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Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2003

Commission file number 1-12193

ARDEN REALTY, INC.
(Exact name of registrant as specified in its charter)

Maryland (State or other jurisdiction of incorporation or organization)		95-4578533 (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     [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes     [X]     No     [   ]

As of May 9, 2003 there were 63,195,718 shares of the registrant’s common stock, $.01 par value, issued and outstanding.

Table of Contents

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

PAGE NO.

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31, 2002

3

Consolidated Statements of Income for the three months ended March 31, 2003 and 2002 (unaudited)

4

Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 (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

22

Item 4.

Controls and Procedures

23

PART II.

OTHER INFORMATION

24

SIGNATURES

25

OFFICERS’ CERTIFICATIONS

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

				March 31,				December 31,
				2003				2002
				(unaudited)
Assets
Investment in real estate:
	Land			$	476,034			$	476,034
	Buildings and improvements				2,166,425				2,164,449
	Tenant improvements and leasing commissions				328,588				320,100
					2,971,047				2,960,583
	Less: accumulated depreciation and amortization				(403,521	)			(381,557	)
					2,567,526				2,579,026
	Properties under development				66,915				65,296
	Land available for development				23,765				23,731
	Properties held for disposition, net				40,756				73,571
		Net investment in real estate			2,698,962				2,741,624
Cash and cash equivalents					15,428				4,063
Restricted cash					23,588				20,498
Rent and other receivables, net of allowance of $4,701 and $4,001 at March 31, 2003 and December 31, 2002, respectively					3,559				2,917
Deferred rent					43,764				43,646
Prepaid financing costs, expenses and other assets, net of amortization					20,305				19,661
		Total assets		$	2,805,606			$	2,832,409
Liabilities
Mortgage loans payable				$	569,905			$	570,654
Unsecured lines of credit					195,587				208,587
Unsecured term loan					125,000				125,000
Unsecured senior notes, net of discount					498,159				498,063
Accounts payable and accrued expenses					60,082				55,705
Security deposits					20,517				20,645
Dividends payable					31,849				31,807
		Total liabilities			1,501,099				1,510,461
Minority interest					74,124				74,571
Stockholders’ Equity
Preferred stock, $.01 par value 20,000,000 shares authorized, none issued					—				—
Common stock, $.01 par value, 100,000,000 shares authorized, 63,066,851 and 62,984,217 issued and outstanding at March 31, 2003 and December 31, 2002, respectively					632				631
Additional paid-in capital					1,246,081				1,260,773
Deferred compensation					(12,465	)			(11,259	)
Accumulated other comprehensive loss					(3,865	)			(2,768	)
		Total stockholders’ equity			1,230,383				1,247,377
		Total liabilities and stockholders’ equity		$	2,805,606			$	2,832,409

See accompanying notes to consolidated financial statements.

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

			Three Months Ended
			March 31,
			2003				2002
Property revenues			$	104,276			$	99,701
Property operating expenses				32,267				29,283
				72,009				70,418
General and administrative expenses				3,652				2,960
Interest expense				23,035				21,397
Depreciation and amortization				28,961				25,580
Interest and other income				(132	)			(540	)
Income from continuing operations before gain on sale of properties and minority interest				16,493				21,021
Gain on sale of operating properties				—				1,192
Income from continuing operations before minority interest				16,493				22,213
Minority interest				(1,486	)			(1,655	)
Income from continuing operations				15,007				20,558
Discontinued operations, net of minority interest				1,070				795
Loss on sale of discontinued properties				(639	)			—
Net income			$	15,438			$	21,353
Basic net income per common share:
	Income from continuing operations		$	0.23			$	0.32
	Income from discontinued operations			0.01				0.01
Net income per common share — basic			$	0.24			$	0.33
Weighted average number of common shares — basic				63,040				64,405
Diluted net income per common share:
	Income from continuing operations		$	0.23			$	0.32
	Income from discontinued operations			0.01				0.01
Net income per common share — diluted			$	0.24			$	0.33
Weighted average number of common shares — diluted				63,126				64,683

See accompanying notes to consolidated financial statements.

