ARDEN REALTY INC - 10-Q Quarterly Report

(ARDEN REALITY LOGO)

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, 2002

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
incorporation or organization) (I.R.S. Employer
Identification No.)

11601 Wilshire Boulevard,
4th Floor
Los Angeles, California 90025-1740
(Address and zip code of principal executive offices)

Registrant’s telephone number, including area code: (310) 966-2600

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

As of November 12, 2002 there were 63,074,884 shares of the registrant’s common stock, $.01 par value, issued and outstanding.

TABLE OF CONTENTS


Part I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Income
Consolidated Statements of Cash Flows
		Notes to Consolidated Condensed Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure about Market Risk
	Item 4. Controls and Procedures
Part II. OTHER INFORMATION
SIGNATURES
OFFICERS’ CERTIFICATIONS

ARDEN REALTY, INC.
FORM 10-Q
TABLE OF CONTENTS

PAGE NO.

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001
3

Consolidated Statements of Income for the three and nine months ended
September 30, 2002 and 2001 (unaudited)
4

Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 (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 25

Item 4. Controls and Procedures 26

PART II
OTHER INFORMATION 27

SIGNATURES 28

OFFICERS’ CERTIFICATIONS 29

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Arden Realty, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)


			September 30,			December 31,
			2002			2001

			(unaudited)
Assets
Investment in real estate:
	Land		$	491,615		$	447,753
	Buildings and improvements			2,167,193			1,975,427
	Tenant improvements and leasing commissions			295,903			251,201

				2,954,711			2,674,381
	Less: accumulated depreciation and amortization			(368,965	)		(293,385	)

				2,585,746			2,380,996
	Properties under development			154,890			133,012
	Properties held for disposition, net			—			108,972

		Net investment in real estate		2,740,636			2,622,980
Cash and cash equivalents				6,288			37,041
Restricted cash				22,061			18,768
Rent and other receivables, net of allowance of $5,444 and $3,770 at September 30, 2002 and December 31, 2001, respectively				3,438			9,685
Mortgage notes receivable, net of discount				13,007			13,495
Deferred rent				42,840			38,989
Prepaid financing costs, expenses and other assets, net of amortization				20,227			20,485

		Total assets	$	2,848,497		$	2,761,443

Liabilities
Mortgage loans payable			$	571,396		$	573,452
Unsecured lines of credit				174,587			180,350
Unsecured term loan				125,000			—
Unsecured senior notes, net of discount				497,967			497,681
Accounts payable and accrued expenses				52,190			43,002
Security deposits				20,278			19,683
Dividends payable				32,589			31,408

		Total liabilities		1,474,007			1,345,576
Minority interest				75,201			78,661
Stockholders’ Equity
Preferred stock, $.01 par value 20,000,000 shares authorized, none issued				—			—
Common stock, $.01 par value, 100,000,000 shares authorized, 64,503,384 and 64,098,110 issued and outstanding at September 30, 2002 and December 31, 2001, respectively				646			641
Additional paid-in capital				1,310,276			1,345,698
Deferred compensation				(11,633	)		(9,133	)

		Total stockholders’ equity		1,299,289			1,337,206

		Total liabilities and stockholders’ equity	$	2,848,497		$	2,761,443

See accompanying notes to consolidated financial statements.

Arden Realty, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2002			2001			2002			2001

Revenue		$	104,378		$	105,831		$	309,277		$	311,932
Property operating expenses			34,935			32,016			96,079			91,132

			69,443			73,815			213,198			220,800
General and administrative expenses			3,323			2,505			9,234			8,087
Interest expense			22,403			20,819			65,384			63,058
Depreciation and amortization			27,650			25,854			82,855			74,176
Interest and other income			(524	)		(706	)		(1,576	)		(2,331	)

Income before gain and minority interest			16,591			25,343			57,301			77,810
Gain on sale of properties			—			24			1,273			3,575

Income before minority interest			16,591			25,367			58,574			81,385
Minority interest			(1,478	)		(1,878	)		(4,701	)		(5,806	)

Net income		$	15,113		$	23,489		$	53,873		$	75,579

Net income per common share:
	Basic	$	0.23		$	0.37		$	0.84		$	1.19

	Diluted	$	0.23		$	0.37		$	0.83		$	1.18

Weighted average common shares outstanding:
	Basic		64,586			63,761			64,440			63,692

	Diluted		64,790			64,121			64,695			63,959

See accompanying notes to consolidated financial statements.

Arden Realty, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


				Nine Months Ended
				September 30,

				2002			2001

Operating Activities:
	Net income			$	53,873		$	75,579
	Adjustments to reconcile net income to net cash provided by operating activities:
		Minority interests			4,701			5,806
		Gain on sale of property			(1,273	)		(3,575	)
		Depreciation and amortization			82,855			74,176
		Amortization of loan costs			2,814			2,645
		Non-cash compensation expense			875			1,395
		Changes in operating assets and liabilities:
			Rent and other receivables		6,735			2,068
			Deferred rent		(3,851	)		(5,641	)
			Prepaid financing costs, expenses and other assets		(2,666	)		(3,879	)
			Accounts payable and accrued expenses		8,979			(2,304	)
			Security deposits		595			294

	Net cash provided by operating activities				153,637			146,564

Investing Activities:
	Improvements to investment in real estate				(85,419	)		(125,087	)
	Acquisition of properties				(134,938	)		—
	Proceeds from sale of properties				21,919			26,365

	Net cash used in investing activities				(198,438	)		(98,722	)

Financing Activities:
	Proceeds from term loan				125,000			—
	Repayments of mortgage loans				(2,056	)		(1,934	)
	Proceeds from unsecured lines of credit				182,737			123,500
	Repayments of unsecured lines of credit				(188,500	)		(63,500	)
	Proceeds from issuance of common stock				8,358			102
	Repurchases of common stock				(5,723	)		—
	Distributions to preferred operating partnership unit holders				(3,234	)		(3,234	)
	Increase in restricted cash				(3,293	)		(1,684	)
	Distributions to minority interests				(2,660	)		(3,132	)
	Dividends paid				(96,581	)		(91,983	)

	Net cash provided by (used in) financing activities				14,048			(41,865	)

Net (decrease) increase in cash and cash equivalents					(30,753	)		5,977
Cash and cash equivalents at beginning of period					37,041			5,432

Cash and cash equivalents at end of period				$	6,288		$	11,409

Supplemental Disclosure of Cash Flow Information:
		Cash paid during the period for interest, net of amounts capitalized		$	69,024		$	65,460

See accompanying notes to consolidated financial statements.

Arden Realty, Inc.
Notes to Consolidated Condensed Financial Statements
September 30, 2002
(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, 2002, our portfolio was comprised of 137 primarily suburban office properties, consisting of 223 buildings with approximately 19.4 million net rentable square feet including two properties with approximately 566,000 net rentable square feet under lease-up. As of September 30, 2002 our properties were 89.7% occupied.

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, 2002 consisted of limited partnership interests in the Operating Partnership of approximately 2.6%, exclusive of ownership interests of the Operating Partnership’s preferred unit holders.

2. Interim Financial Data

The accompanying consolidated condensed financial statements should be read in conjunction with our 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The accompanying financial information reflects all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year.

3. New Accounting Standards

In October 2001, the Financial Accounting Standards Board issued Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, which is required to be adopted in fiscal years beginning after December 15, 2001. Statement No. 144 supercedes Statement No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and provide a single accounting model for long-lived assets to be disposed of. We adopted Statement No. 144 on January 1, 2002 and its adoption did not have a significant impact on our consolidated financial statements.

4. Commercial Real Estate

The following tables sets forth information regarding our acquisition and disposition activities during the nine months ended September 30, 2002.

Property Acquisitions

Purchase Price

Property County Submarket Date of Purchase Property Type Square Feet (in thousands)

Gateway Towers
Los Angeles Torrance August 7, 2002 Office 432,894 $ 62,500

Gateway Land Parcel
Los Angeles Torrance August 7, 2002 Developable Land N/A 3,500

Crossroads
San Diego Mission Valley August 16, 2002 Office 133,566 (1 )

Governor Executive
Center
San Diego Governor Park August 16, 2002 Office 52,195 (1 )

Carmel Valley
Center I & II
San Diego Del Mar Heights August 30, 2002 Office 107,197 (1 )

Carmel View Office Center
San Diego Rancho Bernardo August 30, 2002 Office 77,460 (1 )

Sub-Total
803,312 66,000

(1) San Diego Portfolio Acquisition
— 69,000

Total
803,312 $ 135,000

Property Dispositions

Sales Price

Property County Submarket Date of Sale Property Type Square Feet (in thousands)

Harbor Corporate Center
Los Angeles Torrance March 7, 2002 Office 63,925 $ 6,900

Renaissance Court
Los Angeles Simi/Conejo Valley April 16, 2002 Office 61,245 8,300

6800 Owensmouth
Los Angeles West San Fernando Valley May 1, 2002 Office 80,014 8,400

Total
205,184 $ 23,600

5. Outstanding Indebtedness

A summary of our outstanding indebtedness as of September 30, 2002 and December 31, 2001 is as follows:

