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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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 (IRS EMPLOYER I.D. NUMBER)
INCORPORATION OR ORGANIZATION)
11601 WILSHIRE BOULEVARD 90025-1740
FOURTH FLOOR (ZIP CODE)
LOS ANGELES, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 966-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by checkmark 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. Yes [ ]
The aggregate market value of the shares of common stock held by
non-affiliates was approximately $1.4 billion based on the closing price on the
New York Stock Exchange for such shares on March 15, 1999.
The number of the Registrant's shares of common stock outstanding was
62,407,737 as of March 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates information by reference from the
definitive Proxy Statement for the Annual Meeting of Stockholders, to be held on
May 18, 1999.
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ARDEN REALTY, INC.
TABLE OF CONTENTS
ITEM
NO. PAGE NO.
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PART I
1. Business.................................................... 1
2. Properties.................................................. 16
3. Legal Proceedings........................................... 27
4. Submission of Matters to a Vote of Security Holders......... 27
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 28
6. Selected Financial Data..................................... 29
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 32
7A. Quantitative and Qualitative Disclosure About Market Risk... 43
8. Financial Statements and Supplementary Data................. 43
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 43
PART III
10. Directors and Executive Officers of the Registrant.......... 44
11. Executive Compensation...................................... 44
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 44
13. Certain Relationships and Related Transactions.............. 44
PART IV
14. Exhibits, Financial Statements and Schedule, and Reports on
Form 8-K.................................................. 45
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PART I
ITEM 1. BUSINESS
(a) General Development of Business.
BACKGROUND AND FORMATION
The terms "Arden Realty", "us", "we" and "our" as used in this report refer to
Arden Realty, Inc. Arden Realty was incorporated in Maryland in May 1996 and was
formed to continue and expand the real estate business of Arden Realty Group,
Inc. and a group of affiliated entities (the "Arden Predecessors"). Commencing
with our taxable year ended December 31, 1996, Arden Realty has operated and
qualified as a real estate investment trust ("REIT") for federal income tax
purposes.
Arden Realty is the sole general partner of Arden Realty Limited Partnership
(the "Operating Partnership"). We conduct substantially all of our business
through the Operating Partnership and certain other majority owned subsidiaries,
which hold our interests in our real estate assets.
On October 9, 1996, we completed an initial public offering (the "IPO") of our
common stock, $.01 par value (the "Common Stock"). Concurrent with consummation
of the IPO, Arden Realty, together with the partners and members of the Arden
Predecessors, engaged in certain formation transactions which, among other
things, resulted in our acquisition of 24 commercial properties from certain
members of the Arden Predecessors. Since our initial public offering, we have
pursued a strategy of acquiring under-performing commercial properties,
properties in need of renovation, properties which provide attractive yields
with stable cash flow, and more recently, fully entitled commercial undeveloped
real estate, all in Southern California submarkets where we can utilize our
local market expertise.
(b) Financial Information about Industry Segments.
We are currently involved in only one industry segment, namely real estate.
Therefore, all of the financial information contained herein relates to this
industry segment.
(c) Narrative Description of the Business.
BUSINESS
We are a self-administered and self-managed REIT engaged in acquiring,
developing, renovating, leasing and managing commercial properties located in
Southern California. As of December 31, 1998, we owned a portfolio of 138
primarily office properties containing approximately 18 million rentable square
feet (the "Properties"), making us the largest publicly traded owner of office
space in Southern California as measured by total rentable square feet owned.
BUSINESS AND GROWTH STRATEGIES
Our primary business objectives are to maximize growth in cash flow and to
enhance the value of our portfolio to maximize total return to our stockholders.
We believe we can achieve these objectives by continuing to implement our
business strategies and by capitalizing on the internal and external growth
opportunities described below. Based on our geographic focus and evaluation of
local market conditions, we also believe that a number of factors provides us
opportunities to maximize occupancy and rental rates and overall portfolio
value, including:
- The continuing improvement of the Southern California economy.
- The limited construction of new office properties in the Southern California
region due to substantial building construction limitations in many
submarkets.
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BUSINESS STRATEGIES
Our primary business strategy is to actively manage our portfolio to achieve
gains in occupancy and rental rates and to reduce operating expenses. When
market conditions permit, we may also acquire underperforming office and
industrial properties, properties in need of renovation, or properties that
provide attractive yields with stable cash flow in submarkets where we can
utilize our local market expertise and extensive real estate experience. We may
also continue to develop new properties, when market conditions permit, in
submarkets where we have extensive local market expertise.
Through our regional management and leasing offices, we implement our business
strategies by:
- Utilizing a multidisciplinary approach to acquisition, finance, development,
renovation, leasing and management activities that is designed to coordinate
decision-making and enhance responsiveness to market opportunities and
tenant needs.
- Emphasizing tenant satisfaction and retention and employing intensive
property marketing programs.
- Implementing cost control management techniques and systems that capitalize
on economies of scale and concentration arising from the size and geographic
focus of our portfolio.
We believe the implementation of these operating practices has been
instrumental in the increased occupancy and operating results of our existing
portfolio.
Integrated Decision-Making and Responsiveness.
Our acquisition, finance, development, renovation, leasing and management
activities are coordinated to enhance responsiveness to market opportunities and
tenant needs. The acquisition, finance, development, leasing and renovation
teams work closely with our senior management, from the initial meetings with
prospective tenants or sellers and throughout the negotiation process. This
integrated approach permits us to analyze the economic terms and costs
(including tenant build-out and retrofitting costs) for each lease on a timely
and efficient basis throughout lease negotiations. With respect to acquisitions,
this integrated approach allows us to quickly analyze the costs of necessary
upgrades and lease-up potential. We are therefore able to analyze and commit to
leasing and acquisition terms quickly, facilitate timely deal execution and
build-out of space for prospective tenants, and minimize downtime after lease
expirations.
Aggressive Leasing.
The concentration of many of our Properties within certain office submarkets
and our relationships with a broad array of tenants and brokers enable us to
pursue aggressive leasing strategies, to effectively monitor the office space
requirements of existing and potential tenants and to offer tenants a variety of
space alternatives across our portfolio. In an effort to realize cost savings
and exercise more control over lease negotiations, we have implemented in-house
leasing programs for approximately 72% of our Properties in selected submarkets
in which we have a substantial market presence. We continue to employ
third-party broker listings in the submarkets in which we have a less
significant market presence. In 1998, we signed 905 leases for approximately 4.2
million rentable square feet, including approximately 900,000 square feet of net
absorption.
Our ability to rent expiring lease space at estimated levels is highly
dependent upon many factors over which we have no control. These factors
include, the national economic climate, perceptions of prospective tenants of
the attractiveness of the property, and our ability to maintain and manage the
properties. We also have numerous competitors and some of the competing
properties may be newer, better located or owned by parties better capitalized
than us. As new commercial properties are developed and the number of
competitive commercial properties in a particular area increases, competitive
pressures will increase as well. Additionally, all of our properties are located
in Southern California. Our ability to charge estimated rents could adversely
affected by the local economic
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climate (which could be adversely impacted by business layoffs or downsizing,
industry slowdowns, changing demographics and other factors) and local real
estate conditions (such as oversupply of or reduced demand for office and other
competing commercial properties). The preceding discussion is not intended as an
exhaustive list of the risks associated with occupancy and rental rate
projections and should be read in conjunction with "Risk Factors -- Real Estate
Ownership Risk," "-- Risk that We May be Unable to Retain Tenants or Rent Space
Upon Lease Expirations," "-- Impact of Competition on Occupancy Levels and Rents
Charged," and "-- Concentration of Properties in Southern California."
Cost Control and Operating Efficiencies.
The size and geographic location of our portfolio permits us to enhance
portfolio value by lowering operating costs and expenses, in comparison to
single-site ownership and management. We seek to capitalize on the economies of
scale and concentration which result from the geographic focus of our portfolio,
the ownership and management of multiple properties within certain submarkets
and the maintenance of a centralized purchasing and accounting system for cost
control at each of our Properties.
GROWTH STRATEGIES
Internal Growth.
We believe that opportunities exist to increase cash flow from our existing
portfolio and that such opportunities will be enhanced as the Southern
California commercial real estate market continues to improve. We intend to
pursue internal growth by:
- Continuing to maintain and improve occupancy rates through active management
and aggressive leasing.
- Realizing fixed contractual base rental increases or increases tied to
indices such as the Consumer Price Index.
