================================================================================
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
Commission file number 1-12193
ARDEN REALTY, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 95-4578533
(State or other jurisdiction of (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 November 9, 2000 there were 63,506,871 shares of the registrant's Common
Stock, $.01 par value, issued and outstanding.
================================================================================
<PAGE>
ARDEN REALTY, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and
<S> <C>>
December 31, 1999................................................................... 3
Consolidated Statements of Income for the three and nine months ended
September 30, 2000 and 1999 (Unaudited)............................................. 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 (Unaudited)............................................. 5
Notes to Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................... 24
PART II. OTHER INFORMATION............................................................................. 25
SIGNATURES.................................................................................... 26
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARDEN REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- --------------
(unaudited)
ASSETS
Investment in real estate:
<S> <C> <C>
Land.................................................................... $ 476,215 $ 467,157
Buildings and improvements.............................................. 2,002,572 1,833,052
Tenant improvements and leasing commissions............................. 225,299 153,161
----------- -----------
2,704,086 2,453,370
Less: accumulated depreciation......................................... (221,551) (157,608)
----------- -----------
2,482,535 2,295,762
Properties under development............................................ 104,253 183,349
----------- -----------
Net investment in real estate......................................... 2,586,788 2,479,111
Cash and cash equivalents.................................................. 1,499 7,056
Restricted cash............................................................ 21,533 18,513
Rent and other receivables................................................. 11,047 11,785
Mortgage notes receivable, net of discount................................. 13,786 13,847
Deferred rent.............................................................. 29,604 23,932
Prepaid financing costs, expenses and other assets, net of amortization.... 19,629 16,214
----------- -----------
Total assets.......................................................... $ 2,683,886 $ 2,570,458
=========== ===========
LIABILITIES
Mortgage loans payable..................................................... $ 617,031 $ 740,806
Unsecured lines of credit.................................................. 289,350 288,850
Unsecured senior notes, net of discount.................................... 249,150 --
Accounts payable and accrued expenses...................................... 34,638 34,482
Security deposits.......................................................... 20,140 16,073
Dividends payable.......................................................... 29,531 28,195
----------- -----------
Total liabilities..................................................... 1,239,840 1,108,406
----------- -----------
Minority interests......................................................... 86,270 86,294
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 20,000,000 shares authorized, none issued. -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
63,506,871 and 63,358,977 issued and outstanding, respectively........... 636 633
Additional paid-in capital................................................. 1,357,140 1,377,292
Notes receivable from officers for purchase of common stock................ -- (2,167)
----------- -----------
Total stockholders' equity............................................ 1,357,776 1,375,758
----------- -----------
Total liabilities and stockholders' equity............................ $ 2,683,886 $ 2,570,458
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue................................................. $ 99,031 $ 86,723 $ 281,565 $ 248,771
Property operating expenses............................. 29,516 26,744 81,584 74,698
--------- --------- --------- ---------
69,515 59,979 199,981 174,073
General and administrative expenses..................... 2,297 1,832 5,956 5,015
Interest expense........................................ 20,345 16,047 56,967 43,685
Depreciation and amortization........................... 22,528 17,810 63,952 51,198
Interest and other income............................... (948) (751) (2,573) (2,092)
--------- --------- --------- ---------
Income before minority interests........................ 25,293 25,041 75,679 76,267
Minority interests...................................... (1,921) (1,120) (5,618) (3,302)
--------- --------- --------- ---------
Net income.............................................. $ 23,372 $ 23,921 $ 70,061 $ 72,965
========= ========= ========= =========
Net income per common share:
Basic.............................................. $ 0.37 $ 0.38 $ 1.11 $ 1.16
========= ========= ========= =========
Diluted............................................ $ 0.37 $ 0.38 $ 1.10 $ 1.16
========= ========= ========= =========
Weighted average common shares outstanding:
Basic.............................................. 63,438 63,316 63,365 62,906
========== ========== ========== ==========
Diluted............................................ 63,798 63,417 63,547 63,022
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
2000 1999
-------------- --------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income....................................................................... $ 70,061 $ 72,965
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests............................................................. 5,618 3,302
Depreciation and amortization.................................................. 63,952 51,198
Amortization of loan costs..................................................... 2,687 2,036
Stock compensation expense..................................................... 212 --
Changes in operating assets and liabilities:
Rent and other receivables.................................................. 1,046 (1,539)
Deferred rent............................................................... (5,672) (5,557)
Prepaid financing costs, expenses and other assets.......................... (7,515) (8,640)
Accounts payable and accrued expenses....................................... 8,581 4,598
Security deposits........................................................... 4,067 1,427
-------- --------
Net cash provided by operating activities........................................ 143,037 119,790
-------- --------
INVESTING ACTIVITIES:
Acquisitions and improvements to investment in real estate....................... (178,728) (212,367)
-------- --------
FINANCING ACTIVITIES:
Proceeds from mortgage loans..................................................... 43,336 301,802
Repayments of mortgage loans..................................................... (167,111) (112,591)
Proceeds from unsecured lines of credit.......................................... 201,500 159,461
Repayments of unsecured lines of credit.......................................... (201,000) (212,061)
Proceeds from issuance of Preferred Operating Partnership Units, net of offering -- 49,000
costs...........................................................................
Proceeds from unsecured senior notes, net of discount............................ 249,150 --
Distributions to preferred operating partnership unit holders.................... (3,234) --
Increase in restricted cash...................................................... (3,020) (8,087)
Distributions to and contributions from minority interests, net.................. (2,408) (3,668)
Dividends paid................................................................... (87,079) (82,206)
-------- --------
Net cash provided by financing activities........................................ 30,134 91,650
-------- --------
Net decrease in cash and cash equivalents........................................ (5,557) (927)
Cash and cash equivalents at beginning of period................................. 7,056 4,578
-------- --------
Cash and cash equivalents at end of period....................................... $ 1,499 $ 3,651
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest, net of amount capitalized............ $ 58,365 $ 47,842
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
ARDEN REALTY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(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, or the "Operating Partnership," and our other subsidiaries,
we own, manage, lease, develop, renovate and acquire commercial office
properties located in Southern California. As of September 30, 2000, our
portfolio was comprised of 143 primarily suburban office properties or the
"Properties," with approximately 18.7 million net rentable square feet and two
properties with approximately 442,000 net rentable square feet under
development.
The accompanying consolidated condensed 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.
The minority interests at September 30, 2000 and December 31, 1999
consisted of limited partnership interests in the Operating Partnership of
approximately 3.3%, exclusive of ownership interests of our preferred Operating
Partnership unit holders.
2. INTERIM FINANCIAL DATA
The accompanying consolidated condensed financial statements should be
read in conjunction with our 1999 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission. The accompanying financial information
reflects all adjustments, which are, in our opinion, of a normal recurring
nature and necessary for a fair presentation of our financial position, results
of operations and cash flows for the interim periods. Interim results of
operations are not necessarily indicative of the results to be expected for the
full year.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
3. NEW ACCOUNTING STANDARDS
In June 1998, June 1999 and June 2000, respectively, the Financial
Accounting Standards Board issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of Statement No. 133," and Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of Statement No. 133."