Stated Annual

Interest Rate at

September 30, September 30, Number of

2002 December 31, 2002 Rate Properties

Type of Debt (unaudited) 2001 (unaudited) Fixed/Floating Securing Loan Maturity

(in thousands)

Mortgage Loans Payable:

Fixed Rate

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)
108,697 110,253 6.94 % Fixed 12 4/09

Mortgage Financing VI(3)
21,890 22,036 7.54 % Fixed 3 4/09

Activity Business Center(3)
7,621 7,737 8.85 % Fixed 1 5/06

145 South Fairfax(3)
3,961 3,987 8.93 % Fixed 1 1/27

Marin Corporate Center(3)
2,880 2,966 9.00 % Fixed 1 7/15

Conejo Business Center(3)
2,825 2,911 8.75 % Fixed (Note 4) 7/15

Conejo Business Center(3)
1,222 1,262 7.88 % Fixed (Note 4) 7/15

571,396 573,452

Unsecured Lines of Credit:

Floating Rate

Wells Fargo-$310 mm(1)
174,587 105,350 2.88 % LIBOR + 1.00% (Note 5) — 4/06

Lehman Brothers-$75 mm(6)
— 75,000 — LIBOR + 1.30% — —

City National Bank-$10 mm(1)
— — — Prime Rate — 0.875% — 8/03

174,587 180,350

Unsecured Term Loan:

Floating Rate

Wells Fargo-$125 mm(1),(7)
125,000 — 3.13 % LIBOR + 1.25% — 6/04

Unsecured Senior Notes:

Fixed Rate

2005 Notes(8)
199,744 199,667 8.88 % Fixed — 3/05

2010 Notes(8)
49,693 49,663 9.15 % Fixed — 3/10

2010 Notes(8)
99,324 99,262 8.50 % Fixed — 11/10

2007 Notes(8)
149,206 149,089 7.00 % Fixed — 11/07

497,967 497,681

Total Debt
$ 1,368,950 $ 1,251,483

(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 line of credit also has an annual 20 basis points facility fee on the entire $310 million commitment amount.




(6)		This line of credit was repaid in June 2002.




(7)		This loan has a two-year extension option.




(8)		Requires semi-annual interest payments only, with principal balance due upon maturity.

On June 13, 2002, our Operating Partnership closed on a $75 million unsecured term loan with Wells Fargo. This loan matures in June 2004, has a two-year extension option and bears interest at LIBOR + 1.25% during the initial term and LIBOR + 1.45% during the extension period. On September 25, 2002, our Operating Partnership increased this term loan by an additional $50 million. The initial $75 million in proceeds from this loan were used to repay the outstanding balance on our Lehman Brothers unsecured line of credit that was scheduled to mature in July 2002. The additional $50 million in borrowings were used to pay down our Wells Fargo unsecured line of credit.

On August 9, 2002, our Operating Partnership renewed and increased its unsecured line of credit with a group of banks led by Wells Fargo. The renewed line of credit provides for borrowings up to $310 million with an option to increase the amount to $350 million and bears interest at a rate ranging between LIBOR + 0.80% and LIBOR + 1.25% (including an annual facility fee ranging from 0.15% to 0.40% based on the aggregate amount of the line of credit) depending on the Operating Partnership’s unsecured debt rating. This new line of credit amends the previous $275 million unsecured line of credit that was scheduled to mature in April 2003. This line of credit matures in April 2006. In addition, as long as the Operating Partnership maintains an unsecured debt rating of BBB-/Baa3 or better, the agreement contains a competitive bid option, whereby the lenders may bid on the interest rate to be charged for up to $150 million of the unsecured line of credit. The Operating Partnership also has the option to convert the interest rate on this line of credit to the higher of Wells Fargo’s prime rate or the Federal Funds rate plus 0.5%.

6. Stockholders’ Equity and Minority Interests

An operating partnership unit, or OP Unit, and a share of our common stock have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the operating partnership. An OP Unit may be redeemed for cash or, at our election, for shares of common stock on a one-for-one basis.

Our minority interest balance includes $50 million of 85/8% Series B Cumulative Redeemable Preferred Operating Partnership Units, or Preferred OP Units. These Preferred OP Units were issued in September of 1999, are callable by us after five years and are exchangeable after ten years by the holder into our 85/8% Series B Cumulative Redeemable Preferred Stock, on a one-for-one basis. The Preferred OP Units have no stated maturity or mandatory redemption and are subordinate to all debt.

On January 1, 2002, we extended the vesting period of a total of 477,600 unvested restricted stock awards granted to several key executive officers in 2000 and 2001, from their initial four-year and five-year vesting periods to a ten-year vesting period from their initial grant date.

On February 28, 2002 we issued a total of 182,500 restricted stock awards to several key executive officers. Holders of these shares have full voting rights and will receive any dividends paid but are prohibited from selling or transferring unvested shares. Of the 182,500 restricted shares awarded, 15,500 shares vest equally over three years and 167,000 shares vest equally over ten years. We recorded a deferred compensation charge of approximately $4.7 million based on the market value of these shares on the date of award and will amortize the compensation charge to expense on a straight-line basis over the respective vesting periods.

On July 15, 2002, each non-employee director was granted 1,000 shares of restricted stock under our Stock Option and Incentive Plan as part of their annual compensation. The fair market value on the date of the grant for these restricted shares was $25.09 per share. These restricted stock awards will vest equally on the anniversary date of the awards over five years.

On July 24, 2002 our Board of Directors authorized a common stock repurchase program pursuant to which we are authorized to purchase up to $75 million of our common stock over the following 12 months. As part of this repurchase program, we acquired 239,500 shares of our common stock at an average price of approximately $23.90 per share during the three months ended September 30, 2002.

On September 5, 2002, we declared a quarterly dividend of $0.505 per share to stockholders of record on September 30, 2002.

7. Revenue from Rental Operations and Property Expenses

Revenue from rental operations and property expenses are summarized as follows (in thousands):


		Three Months				Nine Months
		Ended September 30,				Ended September 30,

		2002		2001		2002		2001

		(unaudited)
Revenue from Rental Operations:
	Scheduled cash rents	$	89,471	$	87,541	$	263,785	$	257,873
	Straight-line rents		880		2,428		4,665		6,937
	Tenant reimbursements		5,805		5,769		19,102		16,671
	Parking, net of expenses		5,420		5,768		15,953		16,631
	Other rental operations		2,802		4,325		5,772		13,820

			104,378		105,831		309,277		311,932

Property Expenses:
	Repairs and maintenance		9,904		8,892		28,953		27,128
	Utilities		10,734		10,514		26,591		25,272
	Real estate taxes		7,666		7,308		22,278		21,994
	Insurance		2,187		1,500		5,951		4,211
	Ground rent		278		240		616		1,624
	Administrative		4,166		3,562		11,690		10,903

			34,935		32,016		96,079		91,132

		$	69,443	$	73,815	$	213,198	$	220,800

8. Subsequent Events

As part of our common stock repurchase program described in footnote 6 above, we repurchased an additional 1,428,500 shares of our common stock at an average price of approximately $22.46 per share, subsequent to September 30, 2002.

On October 17, 2002, the borrower under our mortgage notes receivable repaid the outstanding balance on the notes totaling approximately $13.7 million. As a result of this redemption, we recognized as income the unamortized purchase discount at the time of repayment on these notes totaling approximately $750,000.

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 2001 Annual Report on Form 10-K.

We are a self-administered and self-managed real estate investment trust that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. We are managed by 8 senior executive officers who have experience in the real estate industry ranging from eleven to thirty-four years and who collectively have an average of nineteen years experience. We perform all property and development management, accounting, finance and acquisition activities and a majority of our leasing transactions with our staff of approximately 300 employees.

As of September 30, 2002, we were Southern California’s largest publicly traded office landlord as measured by total net rentable square feet owned. As of that date, our portfolio was comprised of 137 primarily suburban office properties, consisting of 223 buildings with approximately 19.4 million net rentable square feet including two development properties with approximately 566,000 net rentable square feet under lease-up. As of September 30, 2002, our properties were approximately 89.7% occupied.

Our primary business strategy is to actively manage our portfolio to achieve gains in rental rates and occupancy, control operating expenses and to maximize income from ancillary operations and services. When market conditions permit, we may selectively develop or acquire new properties that add value and fit strategically into our portfolio. We may also sell existing properties and redeploy the proceeds into investments that we believe will generate higher long-term value.

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 property developments, acquisitions and dispositions.

