<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
Commission file number 1-12193
ARDEN REALTY, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 95-04578533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11601 WILSHIRE BOULEVARD,
4TH FLOOR
LOS ANGELES, CALIFORNIA 90025-1740
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (310) 966-2600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of October 23, 1998, there were 62,404,737 shares of the registrant's Common
Stock, $.01 par value, issued and outstanding.
<PAGE> 2
ARDEN REALTY, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997.................................................. 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 1998 and 1997.................................. 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997.................................. 5
Notes to Consolidated Financial Statements............................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 12
PART II. OTHER INFORMATION ...................................................... 26
SIGNATURES ....................................................... 29
</TABLE>
2
<PAGE> 3
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
ARDEN REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Commercial properties:
Land $ 491,342 $ 241,440
Buildings and improvements 1,756,509 975,791
Tenant improvements 45,716 21,801
---------- ----------
2,293,567 1,239,032
Less: accumulated depreciation (71,174) (35,860)
---------- ----------
2,222,393 1,203,172
Cash and cash equivalents 6,826 5,300
Restricted cash 13,381 4,040
Rent and other receivables 11,758 10,203
Mortgage notes receivable, net 14,343 14,430
Deferred rent 14,404 8,811
Prepaid financing and leasing costs, net of accumulated
amortization of $5,857 and $2,649, respectively 27,893 12,680
Prepaid expenses and other assets 5,300 25,368
---------- ----------
Total assets $2,316,298 $1,284,004
========== ==========
LIABILITIES
Mortgage loans payable $ 533,587 $ 237,166
Unsecured lines of credit 285,450 240,400
Accounts payable and accrued expenses 30,049 16,458
Security deposits 13,609 6,847
Dividends payable 26,210 14,177
---------- ----------
Total liabilities 888,905 515,048
---------- ----------
Minority interests 56,267 95,973
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 20,000,000 shares authorized, -- --
Common stock, $.01 par value, 100,000,000 shares authorized, 62,404,737
none issued and 35,796,704 issued and outstanding, respectively 623 358
Additional paid-in capital 1,370,503 672,625
---------- ----------
Total stockholders' equity 1,371,126 672,983
---------- ----------
Total liabilities and stockholders' equity $2,316,298 $1,284,004
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 76,738 $ 36,431 $202,000 $ 91,051
Property operating expenses 24,072 11,737 62,353 29,175
-------- -------- -------- --------
52,666 24,694 139,647 61,876
General and administrative 1,564 979 4,587 2,828
Interest 11,988 4,816 31,139 13,723
Loss on valuation of derivative -- 3,111 -- 3,111
Depreciation and amortization 12,954 5,241 37,180 13,261
Interest and other income (680) (450) (2,833) (563)
-------- -------- -------- --------
Income before minority interests 26,840 10,997 69,574 29,516
Minority interests (1,253) (881) (4,188) (3,105)
-------- -------- -------- --------
Net income $ 25,587 $ 10,116 $ 65,386 $ 26,411
======== ======== ======== ========
Net income per common share:
Basic $ 0.41 $ 0.31 $ 1.14 $ 1.05
Diluted $ 0.41 $ 0.31 $ 1.14 $ 1.04
Weighted average common shares
outstanding:
Basic 62,364 32,155 57,398 25,215
Diluted 62,470 32,401 57,576 25,440
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1998 1997
----------- ------------
(Unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 65,386 $ 26,411
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interests 3,613 3,105
Loss on valuation of derivative -- 3,111
Depreciation and amortization 37,180 13,261
Amortization of loan costs and fees 1,342 497
Changes in operating assets and liabilities:
Rent and other receivables (1,468) (16,031)
Deferred rent (5,593) (1,964)
Prepaid financing and leasing costs (18,421) (8,435)
Prepaid expenses and other assets 20,068 (2,393)
Accounts payable and accrued expenses 13,591 7,724
Security deposits 6,762 2,396
----------- ---------
Net cash provided by operating activities 122,460 27,682
----------- ---------
INVESTING ACTIVITIES:
Acquisitions and improvements to commercial properties (1,073,817) (407,613)
----------- ---------
FINANCING ACTIVITIES:
Proceeds from mortgage loans 666,919 251,000
Repayments of mortgage loans (370,498) (175,000)
Proceeds from secured line of credit -- 26,700
Repayment of secured line of credit -- (26,700)
Proceeds from unsecured lines of credit 380,550 233,900
Repayments of unsecured lines of credit (335,500) (239,000)
Proceeds from issuance of common stock, net of
offering costs 706,950 340,898
Redemption of Operating Partnership Units (16,305) --
Increase in restricted cash (9,341) (4,000)
Distributions to minority interests (3,833) (3,395)
Dividends paid (66,059) (25,159)
----------- ---------
Net cash provided by financing activities 952,883 379,244
----------- ---------
Net increase (decrease) in cash and cash equivalents 1,526 (687)
Cash and cash equivalents at beginning of period 5,300 7,632
----------- ---------
Cash and cash equivalents, at end of period $ 6,826 $ 6,945
=========== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest,
net of amount capitalized $ 23,118 $ 12,668
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
ARDEN REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
The terms "Arden Realty", "us", "we" and "our" as used in this report refer
to Arden Realty, Inc. Through our controlling interest in Arden Realty Limited
Partnership (the "Operating Partnership") and our other subsidiaries, we are
engaged in owning, acquiring, managing, leasing, and renovating commercial
properties located in Southern California. As of September 30, 1998, our
portfolio of properties included 138 commercial properties with approximately
18.0 million rentable square feet (the "Properties").
The accompanying consolidated financial statements include our accounts,
and the accounts of the Operating Partnership and our other subsidiaries. All
significant inter-company balances and transactions have been eliminated in
consolidation.
Minority interests for the nine-month periods ended September 30, 1998 and
1997 include limited partnership interests in the Operating Partnership of
approximately 5.3% and 10.5%, respectively.
2. INTERIM FINANCIAL DATA
The accompanying consolidated financial statements should be read in
conjunction with our 1997 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission. The accompanying financial information
reflects all adjustments, which are, in our opinion, of a normal recurring
nature and necessary for a fair presentation of our financial position, results
of operations and cash flows for the interim periods. Interim results of
operations are not necessarily indicative of the results to be expected for the
full year.
3. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("Statement 131"). Statement 131 is
effective for fiscal years beginning after December 15, 1997 and requires
disclosure of selected information about reportable segments. Implementation of
Statement 131 will have no impact on how we report our results of operations.
In March 1998, the Financial Accounting Standards Board Emerging Issues
Task Force ("EITF") reached a consensus on Issue 97-11, concluding that internal
preacquisition costs related to the purchase of an operating property should be
expensed as incurred. We have adopted the provisions of EITF Abstract 97-11, and
we do not believe that our results of operations will be materially impacted.
6
<PAGE> 7
4. ACQUISITIONS
The following table sets forth certain information regarding our
acquisitions for the nine months ended September 30, 1998.
