<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 June 30, 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 (I.R.S. Employer Identification No.)
of 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 July 26, 1999, there were 63,296,315 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 June 30, 1999 and December 31, 1998 .... 3
Consolidated Statements of Income for the three and six months ended
June 30, 1999 and 1998 ................................................... 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 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 ............... 19
PART II. OTHER INFORMATION .................................................................. 23
SIGNATURES ......................................................................... 25
</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>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in real estate:
Land $ 501,216 $ 491,342
Buildings and improvements 1,721,279 1,616,439
Tenant improvements 65,891 65,413
----------- -----------
2,288,386 2,173,194
Less: accumulated depreciation (114,910) (84,754)
----------- -----------
2,173,476 2,088,440
Properties under development 177,696 151,158
----------- -----------
Net investment in real estate 2,351,172 2,239,598
Cash and cash equivalents 5,460 4,578
Restricted cash 17,559 12,409
Rent and other receivables 9,148 9,024
Mortgage notes receivable, net of discount 14,082 14,329
Deferred rent 20,571 17,004
Prepaid financing and leasing costs,
net of accumulated amortization 39,085 31,230
Prepaid expenses and other assets 6,661 3,747
----------- -----------
Total assets $ 2,463,738 $ 2,331,919
=========== ===========
LIABILITIES
Mortgage loans payable $ 662,178 $ 544,027
Unsecured lines of credit 306,613 296,450
Accounts payable and accrued expenses 30,200 21,687
Security deposits 14,426 13,933
Dividends payable 28,167 26,210
----------- -----------
Total liabilities 1,041,584 902,307
----------- -----------
Minority interest 40,895 56,222
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
20,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 100,000,000
shares authorized, 63,296,315 and 62,404,737
issued and outstanding, respectively 633 624
Additional paid-in capital 1,382,733 1,374,813
Notes receivable from officers-shareholders
for purchase of common stock (2,107) (2,047)
----------- -----------
Total stockholders' equity 1,381,259 1,373,390
----------- -----------
Total liabilities and stockholders' equity $ 2,463,738 $ 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)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 82,712 $ 70,503 $ 162,048 $ 125,262
Property operating expenses 24,444 21,543 47,954 38,281
--------- --------- --------- ---------
58,268 48,960 114,094 86,981
General and administrative expenses 1,687 1,388 3,183 3,023
Interest expense 14,455 10,539 27,638 19,151
Depreciation and amortization 17,173 12,930 33,388 24,226
Interest and other income (671) (695) (1,341) (2,153)
--------- --------- --------- ---------
Income before minority interest 25,624 24,798 51,226 42,734
Minority interest (971) (1,183) (2,182) (2,935)
--------- --------- --------- ---------
Net income $ 24,653 $ 23,615 $ 49,044 $ 39,799
========= ========= ========= =========
Net income per common share:
Basic $ 0.39 $ 0.38 $ 0.78 $ 0.73
Diluted $ 0.39 $ 0.38 $ 0.78 $ 0.72
Weighted average common shares outstanding:
Basic 62,984 62,051 62,755 54,874
Diluted 63,136 62,248 62,879 55,081
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 49,044 $ 39,799
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests 2,182 2,935
Depreciation and amortization 33,388 24,226
Amortization of loan costs 1,239 844
Changes in operating assets and liabilities:
Rent and other receivables 63 (1,355)
Deferred rent (3,567) (2,991)
Prepaid financing and leasing costs (11,843) (14,036)
Prepaid expenses and other assets (3,204) 67
Accounts payable and accrued expenses 8,513 6,379
Security deposits 493 5,824
--------- ---------
Net cash provided by operating activities 76,308 61,692
--------- ---------
INVESTING ACTIVITIES:
Acquisitions and improvements to investment in real estate (141,924) (988,966)
Escrow deposit -- 20,000
--------- ---------
Net cash used in investing activities (141,924) (968,966)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from mortgage loans 229,888 639,920
Repayments of mortgage loans (111,737) (365,894)
Proceeds from unsecured lines of credit 130,461 314,150
Repayments of unsecured lines of credit (120,298) (319,950)
Proceeds from issuance of common stock, net of offering costs -- 707,005
Redemption of Operating Partnership Units -- (16,305)
Increase in restricted cash (5,150) (7,764)
Distributions to minority interests (2,683) (3,141)
Dividends paid (53,983) (39,885)
--------- ---------
Net cash provided by financing activities 66,498 908,136
--------- ---------
Net increase in cash and cash equivalents 882 862
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,578 5,300
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,460 $ 6,162
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest, net of amount capitalized $ 30,318 $ 20,293
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
ARDEN REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1999, our
portfolio of properties included 141 commercial properties with approximately
18.4 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 six-month periods ended June 30, 1999 and
1998 include limited partnership interests in the Operating Partnership of
approximately 4.3% and 5.7%, 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. ACQUISITIONS
The following table sets forth certain information regarding our
acquisition of office properties for the six months ended June 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>
Hillside Corporate Center Thousand Oaks 59,876 February 1999 $ 9.6
Westlake Gardens II Westlake 49,639 April 1999 7.3
Howard Hughes Tower Los Angeles 313,833 May 1999 53.0
------- ----
423,348 $69.9
======= =====
</TABLE>
4. 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 was secured by seven of our
properties, bore interest at LIBOR plus 2.25% per annum and required monthly
payments of interest only. On May 5, 1999, the Lehman Bridge Loan I was
refinanced; see discussion below.