- Re-leasing space as leases expire at increasing market rents which are
expected to result over time from increased demand for commercial space in
Southern California.
- Controlling operating expenses through active cost control management and
systems.
- Optimizing economies of scale and concentration arising from the size and
geographic focus of our portfolio.
(i) Maintaining and improving occupancy rates: We believe that we have
been successful in attracting, expanding and retaining a diverse tenant
base by actively managing our Properties with an emphasis on tenant
satisfaction and retention. We strive to be responsive to the needs of
individual tenants through our on-site professional management staff and by
providing tenants with alternative space within our portfolio to
accommodate their changing space requirements. Our success in maintaining
and improving occupancy rates is demonstrated, in part, by the number of
existing tenants that have renewed or released their space, leased
additional space to support their expansion needs, or moved to other space
within our portfolio. During 1998 we retained 79.4% and 71.4.% of the
tenant's whose leases expired in our office and industrial/retail
Properties, respectively. We also seek to improve occupancies by
aggressively marketing available space within our portfolio.
(ii) Re-leasing space as leases expire at increasing market
rents: Although there can be no assurances in this regard, we believe that
as the commercial real estate market in Southern California continues to
improve, there will be increasing demand for office space and declining
vacancy rates which are expected to result over time in increasing market
rents. We believe we will have significant opportunities to increase cash
flow during such periods of increasing market rents by renewing or
re-leasing space as leases expire at higher market rents.
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(iii) Cost control management and systems: We plan to continue
lowering our operating expenses through active cost control management at
all of our Properties. We focus on cost control in various areas of
operations. We continuously monitor the operating performance of our
Properties and employ energy enhancing and expense recovery technologies
when appropriate. These system enhancements include lighting retrofits,
replacement of inefficient heating, ventilation and air conditioning
systems, computer-driven energy management systems which monitor and react
to the climatic requirements of individual Properties and enhancement of
billing systems, which enable us to more efficiently recover certain
operating expenses from our tenants.
(iv) Capitalizing on economies of scale and concentration: In order to
capitalize on economies of scale and concentration arising from the size
and geographic focus of our portfolio, our property and regional managers
are often responsible for several Properties, which spreads administrative
costs over such Properties and reduces per square foot administrative
expense. In addition, we believe that parking operations, building and
other services and tenant improvements purchased in bulk on a
portfolio-wide basis will facilitate further benefits from these economies
of scale and concentration.
External Growth.
We believe in the strength and potential of the Southern California commercial
real estate market and intend to continue focusing our resources in this region.
We have assembled a management team that has extensive experience and knowledge
in this market that we believe provides us with a competitive advantage in
identifying and capitalizing on development and acquisition opportunities.
Consistent with our recent development and redevelopment activity at both
Westwood Center and the Howard Hughes Center, our approach is to seek
opportunities in Southern California submarkets where we have an existing
presence and where the following conditions exist:
- Low vacancy rates.
- Opportunities for long-term stable and rising rental rates due to employment
growth and or population movements.
- A minimum of developable land.
- Significant barriers to entry because of constraints on new development
including challenging entitlement processes, strictly enforced height and
density restrictions and governmental requirements resulting in significant
additional construction costs.
We generally target properties for acquisition in submarkets in which we have
an existing presence and which are underperforming, need renovation or provide
attractive yields with stable cash flow and offer opportunities for us to
implement our value-added strategy to increase cash flow. Volatility in both
capital and investment markets have resulted in fewer recent viable acquisition
opportunities. We intend to continue assessing market conditions and acquisition
opportunities and add those properties to our portfolio that meet our strategic
requirements.
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ACQUISITIONS
The following table lists certain information on the 66 commercial properties
we acquired during 1998:
APPROXIMATE NET ACQUISITION
RENTABLE COST MONTH
PROPERTY NAME LOCATION SQUARE FEET (MILLIONS) ACQUIRED
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OFFICE
LOS ANGELES COUNTY
Los Angeles West
9100 Wilshire Beverly Hills 326,227 $ 65.1 January
Westwood Center(1) Los Angeles 313,000 28.7 January
World Savings Center Los Angeles (2) 27.5 March
600 Corporate Pointe Culver City 273,339 (3) March
1919 Santa Monica Santa Monica 44,096 (3) March
11075 Santa Monica Los Angeles 35,696 5.0 April
Los Angeles North
Sunset Pointe Plaza Newhall 58,105 8.5 January
Westlake Gardens Westlake 49,639 7.3 January
5161 Lankershim North Hollywood 178,317 (3) March
150 East Colorado Pasadena 61,168 (3) March
Calabasas Tech Center Calabasas 273,526 46.1 May
Lyons Plaza Santa Clarita 61,203 8.4 June
601 South Glenoaks Burbank 72,524 9.8 August
Tourney Pointe(1)(4) Valencia 219,991 27.5 September
Los Angeles South
1501 Hughes Way Long Beach 77,060 (3) March
3901 Via Oro Long Beach 53,195 (3) March
Continental Grand El Segundo 235,926 47.6 April
Oceangate Tower Long Beach 210,907 23.5 May
91 Freeway Center Artesia 94,516 11.9 August
ORANGE COUNTY
Savi Tech Center Yorba Linda 341,446 (3) March
Yorba Linda Business Park Yorba Linda 167,142 (3) March
Huntington Commerce Center Huntington Beach 67,551 (3) March
Huntington Beach Plaza I & II Huntington Beach 52,186 (3) March
5702 Bolsa Huntington Beach 27,731 (3) March
5632 Bolsa Huntington Beach 21,568 (3) March
5672 Bolsa Huntington Beach 11,968 (3) March
Von Karman Corporate Center Irvine 451,477 (3) March
Orange Financial Center Orange 305,439 (3) March
625 The City Orange 139,806 (3) March
Fountain Valley Plaza Fountain Valley 107,252 (3) March
3300 Irvine Avenue Newport Beach 74,224 (3) March
1503 South Coast Costa Mesa 60,605 (3) March
One Venture Irvine 43,324 (3) March
Lambert Office Plaza Brea 32,807 (3) March
SAN DIEGO COUNTY
Activity Business Center San Diego 167,045 14.9 January
Skypark Office Plaza San Diego 202,164 (3) March
Sorrento Valley Science Park San Diego 181,207 (3) March
Panorama Corporate Center San Diego 133,245 (3) March
Governor Park Plaza San Diego 104,065 (3) March
Torreyanna Science Park La Jolla 81,204 (3) March
Balboa Corporate Center San Diego 69,890 (3) March
10251 Vista Sorrento San Diego 69,386 (3) March
Westridge San Diego 48,850 (3) March
Ruffin Corporate Center San Diego 45,059 (3) March
10180 Scripps Ranch San Diego 43,560 (3) March
5120 Shoreham San Diego 37,759 (3) March
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APPROXIMATE NET ACQUISITION
RENTABLE COST MONTH
PROPERTY NAME LOCATION SQUARE FEET (MILLIONS) ACQUIRED
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SAN DIEGO COUNTY (CONTINUED)
Uniden Building San Diego 28,119 (3) March
Cymer Technology Center Rancho Bernardo 155,612 (3) March
Carlsbad Corporate Center Carlsbad 125,000 (3) March
Poway Industrial Poway 112,000 (3) March
10965-93 Via Frontera Rancho Bernardo 77,920 (3) March
Genesee Executive Plaza San Diego 155,820 27.0 June
VENTURA COUNTY
Camarillo Business Center Camarillo 154,216 (3) March
Solar Drive Business Park Oxnard 125,132 17.1 July
RIVERSIDE & SAN BERNARDINO
COUNTIES
Hunter Business Park Riverside 106,782 (3) March
Chicago Avenue Business Park Riverside 47,482 (3) March
Tower Plaza I Temecula 72,350 (3) March
Tower Plaza II Temecula 19,301 (3) March
Tower Plaza III Temecula 12,483 (3) March
Centrelake Plaza Ontario 110,763 (3) March
HDS Plaza San Bernardino 104,178 (3) March
Havengate Center Rancho Cucamonga 80,557 (3) March
INDUSTRIAL
RIVERSIDE & SAN BERNARDINO
COUNTIES
Ontario Airport Commerce Center Ontario 213,127 (3) March
Highlands I Temecula 26,856 (3) March
Highlands II Temecula 41,210 (3) March
RETAIL
INLAND EMPIRE
Tower Plaza Retail Temecula 133,481 (3) March
LOS ANGELES WEST
The Spectrum Club Los Angeles 36,959 (5) March
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Sub-total 7,665,743 375.9
LBA Portfolio -- 619.9(3)
Howard Hughes Center -- 38.6(5)
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Total 7,665,743 $1,034.4
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(1) Property currently under renovation.