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

					Three Months Ended
					March 31,
					2003				2002
Operating Activities:
	Net income				$	15,438			$	21,353
	Adjustments to reconcile net income to net cash provided by operating activities:
		Minority interest, including discontinued operations				1,498				1,677
		Gain on sale of operating properties				—				(1,192	)
		Loss on sale of discontinued operations				639				—
		Depreciation and amortization, including discontinued operations				29,526				26,383
		Amortization of loan costs				946				937
		Non-cash compensation expense				389				245
		Changes in operating assets and liabilities:
			Rent and other receivables			(642	)			2,562
			Deferred rent			(118	)			(1,596	)
			Prepaid financing costs, expenses and other assets			(1,494	)			(13	)
			Accounts payable and accrued expenses			3,280				(2,094	)
			Security deposits			(128	)			16
	Net cash provided by operating activities					49,334				48,278
Investing Activities:
	Improvements to commercial properties					(19,386	)			(31,659	)
	Proceeds from sale of properties					31,943				6,122
	Net cash provided by (used in) investing activities					12,557				(25,537	)
Financing Activities:
	Repayments of mortgage loans					(749	)			(721	)
	Proceeds from unsecured lines of credit					36,500				10,000
	Repayments of unsecured lines of credit					(49,500	)			(27,000	)
	Proceeds from issuance of common stock					64				1,166
	Distributions to preferred operating partnership unit holders					(1,078	)			(1,078	)
	Increase in restricted cash					(3,090	)			(2,828	)
	Distributions to minority interests					(867	)			(901	)
	Dividends paid					(31,806	)			(31,408	)
	Net cash used in financing activities					(50,526	)			(52,770	)
Net increase (decrease) in cash and cash equivalents						11,365				(30,029	)
Cash and cash equivalents at beginning of period						4,063				37,041
Cash and cash equivalents at end of period					$	15,428			$	7,012
Supplemental Disclosure of Cash Flow Information:
		Cash paid during the period for interest, net of amounts capitalized			$	23,555			$	22,353

See accompanying notes to consolidated financial statements.

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Arden Realty, Inc.
Notes to Consolidated Condensed Financial Statements
March 31, 2003
(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 March 31, 2003, our portfolio was comprised of 136 primarily suburban office properties, consisting of 222 buildings with approximately 19.3 million net rentable square feet including one property with approximately 283,000 net rentable square feet under lease-up. As of March 31, 2003 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 March 31, 2003 consisted of limited partnership interests in the Operating Partnership of approximately 2.7%, exclusive of ownership interests of the Operating Partnership’s preferred unit holders.

     2. Summary of Significant Accounting Policies

          Basis of Presentation

               The accompanying consolidated financial statements include the accounts of Arden Realty, Inc., the operating partnership, and our subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

               We consolidate all entities for which we have controlling financial interest as measured by a majority of the voting interest. For entities in which the controlling financial interest is not clearly indicated by ownership of a majority of the voting interest, we would consolidate those entities that we control by agreement.

               We currently own 100% of all of our consolidated subsidiaries and do not have any unconsolidated investments other than an investment in the securities of a non-publicly traded company. This investment represents approximately 5.8% of the total equity outstanding for this particular company. Because we do not control this company contractually nor exert significant influence over its operating and financial policies, we account for this investment under the cost method of accounting.

          Interim Financial Data

               The accompanying consolidated condensed financial statements should be read in conjunction with our 2002 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.

          Reclassifications

               Certain prior year amounts have been reclassified to conform with the current year presentation.

     3. New Accounting Standards

               In April 2002, FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS 145). SFAS 145 rescinds Statement No. 4 “Reporting Gains and Losses from Extinguishment of Debt.” Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified to income before extraordinary items. The provisions of SFAS 145 are effective for 2003. Our adoption of this statement in 2003 did not have an impact on our consolidated financial statements.

               In June 2002, FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred based on the present value of the expected contingent payment under the guarantee. The provisions of SFAS 146 are effective for 2003. Our adoption of this statement in 2003 did not have an impact on our consolidated financial statements.