Comparison of the three months ended September 30, 2002 to the three months ended September 30, 2001
(in thousands, except number of properties and percentages):


				Three Months Ended
				September 30,
									Dollar			Percent
				2002		2001			Change			Change

				(unaudited)
Revenue
	Revenue from rental operations:
		Scheduled cash rents		$	89,471	$	87,541		$	1,930			2	%
		Straight-line rents			880		2,428			(1,548	)		(64	)
		Tenant reimbursements			5,805		5,769			36			1
		Parking, net of expense			5,420		5,768			(348	)		(6	)
		Other rental operations			2,802		4,325			(1,523	)		(35	)

			Total		104,378		105,831			(1,453	)		(1	)
	Interest and other income				524		706			(182	)		(26	)

			Total revenue	$	104,902	$	106,537		$	(1,635	)		(2	)%

Expenses
	Property expenses:
		Repairs and maintenance		$	9,904	$	8,892		$	1,012			11	%
		Utilities			10,734		10,514			220			2
		Real estate taxes			7,666		7,308			358			5
		Insurance			2,187		1,500			687			46
		Ground rent			278		240			38			16
		Administrative			4,166		3,562			604			17

			Total property expenses		34,935		32,016			2,919			9
	General and administrative				3,323		2,505			818			33
	Interest				22,403		20,819			1,584			8
	Depreciation and amortization				27,650		25,854			1,796			7

			Total expenses	$	88,311	$	81,194		$	7,117			9	%

Number of Properties:
	Acquired during period				5		—
	Sold during period				—		(2	)
	In service at end of period				135		138
Net Rentable Square Feet:
	Acquired during period				803		—
	Sold during period				—		(131	)
	In service at end of period				18,845		18,271

Variances from rental operations and property expenses are discussed on the next page.

Interest and other income decreased by approximately $182,000 for the three months ended September 30, 2002 as compared to the same period in 2001, primarily due to lower effective interest rates in 2002 on investment of our restricted cash balances required by mortgage loans.

General and administrative expenses as a percentage of total revenues were approximately 3.2% for the three months ended September 30, 2002, as compared to approximately 2.4% for the same period in 2001. The $818,000 increase in general and administrative expenses was primarily related to non-recurring costs resulting from employee separation costs and higher external legal and accounting costs.

Interest expense increased approximately $1.6 million, or 8%, during the three months ended September 30, 2002, as compared to the same period in 2001. This increase was primarily due to increases in borrowings in 2002 for property acquisitions and lower interest capitalized in 2002. Capitalized interest was lower in 2002 as we ceased capitalizing interest on our 6080 Center Drive development property in May 2002. The increases in interest expense were partially offset by lower effective interest rates in 2002.

Depreciation and amortization expense increased by approximately $1.8 million or 7% during the three months ended September 30, 2002, as compared to the same period in 2001, primarily due to depreciation related to a property placed in service in the fourth quarter of 2001 and depreciation expense recorded in 2002 related to properties previously held for sale in 2001 for which no depreciation expense was recorded in 2001 while classified as held for sale.

Variances for Revenue from Rental Operations and Property Expenses

The decrease in revenue from rental operations for the three months ended September 30, 2002 as compared to the same period in 2001 was primarily due to a 4.3% reduction in the average occupancy and the timing of lease termination settlements and other non-recurring items in our portfolio of 129 properties that we owned for all of the three month periods ended September 30, 2001 and 2002.

Following is a summary of the variances in revenue from rental operations and property expenses that relates to the seventeen properties that were either acquired, sold or placed in service after June 30, 2001 and for the 129 non-development properties we owned for all of the three month periods ended September 30, 2001 and 2002 (unaudited and in thousands, except for number of properties):


								Non-Development Properties
					Properties Acquired, Sold or			Owned for all of the
					Placed in Service			Three Months Ended
		Total Variance			after June 30, 2001			September 30, 2002 and 2001(1)

Revenue from Rental Operations:
	Scheduled cash rents	$	1,930		$	1,991		$	(61	)
	Straight-line rents		(1,548	)		(207	)		(1,341	)
	Tenant reimbursements		36			606			(570	)
	Parking, net of expenses		(348	)		43			(391	)
	Other rental operations		(1,523	)		60			(1,583	)

		$	(1,453	)	$	2,493		$	(3,946	)

Property Expenses:
	Repairs and maintenance	$	1,012		$	434		$	578
	Utilities		220			165			55
	Real estate taxes		358			275			83
	Insurance		687			63			624
	Ground rent		38			—			38
	Administrative		604			859			(255	)

		$	2,919		$	1,796		$	1,123

Other Data:
	Number of properties					17			129
	Net rentable square feet					1,444			17,880

(1)

See analysis for these properties below.

Same Properties

Following is a comparison of property operating data computed under the GAAP basis and cash basis of accounting for the 129 non-development properties we owned for the entire three month periods ended September 30, 2002 and 2001 (in thousands, except number of properties and percentages):


	Three Months Ended
	September 30,
							Dollar			Percent
	2002			2001			Change			Change

	(unaudited)
GAAP Basis:
Revenue from rental operations	$	97,964		$	101,910		$	(3,946	)		(3.9	%)
Property expenses		32,347			31,224			1,123			3.6	%

	$	65,617		$	70,686		$	(5,069	)		(7.2	%)

Cash Basis(1):
Revenue from rental operations	$	97,523		$	100,128		$	(2,605	)		(2.6	%)
Property expenses		32,347			31,224			1,123			3.6	%

	$	65,176		$	68,904		$	(3,728	)		(5.4	%)

Number of non-development properties		129			129
Average occupancy		89.6	%		93.9	%
Net rentable square feet		17,880			17,880

(1)

Excludes straight-line rent adjustments.

Revenue from rental operations for these properties, computed on a GAAP basis, decreased by approximately $3.9 million, or 3.9%, during the third quarter of 2002 as compared to the same period in 2001. This decrease was due to a $1.6 million decrease in revenue from other rental operations in 2002, a $1.3 million decrease in straight-line rents, a $570,000 decrease in tenant reimbursements, a $391,000 decrease in parking income and a $61,000 decrease in scheduled cash rents. Revenue from other rental operations decreased primarily due to lower lease termination settlements and other non-recurring items in 2002. The decrease in straight-line rents is discussed below. Tenant reimbursements decreased primarily due to a 4.3% decrease in average occupancy for the three months ended September 30, 2002 compared to the same period in 2001 and increases in our reimbursement receivables reserve partially offset by recovery billings from higher property expenses discussed below. Parking income decreased due to the decline in average occupancy while scheduled cash rents decreased slightly as the decrease in rents from our decline in average occupancy was offset by scheduled rent increases and rental rate growth attained on new and renewed leases.

The approximate $1.3 million decrease in 2002 for straight-line rents was primarily due to increases in our deferred rent reserves and the turning over of straight-line rents for older leases throughout our same property portfolio.

Property expenses for these properties increased by approximately $1.1 million, or 3.6%, during the three months ended September 30, 2002, compared to the same period in 2001, primarily due to an approximate $578,000 increase in repairs and maintenance expense and a $624,000 increase in insurance expense. The increase in repairs and maintenance expense was due primarily to increases in janitorial costs and the timing of contractual payments. Insurance expense increased due to increases in industry-wide insurance rates in 2002 and premiums related to a $100 million terrorism insurance policy entered into in the second quarter of 2002.

Comparison of the nine months ended September 30, 2002 to the nine months ended September 30, 2001
(in thousands, except number of properties and percentages):


				Nine Months Ended
				September 30,
										Dollar			Percent
				2002			2001			Change			Change

				(unaudited)
Revenue
	Revenue from rental operations:
		Scheduled cash rents		$	263,785		$	257,873		$	5,912			2	%
		Straight-line rents			4,665			6,937			(2,272	)		(33	)
		Tenant reimbursements			19,102			16,671			2,431			15
		Parking, net of expenses			15,953			16,631			(678	)		(4	)
		Other rental operations			5,772			13,820			(8,048	)		(58	)

					309,277			311,932			(2,655	)		(1	)
	Interest and other income				1,576			2,331			(755	)		(32	)

		Total revenue		$	310,853		$	314,263		$	(3,410	)		(1	)%

Expenses
	Property expenses:
		Repairs and maintenance		$	28,953		$	27,128		$	1,825			7	%
		Utilities			26,591			25,272			1,319			5
		Real estate taxes			22,278			21,994			284			1
		Insurance			5,951			4,211			1,740			41
		Ground rent			616			1,624			(1,008	)		(62	)
		Administrative			11,690			10,903			787			7

			Total property operating expenses		96,079			91,132			4,947			5
	General and administrative				9,234			8,087			1,147			14
	Interest				65,384			63,058			2,326			4
	Depreciation and amortization				82,855			74,176			8,679			12

		Total expenses		$	253,552		$	236,453		$	17,099			7	%

Number of Properties:
	Acquired during period				5			—
	Sold during period				(3	)		(4	)
	In service at end of period				135			138
Net Rentable Square Feet:
	Acquired during period				803			—
	Sold during period				(205	)		(387	)
	In service at end of period				18,845			18,271

Variances from rental operations and property expenses are discussed on the next page.

Interest and other income decreased approximately $755,000 for the nine months ended September 30, 2002 as compared to the same period in 2001, primarily due to lower effective interest rates in 2002 on investment of our restricted cash balances required by mortgage loans.

General and administrative expenses as a percentage of total revenues were approximately 3.0% for the nine months ended September 30, 2002, as compared to approximately 2.6% for the same period in 2001. The $1.1 million increase in general and administrative expenses was partially due to non-recurring costs resulting from employee separation costs and higher external legal and accounting costs.

Interest expense increased approximately $2.3 million or 4% during the nine months ended September 30, 2002, as compared to the same period in 2001. This increase was primarily due to an increase in borrowings in 2002 for property acquisitions and lower interest capitalized in 2002. Capitalized interest was lower in 2002 as we ceased capitalizing interest on 6080 Center Drive development property in May 2002. The increases in interest expense were partially offset by lower effective interest rates in 2002.