(2) At January 1, 1998 we owned a 75% interest in this property and exercised an
option to purchase the remaining 25% interest for $27.5 million on March 25,
1998, resulting in a total acquisition cost of approximately $110.7 million.
(3) On March 1, 1998, we acquired a portfolio of 50 primarily office and
industrial properties (the "LBA Portfolio"), aggregating approximately 5.2
million rentable square feet for a purchase price of approximately $619.9
million, including $1.8 million of closing costs and the estimated $3.6
million value of warrants to purchase 2.5 million shares of our Common
Stock.
(4) We acquired a 99.33% interest in this property.
(5) On March 31, 1998, we acquired the undeveloped commercial property portions
of the 70-acre Howard Hughes Center and a building containing an executive
health and athletic club (the "Center") for approximately $38.6 million. The
Center, located in West Los Angeles, California, is a mixed-use development
currently containing three office buildings, the executive health and
athletic club building and entitlements for an additional 1.3 million square
feet of office space.
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EMPLOYEES
As of December 31, 1998, we had 228 full-time employees.
(d) Foreign Operations.
We do not engage in any foreign operations or derive revenues from foreign
sources.
FORWARD-LOOKING STATEMENTS
This Form 10-K, including the documents incorporated herein by reference,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act. Also, documents subsequently filed by Arden Realty with the
Securities Exchange Commission and incorporated herein by reference will contain
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below and the matters set forth or incorporated in this Form 10-K
generally. We caution the reader, however, that this list of factors may not be
exhaustive, particularly with respect to future filings.
RISK FACTORS
In addition to the other information contained or incorporated by reference in
this Form 10-K readers should carefully consider the following factors.
REAL ESTATE FINANCING RISKS
Inability to Repay or Refinance Indebtedness at Maturity.
We will be subject to risks normally associated with debt financing, including
the risk that the our cash flow will be insufficient to meet required payments
of principal and interest, the risk that any indebtedness will not be able to be
refinanced or that the terms of any such refinancing will not be as favorable as
the terms of our current indebtedness. If, at maturity, our indebtedness cannot
be refinanced, extended or paid with proceeds of other capital transactions,
such as the issuance of new equity capital, we expect that our cash flow will
not be sufficient in all years to pay distributions at expected levels and to
repay all maturing debt. Furthermore, if prevailing interest rates or other
factors at the time of refinancing result in higher interest rates, the interest
expense relating to that refinanced indebtedness would increase, adversely
affecting our cash flow and the amounts available for distributions to our
stockholders.
Risk of Failure to Cover Debt Service of Current Collateralized Debt Under the
Mortgage Financing.
Arden Realty, through special purpose entities, currently has outstanding
three mortgage financings (collectively the "Mortgage Financings") totaling
$422.3 million. The payments and other obligations under each of the Mortgage
Financings are secured by fully cross-collateralized and cross-defaulted first
mortgage liens on 18, 22 and 12 of our properties (collectively, the "Mortgage
Financing Properties"), respectively, and $10 million in cash collateral. One of
the Mortgage Financings totaling $175 million requires monthly payments of
interest only, with all principal anticipated to be repaid on June 2004. Two of
the Mortgage Financings totaling $247.3 million require monthly payments of
interest only for five years and monthly payments of principal and interest
thereafter, with all principal anticipated to be repaid on June 2008. If the
Mortgage Financing totaling $175 million is not repaid or refinanced by June
2004, the interest rate increases by at least 2% and all excess cash flow from
the Mortgage Financing Properties must be used to pay down principal. If the
Mortgage Financings totaling $247.3 million are not repaid or refinanced by June
2008, the interest rates increase by at least 5% and all excess cash flow from
those Mortgage Financing Properties must be used to pay down principal. If we
are unable to meet our obligations under the Mortgage Financings, the Mortgage
Financing Properties securing our debt could be foreclosed on, which would have
a material adverse effect on us and our ability to make expected distributions.
Similarly, six of our other Properties that
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are subject to single property mortgage financing are, and any of our future
indebtedness secured by any of the Properties we own will be, subject to this
risk of foreclosure.
Potential Effect of Rising Interest Rates on Our Variable Rate Debt.
Approximately 45% of our indebtedness at December 31, 1998 bore interest at
variable rates. In addition, we may incur other variable rate indebtedness in
the future. Increases in interest rates on that indebtedness would increase our
interest expense, which could adversely affect our cash flow and the amounts
available for distributions to our stockholders.
No Limitation on Debt.
While we currently have a policy of incurring debt only if, upon incurrence,
the debt to total market capitalization ratio would be 50% or less, our
organizational documents contain no limitation on the amount of indebtedness
that we may incur. Accordingly, our Board of Directors could alter or eliminate
this policy. If this policy were changed, we could become more highly leveraged,
resulting in an increase in debt service that could adversely affect our cash
flow and, consequently, the amount available for distribution to stockholders,
and could increase the risk of default on our indebtedness.
We have established our debt policy relative to our total market
capitalization rather than relative to the book value of our assets. We have
used total market capitalization because we believe that the book value of our
assets (which to a large extent is the depreciated original cost of real
property, our primary tangible assets) does not accurately reflect our ability
to borrow and to meet debt service requirements. Our market capitalization,
however, is more variable than book value, and may not necessarily reflect the
fair market value of our underlying assets at all times. We also will consider
factors other than market capitalization in making decisions regarding the
incurrence of indebtedness, such as the use of proceeds from the indebtedness,
the estimated market value of our Properties upon refinancing and the ability of
particular Properties and Arden Realty as a whole to generate cash flow to cover
expected debt service.
REAL ESTATE INVESTMENT RISKS
Real Estate Ownership Risks.
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend in large part on the
amount of income generated and expenses incurred. If our Properties do not
generate revenue sufficient to meet operating expenses, including debt service,
tenant improvements, leasing commissions and other capital expenditures, we may
have to borrow additional amounts to cover fixed costs, and our cash flow and
ability to make distributions to our stockholders will be adversely affected.
Our revenue and the value of our Properties may be adversely affected by a
number of factors, including:
- The national economic climate.
- The local economic climate.
- Local real estate conditions.
- The perceptions of prospective tenants of the attractiveness of the
property.
- Our ability to manage and maintain the Properties and secure adequate
insurance.
- The potential increase in operating costs (including real estate taxes and
utilities).
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In addition, real estate values and income from properties are also affected
by such factors as:
- Applicable laws, including tax laws.
- Interest rate levels.
- Availability of financing.
Risk That We May be Unable to Retain Tenants or Rent Space Upon Lease
Expirations.
We are and will be subject to the risks that upon expiration, leases may not
be renewed, the space may not be relet or the terms of renewal or reletting
(including the cost of required renovations) may be less favorable than current
lease terms. If we are unable to promptly relet or renew leases for all or a
substantial portion of this space, or if the rental rates upon such renewal or
reletting are significantly lower than expected, our cash flow and ability to
make expected distributions to stockholders could be adversely affected.
Restraints on Our Flexibility to Liquidate Real Estate.
Equity real estate investments are relatively illiquid. That illiquidity will
tend to limit our ability to vary our portfolio promptly in response to changes
in economic or other conditions. In addition, the Internal Revenue Code of 1986,
as amended (the "Code"), limits a REIT's ability to sell properties held for
fewer than four years, which may affect our ability to sell properties without
adversely affecting returns to stockholders.
Impact of Competition on Occupancy Levels and Rents Charged.
Numerous office properties compete with our Properties in attracting tenants
to lease space. Some of the competing properties may be newer, better located or
owned by parties better capitalized than Arden Realty. The number of competitive
commercial properties in a particular area could have a material adverse effect
on:
- Our ability to lease space in the Properties (or at newly acquired or
developed properties).
- The rents we can charge.
Potential Increases in Certain Taxes and Regulatory Compliance Costs.
Because increases in income, service or transfer taxes are generally not
passed through to tenants under leases, any increases may adversely affect our
cash flow and our ability to make distributions to stockholders. Our Properties
are also subject to various federal, state and local regulatory requirements,
such as requirements of the Americans with Disabilities Act (the "ADA") and
state and local fire and life safety requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants. We believe that our Properties are
currently in substantial compliance with these regulatory requirements and that
any noncompliance would not have a material adverse effect on us. However, there
can be no assurance that these requirements will not be changed or that new
requirements will not be imposed which would require significant unanticipated
expenditures by us and could have an adverse effect on our cash flow and
expected distributions.