               In January 2003, FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and provides guidance on the identification of entities for which control is achieved through means other than through voting rights and how to determine when and which business enterprise should consolidate such an entity. This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. Our adoption of this statement in 2003 did not have an impact on our consolidated financial statements.

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               In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires guarantees and indemnification agreements meeting the characteristics described in FIN 45 to be initially recorded as a liability at fair value. FIN 45 also requires a guarantor to make new disclosures for guarantees, even if the likelihood of the guarantor having to make payment under the guarantee is remote. The disclosure requirements within FIN 45 are effective for 2002 and its adoption is required for 2003 on a prospective basis to guarantees issued or modified after December 31, 2002. We adopted the disclosure provisions of FIN 45 in 2003. Our adoption of this statement did not have an impact on our consolidated financial statements.

     4. Property Dispositions

               On March 11, 2003, we sold an approximate 140,000 square foot office property located in West Hollywood, California for an approximate gross sales price of approximately $32.5 million.

               As of March 31, 2003, properties held for disposition consisted of five properties representing approximately 375,000 square feet. See footnote 10 for additional discussion on property dispositions.

     5. Outstanding Indebtedness

               A summary of our outstanding indebtedness as of March 31, 2003 and December 31, 2002 is as follows:

											Stated Annual
			March 31,								Interest Rate at								Number of
			2003				December 31,				March 31, 2003				Rate				Properties
Type of Debt			(unaudited)				2002				(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)				107,578				108,153				6.94	%		Fixed					12				4/09
Mortgage Financing VI(3)				21,769				21,816				7.54	%		Fixed					3				4/09
Activity Business Center(3)				7,539				7,580				8.85	%		Fixed					1				5/06
145 South Fairfax(3)				3,940				3,952				8.93	%		Fixed					1				1/27
Marin Corporate Center(3)				2,820				2,850				9.00	%		Fixed					1				7/15
Conejo Business Center(3)				2,765				2,795				8.75	%		Fixed				(Note 4)					7/15
Conejo Business Center(3)				1,194				1,208				7.88	%		Fixed				(Note 4)					7/15
				569,905				570,654
Unsecured Lines of Credit:
Floating Rate
Wells Fargo-$310 mm(1)				195,587				208,587				2.77	%		LIBOR + 1.00% (Notes 5,6)					—				4/06
City National Bank-$10 mm(1)				—				—				—			Prime Rate — 0.875%					—				8/03
				195,587				208,587
Unsecured Term Loan:
Floating Rate
Wells Fargo-$125 mm(1),(7)				125,000				125,000				3.64	%		Fixed (Note 8)					—				6/04
Unsecured Senior Notes:
Fixed Rate
2005 Notes(9)				199,795				199,769				8.88	%		Fixed					—				3/05
2007 Notes(9)				149,284				149,245				7.00	%		Fixed					—				11/07
2010 Notes(9)				49,714				49,704				9.15	%		Fixed					—				3/10
2010 Notes(9)				99,366				99,345				8.50	%		Fixed					—				11/10
				498,159				498,063
	Total Debt		$	1,388,651			$	1,402,304

     6. Interest Rate Swap Agreements

               We have interest rate swap agreements to effectively convert floating rate debt into fixed rate debt. Net amounts received or paid under these agreements are recognized as an adjustment to interest expense when such amounts are incurred or earned. Our objective in using interest rate swap agreements is to limit our exposure to interest rate movements. During 2002, such agreements were used to fix the floating interest rate associated with $50 million of the Wells Fargo unsecured line of credit and the entire $125 million balance of the unsecured term loan.

               Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), as amended and interpreted, establishes accounting and reporting standards for derivative instruments and for hedging activities. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular

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risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

               For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss), outside of earnings and subsequently recognized to earnings when the hedged transaction affects earnings.

