<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 March 31, 1999
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 Identification No.)
incorporation or organization)
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 May 10, 1999, there were 62,407,737 shares of the registrant's Common
Stock, $.01 par value, issued and outstanding.
<PAGE> 2
ARDEN REALTY, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998 ............................................ 3
Consolidated Statements of Income for the three months ended
March 31, 1999 and 1998 ...................................... 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 ...................................... 5
Notes to Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 15
PART II. OTHER INFORMATION ................................................. 19
SIGNATURES ........................................................ 20
</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>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Commercial properties:
Land $ 493,555 $ 491,342
Buildings and improvements 1,806,812 1,776,068
Tenant improvements 63,280 55,413
----------- -----------
2,363,647 2,322,823
Less: accumulated depreciation (99,377) (84,754)
----------- -----------
2,264,270 2,238,069
Cash and cash equivalents 1,901 4,578
Restricted cash 15,185 12,409
Rent and other receivables 7,294 9,024
Mortgage notes receivable, net of discount
of $2,357 and $2,463, respectively 14,229 14,329
Deferred rent 18,613 17,004
Prepaid financing and leasing costs, net of accumulated
amortization of $9,139 and $7,245, respectively 35,229 32,759
Prepaid expenses and other assets 8,998 3,747
----------- -----------
Total assets $ 2,365,719 $ 2,331,919
=========== ===========
LIABILITIES
Mortgage loans payable $ 573,859 $ 544,027
Unsecured lines of credit 296,450 296,450
Accounts payable and accrued expenses 27,417 21,687
Security deposits 14,111 13,933
Dividends payable 27,773 26,210
----------- -----------
Total liabilities 939,610 902,307
----------- -----------
Minority interest 56,130 56,222
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 issued and outstanding 624 624
Additional paid-in capital 1,371,431 1,374,813
Notes receivable from officers-shareholders for purchase
of common stock (2,076) (2,047)
----------- -----------
Total stockholders' equity 1,369,979 1,373,390
----------- -----------
Total liabilities and stockholders' equity $ 2,365,719 $ 2,331,919
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenue $ 79,336 $ 54,759
Property operating expenses 23,510 16,738
-------- --------
55,826 38,021
General and administrative 1,496 1,635
Interest 13,183 8,612
Depreciation and amortization 16,215 11,296
Interest and other income (670) (1,458)
-------- --------
Income before minority interest 25,602 17,936
Minority interest (1,211) (1,752)
-------- --------
Net income $ 24,391 $ 16,184
======== ========
Net income per common share:
Basic $ 0.39 $ 0.34
Diluted $ 0.39 $ 0.34
Weighted average common shares outstanding:
Basic 62,408 47,617
Diluted 62,501 47,834
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 24,391 $ 16,184
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 1,211 1,752
Depreciation and amortization 16,215 11,296
Amortization of loan costs and fees 568 378
Changes in operating assets and liabilities:
Rent and other receivables 1,801 254
Deferred rent (1,609) (1,253)
Prepaid financing and leasing costs (4,218) (2,465)
Prepaid expenses and other assets (5,429) (7,345)
Accounts payable and accrued expenses 5,730 8,201
Security deposits 178 3,024
--------- ---------
Net cash provided by operating activities 38,838 30,026
--------- ---------
INVESTING ACTIVITIES:
Acquisitions and improvements to commercial properties (41,058) (811,151)
Escrow deposit -- 20,000
--------- ---------
Net cash used in investing activities (41,058) (791,151)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from mortgage loans 30,002 303,220
Repayments of mortgage loans (170) (136)
Proceeds from unsecured lines of credit 12,200 85,650
Repayments of unsecured lines of credit (12,200) (287,950)
Proceeds from issuance of common stock, net of offering costs -- 677,434
Increase in restricted cash (2,776) (2,183)
Distributions to minority interests (1,303) (1,771)
Dividends paid (26,210) (14,177)
--------- ---------
Net cash provided by (used in) financing activities (457) 760,087
--------- ---------
Net decrease in cash and cash equivalents (2,677) (1,038)
Cash and cash equivalents at beginning of period 4,578 5,300
--------- ---------
Cash and cash equivalents at end of period $ 1,901 $ 4,262
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest, net of capitalized
amounts of $2,304 and $1,406, respectively $ 15,102 $ 8,002
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
ARDEN REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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, developing, renovating, leasing and managing
commercial properties located in Southern California. As of March 31, 1999, our
portfolio of properties included 139 commercial properties with approximately 18
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 intercompany balances and transactions have been eliminated in
consolidation.