<TABLE>
<CAPTION>
TOTAL
APPROXIMATE MONTH ACQUISITION
NET RENTABLE OF COST
PROPERTY NAME LOCATION SQUARE FEET ACQUISITION (IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OFFICE
LOS ANGELES COUNTY
Los Angeles West
9100 Wilshire Beverly Hills 326,227 January 1998 $ 65.1
Westwood Center (A) Los Angeles 282,013 January 1998 28.7
World Savings Center Los Angeles (B) March 1998 27.5
600 Corporate Pointe Culver City 273,339 March 1998 (C)
1919 Santa Monica Santa Monica 44,096 March 1998 (C)
11075 Santa Monica Los Angeles 35,696 April 1998 5.0
Los Angeles North
Sunset Pointe Plaza Newhall 58,105 January 1998 8.5
Westlake Gardens Westlake 49,639 January 1998 7.3
5161 Lankershim North Hollywood 178,317 March 1998 (C)
150 East Colorado Pasadena 61,168 March 1998 (C)
Calabasas Tech Center Calabasas 273,526 May 1998 46.1
Lyons Plaza Santa Clarita 61,203 June 1998 8.4
601 South Glenoaks Burbank 72,524 August 1998 9.8
Tourney Pointe (D) Valencia 219,991 September 1998 27.5
Los Angeles South
1501 Hughes Way Long Beach 77,060 March 1998 (C)
3901 Via Oro Long Beach 53,195 March 1998 (C)
Continental Grand El Segundo 235,926 April 1998 47.6
Oceangate Tower Long Beach 210,907 May 1998 23.5
91 Freeway Center Artesia 94,516 August 1998 11.9
ORANGE COUNTY
Savi Tech Center Yorba Linda 341,446 March 1998 (C)
Yorba Linda Business Park Yorba Linda 167,142 March 1998 (C)
Huntington Commerce Center Huntington Beach 67,551 March 1998 (C)
Huntington Beach Plaza I & II Huntington Beach 52,186 March 1998 (C)
5702 Bolsa Huntington Beach 27,731 March 1998 (C)
5632 Bolsa Huntington Beach 21,568 March 1998 (C)
5672 Bolsa Huntington Beach 11,968 March 1998 (C)
Von Karman Corporate Center Irvine 451,477 March 1998 (C)
Orange Financial Center Orange 305,439 March 1998 (C)
625 The City Orange 139,806 March 1998 (C)
Fountain Valley Plaza Fountain Valley 107,252 March 1998 (C)
3300 Irvine Avenue Newport Beach 74,224 March 1998 (C)
1503 South Coast Costa Mesa 60,605 March 1998 (C)
One Venture Irvine 43,324 March 1998 (C)
Lambert Office Plaza Brea 32,807 March 1998 (C)
SAN DIEGO COUNTY
Activity Business Center San Diego 167,045 January 1998 14.9
Skypark Office Plaza San Diego 202,164 March 1998 (C)
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
TOTAL
APPROXIMATE MONTH ACQUISITION
NET RENTABLE OF COST
PROPERTY NAME LOCATION SQUARE FEET ACQUISITION (IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sorrento Valley Science Park San Diego 181,207 March 1998 (C)
Panorama Corporate Center San Diego 133,245 March 1998 (C)
Governor Park Plaza San Diego 104,065 March 1998 (C)
Torreyanna Science Park La Jolla 81,204 March 1998 (C)
Balboa Corporate Center San Diego 69,890 March 1998 (C)
10251 Vista Sorrento San Diego 69,386 March 1998 (C)
Westridge San Diego 48,850 March 1998 (C)
Ruffin Corporate Center San Diego 45,059 March 1998 (C)
10180 Scripps Ranch San Diego 43,560 March 1998 (C)
5120 Shoreham San Diego 37,759 March 1998 (C)
Uniden Building San Diego 28,119 March 1998 (C)
Cymer Technology Center Rancho Bernardo 155,612 March 1998 (C)
Carlsbad Corporate Center Carlsbad 125,000 March 1998 (C)
Poway Industrial Poway 112,000 March 1998 (C)
10965-93 Via Frontera Rancho Bernardo 77,920 March 1998 (C)
Genesee Executive Plaza San Diego 155,820 June 1998 27.0
VENTURA COUNTY
Camarillo Business Center Camarillo 154,216 March 1998 (C)
Solar Drive Busness Park Oxnard 125,132 July 1998 17.1
RIVERSIDE & SAN BERNARDINO COUNTIES
Hunter Business Park Riverside 106,782 March 1998 (C)
Chicago Avenue Business Park Riverside 47,482 March 1998 (C)
Tower Plaza I Temecula 72,350 March 1998 (C)
Tower Plaza II Temecula 19,301 March 1998 (C)
Tower Plaza III Temecula 12,483 March 1998 (C)
Centrelake Plaza Ontario 110,763 March 1998 (C)
HDS Plaza San Bernardino 104,178 March 1998 (C)
Havengate Center Rancho Cucamonga 80,557 March 1998 (C)
INDUSTRIAL
RIVERSIDE & SAN BERNARDINO COUNTIES
Ontario Airport Commerce Center Ontario 213,127 March 1998 (C)
Highlands I Temecula 26,856 March 1998 (C)
Highlands II Temecula 41,210 March 1998 (C)
RETAIL
LOS ANGELES WEST
The Spectrum Club Los Angeles 36,959 March 1998 (E)
SAN DIEGO AREA
Tower Plaza Retail Temecula 144,225 March 1998 (C)
--------- --------
Sub-total 7,645,500 375.9
LBA Portfolio -- 619.9 (C)
Howard Hughes Center -- 38.6 (E)
--------- --------
Total 7,645,500 $1,034.4
========= ========
</TABLE>
8
<PAGE> 9
(A) We acquired a 97.5% interest in this property.
(B) At December 31, 1997, we owned a 75% interest in the 469,115 square foot
World Savings Center 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.
(C) On March 1, 1998, we 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 the estimated
$3.6 million value of warrants to purchase 2.5 million shares of our Common
Stock.
(D) We acquired a 99.33% interest in this property.
(E) On March 31, 1998, we acquired an executive health and athletic club and
the undeveloped commercial property portions of the 70-acre Howard Hughes
Center (the "Center") for approximately $38.6 million. The Center, located
in West Los Angeles, California, is a mixed-use development currently
containing three office buildings, the executive health and athletic club
and entitlements for an additional 1.3 million square feet of office space.
5. MORTGAGE LOANS PAYABLE
In January 1998, we assumed a mortgage note payable of approximately $8.2
million in connection with the acquisition of Activity Business Center. 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 (effective
rate of 8.85%). The note requires monthly payments of principal, interest, and
impound payments for taxes and insurance, and matures on May 1, 2006. This
mortgage note prohibits prepayment prior to May 1, 2002.
In January 1998, we also assumed a mortgage note payable of approximately
$15.4 million in connection with the acquisition of Westwood Center. The note
bears interest at 8.09% per annum, requires monthly payments of principal and
interest and matures on April 30, 2003.
Also in January 1998, we borrowed $60.0 million from Lehman Brothers Realty
Corporation (the "Lehman Bridge Loan I") in connection with the acquisition of
9100 Wilshire. In June 1998, we repaid $5.6 million on the Lehman Bridge Loan I
with proceeds from the Mortgage Financing III and IV mortgage loans, as defined
below. In September 1998, the Lehman Bridge Loan I was expanded to $81.4
million. The Lehman Bridge Loan I is secured by seven of our properties, bears
interest at LIBOR plus .75% per annum (effective rate of 6.40% at September 30,
1998), requires monthly payments of interest only, and matures on February 20,
1999.
In March 1998, in connection with our acquisition of the LBA Portfolio, we
borrowed $200 million from Lehman Brothers Realty Corporation (the "Lehman
Bridge Loan II"). This $200 million mortgage loan was secured by 40 properties,
required monthly payments of interest only, with $100 million bearing interest
at LIBOR plus 1.0% per annum and $100 million at a fixed rate of 6.78% per
annum. In June 1998, we repaid the Lehman Bridge Loan II with proceeds from the
Mortgage Financing III and IV mortgage loans, as defined below.
In March 1998, we assumed an additional $15.0 million of debt under an
existing mortgage note (the "World Savings Note"). On May 1, 1998, the $60.0
million World Savings Note was repaid in full with proceeds from a draw on our
Amended Credit Facility.
On June 8, 1998, we repaid, through two special purposes subsidiaries, our
$200 million Lehman Bridge Loan II with two new mortgages loans totaling $236.7
million. The additional proceeds were used to repay $22.0 million on our lines
of credit and to repay $5.6 million on the Lehman Bridge Loan I. The $136.1
million ("Mortgage Financing III") and $100.6 million ("Mortgage Financing IV")
mortgage loans are payable to an affiliate of Lehman Brothers, are non-recourse
and secured by fully cross-collateralized and cross-defaulted first mortgage
liens on 22 and 12 of our Properties ("Mortgage Financing III, and IV,
Properties"), respectively. The Mortgage Financing III and IV mortgage loans
each have a thirty year term, bear interest at a fixed rate of 6.74% (6.93%
including the amortization of costs associated with the Swap Agreement, as
defined below) per annum, require interest only payments through April 2003, and
thereafter require monthly payments of principal and interest amortized over a
25 year period through maturity and are anticipated to be repaid within ten
years of issuance. If the Mortgage Financing III and IV mortgage loans are not
repaid within ten years of issuance, the interest rate will increase by at least
5% per annum and all excess cash flow (as defined) from the Mortgage Financing
III and IV Properties must be used to pay down outstanding principal.