Depreciation and amortization expense increased by approximately $8.7 million or 12% during the nine months ended September 30, 2002 compared to the same period in 2001, primarily due to depreciation related to a newly developed property placed in service in the fourth quarter of 2001 and depreciation expense recorded in 2002 related to properties previously held for sale in 2001 for which no depreciation expense was recorded in 2001 while classified as held for sale.

Variances for Revenue from Rental Operations and Property Expenses

The decrease in revenue from rental operations for the nine months ended September 30, 2002 as compared to the same period in 2001 was primarily due to a 3.2% reduction in the average occupancy and the timing of lease termination settlements and other non-recurring items in our portfolio of 129 properties that we owned for all of the nine month periods ended September 30, 2001 and 2002.

Following is a summary of the variances in revenue from rental operations and property expenses that relates to the nineteen properties that were either acquired, sold or placed in service after December 31, 2000 and for the 129 non-development properties we owned for all of the nine month periods ended September 30, 2001 and 2002 (unaudited and in thousands, except for number of properties):


								Non-Development
					Properties			Properties Owned
					Acquired, Sold or			for all of the
					Placed in Service			Nine Months Ended
					after December 31,			September 30, 2002
		Total Variance			2000			and 2001(1)

Revenue from Rental Operations:
	Scheduled cash rents	$	5,912		$	4,499		$	1,413
	Straight-line rents		(2,272	)		721			(2,993	)
	Tenant reimbursements		2,431			1,588			843
	Parking, net of expenses		(678	)		(92	)		(586	)
	Other rental operations		(8,048	)		(2,082	)		(5,966	)

		$	(2,655	)	$	4,634		$	(7,289	)

Property Expenses:
	Repairs and maintenance	$	1,825		$	817		$	1,008
	Utilities		1,319			288			1,031
	Real estate taxes		284			470			(186	)
	Insurance		1,740			66			1,674
	Ground rent		(1,008	)		—			(1,008	)
	Administrative		787			673			114

		$	4,947		$	2,314		$	2,633

Other Data:
	Number of properties					19			129
	Net rentable square feet					1,700			17,880

(1)

See analysis for these properties below.

Same Properties

Following is a comparison of property operating data computed under the GAAP Basis and Cash Basis for the 129 non- development properties we owned for the entire nine month periods ended September 30, 2002 and 2001 (in thousands, except number of properties and percentages):


	Nine months Ended
	September 30,
							Dollar			Percent
	2002			2001			Change			Change

	(unaudited)
GAAP Basis:
Revenue from rental operations	$	293,782		$	301,071		$	(7,289	)		(2.4	%)
Property expenses		90,975			88,342			2,633			3.0	%

	$	202,807		$	212,729		$	(9,922	)		(4.7	%)

Cash Basis(1):
Revenue from rental operations	$	290,560		$	294,856		$	(4,296	)		(1.5	%)
Property expenses		90,975			88,342			2,633			3.0	%

	$	199,585		$	206,514		$	(6,929	)		(3.4	%)

Number of non-development properties		129			129
Average occupancy		90.8	%		94.0	%
Net rentable square feet		17,880			17,880

(1)

Excludes straight-line rent adjustments.

Revenue from rental operations for these properties, computed on a GAAP basis, decreased by approximately $7.3 million, or 2.4%, during the nine months ended September 30, 2002 as compared to the same period in 2001. The decrease was due to an approximate $6.0 million decrease in revenue from other rental operations, a $3.0 million decrease in straight-line rents and a $586,000 decrease in parking income that was partially offset by an approximate $1.4 million increase in scheduled cash rents and an $843,000 increase in tenant reimbursements. The decrease in revenue from other rental operations was primarily due to lower lease termination settlements and other non-recurring items in 2002 while the decrease in parking income was due to a decrease in average occupancy for the nine month ended September 30, 2002 compared to the same period in 2001. The decrease in straight-line rents in 2002 is discussed below. Scheduled cash rents increased primarily due to scheduled rent increases and rental rate growth attained on new and renewed leases which were partially offset by the decline in average occupancy. Tenant reimbursements increased primarily due to recovery billings for higher operating expenses discussed below.

The approximate $3.0 million decrease in 2002 for straight-line rents was primarily due to the turning over of straight-line rents for older leases throughout our same store portfolio and increases in our deferred rent reserves.

Property expenses for these properties increased by approximately $2.6 million, or 3.0%, during the nine months ended September 30, 2002 as compared to the same period in 2001. The increase was primarily due to a $1.0 million increase in utility expenses, a $1.0 million increase in repairs and maintenance expense and a $1.7 million increase in insurance expense in 2002 which was partially offset by a $1.0 million decrease in ground rent expense. The increase in utility expenses was due to rate increases enacted in May 2001. Repairs and maintenance expense increased in 2002 primarily due to higher janitorial costs while insurance expense increased due to increases in industry-wide insurance rates in 2002 and premiums related to a $100 million terrorism insurance policy entered into in the second quarter of 2002. Ground rent expense decreased in 2002 due to lower operating income from one of our properties with a participating ground lease.

Liquidity and Capital Resources

Cash Flows

Cash provided by operating activities increased by approximately $7.0 million to $153.6 million for the nine months ended September 30, 2002, as compared to $146.6 million for the same period in 2001. This increase was primarily due to the increased cash flows on five properties acquired in the third quarter of 2002, a reduction in tenant receivables in 2002 as a result of our collection efforts and cash flows for a development property placed in service in the fourth quarter of 2001, all of which was partially offset by the loss of operating cash flows on ten properties sold in 2001, one property sold in the first quarter of 2002 and two properties sold in the second quarter of 2002.

Cash used in investing activities increased by approximately $99.7 million to $198.4 million for the nine months ended September 30, 2002 compared to $98.7 million for the same period in 2001. This increase was primarily due to the acquisition of five properties for approximately $134.9 million in the third quarter of 2002 which was partially offset by the decrease in our construction activity in 2002 as a result of our placement in service of a development project in the fourth quarter of 2001 and completion of shell construction of an additional development property in the second quarter of 2002.

Cash used in financing activities increased by approximately $55.9 million to an inflow of $14.0 million for the nine months ended September 30, 2002, as compared to an out flow of $41.9 million for the same period in 2001. This increase was primarily due to borrowings under the Wells Fargo unsecured line of credit made for purposes of funding our property acquisitions in 2002.

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, 2003. 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, 2002, there was no outstanding balance on this line of credit and $10 million was available for additional borrowings.

On March 7, 2002, we sold an approximate 64,000 square foot office property located in Torrance, California for approximately $6.9 million. On April 16, 2002, we sold an approximate 61,000 square foot office building located in Westlake, California for approximately $8.3 million. On May 1, 2002 we also completed the sale of an approximate 80,000 square foot office property located in Canoga Park, California for approximately $8.4 million. The net proceeds from these dispositions were used to reduce the outstanding balance on the Wells Fargo unsecured line of credit.

On July 24, 2002, our Board of Directors authorized a common stock repurchase program pursuant to which we were authorized to purchase up to $75 million of our common stock over the following 12 months. As part of this repurchase program, we have acquired a total of 1,668,000 shares as of the date of this report at an average price of approximately $22.67 per share. The funds for these repurchases were attained from the proceeds received from the repayment of the mortgage notes receivable described below and borrowings under the Wells Fargo unsecured line of credit.

On August 6, 2002, we acquired Gateway Towers, an office property located in Torrance, California containing approximately 433,000 net rentable square feet for approximately $66 million. Gateway Towers consists of two buildings that are approximately 93% leased and includes an additional 5-acre development parcel. The funds for this acquisition were attained from borrowings under the Wells Fargo unsecured line of credit.

On August 16, 2002, we acquired Governor Executive Center and Crossroads, two office properties located in San Diego County containing approximately 186,000 square feet for approximately $28.0 million. Governor Executive Center is a three-story, 52,195 square foot, 97% leased office building located in the Governor Park submarket. Crossroads is a seven-story, 133,566 square foot, 100% leased multi-tenant office building located in the Mission Valley submarket. On August 30, 2002, we acquired Carmel Valley Center I & II and Carmel View Office Center, two office properties located in San Diego County containing approximately 185,000 square feet for approximately $41.0 million. Carmel Valley Center I & II consists of two 97% leased office buildings totaling 107,197 square feet located in the Del Mar Heights submarket. Carmel View Office Center is a three-story, 77,460 square foot, 94% leased office building

located in the master planned development of Carmel Mountain Ranch within the Rancho Bernardo submarket. The funds for these acquisitions were attained from borrowings under the Wells Fargo unsecured line of credit.

On September 25, 2002, our Operating Partnership increased its $75 million unsecured term loan with Wells Fargo by an additional $50 million and repaid $50 million on the Wells Fargo unsecured line of credit.

On October 17, 2002, the borrower of our mortgage notes receivable repaid the outstanding balance on the notes totaling approximately $13.7 million. As a result of this redemption, we recognized as income the unamortized purchase discount on these notes at the time of repayment totaling approximately $750,000. The proceeds from this repayment were used to partially fund our stock repurchases described above.