Minority interests for the three-month periods ended March 31, 1999 and
1998 include limited partnership interests in the Operating Partnership of
approximately 4.7% and 6.8%, respectively.
2. INTERIM FINANCIAL DATA
The accompanying consolidated financial statements should be read in
conjunction with our 1998 Annual Report on Form 10-K/A 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.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
3. MORTGAGE LOANS PAYABLE
On January 20, 1999, our Lehman Bridge Loan I was expanded from $81.4
million to $111.4 million. The Lehman Bridge Loan I is secured by seven of our
properties, bears interest at LIBOR plus 2.25% per annum (effective rate of
7.21% at March 31, 1999) and requires monthly payments of interest only.
On April 5, 1999, we closed a $115 million loan with Mass Mutual Life
Insurance Company (the "Mortgage Financing V Loan"). The Mortgage Financing V
Loan is secured by 12 Properties, has a ten year term, bears interest at a fixed
rate of 6.94%, requires monthly payments of principal and interest totaling
$815,935 and is amortized over a 25 year period. Proceeds from this loan were
used to repay $76.4 million of our Lehman Bridge Loan I and to repay a portion
of our lines of credit.
On April 30, 1999, we closed a $22.5 million loan with Lehman Brothers,
Inc. (the "Mortgage Financing VI Loan"). The Mortgage Financing VI Loan is
secured by 3 properties, has a ten year term and bears interest at a fixed rate
of 7.54%, requires monthly payments of principal and interest totaling $158,115
and is amortized over a 30 year period. Proceeds from this loan were used to
repay a portion of our lines of credit.
On May 5, 1999, we refinanced the remaining $35 million under the Lehman
Bridge Loan I with one secured note payable totaling $62.5 million to Lehman
Brothers, Inc. (the "Lehman Bridge Loan III"). The Lehman Bridge Loan III is
secured by 3 properties, bears interest at LIBOR plus 2.25% per annum (effective
rate of 7.21% at March 31, 1999), requires monthly payments of interest only and
matures on November 1, 2000. The remaining proceeds from this loan were used to
repay a portion of our lines of credit.
4. STOCKHOLDERS' EQUITY
On March 9, 1999, we declared a first quarter dividend of $.445 per
share to shareholders of record on March 31, 1999, which was paid on April 23,
1999.
6
<PAGE> 7
5. 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
ENDED MARCH 31,
1999 1998
------- --------
(UNAUDITED)
<S> <C> <C>
Revenue from Rental Operations:
Rental $69,510 $48,689
Tenant reimbursements 3,467 1,883
Parking, net of expenses 3,182 2,650
Other rental operations 3,177 1,537
------- -------
79,336 54,759
------- -------
Property Operating Expenses:
Repairs and maintenance 7,670 5,352
Utilities 6,341 4,616
Real estate taxes 5,747 4,100
Insurance 982 806
Ground rent 181 178
Marketing and other 2,589 1,686
------- -------
23,510 16,738
------- -------
$55,826 $38,021
======= =======
</TABLE>
7
<PAGE> 8
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 1998 Annual Report on Form 10-K/A.
Our primary business strategy is to actively manage our portfolio to
achieve gains in occupancy and rental rates and to reduce operating expenses.
When market conditions permit, we may also acquire underperforming office and
industrial properties, properties in need of renovation or properties that
provide attractive yields with stable cash flow in submarkets where we can
utilize our local market expertise and extensive real estate experience. We may
also continue to develop new properties, when market conditions permit, in
submarkets where we have extensive local market expertise.
RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 1999 to the three months ended
March 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------- PERCENT
1999 1998 CHANGE CHANGE
------- ------- -------- -------
(dollars in thousands)
(Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Revenue from rental operations:
Rental $69,510 $48,689 $ 20,821 43%
Tenant Reimbursements 3,467 1,883 1,584 84%
Parking, net of expense 3,182 2,650 532 20%
Other rental operations 3,177 1,537 1,640 107%
------- ------- -------- ----
79,336 54,759 24,577 45%
Interest and other income 670 1,458 (788) (54%)
------- ------- -------- ----
Total revenue $80,006 $56,217 $ 23,789 42%
======= ======= ======== ====
EXPENSES
Property operations:
Repairs and maintenance $ 7,670 $ 5,352 $ 2,318 43%
Utilities 6,341 4,616 1,725 37%
Real estate taxes 5,747 4,100 1,647 40%
Insurance 982 806 176 22%
Ground rent 181 178 3 2%
Marketing and other 2,589 1,686 903 54%
------- ------- -------- ----
Total property expenses 23,510 16,738 6,772 40%
General and administrative 1,496 1,635 (139) (9%)
Interest 13,183 8,612 4,571 53%
Depreciation and amortization 16,215 11,296 4,919 44%
------- ------- -------- ----
Total expenses $54,404 $38,281 $ 16,123 42%
======= ======= ======== ====
OTHER DATA:
NUMBER OF PROPERTIES
Acquired during period 1 56 (55)
Owned at end of period 139 128 11
SQUARE FEET: (IN THOUSANDS)
Acquired during period 60 6,174 (6,114)
Owned at end of period 18,024 16,481 1,543
</TABLE>
8
<PAGE> 9
The increase in revenue from rental operations and property expenses for
the three months ended March 31, 1999 as compared to the same period in 1998 is
primarily from a full quarter of operations in 1999 from the 67 properties we
acquired during 1998 and 1999.
Following is a summary of the increase in revenue from rental operations
and property expenses that relates to the 67 properties we acquired during 1998
and 1999 and for the 72 properties we owned for all of the first quarter of 1998
and 1999 (in thousands, except number of properties).
<TABLE>
<CAPTION>
PROPERTIES PROPERTIES OWNED
ACQUIRED FOR ALL OF THE
DURING FIRST QUARTER
TOTAL VARIANCE 1998 AND 1999 1998 AND 1999 (1)
-------------- ------------- ----------------
<S> <C> <C> <C>
REVENUE FROM RENTAL OPERATIONS:
Rental ...................... $20,821 $18,868 $ 1,953
Tenant Reimbursements ....... 1,584 922 662
Parking, net of expenses .... 532 456 76
Other rental expenses ....... 1,640 2,096 (456)
------- ------- -------
$24,577 $22,342 $ 2,235
======= ======= =======
PROPERTY EXPENSES:
Repairs and maintenance ..... $ 2,318 $ 1,928 $ 390
Utilities ................... 1,725 1,577 148
Real estate taxes ........... 1,647 1,602 45
Insurance ................... 176 267 (91)
Ground rent ................. 3 -- 3
Marketing and other ......... 903 761 142
------- ------- -------
$ 6,772 $ 6,135 $ 637
======= ======= =======
OTHER DATA:
Number of Properties ........ 67 72
Square feet ................. 7,717 10,307
</TABLE>
(1) See the Same Properties analysis below.
Interest and other income decreased by approximately $.8 million during
the three months ended March 31, 1999 as compared to the same period in 1998,
primarily due to higher interest income earned in 1998 on $20 million held in
escrow pursuant to the purchase of a portfolio of 50 primarily office and
industrial properties in March 1998.
General and administrative expenses were approximately $1.5 million or
1.9% of total revenues during the three months ended March 31, 1999 as compared
to $1.6 million or 2.9% of total revenues during the same period in 1998. This
decrease was primarily due to benefits achieved from economies of scale and
concentration over a larger property portfolio.
Interest expense increased approximately $4.6 million during the three
months ended March 31, 1999 as compared to the same period in 1998. This
increase was due to higher outstanding debt balances in 1999, with the proceeds
from such indebtedness primarily used to fund property acquisitions.
Depreciation and amortization expense increased by approximately $4.9
million during the three months ended March 31, 1999, primarily from
depreciation related to the addition of approximately $1.1 billion in commercial
properties, capital expenditures and tenant improvements since January 1, 1998.