9
<PAGE> 10
The Mortgage Financing III and IV mortgage loans require us to maintain a cash
reserve for tenant improvements of approximately $2.7 million and $3.3 million,
respectively, and to comply with certain customary financial covenants, ongoing
operational restrictions, and certain cash management procedures.
In October 1998, pursuant to the execution of certain leasing transactions,
we borrowed an additional $10.6 million under the Mortgage Financing IV loan.
The interest rate associated with this additional borrowing was lower than the
initial $100.6 million Mortgage Financing IV borrowing, resulting in an average
annual fixed rate of 6.61% (6.70% including the amortization of costs associated
with the Swap Agreement, as defined below).
In connection with the Mortgage Financing III and IV mortgage loans, we
entered into a treasury rate lock agreement (the "Swap Agreement") with a
notional amount of $100,000,000 and locked in the United States 10 year treasury
rate at 6.174%. We are amortizing the approximate $4.5 million cost of the Swap
Agreement over ten years, the anticipated repayment term of the Mortgage
Financing III and IV mortgage loans.
6. STOCKHOLDERS' EQUITY
An Operating Partnership Unit ("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 Operating Partnership. OP Units may
be redeemed for cash or, at our election, for shares of Common Stock on a
one-for-one basis.
In January 1998, 226,880 OP Units were exchanged for Common Stock.
On February 23, 1998, we completed three February 1998 equity offerings
(the "February 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 us from the February 1998 Offerings, net
of underwriters' discount and offering costs aggregating approximately $35.9
million, were approximately $677.3 million. Of these February 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. We used the net proceeds from the
February 1998 Offerings to fund the acquisition of the LBA Portfolio described
above, to repay the outstanding balances on our lines of credit and for working
capital.
On March 1, 1998, the Operating Partnership issued 203,420 OP Units valued
at approximately $5.8 million in connection with acquisition of the LBA
Portfolio and issued warrants to purchase 2.5 million shares of our Common Stock
at a price of $29.59 per share, subject to adjustment.
On March 17, 1998, we declared a first quarter dividend of $.42 per share
to shareholders of record on March 31, 1998.
In December 1997, we issued 822,400 OP Units in connection with the
acquisition of the World Savings Center. On April 16, 1998, we redeemed 542,382
of these OP Units at a cost of approximately $16.3 million based on the original
issuance price of the OP Units.
In April 1998, we issued 10,412 OP Units valued at approximately $.3
million in connection with the acquisition of Continental Grand.
On April 23, 1998, we completed an offering (the "April 1998 Offering") of
1,110,132 shares of Common Stock. The shares from the April 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 $31.5
million. The aggregate proceeds to us, net of underwriters' discount and
offering costs aggregating approximately $1.8 million, were approximately $29.7
million. We used the net proceeds from the April 1998 Offering to repay a
portion of our outstanding balance on our line of credit and for working
capital.
On June 17, 1998, we declared a second quarter dividend of $.42 per share
to shareholders of record on June 30, 1998.
In August 1998, we issued 86,423 OP Units valued at approximately $2.1
million in connection with the acquisition of 91 Freeway Center.
In August 1998, we declared a dividend distribution of one preferred share
purchase right on each outstanding share of our common stock. Subject to limited
exceptions, these rights will be exercisable if a person or group acquires 15%
or more of our common stock or announces a tender offer for 15% or more of our
common stock. Under certain circumstances, each right will entitle shareholders
to buy one one-hundredth of a share of our newly created Class A Junior
Participating Preferred Stock at an exercise price of $75. Our Board of
Directors will be entitled to redeem the rights at $.01 per right at any time
before a person has acquired 15% or more of our outstanding common stock. The
Rights Plan will expire in August 2008.
10
<PAGE> 11
If a person becomes an Acquiring Person (as defined below), each right will
entitle its holder to purchase, at the right's then-current exercise price, a
number of our common shares having a market value at that time of twice the
Right's exercise price. Rights held by the Acquiring Person will become void and
will not be exercisable to purchase shares at the bargain purchase price. An
Acquiring Person is defined as a person who acquires 15% or more of our
outstanding common stock. If we are acquired in a merger or other business
combination transaction which has not been approved by our Board of Directors,
each right will entitle its holder to purchase, at the right's then-current
exercise price, a number of the acquiring company's common shares having a
market value at that time of twice the right's exercise price.
On September 19, 1998, we declared a third quarter dividend of $.42 per
share to shareholders of record on September 30, 1998.
7. REVENUE FROM RENTAL OPERATIONS AND PROPERTY OPERATING EXPENSES
Revenue from rental operations and property operating expenses are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue from Rental Operations:
Rental $ 68,609 $ 32,237 $180,820 $ 80,740
Tenant reimbursements 2,211 1,704 6,268 3,593
Parking, net of expense 3,252 2,045 8,784 5,267
Other rental operations 2,666 445 6,128 1,451
-------- -------- -------- --------
76,738 36,431 202,000 91,051
-------- -------- -------- --------
Property Operating Expenses:
Repairs and maintenance 7,251 3,934 19,401 10,309
Utilities 8,663 3,956 19,261 9,325
Real estate taxes 4,580 2,139 14,052 5,152
Insurance 1,096 583 2,978 1,447
Ground rent 178 69 534 172
Marketing and other 2,304 1,056 6,127 2,770
-------- -------- -------- --------
24,072 11,737 62,353 29,175
-------- -------- -------- --------
$ 52,666 $ 24,694 $139,647 $ 61,876
======== ======== ======== ========
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion relates to our consolidated financial statements
and should be read in conjunction with the financial statements and related
notes thereto included in our 1997 Annual Report on Form 10-K.
Since our initial public offering in October 1996, we have pursued a strategy of
acquiring under-performing commercial properties, properties in need of
renovation, properties which provide attractive yields with stable cash flow,
and more recently, fully entitled commercial undeveloped real estate, all in
Southern California submarkets where we can utilize our local market expertise.
We have also used our active in-house management, leasing and finance expertise
to maximize growth in cash flow. In particular, during the nine months ended
September 30, 1998 we have:
- - Acquired a total of 66 commercial properties, all located in Southern
California, with approximately 7.6 million rentable square feet.
- - Acquired an executive health and athletic club and the undeveloped
commercial property portions of the 70-acre Howard Hughes Center (the
"Center") for approximately $38.6 million. The Center, located in West Los
Angeles, California, is a mixed-use development currently containing three
office buildings, the executive health and athletic club and entitlements
for an additional 1.3 million square feet of office space.
- - Raised approximately $744.7 million of equity in a series of four public
offerings. Proceeds to us from these offerings, net of underwriters'
discount, advisory fees and offering costs aggregating approximately $37.7
million, were approximately $707.0 million.
- - Refinanced $200 million of variable rate mortgage debt that matured on July
1, 1998, with two-fixed rate mortgage loans totaling $236.7 million. In
October 1998, we borrowed an additional $10.6 million under one of these
Mortgage Loans and reduced the average annual fixed rate to 6.61% on $111.2
million of these borrowings. The additional proceeds from this refinancing
were used to repay outstanding indebtedness.
We intend to continue focusing on maximizing growth in cash flow and
enhancing the value of our portfolio of commercial properties. These objectives
will be pursued by active management of our existing portfolio, through the
development of new office or R&D/industrial properties and through strategic
acquisitions.