Following is a summary of scheduled principal payments for our total debt outstanding as of September 30, 2002 (in thousands):


Year		Amount

2002		$	808
2003			5,298
2004			307,062	⁽¹⁾
2005			207,678
2006			189,650	⁽²⁾
2007			158,681
2008			230,305
2009			111,980
2010			150,565
2011			710
Thereafter			6,213

	Total	$	1,368,950

(1)		Includes $125 million outstanding on the Wells Fargo term loan which has a two-year extension option.




(2)		Consists primarily of $174.6 million outstanding on the Wells Fargo line of credit.

Following is certain other information related to our outstanding indebtedness as of September 30, 2002 (in thousands, except percentage data):

Unsecured and Secured Debt:


						Weighted
						Average
	Balance		Percent			Interest Rate(1)

Unsecured Debt	$	797,554		58	%		6.64	%
Secured Debt		571,396		42	%		7.36	%

Total Debt	$	1,368,950		100	%		6.94	%

Floating and Fixed Rate Debt:


						Weighted
						Average
	Balance		Percent			Interest Rate(1)

Floating Rate Debt	$	299,587		22	%		3.47	%
Fixed Rate Debt		1,069,363		78	%		7.91	%

Total Debt	$	1,368,950		100	%		6.94	%

(1)

Includes amortization of prepaid financing costs.

Total interest incurred and the amount capitalized was as follows (unaudited and in thousands):


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,

	2002			2001			2002			2001

Total interest incurred	$	23,651		$	23,074		$	69,749		$	70,269
Amount capitalized		(1,248	)		(2,255	)		(4,365	)		(7,211	)

Amount expensed	$	22,403		$	20,819		$	65,384		$	63,058

As of September 30, 2002, we had $28.3 million in cash and cash equivalents, including $22.1 million in restricted cash. Restricted cash consisted of $13.7 million in interest bearing cash deposits required by five of our mortgage loans payable and $8.4 million in cash impound accounts for real estate taxes and insurance as required by several of our mortgage loans payable.

We expect to continue meeting our short-term liquidity and capital requirements generally through net cash provided by operating activities and proceeds from our unsecured lines of credit. We believe the foregoing sources of liquidity will be sufficient to fund our short-term liquidity needs over the next twelve months, 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 net cash provided by operations, refinancing of existing indebtedness and the issuance of long-term debt and equity securities.

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-month and nine-month periods ended September 30, 2002 and 2001 (in thousands):

For the
Three Months Ended September 30, For the
Nine Months Ended September 30,

2002 2001 2002 2001

(unaudited)

Funds From Operations:⁽¹⁾

Net income
$ 15,113 $ 23,489 $ 53,873 $ 75,579

Depreciation and amortization of real estate assets
27,650 25,854 82,855 74,176

Gain on sale of properties
— (24 ) (1,273 ) (3,575 )

Minority interest
1,478 1,878 4,701 5,806

Income allocated to preferred units
(1,078 ) (1,078 ) (3,234 ) (3,234 )

Funds From Operations⁽²⁾
$ 43,163 $ 50,119 $ 136,922 $ 148,752

Funds Available for Distribution:⁽³⁾

Funds From Operations
$ 43,163 $ 50,119 $ 136,922 $ 148,752

Non-cash compensation expense
315 545 875 1,395

Amortization of prepaid financing costs
913 891 2,814 2,645

Straight-line rent adjustment
(880 ) (2,428 ) (4,665 ) (6,937 )

Recurring capital expenditures, second generation tenant improvements and leasing commissions^(4),(5)
(8,573 ) (3,685 ) (19,478 ) (15,317 )

Funds Available for Distribution
$ 34,938 $ 45,442 $ 116,468 $ 130,538

Weighted average shares outstanding — Diluted
66,513 66,278 66,452 66,125

(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 April 2002 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)		Includes non-cash compensation expense of $315,000 for the three months ended September 30, 2002, $545,000 for the three months ended September 30, 2001, $875,000 for the nine months ended September 30, 2002 and $1.4 million for the nine months ended September 30, 2001.

(3)		Funds available for distribution consists of funds from operations excluding non-cash compensation expense, amortization of prepaid financing costs, straight-line rents and less costs incurred for recurring capital expenditures, second generation tenant improvements and leasing commissions.

		We revised our funds available for distribution calculation for the three months ended September 30, 2002. Prior to the current period, we deducted an estimated reserve for capital expenditures and leasing costs based on total capital expenditures, tenant improvements and leasing costs forecasted for the future twelve months.

		As a result of a review of the funds available for distribution presentation of other publicly traded office REITs, we noted that most companies deduct actual second generation capital expenditures and leasing costs incurred during the period for purposes of calculating funds available for distribution. Consequently, we have revised our funds available for distribution calculation to deduct actual second generation capital expenditures and leasing costs incurred on an “as-spent” basis during the period in order to make our presentation more comparable to our industry peers. We recalculated the funds available for distribution for the nine months ended September 30, 2002 and the corresponding three and nine-month periods in 2001 to conform to the current revised presentation.

(4)		Recurring capital expenditures represent non-incremental building improvements and leasing costs required to maintain current revenues. Recurring capital expenditures do not include immediate building improvements that were taken into consideration when underwriting the purchase of a building or which are incurred to bring a building up to “operating standards.”

(5)		Second generation tenant improvements and leasing commissions are tenant improvements, leasing commissions and other leasing costs incurred during leasing of second generation space. Costs incurred prior to leasing available square feet are not included until such space is leased. Second generation space excludes newly developed and renovated square footage or square footage vacant at acquisition.

Portfolio and Lease Information

The following tables set forth certain information regarding our properties as of September 30, 2002.

PORTFOLIO SUMMARY


																					Net Operating Income

			Number						Number												For the Three					For the Nine
			of						of						Approximate Net						Months Ended					Months Ended
Location			Properties						Buildings						Rentable (Square Feet)						September 30, 2002					September 30, 2002

																					(in thousands and unaudited)
						% of						% of						% of					% of					% of
			Total			Total			Total			Total			Total			Total			Total		Total			Total		Total

Los Angeles County
	West⁽¹⁾			30			22	%		32			15	%		4,734,567			25	%	$	27,085		39	%	$	83,625		39	%
	North			29			22	%		46			21	%		3,231,591			17	%		10,684		16	%		34,609		16	%
	South			16			12	%		21			9	%		3,057,925			16	%		8,480		12	%		24,137		12	%

	Subtotal			75			56	%		99			45	%		11,024,083			58	%		46,249		67	%		142,371		67	%
Orange County				24			18	%		57			25	%		3,708,926			20	%		11,348		16	%		35,946		17	%
San Diego County				25			18	%		40			18	%		2,857,195			15	%		8,586		12	%		24,440		11	%
Ventura/Kern Counties				6			4	%		17			8	%		778,363			4	%		2,168		3	%		7,006		3	%
Riverside/San Bernardino Counties⁽²⁾				5			4	%		8			4	%		476,461			3	%		1,092		2	%		3,435		2	%

		Total		135	⁽³⁾		100	%		221	⁽³⁾		100	%		18,845,028	⁽³⁾		100	%	$	69,443		100	%	$	213,198		100	%

(1)		Includes a retail property with approximately 37,000 net rentable square feet.




(2)		Includes a retail property with approximately 133,000 net rentable square feet.




(3)		Including two development properties currently under lease-up, our total portfolio consists of 137 properties with 223 buildings and approximately 19.4 million rentable square feet.

PORTFOLIO OCCUPANCY AND IN-PLACE RENTS
As of September 30, 2002

Annualized Base Rent

Location Percent Occupied Percent Leased Per Leased Square Foot ⁽¹⁾

Full Service

Portfolio Total Gross Leases⁽²⁾

Los Angeles County

West
89.2 % 90.9 % $ 27.76 $ 27.88

North
87.2 % 87.8 % 21.29 22.39

South
88.1 % 89.7 % 19.18 20.25

Orange County
93.4 % 94.7 % 18.19 21.37

San Diego County
88.3 % 88.6 % 18.35 22.66

Ventura/Kern Counties
95.4 % 96.9 % 18.28 18.53

Riverside/San Bernardino Counties
93.4 % 93.4 % 16.67 18.92

Total/Weighted Average
89.7 % 90.9 % $ 21.26 $ 23.28

(1)		Based on monthly contractual base rent under existing leases as of September 30, 2002, 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 38 properties and approximately 3.9 million square feet under triple net and modified gross leases.

TEN LARGEST TENANTS
As of September 30, 2002

Weighted Percentage Percentage of

Average of Aggregate Aggregate

Remaining Portfolio Portfolio Annualized

Number of Lease Term Leased Annualized Net Rentable Base Rent

Tenant Leases In Months Square Feet Base Rent(1) Square Feet (in thousands)

Vivendi Universal
4 91 1.33 % 2.17 % 231,681 $ 8,111

State of California
40 47 1.94 1.90 337,118 7,078

University of Phoenix
20 25 1.38 1.23 240,162 4,605

Univision
2 229 0.96 1.14 166,363 4,247

Ceridian Corporation
5 83 0.93 0.96 160,805 3,589

SBC Communications
8 31 0.83 0.84 144,927 3,138

Atlantic Richfield
13 47 0.73 0.71 126,830 2,658

Verizon Communications Inc.
8 23 0.90 0.71 156,612 2,655

U.S. Government
22 42 0.69 0.71 119,829 2,651

Sony
7 19 0.67 0.70 116,729 2,597

Total/Weighted Average⁽²⁾
129 64 10.36 % 11.07 % 1,801,056 $ 41,329

(1)		Annualized base rent is calculated as monthly contractual base rent under existing leases as of September 30, 2002, multiplied by 12; for those leases where rent has not yet commenced or which are in a free rent period, the first month in which rent is to be received is used to determine annualized base rent.