9
<PAGE> 10
SAME PROPERTIES
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 72 properties we owned for
the entire three month periods ended March 31, 1999 and 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------- DOLLAR PERCENT
1999 1998 CHANGE CHANGE
------- -------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
GAAP BASIS:
Revenues from rental operations $47,950 $45,715 $2,235 5%
Property expenses 15,190 14,553 637 4%
------- ------- ------ -
Net $32,760 $31,162 $1,598 5%
======= ======= ====== =
CASH BASIS (1):
Revenue from rental operations $47,517 $44,912 $2,605 6%
Property expenses 15,190 14,553 637 4%
------- ------- ------ -
Net $32,327 $30,359 $1,968 6%
======= ======= ====== =
</TABLE>
(1) Excludes straight-line rent adjustments.
Revenue from rental operations for these properties, computed on a GAAP
basis, increased by approximately $2.2 million during the three months ended
March 31, 1999 compared to the same period in 1998, primarily due to increases
in occupancy and higher tenant reimbursements. Average occupancy at these
properties was 87.0% during the first quarter of 1999 compared to 82.5% for the
same period in 1998.
Excluding only the straight-line rent adjustments for these properties,
revenue from rental operations for the three months ended March 31, 1999,
computed on a Cash Basis, increased by approximately $2.6 million.
Property operating expenses for these properties increased by
approximately $600,000 during the three months ended March 31, 1999 compared to
the same period in 1998, primarily due to higher repairs and maintenance and
utility expenses related to higher average occupancy at these properties in
1999.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities increased by approximately $8.8
million to $38.8 million for the three months ended March 31, 1999, as compared
to $30.0 million for the same period in 1998, primarily due to operating results
from the 67 properties acquired in 1998 and 1999. Cash used in investing
activities decreased by approximately $750.1 million, to approximately $41.1
million for the three months ended March 31, 1999 compared to approximately
$791.2 million for the same period in 1998, primarily due to the acquisition of
56 properties during the three months ended March 31, 1998. Cash from financing
activities decreased by approximately $760.5 million for the three months ended
March 31, 1999 compared to the same period in 1998. Cash provided by financing
activities for the three months ended March 31, 1998 consisted primarily of net
proceeds from mortgage loans and the issuance of 25,185,915 shares of Common
Stock, 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%
(effective rate of 6.33% at March 31, 1999) depending on the leverage ratio of
the Company. If 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 the debt rating. Under certain circumstances, we have 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 June 1, 2000. As of
March 31, 1999, the aggregate outstanding balance on the Amended Credit Facility
was $296.4 million, and $3.6 million was available for additional borrowing.
10
<PAGE> 11
We also have an unsecured line of credit with a total commitment of $10
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 7.4% at March 31, 1999) 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 March 31, 1999, there was no outstanding balance on
the City National Bank Credit Facility.
On January 20, 1999, our Lehman Bridge Loan I was expanded from $81.4
million to $111.4 million. The Lehman Bridge Loan I is secured by seven of our
properties, bears interest at LIBOR plus 2.25% per annum (effective rate of
7.21% at March 31, 1999) and requires monthly payments of interest only.
On April 5, 1999, we closed a $115 million loan with Mass Mutual Life
Insurance Company (the "Mortgage Financing V Loan"). The Mortgage Financing V
Loan is secured by 12 Properties, has a ten year term, bears interest at a fixed
rate of 6.94%, requires monthly payments of principal and interest totaling
$815,935 and is amortized over a 25 year period. Proceeds from this loan were
used to repay $76.4 million of our Lehman Bridge Loan I and to repay a portion
of our lines of credit.
On April 30, 1999 we closed a $22.5 million loan with Lehman Brothers,
Inc. (the "Mortgage Financing VI Loan"). The Mortgage Financing VI Loan is
secured by 3 properties, has a ten year term and bears interest at a fixed rate
of 7.54%, requires monthly payments of principal and interest totaling $158,115
and is amortized over a 30 year period. Proceeds from this loan were used to
repay a portion of our lines of credit.