12
<PAGE> 13
RESULTS OF OPERATIONS
Comparison of the nine months ended September 30, 1998 to the nine months
ended September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------- PERCENT
1998 1997 CHANGE CHANGE
-------- -------- -------- --------
(dollars in thousands)
(Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Revenues from rental operations:
Rental $ 180,820 $ 80,740 $ 100,080 124%
Tenant reimbursements 6,268 3,593 2,675 74%
Parking, net of expense 8,784 5,267 3,517 67%
Other rental operations 6,128 1,451 4,677 322%
--------- --------- --------- ----
202,000 91,051 110,949 122%
Other income 2,833 563 2,270 403%
--------- --------- --------- ----
Total revenue $ 204,833 $ 91,614 $ 113,219 124%
========= ========= ========= ====
EXPENSES
Property operations:
Repairs and maintenance $ 19,401 $ 10,309 $ 9,092 88%
Utilities 19,261 9,325 9,936 107%
Real estate taxes 14,052 5,152 8,900 173%
Insurance 2,978 1,447 1,531 106%
Ground rent 534 172 362 210%
Marketing and other 6,127 2,770 3,357 121%
--------- --------- --------- ----
Total property expenses 62,353 29,175 33,178 114%
General and administrative 4,587 2,828 1,759 62%
Interest 31,139 13,723 17,416 127%
Loss on valuation of derivative __ 3,111 (3,111) (100%)
Depreciation and amortization 37,180 13,261 23,919 180%
--------- --------- --------- ----
Total expenses $ 135,259 $ 62,098 $ 73,161 118%
========= ========= ========= ====
OTHER DATA:
NUMBER OF PROPERTIES:
Acquired during period 66 24 42 N/A
Owned at end of period 138 58 80 N/A
SQUARE FEET: (IN THOUSANDS)
Acquired during period 7,646 3,283 4,363 N/A
Owned at end of period 17,953 8,726 9,227 N/A
</TABLE>
13
<PAGE> 14
Rental revenue increased approximately $100.1 million for the nine months
ended September 30, 1998 compared to the same period in 1997. Rental revenue
from properties owned for the entire nine month periods ended September 30, 1998
and 1997 increased approximately $.4 million in 1998 compared to 1997, primarily
due to increases in occupancy and rental rates. Rental revenue from properties
acquired after January 1, 1997 was approximately $99.7 million higher for the
nine months ended September 30, 1998 compared to the same period in 1997,
primarily due to the timing of these acquisitions.
Tenant reimbursements increased approximately $2.7 million for the nine
months ended September 30, 1998 compared to the same period in 1997. Tenant
reimbursements from properties owned for the entire nine month periods ended
September 30, 1998 and 1997 decreased approximately $.9 million in 1998 compared
to 1997, primarily as a result of resetting base years for leases that were
retenanted in 1998. Tenant reimbursements from properties acquired after January
1, 1997 were approximately $3.6 million higher for the nine months ended
September 30, 1998 compared to the same period in 1997, primarily due to the
timing of these acquisitions.
Parking revenue, net of expense, increased approximately $3.5 million for
the nine months ended September 30, 1998 compared to the same period in 1997,
primarily from properties acquired after January 1, 1997.
Revenue from other rental operations, consisting primarily of miscellaneous
tenant charges such as late fees, after hours utility charges, signage income
and lease buyout income increased approximately $4.7 million for the nine months
ended September 30, 1998 compared to the same period in 1997. Revenues from
properties owned for the entire nine month periods ended September 30, 1998 and
1997 increased approximately $.7 million in 1998, compared to the same period
in 1997, primarily due to higher after hours utility charges in 1998. Revenues
from properties acquired after January 1, 1997 were approximately $4.0 million
higher for the nine months ended September 30, 1998 compared to the same period
in 1997, primarily due to the timing of these acquisitions.
Other income increased approximately $2.3 million for the nine months ended
September 30, 1998 compared to the same period in 1997, primarily due to higher
interest income earned on mortgage notes receivable acquired in September 1997
and on cash deposits required by certain of our mortgage loans.
For the nine months ended September 30, 1998, total property expenses were
$62.4 million, or 30.9% of total revenue from rental operations, compared with
total property expenses of $29.2 million or 32.0% of total revenue from rental
operations in 1997. Property expenses for properties owned for the entire nine
month periods ended September 30, 1998 and 1997 decreased approximately $1.2
million in 1998 compared to 1997, primarily due to repair and maintenance
expense reductions achieved from economies of scale. Property expenses from
properties acquired after January 1, 1997 were $34.4 million higher for the nine
months ended September 30, 1998, primarily due to the timing of these
acquisitions.
General and administrative expenses were approximately $4.6 million or 2.2%
of total revenue for the nine months ended September 30, 1998 as compared to
$2.8 million or 3.1% of total revenue for the same period in 1997. General and
administrative expenses as a percentage of total revenue decreased in the first
nine months of 1998 compared to 1997 primarily due to benefits achieved from
economies of scale.
Interest expense increased approximately $17.4 million for the nine months
ended September 30, 1998 compared to the same period in 1997, primarily as a
result of higher outstanding indebtedness to fund property acquisitions.
In September 1997, we recorded a loss of approximately $3.1 million related
to the retirement of agreements to convert certain floating rate debt
liabilities to fixed rate liabilities. The underlying variable rate liabilities
were repaid in full with proceeds from an equity offering in July 1997.
Depreciation and amortization expense increased approximately $23.9 million
for the nine months ended September 30, 1998 compared to the same period in
1997, primarily due to 1997 and 1998 property acquisitions and depreciation of
capital improvements made to our existing portfolio.
14
<PAGE> 15
Following is a comparison of property operating data computed under
generally accepted accounting principles ("GAAP Basis") and excluding the
straight-line rent adjustment ("Cash Basis") for the 34 properties which were
owned for the entire nine month periods ended September 30, 1998 and 1997
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------- DOLLAR PERCENT
1998 1997 CHANGE CHANGE
-------- ------- ------- ------
GAAP BASIS: (Unaudited)
<S> <C> <C> <C> <C>
Revenues from rental operations $75,222 $74,989 $ 233 0.3%
Property expenses 23,421 24,576 (1,155) (4.7%)
------- ------- ------- ---
Net $51,801 $50,413 $ 1,388 2.8%
======= ======= ======= ===
CASH BASIS (1):
Revenues from rental operations $74,521 $73,546 $ 975 1.3%
Property expenses 23,421 24,576 (1,155) (4.7%)
------- ------- ------- ---
Net $51,100 $48,970 $ 2,130 4.3%
======= ======= ======= ===
</TABLE>
(1) Excludes straight-line rent adjustments.
Revenue from rental operations for these properties, computed on a GAAP
Basis, increased by approximately $.2 million in 1998 compared to 1997,
primarily due to increases in occupancy, rental rates and higher miscellaneous
tenant charges, partially offset by lower tenant expense reimbursements from
resetting base years for leases that were retenanted in 1998.
Excluding only the straight-line rent adjustments for these properties,
revenue from rental operations for the nine months ended September 30, 1998,
computed on a Cash Basis, increased by approximately $1.0 million.
Property operating expenses for these properties decreased by
approximately $1.2 million in 1998 compared to 1997, primarily due to repair and
maintenance expense reductions achieved from economies of scale.
15
<PAGE> 16
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 1998 to the three months
ended September 30, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------- PERCENT
1998 1997 CHANGE CHANGE
-------- -------- -------- -------
(dollars in thousands)
(Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Revenues from rental operations:
Rental $ 68,609 $ 32,237 $ 36,372 113%
Tenant reimbursements 2,211 1,704 507 30%
Parking, net of expense 3,252 2,045 1,207 59%
Other rental operations 2,666 445 2,221 499%
-------- -------- -------- -----
76,738 36,431 40,307 111%
Other income 680 450 230 51%
-------- -------- -------- -----
Total revenue $ 77,418 $ 36,881 $ 40,537 110%
======== ======== ======== =====
EXPENSES
Property operations:
Repairs and maintenance $ 7,251 $ 3,934 $ 3,317 84%
Utilities 8,663 3,956 4,707 119%
Real estate taxes 4,580 2,139 2,441 114%
Insurance 1,096 583 513 88%
Ground rent 178 69 109 158%
Marketing and other 2,304 1,056 1,248 118%
-------- -------- -------- -----
Total property expenses 24,072 11,737 12,335 105%
General and administrative 1,564 979 585 60%
Interest 11,988 4,816 7,172 149%
Loss on valuation of derivative -- 3,111 (3,111) (100%)
Depreciation and amortization 12,954 5,241 7,713 147%
-------- -------- -------- -----
Total expenses $ 50,578 $ 25,884 $ 24,694 95%
======== ======== ======== =====
OTHER DATA:
NUMBER OF PROPERTIES:
Acquired during period 4 13 (9) N/A
Owned at end of period 138 58 80 N/A
SQUARE FEET: (IN THOUSANDS)
Acquired during period 512 1,336 (824) N/A
Owned at end of period 17,953 8,726 9,227 N/A
</TABLE>
16
<PAGE> 17
Rental revenue increased approximately $36.4 million for the three months
ended September 30, 1998 compared to the same period in 1997. Rental revenue
from properties owned for the entire three month periods ended September 30,
1998 and 1997 increased approximately $.9 million in 1998 compared to the prior
year, primarily from an increase in occupancy and rental rates. Rental revenue
from properties acquired after July 1, 1997 was approximately $35.5 million
higher for the three months ended September 30, 1998 compared to the same period
in 1997, primarily due to the timing of these acquisitions.
