accordingly, the Board of Directors could alter or eliminate this
policy. If this policy were changed, the Company could become more highly
leveraged, resulting in an increase in debt service that could adversely affect
the
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Company's cash flow and, consequently, the amount available for distribution to
stockholders, and could increase the risk of default on the Company's
indebtedness.
The Company has established its debt policy relative to the total market
capitalization of the Company rather than relative to the book value of its
assets. The Company has used total market capitalization because it believes
that the book value of its assets (which to a large extent is the depreciated
original cost of real property, the Company's primary tangible assets) does not
accurately reflect its ability to borrow and to meet debt service requirements.
The market capitalization of the Company, however, is more variable than book
value, and may not necessarily reflect the fair market value of the underlying
assets of the Company at all times. The Company also will consider factors
other than market capitalization in making decisions regarding the incurrence
of indebtedness, such as the purchase price of properties to be acquired with
debt financing, the estimated market value of its properties upon refinancing
and the ability of particular properties and the Company as a whole to generate
cash flow to cover expected debt service.
REAL ESTATE INVESTMENT RISKS
REAL ESTATE OWNERSHIP RISKS. Real property investments are subject to
varying degrees of risk. The yields available from equity investments in real
estate depend in large part on the amount of income generated and expenses
incurred. If the Company's properties do not generate revenue sufficient to
meet operating expenses, including debt service, tenant improvements, leasing
commissions and other capital expenditures, the Company may have to borrow
additional amounts to cover fixed costs, and the Company's cash flow and
ability to make distributions to its stockholders will be adversely affected.
The Company's revenue and the value of its properties may be adversely
affected by a number of factors, including the national economic climate; the
local economic climate; local real estate conditions; the perceptions of
prospective tenants of the attractiveness of the property; the ability of the
Company to manage and maintain the properties and secure adequate insurance;
and the potential increase in operating costs (including real estate taxes and
utilities). In addition, real estate values and income from properties are also
affected by such factors as applicable laws, including tax laws, interest rate
levels and the availability of financing.
RISK THAT COMPANY MAY BE UNABLE TO RETAIN TENANTS OR RENT SPACE UPON
LEASE EXPIRATIONS. The Company is and will be subject to the risks that upon
expiration, leases may not be renewed, the space may not be relet or the terms
of renewal or reletting (including the cost of required renovations) may be less
favorable than current lease terms. If the Company is unable to promptly relet
or renew leases for all or a substantial portion of this space, or if the
rental rates upon such renewal or reletting are significantly lower than
expected, the Company's cash flow and ability to make expected distributions to
stockholders could be adversely affected.
RESTRAINTS ON COMPANY'S FLEXIBILITY TO LIQUIDATE REAL ESTATE. Equity real
estate investments are relatively illiquid. Such illiquidity will tend to limit
the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions. In addition, the Internal Revenue Code
of 1986, as amended (the "Code"), limits a REIT's ability to sell properties
held for fewer than four years, which may affect the Company's ability to sell
properties without adversely affecting returns to stockholders.
IMPACT OF COMPETITION ON OCCUPANCY LEVELS AND RENTS CHARGED. Numerous
office properties compete with the Company's properties in attracting tenants
to lease space. Some of the competing properties may be newer, better located or
owned by parties better capitalized than the Company. The number of competitive
commercial properties in a particular area could have a material adverse effect
on (i) the ability to lease space in the properties (or at newly acquired or
developed properties) and (ii) the rents charged.
POTENTIAL INCREASES IN CERTAIN TAXES AND REGULATORY COMPLIANCE COSTS.
Because increases in income, service or transfer taxes are generally not passed
through to tenants under leases, such increases may adversely affect the
Company's cash flow and its ability to make distributions to stockholders. The
properties are also subject to various federal, state and local regulatory
requirements, such as requirements of the Americans with Disabilities Act (the
"ADA") and state and local fire and life safety requirements. Failure to comply
with
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these requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants. The Company believes
that its properties are currently in substantial compliance with all such
regulatory requirements and that any noncompliance would not have a material
adverse effect on the Company. However, there can be no assurance that these
requirements will not be changed or that new requirements will not be imposed
which would require significant unanticipated expenditures by the Company and
could have an adverse effect on the Company's cash flow and expected
distributions.
IMPACT OF FINANCIAL CONDITION AND SOLVENCY OF TENANTS ON THE COMPANY'S CASH
FLOW. At any time, a tenant of the Company's properties may seek the protection
of bankruptcy laws, which could result in rejection and termination of such
tenant's lease and thereby cause a reduction in cash flow available for
distribution by the Company. Although the Company has not experienced material
losses from tenant bankruptcies, no assurance can be given that tenants will not
file for bankruptcy protection in the future or, if any tenants file, that they
will affirm their leases and continue to make rental payments in a timely
manner. In addition, a tenant from time to time may experience a downturn in its
business which may weaken its financial condition and result in the failure to
make rental payments when due. If tenant leases are not affirmed following
bankruptcy or if a tenant's financial condition weakens, the Company's income
may be adversely affected.
AMERICANS WITH DISABILITIES ACT COMPLIANCE COSTS. Under the ADA, all
public accommodations and commercial facilities are required to meet certain
federal requirements related to access and use by disabled persons. These
requirements became effective in 1992. Compliance with the ADA requirements
could require removal of access barriers and non-compliance could result in
imposition of fines by the U.S. government or an award of damages to private
litigants. Although the Company believes that its properties are substantially
in compliance with these requirements, the Company may incur additional costs
to comply with the ADA. Although the Company believes that such costs will not
have a material adverse effect on the Company, if required changes involved a
greater expenditure than the Company currently anticipates, the Company's
ability to make expected distributions could be adversely affected.
FINANCIAL DEPENDENCY AND MANAGEMENT CONFLICTS ASSOCIATED WITH PARTNERSHIP
AND JOINT VENTURE PROPERTY OWNERSHIP STRUCTURES. The Company owns its interests
in its properties through the Operating Partnership. In addition, the Company
may also participate with other entities in property ownership through joint
ventures or partnerships in the future. The Company currently does not have
any plans to invest in joint ventures or partnerships with affiliates or
promoters of the Company. Nonetheless, partnership or joint venture investments
may, under certain circumstances, involve risks not otherwise present,
including the possibility that the Company's partners or co-venturers might
become bankrupt, that such partners or co-venturers might at any time have
economic or other business interests or goals which are inconsistent with the
business interests or goals of the Company, and that such partners or
co-venturers may be in a position to take action contrary to the Company's
instructions or requests or contrary to the Company's policies or objectives,
including the Company's policy with respect to maintaining its qualification
as a REIT. The Company will, however, seek to maintain sufficient control of
any such partnerships or joint ventures with which it may become involved to
permit the Company's business objectives to be achieved. There is no limitation
under the Company's organizational documents as to the amount of available
funds that may be invested in partnerships or joint ventures.
CONCENTRATION OF PROPERTIES IN SOUTHERN CALIFORNIA
All of the Company's properties are located in Southern California. The
Company's revenue and the value of its properties may be affected by a number
of factors, including the local economic climate (which may be adversely
impacted by business layoffs or downsizing, industry slowdowns, changing
demographics and other factors) and local real estate conditions (such as
oversupply of or reduced demand for office and other competing commercial
properties). Therefore, the Company's performance and its ability to make
distribution to stockholders will likely be dependent, to a large extent, on
the economic conditions in this market area.
10
<PAGE> 11
RISKS ASSOCIATED WITH ACQUISITION, RENOVATION AND DEVELOPMENT ACTIVITIES
The Company is currently experiencing a period of rapid growth. As the
Company acquires additional properties, the Company will be subject to risks
associated with managing new properties, including lease-up and tenant
retention. In addition, the Company's ability to manage its growth effectively
will require it to successfully integrate its new acquisitions into its
existing management structure. No assurances can be given that the Company will
be able to succeed with such integration or effectively manage additional
properties or that newly acquired properties will perform as expected.
The Company intends to expand and/or renovate its properties from time to
time. Expansion and renovation projects generally require expenditures of
capital as well as various government and other approvals, the receipt of which
cannot be assured. While policies with respect to expansion and renovation
activities are intended to limit some of the risks otherwise associated with
such activities, the Company will nevertheless incur certain risks, including
expenditures of funds on, and devotion of management's time to, projects which
may not be completed. The Company anticipates that future acquisitions and
renovations will be financed through a combination of advances under the Amended
Credit Facility, other lines of credit and other forms of secured or unsecured
financing. If new developments are financed through construction loans, there is
a risk that, upon
11
<PAGE> 12
completion of construction, permanent financing for newly developed properties
may not be available or may be available only on disadvantageous terms.
While the Company has generally limited its acquisition, renovation,
management and leasing business primarily to the Southern California market, it
is possible that the Company will in the future expand its business to new
geographic markets. The Company will not initially possess the same level of
familiarity with new markets outside of Southern California, which could
adversely affect its ability to acquire, develop, manage or lease properties in
any new localities. Changing market conditions, including competition from
other purchasers of suburban office properties, may diminish the Company's
opportunities for attractive additional acquisitions.
The Company also intends to review from time to time the possibility of
developing and constructing office buildings and other commercial properties in
accordance with the Company's development and underwriting policies. Risks
associated with the Company's development and construction activities may
include: abandonment of development opportunities; construction costs of a
property exceeding original estimates, possibly making the property
uneconomical; occupancy rates and rents at a newly completed property may not
be sufficient to make the property profitable; financing may not be available
on favorable terms for development of a property; and construction and lease-up
may not be completed on schedule, resulting in increased debt service expense
and construction costs. In addition, new development activities, regardless of
whether they would ultimately be successful, typically require a substantial
portion of management's time and attention. Development activities would also
be subject to risks relating to the inability to obtain, or delays in
obtaining, all necessary zoning, land-use, building, occupancy, and other
required governmental permits and authorizations.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL
The investment, financing, borrowing and distribution policies of the
Company and its policies with respect to all other activities, including
growth, debt, capitalization and operations, will be determined by the Board of
Directors. Although the Board of Directors has no present intention to do so,
these policies may be amended or revised at any time and from time to time at
the discretion of the Board of Directors without a vote of the stockholders of
the Company. In addition, the Board of Directors may change the Company's
policies with respect to conflicts of interest provided that such changes are
consistent with applicable legal requirements. A change in these policies could
adversely affect the Company's financial condition, results of operations or
the market price of the Common Stock.
POTENTIAL ADVERSE TAX CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company has operated and intends to continue to operate so as to
qualify as a REIT under the Code, commencing with its taxable year ended
December 31, 1996. Although management believes that the Company is and will
continue to be organized and has operated and will continue to operate in such
a manner, no assurance can be given that the Company is now or will continue to
be organized or operated in a manner so as to qualify or remain so qualified.
Qualification as a REIT involves the satisfaction of numerous requirements
(some on an annual and quarterly basis) established under highly technical and
complex Code provisions for which there are only limited judicial and
administrative interpretations, and involves the determination of various
factual matters and circumstances not entirely within the Company's control. For
example, in order to qualify as a REIT, at least 95% of the Company's gross
income in any year must be derived from qualifying sources and the Company must
pay distributions to stockholders aggregating annually at least 95% of its REIT
taxable income (excluding capital gains). The complexity of these provisions
and of the applicable Treasury Regulations that have been promulgated under the
Code is greater in the case of a REIT that holds its assets in partnership
form. No assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. The Company, however, is not aware of any
pending legislation that would adversely affect the Company's ability to
operate as a REIT. The Company's qualification and taxation as a REIT depend on
the Company's ability to meet (through actual annual operating results,
distribution levels and diversity of stock ownership) the various qualification
12
<PAGE> 13
tests imposed under the Code, the results of which will not be reviewed by tax
counsel to the Company.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Moreover, unless entitled to relief under certain statutory provisions, the
Company also would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification was lost. This
treatment would significantly reduce the net earnings of the Company available
for investment or distribution to stockholders because of the additional tax
liability to the Company for the years involved. In addition, distributions to
stockholders would no longer be required to be made.
OTHER TAX LIABILITIES
Even if the Company qualifies for and maintains its REIT status, it will
be subject to certain federal, state and local taxes on its income and
property. If the Company has net income from a prohibited transaction, such
income will be subject to a 100% tax.
INSURANCE
The Operating Partnership carries comprehensive liability, fire, extended
coverage and rental loss insurances which currently cover all of the Company's
properties with policy specifications and insured limits that the Company
believes are adequate and appropriate under the circumstances. The Operating
Partnership also carries earthquake insurance on all of the Company's
properties. There are, however, certain types of losses that are not generally
insured because it is not economically feasible. Should an uninsured loss or a
loss in excess of insured limits occur, the Operating Partnership could lose
its capital invested in the property, as well as the anticipated future revenue
from the property and, in the case of debt which is with recourse to the
Operating Partnership, would remain obligated for any mortgage debt or other
financial obligations related to the property. Any such loss would adversely
affect the Company. Moreover, as the sole general partner of the Operating
Partnership, the Company will generally be liable for any unsatisfied
obligations other than non-recourse obligations. The Company believes that its
properties are adequately insured. In addition, in light of the California
earthquake risk, California building codes since the early 1970s have
established construction standards for all newly built and renovated buildings,
including office buildings, the current and strictest construction standards
having been adopted in 1984. The Company believes that all of its properties
were constructed in full compliance with the applicable standards existing at
the time of construction. No assurance can be given that material losses in
excess of insurance proceeds will not occur in the future.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers,
particularly Messrs. Ziman and Coleman and Ms. Diana M. Laing. The loss of
their services could have a material adverse effect on the operations of the
Company. Each of Messrs. Ziman and Coleman and Ms. Laing have entered into an
employment agreement with the Company.
LIMITS ON CHANGES IN CONTROL
Certain provisions of the Charter and bylaws of the Company (the
"Bylaws") may have the effect of delaying, deferring or preventing a third
party from making an acquisition proposal for the Company and may thereby
inhibit a change in control of the Company. For example, such provisions may
(i) deter tender offers for the Common Stock, which offers may be attractive to
the stockholders, or (ii) deter purchases of large blocks of Common Stock,
thereby limiting the opportunity for stockholders to receive a premium for
their Common Stock over then-prevailing market prices.
LIMITS ON OWNERSHIP OF COMMON STOCK. In order for the Company to maintain
its qualification as a REIT under the Code, not more than 50% in value of the
outstanding shares of Common Stock of the
13
<PAGE> 14
Company may be owned, actually or constructively, by five or fewer individuals
(as defined in the Code to include certain entities) at any time during the
last half of the Company's taxable year (other than the first year for which
the election to be treated as a REIT has been made). In addition, if the
Company, or an owner of 10% or more of the Company, actually or constructively
owns 10% or more of a tenant of the Company (or a tenant of any partnership in
which the Company is a partner), the rent received by the Company (either
directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. In
order to protect the Company against the risk of losing REIT status due to the
concentration of ownership among its stockholders, the ownership limit included
in the Charter (the "Ownership Limit") limits actual or constructive ownership
of the outstanding shares of Common Stock by any single stockholder to 9.0% (by
value or by number of shares, whichever is more restrictive) of the then
outstanding shares of Common Stock. Although the Board of Directors presently
has no intention of doing so (except as described below), the Board of
Directors could waive this restriction with respect to a particular stockholder
if it were satisfied, based upon the advice of counsel or a ruling from the
Internal Revenue Service, that ownership by such stockholder in excess of the
Ownership Limit would not jeopardize the Company's status as a REIT and the
Board of Directors otherwise decided such action would be in the best interests
of the Company. Actual or constructive ownership of shares of Common Stock in
excess of the Ownership Limit will cause the violative transfer or ownership to
be void with respect to the transferee or owner as to that number of shares in
excess of the Ownership Limit and such shares will be automatically transferred
to a trust for the exclusive benefit of one or more qualified charitable
organizations. Such transferee or owner shall have no right to vote such shares
or be entitled to dividends or other distributions with respect to such shares.
The Board of Directors has waived the Ownership Limit with respect to Mr. Ziman
and certain family members and affiliates and permitted such parties to
actually and constructively own up to 13.0% of the outstanding shares of Common
Stock.
ADDITIONAL COMMON STOCK AND PREFERRED STOCK ISSUANCES. The Charter
authorizes the Board of Directors to cause the Company to issue authorized but
unissued shares of Common Stock or Preferred Stock and to reclassify any
unissued shares of Common Stock or classify any unissued and reclassify any
previously classified but unissued shares of Preferred Stock and, with respect
to the Preferred Stock, to set the preferences, rights and other terms of such
classified or unclassified shares. Although the Board of Directors has no such
intention at the present time, it could establish a series of Preferred Stock
that could, depending on the terms of such series, delay, defer or prevent a
transaction or a change in control of the Company that might involve a premium
price for the Common Stock or otherwise be in the best interest of the
stockholders.
STAGGERED BOARD. The Company's Board of Directors is divided into three
classes of directors. Directors of each class are chosen for three-year terms
upon the expiration of their current terms and each year one class of directors
will be elected by the stockholders. The staggered terms of directors may
reduce the possibility of a tender offer or an attempt to change control of the
Company even though a tender offer or change in control might be in the best
interest of the stockholders.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a governmental
entity or to third parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically impose clean-up responsibility and liability without regard
to whether the owner knew of or caused the presence of the contaminants, and
the liability under such laws has been interpreted to be joint and several
unless the harm is divisible and there is a reasonable basis for allocation or
responsibility. The cost of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to remediate the contamination on
14
<PAGE> 15
such property, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral. Persons who arrange for
the disposal or treatment of hazardous or toxic substances at a disposal or
treatment facility also may be liable for the costs of removal or remediation of
a release of hazardous or toxic substances at such disposal or treatment
facility, whether or not such facility is owned or operated by such person. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs incurred with the contamination.
Finally, the owner of a site may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination
emanating from such site.
Certain federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACM") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACM and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACM. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs. Except for two
properties, one of which is currently undergoing abatement activities, the
Company is not aware of any friable ACM at any of its properties.
In the past few years, independent environmental consultants have
conducted or updated Phase I Environmental Assessments and other environmental
investigations as appropriate ("Environmental Site Assessments") at the
Company's properties. These Environmental Site Assessments have included, among
other things, a visual inspection of the properties and the surrounding area and
a review of relevant state, federal and historical documents. Soil and
groundwater sampling were performed where warranted and remediation, if
necessary, has or is being conducted.
The Company's Environmental Site Assessments of its properties identified
several properties that may be impacted by known or suspected regional
contamination. The Environmental Site Assessments have not, however, revealed
any environmental liability that the Company believes would have a material
adverse effect on the Company's business, assets or results of operations taken
as a whole, nor is the Company aware of any such material environmental
liability. Nevertheless, it is possible that the Company's Environmental Site
Assessments do not reveal all environmental liabilities or that there are
material environmental liabilities of which the Company is unaware. Moreover,
there can be no assurance that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of its properties will not be affected by tenants, by
the condition of land or operations in the vicinity of its properties (such as
the presence of underground storage tanks), or by third parties unrelated to the
Company.