These statements outline the accounting treatment for all derivative activity.
We are in the process of completing our analysis of the impact of Statement No.
133 and do not expect adoption to have a significant effect on our consolidated
results of operations or financial position. We are required to and will adopt
Statement No. 133, as amended, on January 1, 2001.
As of September 30, 2000 we have no outstanding interest rate cap or
swaps or other types of derivative instruments.
-6-
<PAGE>
4. MORTGAGE LOANS PAYABLE, UNSECURED LINES OF CREDIT AND UNSECURED SENIOR
NOTES
A summary of our outstanding indebtedness as of September 30, 2000 and
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Stated Annual
September 30, Interest Rate at Number of Maturity
2000 December 31, September 30, 2000 Fixed/Floating Properties Month/
Type of Debt (unaudited) 1999 (unaudited) Rate Securing Loan Year
------------ ------------ ------------- ------------------ -------------- ------------- -------
(in thousands)
MORTGAGE LOANS PAYABLE:
Fixed Rate
<S> <C> <C> <C> <C> <C> <C>
Mortgage Financing I(1).... $ 175,000 $ 175,000 7.52% Fixed 18 6/04
Mortgage Financing III(2).. 136,100 136,100 6.74% Fixed 22 4/08
Mortgage Financing IV(2)... 111,200 111,200 6.61% Fixed 12 4/08
Mortgage Financing V(3).... 112,686 114,016 6.94% Fixed 12 4/09
Mortgage Financing VI(3)... 22,286 22,426 7.54% Fixed 3 4/09
Activity Business Center(3) 7,915 8,003 8.85% Fixed 1 5/06
145 South Fairfax(3)....... 4,029 4,050 8.93% Fixed 1 1/27
Marin Corporate Center(3).. 3,088 3,168 9.00% Fixed 1 7/15
Conejo Business Center(3).. 3,034 3,114 8.75% Fixed (Note 4) 7/15
Conejo Business Center(3).. 1,320 1,358 7.88% Fixed (Note 4) 7/15
Westwood Center............ -- 14,859 -- -- -- --
299 North Euclid........... -- 5,000 -- -- -- --
----------- -----------
576,658 598,294
Floating Rate
Construction Loan(6)....... 40,373 22,037 8.63% LIBOR + 2.00% (Note 5) 12/00
Lehman Prepayable Term Loan
II and III.............. -- 120,475 -- -- -- --
----------- -----------
617,031 740,806
UNSECURED LINES OF CREDIT:
Floating Rate
Wells Fargo(1)............. 214,350 280,850 7.78% LIBOR + 1.15% (Note 7) -- 4/03
Lehman Brothers(1),(8)..... 75,000 -- 7.92% LIBOR + 1.30% -- 7/02
City National Bank(1)...... -- 8,000 -- Prime Rate - 0.875% -- 8/01
----------- -----------
289,350 288,850
UNSECURED SENIOR NOTES:
Fixed Rate
2005 Notes(9).............. 199,539 -- 8.88% Fixed -- 3/05
2010 Notes(9).............. 49,611 -- 9.15% Fixed -- 3/10
----------- -----------
249,150 --
----------- -----------
Total Debt.............. $ 1,155,531 $ 1,029,656
=========== ===========
</TABLE>
----------
(1) Requires monthly payments of interest only, with outstanding principal
balance due upon maturity.
(2) Requires monthly payments of interest only for five years and monthly
payments of principal and interest thereafter.
(3) Requires monthly payments of principal and interest.
(4) Both mortgage loans are secured by the Conejo Business Center property.
(5) This loan is secured by certain property and construction improvements
relating to the 6060 Center Drive office building in the Howard Hughes
Center.
(6) All interest and principal due upon maturity. This loan matures in December
2000 with two one-year extension options.
(7) This line of credit also has an annual 25 basis point facility fee on the
entire $275 million commitment amount.
(8) This line of credit has a one-year extension option.
(9) Requires semi-annual interest payments only, with principal balance due
upon maturity.
On January 25, 2000, we expanded one of our two prepayable term loans
with an affiliate of Lehman Brothers totaling $120.5 million by $25.0 million,
resulting in a combined outstanding balance of $145.5 million for both loans. As
discussed below, these loans were repaid in full in March 2000 with proceeds
from the issuance of senior unsecured notes.
-7-
<PAGE>
On March 17, 2000, the Operating Partnership issued $250 million of
senior unsecured notes in two tranches. One tranche was for $200 million at an
interest rate of 8.88% due in March 2005 and the other tranche was for $50
million at an interest rate of 9.15% due in March 2010. These notes are the
Operating Partnership's senior unsecured obligations and pay interest
semi-annually on March 1 and September 1 of each year. Net proceeds from this
offering were used to repay two prepayable term loans to an affiliate of Lehman
Brothers, described above, totaling $145.5 million, a $5.0 million mortgage loan
and approximately $96.1 million under our unsecured lines of credit. These
senior unsecured notes were issued in a private placement and resold in reliance
upon an exemption from registration provided by Rule 144A under the Securities
Act. As part of issuing these notes, the Operating Partnership filed a
registration statement with the Securities and Exchange Commission enabling the
holders of the notes to exchange the privately placed notes for publicly traded
notes. This registration statement became effective on May 10, 2000 and by June
5, 2000 all holders of the privately placed notes had exchanged such notes for
the Operating Partnership's registered notes.
On May 3, 2000, we extended our unsecured line of credit with a group
of banks led by Wells Fargo, or the Lenders. The extended line of credit
provides for borrowings up to $275 million with an option to increase the amount
to $325 million and bears interest at a rate ranging between LIBOR plus 1.15%
and LIBOR plus 1.80% (including an annual facility fee ranging from .20% to .40%
based on the aggregate amount of the facility) depending on our unsecured debt
rating. In addition, as long as we maintain an unsecured debt rating of
BBB-/Baa3 or better, the agreement contains a competitive bid option, whereby
the Lenders on this line of credit may bid on the interest rate to be charged
for up to $137.5 million of the unsecured line of credit. Under certain
circumstances, we also have the option to convert the interest rate on this line
of credit to the prime rate plus 0.5%. This line of credit matures in April
2003.
In July 2000, we closed on a $75 million unsecured line of credit with
Lehman Brothers. Borrowings on this line of credit bear interest at a rate
ranging between LIBOR plus 1.05% and LIBOR plus 1.70%, depending on our
unsecured debt rating. We also have the option to convert the interest rate to
the prime rate plus 0.5%. This line of credit matures in July 2002 with an
option to extend the maturity date for one year. Proceeds from this line of
credit were used to paydown a portion of our Wells Fargo unsecured line of
credit.
In September 2000, we repaid in full a $14.7 million mortgage loan
secured by our Westwood Center building.
5. STOCKHOLDERS' EQUITY
On September 15, 2000, we declared a third quarter dividend of $0.465
per share to shareholders of record on September 30, 2000, which equates to
$1.86 per share on an annualized basis.