(2)		The weighted average calculation is based on net rentable square footage leased by each tenant.

LEASING ACTIVITY


		For the			For the
		Three Months Ended			Nine Months Ended
		September 30, 2002			September 30, 2002

Net Absorption (square feet)			(57,988	)		(482,436	)

Retention Rate			68.9	%		69.9	%

Cash Rent Growth⁽¹⁾:
	Expiring Rate	$	15.47		$	17.90

	New/Renewed Rate	$	16.83		$	19.90

	Increase		9	%⁽²⁾		11	%

GAAP Rent Growth⁽³⁾:
	Expiring Rate	$	15.02		$	17.38

	New/Renewed Rate	$	17.51		$	20.71

	Increase		17	%⁽²⁾		19	%

Weighted Average Lease Term in Months			62			56

Tenant Improvements and Commissions (per square foot):
	New⁽⁴⁾	$	14.91		$	15.98

	Renewal	$	7.04		$	8.10

Capital Expenditures (per square foot):
	Recurring	$	0.04		$	0.16

	Non-recurring	$	0.04		$	0.13

(1)		Represents the difference between initial market rents on new and renewed leases as compared to the expiring cash rents on the same space.




(2)		Excluding a new triple net lease signed during the third quarter, Cash Rent Growth and GAAP Rent Growth increased 12% and 20% respectively, for the three months ended September 30, 2002.




(3)		Represents estimated cash rent growth adjusted for straight-line rents.




(4)		Excludes all newly developed or renovated square footage or square footage vacant at acquisition.

LEASE EXPIRATIONS
As of September 30, 2002


																		2007 and
			2002			2003			2004			2005			2006			Thereafter

Los Angeles West		Expiring SF⁽¹⁾		154,981			603,717			847,575			939,120			430,908			1,653,970
		% of Leased SF⁽²⁾		0.9	%		3.5	%		5.0	%		5.5	%		2.5	%		9.6	%
		Rent per SF⁽³⁾	$	23.05		$	26.46		$	26.49		$	28.16		$	30.21		$	34.23
Los Angeles North		Expiring SF⁽¹⁾		73,477			422,142			636,394			416,108			340,667			874,526
		% of Leased SF⁽²⁾		0.4	%		2.5	%		3.7	%		2.4	%		2.0	%		5.1	%
		Rent per SF⁽³⁾	$	23.10		$	21.19		$	21.64		$	22.65		$	24.59		$	23.71
Los Angeles South		Expiring SF⁽¹⁾		92,792			292,664			487,372			626,139			243,294			591,445
		% of Leased SF⁽²⁾		0.6	%		1.7	%		2.8	%		3.7	%		1.4	%		3.5	%
		Rent per SF⁽³⁾	$	18.82		$	18.89		$	20.28		$	15.42		$	22.38		$	22.85

Subtotal -
	Los Angeles County	Expiring SF⁽¹⁾		321,250			1,318,523			1,971,341			1,981,367			1,014,869			3,119,941
		% of Leased SF⁽²⁾		1.9	%		7.7	%		11.5	%		11.6	%		5.9	%		18.2	%
		Rent per SF⁽³⁾	$	21.84		$	23.09		$	23.39		$	22.98		$	26.45		$	29.12
	Orange County	Expiring SF⁽¹⁾		188,902			798,980			665,294			497,644			631,073			700,899
		% of Leased SF⁽²⁾		1.1	%		4.7	%		3.9	%		2.9	%		3.7	%		4.1	%
		Rent per SF⁽³⁾	$	14.99		$	16.99		$	17.63		$	21.54		$	20.44		$	23.22
	San Diego County	Expiring SF⁽¹⁾		57,872			573,289			358,973			496,178			243,122			775,176
		% of Leased SF⁽²⁾		0.4	%		3.3	%		2.1	%		2.9	%		1.4	%		4.5	%
		Rent per SF⁽³⁾	$	19.25		$	18.88		$	20.51		$	18.01		$	25.18		$	21.93
	All Others	Expiring SF⁽¹⁾		8,085			169,204			347,869			165,066			223,125			273,281
		% of Leased SF⁽²⁾		0.0	%		1.0	%		2.0	%		0.9	%		1.3	%		1.6	%
		Rent per SF⁽³⁾	$	18.09		$	19.28		$	18.26		$	19.79		$	19.14		$	18.41

Total Portfolio		Expiring SF⁽¹⁾		576,109			2,859,996			3,343,477			3,140,255			2,112,189			4,869,297

		% of Leased SF⁽²⁾		3.4	%		16.7	%		19.5	%		18.3	%		12.3	%		28.4	%

		Rent per SF⁽³⁾	$	19.28		$	20.32		$	21.40		$	21.80		$	23.73		$	26.53

(1)		Represents the rentable square footage of expiring leases. For 2002, represents expirations from October 1, 2002 through December 31, 2002, not including month-to-month tenants.




(2)		Percentage of total rentable square footage expiring during the period.




(3)		Represents annualized ending cash rents of expiring leases.

LEASE EXPIRATIONS BY QUARTER
As of September 30, 2002

Q1-03 Q2-03 Q3-03 Q4-03

Los Angeles County:

West
Expiring SF(1)
132,515 94,309 194,434 182,459

% of Leased SF(2)
0.8 % 0.5 % 1.1 % 1.1 %

Rent per SF(3)
$ 25.69 $ 25.68 $ 24.37 $ 29.66

North
Expiring SF(1)
58,111 135,777 63,260 164,994

% of Leased SF(2)
0.3 % 0.8 % 0.4 % 1.0 %

Rent per SF(3)
$ 22.76 $ 18.15 $ 23.28 $ 22.34

South
Expiring SF(1)
45,799 50,723 138,267 57,875

% of Leased SF(2)
0.3 % 0.3 % 0.8 % 0.3 %

Rent per SF(3)
$ 20.76 $ 19.81 $ 17.35 $ 20.27

Subtotal -

Los Angeles County
Expiring SF(1)
236,425 280,809 395,961 405,328

% of Leased SF(2)
1.4 % 1.6 % 2.3 % 2.4 %

Rent per SF(3)
$ 24.02 $ 20.98 $ 21.74 $ 25.34

Orange County
Expiring SF(1)
84,295 144,801 374,776 195,108

% of Leased SF(2) 0.5 % 0.9 % 2.2 % 1.1 %

Rent per SF(3)
$ 17.07 $ 16.36 $ 17.29 $ 16.85

San Diego County
Expiring SF(1)
289,895 101,684 89,271 92,439

% of Leased SF(2)
1.7 % 0.6 % 0.5 % 0.5 %

Rent per SF(3)
$ 17.94 $ 20.46 $ 17.62 $ 21.32

All Others
Expiring SF(1)
21,713 54,447 47,423 45,621

% of Leased SF(2)
0.1 % 0.3 % 0.3 % 0.3 %

Rent per SF(3)
$ 20.76 $ 16.90 $ 19.18 $ 21.53

Total Portfolio
Expiring SF(1)
632,328 581,741 907,431 738,496

% of Leased SF(2)
3.7 % 3.4 % 5.3 % 4.3 %

Rent per SF(3)
$ 20.19 $ 19.35 $ 19.36 $ 22.36

(1)		Excludes month-to-month tenants.




(2)		Percentage of total rentable space expiring during the period.




(3)		Represents annualized ending cash rents of expiring leases.

DEVELOPMENT SUMMARY
As of September 30, 2002


																Estimated
					Costs				Percent			Estimated				Year 1					Estimated
					Incurred		Estimated		Leased			Shell	Estimated			Stabilized		Estimated			Year 1
			Square		To Date		Total Cost (1)		at			Completion	Stabilization			Cash NOI (3)		Year 1 Annual			Annual
Property			Feet		*(in thousands)*		*(in thousands)*		10/28/02			Date	Date (2)			*(in thousands)*		Cash Yield			GAAP Yield (4)

Howard Hughes Center:
	6080 Center Drive			283,000	$	74,047	$	77,100		96	%(5)	Complete		(5	)	$	8,200		10.6	%		11.8	%
	6100 Center Drive			283,000		63,558		81,500		—		Complete	2nd Qtr 2003			$	7,500		9.2	%		10.2	%
	Unallocated Acquisition And Master Plan Costs(1)			—		17,285		19,800

		Total Development Properties		566,000	$	154,890	$	178,400

(1)		Estimated total cost includes purchase and closing costs, capital expenditures, tenant improvements, leasing commissions and carrying costs during development, as well as an allocation of land and master plan costs. Unallocated acquisition and master plan costs consists of unallocated land costs and master plan costs that will be allocated to future development projects at the Howard Hughes Center. We have entitlements to construct an additional approximately 425,000 net rentable square feet of office space and have two parcels entitled for hotel development at the Howard Hughes Center.