The Company believes that its properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products, except as noted
above. The Company has not been notified by any governmental authority, and is
not otherwise aware, of any material noncompliance, liability or claim relating
to hazardous or toxic substances or petroleum products in connection with any of
its present properties, other than as noted above.
15
<PAGE> 16
ITEM 2. PROPERTIES
GENERAL
As of March 1, 1998 the Company's Properties consisted of 127 commercial
properties containing approximately 16.4 million rentable square feet. The
Properties consist primarily of suburban office and R&D/industrial properties
and individually range from approximately 12,000 to 598,000 rentable square
feet. All of the Properties are located in Southern California, with 69 located
in suburban Los Angeles County, 21 in Orange County, 20 in San Diego County,12
in Riverside and San Bernardino counties, three 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 127 Properties, 103 have been built since 1980 and 39 have been
substantially renovated within the last five years. The average age of the
buildings is approximately 14 years. The Properties offer an array of amenities
including security, parking, conference facilities, on-site management, food
services and health clubs.
The LBA Portfolio, which the Company acquired on March 1, 1998, is included
in the portfolio summary described above. The LBA Portfolio consisted 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, 12 in Riverside and San Bernardino Counties and one in Ventura County.
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.
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. The Properties, including acquisitions through March 1, 1998, were 84.5%
leased (87.0% leased if the four properties under renovation are excluded) to
over 2,600 tenants as of January 1, 1998. 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, including acquisitions through March 1, 1998, and
only four tenants individually represented more than 1.0% of such aggregate
Annualized Base Rent.
The Properties 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. Finally, tenants
generally
16
<PAGE> 17
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 primarily consist of gross leases,
approximately 18% of the total portfolio leased square footage as of January 1,
1998 is leased pursuant to 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.
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<PAGE> 18
The following table sets forth certain information regarding the Company's
127 Properties as of January 1, 1998:
<TABLE>
<CAPTION>
YEAR(S) APPROXIMATE NET
BUILT/ RENTABLE SQUARE
PROPERTY NAME SUBMARKET LOCATION RENOVATED FEET
- ------------- --------- -------- --------- ----
<S> <C> <C> <C> <C>
OFFICE
LOS ANGELES COUNTY
LOS ANGELES WEST
9665 Wilshire Beverly Hills/Century City Beverly Hills 1972/92-93 158,684
Beverly Atrium Beverly Hills/Century City Beverly Hills 1989 61,314
8383 Wilshire Beverly Hills/Century City Beverly Hills 1971/93 417,463
120 Spalding Beverly Hills/Century City Beverly Hills 1984 60,656
9100 Wilshire Beverly Hills/Century City Beverly Hills 1971/90 326,227
Century Park Center Beverly Hills/Century City Los Angeles 1972/94 243,404
10350 Santa Monica Beverly Hills/Century City Los Angeles 1979 42,292
10351 Santa Monica Beverly Hills/Century City Los Angeles 1984 96,251
Westwood Terrace Westwood/West Los Angeles Los Angeles 1988 135,943
1950 Sawtelle Westwood/West Los Angeles Los Angeles 1988/95 103,772
10780 Santa Monica Westwood/West Los Angeles Los Angeles 1984 92,486
Wilshire Pacific Plaza Westwood/West Los Angeles Los Angeles 1976/1987 100,122
World Savings Center(2)(3) Westwood/West Los Angeles Los Angeles 1983 469,115
1100 Glendon(4)(5) Westwood/West Los Angeles Los Angeles 1965 282,013
2730 Wilshire(6) Westwood/West Los Angeles Santa Monica 1985 55,080
Carlsberg Corporate Center Westwood/West Los Angeles Santa Monica 1979 103,506
1919 Santa Monica* Westwood/West Los Angeles Santa Monica 1991 44,096
400 Corporate Pointe Marina Area/Culver City/LAX Culver City 1987 164,598
600 Corporate Pointe* Marina Area/Culver City/LAX Culver City 1989 273,339
Bristol Plaza Marina Area/Culver City/LAX Culver City 1982 84,014
Skyview Center Marina Area/Culver City/LAX Los Angeles 1981,87/95 391,675
5200 West Century(5) Marina Area/Culver City/LAX Los Angeles 1982 310,910
Northpoint Marina Area/Culver City/LAX Los Angeles 1991 104,235
The New Wilshire Park Mile/West Hollywood Los Angeles 1986 202,704
145 South Fairfax Park Mile/West Hollywood Los Angeles 1984 54,429
9201 Sunset Park Mile/West Hollywood Los Angeles 1963/92-95 158,585
---------
Subtotal/Weighted 4,536,913
Average -- Los Angeles West
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL PORTFOLIO PERCENT LEASED AS ANNUALIZED BASE
NET RENTABLE OF ANNUALIZED BASE NUMBER OF RENT PER LEASED
PROPERTY NAME SQUARE FEET JANUARY 1, 1998 RENT(1) ($000S) LEASES SQUARE FOOT
- ------------- ----------- --------------- --------------- ------ -----------
<S> <C> <C> <C> <C> <C>
OFFICE
LOS ANGELES COUNTY
LOS ANGELES WEST
9665 Wilshire 1.0% 90.4% $4,151 22 $28.95
Beverly Atrium 0.4% 89.1% 1,341 10 24.55
8383 Wilshire 2.5% 80.8% 6,668 124 19.78
120 Spalding 0.4% 45.5% 1,054 12 38.22
9100 Wilshire 2.0% 84.9% 5,289 73 19.10
Century Park Center 1.5% 84.6% 4,326 79 21.01
10350 Santa Monica 0.3% 93.6% 700 16 17.68
10351 Santa Monica 0.6% 94.9% 1,584 16 17.33
Westwood Terrace 0.8% 88.4% 3,117 23 25.94
1950 Sawtelle 0.6% 92.2% 1,863 32 19.46
10780 Santa Monica 0.6% 90.4% 1,610 30 19.26
Wilshire Pacific Plaza 0.6% 68.1% 1,218 29 17.86
World Savings Center(2)(3) 2.8% 86.1% 11,277 43 27.93
1100 Glendon(4)(5) 1.7% 42.5% 2,974 136 24.81
2730 Wilshire(6) 0.3% 78.9% 924 27 21.25
Carlsberg Corporate Center 0.6% 94.6% 1,889 40 19.30
1919 Santa Monica* 0.3% 96.3% 941 6 22.14
400 Corporate Pointe 1.0% 95.4% 3,435 16 21.87
600 Corporate Pointe* 1.7% 86.3% 4,293 20 18.21
Bristol Plaza 0.5% 82.5% 1,213 22 17.52
Skyview Center 2.4% 89.5% 5,699 42 16.25
5200 West Century(5) 1.9% 30.2% 1,096 17 11.68
Northpoint 0.6% 99.0% 3,261 6 31.62
The New Wilshire 1.2% 84.7% 3,607 33 21.02
145 South Fairfax 0.3% 96.7% 992 12 18.85
9201 Sunset 1.0% 63.8% 3,200 57 31.64
---- ---- ------ --- -----
Subtotal/Weighted 27.6% 79.1% 77,722 943 21.67
Average -- Los Angeles West
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
YEAR(S) APPROXIMATE NET
BUILT/ RENTABLE SQUARE
PROPERTY NAME SUBMARKET LOCATION RENOVATED FEET
- ------------- --------- -------- --------- ----
<S> <C> <C> <C> <C>
LOS ANGELES NORTH
Calabasas Commerce Center Simi/Conejo Valley Calabasas 1990 123,121
Thousand Oaks Plaza Simi/Conejo Valley Thousand Oaks 1988 13,434
Rancho Plaza Simi/Conejo Valley Thousand Oaks 1987 24,057
Pennsfield Plaza Simi/Conejo Valley Thousand Oaks 1989 21,202
Conejo Business Park Simi/Conejo Valley Thousand Oaks 1991 69,017
Marin Corporate Center Simi/Conejo Valley Thousand Oaks 1986 51,360
Evergreen Plaza Simi/Conejo Valley Thousand Oaks 1979/96 75,722
5601 Lindero Canyon Simi/Conejo Valley Westlake 1989 105,830
Renaissance Court Simi/Conejo Valley Westlake 1981/92 61,245
Westlake Gardens Simi/Conejo Valley Westlake 1998 49,639
6800 Owensmouth West San Fernando Valley Canoga Park 1986 80,014
Woodland Hills Financial Center West San Fernando Valley Woodland Hills 1972/95 224,955
Clarendon Crest West San Fernando Valley Woodland Hills 1990 43,063
16000 Ventura Central San Fernando Valley Encino 1980/96 174,841
Sumitomo Bank Building Central San Fernando Valley Sherman Oaks 1970/90-91 110,641
Noble Professional Center Central San Fernando Valley Sherman Oaks 1985/93 51,828
Sunset Pointe Plaza Valencia Newhall 1988 58,105
303 Glenoaks East San Fernando Valley/Tri-Cities Burbank 1983/96 175,449
Burbank Executive Plaza East San Fernando Valley/Tri-Cities Burbank 1983 60,395
California Federal Building East San Fernando Valley/Tri-Cities Burbank 1978 82,467
425 West Broadway East San Fernando Valley/Tri-Cities Glendale 1984 71,589
535 Brand(5) East San Fernando Valley/Tri-Cities Glendale 1973/92 109,187
Glendale Corporate Center East San Fernando Valley/Tri-Cities Glendale 1985 108,209
70 South Lake East San Fernando Valley/Tri-Cities Pasadena 1982/94 100,133
299 Euclid(5) East San Fernando Valley/Tri-Cities Pasadena 1983 73,400
150 East Colorado* East San Fernando Valley/Tri-Cities Pasadena 1979/97 61,168
5161 Lankershim* East San Fernando Valley/Tri-Cities North Hollywood 1985/97 178,317
---------
Subtotal/Weighted 2,358,388
Average -- Los Angeles
North
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF ANNUALIZED
TOTAL PORTFOLIO BASE RENT PER
NET RENTABLE PERCENT LEASED AS OF ANNUALIZED BASE NUMBER OF LEASED SQUARE
PROPERTY NAME SQUARE FEET JANUARY 1, 1998 RENT(1) ($000S) LEASES FOOT
- ------------- ----------- --------------- --------------- ------ ----
<S> <C> <C> <C> <C> <C>
LOS ANGELES NORTH
Calabasas Commerce Center 0.7% 100.0% $1,499 13 $12.17
Thousand Oaks Plaza 0.1% 100.0% 208 6 15.46
Rancho Plaza 0.1% 95.8% 344 19 14.93
Pennsfield Plaza 0.1% 100.0% 375 11 17.67
Conejo Business Park 0.4% 83.3% 1,024 24 17.80
Marin Corporate Center 0.3% 98.6% 998 31 19.70
Evergreen Plaza 0.5% 80.3% 1,066 37 17.52
5601 Lindero Canyon 0.6% 100.0% 1,206 2 11.39
Renaissance Court 0.4% 61.1% 710 13 18.97
Westlake Gardens 0.3% 22.1% 262 3 23.85
6800 Owensmouth 0.5% 84.1% 1,173 19 17.42
Woodland Hills Financial Center 1.3% 88.1% 4,472 60 22.57
Clarendon Crest 0.3% 84.7% 677 8 18.56
16000 Ventura 1.1% 89.6% 2,917 45 18.62
Sumitomo Bank Building 0.7% 89.4% 1,933 48 19.54
Noble Professional Center 0.3% 92.3% 1,063 17 22.22
Sunset Pointe Plaza 0.4% 95.7% 1,171 27 21.06
303 Glenoaks 1.0% 98.3% 3,601 24 20.88
Burbank Executive Plaza 0.4% 83.8% 1,090 9 21.54
California Federal Building 0.5% 96.3% 1,661 9 20.91
425 West Broadway 0.4% 95.2% 1,321 13 19.38
535 Brand(5) 0.7% 33.6% 293 6 8.00
Glendale Corporate Center 0.7% 72.6% 1,462 13 18.60
70 South Lake 0.6% 94.4% 1,971 16 20.87
299 Euclid(5) 0.4% 29.4% 402 1 18.60
150 East Colorado* 0.4% 75.3% 796 15 17.29
5161 Lankershim* 1.1% 83.5% 3,263 5 21.93
---- ----- ------ --- -----
Subtotal/Weighted 14.3% 83.2% 36,958 494 18.84
Average -- Los Angeles
North
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
YEAR(S) APPROXIMATE NET PORTFOLIO NET
BUILT/ RENTABLE SQUARE RENTABLE SQUARE
PROPERTY NAME SUBMARKET LOCATION RENOVATED FEET 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
</TABLE>
<TABLE>
<CAPTION>
ANNUALIZED
PERCENT BASE RENT PER
LEASED AS OF ANNUALIZED BASE NUMBER OF LEASED SQUARE
PROPERTY NAME JANUARY 1, 1998 RENT(1) ($000S) 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>
20
<PAGE> 21
<TABLE>
<CAPTION>
YEAR(S) APPROXIMATE NET
BUILT/ RENTABLE SQUARE
PROPERTY NAME SUBMARKET LOCATION RENOVATED FEET
- ------------- --------- -------- --------- ----
<S> <C> <C> <C> <C>
SAN DIEGO COUNTY
Imperial Bank Tower(3) Downtown San Diego 1982/96 540,413
Foremost Professional Plaza I-15 Corridor San Diego 1992 60,534
Activity Business Center I-15 Corridor San Diego 1987 167,045
Bernardo Regency I-15 Corridor San Diego 1986 47,916
Carlsbad Corporate Center* North Coast Carlsbad 1996 125,000
Balboa Corporate Center* Mission Valley/Kearny Mesa San Diego 1990 69,890
Panorama Corporate Center* Mission Valley/Kearny Mesa San Diego 1991 133,245
Ruffin Corporate Center* Mission Valley/Kearny Mesa San Diego 1990 45,059
Skypark Office Plaza* Mission Valley/Kearny Mesa San Diego 1986 202,164
Governor Park Plaza* North City San Diego 1986 104,065
5120 Shoreham* North City San Diego 1984 37,759
Sorrento Valley Science Park* North City San Diego 1984 181,207
Torreyanna Science Park* North City La Jolla 1980/97 81,204
Uniden Building* North City San Diego 1990 28,119
10251 Vista Sorrento* North City San Diego 1981/95 69,386
----------
Subtotal/Weighted 1,893,006
Average --
San Diego County
VENTURA COUNTY
Center Promenade West County Ventura 1982 174,837
1000 Town Center West County Oxnard 1989 107,653
Camarillo Business Center* West County Camarillo 1984/1997 154,216
----------
Subtotal/Weighted 436,706
Average --
Ventura County
RIVERSIDE AND SAN BERNARDINO
COUNTIES
Centrelake Plaza* Inland Empire West Ontario 1989 110,763
Tower Plaza I* Temecula Temecula 1988 72,350
Tower Plaza II* Temecula Temecula 1983 19,301
Tower Plaza III* Temecula Temecula 1983 12,483
Chicago Avenue Business Park* Inland Empire East Riverside 1986 47,482
Havengate Center* Inland Empire East Rancho Cucamonga 1985 80,557
HDS Plaza* Inland Empire East San Bernardino 1987 104,178
----------
Subtotal/Weighted 447,114
Average --
Riverside and San Bernardino
Counties
KERN COUNTY
Parkway Center Bakersfield Bakersfield 1992,95 61,333
California Twin Center Bakersfield Bakersfield 1983 155,189
----------
Subtotal/Weighted 216,522
Average -- Kern County
Total/Weighted
Average -- Office 14,842,099
----------
Total -- Office (Excluding
properties
under renovation) 14,066,589
----------
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL PORTFOLIO ANNUALIZED BASE
NET RENTABLE PERCENT LEASED AS OF ANNUALIZED BASE NUMBER RENT PER LEASED
PROPERTY NAME SQUARE FEET JANUARY 1, 1998 RENT(1) ($000S) OF LEASES SQUARE FOOT
- ------------- ----------- --------------- --------------- --------- -----------
<S> <C> <C> <C> <C> <C>
SAN DIEGO COUNTY
Imperial Bank Tower(3) 3.3% 81.4% $7,437 50 $16.90
Foremost Professional Plaza 0.4% 93.9% 1,094 53 19.25
Activity Business Center 1.0% 97.7% 1,691 44 10.36
Bernardo Regency 0.3% 95.1% 743 19 16.31
Carlsbad Corporate Center* 0.8% 100.0% 819 1 6.55
Balboa Corporate Center* 0.4% 100.0% 693 1 9.92
Panorama Corporate Center* 0.8% 99.9% 2,157 1 16.20
Ruffin Corporate Center* 0.3% 100.0% 387 1 8.60
Skypark Office Plaza* 1.2% 99.7% 2,712 11 13.45
Governor Park Plaza* 0.6% 91.2% 1,342 18 14.14
5120 Shoreham* 0.2% 84.5% 476 1 14.93
Sorrento Valley Science Park* 1.1% 95.2% 2,447 9 14.17
Torreyanna Science Park* 0.5% 100.0% 1,633 1 20.11
Uniden Building* 0.2% 100.0% 321 2 11.40
10251 Vista Sorrento* 0.4% 100.0% 1,029 1 14.83
---- ----- -------- ----- ------
Subtotal/Weighted 11.5% 92.9% 24,981 213 14.21
Average --
San Diego County
VENTURA COUNTY
Center Promenade 1.1% 76.7% 1,939 46 14.46
1000 Town Center 0.7% 100.0% 2,041 13 18.96
Camarillo Business Center* 0.9% 78.9% 1,767 16 14.51
--- ----- -------- ----- ------
Subtotal/Weighted 2.7% 83.2% 5,747 75 15.81
Average --
Ventura County
RIVERSIDE AND SAN BERNARDINO
COUNTIES
Centrelake Plaza* 0.7% 63.2% 1,166 14 16.65
Tower Plaza I* 0.4% 78.8% 853 15 14.95
Tower Plaza II* 0.1% 76.7% 153 17 10.32
Tower Plaza III* 0.1% 69.1% 90 18 10.45
Chicago Avenue Business Park* 0.3% 76.3% 489 6 13.49
Havengate Center* 0.5% 92.7% 1,142 12 15.29
HDS Plaza* 0.6% 82.2% 1,395 13 16.29
---- ----- -------- ----- ------
Subtotal/Weighted 2.7% 77.6% 5,288 95 15.24
Average --
Riverside and San Bernardino
Counties
KERN COUNTY
Parkway Center 0.4% 99.5% 1,092 10 17.88
California Twin Center 0.9% 92.4% 3,352 9 23.39
---- ----- -------- ----- -----
Subtotal/Weighted
Average -- Kern County 1.3% 94.4% 4,444 19 21.75
Total/Weighted
Average -- Office 90.2% 83.6% $224,584 2,428 $18.10
---- ------ -------- ----- ------
Total -- Office (Excluding
properties
under renovation) 85.5% 86.3% $219,818 2,268 $18.12
---- ------ -------- ----- ------
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
APPROXIMATE
YEAR(S) NET
BUILT/ RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET
------------- --------- -------- --------- -----------
<S> <C> <C> <C> <C>
R&D/INDUSTRIAL
ORANGE COUNTY
5602 Bolsa* West County Huntington Beach 1987/97 27,731
5672 Bolsa* West County Huntington Beach 1987 11,968
5632 Bolsa* West County Huntington Beach 1987 21,568
Huntington Commerce Center* West County Huntington Beach 1987 67,551
Savi Tech Center* North County Yorba Linda 1989 341,446
Yorba Linda Business Park* North County Yorba Linda 1988 167,142
----------
Subtotal/Weighted Average --
Orange County 637,406
SAN DIEGO COUNTY
Cymer Technology Center* I-15 Corridor Rancho Bernardo 1986 155,612
Poway Industrial* I-15 Corridor Poway 1991/96 112,000
10180 Scripps Ranch* I-15 Corridor San Diego 1978/96 43,560
10965-93 Via Frontera* I-15 Corridor Rancho Bernardo 1982/97 77,920
Westridge* North City San Diego 1984/96 48,850
----------
Subtotal/Weighted
Average -- San Diego County 437,942
RIVERSIDE AND SAN BERNARDINO
COUNTY
Ontario Airport Commerce Center* Inland Empire West Ontario 1987/97 213,127
Highlands I* Temecula Temecula 1988 26,856
Highlands II* Temecula Temecula 1990 41,210
Hunter Business Park* Inland Empire East Riverside 1990 106,782
----------
Subtotal/Weighted Average --
Riverside and San Bernardino
County 387,975
Total/Weighted Average --
R&D/Industrial 1,463,323
----------
RETAIL
SAN DIEGO AREA
Tower Plaza Retail* Temecula Temecula 1970/97 144,225
----------
Total/Weighted
Average -- Retail 144,225
----------
Portfolio Total 16,449,647
==========
Portfolio Total (excluding
properties under renovation) 15,674,137
==========
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE ANNUALIZED
OF TOTAL BASE RENT
PORTFOLIO PERCENT LEASED ANNUALIZED PER LEASED
NET RENTABLE AS OF BASE RENT(1) NUMBER SQUARE
PROPERTY NAME SQUARE FEET JANUARY 1, 1998 ($000S) OF LEASES FOOT
------------- ----------- --------------- ------- --------- ----
<S> <C> <C> <C> <C> <C>
R&D/INDUSTRIAL
ORANGE COUNTY
5602 Bolsa* 0.2% 100.0% $ 189 2 $ 6.81
5672 Bolsa* 0.1% 100.0% 75 1 6.24
5632 Bolsa* 0.1% 100.0% 155 1 7.20
Huntington Commerce Center* 0.4% 94.1% 413 19 6.50
Savi Tech Center* 2.0% 100.0% 2,556 4 7.48
Yorba Linda Business Park* 1.0% 96.5% 1,158 60 7.18
----- ----- ------------ ----- --------
Subtotal/Weighted Average --
Orange County 3.8% 98.5% 4,546 87 7.24
SAN DIEGO COUNTY
Cymer Technology Center* 0.9% 88.1% 1,742 2 12.71
Poway Industrial* 0.7% 100.0% 605 1 5.40
10180 Scripps Ranch* 0.3% 100.0% 366 1 8.40
10965-93 Via Frontera* 0.5% 89.4% 529 4 7.59
Westridge* 0.3% 100.0% 550 4 11.25
----- ----- ------------ ----- --------
Subtotal/Weighted
Average -- San Diego County 2.7% 93.9% 3,792 12 9.22
RIVERSIDE AND SAN BERNARDINO
COUNTY
Ontario Airport Commerce Center* 1.3% 97.7% 1,189 44 5.71
Highlands I* 0.2% 94.7% 218 8 8.57
Highlands II* 0.3% 84.9% 387 12 11.06
Hunter Business Park* 0.6% 65.8% 436 12 6.21
----- ----- ------------ ----- --------
Subtotal/Weighted Average --
Riverside and San Bernardino
County 2.4% 87.3% 2,230 76 6.58
Total/Weighted Average --
R&D/Industrial 8.9% 94.2% $ 10,568 175 $ 7.67
----- ----- ------------ ----- --------
RETAIL
SAN DIEGO AREA
Tower Plaza Retail* 0.9% 83.3% 1,252 21 10.41
----- ----- ------------ ----- --------
Total/Weighted
Average -- Retail 0.9% 83.3% $ 1,252 21 $ 10.41
----- ----- ------------ ----- --------
Portfolio Total 100.0% 84.5% $ 236,403 2,624 $ 17.00
===== ===== ============ ===== ========
Portfolio Total (excluding
properties under renovation) 95.3% 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) At January 1, 1998, the Company owned a 75% interest in this property and
on March 25, 1998 exercised its option to purchase the remaining 25%
interest for $27.5 million, resulting in a total acquisition cost of
approximately $110.7 million.