Impact of Financial Condition and Solvency of Tenants on Our Cash Flow.
At any time, a tenant of our Properties may seek the protection of bankruptcy
laws, which could result in rejection and termination of such tenant's lease and
thereby cause a reduction in our cash flow available for distribution. Although
we have not experienced material losses from tenant bankruptcies, no assurance
can be given that tenants will not file for bankruptcy protection in the future
or, if any tenants file, that they will affirm their leases and continue to make
rental payments in
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a timely manner. In addition, a tenant from time to time may experience a
downturn in its business which may weaken its financial condition and result in
the failure to make rental payments when due. If tenant leases are not affirmed
following bankruptcy or if a tenant's financial condition weakens, our income
may be adversely affected.
Americans With Disabilities Act Compliance Costs.
Under the ADA, all public accommodations and commercial facilities are
required to meet certain federal requirements related to access and use by
disabled persons. These requirements became effective in 1992. Compliance with
the ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the U.S. government or an award of
damages to private litigants. Although we believe that our Properties are
substantially in compliance with these requirements, we may incur additional
costs to comply with the ADA. Although we believe that compliance costs will not
have a material adverse effect on us, if required changes involved a greater
expenditure than we currently anticipate, our ability to make expected
distributions could be adversely affected.
Financial Dependency and Management Conflicts Associated with Partnership and
Joint Venture Property Ownership Structures.
We own our interests in our Properties through the Operating Partnership and
certain other majority owned subsidiaries. In addition, we may also participate
with other entities in property ownership through joint ventures or partnerships
in the future. We currently do not have any plans to invest in joint ventures or
partnerships with our affiliates or promoters. Nonetheless, partnership or joint
venture investments may, under certain circumstances, involve risks not
otherwise present, including the possibility that our partners or co-venturers
might become bankrupt, that the partners or co-venturers might at any time have
economic or other business interests or goals which are inconsistent with our
business interests or goals, and that the partners or co-venturers may be in a
position to take action contrary to our instructions or requests or contrary to
our policies or objectives, including our policy with respect to maintaining our
qualification as a REIT. We will, however, seek to maintain sufficient control
of any partnerships or joint ventures with which we may become involved to
permit our business objectives to be achieved. There is no limitation under our
organizational documents as to the amount of available funds that may be
invested in partnerships or joint ventures.
Concentration of Properties in Southern California.
All of our Properties are located in Southern California. Our revenue and the
value of our Properties may be affected by a number of factors, including the
local economic climate (which may be adversely impacted by business layoffs or
downsizing, industry slowdowns, changing demographics and other factors) and
local real estate conditions (such as oversupply of or reduced demand for office
and other competing commercial properties). Therefore, our performance and our
ability to make distributions to stockholders will likely be dependent, to a
large extent, on the economic conditions in this market area.
INABILITY TO INTEGRATE OR FINANCE ACQUISITION, RENOVATION AND DEVELOPMENT
ACTIVITIES
As we acquire additional properties, we will be subject to risks associated
with managing new properties, including lease-up and tenant retention. In
addition, our ability to manage our growth effectively will require us to
successfully integrate our new acquisitions into our existing management
structure. No assurances can be given that we will be able to succeed with that
integration or effectively manage additional properties or that newly acquired
properties will perform as expected.
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We intend to expand and/or renovate our Properties from time to time.
Expansion and renovation projects generally require expenditures of capital as
well as various government and other approvals, the receipt of which cannot be
assured. While policies with respect to expansion and renovation activities are
intended to limit some of the risks otherwise associated with these activities,
we will nevertheless incur risks, including expenditures of funds on, and
devotion of our time to, projects which may not be completed. We anticipate that
future acquisitions and renovations will be financed through a combination of
advances under our lines of credit, other forms of secured or unsecured
financing and equity. If new developments are financed through construction
loans, there is a risk that, upon completion of construction, permanent
financing for newly developed properties may not be available or may be
available only on disadvantageous terms.
While we have generally limited our acquisition, renovation, management and
leasing business primarily to the Southern California market, it is possible
that we will in the future expand our business to new geographic markets. We
will not initially possess the same level of familiarity with new markets
outside of Southern California, which could adversely affect our ability to
acquire, develop, manage or lease properties in any new localities. Changing
market conditions, including competition from other purchasers of suburban
office properties, may diminish our opportunities for attractive additional
acquisitions.
We also intend to review from time to time the opportunities for developing
and constructing office buildings and other commercial properties in accordance
with our development and underwriting policies. Risks associated with our
development and construction activities may include:
- Abandonment of development opportunities.
- Construction costs of a property exceeding original estimates, possibly
making the property uneconomical.
- Occupancy rates and rents at a newly completed property may not be
sufficient to make the property profitable.
- Financing may not be available on favorable terms for development of a
property.
- Construction and lease-up may not be completed on schedule, resulting in
increased debt service expense and construction costs.
In addition, new development activities, regardless of whether they would
ultimately be successful, typically require a substantial portion of our time
and attention. Development activities would also be subject to risks relating to
the inability to obtain, or delays in obtaining, all necessary zoning, land-use,
building, occupancy, and other required governmental permits and authorizations.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL
Our investment, financing, borrowing and distribution policies and our
policies with respect to all other activities, including growth, debt,
capitalization and operations, will be determined by our Board of Directors.
Although our Board of Directors has no present intention to do so, these
policies may be amended or revised at any time and from time to time at the
discretion of our Board of Directors without a vote of our stockholders. In
addition, our Board of Directors may change our policies with respect to
conflicts of interest provided that such changes are consistent with applicable
legal requirements. A change in these policies could adversely affect our
financial condition, results of operations or the market price of our Common
Stock.
POTENTIAL ADVERSE TAX CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
We have operated and intend to continue to operate so as to qualify as a REIT
under the Code, commencing with our taxable year ended December 31, 1996.
Although we believe that we have been and will continue to be organized and have
operated and will continue to operate in such a manner, no assurance can be
given that we have been or will continue to be organized or operated in
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a manner so as to qualify or remain so qualified. Qualification as a REIT
involves the satisfaction of numerous requirements (some on an annual and
quarterly basis) established under highly technical and complex Code provisions
for which there are only limited judicial and administrative interpretations,
and involves the determination of various factual matters and circumstances not
entirely within the our control. For example, in order to qualify as a REIT, at
least 95% of our gross income in any year must be derived from qualifying
sources and we must pay distributions to stockholders aggregating annually at
least 95% of our REIT taxable income (excluding capital gains). The complexity
of these provisions and of the applicable Treasury Regulations that have been
promulgated under the Code is greater in the case of a REIT, like us, that holds
its assets in partnership form. No assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. We are, however, not
aware of any pending legislation that would adversely affect our ability to
operate as a REIT. Our qualification and taxation as a REIT depend on our
ability to meet (through actual annual operating results, distribution levels
and diversity of stock ownership) the various qualification tests imposed under
the Code, the results of which have not been and will not be reviewed by our tax
counsel.
If we were to fail to qualify as a REIT in any taxable year, we would be
subject to federal income tax (including any applicable alternative minimum tax)
on our taxable income at regular corporate rates. Moreover, unless entitled to
relief under certain statutory provisions, we also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. This treatment would significantly reduce our net
earnings available for investment or distribution to stockholders because of the
additional tax liability to us for the years involved. In addition,
distributions to stockholders would no longer be required to be made.
OTHER TAX LIABILITIES
Even if we qualify for and maintain our REIT status, we will be subject to
certain federal, state and local taxes on our income and property. If we have
net income from a prohibited transaction (in general, sales or other taxable
disposition of property held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax.
INSURANCE
We carry comprehensive liability, fire, extended coverage and rental loss
insurance policies which currently cover all of our Properties with certain
specifications and insured limits that we believe are adequate and appropriate
under the circumstances. We also carry earthquake insurance on all our
Properties. There are, however, certain types of losses that are not generally
insured because it is not economically feasible. Should an uninsured loss or a
loss in excess of insured limits occur, we could lose our capital invested in
the Property, as well as the anticipated future revenue from the property and,
in the case of debt which is with recourse to us, we would remain obligated for
any mortgage debt or other financial obligations related to the Property. Any
such loss would adversely affect us. Moreover, we could generally be liable for
any unsatisfied obligations other than non-recourse obligations. We believe that
our Properties are adequately insured. In addition, in light of the California
earthquake risk, California building codes since the early 1970s have
established construction standards for all newly built and renovated buildings,
including office buildings, the current and strictest construction standards
having been adopted in 1984. We believe all of our Properties were constructed
in full compliance with the applicable standards existing at the time of
construction. No assurance can be given that material losses in excess of
insurance proceeds will not occur in the future.