(2)		We consider a property to be stabilized in the quarter when the property is at least 95% leased.




(3)		We consider Stabilized Cash NOI to be the rental revenues from the property less the operating expenses of the property on a cash basis before deducting financing costs (interest and principal payments) after the property is at least 95% leased.




(4)		We consider the Estimated Year 1 Annual GAAP Yield to be the property’s Stabilized Cash NOI adjusted for straight-line rents during its first year in service over the property’s estimated total costs.




(5)		This property stabilized on October 23, 2002 at 96% leased and is currently 89% occupied.

In addition to the properties above, we have preliminary architectural designs completed for additional build-to-suit buildings at the Howard Hughes Center totaling approximately 425,000 net rentable square feet of office space. Build-to-suit buildings consist of properties constructed to the tenant’s specifications in return for the tenant’s long-term commitment to the property. We do not intend to commence construction on any additional build-to-suit buildings at the Howard Hughes Center until development plans and budgets are finalized and build-to-suit tenant leases are signed with terms allowing us to achieve yields commensurate with the project’s development risk.

In addition to our development at the Howard Hughes Center, 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. Also as part of our Gateway Towers acquisition in August 2002, we acquired a 5-acre developable land parcel in Torrance, California that we intend to market for a build-to-suit office building. We do not intend to commence construction on these projects until build-to-suit tenant leases are signed with terms allowing us to achieve yields commensurate with the project’s development risk.

We expect to finance our development activities over the next 24 months through net cash provided by operating activities, proceeds from asset sales and proceeds from our unsecured lines of credit.

Business Strategy

We continue to seek to build a tenant base of smaller, diverse companies that limit our exposure to any single tenant or industry. Smaller tenants typically translate into shorter-term leases. Shorter-term leases provide greater opportunity for renewing a substantial portion of our portfolio at higher rental rates each year during strong markets, but create challenges to maintain occupancy and rates when markets weaken. The average term of our leases is 4 to 5 years resulting in approximately 15% to 20% of our leases turning over annually.

We closely monitor our operating expenses and capital expenditures to sustain or improve operating margins and dividend coverage. We may defer discretionary capital expenditures until market conditions improve.

When market conditions permit, we may selectively develop or acquire new properties that add value and fit strategically into our portfolio. We may also sell existing properties and redeploy the proceeds into investments that we believe will generate higher long-term value.

Current Economic Climate

Our short and long-term liquidity, ability to refinance existing indebtedness, ability to issue long-term debt and equity securities at favorable rates and our dividend policy are significantly impacted by the operating results of our properties, all of which are located in Southern California. Our

ability to lease available space and increase rates when leases expire is largely dependent on the demand for office space in the markets where our properties are located. We believe current uncertainty over the national and Southern California economic environment is exerting downward pressures on the demand for Southern California commercial office space. We are experiencing these downward pressures due to several factors as follows:

       •    Occupancy and rental rates have decreased in recent months, and are expected to decrease further due to the state of the local economy and competition from other office landlords;

       •    Larger tenants are taking more time to make their leasing decisions reflecting the uncertainty in the economy;

       •    Some tenants are under-utilizing their existing space and can therefore expand internally before they need new space;

       •    Tenant concessions have increased and are expected to further increase as a result of competition for prospective tenants;

       •    Sublease space, although stabilizing, stands at about 2.5% of total inventory throughout Southern California; and

       •    Over-building has increased vacancy rates in some submarkets.

These factors have contributed to a decrease in the occupancy of our portfolio from 92.2% as of December 31, 2001 to 89.7% as of September 30, 2002.

Overall market rental rates in Southern California declined 1 to 2% during the three months ended September 30, 2002. Given the current trends, including the expected continued occupancy pressures and more aggressive pricing for sublease space, we expect market rates will decline an additional 1 to 2% during the remainder of 2002. Concessions also rose 3 to 5% during the three months ended September 30, 2002. As occupancy pressures continue, we expect concessions in either free rent or higher tenant improvement allowances to rise.

The timing and extent of future changes in the national and local economy and their effects on our properties and results of operations are difficult to accurately predict. It is possible, however, that these national and regional issues may more directly affect us and our operating results in the future, making it more difficult for us to lease and renew available space, to increase or maintain rental rates as leases expire and to collect amounts due from our tenants. For additional information, see “Risk Factors — Further declines in the economic activity of Southern California will adversely affect our operating results,” “— The financial condition and solvency of our tenants may reduce our cash flow,” and “— Rising energy costs and power outages in California may have an adverse effect on our operations and revenue” sections of our 2001 annual report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Market risk is the exposure or 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 use 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.

Some 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 as of September 30, 2002, a 1% increase in interest rates on our $299.6 million of floating rate debt would decrease annual future earnings and cash flows by approximately $3.0 million and would not have an impact on the fair value of the floating rate debt. Conversely, a 1% decrease in interest rates on our $299.6 million of floating rate debt would increase annual future earnings and cash flows by approximately $3.0 million and would not have an impact on the fair value of the floating rate debt. The weighted average interest rate on our floating debt as of September 30, 2002 was 3.47%.

Our fixed rate debt totaled $1,069.4 million as of September 30, 2002 with a weighted average interest rate of 7.91% and a total fair value of approximately $1,143.2 million. A 1% decrease in interest rates would increase the fair value of our fixed rate debt by approximately $46.1 million and would not have an impact on future earnings and cash flows. A 1% increase in interest rates would decrease the fair value of our fixed rated debt by approximately $43.7 million and would not have an impact on future earnings and cash flows.

These amounts are determined by considering the impact of 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 that environment. Further, in the event of a change of this magnitude, we would consider taking actions to further mitigate our exposure to the change. Due to the uncertainty of the specific actions that would be taken and their possible effects, however, this sensitive analysis assumes no changes in our capital structure.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we have an investment in an unconsolidated entity. Because we do not control or manage this entity, our disclosure controls and procedures with respect to such an entity is necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

We are presently subject to various lawsuits, claims and proceedings of a nature considered normal to our ordinary course of business. We expect most of these legal proceedings to be covered by our liability insurance. The most significant of these contingencies not covered by insurance is described below.

In December 2001, the owner of the entertainment center at our Howard Hughes Center project asserted a claim against us for indemnification arising out of a Los Angeles Superior Court judgment against them, which invalidated a transfer of in-lieu credits that we made in August of 1999 as part of our sale of the land for the entertainment center. The value of these in-lieu credits was approximately $6.0 million and were transferred to satisfy certain Transportation Impact Assessment fees related to the entertainment center. The owner of the entertainment center is currently appealing the judgment.

Based on our review of the current facts and circumstances and advice of our outside counsel, we are not able to express an opinion as to the ultimate outcome of this matter. However, we do not believe that the resolution of this matter or any of our ongoing legal proceedings will have a material adverse effect on our consolidated results of operations, cash flow or financial position.

Item 2. Changes in Securities

During the three months ended September 30, 2002, we redeemed an aggregate of 13,000 common operating partnership units of the Operating Partnership for shares of our common stock. The redemption of limited partnership units for shares of our common stock was exempt from the registration requirement of the Securities Act pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D.

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

(a) Exhibits


10.40*		Third Amended and Restated Revolving Credit Agreement between Arden Realty Limited Partnership and a group of lenders led by Wells Fargo Bank dated as of August 9, 2002.




10.41*		Term Loan Agreement between Arden Realty Limited Partnership and Wells Fargo Bank, National Association dated as of September 19, 2002.

(*)

Incorporated by reference from Arden Realty Limited Partnership’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 2002.

(b) Reports on Form 8-K

None

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 12, 2002 By: /s/ Andrew J. Sobel

Andrew J. Sobel
Executive Vice President — Strategic Planning
and Operations

Date: November 12, 2002 By: /s/ Richard S. Davis

Richard S. Davis
Senior Vice President and
Chief Financial Officer

OFFICERS’ CERTIFICATIONS

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Richard S. Ziman, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Arden Realty, Inc.;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.    The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/ Richard S. Ziman

Richard S. Ziman
Chairman of the Board and Chief Executive Officer
Arden Realty, Inc.

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Richard S. Davis, certify that:

Date: November 12, 2002

/s/ Richard S. Davis

Richard S. Davis
Senior Vice President and Chief Financial Officer
Arden Realty, Inc.

CERTIFICATION OF CHIEF OPERATING OFFICER

I, Victor J. Coleman, certify that:

Date: November 12, 2002

/s/ Victor J. Coleman

Victor J. Coleman
President and Chief Operating Officer
Arden Realty, Inc.

CERTIFICATION OF EXECUTIVE VICE PRESIDENT

I, Andrew J. Sobel, certify that:

Date: November 12, 2002

/s/ Andrew J. Sobel

Andrew J. Sobel
Executive Vice President — Strategic Planning and Operations
Arden Realty, Inc.

CERTIFICATION OF SENIOR VICE PRESIDENT

I, Robert C. Peddicord, certify that:

Date: November 12, 2002

/s/ Robert C. Peddicord

Robert C. Peddicord
Senior Vice President — Leasing and Property Operations
Arden Realty, Inc.