(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.
22
<PAGE> 23
TENANT INFORMATION
The Company's 127 Properties 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 these Properties:
<TABLE>
<CAPTION>
Weighted Percentage of
Average Percentage of Aggregate
Remaining Aggregate Portfolio
Number of Lease Term Leased Annualized
Tenant Leases in Months Square Feet Base Rent
- ------ ------ --------- ----------- ---------
<S> <C> <C> <C> <C>
State of California 25 131 1.53% 1.46%
Chevron USA, Inc. 1 45 0.74 1.12
State Compensation Insurance Fund 1 2 0.81 1.07
Eastman Kodak Company 1 48 0.50 1.00
Foote, Cone & Belding - Honig, Inc. 1 71 0.44 0.95
Atlantic Richfield Company 2 106 0.90 0.92
Walt Disney Pictures & Television, Inc. 1 68 0.71 0.91
McDonnell Douglas Corp. 1 95 1.94 0.90
Community Healthcare Alliance 1 69 0.95 0.88
Pepperdine University 1 61 0.64 0.84
Sony Pictures Entertainment, Inc. 4 70 0.82 0.83
Needham Harper & Steers/USA, Inc. 1 71 0.36 0.83
Southern Pacific Transportation 1 15 0.59 0.79
Donnelley Information Publishing, Inc. 1 9 0.51 0.76
GTE Directories Sales, Inc. 2 21 0.81 0.72
Aurora Biosciences Corp. 1 131 0.58 0.66
Cymer, Inc. 1 146 0.98 0.66
Logicon, Inc. 1 55 0.53 0.64
Systems Tax Service 3 53 0.63 0.51
Computer & Equipment Leasing Corp. 1 27 0.45 0.51
-- --- ----- -----
Total/Weighted Average(1) 51 52 15.42% 16.96%
== === ===== =====
(1) Weighted average calculation based on rentable square footage leased by each tenant.
</TABLE>
23
<PAGE> 24
LEASE DISTRIBUTIONS
The following table sets forth information relating to the distribution of
the leases for the Company's 127 Properties, 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>
LEASE EXPIRATIONS
The following table sets forth a summary schedule of the total lease
expirations for the Company's 127 Properties 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%
===== ========== ====== ============ ========= =======
(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.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently subject to any material litigation nor, to the
Company's knowledge, is any litigation threatened against the Company, other
than routine litigation arising in the ordinary course of business, some of
which is expected to be covered by liability insurance and all of which
collectively is not expected to have a material adverse effect on the
consolidated financial statements of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the
fourth quarter of the year ended December 31, 1997.
24
<PAGE> 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock began trading on the NYSE on October 4, 1996
under the symbol "ARI." On March 27, 1998, the last reported sales price per
share of Common Stock on the NYSE was $28 7/16, and there were approximately 150
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
---- --- -------------
1996
- ----
<S> <C> <C> <C>
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 13/16 0.40
Fourth Quarter 32 1/4 28 5/8 0.40
</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. The
distribution was for the period from October 9, 1996 through December 31,
1996 and is approximately equivalent to a quarterly distribution of $.40
per share and an annual distribution of $1.60 per share.
On March 17, 1998, the Company announced its first quarter 1998
dividend of $.42 per share, to be paid on April 30, 1998, to shareholders of
record at the close of business on March 31, 1998.
Concurrent with consummation of the IPO and pursuant to the
Formation Transactions, the Operating Partnership issued 2,889,071 OP Units to
the partners and members of the Arden Predecessors and certain other
"accredited" individuals in consideration for their contribution to the
Operating Partnership of ownership interests in the Properties. In addition, the
Operating Partnership issued 55,805 OP Units as partial consideration in the
acquisition of one office property purchased by the Company subsequent to the
IPO and prior to January 1, 1997. From January 1, 1997 through March 1, 1998,
the Operating Partnership issued a total of 1,052,700 OP Units as partial
consideration in the acquisition of three commercial properties, including
203,420 OP Units issued in connection with acquisition of the LBA Portfolio.
Holders of the OP Units may redeem part or all of their OP Units for cash, or at
the election of the Company, exchange such OP Units for shares of Common Stock
on a one-for-one basis.
On July 23, 1997, the Company completed a secondary public offering
(the "July 1997 Offering") of 13,750,000 shares of Common Stock. The July 1997
Offering price was $26.125 per share resulting in gross proceeds of
approximately $313.5 million. Also on July 23, 1997, the underwriters exercised
their overallotment option and, accordingly, the Company issued an additional
1,750,000 shares of common stock and received gross proceeds of approximately
$45.7 million. The aggregate proceeds to the company, net of underwriters'
discount and offering costs aggregating approximately $18.6 million were
approximately $340.6 million.
On January 21, 1998, the Company filed a Registration Statement on
Form S-3 with the Securities and Exchange Commission to offer in one or more
series, its $.01 par value Common Stock, with an aggregate public offering
price of up to $1.0 billion on terms to be determined at the time of the
offerings.
On February 18, 1998, the Company completed an offering (the
"February 18, 1998 Offering") of 881,950 shares of Common Stock. The shares from
the February 18, 1998 Offering were issued to the trustee of a registered unit
investment trust at an offering price of $28.3125 per share. Gross proceeds from
this offering were approximately $25.0 million. The aggregate proceeds to the
Company, net of
25
<PAGE> 26
underwriters' discount and offering costs aggregating approximately $1.3 million
were approximately $23.6 million.
On February 19, 1998, the Company completed a secondary public
offering (the "February 19, 1998 Offering") of 20,000,000 shares of Common
Stock. The February 19, 1998, offering price was $28.3125 per share resulting in
gross proceeds of approximately $566.3 million. Also on February 19, 1998, the
underwriters exercised their overallotment option and, accordingly, issued an
additional 3,000,000 shares of common stock and received gross proceeds of
approximately $84.9 million from the issuance of such shares. The aggregate
proceeds to the Company from the issuance of these 23,000,000 shares of Common
Stock, net of underwriters' discount and offering costs aggregating
approximately $32.4 million, were approximately $618.8 million.
On February 23, 1998, the Company completed an offering (the
"February 23, 1998 Offering") of 1,303,965 shares of Common Stock. The shares
from the February 23, 1998 Offering were issued to the trustee of a registered
unit investment trust at an offering price of $28.375 per share. Gross proceeds
from this offering were approximately $37.0 million. The aggregate proceeds to
the Company, net of underwriters' discount and offering costs aggregating
approximately $1.9 million were approximately $35.1 million.
26
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated/combined
financial data for Arden Realty, Inc. and the Arden Predecessors (in thousands
except per share amounts) and should be read in conjunction with the
consolidated/combined financial statements included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
ARDEN REALTY, INC. ARDEN PREDECESSORS
------------------ ------------------
FOR THE YEAR FOR THE PERIOD FOR THE PERIOD
ENDED OCTOBER 9, 1996 TO JANUARY 1, 1996 TO
DECEMBER 31, 1997 DECEMBER 31, 1996 OCTOBER 8, 1996
----------------- ----------------- ---------------
<S> <C> <C> <C>
OPERATING DATA:
Revenues $ 133,817 $ 19,434 $ 39,135
Property operating expenses 44,332 6,005 14,224
--------- ---------- --------
89,485 13,429 24,911
General and administrative expense 4,322 753 1,758
Interest expense 19,511 1,280 24,521
Loss on valuation of derivative 3,111 -- --
Depreciation and amortization 20,260 3,108 5,264
Interest and other income (1,630) (138) (1,330)
Equity in net loss (income) of
noncombined entities -- -- 336
--------- ---------- --------
Income (loss) before minority
interests and extraordinary
items 43,911 8,426 (5,638)
Minority interests' share of loss
(income) of Arden
Predecessors -- -- 721
Minority interests (4,281) (993) --
--------- ---------- --------
Income (loss) before
extraordinary items 39,630 7,433 (4,917)
Extraordinary (loss) gain on
early extinguishment of debt,
net of minority interests' share -- (13,105) 1,877
--------- ---------- --------
Net income (loss) $ 39,630 $ (5,672) $ (3,040)
========= ========== ========
Earnings per share:
Net income (loss) per common share:
Income before extraordinary item $ 1.43 $ .34
Extraordinary item - loss on early
extinguishment of debt -- (.60)
--------- ----------
Net income (loss) per
common share - Basic $ 1.43 $ (.26)
========= ==========
Net income (loss) per share - Diluted $ 1.41 $ (.26)
========= ==========
Weighted average common
shares outstanding:
Basic 27,794 21,680
========== ==========
Diluted 28,039 21,680
========== ==========
Cash dividends declared $ 1.60 $ .36
========== ==========
</TABLE>
<TABLE>
<CAPTION>
ARDEN PREDECESSORS
-------------------------------------
FOR THE YEARS ENDED
DECEMBER 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OPERATING DATA:
Revenues $ 10,236 $ 5,867 $3,662
Property operating expenses 3,340 2,191 1,480
-------- ------- ------
6,896 3,676 2,182
General and administrative expense 1,377 689 386
Interest expense 5,537 1,673 646
Loss on valuation of derivative -- -- --
Depreciation and amortization 1,898 1,143 499
Interest and other income (1,457) (685) --
Equity in net loss (income) of
noncombined entities 116 (201) (4)
-------- ------- ------
Income (loss) before minority
interest and extraordinary
items (575) 1,057 655
Minority interests' share of loss
(income) of Arden
Predecessors (1) 1 --
Minority interests -- -- --
-------- ------- ------
Income (loss) before
extraordinary items (576) 1,058 655
Extraordinary (loss) gain on
early extinguishment of debt,
net of minority interests' share -- -- --
-------- ------- ------
Net income (loss) $ (576) $ 1,058 $ 655
======== ======= ======
Earnings per share:
Net income (loss) per common share:
Income before extraordinary item
Extraordinary item - loss on early
extinguishment of debt
Net income (loss) per
common share - Basic
Net income (loss) per share - Diluted
Weighted average common
shares outstanding:
Basic
Diluted
Cash dividends declared
</TABLE>
<TABLE>
<CAPTION>
ARDEN PREDECESSORS
------------------
DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Commercial properties, net
of accumulated depreciation $1,203,172 $529,568 $160,874 $34,977 $25,404
Total assets 1,284,004 551,256 182,379 46,090 27,911
Mortgage loans payable and
unsecured lines of credit 477,566 155,000 168,451 32,944 24,356
Total liabilities 515,048 173,612 174,163 34,148 25,190
Minority interests 95,973 45,667 100
99 --
Total Stockholders' equity/
Owners' equity 672,983 331,977 8,116 11,843 2,721
</TABLE>
27
<PAGE> 28
ARDEN REALTY, INC.
AND
ARDEN PREDECESSORS
(In thousands, except number of properties and percentages)
<TABLE>
<CAPTION>
ARDEN REALTY, INC. ARDEN PREDECESSORS
-------------------------------------------- ------------------
FOR THE FOR THE PERIOD FOR THE PERIOD
YEAR ENDED OCTOBER 9, 1996 TO JANUARY 1, 1996 TO
DECEMBER 31, 1997 DECEMBER 31, 1996 OCTOBER 8, 1996
----------------- ----------------- ---------------
<S> <C> <C> <C>
OTHER DATA:
Funds from Operations (1) $ 67,282 $ 11,534 $ (374)
Company's Share Percentage 90.3% 88.2%
--------- ---------
Company's Share of Funds
from Operations $ 60,756 $ 10,173 $ (374)
========= ========= =========
Cash flows from operating activities 35,116 8,665 7,387
Cash flows from investing activities (659,670) (164,763) (119,083)
Cash flows from financing activities 622,222 163,730 119,908
Number of Properties
owned at period end 72 33 22
Gross rentable square feet
of Properties owned at end
of period 10,326 5,443 3,739
Occupancy of Properties
owned at end of period 84% 85% 88%
</TABLE>
<TABLE>
<CAPTION>
ARDEN PREDECESSORS
------------------
FOR THE YEARS ENDED
DECEMBER 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
OTHER DATA:
Funds from Operations (1) $ 1,323 $ 2,200 $ 1,154
Company's Share Percentage
Company's Share of Funds
from Operations $ 1,323 $ 2,200 $ 1,154
========= ======== ========
Cash flows from operating activities (8,819) 834 1,186
Cash flows from investing activities (123,358) (17,921) (25,965)
Cash flows from financing activities 132,356 16,845 25,632
Number of Properties
owned at period end 17 8 3
Gross rentable square feet
of Properties owned at end
of period 2,634 1,130 530
Occupancy of Properties
owned at end of period 88% 82% 84%
</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 and unusual items, 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.
28
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
historical consolidated financial statements of the Company and the combined
financial statements of the Arden Predecessors and related notes thereto
included elsewhere in this Form 10-K.
Since its initial public offering in October 1996, the Company has pursued a
strategy of acquiring underperforming commercial properties, properties in need
of renovation and properties which provide attractive yields with stable cash
flow, all in Southern California submarkets where it can utilize its local
market expertise. The Company has also used its active in-house management,
leasing and finance expertise to maximize growth in cash flow. In particular,
through December 31, 1997 the Company has:
- - Raised approximately $433.5 million of equity in its initial public
offering and approximately $359.2 million in a July 1997 secondary public
offering. Proceeds to the Company from these offerings, net of
underwriters' discount, advisory fee and offering costs aggregating
approximately $54.8 million were approximately $737.9 million.
- - Completed $175.0 million of secured, non-recourse mortgage financing which
bears interest at a fixed rate of 7.52% per annum.
- - Increased its borrowing capacity under lines of credit from $150 million at
December 31, 1996 to $310 million at December 31, 1997, thereby providing
flexibility in pursuing acquisitions and to fund tenant improvements and
capital expenditures.