DEPENDENCE ON KEY PERSONNEL
We are dependent on the efforts of our executive officers, particularly
Messrs. Ziman, Coleman, Sobel, and Ms. Laing. The loss of their services could
have a material adverse effect on our operations.
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Each of Messrs. Ziman, Coleman, Sobel, and Ms. Laing have entered into an
employment agreement with us.
LIMITS ON CHANGES IN CONTROL
Certain provisions of our Charter and bylaws (our "Bylaws") as well as our
Stockholder rights plan, which is described below, may have the effect of
delaying, deferring or preventing a third party from making an acquisition
proposal for Arden Realty and may thereby inhibit a change in our control. For
example, such provisions may:
- Deter tender offers for our Common Stock, which offers may be attractive to
the stockholders.
- Deter purchases of large blocks of Common Stock, thereby limiting the
opportunity for stockholders to receive a premium for their Common Stock
over then-prevailing market prices.
Limits on Ownership of Common Stock.
In order for us to maintain our qualification as a REIT under the Code, not
more than 50% in value of our outstanding shares of Common Stock may be owned,
actually or constructively, by five or fewer individuals (as defined in the Code
to include certain entities) at any time during the last half of our taxable
year (other than the first year for which the election to be treated as a REIT
has been made). In addition, if we, or an owner of 10% or more of our Stock,
actually or constructively owns 10% or more of a tenant of ours (or a tenant of
any partnership in which we are a partner), the rent received by us (either
directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. In
order to protect us against the risk of losing REIT status due to the
concentration of ownership among our stockholders, the ownership limit included
in our Charter (our "Ownership Limit") limits actual or constructive ownership
of our outstanding shares of Common Stock by any single stockholder to 9.0% (by
value or by number of shares, whichever is more restrictive) of the then
outstanding shares of Common Stock. Although our Board of Directors presently
has no intention of doing so (except as described below), our Board of Directors
could waive this restriction with respect to a particular stockholder if it were
satisfied, based upon the advice of counsel or a ruling from the Internal
Revenue Service, that ownership by such stockholder in excess of the Ownership
Limit would not jeopardize our status as a REIT and our Board of Directors
otherwise decided such action would be in our best interests. Actual or
constructive ownership of shares of Common Stock in excess of the Ownership
Limit will cause the violative transfer or ownership to be void with respect to
the transferee or owner as to that number of shares in excess of the Ownership
Limit and such shares will be automatically transferred to a trust for the
exclusive benefit of one or more qualified charitable organizations. That
transferee or owner will have no right to vote such shares or be entitled to
dividends or other distributions with respect to such shares. Our Board of
Directors has waived our Ownership Limit with respect to Mr. Ziman and certain
family members and affiliates and permitted these parties to actually and
constructively own up to 13.0% of the outstanding shares of Common Stock.
Additional Common Stock and Preferred Stock Issuances.
Our Charter authorizes our Board of Directors to cause us to issue authorized
but unissued shares of Common Stock or Preferred Stock and to reclassify any
unissued shares of Common Stock or classify any unissued and reclassify any
previously classified but unissued shares of Preferred Stock and, with respect
to the Preferred Stock, to set the preferences, rights and other terms of such
classified or unclassified shares. Although our Board of Directors has no such
intention at the present time, it could establish a series of Preferred Stock
that could, depending on the terms of such series, delay, defer or prevent a
transaction or a change in control that might involve a premium price for the
Common Stock or otherwise be in the best interest of our stockholders.
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Staggered Board.
Our Board of Directors is divided into three classes of directors. Directors
of each class are chosen for three-year terms upon the expiration of their
current terms and each year one class of directors will be elected by the
stockholders. The staggered terms of directors may reduce the possibility of a
tender offer or an attempt to change control even though a tender offer or
change in control might be in the best interest of our stockholders.
Preferred Share Purchase Rights Agreement.
In August 1998, we declared a dividend distribution of one preferred share
purchase right on each outstanding share of our common stock. Subject to limited
exceptions, these rights will be exercisable if a person or group (an "Acquiring
Person") acquires 15% or more of our common stock or announces a tender offer
for 15% or more of our common stock. Under certain circumstances, each right
will entitle stockholders to buy one one-hundredth of a share of our newly
created Class A Junior Participating Preferred Stock at an exercise price of
$75. Our Board of Directors will be entitled to redeem the Rights at $.01 per
Right at any time before a person has acquired 15% or more of the outstanding
common stock. The Rights Plan will expire in August 2008.
If a person becomes an Acquiring Person, each right will entitle its holder to
purchase, at the right's then-current exercise price, a number of our common
shares having a market value at that time of twice the Right's exercise price.
Rights held by the Acquiring Person will become void and will not be exercisable
to purchase shares at the bargain purchase price. If we are acquired in a merger
or other business combination transaction which has not been approved by our
Board of Directors, each right will entitle its holder to purchase, at the
right's then-current exercise price, a number of the acquiring company's common
shares having a market value at that time of twice the right's exercise price.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or petroleum product
releases at the property and may be held liable to a governmental entity or to
third parties for property damage and for investigation and clean-up costs
incurred by those parties in connection with the contamination. These laws
typically impose clean-up responsibility and liability without regard to whether
the owner knew of or caused the presence of the contaminants, and the liability
under these laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation or responsibility. The
cost of investigation, remediation or removal of the substances may be
substantial, and the presence of these substances, or the failure to remediate
the contamination on the property, may adversely affect the owner's ability to
sell or rent the property or to borrow using the property as collateral. Persons
who arrange for the disposal or treatment of hazardous or toxic substances at a
disposal or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at the disposal or
treatment facility, whether or not the facility is owned or operated by that
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs incurred with the
contamination. Finally, the owner of a site may be subject to common law claims
by third parties based on damages and costs resulting from environmental
contamination emanating from that site.
Certain federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos-containing materials when
those materials are in poor condition or in the event of construction,
remodeling, renovation or demolition of a building. These laws may impose
liability for release of asbestos-containing material and may provide for third
parties to seek recovery from owners or operators of real properties for
personal injury associated with asbestos-containing materials. In connection
with the ownership and operation of our properties, we may be potentially
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liable for such costs. Except for two properties, one of which is currently
undergoing abatement activities, we are not aware of any friable
asbestos-containing materials at any of our properties.
In the past few years, independent environmental consultants have conducted or
updated Phase I Environmental Assessments and other environmental investigations
as appropriate ("Environmental Site Assessments") at our Properties. These
Environmental Site Assessments have included, among other things, a visual
inspection of the Properties and the surrounding area and a review of relevant
state, federal and historical documents. Soil and groundwater sampling were
performed where warranted and remediation, if necessary, has or is being
conducted.
The Environmental Site Assessments of our Properties identified several
Properties that may be impacted by known or suspected regional contamination.
The Environmental Site Assessments have not, however, revealed any environmental
liability that we believe would have a material adverse effect on our business,
assets or results of operations taken as a whole, nor are we aware of any such
material environmental liability. Nevertheless, it is possible that our
Environmental Site Assessments do not reveal all environmental liabilities or
that there are material environmental liabilities of which we are unaware.
Moreover, there can be no assurance that future laws, ordinances or regulations
will not impose any material environmental liability or the current
environmental condition of our properties will not be affected by tenants, by
the condition of land or operations in the vicinity of our properties (such as
the presence of underground storage tanks), or by third parties unrelated to us.
We believe that our Properties are in compliance in all material respects with
all federal, state and local laws, ordinances and regulations regarding
hazardous or toxic substances or petroleum products, except as noted above. We
have not been notified by any governmental authority, and are not otherwise
aware, of any material noncompliance, liability or claim relating to hazardous
or toxic substances or petroleum products in connection with any of our present
Properties, other than as noted above.