               Under SFAS 133 our interest rate swap agreements are classified as cash flow hedges with their fair value as of March 31, 2003 of approximately $3.9 million reported in accumulated other comprehensive loss on our balance sheet. The estimated fair value of these interest rate swap agreements are dependent on changes in market interest rates and other market factors that affect the value of such agreements. Consequently, the estimated current fair value may significantly change during the term of the agreements. Any estimated gain or loss from these agreements will be amortized into earnings as we recognize the interest expense for the underlying floating-rate loans at the fixed interest rate provided under our agreements. If the underlying floating rate loans were to be repaid prior to maturity, we would recognize into interest expense any unamortized gain or loss at the time of such early repayment.

               As of March 31, 2003, we did not have any derivatives that could be designated as fair value hedges.

     7. Stockholders’ Equity and Minority Interests

               A common operating partnership unit, or common 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. A common 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 28, 2003, we issued a total of 81,500 restricted stock awards to several key executive officers. Holders of these shares of restricted stock have full voting rights and will receive any dividends paid but are prohibited from selling or transferring unvested shares. Of the 81,500 restricted shares awarded, 48,000 shares vest equally over three years and 33,500 shares vest after three years (cliff vesting). We recorded a deferred compensation charge of approximately $1.7 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 March 11, 2003, we declared a quarterly dividend of $0.505 per share to stockholders of record on March 31, 2003.

     8. Revenue from Rental Operations and Property Expenses

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

     9. Stock Option Plan

               Beginning on January 1, 2003, we adopted the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation” under which we began expensing the costs of new stock options granted to employees in 2003. We used the Black-Scholes option valuation model to estimate the fair value of the stock options granted in 2003. During the three months ended March 31, 2003, we expensed approximately $8,000 of stock based employee compensation costs.

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               The following table reflects pro forma net income and earnings per share had we elected to expense all options granted prior to 2003 assuming the fair value method and using the Black-Scholes option valuation model (in thousands, except per share amounts):

     10. Subsequent Events

               On April 11, 2003, we sold four properties totaling approximately 343,000 square feet located in Riverside and San Bernardino counties for approximately $43.4 million. The net proceeds from this disposition were used to reduce the outstanding balance on our Wells Fargo unsecured line of credit.

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     Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     The following discussion relates to our unaudited consolidated financial statements included herein, which should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Form 10-Q and in our 2002 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 11 to 33 years and who collectively have an average of 19 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 March 31, 2003, 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 136 primarily suburban office properties, consisting of 222 buildings with approximately 19.3 million net rentable square feet, including one development property with approximately 283,000 net rentable square feet under lease-up. As of March 31, 2003, our properties were 89.7% occupied.

Business Strategy

     Our primary business strategy is to actively manage our portfolio to seek 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 also selectively develop, renovate 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 we believe will generate higher long-term value.

     We continue to seek to build a tenant base of smaller, diverse companies that limits 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.

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 continued downward pressures due to several factors as follows:

	•		Job growth in Southern California, which we believe to be a leading indicator of office demand in the region, was negative in 2002 as well as in the first quarter of 2003 and is largely dependent on improved economic activity;
	•		Occupancy and rental rates have decreased in recent months, 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 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;
	•		Sublease space is impacting vacancy and rental rates in some submarkets; and
	•		Over-building has increased vacancy rates in some submarkets.

     These factors have contributed to a decrease in the occupancy of our portfolio from 90.1% as of December 31, 2002 to 89.7% as of March 31, 2003.

     According to published reports, overall market rental rates in Southern California declined 1 to 2% during the three months ended March 31, 2003. Given the current trends, including the expected continued occupancy pressures and more aggressive pricing for sublease space, we expect market rates will decline by an additional 3 to 4% during the remainder of 2003. Concessions also rose during the three months ended March 31, 2003. As occupancy pressures continue, we expect concessions in either free rent or higher tenant improvement allowances to rise.

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     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,” in our 2002 Annual Report on Form 10-K.

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RESULTS OF OPERATIONS

     Our financial position and operating results primarily relate to 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 March 31, 2003 to the three months ended March 31, 2002
(in thousands, except number of properties and percentages):