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 Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
(unaudited)
Revenue from Rental Operations:
<S> <C> <C> <C> <C>
Rental.......................................... $ 84,210 $ 74,193 $ 241,726 $ 216,034
Tenant reimbursements........................... 4,403 4,554 12,213 10,890
Parking, net of expenses ....................... 4,812 3,826 13,199 10,583
Other rental operations......................... 5,606 4,150 14,427 11,264
--------- --------- ---------- ----------
99,031 86,723 281,565 248,771
--------- --------- ---------- ----------
Property Operating Expenses:
Repairs and maintenance......................... 8,668 8,255 25,965 24,180
Utilities....................................... 9,570 8,608 22,206 21,487
Real estate taxes............................... 6,857 5,765 19,449 17,181
Insurance....................................... 1,056 992 3,140 2,962
Ground rent..................................... 222 199 1,016 693
Property administrative......................... 3,143 2,925 9,808 8,195
--------- --------- ---------- ----------
29,516 26,744 81,584 74,698
--------- --------- ---------- ----------
$ 69,515 $ 59,979 $ 199,981 $ 174,073
========= ========= ========== ==========
</TABLE>
-8-
<PAGE>
7. RELATED PARTY TRANSACTIONS
Ms. Diana Laing resigned as Executive Vice President and Chief
Financial Officer effective July 1, 2000 to become Senior Executive and Chief
Financial Officer of a technology company. At the time of her resignation, Ms.
Laing surrendered stock options valued at approximately $59,000 as well as
42,553 shares of our common stock underlying a promissory note in the amount of
$1.0 million payable to us. The value of the options and shares surrendered by
Ms. Laing equaled the unpaid principal and interest of her promissory note.
On July 28, 2000 Mr. Andrew Sobel returned to Arden Realty as our
Executive Vice President. Mr. Sobel will focus on our corporate strategy, and
oversee our capital allocation and capital market strategies as well as our
technology initiatives.
8. SUBSEQUENT EVENTS
On October 13, 2000, we sold Evergreen Plaza, a 76,000 square foot
retail property located in Thousand Oaks, California, for approximately $11.7
million and recorded a gain of approximately $2.2 million. Proceeds from this
sale were used to repay a portion of our unsecured lines of credit.
-9-
<PAGE>
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 1999 ANNUAL REPORT ON FORM 10-K.
We are a self-administered and self-managed real estate investment
trust, or REIT, that owns, manages, leases, develops, renovates and acquires
commercial properties located in Southern California. We are a full-service real
estate organization managed by 11 senior executive officers who have an average
of over 15 years of experience in the real estate industry. We perform all
property management, accounting, finance and acquisition activities and a
majority of our leasing transactions with our own staff of approximately 300
employees.
As of September 30, 2000, we are Southern California's largest publicly
traded office landlord as measured by total net rentable square feet owned. As
of that date, our portfolio consisted of 143 primarily suburban office
properties containing approximately 18.7 million net rentable square feet and
two properties with approximately 442,000 net rentable square feet under
development. As of September 30, 2000, our properties were approximately 95.9%
leased, excluding an existing property under renovation.
Our primary business strategy is to actively manage our portfolio to
achieve gains in occupancy and rental rates, control operating expenses and to
maximize income from ancillary operations and services. When market conditions
permit, we may also develop or acquire new properties that add value and fit
strategically into our portfolio. We may also sell existing mature or slow
growth properties and redeploy the proceeds into investments that we believe
will generate higher yields.
-10-
<PAGE>
RESULTS OF OPERATIONS
Our financial position and operating results are primarily comprised of
our portfolio of commercial properties and income derived from those properties.
Therefore, the comparability of financial data from period to period will be
affected by the timing of significant property renovations, development and
acquisitions.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT NUMBER OF PROPERTIES AND
PERCENTAGES):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------- Dollar Percent
2000 1999 Change Change
---------- ---------- -------- --------
(unaudited)
REVENUE
Revenue from rental operations:
<S> <C> <C> <C> <C>
Rental..................................... $ 84,210 $ 74,193 $ 10,017 14%
Tenant reimbursements...................... 4,403 4,554 (151) (3%)
Parking, net of expenses................... 4,812 3,826 986 26%
Other rental operations.................... 5,606 4,150 1,456 35%
--------- ----------- ---------- -----
99,031 86,723 12,308 14%
Interest and other income..................... 948 751 197 26%
--------- ----------- ---------- -----
Total revenue.............................. $ 99,979 $ 87,474 $ 12,505 14%
========= =========== ========== =====
EXPENSES
Property operating expenses:
Repairs and maintenance.................... $ 8,668 $ 8,255 $ 413 5%
Utilities.................................. 9,570 8,608 962 11%
Real estate taxes.......................... 6,857 5,765 1,092 19%
Insurance.................................. 1,056 992 64 6%
Ground rent................................ 222 199 23 12%
Property administrative.................... 3,143 2,925 218 7%
--------- ----------- ---------- -----
Total property operating expenses....... 29,516 26,744 2,772 10%
General and administrative................... 2,297 1,832 465 25%
Interest..................................... 20,345 16,047 4,298 27%
Depreciation and amortization................ 22,528 17,810 4,718 26%
--------- ----------- ---------- -----
Total expenses............................. $ 74,686 $ 62,433 $ 12,253 20%
========= =========== ========== =====
OTHER DATA:
NUMBER OF PROPERTIES
Acquired during period....................... -- 1
Completed and placed in service during period 1 --
Owned at end of period....................... 143 142
NET RENTABLE SQUARE FEET:
Acquired during period....................... -- 101
Completed and placed in service during period 242 --
Owned at end of period....................... 18,734 18,492
</TABLE>
Variances for revenue from rental operations and property operating
expenses are discussed below.
Interest and other income increased by approximately $197,000 or 26%
for the three months ended September 30, 2000, as compared to the same period in
1999, primarily due to additional management fees for associations we manage and
from higher interest income earned in 2000 on higher restricted cash balances
due to increases in impounds for real estate taxes.
General and administrative expenses as a percentage of total revenues
were approximately 2.3% for the three months ended September 30, 2000, as
compared to approximately 2.1% for the same period in 1999. The $465,000
increase in general and administrative expenses was primarily related to an
approximate $210,000 increase in corporate compensation expense, additional
salaries of approximately $40,000 related to new technology initiatives,
approximately $65,000 in salaries reallocated from property administrative
expense based on changes in job responsibilities for certain employees and
approximately $150,000 in non-recurring employee separation costs.
-11-
<PAGE>
Interest expense increased approximately $4.3 million or 27% during the
three months ended September 30, 2000, as compared to the same period in 1999.
Interest incurred increased due to both higher outstanding balances, primarily
to fund a September 1999 property acquisition, tenant improvement and leasing
commission costs and our development and renovation projects, and higher average
interest rates in 2000.
Depreciation and amortization expense increased by approximately $4.7
or 26% million during the three months ended September 30, 2000, primarily due
to depreciation related to newly developed and renovated properties placed in
service in 2000 and for capital expenditures, tenant improvements and leasing
commissions placed in service after September 30, 1999.