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ITEM 2. PROPERTIES
GENERAL
As of December 31, 1998 our portfolio consisted of 138 commercial properties
containing approximately 18 million rentable square feet. Our Properties consist
primarily of suburban office and industrial properties and individually range
from approximately 12,000 to 600,000 rentable square feet. All of our Properties
are located in Southern California as follows:
APPROXIMATE NET
NUMBER OF PROPERTIES RENTABLE SQUARE FEET
--------------------------- ------------------------------------
INDUSTRIAL INDUSTRIAL
LOCATION OFFICE AND RETAIL TOTAL OFFICE AND RETAIL TOTAL
-------- ------ ---------- ----- ---------- ---------- ----------
Los Angeles County
West................................. 25 1 26 3,960,812 36,959 3,997,771
North................................ 28 -- 28 2,583,054 -- 2,583,054
South................................ 16 -- 16 2,206,114 -- 2,206,114
Central.............................. 3 -- 3 608,789 -- 608,789
Orange County.......................... 20 -- 20 3,202,241 -- 3,202,241
San Diego County....................... 21 -- 21 2,486,768 -- 2,486,768
Ventura County......................... 4 -- 4 561,838 -- 561,838
Riverside/San Bernardino Counties...... 8 4 12 553,896 414,674 968,570
Kern County............................ 2 -- 2 216,522 -- 216,522
--- -- --- ---------- ------- ----------
Subtotal..................... 127 5 132 16,380,034 451,633 16,831,667
Renovation Properties.................. 6 -- 6 1,141,549 -- 1,141,549
--- -- --- ---------- ------- ----------
Total........................ 133 5 138 17,521,583 451,633 17,973,216
=== == === ========== ======= ==========
Following is a summary of our Properties under renovation at December 31,
1998:
ESTIMATED
APPROXIMATE ESTIMATED TOTAL WEIGHTED ESTIMATED
NET RENTABLE COST PER AVERAGE ANNUAL PERCENT STABILIZATION
PROPERTY SQUARE FEET SQ. FT.(1) RENTAL RATE(2) LEASED DATE
-------- ------------ --------------- -------------- ------- -------------
299 Euclid................ 73,400 $140 $23.75 100% 1st QTR 1999
1821 Dyer Boulevard....... 115,061 $ 88 $17.59 56% 2nd QTR 1999
535 Brand Boulevard....... 109,187 $175 $23.23 53% 2nd QTR 1999
5200 West Century......... 310,910 $ 65 $15.66 63% 2nd QTR 1999
Tourney Pointe............ 219,991 $151 $21.03 6% 4th QTR 1999
Westwood Center........... 313,000 $251 $34.80 -- 2nd QTR 2000
---------
1,141,549
=========
- ---------------
(1) Estimated total cost per square foot includes all purchase and closing
costs, capital expenditures, tenant improvements, leasing commissions and
carrying costs during renovation.
(2) Except for 299 Euclid, anticipated weighted average annual rental rate
represents the weighted average of the in-place rental rates for occupied
space and market rental rates for vacant space. Our estimates of the market
rental rates are based on current trends which could change or reverse at
any time as a result of future events. The calculation for 299 Euclid, which
is 100% leased, was based on leases in place. Our ability to rent vacant
space at estimated levels is highly dependent upon many factors over which
we have no control. We undertake no obligation to update or correct these
estimates if future events prove them to be inaccurate.
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PORTFOLIO SUMMARY
The following table sets forth certain information regarding our properties as
of December 31, 1998:
PERCENT OCCUPIED PERCENT LEASED
AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
--------------------------- ---------------------------
INDUSTRIAL INDUSTRIAL
AND AND
LOCATION: OFFICE RETAIL TOTAL OFFICE RETAIL TOTAL
--------- ------ ---------- ----- ------ ---------- -----
Los Angeles County
West.................... 90.0% 100.0% 90.1% 91.6% 100.0% 91.7%
North................... 91.2% -- 91.2% 92.6% -- 92.6%
South................... 88.6% -- 88.6% 88.6% -- 88.6%
Central................. 88.1% -- 88.1% 88.1% -- 88.1%
Orange County............. 94.9% -- 94.9% 96.1% -- 96.1%
San Diego County.......... 95.1% -- 95.1% 95.7% -- 95.7%
Ventura County............ 93.7% -- 93.7% 94.0% -- 94.0%
Riverside/San Bernardino
Counties................ 79.7% 94.9% 86.2% 81.3% 95.2% 87.3%
Kern County............... 93.3% -- 93.3% 94.9% -- 94.9%
---- ----- ---- ---- ----- ----
Subtotal/Weighted
Average............. 91.5% 95.3% 91.6% 92.5% 95.6% 92.6%
Renovation Properties..... 28.6% -- 28.6% 38.4% -- 38.4%
---- ----- ---- ---- ----- ----
Weighted Average
Total/Weighted
Average............... 87.5% 95.3% 87.7% 89.1% 95.6% 89.2%
==== ===== ==== ==== ===== ====
ANNUALIZED BASE RENT
PER LEASED SQUARE FOOT(1)
----------------------------------------------
INDUSTRIAL
AND FULL SERVICE
LOCATION: OFFICE RETAIL TOTAL GROSS LEASES(2)
--------- ------ ---------- ------ ---------------
Los Angeles County
West.................... $22.57 $24.60 $22.59 $22.57
North................... $19.35 -- $19.35 $20.39
South................... $16.97 -- $16.97 $18.55
Central................. $19.86 -- $19.86 $19.86
Orange County............. $15.18 -- $15.18 $17.41
San Diego County.......... $14.77 -- $14.77 $17.25
Ventura County............ $16.62 -- $16.62 $16.62
Riverside/San Bernardino
Counties................ $14.16 $ 8.07 $11.32 $16.60
Kern County............... $21.94 -- $21.94 --
------ ------ ------ ------
Subtotal/Weighted
Average............. $18.05 $ 9.48 $17.82 $19.73
Renovation Properties..... $16.24 -- $16.24 $16.82
------ ------ ------ ------
Weighted Average
Total/Weighted
Average............... $18.00 $ 9.48 $17.77 $19.65
====== ====== ====== ======
- ---------------
(1) Annualized base rent is calculated as monthly contractual base rent under
existing leases as of December 31, 1998, 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 received is used to determine Annualized Base
Rent.
(2) Excludes 48 properties and 4,718,622 square feet under triple net and
modified gross leases.
We believe our Properties have desirable locations within established business
communities and are well maintained. Of our 138 Properties, 113 have been built
since 1980 and 39 have been substantially renovated within the last five years.
The average age of our buildings is approximately 15 years. Our Properties offer
an array of amenities including security, parking, conference facilities,
on-site management, food services and health clubs.
We believe that the location, quality of construction and building amenities,
as well as our reputation for providing a high level of tenant service, have
enabled us to attract and retain a diverse tenant base. As of December 31, 1998,
no one tenant represented more than 2% of the aggregate Annualized Base Rent (as
defined herein) of our Properties, and only five tenants individually
represented more than 1% of our aggregate Annualized Base Rent.
Our Properties are leased to a variety of local, national and foreign
businesses. Leases are typically structured for terms of three, five or 10
years. Most of the leases are full service, gross leases under which tenants
typically pay for all real property taxes and operating expenses above those for
an established base year or expense stop. Leases typically contain provisions
permitting tenants to renew at prevailing market rates. Under these leases, we
are generally responsible for structural repairs. Finally, tenants generally pay
directly (without regard to a base year or expense stop) for overtime use of air
conditioning and for on site monthly employee and visitor parking.
Although the leases at our Properties primarily consist of gross leases,
approximately 15% of the total portfolio leased square footage as of December
31, 1998 is leased pursuant to triple net leases. In general, triple net leases
require the tenants to pay all real property taxes, insurance and expenses of
maintaining the leased space and have renewal and termination provisions similar
to those described above.
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Our Properties are regionally managed under active central control. All
administration (including the formation and implementation of policies and
procedures), leasing, capital expenditures and construction decisions are
centrally administered at our corporate office. We employ regional managers to
oversee and direct the day-to-day operations of our Properties, as well as the
on-site personnel, which may include a manager, assistant manager and other
necessary staff. Regional managers communicate frequently with our corporate
office to implement our policies and procedures.
The on-site staffing of each property is dictated by the property's size,
tenant profile, number of tenants and location. We contract with third parties
for cleaning services, day porters, engineers and any other personnel necessary
to operate our Properties.