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 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
6
<PAGE> 7
rate of 7.54%, requires monthly payments of principal and interest 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 outstanding
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 7.19% at June 30, 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.
On July 23, 1999, we entered into a construction loan with a total
commitment of $50 million (the "Construction Loan") related to our development
of the 240,724 square foot 6060 Center Drive office building in the Howard
Hughes Center. The Construction Loan is secured by certain property and
construction improvements, bears interest at LIBOR plus 2.0% per annum,
requires monthly payments of interest, and matures December 30, 2000, with two
one year extension options. Subject to meeting certain construction completion
and leasing benchmarks, as defined, the interest rate on the Construction Loan
may be reduced to LIBOR plus 1.75%, then to LIBOR plus 1.5%.
On July 27, 1999, we closed a $58 million loan with Lehman Brothers,
Inc. (the "Lehman Bridge Loan IV"). The Lehman Bridge Loan IV is secured by 6
properties, bears interest at LIBOR plus 2.25% annum, requires monthly payments
of interest only and matures on November 1, 2000. Proceeds from this loan were
used to repay a portion of our floating rate debt and to fund certain capital
expenditures.
5. STOCKHOLDERS' EQUITY
On March 9, 1999, we declared a quarterly dividend of $.445 per share to
shareholders of record at the close of business on March 31, 1999, which was
paid on April 23, 1999.
On June 16, 1999, we declared a quarterly dividend of $.445 per share to
shareholders of record at the close of business on June 30, 1999, which was paid
on July 29, 1999.
6. 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue from Rental Operations:
Rental $ 72,331 $ 63,522 $141,841 $112,211
Tenant reimbursements 2,869 2,174 6,336 4,057
Parking, net of expenses 3,575 2,882 6,757 5,532
Other rental operations 3,937 1,925 7,114 3,462
-------- -------- -------- --------
82,712 70,503 162,048 125,262
-------- -------- -------- --------
Property Operating Expenses:
Repairs and maintenance 8,255 6,798 15,925 12,150
Utilities 6,538 5,982 12,879 10,598
Real estate taxes 5,669 5,372 11,416 9,472
Insurance 988 1,076 1,970 1,882
Ground rent 313 178 494 356
Marketing and other 2,681 2,137 5,270 3,823
-------- -------- -------- --------
24,444 21,543 47,954 38,281
-------- -------- -------- --------
$ 58,268 $ 48,960 $114,094 $ 86,981
======== ======== ======== ========
</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. In particular, during
the six months ended June 30, 1999, we have:
o Commenced construction on 6060 Center Drive, a 240,724 square foot
office building located in the Howard Hughes Center. Total estimated
costs, including purchase and closing costs, capital expenditures,
tenant improvements, leasing commissions and carrying costs during
construction are approximately $56 million. Construction on 6060 Center
Drive is expected to be complete during the second quarter of 2000.
o Acquired three office properties, all located in Southern California,
with approximately 423,348 rentable square feet. One of these
properties, Howard Hughes Tower, is a 313,833 square foot building
located in the Howard Hughes Center. With this purchase, we now own two
of the three existing office buildings in the Howard Hughes Center, as
well as the building housing the Spectrum Executive Health Club.
o Converted $115 million of floating rate debt to a fixed rate loan
bearing interest at 6.94% per annum. This fixed rate loan, with the Mass
Mutual Life Insurance Company, has a ten year term with principal
amortized over a 25 year period.
8
<PAGE> 9
RESULTS OF OPERATIONS
Our financial position and operating results are primarily comprised of
our portfolio of commercial properties and income derived therefrom. Therefore,
financial data from period to period will be affected by the timing of
significant property acquisitions.