Tenant reimbursements increased approximately $.5 million for the three
months ended September 30, 1998 compared to the same period in 1997. Tenant
reimbursements from properties owned for the entire three month periods ended
September 30, 1998 and 1997 decreased approximately $.7 million in 1998 compared
to 1997, primarily as a result of resetting base years for leases that were
retenanted in 1998. Tenant reimbursements from properties acquired after July 1,
1998 were approximately $1.2 million higher for the three months ended September
30, 1998, compared to the same period in 1997, primarily due to the timing of
these acquisitions.
Parking revenue, net of expense, increased approximately $1.2 million for
the three months ended September 30, 1998 compared to the same period in 1997,
primarily from the properties acquired after July 1, 1997.
Revenue from other rental operations, consisting primarily of miscellaneous
tenant charges such as late fees, after hours utility charges, signage income
and lease buyout income increased approximately $2.2 million for the three
months ended September 30, 1998 compared to the same period in 1997. Revenues
from properties owned for the entire three month periods ended September 30,
1998 and 1997 increased approximately $.7 million for the three months ended
September 30, 1998 compared to 1997, primarily due to higher after hour utility
charges and lease buyout income in 1998. Revenues from properties acquired after
July 1, 1997 were approximately $1.5 million higher for the three months ended
September 30, 1998 compared to the same period in 1997, primarily due to the
timing of these acquisitions.
Other income increased approximately $.2 million for the three months ended
September 30, 1998 compared to the same period in 1997, primarily due to higher
interest income earned on mortgage notes receivable acquired in September 1997
and on cash deposits required by certain of our mortgage loans.
For the three months ended September 30, 1998, total property expenses
were $24.1 million, or 31.4% of total revenue from rental operations, compared
with total property expenses of $11.7 million or 32.2% of total revenue from
rental operations in 1997. Property expenses for properties owned for the entire
three month periods ended September 30, 1998 and 1997 decreased approximately
$.2 million in 1998 compared to 1997, primarily due to repair and maintenance
expense reductions achieved from economies of scale. Property expenses from
properties acquired after July 1, 1997 were $12.5 million higher for the three
months ended September 30, 1998, primarily due to the timing of these
acquisitions.
General and administrative expenses were approximately $1.6 million or 2.0%
of total revenue for the three months ended September 30, 1998 as compared to
$1.0 million or 2.7% of total revenue for the same period in 1997. General and
administrative expenses as a percentage of total revenue decreased in the third
quarter of 1998 compared to 1997 primarily due to benefits achieved from
economies of scale.
Interest expense increased approximately $7.2 million for the three months
ended September 30, 1998 compared to the same period in 1997, primarily as a
result of higher outstanding indebtedness to fund property acquisitions.
In September 1997, we recorded a loss of approximately $3.1 million related
to the retirement of agreements to convert certain floating rate debt
liabilities to fixed rate liabilities. The underlying variable rate liabilities
were repaid in full with proceeds from an equity offering in July 1997.
Depreciation and amortization expense increased approximately $7.7 million
for the three months ended September 30, 1998 compared to 1997 primarily due to
1997 and 1998 property acquisitions and depreciation of capital improvements
made to our existing portfolio.
17
<PAGE> 18
Following is a comparison of property operating data computed on a GAAP and
Cash Basis for the 45 properties which were owned for the entire three month
periods ended September 30, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------- DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---------------------- ------- -------
GAAP BASIS: (Unaudited)
<S> <C> <C> <C> <C>
Revenues from rental operations $34,545 $33,608 $ 937 2.8%
Property expenses 11,372 11,543 (171) (1.5%)
------- ------- ------- ---
Net $23,173 $22,065 $ 1,108 5.0%
======= ======= ======= ===
CASH BASIS (1):
Revenues from rental operations $34,044 $32,982 $ 1,062 3.2%
Property expenses 11,372 11,543 (171) (1.5%)
------- ------- ------- ---
Net $22,672 $21,439 $ 1,233 5.8%
======= ======= ======= ===
</TABLE>
(1) Excludes straight-line rent adjustments.
Revenue from rental operations for these properties, computed on a GAAP
basis, increased by approximately $.9 million in 1998 compared to 1997,
primarily due to increased occupancy, rental rates and higher miscellaneous
tenant charges partially offset by lower tenant reimbursements due to resetting
base years for leases that were retenanted in 1998.
Excluding only the straight-line adjustments for these properties, revenue
from rental operations for the three months ended September 30, 1998, computed
on a Cash Basis, increased by approximately $1.1 million.
Property operating expenses for the properties owned for the entire three
month periods ended September 30, 1998 and 1997 decreased by approximately $.2
million, in 1998 compared to 1997, primarily due to repair and maintenance
expense reductions achieved from economies of scale.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities increased by approximately $94.8
million to $122.5 million for the nine months ended September 30, 1998, as
compared to $27.7 million for the same period in 1997, primarily due to
operating results from properties acquired since January 1, 1997. Cash used in
investing activities increased by approximately $666.2 million, to approximately
$1.1 billion for the nine months ended September 30, 1998 compared to
approximately $407.6 million for the same period in 1997, primarily due to the
acquisition of 66 properties during the nine months ended September 30, 1998 and
an increase in capital expenditures on properties owned. Cash provided by
financing activities increased by approximately $573.6 million to $952.9
million, compared to $379.2 million for the same period in 1997. Cash provided
by financing activities for the nine months ended September 30, 1998 consisted
primarily of net proceeds from mortgage loans and the issuance of 26,296,047
shares of Common Stock in a series of 1998 secondary offerings, partially offset
by distributions to shareholders and minority interest holders.
AVAILABLE BORROWINGS, CASH BALANCE AND CAPITAL RESOURCES
We have a $300 million unsecured line of credit (the "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%
depending on our leverage ratio. Once we achieve 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, we
have the option to convert the interest rate from LIBOR to the prime rate plus
0.5%.
18
<PAGE> 19
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 September
30, 1998, the aggregate outstanding balance on the Amended Credit Facility was
$283 million, and $17 million was available for additional borrowing. The LIBOR
rate was approximately 6.9% at September 30, 1998.
We also have 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, 1999. 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 September 30, 1998, there
was an outstanding balance of $2 million on the City National Bank Credit
Facility. The City National Bank Prime Rate was 8.25% at September 30, 1998.
On June 8, 1998 we repaid, through two special purpose subsidiaries, our
$200 million Lehman Bridge Loan II with two new mortgages loans totaling $236.7
million. The additional proceeds were used to repay $22.0 million on our lines
of credit and to repay $5.6 million on the Lehman Bridge Loan I. The $136.1
million ("Mortgage Financing III") and $100.6 million ("Mortgage Financing IV")
mortgage loans payable to an affiliate of Lehman Brothers are non-recourse and
secured by fully cross-collateralized and cross-defaulted first mortgage liens
on 22 and 12 of our Properties ("Mortgage Financing III, and IV, Properties"),
respectively. The Mortgage Financing III and IV mortgage loans each have a
thirty year term, bear interest at a fixed rate of 6.74% (6.93% including the
amortization of costs associated with the Swap Agreement) per annum, require
interest only payments through April 2003, and thereafter require monthly
payments of principal and interest amortized over a 25 year period through
maturity and are anticipated to be repaid within ten years of issuance. If the
Mortgage Financing III and IV mortgage loans are not repaid within ten years of
issuance, the interest rate will increase by at least 5% per annum and all
excess cash flow (as defined) from the Mortgage Financing III and IV Properties
must be used to pay down outstanding principal. The Mortgage Financing III and
IV mortgage loans require us to maintain a cash reserve for tenant improvements
of approximately $2.7 million and $3.3 million, respectively, and to comply with
certain customary financial covenants, ongoing operational restrictions, and
certain cash management procedures. In October 1998, pursuant to the execution
of certain leasing transactions, we borrowed an additional $10.6 million and
reduced the average annual fixed rate to 6.61% under the Mortgage Financing IV
loan.