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The following table sets forth certain information regarding our 138
Properties as of December 31, 1998:
PERCENTAGE
OF TOTAL
PORTFOLIO
YEAR(S) APPROXIMATE NET
BUILT/ NET RENTABLE RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET SQUARE FEET
- ---------------------------------- ----------------------------------- ---------------- ---------- ------------ -----------
OFFICE
LOS ANGELES COUNTY
Los Angeles West
9665 Wilshire..................... Beverly Hills/Century City Beverly Hills 1972/92-93 158,684 0.9%
Beverly Atrium.................... Beverly Hills/Century City Beverly Hills 1989 61,314 0.3%
8383 Wilshire..................... Beverly Hills/Century City Beverly Hills 1971/93 417,463 2.3%
120 Spalding...................... Beverly Hills/Century City Beverly Hills 1984 60,656 0.3%
9100 Wilshire..................... Beverly Hills/Century City Beverly Hills 1971/90 326,227 1.8%
Century Park Center............... Beverly Hills/Century City Los Angeles 1972/94 243,404 1.4%
10350 Santa Monica................ Beverly Hills/Century City Los Angeles 1979 42,292 0.2%
10351 Santa Monica................ Beverly Hills/Century City Los Angeles 1984 96,251 0.5%
Westwood Terrace.................. Westwood/West Los Angeles Los Angeles 1988 135,943 0.8%
1950 Sawtelle..................... Westwood/West Los Angeles Los Angeles 1988/95 103,772 0.6%
10780 Santa Monica................ Westwood/West Los Angeles Los Angeles 1984 92,486 0.5%
Wilshire Pacific Plaza............ Westwood/West Los Angeles Los Angeles 1976/1987 100,122 0.6%
World Savings Center(2)(3)........ Westwood/West Los Angeles Los Angeles 1983 469,115 2.6%
11075 Santa Monica................ Westwood/West Los Angeles Los Angeles 1983 35,696 0.2%
2730 Wilshire(4).................. Westwood/West Los Angeles Santa Monica 1985 55,080 0.3%
Carlsberg Corporate Center........ Westwood/West Los Angeles Santa Monica 1979 103,506 0.6%
1919 Santa Monica................. Westwood/West Los Angeles Santa Monica 1991 44,096 0.2%
400 Corporate Pointe.............. Marina Area/Culver City/LAX Culver City 1987 164,598 0.9%
600 Corporate Pointe.............. Marina Area/Culver City/LAX Culver City 1989 273,339 1.5%
Bristol Plaza..................... Marina Area/Culver City/LAX Culver City 1982 84,014 0.5%
Skyview Center.................... Marina Area/Culver City/LAX Los Angeles 1981,87/95 391,675 2.2%
Northpoint........................ Marina Area/Culver City/LAX Los Angeles 1991 104,235 0.6%
The New Wilshire.................. Park Mile/West Hollywood Los Angeles 1986 202,704 1.1%
145 South Fairfax................. Park Mile/West Hollywood Los Angeles 1984 54,429 0.3%
9201 Sunset....................... Park Mile/West Hollywood Los Angeles 1963/92-95 139,711 0.8%
---------- -----
Subtotal/Weighted Average --
Los Angeles West 3,960,812 22.0%
Los Angeles North
Calabasas Commerce Center......... Simi/Conejo Valley Calabasas 1990 123,121 0.7%
Calabasas Tech Center............. Simi/Conejo Valley Calabasas 1990 273,526 1.5%
ANNUALIZED
ANNUALIZED NUMBER BASE RENT
PERCENT BASE RENT(1) OF PER LEASED
PROPERTY NAME LEASED ($000S) LEASES SQUARE FOOT
- ---------------------------------- ------- ------------ ------ -----------
OFFICE
LOS ANGELES COUNTY
Los Angeles West
9665 Wilshire..................... 100.0% $ 4,691 23 $29.74
Beverly Atrium.................... 83.6% 1,307 10 25.49
8383 Wilshire..................... 89.6% 7,669 131 20.50
120 Spalding...................... 100.0% 2,211 19 35.79
9100 Wilshire..................... 88.2% 6,204 76 21.56
Century Park Center............... 89.9% 4,635 91 21.19
10350 Santa Monica................ 92.3% 718 16 18.39
10351 Santa Monica................ 97.1% 1,698 17 18.17
Westwood Terrace.................. 99.6% 3,244 28 23.95
1950 Sawtelle..................... 96.2% 1,977 35 19.80
10780 Santa Monica................ 92.5% 1,670 32 19.52
Wilshire Pacific Plaza............ 77.1% 1,481 34 19.19
World Savings Center(2)(3)........ 95.1% 13,259 51 29.73
11075 Santa Monica................ 100.0% 627 5 17.55
2730 Wilshire(4).................. 85.3% 1,038 28 22.08
Carlsberg Corporate Center........ 94.0% 2,070 41 21.29
1919 Santa Monica................. 100.0% 1,065 5 24.33
400 Corporate Pointe.............. 98.3% 3,317 18 20.51
600 Corporate Pointe.............. 93.1% 4,741 22 18.63
Bristol Plaza..................... 90.7% 1,332 24 17.48
Skyview Center.................... 90.3% 5,836 47 16.50
Northpoint........................ 96.4% 3,184 6 31.69
The New Wilshire.................. 87.2% 3,720 34 21.05
145 South Fairfax................. 100.0% 1,057 13 19.57
9201 Sunset....................... 71.1% 3,146 55 31.67
----- -------- ----- ------
Subtotal/Weighted Average --
Los Angeles West 91.6% $ 81,897 861 $22.57
Los Angeles North
Calabasas Commerce Center......... 100.0% $ 1,827 13 $14.47
Calabasas Tech Center............. 100.0% 5,241 12 19.16
19
22
PERCENTAGE
OF TOTAL
PORTFOLIO
YEAR(S) APPROXIMATE NET
BUILT/ NET RENTABLE RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET SQUARE FEET
- ---------------------------------- ----------------------------------- ---------------- ---------- ------------ -----------
Thousand Oaks Plaza............... Simi/Conejo Valley Thousand Oaks 1988 13,434 0.1%
Rancho Plaza...................... Simi/Conejo Valley Thousand Oaks 1987 24,057 0.1%
Pennsfield Plaza.................. Simi/Conejo Valley Thousand Oaks 1989 21,202 0.1%
Conejo Business Park.............. Simi/Conejo Valley Thousand Oaks 1991 69,017 0.4%
Marin Corporate Center............ Simi/Conejo Valley Thousand Oaks 1986 51,360 0.3%
Evergreen Plaza................... Simi/Conejo Valley Thousand Oaks 1979/96 75,722 0.4%
5601 Lindero Canyon............... Simi/Conejo Valley Westlake 1989 105,830 0.6%
Renaissance Court................. Simi/Conejo Valley Westlake 1981/92 61,245 0.3%
Westlake Gardens.................. Simi/Conejo Valley Westlake 1998 49,639 0.3%
6800 Owensmouth(3)................ West San Fernando Valley Canoga Park 1986 80,014 0.4%
Woodland Hills Financial Center... West San Fernando Valley Woodland Hills 1972/95 224,955 1.4%
Clarendon Crest................... West San Fernando Valley Woodland Hills 1990 43,063 0.2%
Lyons Plaza....................... Santa Clarita Valley Santa Clarita 1990 61,203 0.3%
16000 Ventura..................... Central San Fernando Valley Encino 1980/96 174,841 1.0%
Sumitomo Bank Building............ Central San Fernando Valley Sherman Oaks 1970/90-91 110,641 0.6%
Noble Professional Center......... Central San Fernando Valley Sherman Oaks 1985/93 51,828 0.3%
Sunset Pointe Plaza............... Valencia Newhall 1988 58,105 0.3%
303 Glenoaks...................... East San Fernando Valley/Tri-Cities Burbank 1983/96 175,449 1.0%
601 South Glenoaks................ East San Fernando Valley/Tri-Cities Burbank 1990 72,524 0.4%
Burbank Executive Plaza........... East San Fernando Valley/Tri-Cities Burbank 1983 60,395 0.3%
California Federal Building....... East San Fernando Valley/Tri-Cities Burbank 1978 82,467 0.5%
425 West Broadway................. East San Fernando Valley/Tri-Cities Glendale 1984 71,589 0.4%
Glendale Corporate Center......... East San Fernando Valley/Tri-Cities Glendale 1985 108,209 0.6%
70 South Lake..................... East San Fernando Valley/Tri-Cities Pasadena 1982/94 100,133 0.6%