Comparison of the six months ended June 30, 1999 to the six months ended
June 30, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------ PERCENT
1999 1998 CHANGE CHANGE
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Revenue from rental operations:
Rental .................................. $141,841 $112,211 $ 29,630 26%
Tenant reimbursements ................... 6,336 4,057 2,279 56%
Parking, net of expense ................. 6,757 5,532 1,225 22%
Other rental operations ................. 7,114 3,462 3,652 105%
-------- -------- -------- --------
162,048 125,262 36,786 29%
Interest and other income ................ 1,341 2,153 (812) (38%)
-------- -------- -------- --------
Total revenue ........................... $163,389 $127,415 $ 35,974 28%
======== ======== ======== ========
EXPENSES
Property operating expenses:
Repairs and maintenance ................. $ 15,925 $ 12,150 $ 3,775 31%
Utilities ............................... 12,879 10,598 2,281 22%
Real estate taxes ....................... 11,416 9,472 1,944 21%
Insurance ............................... 1,970 1,882 88 5%
Ground rent ............................. 494 356 138 39%
Marketing and other ..................... 5,270 3,823 1,447 38%
-------- -------- -------- --------
Total property operating expenses .... 47,954 38,281 9,673 25%
General and administrative .............. 3,183 3,023 160 5%
Interest ................................ 27,638 19,151 8,487 44%
Depreciation and amortization ........... 33,388 24,226 9,162 38%
-------- -------- -------- --------
Total expenses ....................... $112,163 $ 84,681 $ 27,482 32%
======== ======== ======== ========
OTHER DATA:
NUMBER OF PROPERTIES
Acquired during period ................... 3 62
Owned at end of period ................... 141 134
SQUARE FEET: (IN THOUSANDS)
Acquired during period ................... 423 7,153
Owned at end of period ................... 18,391 17,457
</TABLE>
9
<PAGE> 10
The increase in revenue from rental operations and property operating
expenses for the six months ended June 30, 1999 as compared to the same period
in 1998 is primarily from the 69 properties we acquired after December 31, 1997.
Following is a summary of the increase in revenue from rental operations
and property operating expenses that relates to the 69 properties we acquired
after December 31, 1997 and for the 72 properties we owned for all of the six
month periods ended June 30, 1998 and 1999 (in thousands, except number of
properties).
<TABLE>
<CAPTION>
PROPERTIES OWNED
FOR ALL OF THE
PROPERTIES ACQUIRED SIX MONTHS ENDED
AFTER JUNE 30,
TOTAL VARIANCE DECEMBER 31, 1997 1998 AND 1999(1)
-------------- ------------------- -----------------
<S> <C> <C> <C>
REVENUE FROM RENTAL OPERATIONS:
Rental ............................... $ 29,630 $ 25,090 $ 4,540
Tenant reimbursements ................ 2,279 1,655 624
Parking, net of operations ........... 1,225 635 590
Other rental operations .............. 3,652 3,290 362
-------- -------- --------
$ 36,786 $ 30,670 $ 6,116
======== ======== ========
PROPERTY OPERATING EXPENSES:
Repairs and maintenance .............. $ 3,775 $ 2,584 $ 1,191
Utilities ............................ 2,281 2,079 202
Real estate taxes .................... 1,944 1,855 89
Insurance ............................ 88 260 (172)
Ground rent .......................... 138 (1) 139
Marketing and other .................. 1,447 1,000 447
-------- -------- --------
$ 9,673 $ 7,777 $ 1,896
======== ======== ========
OTHER DATA:
Number of Properties ................. 69 72
Square feet .......................... 8,087 10,304
</TABLE>
(1) See the Same Properties analysis below.
Interest and other income decreased by approximately $800,000 during the
six months ended June 30, 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 properties in March 1998.
General and administrative expenses were approximately $3.2 million or
1.9% of total revenues during the six months ended June 30, 1999 as compared to
$3.0 million or 2.4% of total revenues during the same period in 1998. This
decrease as a percentage of total revenues was primarily due to benefits
achieved from economies of scale and concentration over a larger property
portfolio.
Interest expense increased approximately $8.5 million during the six
months ended June 30, 1999 as compared to the same period in 1998. This increase
was due to higher outstanding debt balances in 1999, partially offset by lower
overall interest rates.
Depreciation and amortization expense increased by approximately $9.2
million during the six months ended June 30, 1999, primarily from depreciation
related to the addition of approximately $1.2 billion in commercial properties,
capital expenditures and tenant improvements since January 1, 1998.
10
<PAGE> 11
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 six month periods ended June 30, 1999 and 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------- DOLLAR PERCENT
1999 1998 CHANGE CHANGE
------- ------- ------- -------
GAAP BASIS: (Unaudited)
<S> <C> <C> <C> <C>
Revenues from rental operations $99,958 $93,842 $ 6,116 6.5%
Property operating expenses 31,099 29,203 1,896 6.5%
------- ------- ------- -------
Net $68,859 $64,639 $ 4,220 6.5%
======= ======= ======= =======
CASH BASIS(1):
Revenue from rental operations $98,619 $92,192 $ 6,427 7.0%
Property operating expenses 31,099 29,203 1,896 6.5%
------- ------- ------- -------
Net $67,520 $62,989 $ 4,531 7.2%
======= ======= ======= =======
Number of properties 72 72
Average occupancy 87.8% 83.7%
Square feet 10,304 10,304
Percentage of total portfolio 56.0% 59.0%
</TABLE>
(1) Excludes straight-line rent adjustments.