VARIANCES FOR REVENUE FROM RENTAL OPERATIONS AND PROPERTY OPERATING EXPENSES
The increase in revenue from rental operations and property operating
expenses for the three months ended September 30, 2000 as compared to the same
period in 1999 was partially due to a property we acquired in September 1999, a
development property placed in service in the third quarter of 2000 and four
properties under renovation for all or a portion of the periods presented.
Operating results for properties under renovation may significantly vary from
period to period depending on the status of the renovation and occupancy levels.
Following is a summary of the increase in revenue from rental
operations and property operating expenses that relates to the six properties
that were either acquired or placed in service after July 1, 1999 or were under
renovation for all or a potion of the period beginning after July 1, 1999 and
for the 137 non-renovation properties we owned for all of the three month
periods ended September 30, 2000 and 1999 (unaudited and in thousands, except
for number of properties).
<TABLE>
<CAPTION>
Properties Acquired, Properties Owned
Placed in Service or for all of the
Under Renovation Three Months Ended
Total Variance after July 1, 1999 September 30, 2000 and 1999 (1)
-------------- --------------------- -------------------------------
REVENUE FROM RENTAL OPERATIONS:
<S> <C> <C> <C>
Rental....................................... $ 10,017 $ 3,697 $ 6,320
Tenant reimbursements........................ (151) 95 (246)
Parking, net of operations................... 986 209 777
Other rental operations...................... 1,456 1,453 3
--------- --------- ---------
$ 12,308 $ 5,454 $ 6,854
========= ========= =========
PROPERTY OPERATING EXPENSES:
Repairs and maintenance...................... $ 413 $ 310 $ 103
Utilities.................................... 962 298 664
Real estate taxes............................ 1,092 383 709
Insurance.................................... 64 35 29
Ground rent.................................. 23 -- 23
Property administrative...................... 218 108 110
--------- --------- ---------
$ 2,772 $ 1,134 $ 1,638
========= ========= =========
OTHER DATA:
Number of properties......................... 6 137
Net rentable square feet..................... 1,100 17,634
</TABLE>
----------
(1) See the Same Properties analysis below.
-12-
<PAGE>
SAME PROPERTIES
Following is a comparison of property operating data computed under
generally accepted accounting principles, or "GAAP Basis," and excluding the
straight-line rent adjustment, or "Cash Basis," for the 137 non-renovation
properties we owned for the entire three month periods ended September 30, 2000
and 1999 (in thousands, except number of properties and percentages):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------- Dollar Percent
2000 1999 Change Change
------------- ------------- --------- ---------
(unaudited)
GAAP Basis:
<S> <C> <C> <C> <C>
Revenue from rental operations................. $ 92,694 $ 85,840 $ 6,854 8.0%
Property operating expenses.................... 28,074 26,436 1,638 6.2%
--------- --------- -------- ---------
Net..................................... $ 64,620 $ 59,404 $ 5,216 8.8%
========= ========= ======== =========
CASH BASIS (1):
Revenue from rental operations................. $ 90,228 $ 83,994 $ 6,234 7.4%
Property operating expenses.................... 28,074 26,436 1,638 6.2%
--------- --------- -------- ---------
Net..................................... $ 62,154 $ 57,558 $ 4,596 8.0%
========= ========= ======== =========
Number of non-renovation properties............ 137 137
Average occupancy.............................. 94.9% 91.8%
Net rentable square feet....................... 17,634 17,634
</TABLE>
----------
(1) Excludes straight-line rent adjustments.
Revenue from rental operations for these properties, computed on a GAAP
basis, increased by approximately $6.8 million, or 8.0%, during the three months
ended September 30, 2000, compared to the same period in 1999. Approximately
$6.3 million of this difference was related to rental revenue, of which $5.7
million was related to scheduled rents and $600,000 was related to increases in
straight-line rent. Approximately 55% of the increase in scheduled rents was due
to higher average occupancy in 2000 and the remaining 45% was related to rental
rate increases. The increase in straight-line rent was primarily due to new
leases and extensions signed with higher rental rate escalations than in 1999.
These increases were partially offset by an approximate $250,000 decrease in
tenant reimbursements. This $250,000 decrease was the result of an approximate
$310,000 increase in tenant reimbursements related to higher utility expenses in
San Diego County offset by an approximate $560,000 decrease in other tenant
reimbursements, primarily due to the timing of prior year reimbursement
reconciliations. In 1999, the majority of the final 1998 reimbursement
adjustments were recorded in the third quarter, whereas the majority of the
final 1999 reimbursement adjustments were recorded in the second quarter of
2000. Parking income also increased by approximately $750,000 in 2000 primarily
due to increases in occupancy and rates.
Excluding only the straight-line rent adjustment for these properties,
revenue from rental operations for the three months ended September 30, 2000,
computed on a Cash Basis, increased by approximately $6.2 million or 7.4%.
Property operating expenses for these properties increased by
approximately $1.6 million, or 6.2%, during the three months ended September 30,
2000, compared to the same period in 1999, primarily due to higher utility and
real estate tax expenses in 2000. The approximate $664,000 increase in utility
expenses was primarily due to an approximate $350,000 increase related to
utility rate increases in San Diego County (most of which was recovered, as
discussed above), and higher utility usage related to the increase in average
occupancy for these properties in 2000. Real estate taxes increased by
approximately $709,000 in 2000 due to normal annual increases and final
assessments on certain properties. Property administrative expenses were also
approximately $110,000 higher in 2000, primarily related to additional resources
and costs incurred in connection with efforts to increase portfolio-wide
occupancy levels.
-13-
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT NUMBER OF PROPERTIES AND
PERCENTAGES):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------- Dollar Percent
2000 1999 Change Change
---------- ---------- ---------- ----------
(unaudited)
REVENUE
Revenue from rental operations:
<S> <C> <C> <C> <C>
Rental.......................................... $ 241,726 $ 216,034 $ 25,692 12%
Tenant reimbursements........................... 12,213 10,890 1,323 12%
Parking, net of expenses........................ 13,199 10,583 2,616 25%
Other rental operations......................... 14,427 11,264 3,163 28%
--------- --------- -------- ------
281,565 248,771 32,794 13%
Interest and other income......................... 2,573 2,092 481 23%
--------- --------- -------- ------
Total revenue................................... $ 284,138 $ 250,863 $ 33,275 13%
========= ========= ======== ======
EXPENSES
Property operating expenses:
Repairs and maintenance......................... $ 25,965 $ 24,180 $ 1,785 7%
1,785
Utilities....................................... 22,206 21,487 719 3%
Real estate taxes............................... 19,449 17,181 2,268 13%
Insurance....................................... 3,140 2,962 178 6%
Ground rent..................................... 1,016 693 323 47%
Property administrative......................... 9,808 8,195 1,613 20%
--------- --------- -------- ------
Total property operating expenses............ 81,584 74,698 6,886 9%
General and administrative........................ 5,956 5,015 941 19%
Interest.......................................... 56,967 43,685 13,282 30%
Depreciation and amortization..................... 63,952 51,198 12,754 25%
--------- --------- -------- ------
Total expenses.................................. $ 208,459 $ 174,596 $ 33,863 19%
========= ========= ======== ======
OTHER DATA:
NUMBER OF PROPERTIES
Acquired during period............................ -- 4
Completed and placed in service during period..... 1 --
Owned at end of period............................ 143 142
NET RENTABLE SQUARE FEET:
Acquired during period............................ -- 524
Completed and placed in service during period..... 242 --
Owned at end of period............................ 18,734 18,492
</TABLE>
Variances for revenue from rental operations and property operating
expenses are discussed below.