CERTIFICATION OF GENERAL COUNSEL

I, David A. Swartz, certify that:

Date: November 12, 2002

/s/ David A. Swartz

David A. Swartz
General Counsel and Secretary
Arden Realty, Inc.

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Maryland		95-4578533
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


			PAGE NO.

PART I	FINANCIAL INFORMATION




	Item 1.	Financial Statements




		Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001		3




		Consolidated Statements of Income for the three and nine months ended September 30, 2002 and 2001 (unaudited)		4




		Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 (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		25




	Item 4.	Controls and Procedures		26




PART II	OTHER INFORMATION			27




	SIGNATURES			28




	OFFICERS’ CERTIFICATIONS			29


						Stated Annual
						Interest Rate at
		September 30,				September 30,				Number of
		2002		December 31,		2002			Rate	Properties
Type of Debt		(unaudited)		2001		(unaudited)			Fixed/Floating	Securing Loan		Maturity

		(in thousands)
Mortgage Loans Payable:
Fixed Rate
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)			108,697		110,253		6.94	%	Fixed		12		4/09
Mortgage Financing VI(3)			21,890		22,036		7.54	%	Fixed		3		4/09
Activity Business Center(3)			7,621		7,737		8.85	%	Fixed		1		5/06
145 South Fairfax(3)			3,961		3,987		8.93	%	Fixed		1		1/27
Marin Corporate Center(3)			2,880		2,966		9.00	%	Fixed		1		7/15
Conejo Business Center(3)			2,825		2,911		8.75	%	Fixed	(Note 4)			7/15
Conejo Business Center(3)			1,222		1,262		7.88	%	Fixed	(Note 4)			7/15

			571,396		573,452
Unsecured Lines of Credit:
Floating Rate
Wells Fargo-$310 mm(1)			174,587		105,350		2.88	%	LIBOR + 1.00% (Note 5)		—		4/06
Lehman Brothers-$75 mm(6)			—		75,000		—		LIBOR + 1.30%		—		—
City National Bank-$10 mm(1)			—		—		—		Prime Rate — 0.875%		—		8/03

			174,587		180,350
Unsecured Term Loan:
Floating Rate
Wells Fargo-$125 mm(1),(7)			125,000		—		3.13	%	LIBOR + 1.25%		—		6/04
Unsecured Senior Notes:
Fixed Rate
2005 Notes(8)			199,744		199,667		8.88	%	Fixed		—		3/05
2010 Notes(8)			49,693		49,663		9.15	%	Fixed		—		3/10
2010 Notes(8)			99,324		99,262		8.50	%	Fixed		—		11/10
2007 Notes(8)			149,206		149,089		7.00	%	Fixed		—		11/07

			497,967		497,681

	Total Debt	$	1,368,950	$	1,251,483


			For the Three Months Ended September 30,						For the Nine Months Ended September 30,

			2002			2001			2002			2001

			(unaudited)
Funds From Operations:⁽¹⁾
	Net income		$	15,113		$	23,489		$	53,873		$	75,579
	Depreciation and amortization of real estate assets			27,650			25,854			82,855			74,176
	Gain on sale of properties			—			(24	)		(1,273	)		(3,575	)
	Minority interest			1,478			1,878			4,701			5,806
	Income allocated to preferred units			(1,078	)		(1,078	)		(3,234	)		(3,234	)

Funds From Operations⁽²⁾			$	43,163		$	50,119		$	136,922		$	148,752

Funds Available for Distribution:⁽³⁾
		Funds From Operations	$	43,163		$	50,119		$	136,922		$	148,752
		Non-cash compensation expense		315			545			875			1,395
		Amortization of prepaid financing costs		913			891			2,814			2,645
		Straight-line rent adjustment		(880	)		(2,428	)		(4,665	)		(6,937	)
		Recurring capital expenditures, second generation tenant improvements and leasing commissions^(4),(5)		(8,573	)		(3,685	)		(19,478	)		(15,317	)

Funds Available for Distribution			$	34,938		$	45,442		$	116,468		$	130,538

Weighted average shares outstanding — Diluted				66,513			66,278			66,452			66,125


									Annualized Base Rent
Location			Percent Occupied			Percent Leased			Per Leased Square Foot ⁽¹⁾

											Full Service
									Portfolio Total		Gross Leases⁽²⁾

Los Angeles County
	West			89.2	%		90.9	%	$	27.76	$	27.88
	North			87.2	%		87.8	%		21.29		22.39
	South			88.1	%		89.7	%		19.18		20.25
Orange County				93.4	%		94.7	%		18.19		21.37
San Diego County				88.3	%		88.6	%		18.35		22.66
Ventura/Kern Counties				95.4	%		96.9	%		18.28		18.53
Riverside/San Bernardino Counties				93.4	%		93.4	%		16.67		18.92

		Total/Weighted Average		89.7	%		90.9	%	$	21.26	$	23.28


			Weighted		Percentage			Percentage of
			Average		of Aggregate			Aggregate
			Remaining		Portfolio			Portfolio					Annualized
	Number of		Lease Term		Leased			Annualized			Net Rentable		Base Rent
Tenant	Leases		In Months		Square Feet			Base Rent(1)			Square Feet		(in thousands)

Vivendi Universal		4		91		1.33	%		2.17	%		231,681	$	8,111
State of California		40		47		1.94			1.90			337,118		7,078
University of Phoenix		20		25		1.38			1.23			240,162		4,605
Univision		2		229		0.96			1.14			166,363		4,247
Ceridian Corporation		5		83		0.93			0.96			160,805		3,589
SBC Communications		8		31		0.83			0.84			144,927		3,138
Atlantic Richfield		13		47		0.73			0.71			126,830		2,658
Verizon Communications Inc.		8		23		0.90			0.71			156,612		2,655
U.S. Government		22		42		0.69			0.71			119,829		2,651
Sony		7		19		0.67			0.70			116,729		2,597

Total/Weighted Average⁽²⁾		129		64		10.36	%		11.07	%		1,801,056	$	41,329


			Q1-03			Q2-03			Q3-03			Q4-03

Los Angeles County:
	West	Expiring SF(1)		132,515			94,309			194,434			182,459
		% of Leased SF(2)		0.8	%		0.5	%		1.1	%		1.1	%
		Rent per SF(3)	$	25.69		$	25.68		$	24.37		$	29.66
	North	Expiring SF(1)		58,111			135,777			63,260			164,994
		% of Leased SF(2)		0.3	%		0.8	%		0.4	%		1.0	%
		Rent per SF(3)	$	22.76		$	18.15		$	23.28		$	22.34
	South	Expiring SF(1)		45,799			50,723			138,267			57,875
		% of Leased SF(2)		0.3	%		0.3	%		0.8	%		0.3	%
		Rent per SF(3)	$	20.76		$	19.81		$	17.35		$	20.27

Subtotal -
	Los Angeles County	Expiring SF(1)		236,425			280,809			395,961			405,328
		% of Leased SF(2)		1.4	%		1.6	%		2.3	%		2.4	%
		Rent per SF(3)	$	24.02		$	20.98		$	21.74		$	25.34
	Orange County	Expiring SF(1)		84,295			144,801			374,776			195,108
		% of Leased SF(2)		0.5	%		0.9	%		2.2	%		1.1	%
		Rent per SF(3)	$	17.07		$	16.36		$	17.29		$	16.85
	San Diego County	Expiring SF(1)		289,895			101,684			89,271			92,439
		% of Leased SF(2)		1.7	%		0.6	%		0.5	%		0.5	%
		Rent per SF(3)	$	17.94		$	20.46		$	17.62		$	21.32
	All Others	Expiring SF(1)		21,713			54,447			47,423			45,621
		% of Leased SF(2)		0.1	%		0.3	%		0.3	%		0.3	%
		Rent per SF(3)	$	20.76		$	16.90		$	19.18		$	21.53

Total Portfolio		Expiring SF(1)		632,328			581,741			907,431			738,496

		% of Leased SF(2)		3.7	%		3.4	%		5.3	%		4.3	%

		Rent per SF(3)	$	20.19		$	19.35		$	19.36		$	22.36

	•		Occupancy and rental rates have decreased in recent months, and are expected to decrease further due to the state of the local economy and competition from other office landlords;

	•		Larger tenants are taking more time to make their leasing decisions reflecting the uncertainty in the economy;

	•		Some tenants are under-utilizing their existing space and can therefore expand internally before they need new space;

	•		Tenant concessions have increased and are expected to further increase as a result of competition for prospective tenants;

	•		Sublease space, although stabilizing, stands at about 2.5% of total inventory throughout Southern California; and

	•		Over-building has increased vacancy rates in some submarkets.


	ARDEN REALTY, INC.

Date: November 12, 2002	By:	/s/ Andrew J. Sobel

		Andrew J. Sobel Executive Vice President — Strategic Planning and Operations


Date: November 12, 2002	By:	/s/ Richard S. Davis

		Richard S. Davis Senior Vice President and Chief Financial Officer

1.		I have reviewed this quarterly report on Form 10-Q of Arden Realty, Inc.;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.		The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.		The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.