Revenue from rental operations for these properties, computed on a GAAP
basis, increased by approximately $6.1 million during the six months ended
June 30, 1999 compared to the same period in 1998, primarily due to a 4.1%
increase in average occupancy.
Excluding only the straight-line rent adjustments for these properties,
revenue from rental operations for the six months ended June 30, 1999, computed
on a Cash Basis, increased by approximately $6.4 million or 7.0%.
Property operating expenses for these properties increased by
approximately $1.9 during the six months ended June 30, 1999 compared to the
same period in 1998, primarily due to higher repair and maintenance, utility,
marketing and other expenses in 1999. Increases in utility expenses and certain
repair and maintenance expense items (i.e. janitorial and building engineering
costs) were primarily due to the higher average occupancy for these properties
in 1999. The remaining increase in repair and maintenance and certain other
expenses was primarily related to the timing of certain maintenance items (i.e.
window cleanings and tree trimming) and expenses associated with monitoring and
testing equipment and systems in connection with our Year 2000 readiness
program. Due to an increased focus on raising our portfolio-wide occupancy,
certain marketing and tenant retention related expenses were also higher in
1999.
11
<PAGE> 12
Comparison of the three months ended June 30, 1999 to the three months
ended June 30, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------- PERCENT
1999 1998 CHANGE CHANGE
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Revenue from rental operations:
Rental .............................. $ 72,331 $ 63,522 $ 8,809 14%
Tenant reimbursements ............... 2,869 2,174 695 32%
Parking, net of expense ............. 3,575 2,882 693 24%
Other rental operations ............. 3,937 1,925 2,012 105%
-------- -------- -------- ---
82,712 70,503 12,209 17%
Interest and other income ............ 671 695 (24) (3)%
-------- -------- -------- ---
Total revenue ....................... $ 83,383 $ 71,198 $ 12,185 17%
======== ======== ======== ===
EXPENSES
Property operating expenses:
Repairs and maintenance ............. $ 8,255 $ 6,798 $ 1,457 21%
Utilities ........................... 6,538 5,982 556 9%
Real estate taxes ................... 5,669 5,372 297 6%
Insurance ........................... 988 1,076 (88) (8)%
Ground rent ......................... 313 178 135 76%
Marketing and other ................. 2,681 2,137 544 25%
-------- -------- -------- ---
Total property expenses .......... 24,444 21,543 2,901 13%
General and administrative .......... 1,687 1,388 299 22%
Interest ............................ 14,455 10,539 3,916 37%
Depreciation and amortization ....... 17,173 12,930 4,243 33%
-------- -------- -------- ---
Total expenses ................... $ 57,759 $ 46,400 $ 11,359 24%
======== ======== ======== ===
OTHER DATA:
NUMBER OF PROPERTIES
Acquired during period ............... 2 6
Owned at end of period ............... 141 134
SQUARE FEET: (IN THOUSANDS)
Acquired during period ............... 363 973
Owned at end of period ............... 18,391 17,457
</TABLE>
12
<PAGE> 13
The increase in revenue from rental operations and property operating
expenses for the three months ended June 30, 1999 as compared to the same period
in 1998 is partially from the 13 properties we acquired after March 31, 1998 and
partially from operations for the 128 properties we owned for all of the entire
three month periods ended June 30, 1998 and 1999 (see Same Properties analysis).
Following is a summary of the increase in revenue from rental operations
and property operating expenses that relates to the 13 properties we acquired
after March 31, 1998 and for the 128 properties we owned for all of the three
months ended June 30, 1998 and 1999 (in thousands, except number of properties).
<TABLE>
<CAPTION>
PROPERTIES OWNED
FOR ALL OF THE
PROPERTIES THREE MONTHS
ACQUIRED AFTER ENDED JUNE 30,
TOTAL VARIANCE MARCH 31, 1998 1998 AND 1999(1)
-------------- ----------------- ----------------
<S> <C> <C> <C>
REVENUE FROM RENTAL OPERATIONS:
Rental ............................. $ 8,809 $ 4,719 $ 4,090
Tenant reimbursements .............. 695 (252) 947
Parking, net of operations ......... 693 181 512
Other rental operations ............ 2,012 2,550 (538)
-------- -------- --------
$ 12,209 $ 7,198 $ 5,011
======== ======== ========
PROPERTY OPERATING EXPENSES:
Repairs and maintenance ............ $ 1,457 $ 381 $ 1,076
Utilities .......................... 556 395 161
Real estate taxes .................. 297 329 (32)
Insurance .......................... (88) 41 (129)
Ground rent ........................ 135 (1) 136
Marketing and other ................ 544 159 385
-------- -------- --------
$ 2,901 $ 1,304 $ 1,597
======== ======== ========
OTHER DATA:
Number of Properties ............... 13 128
Square feet ........................ 1,907 16,484
</TABLE>
(1) See the Same Properties analysis below.