- - Acquired a total of 72 commercial properties with approximately 10.3
million rentable square feet, including two office properties aggregating
approximately 182,587 rentable square feet that are undergoing major
renovation.
- - Increased its total market capitalization from $599.0 million at December
31, 1996 to $1.1 billion at December 31, 1997.
The Company intends to continue focusing on maximizing growth in cash flow and
enhancing the value of its portfolio of commercial properties. These objectives
will be pursued by active management of its existing portfolio and by
acquisitions of underperforming office and R&D/industrial properties, properties
in need of renovation or properties which provide attractive yields with stable
cash flows in submarkets where it can utilize its local market expertise. When
market conditions permit, the Company may also develop new office or
R&D/industrial properties in submarkets where it has local market expertise.
The Company's financial position and operating results are primarily comprised
of its portfolio of commercial properties and income derived therefrom.
Therefore, financial data from period to period will be affected by the timing
of any significant property acquisitions. Due to the Company's and the Arden
Predecessors' aggressive acquisition program, the Company expects there will be
significant variability in financial data from period to period.
29
<PAGE> 30
RECENT DEVELOPMENTS
In 1998, the Company has continued to identify and acquire commercial properties
that meet its acquisition profile as described above. Through March 1, 1998, the
Company acquired an additional 55 primarily office and R&D/industrial properties
with approximately 6,123,300 rentable square feet for approximately $765.6
million (the "1998 Acquisitions"). Including the 1998 Acquisitions, the
Company's portfolio of commercial properties consists of 127 properties
containing approximately 16.4 million rentable square feet which are all located
in Southern California. See "Acquisitions" under Item 1 of this Form 10-K for
additional information regarding the 1998 Acquisitions. The Company funded the
1998 Acquisitions with proceeds from equity offerings (see discussion below),
mortgage financing, draws on its lines of credit, and the issuance of OP Units.
Also on February 23, 1998, the Company completed the most recent of three 1998
equity offerings (the "1998 Offerings") resulting in the issuance of an
aggregate of 25,185,915 shares of Common Stock with gross proceeds totaling
approximately $713.2 million. Aggregate proceeds to the Company from the 1998
Offerings, net of underwriters' discount and offering costs aggregating
approximately $35.7 million were approximately $677.5 million. Of these 1998
Offerings, 2,185,915 shares of common stock were issued to the trustees' of two
unrelated registered unit investment trusts and the remaining 23,000,000 shares
were issued in a secondary public offering. The Company used the net proceeds
from the 1998 Offerings to fund the 1998 Acquisitions described above, to
repay the outstanding balances on its lines of credit and for working capital.
RESULTS OF OPERATIONS
Comparison of the year ended December 31, 1997 to the year ended
December 31, 1996. During 1997 the Company and the Arden Predecessors purchased
38 properties resulting in an increase in real estate investments of
approximately $661 million.
The Company's management believes that in order for a meaningful
analysis of the financial statements to be made, certain transactions which
occurred in 1996 should be considered in a manner which makes each accounting
period comparable. Accordingly, the revenue and expenses for the noncombined
entities for the period from January 1, 1996 to October 8, 1996 have been
included as though they were combined, with intercompany management fees
relating to the noncombined entities of $704,000 eliminated in 1996 in the
following discussion. The following section discusses the results of operations,
as adjusted and in thousands.
30
<PAGE> 31
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------- DOLLAR PERCENT
1997 1996 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
REVENUE
Revenues from rental operations
Rental $118,085 $62,156 $ 55,929 90%
Tenant reimbursements 5,945 3,076 2,869 93
Parking, net of expense 7,397 4,948 2,449 49
Other rental operations 2,390 1,305 1,085 83
-------- ------- -------- ----
$133,817 $71,485 $ 62,332 87%
======== ======= ======== ====
EXPENSES
Property expenses:
Repairs and maintenance $ 15,154 $ 7,287 $ 7,867 108%
Utilities 14,321 7,054 7,267 103
Real estate taxes 8,003 3,741 4,262 114
Insurance 2,125 3,049 (924) (30)
Ground rent 314 189 125 66
Marketing and other 4,415 3,451 964 28
-------- ------- -------- ----
Total property expenses 44,332 24,771 19,561 79
General and administrative 4,322 2,512 1,810 72
Interest 19,511 33,157 (13,646) (41)
Loss on valuation of derivative 3,111 -- 3,111 --
Depreciation and amortization 20,260 11,078 9,182 83
-------- ------- -------- ----
Total expenses $ 91,536 $71,518 $ 20,018 28%
======== ======= ======== ====
</TABLE>
Rental revenue increased approximately $55.9 million or 90% in 1997
as compared to 1996. Rental revenue from properties acquired in 1996 increased
approximately $24.6 million in 1997 as compared to the prior year, reflecting a
full year of rental revenue from such properties. Rental revenue from properties
acquired in 1997 was approximately $30.5 million. Rental revenue from properties
owned for all of 1996 and 1997 increased approximately $843,000 in 1997 as
compared to the prior year, primarily from increased occupancy.
Tenant reimbursements increased approximately $2.9 million or 93% in
1997 as compared to 1996. Tenant reimbursements from properties acquired in 1996
increased approximately $922,000 in 1997 as compared to the prior year. Tenant
reimbursements from properties acquired in 1997 were approximately $1.4 million.
Tenant reimbursements from properties owned for all of 1996 and 1997 increased
approximately $527,000 in 1997 as compared to the prior year, primarily due to
additional 1996 tenant reimbursement billings recognized in 1997.
Parking revenue, net of expense increased approximately $2.4 million
or 49% in 1997 as compared to 1996. Parking revenue, net from properties
acquired in 1996 increased approximately $1.1 million in 1997 as compared to the
prior year. Parking revenue, net from properties acquired in 1997 was
approximately $1.0 million. Parking revenue, net from properties owned for all
of 1996 and 1997 increased approximately $262,000 in 1997 as compared to the
prior year, primarily resulting from increased occupancy.
31
<PAGE> 32
Revenue from other rental operations, consisting primarily of
miscellaneous tenant charges such as after hours utility, heating and air
conditioning charges, increased by approximately $1.1 million or 83% in 1997 as
compared to the prior year. The increase associated with properties acquired in
1996 was $532,000 and such revenues from properties purchased in 1997 were
$382,000. Such revenues from properties owned for all of 1996 and 1997 increased
approximately $170,000 primarily due to a non-recurring early lease termination
fee recognized in 1997.
Total property expenses in 1997 were $44.3 million, or 33% of total
revenues from rental operations, compared with total property expenses of $24.8
million or 35% of total revenues from rental operations in 1996. The increase in
total property expenses associated with properties acquired in 1996 was
approximately $8.9 million, reflecting a full year of expenses from such
properties. Expenses from properties acquired in 1997 were approximately $11.0
million. Expenses from properties owned for all of 1996 and 1997 decreased
approximately $433,000 in 1997 as compared to the prior year. The decrease in
total property expenses as a percent of revenues from rental operations was
primarily due to benefits achieved from economies of scale across the entire
portfolio.
General and administrative expenses were approximately $4.3 million
or 3.2% of total revenues in 1997 as compared to $2.5 million or 3.5% of total
revenues in 1996. General and administrative expenses as a percentage of total
revenues decreased in 1997 compared to 1996 primarily due to benefits achieved
from economies of scale across the entire portfolio.
Interest expense decreased approximately $13.6 million or 41% in
1997 as compared to 1996, primarily as a result of lower outstanding debt
balances in 1997. The Company used the net proceeds of approximately $737.9
million from equity offerings in October 1996 and July 1997 to repay outstanding
indebtedness and acquire additional commercial properties.
Depreciation and amortization expense increased $9.2 million or 83%
in 1997, primarily due to 1996 and 1997 acquisitions.
Other income increased approximately $314,000 in 1997, primarily due
to higher interest income from a mortgage note receivable acquired in September
1997.
Following is a comparison of property operating data for 17
properties which were owned for the entire twelve months ended December 31, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------- DOLLAR PERCENT
1997 1996 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Revenues from rental operations $51,086 $49,284 $1,802 4%
Property expenses 16,898 17,331 (433) (2)
------- ------- ------ --
Net $34,188 $31,953 $2,235 7%
======= ======= ====== ==
</TABLE>
Comparison of the year ended December 31, 1996 to the year ended December 31,
1995. During 1996 the Company and the Arden Predecessors purchased 16 properties
resulting in an increase in real estate investments of approximately $266
million.
The Company's management believes that in order for a meaningful
analysis of the financial statements to be made, certain transactions which
occurred in 1996 should be considered in a manner
32
<PAGE> 33
which makes each accounting period comparable. Accordingly, the revenue and
expenses for the noncombined entities for the year ended December 31, 1995 and
the period from January 1, 1996 to October 8, 1996 have been included as though
they were combined, with intercompany management fees relating to the
noncombined entities of $704,000 and $831,000 eliminated in 1996 and 1995,
respectively, in the following discussion. The following section discusses the
results of operations, as adjusted. (in thousands)
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------- DOLLAR PERCENT
1996 1995 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
REVENUE
Revenues from rental operations
Rental $62,156 $24,442 $37,714 154%
Tenant reimbursements 3,076 822 2,254 274
Parking, net of expense 4,948 1,543 3,405 221
Other rental operations 1,305 930 375 40
------- ------- ------- ---
Total revenue $71,485 $27,737 $43,748 158%
======= ======= ======= ===
EXPENSES
Property expenses:
Repairs and maintenance $ 7,287 $ 3,235 $ 4,052 125%
Utilities 7,054 3,076 3,978 129
Real estate taxes 3,741 1,590 2,151 135
Insurance 3,049 626 2,423 387
Ground rent 189 30 159 530
Marketing and other 3,451 1,588 1,863 117
------- ------- ------- ---
Total property expenses 24,771 10,145 14,626 144
General and administrative 2,512 1,404 1,108 79
Interest 33,157 13,780 19,377 141
Depreciation and amortization 11,078 4,346 6,732 155
------- ------- ------- ---
Total expenses $71,518 $29,675 $41,843 141%
======= ======= ======= ===
</TABLE>
Rental revenue increased approximately $37.7 million or 154% in 1996
as compared to 1995. Rental revenue from properties acquired in 1995 increased
approximately $17.8 million in 1996 as compared to the prior year, reflecting a
full year of rental revenue from such properties. Rental revenue from properties
acquired in 1996 was $19.7 million. Rental revenue from properties owned for all
of 1995 and 1996 increased approximately $254,000 in 1996 as compared to the
prior year, primarily from increased occupancy.
Tenant reimbursements increased approximately $2.3 million or 274%
in 1996 as compared to 1995. Tenant reimbursements from properties acquired in
1995 increased approximately $1.1 million in 1996 as compared to the prior year.
Tenant reimbursements from properties acquired in 1996 were approximately $1.3
million. Tenant reimbursements from properties owned for all of 1995 and 1996
decreased approximately $109,000 in 1996 compared to 1995, primarily due to
resetting base years in the expense recovery calculation for leases that were
renewed or retenanted.
Parking revenue, net of expense increased approximately $3.4 million
or 221% in 1996 as compared to 1995. Parking revenue, net from properties
acquired in 1995 increased approximately $2.8 million in 1996 as compared to the
prior year. Parking revenue, net from the properties acquired in 1996 was
$544,000.
33
<PAGE> 34
Parking revenue, net from properties owned for all of 1995 and 1996 increased
approximately $16,000 in 1996 as compared to the prior year, primarily from
increased occupancy.
Revenues from other rental operations, consisting primarily of
miscellaneous tenant charges such as after hours utility, heating and air
conditioning charges, increased by $375,000 or 40% in 1996 as compared to the
prior year. The increase associated with properties acquired in 1995 was
$538,000. Revenues from properties purchased in 1996 were $251,000. Revenues
from other rental operations for properties owned for all of 1995 and 1996
decreased approximately $414,000 due to a non-recurring lease termination fee
recognized in 1995.
In 1996, total property expenses were $24.8 million, or 35% of total
revenues from rental operations, compared with total property expenses of $10.1
million or 37% of total revenues from rental operations in 1995. The increase in
expenses associated with properties acquired in 1995 was $7.4 million,
reflecting a full year of expenses from such properties. Expenses from
properties acquired in 1996 were $7.4 million. Expenses from properties owned
for all of 1995 and 1996 decreased approximately $181,000 in 1996 as compared to
the prior year.
General and administrative expenses increased approximately $1.1
million or 79% in 1996 as compared to the prior year, resulting from higher
management and administrative costs associated with the increased portfolio size
and the operations of the Company as a public real estate investment trust.
Interest expense increased approximately $19.4 million or 141% in
1996 as compared 1995, primarily as a result of higher outstanding balances
during 1996, which were used to fund property acquisitions.
Depreciation and amortization expense increased $6.7 million or 155%
in 1996, primarily due to 1996 and 1995 acquisitions.
Other income increased $593,000 primarily due to an increase in
interest income earned on higher restricted cash balances in 1996.
Following is a comparison of property operating data for eight
properties which were owned for the entire twelve months ended December 31, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------- DOLLAR PERCENT
1996 1995 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Revenues from rental operations $21,141 $21,394 $(253) (1)%
Property expenses 7,361 7,542 (181) (2)
------- ------- ----- --
Net $13,780 $13,852 $ (72) (1)%
======= ======= ===== ==
</TABLE>
34
<PAGE> 35
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities increased by $19.1 million or
119%, to $35.1 million for the year ended December 31, 1997, as compared to
$16.0 million for the year ended December 31, 1996 primarily due to operating
results from the 1996 and 1997 acquisitions. Cash used in investing activities
increased by $375.8 million, or 132.4%, to $659.7 million in 1997 compared to
$283.8 in 1996 primarily due to the Company's aggressive property acquisition
activity in 1997 and an increase in capital expenditures on properties owned.
Cash provided by financing activities increased by $338.6 million, or 119.3%, to
$622.2 million, as compared to $283.6 million for 1996. Cash provided by
financing activities for the year ended December 31, 1997 consisted primarily of
net proceeds from mortgage loans, unsecured lines of credit, and the issuance of
13,750,000 shares of common stock in a July 1997 secondary offering partially
offset by distributions to shareholders and minority interests. Cash provided by
financing activities for the year ended December 31, 1996 consisted primarily of
net proceeds from the issuance of 21,674,500 shares of common stock in the
Company's initial public offering, partially offset by net payments on mortgage
loans and unsecured lines of credit.
CAPITAL COMMITMENTS
As of December 31, 1997 the Company had approximately $1.0 million
outstanding in capital commitments related to tenant improvements, renovation
costs, and general property related capital expenditures.
AVAILABLE BORROWINGS, CASH BALANCE AND CAPITAL RESOURCES
The Company has a $300 million unsecured line of credit (Amended
Credit Facility) from a group of banks led by Wells Fargo. The Amended Credit
Facility bears interest at a rate ranging between LIBOR plus 1.2% and LIBOR plus
1.45% (effective rate of 7.5% at December 31, 1997) depending on the leverage
ratio of the Company. Once the Company achieves an investment grade unsecured
debt rating, the interest rate may be lowered to between LIBOR Plus 0.9% and
LIBOR plus 1.15% depending on such debt rating. Under certain circumstances, the
Company has the option to convert the interest rate from LIBOR to the prime rate
plus 0.5%. In addition, the Amended Credit Facility has a commitment fee ranging
from .125% to .25% on the unused balance. The Amended Credit Facility matures on
September 1, 2000. Proceeds from the Amended Credit Facility will be used, among
other things, to provide funds for tenant improvements and capital expenditures
and provide for working capital and other corporate purposes. As of December 31,
1997, the aggregate outstanding balance on the Amended Credit Facility was
$230.4 million, and $7.0 million was available for additional borrowing. On
February 19, 1998, the aggregate outstanding balance of $277.9 million on the
Amended Credit Facility was repaid with proceeds from equity offerings of common
stock.
The Company also has an unsecured line of credit with a total
commitment of $10.0 million from City National Bank (the "City National Bank
Credit Facility"). The City National Bank Credit Facility accrues interest at
the City National Bank Prime Rate less 0.875% (effective rate of 7.6% at
December 31, 1997), and is scheduled to mature on August 1, 1998. Proceeds from
the City National Bank Credit Facility will be used, among other things, to
provide funds for tenant improvements and capital expenditures and provide for
working capital and other corporate purposes. As of December 31, 1997, the
aggregate outstanding balance on the City National Bank Credit Facility was
$10.0 million. On
35
<PAGE> 36
February 19, 1998 the Company repaid the outstanding balance of $5.0 million on
the City National Bank Credit Facility with proceeds from equity offerings of
common stock.
As of December 31, 1997, the Company had $9.3 million in cash and
cash equivalents, including $4.0 million in restricted cash, representing an
interest bearing cash deposit required by one of the Company's mortgage loans
payable.
On July 23, 1997, the Company completed a secondary public offering
of 13,750,000 shares of Common Stock (the "July 1997 Offering"). The July 1997
Offering price was $26.125 per share resulting in gross proceeds of $359.2
million. The aggregate proceeds to the Company, net of underwriters' discount
and offering costs aggregating approximately $18.6 million were approximately
$340.6 million. Proceeds from the Company's July 1997 Offering were used to pay
down the Company's Amended Credit Facility, City National Bank Credit Facility,
and to acquire additional commercial properties.
On January 12, 1998, the Company filed a Form S-3 Registration
Statement (the "Registration Statement") with the Securities and Exchange
Commission to offer in one or more series, shares of its $.01 par value common
stock with an aggregate public offering price of up to $1.0 billion. The
Registration was declared effective on January 21, 1998.
Also on February 23, 1998, the Company completed the most recent of
three 1998 equity offerings (the "1998 Offerings") resulting in the issuance of
an aggregate of 25,185,915 shares of Common Stock with gross proceeds totaling
approximately $713.2 million. Aggregate proceeds to the Company from these
offerings, net of underwriters' discount and offering costs aggregating
approximately $35.7 million were approximately $676.0 million. Of these 1998
offerings, 2,185,915 shares of common stock were issued to the trustees' of two
unrelated registered unit investment trusts and the remaining 23,000,000 shares
were issued in a secondary public offering. Net proceeds from the 1998 Offerings
were used to repay the outstanding balances on the Amended Credit Facility and
City National Bank Credit Facility and to fund a portion of the LBA Portfolio
acquisition. The remaining proceeds were invested in short-term commercial paper
and used for working capital.
As of March 27, 1998, the Company had $300.0 million available
under its lines of credit and the capacity to issue up to $286.8 million of its
common stock pursuant to the Registration Statement.
The Company expects to continue meeting its short-term liquidity and
capital requirements generally through its working capital and net cash provided
by operating activities. The Company believes that the net cash provided by
operating activities will continue to be sufficient to pay any distributions
necessary to enable the Company to continue qualifying as a REIT. The Company
also believes that the foregoing sources of liquidity will be sufficient to fund
its short-term liquidity needs for the foreseeable future, including recurring
non-revenue enhancing capital expenditures, tenant improvements and leasing
commissions.