On May 5, 1999, we refinanced the remaining $35 million under the Lehman
Bridge Loan I with one secured note payable totaling $62.5 million to Lehman
Brothers, Inc. (the "Lehman Bridge Loan III"). The Lehman Bridge Loan III is
secured by 3 properties, bears interest at LIBOR plus 2.25% per annum (effective
rate of 7.21% at March 31, 1999), requires monthly payments of interest only and
matures on November 1, 2000. The remaining proceeds from this loan were used to
repay a portion of our lines of credit.
Following is a summary of scheduled principal payments for our mortgage
loans as of March 31, 1999 and May 5, 1999 (in thousands):
<TABLE>
<CAPTION>
YEAR AS OF MARCH 31, AS OF MAY 5,
1999 1999
----------- ---------------- -------------
<S> <C> <C>
1999 $111,993 $1,825
2000 743 2,807
2001 808 3,023
2002 5,879 8,255
2003 14,299 16,848
Thereafter 440,137 629,644
-------- --------
Total $573,859 $662,402
======== ========
</TABLE>
11
<PAGE> 12
Following is certain other information related to our indebtedness as of
March 31, 1999 and May 5, 1999 (in thousands, except percentage data):
UNSECURED AND SECURED DEBT ANALYSIS:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999 AS OF MAY 5, 1999
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
BALANCE PERCENT RATE (1) BALANCE PERCENT RATE (1)
--------- ------- -------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Unsecured Debt $296,450 34% 6.64% $253,390 28% 6.71%
Secured Debt 573,859 66% 7.39% 662,402 72% 7.41%
------- --- ----- ------- --- -----
Total Debt $870,309 100% 7.14% $915,792 100% 7.21%
======== ==== ===== ======== ==== =====
</TABLE>
FLOATING AND FIXED RATE DEBT ANALYSIS:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999 AS OF MAY 5, 1999
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
BALANCE PERCENT RATE (1) BALANCE PERCENT RATE (2)
--------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Floating Rate Debt $407,828 47% 6.79% $315,865 34% 6.92%
Fixed Rate Debt 462,481 53% 7.43% 599,927 66% 7.37%
------- --- ----- ------- --- -----
Total Debt $870,309 100% 7.14% $915,792 100% 7.21%
======== ==== ===== ======== ==== =====
</TABLE>
(1) Includes amortization of prepaid financing costs.
As of March 31, 1999, we had $17.1 million in cash and cash equivalents,
including $10 million in restricted cash representing interest bearing cash
deposits required by three of our mortgage loans payable. In addition, we had
$5.2 million in cash impound accounts for real estate taxes and insurance as
required by several of our mortgage loans payable.
As of March 31, 1999, we had $13.6 million available under our lines of
credit and the capacity to issue up to $255.3 million of our common stock
pursuant to a Registration Statement filed with the Securities and Exchange
Commission in January 1998.
We expect to continue meeting our short-term liquidity and capital
requirements generally through net cash provided by operating activities and
proceeds from our lines of credit. 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
("REIT"). We also believe 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 our long-term liquidity and capital requirements such
as scheduled debt payments, renovation costs, property acquisitions and other
non-recurring capital expenditures through long-term secured and unsecured
indebtedness and the issuance of additional equity securities.
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 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 an alternative to net income (determined in accordance with GAAP), as
an indicator of our financial performance or to cash flow from
12
<PAGE> 13
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-month periods ended March 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------- -------
<S> <C> <C>
FUNDS FROM OPERATIONS:
Net income $24,391 $16,184
Depreciation and amortization of real
estate assets 16,215 11,296
Minority interest 1,211 1,177(a)
------- -------
Funds From Operations $41,817 $28,657
======= =======
</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.
13
<PAGE> 14
IMPACT OF YEAR 2000
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 disruption of operations, including,
among other things, a temporary inability to process transactions, send tenant
invoices, provide services to our Properties and tenants, or engage in similar
normal business activities.
The accounting software we are currently using is not Year 2000
compliant. However, we have completed an assessment of our accounting software
needs and have elected to install a different accounting software package that
is both Year 2000 compliant and provides other features not available with our
current software package. We plan to install the Year 2000 compliant version of
this software in the second and third quarters of 1999. We estimate the total
costs associated with installing this Year 2000 compliant accounting software to
be between $400,000 and $600,000. The hardware used to run our accounting
software is Year 2000 compliant.