General and administrative expenses were approximately $1.7 million or
2.0% of total revenues during the three months ended June 30, 1999 as compared
to $1.4 million or 1.9% of total revenues during the same period in 1998.
Interest expense increased approximately $3.9 million during the three
months ended June 30, 1999 as compared to the same period in 1998. This increase
was due to higher outstanding debt balances in 1999, partially offset by lower
overall interest rates.
Depreciation and amortization expense increased by approximately $4.2
million during the three months ended June 30, 1999, primarily from depreciation
related to the addition of approximately $437.6 million in commercial
properties, capital expenditures and tenant improvements since March 31, 1998.
13
<PAGE> 14
SAME PROPERTIES
Following is a comparison of property operating data computed on a GAAP
and Cash Basis for the 128 properties we owned for the entire three month
periods ended June 30, 1999 and 1998 (in thousands, except percentage data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------- PERCENT
1999 1998 CHANGE CHANGE
------- ------- ------- -------
GAAP BASIS: (Unaudited)
<S> <C> <C> <C> <C>
Revenues from rental operations $73,206 $68,195 $ 5,011 7.3%
Property operating expenses 22,381 20,784 1,597 7.7%
------- ------- ------- -------
Net $50,825 $47,411 $ 3,414 7.2%
======= ======= ======= =======
CASH BASIS(1):
Revenue from rental operations $71,354 $66,268 $ 5,086 7.7%
Property operating expenses 22,381 20,784 1,597 7.7%
------- ------- ------- -------
Net $48,973 $45,484 $ 3,489 7.7%
======= ======= ======= =======
Number of properties 128 128
Average occupancy 87.3% 84.9%
Square feet 16,484 16,484
Percentage of total portfolio 89.6% 94.4%
</TABLE>
(1) Excludes straight-line rent adjustments.
Revenue from rental operations for these properties, computed on a GAAP
basis, increased by approximately $5.0 million during the three months ended
June 30, 1999, compared to the same period in 1998, primarily due to a 2.4%
increase in average occupancy.
Excluding the straight-line rent adjustments for these properties,
revenue from rental operations for the three months ended June 30, 1999,
computed on a Cash Basis, increased by approximately $5.1 million or 7.7%.
Property operating expenses for these properties increased by
approximately $1.6 million during the three months ended June 30, 1999 compared
to the same period in 1998, primarily due to higher repair and maintenance,
utility, marketing and other expenses in 1999. Increases in utility expenses and
certain repair and maintenance expense items (i.e. janitorial and building
engineering costs) were primarily due to the higher average occupancy for these
properties in 1999. The remaining increase in repair and maintenance and certain
other expenses was primarily related to the timing of certain maintenance items
(i.e. window cleanings and tree trimming) and expenses associated with
monitoring and testing equipment and systems in connection with our Year 2000
readiness program. Due to an increased focus on raising our portfolio-wide
occupancy, certain marketing and tenant retention related expenses were also
higher in 1999.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities increased by approximately $14.6
million to $76.3 million for the six months ended June 30, 1999, as compared to
$61.7 million for the same period in 1998, primarily due to operating results
from the 69 properties acquired in 1998 and 1999. Cash used in investing
activities decreased by approximately $827.1 million, to approximately $141.9
million for the six months ended June 30, 1999 compared to approximately $969.0
million for the same period in 1998, primarily due to the acquisition of 62
properties during the six months ended June 30, 1998. Cash provided by financing
activities decreased by approximately $841.6 million to $66.5 million for the
six months ended June 30, 1999 as compared to $908.1 million for the same period
in 1998. Cash provided by financing activities for the six months ended June 30,
1998 consisted primarily of net proceeds from mortgage loans and the issuance of
26,296,047 shares of Common Stock. Cash provided by financing activities for the
six months ended June 30, 1999 consisted primarily of net proceeds from mortgage
loans and unsecured lines of credit.
14
<PAGE> 15
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 6.32% at June 30, 1999) depending on our leverage ratio, as
defined by the Amended Credit Facility. 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 June 30, 1999, the aggregate outstanding
balance on the Amended Credit Facility was $298.9 million, and $1.1 million was
available for additional borrowing.
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 6.9% at June 30, 1999) and is
scheduled to mature on August 1, 2000. 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 June 30, 1999, the outstanding balance on the City
National Bank Credit Facility was $7.7 million, and $2.3 million was available
for additional borrowing.
On January 20, 1999, our Lehman Bridge Loan I was expanded from $81.4
million to $111.4 million. The Lehman Bridge Loan I was secured by seven of our
properties, bore interest at LIBOR plus 2.25% per annum and required monthly
payments of interest only. On May 5, 1999, the Lehman Bridge Loan I was
refinanced, see discussion below.
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 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 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 outstanding
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 7.19% at June 30, 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.