The Company expects to meet certain long-term liquidity and capital
requirements such as property acquisitions, scheduled debt payments, renovation
costs, expansions and other non-recurring capital expenditures through long-term
secured and unsecured indebtedness and the issuance of additional equity
securities. The Company also expects to use the remaining funds available under
the
36
<PAGE> 37
Amended Credit Facility to fund acquisitions, development activities and
capital improvements on an interim basis.
FUNDS FROM OPERATIONS
The Company considers Funds from Operations, as defined by NAREIT, to be a
useful financial measure of the operating performance for an equity REIT. The
Company believes that Funds from Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt and
to fund acquisitions and other capital expenditures. Funds from Operations does
not represent net income or cash flows from operations as defined by generally
accepted accounting principles ("GAAP") and it should not be considered as an
alternative to these indicators in evaluating liquidity or operating performance
of the Company.
The following table reflects the calculation of the Company's Funds
from Operations for the year ended December 31, 1997 and for the period October
9, 1996 to December 31, 1996 and for the Arden Predecessors for the period
January 1, 1996 to October 8, 1996 and for the year ended December 31, 1995:
<TABLE>
<CAPTION>
ARDEN REALTY, INC. ARDEN PREDECESSORS
------------------ ------------------
FOR THE FOR THE PERIOD FOR THE PERIOD
YEAR ENDED OCTOBER 9, 1996 TO JANUARY 1, 1996 TO FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 OCTOBER 8, 1996 DECEMBER 31,1995
----------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Funds from Operations:
Income (loss) before
minority interests and
extraordinary items $43,911 $ 8,426 $(5,638) $ (575)
Depreciation and
amortization 20,260 3,108 5,264 1,898
Loss on valuation of derivative 3,111 -- -- --
------- ------- ------- -------
Funds from Operations $67,282 $11,534 $ (374) $ 1,323
Company's Share Percentage 90.3% 88.2%
Company's Share of Funds
from Operations $60,756 $10,173 $ (374) $ 1,323
======= ======= ======= =======
</TABLE>
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 GAAP), excluding gains (or
losses) from debt restructuring and unusual items, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Management considers Funds from Operations an
appropriate measure of performance of an equity REIT because it is predicated on
cash flow analyses. The Company computes Funds from Operations in accordance
with standards established by the White Paper which 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 indicator of the Company's financial performance
or to cash flow from operating activities (determined in accordance with GAAP)
as a measure of the Company's liquidity, nor is it indicative of funds available
to fund the Company's cash needs, including its ability to make distributions.
37
<PAGE> 38
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send tenant invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company intends to initiate communications with all of its
significant service providers, lenders, and large tenants to determine the
extent to which the Company's interface systems are vulnerable to those third
parties' failure to remediate their own Year 2000 Issues. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems.
The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for the Year 2000 modifications.
The Company anticipates completing the Year 2000 project prior to any
anticipated impact on its operating systems. The Company can not presently
estimate the total cost of the Year 2000 project, however, management does not
anticipate such costs will have a material effect on the results of operations.
The Company's ability to complete the Year 2000 modifications prior
to any anticipated impact on its operating systems is based on numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that this estimate will be achieved. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to located
and correct all relevant computer codes, and similar uncertainties.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by
Regulation S-X are included in this Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
<PAGE> 39
PART III
Certain information required by Part III is omitted from this Report
in that the Company will file a definitive proxy statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A for its Annual Meeting of
Stockholders to be held on May 7, 1998 (the "Proxy Statement") and the
information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the section captioned "Proposal I;
Election of Directors" of the Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section captioned "Executive
Compensation" of the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained in the section captioned "Principal and
Management Stockholders" of the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section captioned "Certain
Relationships and Related Transactions" of the Proxy Statement is incorporated
herein by reference.
39
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE, AND REPORTS ON
FORM 8-K
(a) (1 and 2) Financial Statements and Schedule
The following consolidated financial information is included as a
separate section of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARDEN REALTY, INC. AND THE ARDEN PREDECESSORS
Report of Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996 F-2
Consolidated Statements of Operations for the year ended December
31, 1997 and for the period October 9, 1996 to December 31, 1996
and Combined Statements of Operations for the period January 1,
1996 to October 8, 1996 and for the year ended December 31, 1995 F-3
Consolidated Statements of Stockholders' Equity for year ended December 31, 1997
and for the period October 9, 1996 to December 31, 1996 and
Combined Statements of Owners' Equity for the period January 1,
1996 to October 8, 1996
and for the year ended December 31, 1995 F-4
Consolidated Statements of Cash Flows for the year ended December 31, 1997
and for the period October 9, 1996 to December 31, 1996 and
Combined Statements of Cash Flows for the period January 1, 1996
to October 8, 1996 and for the
year ended December 31, 1995 F-5
Notes to Financial Statements F-6
Schedule III - Commercial Properties and Accumulated Depreciation F-21
</TABLE>
All other schedules are omitted since the required information is
not present in amounts sufficient to require submission of the schedule or
because the information required is included in the financial statements and
notes thereto.
40
<PAGE> 41
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Articles of Incorporation as filed as an
exhibit to Registration Statement on Form S-11 (No. 333-8163) and
incorporated herein by reference.
3.2 By-Laws of Registrant as filed as an exhibit to Registration
Statement on Form S-11 (No. 333-8163) and incorporated herein by
reference.
3.3 Specimen of certificate representing shares of Common Stock as filed
as an exhibit to Registration Statement on Form S-11 (No. 333-8163)
and incorporated herein by reference.
10.1 Amended and Restated Agreement of Limited Partnership of the
Operating Partnership as filed as an exhibit to Registration
Statement on Form S-11 (No. 333-8163) and incorporated herein by
reference.
10.1.1 Agreement for Purchase and Sale by and among AEW/LBA Acquisition
Co., LLC, a California limited liability company, AEW/LBA
Acquisition Co. II, LLC, a California limited liability company, Cal
Portfolio VI, L.L.C., a Delaware limited liability company, AEW/LBA
Acquisition Co. IV, LLC, a California limited liability company,
Spectrum Huntington Center, LLC, a California limited liability
company, Spectrum Chicago Avenue, LLC, a California limited
liability company, Spectrum Waples Street, LLC, a California limited
liability company, Spectrum Lambert Plaza, LLC, a California limited
liability company, and Arden Realty, Inc., a Maryland corporation as
filed as an exhibit to Form 8-K filed on March 16, 1998 and
incorporated herein by reference.
10.2 1996 Stock Option and Incentive Plan as filed as an exhibit to
Registration Statement on Form S-11 (No. 333-8163) and incorporated
herein by reference.
10.2.1 Closing Agreement dated March 2, 1998 as filed as an exhibit to Form
8-K filed on March 16, 1998 and incorporated herein by reference.
10.3 Form of Officers and Directors Indemnification Agreement as filed as
an exhibit to Registration Statement on Form S-11 (No. 333-8163) and
incorporated herein by reference.
10.3.1 Warrant Agreement dated as of March 2, 1998 by and among Arden
Realty, Inc., a Maryland corporation and AEW/LBA Acquisition Co. II,
LLC, a California limited liability company as filed as an exhibit
to Form 8-K filed on March 16, 1998 and incorporated herein by
reference.
10.4 Employment Agreement between the Company and Mr. Ziman as filed as
an exhibit to Registration Statement on Form S-11 (No. 333-8163) and
incorporated herein by reference.
41
<PAGE> 42
10.5 Employment Agreement between the Company and Mr. Coleman as filed as
an exhibit to Registration Statement on Form S-11 (No. 333-8163) and
incorporated herein by reference.
10.6 Employment Agreement between the Company and Ms. Laing as filed as
an exhibit to Registration Statement on Form S-11 (No. 333-8163) and
incorporated herein by reference.
10.7 Miscellaneous Rights Agreement among the Company, the Operating
Partnership, NAMIZ, Inc. and Mr. Ziman as filed as an exhibit to
Registration Statement on Form S-11 (No. 333-8163) and incorporated
herein by reference.
10.33 Credit Facility documentation consisting of First Amended and
Restated Revolving Credit Agreement by and among the Operating
Partnership and Chase Manhattan Bank, Lehman Brothers Realty
Corporation and Wells Fargo Bank as filed as an exhibit to
Registration Statement of Form S-11 (No.333-30059) and incorporated
herein by reference.
10.34 Mortgage Financing documentation consisting of Loan Agreement by and
between the Company's special purpose financing subsidiary and
Lehman Brothers Realty Corporation (the Loan Agreement includes the
Mortgage Note, Deed of Trust, and form of Tenant Estoppel
Certificate and Agreement as exhibits) as filed as an exhibit to
Registration Statement of Form S-11 (No. 333-30059) and incorporated
herein by reference.
21.1 Subsidiary of Registrant as filed as an exhibit to Registration
Statement on Form S-11 (No. 333-8163) and incorporated herein by
reference.
23.1 Consent of Independent Auditors.
27 Financial Data Schedule
(b) Reports on Form 8-K
On October 15, 1997 the Company filed a report on Form 8-K relating
to the acquisition of certain real estate properties. The Company filed the
required financial statements and information under cover of Form 8-K/A on
November 14, 1997.
On November 12, 1997 the Company filed a report on Form 8-K relating
to the acquisition of certain real estate properties. The Company filed the
required financial statements and information under cover of Form 8-K/A on
November 24, 1997.
On December 18, 1997, the Company filed a report on Form 8-K
relating to the acquisition of certain real estate properties.
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on March
31, 1998.
ARDEN REALTY, INC.
By: /s/ Richard S. Ziman
-------------------------------
Richard S. Ziman
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Richard S. Ziman Chairman of the Board, Chief Executive March 31, 1998
- ----------------------------- Officer and Director
Richard S. Ziman
/s/ Victor J. Coleman President, Chief Operating Officer and March 31, 1998
- ----------------------------- Director
Victor J. Coleman
Executive Vice President,
/s/ Diana M. Laing Chief Financial Officer and Secretary March 31, 1998
- -----------------------------
Diana M. Laing
/s/ Richard S. Davis Chief Accounting Officer March 31, 1998
- -----------------------------
Richard S. Davis.
/s/ Carl D. Covitz Director March 31, 1998
- -----------------------------
Carl D. Covitz
/s/ Larry Flax Director March 31, 1998
- -----------------------------
Larry Flax
/s/ Steven C. Good Director March 31, 1998
- -----------------------------
Steven C. Good
/s/ Kenneth B. Roath Director March 31, 1998
- -----------------------------
Kenneth B. Roath
</TABLE>
43
<PAGE> 44
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Arden Realty, Inc.
We have audited the accompanying consolidated balance sheets of
Arden Realty, Inc. as of December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows of Arden Realty,
Inc. for the year ended December 31, 1997 and for the period October 9, 1996
(commencement of operations) to December 31, 1996 and the related combined
statements of operations, owners' equity and cash flows of the Arden
Predecessors for the period January 1, 1996 to October 8, 1996 and for the year
ended December 31, 1995. Our audits also included the financial statement
schedule listed in the index at Item 14(a). These financial statements and the
financial statement schedule are the responsibility of the management of Arden
Realty, Inc. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Arden
Realty, Inc. at December 31, 1997 and 1996 and the consolidated results of its
operations and its cash flows for the year ended December 31, 1997 and for the
period October 9, 1996 to December 31, 1996 and the combined results of
operations and cash flows of the Arden Predecessors for the period January 1,
1996 to October 8, 1996 and for the year ended December 31, 1995, in conformity
with generally accepted accounting principles. Also, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
January 29, 1998, except for
Note 21, as to which the date is
February 23, 1998
F-1
<PAGE> 45
ARDEN REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Commercial properties:
Land $ 241,440 $ 116,513
Buildings and improvements 975,791 417,970
Tenant improvements 21,801 12,224
----------- ---------
1,239,032 546,707
Less: accumulated depreciation (35,860) (17,139)
----------- ---------
1,203,172 529,568
Cash and cash equivalents 5,300 7,632
Restricted cash 4,040 --
Rent and other receivables 10,203 2,293
Mortgage notes receivable, net of discount of $2,931 14,430 --
Deferred rent 8,811 6,069
Prepaid financing and leasing costs, net of accumulated
amortization of $2,649, and $859, respectively 12,680 4,013
Prepaid expenses and other assets 25,368 1,681
----------- ---------
Total assets $ 1,284,004 $ 551,256
=========== =========
LIABILITIES
Mortgage loans payable $ 237,166 $ 104,000
Unsecured lines of credit 240,400 51,000
Accounts payable and accrued expenses 16,458 6,178
Security deposits 6,847 3,590
Dividends payable 14,177 7,805
Distributions payable -- 1,039
----------- ---------
Total liabilities 515,048 173,612
----------- ---------
Minority interests 95,973 45,667
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 20,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 100,000,000
shares authorized, 35,796,704 and 21,679,500 issued
and outstanding, respectively 358 217
Additional paid-in capital 672,625 337,432
Accumulated deficit -- (5,672)
----------- ---------
Total stockholders' equity 672,983 331,977
----------- ---------
Total liabilities and stockholders' equity $ 1,284,004 $ 551,256
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 46
ARDEN REALTY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
AND
ARDEN PREDECESSORS COMBINED STATEMENTS OF OPERATIONS
(in thousands except share amounts)
<TABLE>
<CAPTION>
ARDEN REALTY INC. ARDEN PREDECESSORS
----------------- ------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 9, 1996 TO JANUARY 1, 1996 TO FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 OCTOBER 8, 1996 DECEMBER 31, 1995
----------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 133,817 $ 19,434 $ 39,135 $ 10,236
Property operating expenses 44,332 6,005 14,224 3,340
--------- -------- -------- --------
89,485 13,429 24,911 6,896
General and administrative 4,322 753 1,758 1,377
Interest 19,511 1,280 24,521 5,537
Loss on valuation of derivative 3,111 -- -- --
Depreciation and amortization 20,260 3,108 5,264 1,898
Interest and other income (1,630) (138) (1,330) (1,457)
Equity in net loss
of noncombined entities -- -- 336 116
--------- -------- -------- --------
Income (loss) before minority interests
and extraordinary items 43,911 8,426 (5,638) (575)
Minority interests' share of loss
(income) of Arden Predecessors -- -- 721 (1)
Minority interests (4,281) (993) -- --
--------- -------- -------- --------
Income (loss) before extraordinary items 39,630 7,433 (4,917) (576)
Extraordinary (loss) gain on early
extinguishment of debt, net of
minority interests' share of
$1,798 for the period October 9, 1996
to December 31, 1996 -- (13,105) 1,877 --
--------- -------- -------- --------
Net income (loss) $ 39,630 $ (5,672) $ (3,040) $ (576)
========= ======== ======== ========
Net income (loss) per common share:
Income before
extraordinary item $ 1.43 $ .34
Extraordinary loss on early
extinguishment of debt -- (.60)
--------- --------
Net income (loss)
per common share - Basic $ 1.43 $ (.26)
========= ========
Net income (loss)
per common share - Diluted $ 1.41 $ (.26)
========= ========
Weighted average common shares:
Basic 27,794 21,680
Diluted 28,039 21,680
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 47
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNTS CAPITAL DEFICIT EQUITY
------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at October 8, 1996 100
Retirement of originally issued shares (100)
Common stock bonus to
certain employees 5,000
Sale of common stock, net
of offering costs of $36,181 21,674,500 $217 $ 397,092 -- $ 397,309
Distributions paid to
Arden Predecessors -- -- (16,554) -- (16,554)
Allocation of minority interests in
operating partnership -- -- (35,301) -- (35,301)
Net loss -- -- -- $ (5,672) (5,672)
Dividends declared and payable -- -- (7,805) -- (7,805)
---------- ---- --------- -------- ---------
Balance at December 31, 1996 21,679,500 $217 $ 337,432 $ (5,672) $ 331,977
---------- ---- --------- -------- ---------
Common stock issued in connection
with the exercise of options 146,666 1 2,933 -- 2,934
Stock Option compensation -- -- 92 -- 92
Sale of common stock, net of
offering costs of $18,588 13,750,000 138 340,493 -- 340,631
OP units converted 220,538 2 3,425 3,427
Net income -- -- -- 39,630 39,630
Dividends declared and payable -- -- (11,750) (33,958) (45,708)
---------- ---- --------- -------- ---------
Balance at December 31, 1997 35,796,704 $358 $ 672,625 -- $ 672,983
========== ==== ========= ======== =========
</TABLE>
ARDEN PREDECESSORS
COMBINED STATEMENTS OF OWNERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
OWNERS' EQUITY
--------------
<S> <C>
Balance at December 31, 1994 $ 11,843
Owners' contributions 7,427
Owners' distributions (10,578)
Net loss (576)
--------
Balance at December 31, 1995 8,116
Owners' contributions 2,923
Owners' distributions (2,309)
Net loss for the period January 1, to October 8, 1996 (3,040)
--------
Balance at October 8, 1996 $ 5,690
========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 48
ARDEN REALTY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS AND
ARDEN PREDECESSORS COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
ARDEN REALTY, INC
-----------------
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 9, 1996
DECEMBER 31, 1997 TO DECEMBER 31, 1996
----------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 39,630 $ (5,672)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Extraordinary loss (gain) on early
extinguishment of debt -- 13,105
Minority interests in operating partnership 4,281 993
Equity in net loss of noncombined entities -- --
(Loss) income allocable to minority
interests of Arden Predecessors -- --
Depreciation and amortization 20,260 3,108
Amortization of loan costs and fees 823 8
Changes in operating assets and liabilities:
Rents and other receivables (22,340) 557
Restricted cash (4,040) --
Deferred rent (2,742) (618)
Prepaid financing and leasing costs (10,796) (1,201)
Prepaid expenses and other assets (3,497) 499
Accounts payable and accrued expenses 10,280 (2,911)
Deferred interest -- --
Security deposits 3,257 797
--------- ---------
Net cash provided by (used in)
operating activities 35,116 8,665
--------- ---------
INVESTING ACTIVITIES:
Acquisitions and improvements to
commercial properties (639,670) (164,763)
Escrow deposit (20,000) --
Investments in noncombined entities -- --
--------- ---------
Net cash used in investing activities (659,670) (164,763)
--------- ---------
FINANCING ACTIVITIES:
Cash from contributed net assets -- 23,707
Distributions to Arden Predecessors
in exchange for partnership assets -- (16,554)
Proceeds from mortgage loans 308,202 104,000
Repayment of mortgage loans (175,036) (368,471)
Proceeds from secured line of credit 28,700 --
Repayment of secured line of credit (28,700) --
Proceeds from unsecured lines of credit 443,500 51,000
Repayments of unsecured lines of credit (254,100) (3,737)
Payments of additional interest -- (23,524)
Proceeds from issuance of common
stock net of offering costs 343,565 397,309
Distributions to and contributions from
minority interests, net (3,534) --
Dividends paid (40,375) --
Owners' contributions from and
distributions to, net -- --
--------- ---------
Net cash provided by financing activities 622,222 163,730
--------- ---------
Net (decrease) increase in cash and
cash equivalents (2,332) 7,632
Cash and cash equivalents at
beginning of period 7,632 --
--------- ---------
Cash and cash equivalents at end of period $ 5,300 $ 7,632
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest,
net of interest capitalized $ 19,191 $ 3,130
========= =========
</TABLE>
<TABLE>
<CAPTION>
ARDEN PREDECESSORS
------------------
FOR THE PERIOD
JANUARY 1, 1996 FOR THE YEAR ENDED
TO OCTOBER 8, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (3,040) $ (576)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Extraordinary loss (gain) on early
extinguishment of debt (1,877) --
Minority interests in operating partnership -- --
Equity in net loss of noncombined entities 336 116
(Loss) income allocable to minority
interests of Arden Predecessors (721) 1
Depreciation and amortization 5,264 1,898
Amortization of loan costs and fees 202 211
Changes in operating assets and liabilities:
Rents and other receivables (1,866) (1,074)
Restricted cash 2,166 (11,649)
Deferred rent (1,735) (672)
Prepaid financing and leasing costs (1,243) (633)
Prepaid expenses and other assets (1,136) (947)
Accounts payable and accrued expenses 2,883 2,501
Deferred interest 7,607 884
Security deposits 547 1,121
--------- ---------
Net cash provided by (used in)
operating activities 7,387 (8,819)
--------- ---------
INVESTING ACTIVITIES:
Acquisitions and improvements to
commercial properties (119,083) (127,663)
Escrow deposits -- --
Investments in noncombined entities -- 4,305
--------- ---------
Net cash used in investing activities (119,083) (123,358)
--------- ---------
FINANCING ACTIVITIES:
Cash from contributed net assets -- --
Distributions to Arden Predecessors
in exchange for partnership assets -- --
Proceeds from mortgage loans 120,485 142,501
Repayment of mortgage loans (5,051) (7,060)
Proceeds from secured line of credit -- --
Repayment of secured line of credit -- --
Proceeds from unsecured lines of credit 5,188 3,310
Repayments of unsecured lines of credit (2,264) (3,244)
Payments of additional interest -- --
Proceeds from issuance of common
stock net of offering costs -- --
Distributions to and contributions from
minority interests, net 936 --
Dividends paid -- --
Owners' contributions from and
distributions to, net 614 (3,151)
--------- ---------
Net cash provided by financing activities 119,908 132,356
--------- ---------
Net (decrease) increase in cash and
cash equivalents 8,212 179
Cash and cash equivalents at
beginning of period 790 611
--------- ---------
Cash and cash equivalents at end of period $ 9,002 $ 790
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest,
net of interest capitalized $ 15,719 $ 4,022
========= =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 49
ARDEN REALTY, INC.