We have completed 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 included
determining which System Components are date-sensitive. We have also contacted
the manufacturers of the date-sensitive System Components to determine if they
are Year 2000 compliant. We have started to test the date-sensitive System
Components represented to be Year 2000 compliant, and plan to reprogram or
replace the date-sensitive System Components found not to be Year 2000 compliant
by the end of the third quarter of 1999. We estimate the total costs associated
with this phase of our Year 2000 readiness program to be between $200,000 and
$500,000.
We believe our principal risks associated with the Year 2000 issue
include the risk of disruption of our operations due to operational failures of
third parties, including tenants, utility providers, vendors and financial
institutions. 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. As this phase of our
Year 2000 readiness program is not yet complete, we cannot presently assess the
associated risks and estimated costs.
Upon completion of our Year 2000 readiness program, we will consider the
necessity of forming and implementing a contingency plan to mitigate any adverse
affects 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, as well as new systems, and other factors. Accordingly, there
can be no guarantee that these modifications will be successful.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which we are exposed is interest rate risk, which is
sensitive to many factors, including governmental monetary and tax policies,
domestic and international economic and political considerations and other
factors that are beyond our control.
INTEREST RATE RISK
In order to modify and manage the interest characteristics of our
outstanding debt and limit the effects of interest rates on our operations, we
may utilize a variety of financial instruments, including interest rate swaps,
caps, floors, and other interest rate exchange contracts. The use of these types
of instruments to hedge our exposure to changes in interest rates carries
additional risks such as counter-party credit risk and legal enforceability of
hedging contracts. We do not enter into any transactions for speculative or
trading purposes.
Certain of our future earnings, cash flows and fair values relating to
financial instruments are dependent upon prevailing market rates of interest,
such as LIBOR. Based on interest rates and outstanding balances at March 31,
1999, a 1% increase in interest rates on our $407.8 million of floating rate
debt would decrease annual future earnings and cash flows by approximately $4.1
million and would not have an impact on the floating rate debt fair value. A 1%
decrease in interest rates on our $407.8 million of floating rate debt would
increase annual future earnings and cash flows by approximately $4.1 million and
would not have an impact on the floating rate debt fair value. A 1% increase or
decrease in interest rates on our secured note receivable would not have a
material impact on annual future earnings, cash flows and its fair value.
These amounts are determined by considering the impact of the
hypothetical interest rates on our borrowing cost. These analyses do not
consider the effects of the reduced level of overall economic activity that
could exist in such an environment. Further, in the event of a change of such
magnitude, we would consider taking actions to further mitigate our exposure to
the change. However, due to the uncertainty of the specific actions that would
be taken and their possible effects, this sensitivity analysis assumes no
changes in our capital structure.
15
<PAGE> 16
BUILDING AND LEASE INFORMATION
The following tables set forth certain information regarding our
Properties as of March 31, 1999.
<TABLE>
<CAPTION>
LOCATION NUMBER OF PROPERTIES APPROXIMATE NET RENTABLE SQUARE FEET
- --------------------- --------------------------- -----------------------------------------
Industrial Industrial
and and
Office Retail Total Office Retail Total
------ ---------- ----- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Los Angeles County
West 25 1 26 3,957,747 36,959 3,994,706
North 30 - 30 2,715,068 -- 2,715,068
South 16 - 16 2,201,823 -- 2,201,823
Central 3 - 3 608,789 -- 608,789
Orange County 20 - 20 3,202,241 -- 3,202,241
San Diego County 21 - 21 2,486,777 -- 2,486,777
Ventura County 4 - 4 561,841 -- 561,841
Riverside/San
Bernardino Counties 8 4 12 553,896 414,674 968,570
Kern County 2 - 2 216,522 -- 216,522
--- --- --- ---------- ------- ----------
Subtotal 129 5 134 16,504,704 451,633 16,956,337
Renovation Properties 5 - 5 1,068,149 -- 1,068,149
--- --- --- ---------- ------- ----------
Total 134 5 139 17,572,853 451,633 18,024,486
=== === === ========== ======= ==========
</TABLE>
RENOVATION SUMMARY
<TABLE>
<CAPTION>
APPROXIMATE ESTIMATED ANTICIPATED
NET TOTAL COST WEIGHTED AVERAGE PERCENT ESTIMATED
RENTABLE PER SQ FT ANNUAL RENTAL RATE LEASED AT STABILIZATION
PROPERTY SQUARE FEET (1) (2) MARCH 31, 1999 DATE
- -------- ----------- ---------- ------------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
1821 Dyer Boulevard 115,061 $88 $18.15 73% 2nd Qtr 1999
535 Brand Boulevard 109,187 $175 $23.42 58% 4th Qtr 1999
5200 West Century 310,910 $65 $15.67 59% 4th Qtr 1999
Tourney Pointe 219,991 $151 $20.57 21% 4th Qtr 1999
Westwood Center 313,000 $251 $34.80 0% 2nd Qtr 2000
---------
1,068,149
=========
</TABLE>
(1) Estimated total cost per square foot includes purchase and closing costs,
capital expenditures, tenant improvements, leasing commissions and carrying
costs during renovation.