On July 23, 1999, we entered into a construction loan with a total
commitment of $50 million ("Construction Loan") related to our development of
the 240,724 square foot 6060 Center Drive office building in the Howard Hughes
Center. The Construction Loan is secured by certain property and construction
improvements, bears interest at LIBOR plus 2.0% per annum, requires monthly
payments of interest, and matures December 30, 2000, with two one year extension
options. Subject to meeting certain construction completion and leasing
benchmarks, as defined, the interest rate on the Construction Loan may be
reduced to LIBOR plus 1.75%, then to LIBOR plus 1.5%.
On July 27, 1999, we closed a $58 million loan with Lehman Brothers,
Inc. (the "Lehman Bridge Loan IV"). The Lehman Bridge Loan IV is secured by 6
properties, bears interest at LIBOR plus 2.25% annum, requires monthly payments
of interest only and matures on November 1, 2000. Proceeds from this loan were
used to repay a portion of our floating rate debt and to fund certain capital
expenditures.
15
<PAGE> 16
Following is a summary of scheduled principal payments for our mortgage
loans as of June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---------- -------
<S> <C>
1999 $ 1,705
2000 65,282
2001 3,023
2002 8,255
2003 16,696
Thereafter 567,217
-------
Total $662,178
========
</TABLE>
Following is certain other information related to our indebtedness as of
June 30, 1999 (in thousands, except percentage data):
UNSECURED AND SECURED DEBT ANALYSIS:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INTEREST
BALANCE PERCENT RATE(1)
-------- ------- ---------
<S> <C> <C> <C>
Unsecured Debt $306,613 32% 6.63%
Secured Debt 662,178 68% 7.41%
-------- --- ----
Total Debt $968,791 100% 7.16%
======== ==== =====
</TABLE>
FLOATING AND FIXED RATE DEBT ANALYSIS:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INTEREST
BALANCE PERCENT RATE(1)
------- ------- --------
<S> <C> <C> <C>
Floating Rate Debt $369,088 38% 6.82%
Fixed Rate Debt 599,703 62% 7.38%
-------- --- ----
Total Debt $968,791 100% 7.16%
======== ==== =====
</TABLE>
(1) Includes amortization of prepaid financing costs.
Total interest incurred and the amount capitalized was as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total interest incurred $ 16,859 $ 12,727 $ 32,346 $ 22,745
Amount capitalized (2,404) (2,188) (4,708) (3,594)
-------- -------- -------- --------
Amount expensed $ 14,455 $ 10,539 $ 27,638 $ 19,151
======== ======== ======== ========
</TABLE>
As of June 30, 1999, we had $23.0 million in cash and cash equivalents,
including $13.6 million in restricted cash representing interest bearing cash
deposits required by five of our mortgage loans payable. Also included in cash
and cash equivalents were $4.0 million in cash impound accounts for real estate
taxes and insurance as required by several of our mortgage loans payable.
As of June 30, 1999, we had $3.4 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.
16
<PAGE> 17
We expect to meet our long-term liquidity and capital requirements such
as scheduled principal repayments, renovation costs, property acquisitions and
other non-recurring capital expenditures through the issuance of long-term debt
and 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 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 as a substitute for cash flow from operating
activities (determined in accordance with GAAP) as a measure of our liquidity.
Funds from Operations also is not 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 six month periods ended June 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
Net income $24,653 $23,615 49,044 $39,799
Depreciation and amortization of real
estate assets 17,173 12,930 33,388 24,226
Minority interest 971 1,183 2,182 2,360(a)
------- ------- ------- -------
Funds From Operations $42,797 $37,728 $84,614 $66,385
======= ======= ======= =======
</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 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.
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.
We have recently installed a Year 2000 compliant version of our
accounting software. 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 plan to take whatever action is deemed necessary during the third
quarter of 1999. As this phase of our Year 2000 readiness program is not yet
complete, we cannot presently assess the associated risks and estimated costs.
17
<PAGE> 18
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.
18
<PAGE> 19
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
Even though we currently have no such agreements, 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 June 30,
1999, a one percentage point increase in interest rates on our $369.1 million of
floating rate debt would decrease annual future earnings and cash flows by
approximately $3.7 million and would not have an impact on the floating rate
debt fair value. A one percentage point decrease in interest rates on our $369.1
million of floating rate debt would increase annual future earnings and cash
flows by approximately $3.7 million and would not have an impact on the floating
rate debt fair value. A one percentage point 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.
19
<PAGE> 20
BUILDING AND LEASE INFORMATION
The following tables set forth certain information regarding our
Properties as of June 30, 1999.