Interest and other income increased by approximately $481,000 or 23%
during the nine months ended September 30, 2000, as compared to the same period
in 1999, primarily due to higher interest income earned in 2000 on higher
restricted cash balances required by certain mortgage loans entered into after
January 1, 1999 as well as additional management fees for associations we
manage.
General and administrative expenses as a percentage of total revenues
were approximately 2.1% for the nine months ended September 30, 2000, as
compared to approximately 2.0% for the same period in 1999. The $941,000
increase in general and administrative expenses was primarily related to an
approximate $686,000 increase in corporate compensation costs, additional
salaries of approximately $40,000 related to new technology initiatives,
approximately $65,000 in salaries reallocated from property administrative
expense based on changes in job responsibilities for certain employees and
approximately $150,000 in non-recurring employee separation costs.
Interest expense increased approximately $13.3 million or 30% during
the nine months ended September 30, 2000, as compared to the same period in
1999. Interest incurred increased due to both higher outstanding balances,
primarily to fund four property acquisitions in 1999, tenant improvement and
leasing commission costs and for our development and renovation projects, and
higher average interest rates in 2000.
-14-
<PAGE>
Depreciation and amortization expense increased by approximately $12.8
million or 25% during the nine months ended September 30, 2000, primarily due to
depreciation related to properties acquired in 1999, newly developed and
renovated properties placed in service in 2000, and for capital expenditures,
tenant improvements and leasing commissions placed in service after September
30, 1999.
VARIANCES FOR REVENUE FROM RENTAL OPERATIONS AND PROPERTY OPERATING EXPENSES
The increase in revenue from rental operations and property operating
expenses for the nine months ended September 30, 2000 as compared to the same
period in 1999 was partially due to the four properties we acquired during 1999,
a development property placed in service in the third quarter of 2000 and the
five properties under renovation for all or a portion of the periods presented.
Operating results for properties under renovation may significantly vary from
period to period depending on the status of the renovation and occupancy levels.
Following is a summary of the increase in revenue from rental
operations and property operating expenses that relates to the ten properties
that were either acquired or placed in service after January 1, 1999 or were
under renovation for all or a portion of the period beginning after January 1,
1999 and for the 133 non-renovation properties we owned for all of the nine
month periods ended September 30, 2000 and 1999 (in thousands, except number of
properties).
<TABLE>
<CAPTION>
Properties Acquired, Properties Owned
Placed in Service or for all of the
Under Renovation Nine Months Ended
Total Variance after January 1, 1999 September 30, 2000 and 1999 (1)
-------------- ---------------------- -------------------------------
REVENUE FROM RENTAL OPERATIONS:
<S> <C> <C> <C>
Rental....................................... $ 25,692 $ 12,381 $ 13,311
Tenant reimbursements........................ 1,323 415 908
Parking, net of operations................... 2,616 982 1,634
Other rental operations...................... 3,163 2,431 732
-------- --------- ---------
$ 32,794 $ 16,209 $ 16,585
======== ========= =========
PROPERTY OPERATING EXPENSES:
Repairs and maintenance...................... $ 1,785 $ 1,525 $ 260
Utilities.................................... 719 1,233 (514)
Real estate taxes............................ 2,268 1,005 1,263
Insurance.................................... 178 146 32
Ground rent.................................. 323 - 323
Property administrative...................... 1,613 378 1,235
-------- --------- ---------
$ 6,886 $ 4,287 $ 2,599
======== ========= =========
OTHER DATA:
Number of properties......................... 10 133
Net rentable square feet..................... 1,834 16,900
</TABLE>
----------
(1) See the Same Properties analysis below.
-15-
<PAGE>
SAME PROPERTIES
Following is a comparison of property operating data computed under the
GAAP Basis and Cash Basis for the 133 non-renovation properties we owned for the
entire nine month periods ended September 30, 2000 and 1999 (in thousands,
except number of properties and percentages):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------- Dollar Percent
2000 1999 Change Change
------------- ------------- ---------- ---------
(unaudited)
GAAP BASIS:
<S> <C> <C> <C> <C>
Revenue from rental operations................. $ 257,252 $ 240,667 $ 16,585 6.9%
Property operating expenses.................... 74,911 72,312 2,599 3.6%
---------- ---------- --------- ---------
Net..................................... $ 182,341 $ 168,355 $ 13,986 8.3%
========== ========== ========= =========
CASH BASIS (1):
Revenue from rental operations................. $ 251,778 $ 235,751 $ 16,027 6.8%
Property operating expenses.................... 74,911 72,312 2,599 3.6%
---------- ---------- --------- ---------
Net..................................... $ 176,867 $ 163,439 $ 13,428 8.2%
---------- ========== ========= =========
Number of non-renovation properties............ 133 133
Average occupancy.............................. 94.8% 92.1%
Net rentable square feet....................... 16,900 16,900
</TABLE>
----------
(1) Excludes straight-line rent adjustments.
Revenue from rental operations for these properties, computed on a GAAP
basis, increased by approximately $16.6 million, or 6.9%, during the nine months
ended September 30, 2000, compared to the same period in 1999. Approximately
$13.3 million of this difference was related to rental revenue, of which $12.7
million was related to scheduled rents and $600,000 was related to increases in
straight-line rent. Approximately 60% of the increase in scheduled rents was due
to higher average occupancy in 2000 and the remaining 40% was related to rental
rate increases. The increase in straight-line rent was primarily due to new
leases and extensions signed with higher rental rate escalations than in 1999.
Revenue from rental operations was also higher due to an approximate $900,000
increase in tenant reimbursements, a $1.6 million increase in parking income and
an approximate $700,000 increase in other rental operations. Tenant
reimbursements and parking income increased primarily due the approximate 2.7%
increase in occupancy in 2000, while other rental operations increased primarily
due to additional signage, satellite and after-hour utility billings.
Excluding only the straight-line rent adjustment for these properties,
revenue from rental operations for the nine months ended September 30, 2000,
computed on a Cash Basis, increased by approximately $16.0 million or 6.8%.
Property operating expenses for these properties increased by
approximately $2.6 million, or 3.6%, during the nine months ended September 30,
2000, compared to the same period in 1999, primarily due to higher real estate
tax, contingent ground rent, and property administrative expenses in 2000, these
increases were partially offset by lower utilities expense in 2000. Real estate
taxes increased by approximately $1.3 million in 2000 due to normal annual
increases and final assessments on certain properties. Ground rent expense
increased by $323,000 due to higher operating income from one of our properties
with a participating ground lease. Due to our continued focus on raising our
portfolio-wide occupancy, property administrative expenses were also
approximately $1.2 million higher in 2000. These increases in property operating
expenses in 2000 were partially offset by a $514,000 decrease in utility expense
as a result of savings achieved from energy enhancing capital improvements
completed during 1999.