AND
ARDEN PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS
Arden Realty, Inc. (the "Company"), through its controlling interest
in Arden Realty Limited Partnership (the "Operating Partnership"), and its other
subsidiaries, is engaged in owning, acquiring, managing, leasing and renovating
commercial properties (collectively, the "Properties") located in Southern
California. The Company was formed in 1996 to continue and expand the real
estate business of Arden Realty Group, Inc. and a group of affiliated entities
(the "Arden Predecessors").
ORGANIZATION AND FORMATION OF THE COMPANY
The Company was incorporated in Maryland in May 1996. On October 9,
1996, the Company completed an initial public offering (the "IPO") of 21,674,500
shares of $.01 par value common stock, at a price of $20.00 per share resulting
in gross proceeds of $433.5 million. The aggregate proceeds to the Company from
the IPO, net of underwriters' discount, advisory fee and offering costs
aggregating approximately $36.2 million were approximately $397.3 million.
Concurrent with consummation of the IPO, the Company and the
Operating Partnership, together with the partners and members of the Arden
Predecessors (collectively, the "Participants"), engaged in certain formation
transactions (the "Formation Transactions") as follows:
- - Pursuant to separate option agreements (the "Option Agreements"),
the Company acquired for cash from certain Participants the
interests owned by such Participants in certain of the Arden
Predecessors and in certain of the Properties. The Company paid
approximately $26.8 million from the net proceeds of the IPO for
such interests, which represented 31.7% of the ownership interests
in the Properties acquired by the Company.
- - The Company contributed (i) the interests in the Arden Predecessors
and in the properties acquired pursuant to the Option Agreements and
(ii) the net proceeds from the IPO (after payment of the cash
consideration to certain Participants as described above) to the
Operating Partnership in exchange for an 88.2% general partner
interest in the Operating Partnership, representing the sole general
partnership interest.
- - Pursuant to separate contribution agreements (the "Contribution
Agreements"), the following additional contributions were made by
Participants to the Operating Partnership in exchange for limited
partner interests in the Operating Partnership ("OP Units"): (i) the
remaining interests in the Arden Predecessors and in certain of the
Properties (i.e., all interests not acquired by the Company pursuant
to the Option Agreements) and (ii) certain assets, including
management contracts relating to certain of the Properties and the
contract rights to purchase two properties (303 Glenoaks and 12501
East Imperial Highway). The Participants making such contributions
(a total of seven individuals and entities including Arden Realty
Group, Inc., Richard Ziman, Victor Coleman, and Arthur Gilbert),
received an aggregate of 2,889,071 OP Units, with a value of
approximately $57.8 million based on the IPO price of the Company's
common stock.
- - The Company, through the Operating Partnership, borrowed $57.0
million aggregate principal amount under a one year interim loan
(the "1996 Interim Financing") which was non-recourse to the Company
and the Operating Partnership and secured by cross-collateralized
and cross-defaulted first mortgage liens on nine of the Properties.
F-6
<PAGE> 50
- - Approximately $33.0 million of the net proceeds of the IPO were used
by the Operating Partnership to purchase two properties, 303
Glenoaks and 12501 East Imperial Highway.
- - The Company used a portion of the proceeds of the IPO and the
1996 Interim Financing to repay approximately $370.0 million of
mortgage debt secured by the Properties and indebtedness outstanding
under lines of credit assumed by the Operating Partnership in the
Formation Transactions.
The transfer of the Properties and operating interests of affiliates of the
Company to the Operating Partnership for cash or OP Units has been accounted for
at the historical cost of those interests, similar to a pooling of interests.
All transfers by nonaffiliates have been accounted for at the fair value of the
OP Units issued or cash consideration paid.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION.
The accompanying consolidated financial statements of Arden Realty,
Inc. include the accounts of the Company, the Operating Partnership, and its
other subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
The minority interests at December 31, 1997 and December 31, 1996
represent limited partnership interests in the Operating Partnership of
approximately 9.7% and 12.0%, respectively.
The Arden Predecessors were not a legal entity but rather a
combination of partnerships and an affiliated real estate management
corporation. The properties and entities were all managed by Messrs. Ziman and
Coleman. In those instances where the financial interests held by Messrs. Ziman,
Coleman, Gilbert and their affiliates were also controlling interests, the
entities have been combined in the accompanying financial statements. Minority
interests have been recorded for those entities that the affiliated Participants
control but were not wholly-owned. Where controlling interests were not held by
these affiliated Participants, or the Predecessor did not have unilateral right
to refinance the debt on the property, the entities were accounted for as
investments in noncombined entities utilizing the equity method of accounting.
RISKS AND UNCERTAINTIES
The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMMERCIAL PROPERTIES
The properties are stated at the lower of cost or estimated fair
value. Write-downs to estimated fair value would be recognized when impairment
indicators are present and a property's estimated undiscounted future cash flow,
before interest charges, is less than its book value. In that situation, the
Company would recognize an impairment loss to the extent the carrying amount
exceeds the fair value of the property. Based on management's assessment, no
write-downs to estimated fair value by the Company or the Arden Predecessors
were necessary.
Repair and maintenance costs are charged to expense as incurred and
significant replacements and betterments are capitalized.
Depreciation is calculated under the straight-line method using
forty year lives for buildings and ten year lives for building improvements.
Amortization of tenant improvements is calculated using the straight-line method
over the term of the related lease.
F-7
<PAGE> 51
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less when acquired.
RESTRICTED CASH
Restricted cash primarily consists of a cash deposit as required by
one of the Company's mortgage loans payable.
PREPAID COSTS
Costs associated with leasing properties are capitalized and
amortized to expense on a straight-line basis over the related lease term. Costs
associated with obtaining long-term financing are capitalized and amortized to
interest expense over the term of the related loan.
REVENUE RECOGNITION
Minimum rent, including rental abatements and contractual fixed
increases attributable to operating leases, is recognized on a straight-line
basis over the term of the related lease. Amounts expected to be received in
later years are included in deferred rents. Property operating cost
reimbursements due from tenants for common area maintenance, real estate taxes
and other recoverable costs are recognized in the period the expenses are
incurred.
INCOME TAXES
Prior to October 9, 1996 the combined and noncombined entities that
made up the Arden Predecessors consisted of a Subchapter S corporation, limited
liability companies and partnerships. Taxable income for such entities was
recorded on the separate tax returns of the membership unit holders and
individual partners and, accordingly, no provision for income taxes was recorded
in the accompanying financial statements of the Arden Predecessors.
The Company generally will not be subject to federal income taxes as
long as it continues to qualify as a real estate investment trust ("REIT"). A
REIT will generally not be subject to federal income taxation on that portion of
income that qualifies as REIT taxable income and to the extent that it
distributes such taxable income to its stockholders and complies with certain
requirements. As a REIT, the Company is allowed to reduce taxable income by all
or a portion of distributions to stockholders and must distribute at least 95%
of its taxable income to qualify as a REIT. As dividends have eliminated taxable
income, no Federal income tax provision has been reflected in the accompanying
consolidated financial statements. State income tax requirements are essentially
the equivalent of the Federal rules.
During 1997 and 1996, the Company declared dividends of $1.60 and
$.36 per share, respectively. For federal income tax purposes $1.45 and $.28 per
share was reported to shareholders as ordinary income for 1997 and 1996,
respectively. A total of $.23 per share of the fourth quarter 1997 dividend will
be reported to shareholders in 1998.
EARNINGS PER SHARE DATA
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128"),
which replaced primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share is calculated on the
weighted average shares of common stock outstanding during the period. Diluted
earnings per share includes the effect of all potential common shares. The
conversion of OP Units into common stock would have no effect on per share
amounts as the OP Units share proportionately with the common stock shares in
the results of the Operating Partnership. Earnings per share amounts for all
periods presented have been restated in conformity with the requirements of SFAS
No. 128 (Note 17).
RECLASSIFICATIONS
Certain prior year amounts have been reclassified in order to
conform to the current year presentation.
F-8
<PAGE> 52
3. COMMERCIAL PROPERTIES
The Company and the Arden Predecessors capitalize interest and taxes
related to buildings under construction and renovation to the extent such assets
qualify for capitalization. Total interest incurred and the amount capitalized
was $20.6 million and $2.0 million, $1.3 million and $57,000, $24.3 million and
$0 and $5.3 million and $8,000 for the year ended December 31, 1997, for the
period October 9, 1996 to December 31, 1996, for the period January 1, 1996 to
October 8, 1996 and the year ended December 31, 1995, respectively.
Twenty-three of the commercial properties with a carrying value of
$429.4 million are encumbered by the Company's mortgage loans totalling $237.2
million (Note 8).
Office space in the properties is generally leased to tenants under
lease terms which provide for the tenants to pay for increases in operating
expenses in excess of specified amounts.
Future minimum lease payments to be received under noncancelable
operating leases existing as of December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998 $149,137,000
1999 129,546,000
2000 107,285,000
2001 84,275,000
2002 59,083,000
Thereafter 99,814,000
</TABLE>
The above future minimum lease payments do not include specified
payments for tenant reimbursements of operating expenses.
Arden Realty, Inc. leases the land underlying either the office
buildings and/or parking structures of six of its buildings. Ground lease
expense was approximately $1.6 million, $331,000, $806,000 and $19,000 for the
year ended December 31, 1997, for the period from October 9, 1996 to December
31, 1996, for the period January 1, 1996 to October 8, 1996 and for the year
ended December 31, 1995. Future minimum ground lease payments due under existing
ground leases are as follows:
<TABLE>
<S> <C>
1998 $ 2,026,000
1999 2,084,000
2000 1,716,000
2001 1,717,000
2002 1,754,000
Thereafter 121,846,000
</TABLE>
F-9
<PAGE> 53
4. INVESTMENTS IN NONCOMBINED ENTITIES
The Company's affiliates did not own controlling financial interests
in certain of the Arden Predecessors. These investments were accounted for
utilizing the equity method of accounting. Under such accounting method, the net
equity investment of the Company's affiliates was reflected on the combined
balance sheets, and the combined statements of operations included the
affiliates' share of net income or loss from the entities. Subsequent to the
IPO, the Company acquired the nonaffiliated Participants' interests and
accordingly, consolidates the accounts of these properties. The affiliates'
ownership interest in each entity was as follows:
AFFILIATES'
ENTITY OWNERSHIP %
------ -----------
Bristol Encino Associates, LLC 20.9%
222 Harbor Associates, LLC 26.3%
Beverly Ventura Associates, L.P. 50.0%
5000 Spring Associates Tenancy in Common 77.5%
Although the Company's affiliates owned a 77.5% interest in 5000
Spring Associates Tenancy-in-Common, they did not have unilateral right to
refinance the property. As a result, this investment was accounted for utilizing
equity accounting.
Condensed operating information is presented below for all
noncombined entities.
CONDENSED COMBINED STATEMENTS OF OPERATIONS OF NONCOMBINED ENTITIES
(in thousands)
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1996 FOR THE YEAR ENDED
TO OCTOBER 8, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Revenues $ 14,274 $ 17,720
-------- --------
Expenses:
Property operating expenses 6,053 7,758
Interest 7,356 8,243
Depreciation and amortization 2,705 2,475
-------- --------
Total expenses 16,114 18,476
-------- --------
Net loss $ (1,840) $ (756)
======== ========
</TABLE>
The significant accounting policies used by the noncombined entities
were similar to those used by the Arden Predecessors.
5. RENTS AND OTHER RECEIVABLES
Rents and other receivables at December 31, 1997 include a $4.0
million note receivable from a corporation ("Forest City") which retained a 25%
interest in World Savings Center, a 469,115 square foot office building in Los
Angeles, California. The Company purchased a 75% interest in World Savings
Center for $83.2 million in December 1997. The note bears interest at 7.25% per
annum and required monthly payments of interest only. Subsequent to year end,
the Company exercised its option to purchase the remaining 25% interest in World
Savings Center from Forest City and retired this note receivable as partial
consideration for such purchase.
F-10
<PAGE> 54
6. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses at December 31, 1997 include a $20.0 million
deposit made in connection with acquisition of the LBA Portfolio (Note 21). The
deposit was funded with a draw on the Amended Credit Facility.
7. MORTGAGE NOTES RECEIVABLE
In September 1997, the Company purchased two mortgage notes
receivable, secured by a single commercial office property, with an aggregate
balance of approximately $17.6 million, for approximately $14.4 million. The
notes bear interest at the Eleventh District Cost of Funds plus 3.25% per annum
(effective rate of 8.2% at December 31, 1997), require monthly payments of
principal, interest, and additional net cash flow from the property, as
defined, and mature on May 31, 2004.
8. MORTGAGE LOANS PAYABLE
At December 31, 1996 the Company had $104.0 million outstanding
under the 1996 Interim Financing, a mortgage loan due to Lehman Capital, a
division of Lehman Brothers Holdings Inc. ("Lehman"). The loan was secured by
nine fully cross-collateralized and cross-defaulted first trust deeds on real
property bearing interest at LIBOR plus 1.5% on or before March 31, 1997 and
LIBOR plus 2.0% for any subsequent period through maturity. Interest only
payments were to be made monthly and all principal and unpaid interest was
scheduled to mature on September 30, 1997.
In March 1997, the Company replaced the 1996 Interim Financing with
a new mortgage loan (the "1997 Interim Financing") with a total commitment of
$175.0 million from an affiliate of Lehman Brothers. The 1997 Interim Financing
dated March 17, 1997 was scheduled to mature on September 30, 1997 and had a
floating interest rate equal to LIBOR plus 1.5% on or before March 31, 1997 and
LIBOR plus 2.0% for any subsequent period through maturity. The 1997 Interim
Financing was secured by a fully cross-collateralized and cross-defaulted first
mortgage liens on 12 of the Properties and required monthly payments of interest
only, with all principal due at maturity.
On June 11, 1997, the Company refinanced, through a special purpose
subsidiary, its 1997 Interim Financing with a new $175.0 million mortgage
financing (the "Mortgage Financing") from an affiliate of Lehman Brothers. The
Mortgage Financing is non-recourse and secured by fully cross-collateralized and
cross-defaulted first mortgage liens on 18 of the Company's Properties (the
"Mortgage Financing Properties") and has a twenty year term. The Mortgage
Financing bears interest at a fixed rate of 7.52%, is anticipated to be repaid
in seven years and requires monthly payments of interest only with all principal
due in a balloon payment at maturity. If the Mortgage Financing is not repaid or
refinanced within seven years, the interest rate increases by at least 2.0% and
all excess cash flow from the Mortgage Financing Properties must be used to pay
down principal. The Mortgage Financing documentation requires the Company to
maintain a cash deposit of $4.0 million and to comply with certain customary
financial covenants, ongoing operational restrictions, and certain cash
management procedures. In addition, the Mortgage Financing prohibits prepayment
for approximately three years from its origination.
In July 1997, the Company assumed a $5.0 million mortgage note
payable in connection with the acquisition of 299 Euclid, a 73,400 square foot
office building located in Pasadena, California. The note bears interest at 7.0%
per annum, requires monthly payments of interest only, and matures on July 1,
2002.
In October 1997, the Company assumed a mortgage note payable of
approximately $4.1 million (the "145 South Fairfax Mortgage Note") in connection
with acquisition of 145 South Fairfax, a 54,429 square foot office building
located in Los Angeles, California. The note bears interest at 8.93% per annum,
requires monthly payments of principal and interest, and monthly impound
payments for taxes, insurance and other operating purposes, and matures in
January 2027. The 145 South Fairfax Mortgage Note prohibits prepayment prior to
January 2007.
In October 1997, the Company assumed three mortgage notes payable,
with an aggregate balance of approximately $8.1 million, in connection with the
purchase of a 254,792 square foot six office property portfolio in
F-11
<PAGE> 55
Thousand Oaks, California (the "Thousand Oaks Portfolio"). The notes bear
interest ranging from 7.875% to 9% per annum, require monthly payments of
principal and interest, and monthly impound payments for taxes and insurance,
and mature on July 2015. The notes are secured by two of the properties in the
Thousand Oaks Portfolio.