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
LOCATION NUMBER OF PROPERTIES APPROXIMATE NET RENTABLE SQUARE FEET
-------- ------------------------------------------ ------------------------------------------
Industrial Industrial
Office and Retail Total Office and Retail Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Los Angeles County
West 26 1 27 4,271,580 36,959 4,308,539
North 31 -- 31 2,767,592 -- 2,767,592
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 131 5 136 16,871,061 451,633 17,322,694
Renovation Properties 5 -- 5 1,068,149 -- 1,068,149
---------- ---------- ---------- ---------- ---------- ----------
Total 136 5 141 17,939,210 451,633 18,390,843
========== ========== ========== ========== ========== ==========
</TABLE>
PORTFOLIO OCCUPANCY SUMMARY
<TABLE>
<CAPTION>
PERCENT OCCUPIED PERCENT LEASED ANNUALIZED BASE RENT
LOCATION AT JUNE 30, 1999 AT JUNE 30, 1999 PER LEASED SQUARE FOOT(1)
-------- -------------------------- --------------------------- -----------------------------------------
Industrial Industrial Industrial Full Service
and And And Gross
0ffice Retail Total Office Retail Total Office Retail Total Leases(1)
------ ---------- ------ ------ ---------- ------ ------ ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Los Angeles County:
West 90.8% 100.0% 90.8% 92.7% 100.0% 92.7% $22.85 $24.60 $22.86 $22.85
North 88.8% -- 88.8% 91.8% -- 91.8% $19.88 -- $19.88 $20.78
South 86.8% -- 86.8% 89.0% -- 89.0% $17.24 -- $17.24 $18.88
Central 85.4% -- 85.4% 88.8% -- 88.8% $19.51 -- $19.51 $19.51
Orange County 93.5% -- 93.5% 95.0% -- 95.0% $15.71 -- $15.71 $18.11
San Diego County 93.4% -- 93.4% 94.6% -- 94.6% $15.27 -- $15.27 $17.99
Ventura County 96.7% -- 96.7% 97.5% -- 97.5% $16.49 -- $16.49 $16.49
Riverside/San
Bernardino Counties 80.8% 94.4% 86.7% 83.3% 94.4% 88.1% $14.00 $ 8.23 $11.35 $16.80
Kern County 96.6% -- 96.6% 97.7% -- 97.7% $21.86 -- $21.86 --
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
SUBTOTAL/ WEIGHTED AVERAGE 90.6% 94.9% 90.7% 92.6% 94.9% 92.6% $18.52 $ 9.65 $18.28 $20.18
Renovation Properties 40.7% -- 40.7% 44.7% -- 44.7% $15.92 -- $15.92 $16.26
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL/ WEIGHTED AVERAGE 87.6% 94.9% 87.8% 89.7% 94.9% 89.8% $18.44 $ 9.65 $18.21 $20.08
===== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) Excludes 48 properties and 4,722,281 square feet under triple net and
modified gross leases.
20
<PAGE> 21
LEASE EXPIRATIONS
As of June 30, 1999
(unaudited)
<TABLE>
<CAPTION>
SQUARE PERCENTAGE OF ANNUALIZED BASE ESTIMATED MARKET
NUMBER OF FOOTAGE OF AGGREGATE RENT OF EXPIRING RENT OF
YEAR OF LEASE LEASES EXPIRING PORTFOLIO LEASED LEASES EXPIRING LEASES
EXPIRATION EXPIRING LEASES SQUARE FEET (PER SQUARE FOOT) (PER SQUARE FOOT)(1)
------------- -------- ---------- ---------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Month-to-Month 198 356,451 2.16% $17.54 $20.55
1999(2) 283 1,157,422 7.01% $17.78 $20.27
2000 618 2,432,060 14.72% $18.68 $22.32
2001 555 2,234,811 13.53% $19.06 $22.46
2002 470 2,458,812 14.88% $18.56 $23.20
2003 377 2,757,509 16.69% $20.71 $25.14
</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.
(2) Represents leases expiring between July 1, 1999 and December 31, 1999.
LEASING ACTIVITY
Second Quarter 1999
(unaudited)
<TABLE>
<CAPTION>
LEASES SIGNED DURING THREE MONTHS
ENDED JUNE 30, 1999
-------------------------------------
WEIGHTED AVERAGE TENANT IMPROVEMENTS
NET ABSORPTION LEASE TERM AND COMMISSIONS
PROPERTY TYPE (SQUARE FEET) RETENTION RATE(2) (IN MONTHS) (PER SQUARE FOOT)(1)
- ------------- ------------------------ ------------------------ ---------------- -----------------
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
6/30/99 6/30/99 6/30/99 6/30/99 New New Renewal
------------ ---------- ----------- ---------- ---------------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Office 317,122 191,212 76.5% 59.0% 55 $16.17 $ 5.38
Industrial/Retail (3,236) (2,957) 64.7% 87.4% 38 $ 3.32 $ 1.83
-------- -------- ------ ------
Total/Wtd. Avg 313,886 188,255 76.3% 60.6%
======== ======== ====== ======
</TABLE>
(1) Excludes five renovation properties.
(2) Percentage of leases in which tenants were retained at lease expiration.