(2) Anticipated weighted average annual rental rate represents the weighted
average of the in-place rental rates for occupied space and market rental
rates for vacant space. Our estimates of the market 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 vacant space at estimated levels is
highly dependent upon many factors over which we have no control. We
undertake no obligation to update or correct these estimates if future
events prove them to be inaccurate.
16
<PAGE> 17
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
PERCENT OCCUPIED PERCENT LEASED
LOCATION AT MARCH 31, 1999 AT MARCH 31, 1999
- ----------------------- -------------------------------- ----------------------------------
Industrial Industrial
and And
Office Retail Total Office Retail Total
------ ---------- ----- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Los Angeles County:
West 90.4% 100.0% 90.5% 92.1% 100.0% 92.2%
North 91.8% -- 91.8% 92.3% -- 92.3%
South 86.1% -- 86.1% 86.7% -- 86.7%
Central 87.9% -- 87.9% 91.5% -- 91.5%
Orange County 92.1% -- 92.1% 94.0% -- 94.0%
San Diego County 93.2% -- 93.2% 93.5% -- 93.5%
Ventura County 93.5% -- 93.5% 94.0% -- 94.0%
Riverside/San
Bernardino Counties 77.1% 95.2% 84.8% 78.2% 95.2% 85.5%
Kern County 94.3% -- 94.3% 94.3% -- 94.3%
------ ------ ------ ------ ------ ------
SUBTOTAL/WEIGHTED AVERAGE 90.4% 95.6% 90.6% 91.6% 95.6% 91.7%
Renovation Properties 28.8% -- 28.8% 35.9% -- 35.9%
------ ------ ------ ------ ------ ------
TOTAL/WEIGHTED AVERAGE 86.7% 95.6% 86.9% 88.2% 95.6% 88.4%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT
LOCATION PER LEASED SQUARE FOOT (1)
- ----------------------- ------------------------------------------------------
Industrial Full
and Service
Office Retail Total Gross Leases(1)
------- ---------- ------ ---------------
<S> <C> <C> <C> <C>
Los Angeles County:
West $22.44 $24.60 $22.46 $22.44
North $19.54 -- $19.54 $20.50
South $16.98 -- $16.98 $18.62
Central $20.08 -- $20.08 $20.08
Orange County $15.50 -- $15.50 $17.93
San Diego County $15.11 -- $15.11 $17.81
Ventura County $16.70 -- $16.70 $16.70
Riverside/San
Bernardino Counties $13.99 $ 8.25 $11.25 $16.71
Kern County $21.99 -- $21.99 --
------ ------ ------ -----
SUBTOTAL/WEIGHTED AVERAGE $18.23 $ 9.65 $17.99 $19.91
Renovation Properties $15.53 -- $15.53 $15.95
------ ------ ------ -----
TOTAL/WEIGHTED AVERAGE $18.16 $ 9.65 $17.93 $19.83
====== ====== ====== =====
</TABLE>
(1) Excludes 48 properties and 4,718,622 square feet under triple net and
modified gross leases.