In December 1997, the Company borrowed $45.0 million, from an
affiliate of Morgan Stanley (the "World Savings Mortgage Note"). The $45.0
million mortgage note payable is secured by the World Savings Center, bears
interest at 9.21%, per annum, for the first three months and LIBOR plus 1.25%
thereafter, requires monthly payments of interest only and matures on May 1,
1998.
Effective January 2, 1997, the Company entered into interest rate
floor and cap transactions with a notional amount of $155.0 million to hedge the
Company's exposure to variable interest rates. The Company entered into these
agreements to convert floating rate liabilities to fixed rate liabilities. The
agreements fixed the LIBOR portion of the interest rate on the Company's
variable rate debt at 6.6% through March 2004. On July 23, 1997, the Company
repaid all of its outstanding floating rate debt with proceeds from the July
1997 Offering (as defined in Note 10) and on October 22, 1997, the swap
agreement was retired resulting in a loss on the derivative of $3.1 million.
This loss was accrued in September 1997.
Following is a summary of scheduled principal payments for the
Company's mortgage loans:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
----------------------- ------
<S> <C>
1998 $45,233,000
1999 254,000
2000 277,000
2001 302,000
2002 5,329,000
Thereafter 185,771,000
</TABLE>
9. UNSECURED LINES OF CREDIT
The Company had a line of credit, with a total commitment of $150.0
million from a group of banks led by Wells Fargo (the "Credit Facility"). The
Credit Facility allowed the Company to borrow $75.0 million on an unsecured
basis with the remainder to be secured by real property. The aggregate
outstanding balance was $51.0 million (unsecured) at December 31, 1996. The line
accrued interest at LIBOR plus 1.5% for secured borrowings, and LIBOR plus 1.75%
for unsecured borrowings. The Credit Facility was amended in June 1997, as
described below.
On May 5, 1997, the Company entered into a revolving credit
agreement with Wells Fargo Bank (the "Wells Bridge Facility"). The Wells Bridge
Facility was unsecured, with a total commitment of $110.0 million. The Company
repaid the entire balance on the Wells Bridge Facility with a draw on the
Amended Credit Facility as defined below.
On June 11, 1997, the Company amended the Credit Facility with a
$300.0 million unsecured line of credit (the "Amended Credit Facility") from a
group of banks led by Wells Fargo Bank (the "Lenders"). The interest rate of the
Amended Credit Facility ranges between LIBOR plus 1.2% and LIBOR plus 1.45%
depending on the leverage ratio of the Company. Once the Company achieves an
unsecured investment grade debt rating, the interest rate may be lowered to
between LIBOR plus 0.9% and LIBOR plus 1.15% depending on such debt rating.
Under certain circumstances, the Company has the option to convert the interest
rate from LIBOR to the prime rate plus 0.5%. The aggregate outstanding balance
on the Amended Credit Facility was $230.4 million as of December 31, 1997 (see
Note 21).
F-12
<PAGE> 56
The Amended Credit Facility is subject to customary conditions to
borrowing, contains representations, warranties and defaults customary in REIT
financings, and contains financial covenants, including requirements for a
minimum tangible net worth, maximum liabilities to asset values, and minimum
interest, unsecured interest and fixed charge coverage ratios (all calculated as
defined in the Amended Credit Facility documentation) and requirements to
maintain a pool of unencumbered properties which meet certain defined
characteristics and are approved by the Lenders. The Amended Credit Facility
also contains restrictions on, among other things, indebtedness, investments,
distributions, liens and mergers.
Pursuant to a separate agreement, Wells Fargo advanced $28.7 million
to the Company (the "Secured Advance"). This advance, which was secured by two
Properties, accrued interest at the Wells Fargo Prime Rate and matured on July
10, 1997 at which time the Company repaid the Secured Advance with a $28.7
million draw on the Amended Credit Facility.
The Company also has an unsecured line of credit with a total
commitment of $10.0 million from City National Bank (the "City National Bank
Credit Facility"). The City National Bank Credit Facility accrues interest at
the City National Bank Prime Rate less 0.875%, and is scheduled to mature on
August 1, 1998. The City National Bank Credit Facility is used, among other
things, to provide funds for tenant improvements and capital expenditures and
provide for working capital and other corporate purposes. At December 31, 1997,
the aggregate outstanding balance on the City National Bank Credit Facility was
$10.0 million. The City National Bank Prime Rate was 8.5% at December 31, 1997
(see Note 21).
10. STOCKHOLDERS' EQUITY
An OP Unit and a share of common stock have essentially the same
economic characteristics as they share equally in the total net income or loss
and distributions of the Operation Partnership. OP Units may be redeemed for
cash or, at the election of the Company, for shares of common stock on a
one-for-one basis.
On March 28, 1997, the Operating Partnership issued 26,880 OP Units
valued at approximately $763,000 in connection with the acquisition of the
property located in Bakersfield, California.
On July 23, 1997, the Company completed a secondary public offering
(the "July 1997 Offering") of 12,000,000 shares of Common Stock. The July 1997
Offering price was $26.125 per share resulting in gross proceeds of $313.5
million. Also, on July 23, 1997, the underwriters exercised their overallotment
option and, accordingly, the Company issued an additional 1,750,000 shares of
Common Stock and received gross proceeds of $45.7 million. The aggregate
proceeds to the Company, net of underwriters' discount and offering costs
aggregating $18.6 million, were approximately $340.6 million.
In December 1997, the Operating Partnership issued 822,400 OP Units
valued at approximately $24.7 million in connection with the acquisition of a
469,115 square foot office property in Los Angeles.
In December 1997, 220,538 OP Units were exchanged for Common Stock.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value of financial
instruments at December 31, 1997 were determined by management, using available
market information and appropriate valuation methodologies. Considerable
judgment is necessary to interpret market data and develop estimated fair value.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
Cash equivalents, accounts payable, the line of credit and other
financial instruments are carried at amounts which reasonably approximate their
fair value amounts.
F-13
<PAGE> 57
The mortgage notes payable of the Company have an estimated
aggregate fair value which approximates its carrying value. Estimated fair value
is based on interest rates currently available to the Company for issuance of
debt with similar terms and remaining maturities.
12. NON-CASH INVESTING AND FINANCING ACTIVITIES
Additional supplemental disclosures of non-cash investing and
financing activities for the period October 9, 1996 to December 31, 1996 and for
the year ended December 31, 1997 are as follows:
(1) The following summarizes the net assets contributed in 1996 in
exchange for 2,889,071 OP Units (in thousands):
<TABLE>
<S> <C>
ASSETS:
Commercial office properties, net $366,324
Cash and cash equivalents 23,707
Rents and other receivables 2,850
Deferred rent receivable 5,451
Prepaid financing and leasing costs, net 3,841
Prepaid expenses and other assets 2,157
--------
Total assets $404,330
========
LIABILITIES:
Notes payable - affiliates $368,471
Mortgages and notes payable 3,737
Unsecured lines of credit 9,089
Accrued expenses and other liabilities 9,505
Deferred interest deposits 2,794
--------
Total liabilities 393,596
--------
Owners' equity contributed $ 10,734
========
</TABLE>
(2) In 1996, the Company purchased a 310,910 square foot
multi-tenant office building for approximately $10.0 million in cash and the
issuance of 55,805 OP Units valued at approximately $1.4 million.
(3) In March 1997, the Company purchased California Twin Center, a
155,189 square foot office building located in Bakersfield, California, for
approximately $19.6 million with proceeds from the 1997 Interim Financing, and
the issuance of 26,880 OP Units valued at approximately $763,000.
(4) In December 1997, the Company purchased a 75% interest in World
Savings Center, a 469,115 square foot office building located in Los Angeles,
California for approximately $83.2 million with proceeds from the Amended Credit
Facility, World Savings Mortgage note payable, working capital, a $4.0 million
note receivable and the issuance of 822,400 OP Units valued at approximately
$24.7 million.
13. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company's management does not believe there is any litigation
threatened against the Company or the Arden Predecessors other than routine
litigation arising out of the ordinary course of business, some of which is
expected to be covered by liability insurance and all of which is not expected
to have a material adverse effect on the consolidated financial statements of
the Company or the combined financial statements of the Arden Predecessors.
F-14
<PAGE> 58
CONCENTRATION OF CREDIT RISK
The Company maintains its cash and cash equivalents at financial
institutions. The combined account balances at each institution periodically
exceed FDIC insurance coverage, and as a result, there is a concentration of
credit risk related to amounts on deposit in excess of FDIC insurance coverage.
Management believes that the risk is not significant.
14. RELATED PARTY TRANSACTIONS
Included in other income are management fees of $95,000 for 1995
from various affiliated partnerships.
In March 1997, the Company purchased a 109,187 square foot office
property from Arthur Gilbert, a minority interest common share owner for
approximately $10.2 million.
15. PROPERTY ACQUISITIONS
During 1997 the Company acquired 38 commercial properties containing
approximately 4.9 million rentable square feet, all located in Southern
California for a total cost, including the purchase price and closing costs,
of approximately $641.5 million.
16. REVENUE FROM RENTAL OPERATIONS AND PROPERTY OPERATING EXPENSES
Revenues from rental operations and property operating expenses are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
ARDEN REALTY INC. ARDEN PREDECESSORS
----------------- ------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 9, 1996 TO JANUARY 1, 1996 TO FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 OCTOBER 8, 1996 DECEMBER 31, 1995
----------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
REVENUES FROM RENTAL OPERATIONS:
Rental $118,085 $17,041 $32,287 $ 8,832
Tenant reimbursements 5,945 803 2,031 403
Parking, net of expenses 7,397 1,215 3,692 751
Other rental operations 2,390 375 1,125 250
-------- ------- ------- -------
133,817 19,434 39,135 10,236
======== ======= ======= =======
PROPERTY OPERATING EXPENSES:
Repairs and maintenance 15,154 1,980 3,092 1,027
Utilities 14,321 1,844 3,456 953
Real estate taxes 8,003 1,033 2,031 502
Insurance 2,125 290 2,460 279
Ground rent 314 78 806 19
Marketing and other 4,415 780 2,379 560
-------- ------- ------- -------
Total property expenses 44,332 6,005 14,224 3,340
-------- ------- ------- -------
$ 89,485 $13,429 $24,911 $ 6,896
======== ======= ======= =======
</TABLE>
F-15
<PAGE> 59
17. EARNINGS PER SHARE
The following table set forth the computation of basic and diluted
net income (loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 9, 1996 TO
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Net income (loss) $39,630 $ (5,672)
======= ========
Weighted average shares - basic 27,794 21,680
Weighted average dilutive stock options 245 --
------- --------
Weighted average shares - diluted 28,039 21,680
======= ========
Basic net income (loss) per share $ 1.43 $ (0.26)
======= ========
Diluted net income (loss) per share $ 1.41 $ (0.26)
======= ========
</TABLE>
18. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee and directors stock options
because, as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
employee and director stock options granted by the Company equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
The Company established a stock option plan for the purpose of
attracting and retaining executive officers, directors and other key employees.
As of December 31, 1997, and December 31, 1996, 1,353,334 and 1,500,000 of the
Company's authorized shares have been reserved for issuance under such plan. On
October 4, 1996 options to purchase an aggregate of 905,000 shares were granted
at an exercise price equal to the Offering price of $20.00 per share. A total of
865,000 of the options will vest in three equal annual installments and 40,000
will vest in four equal annual installments from the grant date.
On December 2, 1996, and December 27, 1996, 10,000 and 15,000
options, respectively, were granted at exercise prices equal to $24.38 and
$26.63, respectively (the market prices at the date of grant). All of the
holders of these options have a ten year period to exercise and all options vest
in three equal annual installments from the respective grant dates.
During 1997, the Company issued 556,000 options as described below:
<TABLE>
<CAPTION>
VESTING PERIOD FROM
DATE OF GRANT TOTAL OPTIONS EXERCISE PRICE GRANT DATE
- ------------- ------------- -------------- ----------
<S> <C> <C> <C>
February 13, 1997 10,000 $27.00 4 years
September 25, 1997 20,000 $30.50 3 years
October 15, 1997 526,000 $32.25 3 years
</TABLE>
All of the holders of the above options have a ten year period to
exercise and all options were granted at exercise prices equal to the market
prices at the date of the grant.
F-16
<PAGE> 60
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: Risk-free interest rate of 5.81%
and 6.7%; dividend yield of 5.2% and 5.8%; volatility factor of the expected
market price of the Company's common stock of .194 and .23; and a weighted
average expected life of the options of eight and ten years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restriction
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee and director stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
and director stock options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting periods. The
Company's pro forma information follows (in thousands except earnings per share
information):
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR OCTOBER 9, 1996
ENDED TO
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Pro forma income
before extraordinary items $ 38,711 $ 7,189
Extraordinary loss on early
extinquishment of debt -- (13,105)
---------- ----------
Net income (loss) $ 38,711 $ (5,916)
========== ==========
Pro forma income
before extraordinary items
per share $ 1.39 $ .33
Extraordinary loss on early
extinguishment of debt -- (.60)
---------- ----------
Pro forma net income (loss) $ 1.39 $ (.27)
========== ==========
</TABLE>
F-17
<PAGE> 61
A summary of the Company's stock option activity, and related
information for the period October 9, 1996 to December 31, 1996 and for the year
ended December 31, 1997 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000S) EXERCISE PRICE (000S) EXERCISE PRICE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 930 $20.15
Granted 556 32.09 930 $20.15
Exercised (147) 20.00 -- --
Forfeited (36) 20.00 -- --
------ ------ --- ------
Outstanding at end of year 1,303 $25.27 930 $20.15
====== ====== === ======
Weighted-average fair value of
options granted $3.72 $ 3.40
</TABLE>
Exercise prices for options outstanding as of December 31, 1997
ranged from $20.00 to $32.25. The weighted average remaining contractual life of
those options is 9.2 years.
19. EMPLOYEE RETIREMENT SAVINGS PLAN
Effective June 12, 1997, the Company adopted a retirement savings
plan pursuant to Section 401(k) of the Internal Revenue Code ("Code"), whereby
participants may contribute a portion of their compensation to their respective
retirement accounts, in an amount not to exceed the maximum allowed under the
Code. The plan provides for matching contributions by the Company, which
amounted to $71,000 for the year ended December 31, 1997. Plan participants are
immediately vested in their contribution and are vested equally over four years
in the matching contributions by the Company.
20. QUARTERLY RESULTS
Following is a summary of the Company's revenues and expenses for
the year ended December 31, 1997 and for the period October 9, 1996 to December
31, 1996. Revenues and expenses have fluctuated significantly from quarter to
quarter primarily due to property acquisitions made during 1997 (unaudited).
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE PERIOD
--------------------- OCTOBER 9, 1996 TO
MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------- ------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues $24,916 $29,704 $36,431 $42,766 $ 19,434
Property operating expenses 7,894 9,544 11,737 15,157 6,005
General and administrative 918 931 979 1,494 753
Interest expense 3,024 5,883 4,816 5,788 1,280
Depreciation and Amortization 3,562 4,458 5,241 6,999 3,108
Interest and other income 54 59 450 1,067 138
Net Income (loss) $ 8,438 $ 7,857 $10,116 $13,219 $ (5,672)
Net income (loss) per share:
Basic $ .39 $ .36 $ .31 $ .37 $ (.26)
Diluted $ .38 $ .36 $ .31 $ .37 $ (.26)
</TABLE>
F-18
<PAGE> 62
21. SUBSEQUENT EVENTS:
COMMERCIAL PROPERTIES
In January 1998, the Company purchased five office properties
located in California including a 58,105 square foot office property in Newhall
for approximately $8.5 million, a 167,045 square foot office property in San
Diego ("Activity Business Center") for approximately $14.9 million, a 326,227
square foot office property located in Beverly Hills for approximately $65.1
million, a 49,639 square foot office property located in Westlake Village for
approximately $7.3 million, and a 282,013 square foot office property in Los
Angeles for approximately $29.6 million ("1100 Glendon"). These acquisitions
were funded with existing working capital, draws from the Company's Amended
Credit Facility, proceeds from the Bridge Loan, as defined below, and the
assumption of two mortgage loans payable secured by the Activity Business
Center and 1100 Glendon properties.
The Company assumed a mortgage note payable of approximately $8.2
million in connection with the acquisition of Activity Business Center, a
167,045 square foot office building located in San Diego, California. The note
bears interest at 2.2% per annum plus the yield to maturity at the bid price of
obligations of the United States Treasury maturing on April 30, 2006. The note
requires monthly payments of principal and interest, monthly impound payments
for taxes and insurance, and matures on May 1, 2006. The mortgage note prohibits
prepayment prior to May 1, 2002.
The Company assumed a mortgage note payable of approximately $15.4
million in connection with the acquisition of 1100 Glendon, a 282,013 office
building located in Los Angeles, California. The note bears interest at 8.09%
per annum, requires monthly payments of principal and interest and matures on
April 30, 2003.
The Company borrowed $60.0 million from Lehman Brothers Realty
Corporation (the "Bridge Loan") in connection with the acquisition of 9100
Wilshire. The Bridge Loan is secured by three of the Company's properties, bears
interest at LIBOR plus .75% per annum, requires monthly payments of interest,
and matures on May 20, 1998.
On March 1, 1998, the Company acquired a portfolio of 50 primarily
office and R&D/industrial properties (the "LBA Portfolio"), aggregating
approximately 5.2 million rentable square feet for a purchase price of
approximately $619.9 million, including $1.8 million of closing costs and
approximately $3.6 million related to warrants to purchase 2.5 million shares of
the Company's common stock, at a price of $29.59 per share, subject to
adjustment. As partial consideration for this acquisition, the Operating
Partnership issued 203,420 OP Units valued at approximately $5.8 million in
connection with the acquisition of the LBA Portfolio. 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,
all located in Southern California. The Company borrowed $200.0 million from
Lehman Brothers Realty Corporation in connection with the acquisition of the LBA
Portfolio. The $200.0 million mortgage loan is secured by 40 properties in the
LBA Portfolio, bears interest at LIBOR plus 1.0% per annum, requires monthly
payments of interest, and matures on July 1, 1998.
On March 25, 1998, the Company exercised its option to purchase the
remaining 25% interest in World Savings Center for $27.5 million. In connection
with this purchase, the Company assumed an additional $15.0 million of debt
under the World Savings Mortgage Note.
STOCKHOLDERS' EQUITY
On February 18, 1998, the Company completed an offering (the
"February 18, 1998 Offering") of 881,950 shares of Common Stock. The shares from
the February 18, 1998 Offering were issued to the trustee of a registered unit
investment trust at an offering price of $28.3125 per share. Gross proceeds from
this offering were approximately $25.0 million. The aggregate proceeds to the
Company, net of underwriters' discount and offering costs aggregating $1.3
million were approximately $23.6 million.