-16-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities increased by approximately $23.2
million to $143.0 million for the nine months ended September 30, 2000, as
compared to $119.8 million for the same period in 1999, primarily due to
improved operating results, net of depreciation and amortization, from our
property portfolio.
Cash used in investing activities decreased by approximately $33.7
million, to $178.7 million for the nine months ended September 30, 2000 compared
to $212.4 million for the same period in 1999. This decrease was primarily due
to $89.8 million used in 1999 to acquire four properties which was partially
offset by an increase of approximately $56.1 million used in 2000 for capital
expenditures related to our increased development and renovation activity and
higher costs associated with tenant improvement build-outs resulting from
occupancy gains achieved in 2000.
Cash provided by financing activities decreased by approximately $61.5
million to an inflow of $30.1 million for the nine months ended September 30,
2000, as compared to an inflow of $91.6 million for the same period in 1999.
Cash provided by financing activities for the nine months ended September 30,
2000 consisted primarily of net proceeds from the Operating Partnership's
offering of unsecured senior notes partially offset by repayments of mortgage
loans, paydowns of our unsecured lines of credit and distributions to
stockholders and minority interests.
.
AVAILABLE BORROWINGS, CASH BALANCE AND CAPITAL RESOURCES
We have an unsecured line of credit with a total commitment of $10
million from City National Bank. This line of credit accrues interest at the
City National Bank Prime Rate less 0.875% and is scheduled to mature on August
1, 2001. Proceeds from this line of credit are used, among other things, to
provide funds for tenant improvements and capital expenditures and provide for
working capital and other corporate purposes. As of September 30, 2000, there
was no outstanding balance on this line of credit and $10 million was available
for additional borrowings.
On March 17, 2000, the Operating Partnership issued $250 million of
senior unsecured notes in two tranches. One tranche was for $200 million at an
interest rate of 8.88% due in March 2005 and the other tranche was for $50
million at an interest rate of 9.15% due in March 2010. These notes are the
Operating Partnership's senior unsecured obligations and pay interest
semi-annually on March 1, and September 1, of each year. Net proceeds from this
offering were used to repay two prepayable term loans to an affiliate of Lehman
Brothers totaling $145.5 million, a $5.0 million mortgage loan and approximately
$96.1 million under our unsecured lines of credit.
On May 3, 2000, we extended our unsecured line of credit with a group
of banks led by Wells Fargo, or the Lenders. The extended line of credit
provides for borrowings up to $275 million with an option to increase the amount
to $325 million and bears interest at a rate ranging between LIBOR plus 1.15%
and LIBOR plus 1.80% (including an annual facility fee ranging from .20% to .40%
based on the aggregate amount of the facility) depending on our unsecured debt
rating. In addition, as long as we maintain an unsecured debt rating of
BBB-/Baa3 or better, the agreement contains a competitive bid option, whereby
the Lenders on this line of credit may bid on the interest rate to be charged
for up to $137.5 million of the unsecured line of credit. Under certain
circumstances, we also have the option to convert the interest rate on this line
of credit to the prime rate plus 0.5%. This line of credit matures in April
2003. As of September 30, 2000, there was approximately $214.4 million
outstanding on this line of credit and approximately $60.6 million was available
for additional borrowings.
In July 2000, we closed on a $75 million unsecured line of credit with
Lehman Brothers. Borrowings on this line of credit bear interest at a rate
ranging between LIBOR plus 1.05% and LIBOR plus 1.70%, depending on our
unsecured debt rating. We also have the option to convert the interest rate to
the prime rate plus 0.5%. This line of credit matures in July 2002 with an
option to extend the maturity date for one year. Proceeds from this line of
credit were used to paydown a portion of our Wells Fargo unsecured line of
credit.
-17-
<PAGE>
Following is a summary of scheduled principal payments for our total
debt outstanding as of September 30, 2000 (in thousands):
Year Amount
---- ------
2000....................................................... $ 41,014(1)
2001....................................................... 2,501
2002....................................................... 77,702(2)
2003....................................................... 219,888(3)
2004....................................................... 182,302
2005....................................................... 207,918
2006....................................................... 15,303
2007....................................................... 8,895
2008....................................................... 230,388
2009....................................................... 112,063
Thereafter................................................. 57,557
-----------
Total.................................................... $ 1,155,531
===========
----------
(1) Consists primarily of $40.4 million outstanding on our 6060 Center Drive
construction loan which has two one-year extension options.
(2) Consists primarily of $75.0 million outstanding on our Lehman Brothers line
of credit which has a one-year extension option.
(3) Consists primarily of $214.4 million outstanding on our Wells Fargo line of
credit.
Following is certain other information related to our indebtedness as of
September 30, 2000 (in thousands, except percentage data):
<TABLE>
<CAPTION>
UNSECURED AND SECURED DEBT:
--------------------------
Weighted
Average
Balance Percent Interest Rate(1)
------------ ------------ ----------------
<S> <C> <C> <C>
Unsecured Debt...................... $ 538,500 47% 8.73%
Secured Debt........................ 617,031 53% 7.50%
----------- ----------- -----------
Total Debt.......................... $ 1,155,531 100% 8.07%
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FLOATING AND FIXED RATE DEBT:
----------------------------
Weighted
Average
Balance Percent Interest Rate(1)
------------ ------------ ----------------
<S> <C> <C> <C>
Floating Rate Debt.................. $ 329,723 29% 8.45%
Fixed Rate Debt..................... 825,808 71% 7.93%
----------- ----------- -----------
Total Debt.......................... $ 1,155,531 100% 8.07%
=========== =========== ===========
</TABLE>
----------
(1) Includes amortization of prepaid financing costs.
Total interest incurred and the amount capitalized was as follows
(unaudited and in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended September 30, For the Nine Months Ended September 30,
---------------------------------------- ---------------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total interest incurred........... $ 23,476 $ 18,372 $ 66,660 $ 50,718
Amount capitalized................ (3,131) (2,325) (9,693) (7,033)
-------- --------- --------- ---------
Amount expensed................... $ 20,345 $ 16,047 $ 56,967 $ 43,685
======== ========= ========= =========
</TABLE>
-18-
<PAGE>
As of September 30, 2000, we had $23.0 million in cash and cash
equivalents, including $13.8 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 $7.7 million in cash impound accounts
for real estate taxes and insurance as required by several of our mortgage loans
payable.
As of September 30, 2000, we had $70.6 million available under our
lines of credit.
We have identified certain mature, slow growth assets that we may
dispose of throughout the next several years. Due to future market conditions
beyond our control, it is difficult to predict the actual period and amount of
these asset sales. At the time any such sales proceeds are realized, we expect
to redeploy such amounts into what we believe will be higher yielding
investments, which may include development of office buildings, acquisitions or
repurchase of our common stock. In addition, we expect to use a portion of any
proceeds to pay down portions of our debt in order to maintain our conservative
leverage and coverage ratios.
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 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 principal repayments, development costs, property acquisitions, if
any, and other non-recurring capital expenditures through the refinancing of
existing indebtedness and/or the issuance of long-term debt and equity
securities.