Following is a summary of scheduled principal payments for our mortgage
loans as of September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ---------
<S> <C>
1998 $ 162
1999 82,161
2000 743
2001 808
2002 5,879
Thereafter 443,834
---------
Total $ 533,587
=========
</TABLE>
19
<PAGE> 20
Following is a summary of our weighted average interest rates as of
September 30, 1998 (in thousands, except percentage data):
UNSECURED AND SECURED DEBT ANALYSIS
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
BALANCE PERCENT INTEREST RATE
--------- ------- ----------------
<S> <C> <C> <C>
Unsecured Debt $ 285,450 35% 7.18%
Secured Debt 533,587 65% 7.31%
--------- -- ----
Total Debt $ 819,037 100% 7.26%
========== ==== =====
</TABLE>
FLOATING AND FIXED RATE DEBT ANALYSIS
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
BALANCE PERCENT INTEREST RATE
--------- ------- ----------------
<S> <C> <C> <C>
Floating Rate Debt $ 366,828 45% 7.03%
Fixed Rate Debt 452,209 55% 7.45%
--------- -- ----
Total Debt $ 819,037 100% 7.26%
========== ==== ====
</TABLE>
As of September 30, 1998, we had $20.2 million in cash and cash
equivalents, including $13.4 million in restricted cash of which approximately
$10.0 million represents interest bearing cash deposits and tenant improvement
reserves required by certain of our mortgage loans payable.
On January 12, 1998, we 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 our $.01 par value Common Stock with an
aggregate public offering price of up to $1.0 billion. The Registration
Statement was declared effective on January 21, 1998.
On April 23, 1998, we completed the most recent of four 1998 equity
offerings (the "1998 Offerings") resulting in the issuance of an aggregate of
26,296,047 shares of Common Stock with gross proceeds totaling approximately
$744.7 million. Aggregate proceeds to us from these offerings, net of
underwriters' discount and offering costs aggregating approximately $37.7
million, were approximately $707.0 million. Of these 1998 offerings, 3,296,047
shares of Common Stock were issued to the trustees of three 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.
After the 1998 offerings, we have the capacity to issue up to $255.3
million of our Common Stock pursuant to the Registration Statement.
We expect to continue meeting our short-term liquidity and capital
requirements generally through our working capital and net cash provided by
operating activities. We believe that the net cash provided by operating
activities will continue to be sufficient to pay any distributions necessary to
enable us to continue qualifying as a real estate investment trust. We also
believe that the foregoing sources of liquidity will be sufficient to fund our
short-term liquidity needs for the foreseeable future, including recurring
non-revenue enhancing capital expenditures, tenant improvements and leasing
commissions.
We expect 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. We also
expect to use the remaining funds available under the Amended Credit Facility to
fund acquisitions, development activities and capital improvements on an interim
basis.
20
<PAGE> 21
FUNDS FROM OPERATIONS
We consider Funds from Operations, as defined by the National Association
of Real Estate Investment Trusts ("NAREIT"), to be a useful financial measure of
the operating performance for an equity real estate investment trust ("REIT").
We believe 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 should not be
considered as an alternative to net income (determined in accordance with GAAP),
as an indicator of our financial performance or to cash flow from operating
activities (determined in accordance with GAAP) as a measure of our liquidity,
nor is it indicative of funds available to fund our cash needs, including our
ability to make distributions.
The following table reflects the calculation of our Funds from Operations
for the three and nine-month periods ended September 30, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- -------------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
Net income $ 25,587 $ 10,116 $ 65,386 $ 26,411
Depreciation and amortization 12,954 5,241 37,180 13,261
Minority interests 1,253 881 3,613 (a) 3,105
Loss on valuation of derivative -- 3,111 -- 3,111
-------- -------- --------- --------
Funds from Operations $ 39,794 $ 19,349 $ 106,179 $ 45,888
======== ======== ========= ========
</TABLE>
(a) Excludes $575,000 in distributions made to the former minority partner in
the World Savings Center office property.
The White Paper on Funds from Operations approved by the Board of Governors
of 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. We consider Funds from Operations an appropriate measure of
performance of an equity REIT because it is predicated on cash flow analyses. We
compute 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.
21
<PAGE> 22
YEAR 2000 READINESS
Any of our computer programs that have date-sensitive software may not be
able to distinguish the year 2000 from the year 1900, if those programs use two
digits rather than four digits to define the year. 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.
The accounting software we are using is not presently Year 2000 compliant,
however, the manufacturer has indicated that a Year 2000 compliant version of
this software will be available in the fall of 1998. We plan to install the Year
2000 compliant version of this software in the first quarter of 1999. We
estimate the total costs associated with converting to a Year 2000 compliant
version of our accounting software to be between $50,000 to $100,000. The
hardware used to run our software is Year 2000 compliant.
We are currently completing an inventory of the computer hardware and
software (collectively, the "System Components") used to run the operating
systems (i.e. security, energy, elevator and safety) at our Properties. This
process includes determining which System Components are date-sensitive. Once
this inventory is complete, we will contact the manufacturers to determine if
the date-sensitive System Compounds are Year 2000 compliant. We will then test
the date-sensitive System Components represented to be Year 2000 compliant, and
reprogram or replace the date-sensitive System Components found not to be Year
2000 compliant.
We have completed the inventory for approximately 40% of our buildings and
expect to have the remaining buildings inventoried by the end of November 1998.
We plan to have the Year 2000 compliance status of all date-sensitive System
Components identified, tested and reprogrammed or replaced, if necessary, by
March 31, 1999. As we have not completed the inventory of System Components at
our Properties, we are presently unable to estimate the total cost of this phase
of our Year 2000 program.
We are currently surveying material vendors and tenants regarding the Year
2000 compliance status of their computer hardware and software. We will review
the results of this survey, assess the impact of the results on our operations
and take whatever action is deemed necessary. We cannot presently estimate the
total cost of this phase of our Year 2000 program.
Upon completion of our Year 2000 Readiness program, we will consider the
necessity of implementing a contingency plan to mitigate any adverse effects
associated with the Year 2000 issue. Our ability to complete the Year 2000
modifications outlined above prior to any anticipated impact on our operating
systems is based on numerous assumptions of future events and is dependent upon
numerous factors, including the ability of third party software and hardware
manufacturers to make necessary modifications to current versions of their
products, the availability of resources to install and test the modified systems
and other factors. Accordingly, there can be no guarantee that these
modifications will be successful.