F-19
<PAGE> 63
On February 19, 1998, the company completed a secondary public
offering (the "February 19, 1998 Offering") of 20,000,000 shares of Common
Stock. The February 19, 1998 Offering price was $28.3125 per share resulting in
gross proceeds of $566.3 million. Also on February 19, 1998, the underwriters
exercised their overallotment option and, accordingly, issued an additional
3,000,000 shares of common stock and received gross proceeds of approximately
$84.9 million. The aggregate proceeds to the Company, net of underwriters'
discount and offering costs aggregating approximately $32.4 million, were
approximately $618.7 million.
On February 23, 1998, the Company completed an offering (the
"February 23, 1998 Offering") of 1,303,965 shares of Common Stock. The shares
from the February 23, 1998 Offering were issued to the trustee of a registered
unit investment trust at an offering price of $28.375 per share. Gross proceeds
from this offering were approximately $37.0 million. The aggregate proceeds to
the Company, net of underwriters' discount and offering costs aggregating
approximately $1.9 million were approximately $35.1 million.
The Company used the proceeds from the offerings in February 1998 to
repay the aggregate outstanding balance of $283.0 million on its unsecured lines
of credit and on the acquisition of the LBA Portfolio as described above. The
remaining proceeds were used for working capital.
On March 1, 1998 the Operating Partnership issued 203,420 OP Units
valued at $5.8 million in connection with the acquisition of the LBA Portfolio
as described above.
On March 17, 1998, the Company declared a first quarter dividend of
$.42 per share to shareholders of record on March 31, 1998.
F-20
<PAGE> 64
ARDEN REALTY, INC.
SCHEDULE III
COMMERCIAL PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SQUARE FOOT DATA)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COSTS BASIS STEP-UP ACQUISITION
----------------------- -------------- -----------
SQUARE BUILDINGS AND BUILDINGS AND
PROPERTY NAME FOOTAGE LAND IMPROVEMENTS LAND IMPROVEMENTS IMPROVEMENTS(2)
- --------------- ------- ---- ------------ ---- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Century Park Center 243,404 $ 7,189 $ 16,742 $ -- -- $ 5,353
Beverly Atrium 61,314 4,127 11,513 $ 117 $ 328 697
Woodland Hills 224,955 6,566 14,754 365 880 2,478
Anaheim City Centre 175,391 515 11,199 94 2,075 1,137
425 West Broadway 71,589 1,500 4,436 305 918 335
1950 Sawtelle 103,772 1,988 7,263 -- -- 582
Bristol Plaza 84,014 1,820 3,380 257 485 905
16000 Ventura 174,841 1,700 17,189 185 1,929 1,376
5000 East Spring 163,358 -- 11,658 -- 424 1,582
70 South Lake 100,133 1,360 9,097 -- -- 930
Westwood Terrace 135,943 2,103 16,850 -- -- 614
Westlake - 5601 Lindero 105,830 2,577 6,067 -- -- 1,569
The New Wilshire 202,704 1,200 19,902 -- -- 2,059
Calabasas Commerce Center 123,121 1,262 9,725 -- -- 342
Long Beach - DF&G 272,013 -- 14,452 -- -- 26
Skyview Center 391,675 6,514 33,701 -- -- 1,897
400 Corporate Point 164,598 3,382 17,527 75 390 532
5832 Bolsa 49,355 690 3,526 15 80 122
9665 Wilshire 158,684 6,697 22,230 139 473 1,245
Imperial Bank Tower 540,413 3,722 35,184 64 625 4,033
100 W. Broadway 191,727 4,570 15,255 -- -- 761
12501 East Imperial Highway 122,175 4,508 5,532 -- -- 119
303 Glenoaks 175,449 6,500 18,132 -- -- 971
10351 Santa Monica 96,251 3,080 7,906 -- -- 364
2730 Wilshire 67,820 3,515 5,944 -- -- 220
Grand Avenue Plaza 84,500 620 2,832 -- -- 3,199
Burbank Executive Center 60,395 1,100 4,384 -- -- 1,018
California Federal Building 82,467 1,500 5,981 -- -- 332
Center Promenade 174,837 2,310 9,266 -- -- 577
LA Corporate Center 389,293 26,781 15,139 -- -- 639
5200 West Century 310,910 2,080 9,360 -- -- 2,204
Sumitomo Bank Building 110,641 2,560 10,257 -- -- 384
10350 Santa Monica 42,292 861 3,456 -- -- 77
535 N. Brand Blvd 109,187 1,600 8,779 -- -- 1,557
10780 Santa Monica 92,486 2,625 7,997 -- -- 386
California Twin Center 155,189 4,680 14,877 -- -- 454
Whittier Financial Center 135,415 3,575 10,798 -- -- 629
6800 Owensmouth 80,014 1,725 5,851 -- -- 165
Clarendon 43,063 1,300 3,951 -- -- 31
Noble Professional Center 51,828 1,657 5,096 -- -- 106
South Bay Centre 202,830 4,775 14,365 -- -- 341
8383 Wilshire 417,463 13,570 45,505 -- -- 782
Parkway Center 61,333 1,480 5,941 -- -- 27
CenterPointe La Palma 597,550 16,011 64,400 -- -- 341
299 Euclid 73,400 1,050 6,110 -- -- 446
Carlsberg Corp. Center 103,506 2,937 9,063 -- -- 113
Harbor Corporate Center 63,925 870 3,538 -- -- 21
1000 Town Center 107,653 2,800 11,260 -- -- 122
Mariner Court 105,436 2,350 9,461 -- -- 68
Pacific Gateway II 223,731 6,287 19,191 -- -- 48
1821 Dyer 115,061 1,808 5,474 -- -- 83
Crown Cabot Financial 172,900 7,056 21,360 -- -- 77
120 Spalding 60,656 2,775 8,544 -- -- 366
South Bay Tech 104,815 1,600 4,782 -- -- 10
1370 Valley Vista 84,081 2,698 8,141 -- -- 36
Renaissance Court 61,245 1,580 5,477 -- -- 146
Foremost Professional Center 60,534 2,049 6,196 -- -- 21
Northpoint 104,235 1,800 20,272 -- -- --
</TABLE>
<TABLE>
<CAPTION>
TOTAL COSTS
-----------------------
BUILDINGS AND ACCUMULATED YEAR
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION(1) ENCUMBRANCES BUILT
- --------------- ---- ------------ ----- ------------------------------- -----
<S> <C> <C> <C> <C> <C> <C>
Century Park Center $ 7,189 $ 22,095 $ 29,284 $ 4,287 -- 1972
Beverly Atrium 4,244 12,538 16,782 1,772 5,268(3) 1989
Woodland Hills 6,931 18,112 25,043 2,726 14,564(3) 1972
Anaheim City Centre 609 14,411 15,020 1,568 8,914(3) 1986
425 West Broadway 1,805 5,689 7,494 540 4,733(3) 1984
1950 Sawtelle 1,988 7,845 9,833 802 -- 1988
Bristol Plaza 2,077 4,770 6,847 413 4,082(3) 1982
16000 Ventura 1,885 20,494 22,379 1,725 -- 1980
5000 East Spring -- 13,664 13,664 1,558 -- 1989
70 South Lake 1,360 10,027 11,387 599 6,677(3) 1982
Westwood Terrace 2,103 17,464 19,567 1,018 -- 1988
Westlake - 5601 Lindero 2,577 7,636 10,213 913 6,225(3) 1989
The New Wilshire 1,200 21,961 23,161 1,275 11,566(3) 1986
Calabasas Commerce Center 1,262 10,067 11,329 565 -- 1990
Long Beach - DF&G -- 14,478 14,478 777 -- 1987
Skyview Center 6,514 35,598 42,112 2,176 27,604(3) 1981
400 Corporate Point 3,457 18,449 21,906 976 15,583(3) 1987
5832 Bolsa 705 3,728 4,433 191 2,675(3) 1985
9665 Wilshire 6,836 23,948 30,784 1,212 -- 1972
Imperial Bank Tower 3,786 39,842 43,628 2,211 -- 1982
100 W. Broadway 4,570 16,016 20,586 709 15,120(3) 1987
12501 East Imperial Highway 4,508 5,651 10,159 207 7,186(3) 1978
303 Glenoaks 6,500 19,103 25,603 682 13,104(3) 1983
10351 Santa Monica 3,080 8,270 11,350 241 -- 1984
2730 Wilshire 3,515 6,164 9,679 172 -- 1985
Grand Avenue Plaza 620 6,031 6,651 9 -- 1979/80
Burbank Executive Center 1,100 5,402 6,502 151 3,350(3) 1983
California Federal Building 1,500 6,313 7,813 176 5,026(3) 1978
Center Promenade 2,310 9,843 12,153 258 -- 1982
LA Corporate Center 26,781 15,778 42,559 444 21,043(3) 1984/86
5200 West Century 2,080 11,564 13,644 10 -- 1982
Sumitomo Bank Building 2,560 10,641 13,201 280 -- 1970
10350 Santa Monica 861 3,533 4,394 94 2,280(3) 1979
535 N. Brand Blvd 1,600 10,336 11,936 0 -- 1973/92
10780 Santa Monica 2,625 8,383 11,008 190 -- 1984
California Twin Center 4,680 15,331 20,011 353 -- 1983
Whittier Financial Center 3,575 11,427 15,002 251 -- 1967/82
6800 Owensmouth 1,725 6,016 7,741 137 -- 1986
Clarendon 1,300 3,982 5,282 86 -- 1990
Noble Professional Center 1,657 5,202 6,859 116 -- 1985/93
South Bay Centre 4,775 14,706 19,481 318 -- 1984
8383 Wilshire 13,570 46,287 59,857 882 -- 1971/93
Parkway Center 1,480 5,968 7,448 114 -- 1992/95
CenterPointe La Palma 16,011 64,741 80,752 1,115 -- 1986/88/90
299 Euclid 1,050 6,556 7,606 -- 5,000 1983
Carlsberg Corp. Center 2,937 9,176 12,113 112 -- 1979
Harbor Corporate Center 870 3,559 4,429 42 -- 1985
1000 Town Center 2,800 11,382 14,182 136 -- 1989
Mariner Court 2,350 9,529 11,879 114 -- 1989
Pacific Gateway II 6,287 19,239 25,526 230 -- 1982/90
1821 Dyer 1,808 5,557 7,376 66 -- 1980/88
Crown Cabot Financial 7,056 21,437 28,493 257 -- 1989
120 Spalding 2,775 8,910 11,685 -- -- 1984
South Bay Tech 1,600 4,792 6,392 39 -- 1984
1370 Valley Vista 2,698 8,177 10,875 59 -- 1988
Renaissance Court 1,580 5,623 7,203 -- -- 1981/92
Foremost Professional Center 2,049 6,217 8,266 44 -- 1992
Northpoint 1,800 20,272 22,072 147 -- 1991
</TABLE>
F-21
<PAGE> 65
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Thousand Oaks Plaza 13,434 444 1,343 -- -- --
Rancho Plaza 24,057 711 2,213 -- -- --
Pennsfield Plaza 21,202 800 2,383 -- -- --
Conejo Business Park 69,017 2,489 7,359 -- -- --
Marin Corporate Center 51,360 1,956 5,915 -- -- --
Evergreen Plaza 75,722 2,489 6,911 -- -- --
145 South Fairfax 54,429 1,825 5,551 -- -- --
Bernardo Regency 47,916 1,625 4,937 -- -- --
City Centre 302,519 8,250 24,951 -- -- --
Wishire Pacific Plaza 100,122 3.750 11,317 -- -- --
Glendale Corporate Center 108,209 2,750 12,734 -- -- --
World Savings Center(4) 469,115 -- 110,382 -- -- --
9201 Sunset 158,585 7,180 21,666 -- -- --
---------- -------- -------- ------- -------- --------
10,339,087 $239,824 $943,930 $ 1,616 $ 8,607 $ 45,055
========== ======== ======== ======= ======== ========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Thousand Oaks Plaza 444 1,343 1,787 9 -- 1988
Rancho Plaza 711 2,213 2,924 15 -- 1987
Pennsfield Plaza 800 2,383 3,183 17 -- 1989
Conejo Business Park 2,489 7,359 9,848 53 4,726 1991
Marin Corporate Center 1,956 5,915 7,871 41 3,337 1986
Evergreen Plaza 2,489 6,911 9,400 52 -- 1979/96
145 South Fairfax 1,825 5,551 7,363 40 4,103 1984
Bernardo Regency 1,625 4,937 6,562 35 -- 1986
City Centre 8,250 24,951 33,201 -- -- 1982
Wishire Pacific Plaza 3,750 11,317 15,067 -- -- 1976/87
Glendale Corporate Center 2,750 12,734 15,484 -- -- 1985
World Savings Center(4) -- 110,382 110,382 -- 45,000 1983
9201 Sunset 7,180 21,666 28,846 53 -- 1963/92-95
---------- -------- ---------- ------- ----------
$ 241,440 $997,592 $1,239,032 $35,860 $ 237,166
========== ======== ========== ======= ==========
</TABLE>
<TABLE>
<S> <C>
(1) The depreciable life for buildings and improvements ranges from ten to
forty years. Tenant improvements are depreciated over the remaining term
of the lease.
(2) Includes total capitalized interest of $2.6 million.
(3) All of these Properties are collateral for a single mortgage loan. The
encumbrance allocated to an individual property is based on the related
individual release price.
(4) Includes the consolidated 25% minority interest in World Savings Center
of $27.5 million.
</TABLE>
F-22
<PAGE> 66
ARDEN REALTY, INC.
SCHEDULE III - COMMERCIAL PROPERTIES AND ACCUMULATED DEPRECIATION (CONTINUED)
The changes in real estate for each of the periods in the three
years ended December 31, 1997 are as follows.
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD FOR THE
FOR THE YEAR ENDED OCTOBER 9, 1996 TO JANUARY 1, 1996 TO YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 OCTOBER 8, 1996 DECEMBER 31, 1995
----------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Real estate balance at
beginning of period $ 546,707 $283,579 $164,170 $ 36,507
Improvements 23,642 2,366 6,626 2,245
Deletions (335) -- -- --
Consolidation of non-
combined entities(1) -- 96,935 -- --
Acquisition of properties 669,018 153,604 112,783 125,418
Consideration paid in
exchange for interests
of non-affiliates -- 10,223 -- --
----------- -------- -------- --------
Balance at end of period $ 1,239,032 $546,707 $283,579 $164,170
=========== ======== ======== ========
</TABLE>
The changes in accumulated depreciation, exclusive of amounts
relating to equipment, autos, and furniture and fixtures for each of the periods
in the three years ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD FOR THE
FOR THE YEAR ENDED OCTOBER 9, 1996 TO JANUARY 1, 1996 TO YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 OCTOBER 8, 1996 DECEMBER 31, 1995
----------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 17,139 $ 8,345 $3,296 $1,530
Depreciation for period 19,056 2,948 5,049 1,766
Deletions (335) -- -- --
Consolidation of non-
combined entities (1) -- 5,846 -- --
-------- ------- ------ ------
Balance at end of period $ 35,860 $17,139 $8,345 $3,296
======== ======= ====== ======
</TABLE>
(1) The non-combined entities were consolidated as a result of the
Company purchasing the controlling interests as part of the
Formation Transactions
F-23
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-44141, Form S-3 No. 333-40451 and Form S-8 dated October 9,
1997) of Arden Realty, Inc. and in the related Prospectuses of our report dated
January 29, 1998 (except for Note 21, as to which the date is February 23,
1998), with respect to the consolidated financial statements and schedule of
Arden Realty, Inc. included in this Form 10-K for the year ended December 31,
1997.
/s/ Ernst & Young LLP
Los Angeles, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,340
<SECURITIES> 0
<RECEIVABLES> 10,203
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,871
<PP&E> 1,239,032
<DEPRECIATION> (35,860)
<TOTAL-ASSETS> 1,284,004
<CURRENT-LIABILITIES> 30,635
<BONDS> 477,566
0
0
<COMMON> 358
<OTHER-SE> 672,625
<TOTAL-LIABILITY-AND-EQUITY> 1,284,004
<SALES> 0
<TOTAL-REVENUES> 135,447
<CGS> 0
<TOTAL-COSTS> 44,332
<OTHER-EXPENSES> 47,204
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,511
<INCOME-PRETAX> 39,630
<INCOME-TAX> 0
<INCOME-CONTINUING> 39,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,630
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.41
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,632
<SECURITIES> 0
<RECEIVABLES> 2,293
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,606
<PP&E> 546,707
<DEPRECIATION> (17,139)
<TOTAL-ASSETS> 551,256
<CURRENT-LIABILITIES> 15,022
<BONDS> 155,000
0
0
<COMMON> 217
<OTHER-SE> 331,760
<TOTAL-LIABILITY-AND-EQUITY> 551,256
<SALES> 0
<TOTAL-REVENUES> 19,572
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,146
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,280
<INCOME-PRETAX> (5,672)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (13,105)
<CHANGES> 0
<NET-INCOME> (5,672)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,945
<SECURITIES> 0
<RECEIVABLES> 3,932
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,141
<PP&E> 955,082
<DEPRECIATION> (29,543)
<TOTAL-ASSETS> 978,101
<CURRENT-LIABILITIES> 31,190
<BONDS> 225,900
0
0
<COMMON> 354
<OTHER-SE> 667,493
<TOTAL-LIABILITY-AND-EQUITY> 978,101
<SALES> 0
<TOTAL-REVENUES> 91,614
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 62,098
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,723
<INCOME-PRETAX> 26,411
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,411
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.04
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 832
<SECURITIES> 0
<RECEIVABLES> 3,144
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,797
<PP&E> 795,238
<DEPRECIATION> (24,731)
<TOTAL-ASSETS> 801,474
<CURRENT-LIABILITIES> 22,160
<BONDS> 395,600
0
0
<COMMON> 217
<OTHER-SE> 331,040
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 54,733
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 36,214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,907
<INCOME-PRETAX> 16,295
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,295
<EPS-PRIMARY> .75
<EPS-DILUTED> .74
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 822
<SECURITIES> 0
<RECEIVABLES> 2,093
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,608
<PP&E> 601,146
<DEPRECIATION> (20,510)
<TOTAL-ASSETS> 599,338
<CURRENT-LIABILITIES> 19,720
<BONDS> 197,800
0
0
<COMMON> 217
<OTHER-SE> 331,880
<TOTAL-LIABILITY-AND-EQUITY> 599,338
<SALES> 0
<TOTAL-REVENUES> 24,970
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,398
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,024
<INCOME-PRETAX> 8,438
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,438
<EPS-PRIMARY> .39
<EPS-DILUTED> .38
</TABLE>