-19-
<PAGE>
FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
The following table reflects the calculation of our funds from
operations and our funds available for distribution for the three and nine month
periods ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
For the For the
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------- --------- -------- -------
FUNDS FROM OPERATIONS(1): (unaudited)
<S> <C> <C> <C> <C>
Net income.................................. $ 23,372 $ 23,921 $ 70,061 $ 72,965
Depreciation and amortization
of real estate assets..................... 22,528 17,810 63,952 51,198
Minority interest........................... 1,921 1,120 5,618 3,302
Income allocated to Preferred Operating
Partnership Units......................... (1,078) (276) (3,234) (276)
--------- --------- ---------- ----------
Funds From Operations......................... $ 46,743 $ 42,575 $ 136,397 $ 127,189
========= ========= ========== ==========
FUNDS AVAILABLE FOR DISTRIBUTION(2):
Funds From Operations $ 46,743 $ 42,575 $ 136,397 $ 127,189
Straight-line rent adjustment.............. (2,330) (1,990) (5,672) (5,557)
Capital expenditure, tenant improvement
and leasing commission reserve........... (7,600) (6,765) (23,094) (20,460)
--------- --------- ---------- ----------
Funds Available for Distribution.............. $ 36,813 $ 33,820 $ 107,631 $ 101,172
========= ========= ========== ==========
Weighted average shares and Operating
Partnership Units outstanding - Diluted.... 65,966 65,610 65,703 65,625
========= ========= ========== ==========
</TABLE>
----------
(1) We consider funds from operations, as defined by the National Association
of Real Estate Investment Trusts, or NAREIT, to be a useful financial
measure of our operating performance. We believe that funds from
operations provides investors with an additional basis to evaluate our
ability 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, as a substitute for cash flow
from operating activities determined in accordance with GAAP or as a
measure of our liquidity. Funds from operations also is not necessarily
indicative of funds available to fund our cash needs, including our
ability to service our debt.
The White Paper on funds from operations approved by the Board of
Governors of NAREIT in October 1999 defines funds from operations as net
income or loss computed in accordance with GAAP, excluding extraordinary
items, as defined by GAAP, and gains and losses from sales of depreciable
operating property 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 standards used by other
REITs and, accordingly, our funds from operations may not be comparable
to other REITs.
(2) Funds available for distribution consists of funds from operations,
excluding straight-line rent adjustments and less a reserve for capital
expenditures, tenant improvements and leasing commissions.
-20-
<PAGE>
PORTFOLIO AND LEASE INFORMATION
The following tables set forth certain information regarding our
properties as of September 30, 2000.
PORTFOLIO SUMMARY
<TABLE>
<CAPTION>
Net Operating Income
(in thousands and unaudited)
--------------------------------------
For the Three For the Nine
Approximate Net Rentable Square Feet Months Ended Months Ended
Location Number of Properties (in thousands) September 30, 2000 September 30, 2000
--------------------- ------------------------------- ------------------------------------ ------------------ ------------------
Industrial Industrial
and % of and % of % of % of
Office Retail Total Total Office Retail Total Total Total Total Total Total
------ ------ ----- ----- ------ ------ ----- ----- ----- ----- ----- -----
Los Angeles County
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
West.............. 30 1 31 22% 5,238 37 5,275 28% $ 25,617 37% $ 71,005 36%
North............. 32 - 32 22% 2,877 - 2,877 16% 10,849 16% 31,910 16%
South............. 16 - 16 11% 2,202 - 2,202 12% 6,485 9% 20,309 10%
Central........... 3 - 3 2% 609 - 609 3% 2,856 4% 6,703 3%
------ ------- ------- ------ ------- ------ --------- ----- -------- ----- --------- -----
Subtotal......... 81 1 82 57% 10,926 37 10,963 59% 45,807 66% 129,927 65%
Orange County....... 21 - 21 15% 3,317 - 3,317 18% 11,130 16% 32,710 16%
San Diego County.... 21 - 21 15% 2,487 - 2,487 13% 8,502 12% 24,660 12%
Ventura County...... 4 - 4 3% 562 - 562 3% 1,780 3% 5,121 3%
Riverside/San
Bernardino
Counties......... 8 4 12 8% 554 415 969 5% 1,616 2% 5,261 3%
Kern County......... 2 - 2 1% 216 - 216 1% 484 1% 1,961 1%
------ ------- ------- ------ ------- ------ --------- ----- -------- ----- --------- -----
Subtotal......... 137 5 142 99% 18,062 452 18,514 99% 69,319 100% 199,640 100%
Renovation
Properties........ 1 - 1 1% 220 - 220 1% 196 - 341 -
------ ------- ------- ------ ------- ------ --------- ----- -------- ----- --------- -----
Total.......... 138 5 143(1) 100% 18,282 452 18,734(1) 100% $ 69,515 100% $ 199,981 100%
====== ======= ======= ====== ======= ====== ========= ===== ======== ===== ========= =====
</TABLE>
----------
(1) Including two office properties currently under development, our total
portfolio consists of 145 properties and approximately 19.2 million
rentable square feet.
-21-
<PAGE>
PORTFOLIO OCCUPANCY AND LEASING SUMMARY
<TABLE>
<CAPTION>
Percent Occupied Percent Leased Annualized Base Rent
Location at 9/30/00 at 9/30/00 Per Leased Square Foot (1)
----------------------------- --------------------------- -------------------------- -----------------------------------
Full
Industrial Industrial Industrial Service
and and and Gross
Office Retail Total Office Retail Total Office Retail Total Leases(2)
------ ------ ----- ------ ------ ----- ------ ------ ----- ---------
Los Angeles County:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
West..................... 94.7% 100.0% 94.7% 96.6% 100.0% 96.6% $ 24.41 $ 24.60 $ 24.42 $ 24.41
North.................... 92.5% - 92.5% 93.1% - 93.1% 20.30 - 20.30 21.58
South.................... 94.4% - 94.4% 96.3% - 96.3% 17.93 - 17.93 19.38
Central.................... 94.7% - 94.7% 95.1% - 95.1% 19.78 - 19.78 19.78
Orange County.............. 96.4% - 96.4% 96.8% - 96.8% 16.69 - 16.69 19.63
San Diego County........... 97.5% - 97.5% 97.7% - 97.7% 16.28 - 16.28 19.15
Ventura County............. 99.2% - 99.2% 99.5% - 99.5% 17.17 - 17.17 17.17
Riverside/San
Bernardino Counties...... 84.0% 96.7% 89.4% 86.8% 96.7% 91.1% 14.99 8.79 12.17 17.66
Kern County................ 86.3% - 86.3% 86.3% - 86.3% 17.21 - - 17.21
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Subtotal/ Weighted
Average............... 94.7% 97.0% 94.8% 95.8% 97.0% 95.9% 19.68 10.13 19.44 21.53
Renovation Properties...... 31.8% - 31.8% 47.0% - 47.0% 20.30 - 20.30 20.30
------ ------ ------ ------ ------ ------ ------- ------- ------- -------
Total/ Weighted Average... 94.0% 97.0% 94.0% 95.2% 97.0% 95.3% $ 19.68 $ 10.13 $ 19.45 $ 21.52
====== ====== ====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
----------
(1) Based on monthly contractual base rent under existing leases as of
September 30, 2000, multiplied by 12 and divided by leased net rentable
square feet; for those leases where rent has not yet commenced or which are
in a free rent period, the first month in which rent is to be received is
used to determine annualized base rent.