21
<PAGE> 22
RENOVATION/DEVELOPMENT SUMMARY
<TABLE>
<CAPTION>
ANTICIPATED
WEIGHTED
COSTS AVERAGE ESTIMATED
INCURRED ESTIMATED ANNUAL PERCENT CONSTRUCTION ESTIMATED
TO DATE TOTAL COST(1) RENTAL LEASED AT COMPLETION STABILIZATION
PROPERTY SQUARE FEET (IN THOUSANDS) (IN THOUSANDS) RATE(2) JUNE 30, 1999 DATE DATE
- -------- ----------- -------------- -------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Renovation:
1821 Dyer Boulevard 115,061 $ 9,422 $ 10,100 $18.15 73% Complete 3rd Qtr 1999
535 Brand Boulevard 109,187 19,816 20,750 23.34 62 Complete 4th Qtr 1999
5200 West Century 310,910 22,176 22,176 16.34 88 Complete 2nd Qtr 1999
Tourney Pointe 219,991 28,951 33,500 20.69 24 Complete 4th Qtr 1999
Westwood Center 313,000 51,503 83,000 34.80 0 4th Qtr 1999 2nd Qtr 2001
--------- -------- --------
Total Properties
under Renovation 1,068,149 131,868 169,526
Development:
Howard Hughes Center
Acquisition Costs -- 24,261(3) 24,261 N/A N/A N/A N/A
6060 Center Drive 240,724 13,153 56,000 33.00 0 2nd Qtr 2000 4th Qtr 2001
Master Plan Costs(4) -- 8,414 15,000 N/A N/A N/A N/A
--------- -------- --------
Total Development
Costs 240,724 45,828 95,261
--------- -------- --------
Total Properties under
Renovation
and Development 1,308,873 $177,696 $264,787
========= ======== ========
</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.
(3) We acquired the undeveloped commercial property portions of the Howard
Hughes Center for $28.5 million, subject to a $7.5 million sales
agreement for approximately 5.4 acres on which a third party will
develop a 250,000 square foot retail and entertainment complex. Amount
excludes approximately $4.3 million allocated to the 6060 Center Drive
building, currently under construction (Note 4).
(4) Master Plan costs include the costs of road and bridge construction and
other Howard Hughes Center infrastructure and master planning costs. The
Howard Hughes Center is fully entitled for the construction of 1.3
million square feet of office product, including 6060 Center Drive.
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.
22
<PAGE> 23
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
On May 18, 1999 we held our annual meeting of shareholders. The
following directors were elected to serve until the annual meeting of
shareholders in the year 2002: Richard S. Ziman, with 53,025,492 votes cast for
and 379,846 votes withheld/against his election; Victor J. Coleman, with
53,025,592 votes cast for and 379,746 votes withheld/against his election. A
total of 9,002,399 votes were not cast. Directors whose term continued after the
meeting are as follows: Carl D. Covitz, Larry S. Flax, Peter S. Gold, Steven C.
Good, and Kenneth B. Roath.
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 Bylaws 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.
10.42 Promissory Note, dated as of March 30, 1999, between
Massachusetts Mutual Life Insurance Company and Arden
Realty Finance V, L.L.C, and incorporated herein by
reference to our current report on Form 8-K filed on
April 20, 1999.
10.43 Deed of Trust and Security Agreement, dated as of March
30, 1999, with Arden Realty Finance V, L.L.C. as the
Trustor and Massachusetts Mutual Life Insurance Company
as the Beneficiary, and incorporated herein by reference
to our current report on Form 8-K filed on April 20,
1999.
10.44 Assignment of Leases and Rents, dated as of March 30,
1999, between Massachusetts Mutual Life Insurance and
Arden Realty Finance V, L.L.C, and incorporated herein
by reference to our current report on Form 8-K filed on
April 20, 1999.
10.45 Subordination of Management Agreement, dated as of March
30, 1999, between Massachusetts Mutual Life Insurance
Company and Arden Realty Finance V, L.L.C, and
incorporated herein by reference to our current report
on Form 8-K filed on April 20, 1999.
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.46 Environmental Indemnification and Hold Harmless
Agreement, dated as of March 30, 1999, between
Massachusetts Mutual Life Insurance Company and Arden
Realty Finance V, L.L.C, and incorporated herein by
reference to our current report on Form 8-K filed on
April 20, 1999.
27 Financial Data Schedule, as filed herein.
</TABLE>
(b) Reports on Form 8-K
A report on Form 8-K dated April 20, 1999 was filed which included
information under Items 5 and 7. Item 5 contained a description of our $115
million loan with Massachusetts Mutual Life Insurance Company. Item 7 contained
exhibits related to Item 5.
24
<PAGE> 25
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: August 11, 1999 By: /s/ Diana M. Laing
-------------------------------------
Diana M. Laing
Executive Vice President,
Chief Financial Officer and Secretary
Date: August 11, 1999 By: /s/ Richard S. Davis
-------------------------------------
Richard S. Davis
Senior Vice President and
Chief Accounting Officer
25
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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0
0
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