22
<PAGE> 23
BUILDING AND LEASE INFORMATION
The following tables set forth certain information regarding our Properties
as of September 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF PROPERTIES APPROXIMATE NET RENTABLE SQUARE FEET
--------------------------------------- ------------------------------------------
Office Industrial and Retail Total Office Industrial and Retail Total
------ --------------------- ----- -------- --------------------- --------
LOCATION:
<S> <C> <C> <C> <C> <C> <C>
Los Angeles Country
West 25 1 26 3,960,812 36,959 3,997,771
North 28 -- 28 2,583,054 -- 2,583,054
South 16 -- 16 2,206,114 -- 2,206,114
Central 3 -- 3 608,789 -- 608,789
Orange County 20 -- 20 3,202,241 -- 3,202,241
San Diego County 21 -- 21 2,486,768 -- 2,486,768
Ventura County 4 -- 4 561,838 -- 561,838
Riverside/San Bernardino Counties 8 4 12 553,896 425,418 979,314
Kern County 2 -- 2 216,522 -- 216,522
---------- ---------- ---------- ---------- ---------- ----------
Subtotal 127 5 132 16,380,034 462,377 16,842,411
Renovation Properties 6 -- 6 1,110,562 -- 1,110,562
---------- ---------- ---------- ---------- ---------- ----------
Total 133 5 138 17,490,596 462,377 17,952,973
========== ========== ========== ========== ========== ==========
</TABLE>
RENOVATION SUMMARY
<TABLE>
<CAPTION>
Anticipated
Weighted Percent Leased
Approximate Estimated Average at Estimated
Net Rentable Total Cost Per Annual Rental September 30, Stabilization
Property Square Feet Sq.Ft(1) Rate(2) 1998 Date(3)
- -------- ------------ -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
299 Euclid 73,400 $ 109 $19.80 61% 1ST QTR '99
1821 Dyer Boulevard 115,061 $ 68 $17.20 0% 2ND QTR '99
535 Brand Boulevard 109,187 $ 138 $24.60 54% 2ND QTR '99
5200 West Century 310,910 $ 48 $15.00 36% 2ND QTR '99
Tourney Pointe 219,991 $ 125 $21.00 6% 4TH QTR '99
Westwood Center 282,013 $ 218 $32.00 0% 2ND QTR '00
---------
1,110,562
=========
</TABLE>
- ----------
(1) Includes all purchase, closing costs and anticipated capital expenditures
(excluding tenant improvement and carrying costs) during renovation. The
anticipated capital expenditures are based on current plans and costs, which
could change and thus increase our expenditures.
(2) Calculated based on our estimate of current market rental rates. Our
estimates of these rental rates are based on current trends which could
change or reverse at any time as a result of future events.
(3) Period in which anticipated capital expenditures are substantially complete
and the property is at least 75% occupied.
23
<PAGE> 24
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
PERCENT OCCUPIED PERCENT LEASED ANNUALIZED BASE RENT
AT SEPTEMBER 30, 1998 AT SEPTEMBER 30, 1998 PER LEASED SQUARE FOOT(1)
------------------------- ------------------------- -----------------------------------
Full
Service
Gross
Industrial Industrial Industrial Leases
Location: Office and Retail Total Office and Retail Total Office and Retail Total (2)
- --------- ------ ---------- ----- ------ ---------- ----- ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Los Angeles County
West 88.2% 100% 88.3% 90.2% 100% 90.3% $22.18 $24.60 $22.21 $22.18
North 92.5% -- 92.5% 93.6% -- 93.6% $19.15 -- $19.15 $20.39
South 86.7% -- 86.7% 87.4% -- 87.4% $16.97 -- $16.97 $18.50
Central 88.3% -- 88.3% 88.5% -- 88.5% $19.83 -- $19.83 $19.83
Orange County 94.2% -- 94.2% 95.4% -- 95.4% $14.98 -- $14.98 $17.15
San Diego County 95.0% -- 95.0% 95.4% -- 95.4% $14.57 -- $14.57 $17.12
Ventura County 88.8% -- 88.8% 93.4% -- 93.4% $16.49 -- $16.49 $16.49
Riverside/ San Bernardino Counties 78.5% 91.1% 84.0% 79.2% 92.0% 84.8% $13.86 $7.99 $11.09 $16.27
Kern County 93.3% -- 93.3% 93.3% -- 93.3% $22.03 -- $22.03 --
----- -- ----- ----- -- ----- ------ -- ------ --
Subtotal /Weighted Average 90.7% 91.8% 90.7% 91.9% 92.6% 91.9% $17.84 $9.43 $17.60 $19.52
Renovation Properties 20.1% -- 20.1% 26.0% -- 26.0% $15.75 -- $15.75 $16.17
----- -- ----- ----- -- ----- ------ -- ------- -----
Weighted Average
Total/Weighted Average 86.2% 91.8% 86.3% 87.7% 92.6% 87.8% $17.80 $9.43 $17.57 $19.45
==== ==== ==== ==== ==== ==== ====== ===== ====== ======
- ----------
(1) Annualized from September 30, 1998 rental rates.
(2) Excludes 48 properties and 4,729,366 square feet under triple net and modified gross leases.
</TABLE>
LEASE EXPIRATIONS
THIRD QUARTER 1998
<TABLE>
<CAPTION>
ESTIMATED
SQUARE PERCENTAGE OF ANNUALIZED BASE MARKET RENT
NUMBER OF FOOTAGE OF AGGREGATE RENT OF OF EXPIRING
YEAR OF LEASE LEASES EXPIRING PORTFOLIO LEASED EXPIRING LEASES LEASES
EXPIRATION EXPIRING LEASES SQUARE FEET (PER SQUARE FOOT)(2) (PER SQUARE FOOT)(3)
- --------------- --------- --------- ---------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Month to Month 205 417,533 2.66% $16.38 $19.54
1998(1) 143 522,040 3.32% $16.32 $18.41
1999 547 2,055,223 13.09% $17.01 $20.11
2000 551 2,038,972 12.98% $18.74 $23.17
2001 481 2,318,566 14.76% $20.29 $23.59
</TABLE>
24
<PAGE> 25
(1) Represents leases expiring between October 1, 1998 and December 31, 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.
(3) Calculated based on our estimate of current market rental rates and annual
increases in such rates of 8.0%, 6.0% and 6.0%, in 1999, 2000 and 2001,
respectively. Our estimate of these rental rates are based on current
trends, which could change or reverse at any time as a result of future
events.
Our ability to rent expiring lease space at estimated levels is highly
dependent upon many factors over which we have no control. These factors
include, the national economic climate, perceptions of prospective tenants of
the attractiveness of the property, and our ability to maintain and manage the
properties. We also have numerous competitors and some of the competing
properties may be newer, better located or owned by parties better capitalized
than us. As new commercial properties are developed and the number of
competitive commercial properties in a particular area increases, competitive
pressures will increase as well. Additionally, all of our properties are located
in Southern California. Our ability to charge estimated rents may be adversely
affected by 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). The
preceding discussion is not intended as an exhaustive list of the risks
associated with rent rate projections and should be read in conjunction with
"Risk Factors--Real Estate Ownership Risks," "--Risk that Company May be Unable
to Retain Tenants or Rent Space Upon Lease Expirations," "--Impact of
Competition on Occupancy Levels and Rents Charged," and "--Concentration of
Properties in Southern California" in our most recent Annual Report on Form
10-K.
We undertake no obligation to update or correct these estimates if future
events prove them to be inaccurate.
As a result of the foregoing, undue reliance should not be placed on these
estimated rental rates.
LEASING ACTIVITY
Third Quarter 1998
<TABLE>
<CAPTION>
TENANT
IMPROVEMENTS AND
APPROXIMATE NET RENTABLE WEIGHTED AVERAGE COMMISSIONS
TYPE NUMBER OF LEASES SQUARE FEET RETENTION RATE(2) LEASE TERM (MO.) (PER SQUARE FOOT)(1)
- ----------------- ---------------- ------------------------ ------------------- ---------------- --------------------
Third Year to
New Renewal New Renewal Quarter Date New New Renewal
--- ------- ------- ------- ------- ------- --- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Office 117 50 433,182 188,819 72.9% 80.7% 63 $17.68 $ 6.59
Industrial/Retail 6 3 45,014 4,848 41.9% 74.6% 46 $ 3.21 $ .40
--- -- ------- ------- ---- ----
Total 123 53 478,196 193,667 71.6% 80.5%
=== == ======= ======= ==== ====
- ----------
(1) Excludes six renovation properties.
(2) Percentage of leases in which tenants were retained at lease expiration.
</TABLE>
25
<PAGE> 26
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS -- NONE
ITEM 2. CHANGES IN SECURITIES
In August 1998, the Operating Partnership issued 86,426 OP Units as partial
consideration in the acquisition of a 94,516 square foot office property. The
holder of the OP units may redeem part or all of its OP units issued in this
acquisition for cash or, at our election, exchange such OP Units for shares of
Common Stock on a one-for-one basis.
The issuance of OP Units in the above described acquisition constitutes a
private placement of securities which is exempt from the registration
requirements of the Securities Act of 1993, as amended, pursuant to Section 4(2)
and Rule 506 of Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On July 22, 1998, we held a special meeting of shareholders. Peter S. Gold
was elected to serve as a member of the Board of Directors until the annual
meeting of shareholders in the year 2001, with 53,411,741 votes cast for and
386,806 votes withheld/against his election. A total of 8,521,084 votes were not
cast.