LEASE EXPIRATIONS
As of March 31, 1999
(unaudited)
<TABLE>
<CAPTION>
SQUARE PERCENTAGE OF ANNUALIZED ESTIMATED
NUMBER FOOTAGE AGGREGATE BASE RENT OF MARKET RENT OF
OF OF PORTFOLIO EXPIRING EXPIRING LEASES
YEAR OF LEASE LEASES EXPIRING LEASED LEASES (PER (PER SQUARE
EXPIRATION EXPIRING LEASES SQUARE FEET SQUARE FOOT) FOOT)(1)
- -------------- -------- --------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Month-to-Month 196 408,930 2.57% $17.92 $19.93
1999 (2) 428 1,546,241 9.71% $17.46 $20.03
2000 580 2,246,035 14.10% $18.52 $22.14
2001 539 2,251,001 14.13% $19.14 $22.76
2002 404 2,247,821 14.11% $18.53 $23.31
2003 367 2,729,351 17.14% $20.65 $25.27
</TABLE>
(1) Calculation based on our estimate of current market rental rates and
annual increases in such rates of 8%, 6%, 3%, 3% and 3%, in 1999, 2000,
2001, 2002 and 2003, respectively. 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. Our ability to rent expiring lease space at
estimated levels is highly dependent upon many factors over which we
have no control. We undertake no obligation to update or correct these
estimates if future events prove them to be inaccurate.
(2) Represents leases expiring between April 1, 1999 and December 31, 1999.
17
<PAGE> 18
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 could 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 We May be Unable to
Retain Tenants or Rent Space Upon Lease Expirations," "--Restraints on Our
Flexibility to Liquidate Real Estate," "--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/A.
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
First Quarter 1999
<TABLE>
<CAPTION>
LEASES SIGNED
DURING THE THREE MONTHS
ENDED MARCH 31, 1999
--------------------------------------
WEIGHTED
AVERAGE TENANT IMPROVEMENTS
NET ABSORPTION LEASE TERM AND COMMISSIONS
PROPERTY TYPE (SQUARE FEET) RETENTION RATE(2) (IN MONTHS) (ENDED MARCH 31, 1999)(1)
- ------------- -------------------------- ------------------------- ----------- -------------------------
Three Months Three Months
Ended Year Ended Ended Year Ended
3/31/99 12/31/98 3/31/99 12/31/98 New New Renewal
------------ ---------- ------------ ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Office (125,910) 892,886 47.6% 79.4% 55 $ 14.47 $ 5.88
Industrial/Retail 279 5,753 89.6% 71.4% 38 $ .94 $ 1.38
-------- ------- ---- ----
Total/Wtd Avg (125,631) 898,639 51.0% 79.1%
======== ======= ==== ====
</TABLE>
(1) Excludes five renovation properties.
(2) Percentage of leases in which tenants were retained at lease expiration.
18
<PAGE> 19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - NONE
ITEM 2. CHANGES IN SECURITIES - NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS - NONE
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<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 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, filed as an exhibit to our quarterly report on Form
10-Q filed with the Commission on August 14, 1998, and incorporated
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.
10.1 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.
10.41 Amended and Restated Employment Agreement dated January 1, 1999
between Arden Realty, Inc. and Mr. Robert Peddicord, as filed
herein.
27 Financial Data Schedule, as filed herein.
</TABLE>
(b) Reports on Form 8-K
- None
19
<PAGE> 20
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: May 14, 1999 By: /S/ DIANA M. LAING
--------------------------------
Diana M. Laing
Executive Vice President,
Chief Financial Officer and Secretary
Date: May 14, 1999 By: /s/ RICHARD S. DAVIS
--------------------------------
Richard S. Davis
Senior Vice President and
Chief Accounting Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,901
<SECURITIES> 0
<RECEIVABLES> 21,523
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,195
<PP&E> 2,363,647
<DEPRECIATION> (99,377)
<TOTAL-ASSETS> 2,365,719
<CURRENT-LIABILITIES> 55,190
<BONDS> 870,309
0
0
<COMMON> 624
<OTHER-SE> 1,369,355
<TOTAL-LIABILITY-AND-EQUITY> 2,365,719
<SALES> 0
<TOTAL-REVENUES> 80,006
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 54,404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,183
<INCOME-PRETAX> 24,391
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,391
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