(2) Excludes 48 properties and 4,722,281 net rentable square feet under triple
net and modified gross leases.
LEASE EXPIRATIONS
As of September 30, 2000
<TABLE>
<CAPTION>
Square Percentage Annualized Percentage
Footage of of Aggregate Base Rent of Estimated Market Change of
Expiring Portfolio Expiring Rent of Expiring Market Rent
Leases Leased Leases Leases over Expiring
Year of Lease Expiration (in thousands) Square Feet (per square foot) (per square foot)(1) Rents
--------------------------- -------------- -------------- ---------------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
Month-to-Month........... 309 2% $ 19.90 $ 24.45 23%
2000 (2)................. 498 3% $ 16.75 $ 21.05 26%
2001..................... 2,180 12% $ 19.34 $ 24.46 26%
2002..................... 2,797 16% $ 18.65 $ 25.78 38%
2003..................... 3,075 17% $ 20.28 $ 26.56 31%
2004..................... 2,746 15% $ 20.67 $ 26.86 30%
</TABLE>
----------
(1) Calculation based on our estimate of current market rental rates and annual
increases in such rates of 8%, 6%, 4%, 3% and 3%, in 2000, 2001, 2002, 2003
and 2004, 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 from October 1, 2000 through December 31, 2000.
-22-
<PAGE>
LEASING ACTIVITY
For the Three and Nine Months Ended September 30, 2000
<TABLE>
<CAPTION>
Weighted Average Tenant Improvements
Net Absorption Lease Term and Commissions
(square feet) Retention Rate (1) (in months) (per square foot)
--------------------- --------------------- ---------------------- ----------------------------
New (2) Renewal
------- -------
Three Months
<S> <C> <C> <C> <C> <C>
Ended 9/30/00 61,303 78% 56.3 $ 16.15 $ 8.40
============== ============ ============== ======= =======
Nine Months
Ended 9/30/00 471,444 74% 55.6 $ 15.88 $ 9.70
============== ============ ============== ======= =======
</TABLE>
----------
(1) Percentage of leased square feet in which tenants were retained at lease
expiration.
(2) Excludes all first generation space.
DEVELOPMENT/RENOVATION SUMMARY
As of September 30, 2000
<TABLE>
<CAPTION>
Estimated
Costs Percent Estimated Year 1 Estimated
Incurred Estimated Leased Construction Estimated Stabilized Year 1
To Date Total Cost(1) at Completion Stabilization Cash NOI Annual
Property Square Feet (in thousands) (in thousands) 10/24/00 Date Date (in thousands) Cash Yield
-------- ----------- -------------- -------------- -------- ------------- ------------- -------------- ----------
Development:
Howard Hughes Center
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Univision Building 158,473 $ 15,645 $ 51,700 100% 3rd Qtr 2001 3rd Qtr 2001 $ 5,199 10.1%
6080 Center Drive 283,204 33,388 72,750 78% 2nd Qtr 2001 4th Qtr 2001 $ 8,288 11.4%
Unallocated Acquisition
and Master Plan
Costs (1),(2) -- 22,766 34,600
--------- ---------- ----------
Total Development
Properties 441,677 71,799 159,050
Renovation:
Tourney Pointe 219,991 32,454 33,500 47% Complete 4th Qtr 2000 $ 2,943 8.8%
--------- ---------- ----------
Total Properties under
Development and
Renovation 661,668 $ 104,253 $ 192,550
========= ========= ==========
</TABLE>
----------
(1) Estimated total cost includes purchase and closing costs, capital
expenditures, tenant improvements, leasing commissions and carrying costs
during renovation or development, and for the Howard Hughes Center
development properties also includes an allocation of land and Master Plan
costs. Master plan costs include the costs of road and bridge construction
and other Howard Hughes Center infrastructure and master planning costs.
(2) We acquired the undeveloped commercial property portions of the Howard
Hughes Center for $28.5 million. In August 1999, subject to a sales
agreement entered into upon our initial acquisition, we sold approximately
5.4 acres for $7.5 million to a third party who is currently developing a
250,000 square foot retail and entertainment complex. This amount also
excludes approximately $4.3 million allocated to 6060 Center Drive, $5.1
million allocated to 6080 Center Drive, and approximately $1.6 million
allocated to the Univision building. We have entitlements to construct an
additional approximately 720,000 net rentable square feet of office space
at the Howard Hughes Center.
Subsequent to September 30, 2000 we commenced construction on 6100
Center Drive, a multi-tenant office building at the Howard Hughes Center. This
approximate 280,000 square foot building has a similar design as our 6080 Center
Drive project. In addition, we have preliminary architectural designs completed
for two additional build-to-suit buildings at the Howard Hughes Center, totaling
an additional approximate 350,000 square feet.
-23-
<PAGE>
In addition to our development at the Howard Hughes Center project, we
have completed preliminary designs and are marketing an approximate 170,000
square foot build-to-suit office building at our Long Beach Airport Business
Park. Depending on market conditions, we do not intend to commence construction
on this project unless we can achieve yields commensurate with the project's
development risk.
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 our properties, and our ability to maintain and manage our
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 Investment Risks," "--An Inability To Retain Tenants
Or Rent Space Upon Lease Expirations May Adversely Affect Our Ability To Service
Our Debt," "--Because Real Estate Investments Are Illiquid, We May Not Be Able
To Sell Properties When Appropriate," "--Competition Affects Occupancy Levels
And Rents Which Could Adversely Affect Our Revenue," and "--Our Operating
Performance And Property Values Will Be Affected By Changes In The Economic
Climate In Southern California" in our most recent Annual Report on Form 10-K.
We undertake no obligation to update or revise these estimates.
As a result of the foregoing, you should not unduly rely on these
estimated rental rates.
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 September 30,
2000, a one percentage point increase in interest rates on our $329.7 million of
floating rate debt would decrease annual future earnings and cash flows by
approximately $3.3 million and would not have an impact on the floating rate
debt fair value. A one percentage point decrease in interest rates on our $329.7
million of floating rate debt would increase annual future earnings and cash
flows by approximately $3.3 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.
-24-
<PAGE>
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
Exhibit
Number Description
10.4 Senior Unsecured Credit Agreement between Arden Realty Limited
Partnership and Lehman Brothers Inc., dated July 27, 2000.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ARDEN REALTY, INC.
Date: November 10, 2000 By: /s/ Andrew J. Sobel
---------------------------------
Andrew J. Sobel
Executive Vice President
Date: November 10, 2000 By: /s/ Daniel S. Bothe
---------------------------------
Daniel S. Bothe
Senior Vice President and
Co-Chief Financial Officer
Date: November 10, 2000 By: /s/ Richard S. Davis
---------------------------------
Richard S. Davis
Senior Vice President,
Co-Chief Financial Officer and
Treasurer