In addition, an amendment to the 1996 Stock Option and Incentive Plan of
Arden Realty, Inc. and Arden Realty Limited Partnership (the "1996 Incentive
Plan") was proposed at the special meeting held on July 22, 1998. The proposed
amendment of Common Shares reserved and increased the number of shares available
for the 1996 Incentive Plan. The proposed amendment was approved with 44,584,483
votes cast for and 8,997,654 votes cast against the proposal, 216,410 votes
abstained. There were no Broker non-votes and 8,521,084 votes were not cast.
ITEM 5. OTHER INFORMATION--NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
26
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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 Articles Supplementary of the Class A Junior Participating Preferred
Stock as filed as an exhibit to the current report on Form 8-K, dated
August 26, 1998, and incorporated herein by reference.
3.3 By-laws of Registrant as filed as an exhibit to Registration Statement
on Form S-11 (No. 333-8163) and incorporated herein by reference.
3.4 Certificate of Amendment of the Bylaws of Arden Realty, Inc. dated
July 14, 1998 and incorpated herein by reference.
4.1 Rights Agreement, dated as of August 14, 1998, between Arden Realty,
Inc. and the Bank of New York as filed as an exhibit to the current
report on Form 8-K, dated August 26, 1998, and incorporated herein by
reference.
10.3 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 Loan Agreement by and between Arden Realty Finance III, LLC, a
Delaware limited liability company and Lehman Brothers Realty
Corporation, a Delaware corporation and incorporated herein by
reference.
10.5 Mortgage Note, dated June 8, 1998 for $136,100,000 by and between
Arden Realty Finance III, L.L.C., a Delaware limited liability company
("Maker"), and Lehman Brothers Realty Corporation, a Delaware
corporation. (Exhibit B. to Exhibit 10.4 above).
10.6 Tenant Estoppel Certificate (Exhibit C. to Exhibit 10.4 above).
10.7 Subordination, Non-Disturbance and Attornment Agreement (Exhibit D. to
Exhibit 10.4 above).
10.8 Deed of Trust, Assignment of Rents and Leases, Security Agreement, and
Fixture Filing dated as of June 8, 1998 made by Arden Realty Finance
III, L.L.C. as Grantor, to Commonwealth Land Title Company as Trustee
for the benefit of Lehman Brothers Realty Corporation as Beneficiary
and incorporated herein by reference.
10.9 Assignment of Leases and Rents dated June 8, 1998, by and between
Arden Realty Finance III, L.L.C., a Delaware limited liability company
("Assignor"), and Lehman Brothers Realty Corporation, a Delaware
corporation, its successors and assigns ("Assignee") and incorporated
herein by reference.
10.10 Collateral Assignment of Management Agreement and Subordination
Agreement (the "Agreement") dated as of June 8, 1998 among Arden
Realty Finance III, L.L.C., a Delaware limited liability company
("Borrower"), Lehman Brothers Realty Corporation, a Delaware
corporation, ("Lender"), and Arden Realty Limited Partnership, a
Maryland limited partnership ("Manager") and incorporated herein by
reference.
10.11 Security Agreement ("Security Agreement") is entered into as of June
8, 1998 by and between Arden Realty Finance III, L.L.C., a Delaware
limited liability company ("Debtor"), and Lehman Brothers Realty
Corporation, a Delaware corporation ("Secured Party") and incorporated
herein by reference.
10.12 Environmental Indemnity Agreement ("Agreement") dated June 8, 1998 by
Arden Realty Finance III, L.L.C., a Delaware limited liability company
("Indemnitor"), in favor of Lehman Brothers Realty Corporation, a
Delaware corporation ("Lender") and incorporated herein by reference.
10.13 Letter agreement between Lehman Brothers Realty Corporation, or an
affiliate thereof ("Lender"), Arden Realty Finance III, L.L.C.
("Borrower"), Arden Realty, Inc. (the "REIT") and Arden Realty Limited
Partnership (the "Operating Partnership") and incorporated herein by
reference.
10.14 Loan Agreement by and between Arden Realty Finance IV, LLC, a Delaware
limited liability company and Lehman Brothers Realty Corporation, a
Delaware corporation and incorporated herein by reference.
10.15 Mortgage Note, dated June 8, 1998 for $100,600,000 by and between
Arden Realty Finance IV, L.L.C., a Delaware limited liability company
("Maker"), and Lehman Brothers Realty Corporation, a Delaware
corporation (Exhibit B to Exhibit 10.14 above).
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.16 Tenant Estoppel Certificate (Exhibit C. to Exhibit 10.14 above).
10.17 Subordination, Non-Disturbance and Attornment Agreement (Exhibit D. to
Exhibit 10.4 above).
10.18 Deed of Trust, Assignment of Rents and Leases, Security Agreement, and
Fixture Filing dated as of June 8, 1998 made by Arden Realty Finance
IV, L.L.C. as Grantor, to Commonwealth Land Title Company as Trustee
for the benefit of Lehman Brothers Realty Corporation as Beneficiary
and incorporated herein by reference.
10.19 Assignment of Leases and Rents ("Assignment") dated June 8, 1998, by
and between Arden Realty Finance IV, L.L.C., a Delaware limited
liability company ("Assignor"), and Lehman Brothers Realty
Corporation, a Delaware corporation, its successors and assigns
("Assignee") and incorporated herein by reference.
10.20 Collateral Assignment of Management Agreement and Subordination
Agreement (the "Agreement") dated as of June 8, 1998 among Arden
Realty Finance IV, L.L.C., a Delaware limited liability company
("Borrower"), Lehman Brothers Realty Corporation, a Delaware
corporation, ("Lender"), and Arden Realty Limited Partnership, a
Maryland limited partnership ("Manager") and incorporated herein by
reference.
10.21 Security Agreement ("Security Agreement") is entered into as of June
8, 1998 by and between Arden Realty Finance IV, L.L.C., a Delaware
limited liability company ("Debtor"), and Lehman Brothers Realty
Corporation, a Delaware corporation ("Secured Party") and incorporated
herein by reference.
10.22 Environmental Indemnity Agreement ("Agreement") dated June 8, 1998 by
Arden Realty Finance IV, L.L.C., a Delaware limited liability company
("Indemnitor"), in favor of Lehman Brothers Realty Corporation, a
Delaware corporation ("Lender") and incorporated herein by reference.
10.23 Letter agreement between Lehman Brothers Realty Corporation, or an
affiliate thereof ("Lender"), Arden Realty Finance IV, L.L.C.
("Borrower"), Arden Realty, Inc. (the "REIT") and Arden Realty Limited
Partnership (the "Operating Partnership") and incorporated herein by
reference.
27 Financial Data Schedule
(b) Reports on Form 8-K
</TABLE>
A report on Form 8-K/A, dated July 28, 1998, was filed which included
information on Item 7. Item 7 contained financial statements, Pro forma
information and an exhibit. The Form 8-K/A was filed in connection with the
acquisition four commercial properties.
A report on Form 8-K dated August 26, 1998 was filed which included
information on Items 5 and 7. Item 5 contained a description of a Stockholder
Rights Agreement, which was adopted by our Board of Directors on August 14,
1998. Item 7 contained exhibits related to the Stockholder Rights Agreement.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARDEN REALTY, INC.
Date: November 16, 1998 By: /s/ Diana M. Laing
------------------------------------
Diana M. Laing
Executive Vice President
Chief Financial Officer and Secretary
Date: November 16, 1998 By: /s/ Richard S. Davis
------------------------------------
Richard S. Davis
Chief Accounting Officer
29
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,826
<SECURITIES> 0
<RECEIVABLES> 26,101
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,884
<PP&E> 2,293,567
<DEPRECIATION> (71,174)
<TOTAL-ASSETS> 2,316,298
<CURRENT-LIABILITIES> 56,259
<BONDS> 819,037
0
0
<COMMON> 623
<OTHER-SE> 1,370,503
<TOTAL-LIABILITY-AND-EQUITY> 2,316,298
<SALES> 0
<TOTAL-REVENUES> 204,833
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 135,259
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,139
<INCOME-PRETAX> 65,386
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,386
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