150 East Colorado................. East San Fernando Valley/Tri-Cities Pasadena 1979/97 61,168 0.3%
5161 Lankershim................... East San Fernando Valley/Tri-Cities North Hollywood 1985/97 178,317 1.0%
---------- -----
Subtotal/Weighted Average --
Los Angeles North 2,583,054 14.4%
Los Angeles South
4811 Airport Plaza(3)............. Long Beach Long Beach 1987/95 121,610 0.7%
4900/10 Airport Plaza(3).......... Long Beach Long Beach 1987/95 150,403 0.8%
5000 Spring(3).................... Long Beach Long Beach 1989/95 163,358 0.9%
100 West Broadway................. Long Beach Long Beach 1987/96 191,727 1.1%
1501 Hughes Way................... Long Beach Long Beach 1983/97 77,060 0.4%
3901 Via Oro...................... Long Beach Long Beach 1986/97 53,195 0.3%
ANNUALIZED
ANNUALIZED NUMBER BASE RENT
PERCENT BASE RENT(1) OF PER LEASED
PROPERTY NAME LEASED ($000S) LEASES SQUARE FOOT
- ---------------------------------- ------- ------------ ------ -----------
Thousand Oaks Plaza............... 100.0% $ 212 6 $15.78
Rancho Plaza...................... 93.5% 349 19 15.51
Pennsfield Plaza.................. 55.2% 193 9 16.49
Conejo Business Park.............. 80.2% 1,001 26 18.08
Marin Corporate Center............ 96.7% 993 30 20.00
Evergreen Plaza................... 93.2% 1,235 38 17.51
5601 Lindero Canyon............... 100.0% 1,206 2 11.39
Renaissance Court................. 86.7% 1,005 15 18.92
Westlake Gardens.................. 70.0% 842 13 24.26
6800 Owensmouth(3)................ 83.4% 1,205 21 18.06
Woodland Hills Financial Center... 83.4% 4,082 62 21.76
Clarendon Crest................... 95.7% 765 11 18.57
Lyons Plaza....................... 91.0% 1,230 24 22.08
16000 Ventura..................... 89.2% 2,955 44 18.96
Sumitomo Bank Building............ 85.2% 1,841 43 19.52
Noble Professional Center......... 90.6% 1,032 18 21.97
Sunset Pointe Plaza............... 100.0% 1,254 29 21.64
303 Glenoaks...................... 100.0% 3,685 26 20.84
601 South Glenoaks................ 100.0% 1,365 16 18.82
Burbank Executive Plaza........... 96.8% 1,283 13 21.94
California Federal Building....... 100.0% 1,741 11 21.43
425 West Broadway................. 92.1% 1,263 13 19.16
Glendale Corporate Center......... 88.6% 1,766 17 18.43
70 South Lake..................... 99.8% 2,107 18 21.09
150 East Colorado................. 88.7% 994 19 18.32
5161 Lankershim................... 92.0% 3,620 9 22.07
----- -------- ----- ------
Subtotal/Weighted Average --
Los Angeles North 92.6% $ 46,292 577 $19.35
Los Angeles South
4811 Airport Plaza(3)............. 100.0% $ 1,051 1 $ 8.64
4900/10 Airport Plaza(3).......... 100.0% 1,173 1 7.80
5000 Spring(3).................... 97.3% 3,183 30 20.03
100 West Broadway................. 98.0% 3,969 30 21.13
1501 Hughes Way................... 45.1% 513 3 14.74
3901 Via Oro...................... 85.1% 704 3 15.54
20
23
PERCENTAGE
OF TOTAL
PORTFOLIO
YEAR(S) APPROXIMATE NET
BUILT/ NET RENTABLE RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET SQUARE FEET
- ---------------------------------- ----------------------------------- ---------------- ---------- ------------ -----------
100 Oceangate Tower............... Long Beach Long Beach 1971/93-94 210,907 1.2%
12501 East Imperial Highway....... Long Beach Norwalk 1978/94 122,175 0.7%
91 Freeway Center................. Mid-Cities Artesia 1986/97 94,516 0.5%
Continental Grand................. El Segundo El Segundo 1986 235,926 1.3%
Grand Avenue Plaza................ El Segundo El Segundo 1979,80 84,500 0.5%
South Bay Centre.................. Torrance Gardena 1984 202,830 1.1%
Harbor Corporate Center........... Torrance Gardena 1985 63,925 0.4%
Pacific Gateway II................ Torrance Torrance 1982/90 223,731 1.2%
Mariner Court..................... Torrance Torrance 1989 105,436 0.6%
South Bay Technology Center....... Torrance Torrance 1984 104,815 0.6%
---------- -----
Subtotal/Weighted Average --
Los Angeles South 2,206,114 12.3%
Los Angeles Central
Los Angeles Corporate Center...... San Gabriel Valley Monterey Park 1984,86 389,293 2.1%
Whittier Financial Center......... San Gabriel Valley Whittier 1967,82 135,415 0.8%
1370 Valley Vista................. San Gabriel Valley Diamond Bar 1988 84,081 0.5%
---------- -----
Subtotal/Weighted Average --
Los Angeles Central 608,789 3.4%
ORANGE COUNTY
5832 Bolsa........................ West County Huntington Beach 1985 49,355 0.3%
Huntington Beach Plaza I & II..... West County Huntington Beach 1984/96 52,186 0.3%
5702 Bolsa........................ West County Huntington Beach 1987/97 27,731 0.2%
5672 Bolsa........................ West County Huntington Beach 1987 11,968 0.1%
5632 Bolsa........................ West County Huntington Beach 1987 21,568 0.1%
Huntington Commerce Center........ West County Huntington Beach 1987 67,551 0.4%
City Centre....................... West County Fountain Valley 1982 302,519 1.7%
Fountain Valley Plaza............. West County Fountain Valley 1982 107,252 0.6%
3300 Irvine Avenue................ Greater Airport Area Newport Beach 1981/97 74,224 0.4%
Von Karman Corporate Center....... Greater Airport Area Irvine 1981/84 451,477 2.5%
1503 South Coast.................. Greater Airport Area Costa Mesa 1979/97 60,605 0.3%
Anaheim City Centre(3)............ Tri-Freeway Area Anaheim 1986/91 175,391 1.0%
Crown Cabot....................... South County Laguna Niguel 1989 172,900 1.0%
625 The City...................... Tri-Freeway Area Orange 1985/97 139,806 0.8%
One Venture....................... South County Irvine 1990/97 43,324 0.2%
Orange Financial Center........... Central County Orange 1985/95 305,439 1.7%
ANNUALIZED
ANNUALIZED NUMBER BASE RENT
PERCENT BASE RENT(1) OF PER LEASED
PROPERTY NAME LEASED ($000S) LEASES SQUARE FOOT
- ---------------------------------- ------- ------------ ------ -----------
100 Oceangate Tower............... 83.1% $ 2,894 37 $16.51
12501 East Imperial Highway....... 96.9% 2,029 5 17.15
91 Freeway Center................. 97.9% 1,691 19 18.28
Continental Grand................. 89.4% 4,772 35 22.63
Grand Avenue Plaza................ 100.0% 1,303 6 16.00
South Bay Centre.................. 91.2% 3,215 37 17.38
Harbor Corporate Center........... 72.0% 655 15 14.23
Pacific Gateway II................ 72.8% 3,107 32 19.09
Mariner Court..................... 96.4% 1,738 37 17.09
South Bay Technology Center....... 78.3% 1,174 8 14.30
----- -------- ----- ------
Subtotal/Weighted Average --
Los Angeles South 88.6% $ 33,171 299 $16.97
Los Angeles Central
Los Angeles Corporate Center...... 85.3% $ 6,530 29 $19.66
Whittier Financial Center......... 90.0% 2,487 41 20.41
1370 Valley Vista................. 97.6% 1,635 16 19.92
----- -------- ----- ------
Subtotal/Weighted Average --
Los Angeles Central 88.1% $ 10,652 86 $19.86
ORANGE COUNTY
5832 Bolsa........................ 100.0% $ 699 1 $14.16
Huntington Beach Plaza I & II..... 91.1% 684 14 14.39
5702 Bolsa........................ 100.0% 191 2 6.89
5672 Bolsa........................ 100.0% 75 1 6.24
5632 Bolsa........................ 100.0% 155 1 7.20
Huntington Commerce Center........ 97.9% 453 21 6.85
City Centre....................... 98.7% 4,420 30 14.80
Fountain Valley Plaza............. 100.0% 1,758 4 16.39
3300 Irvine Avenue................ 90.8% 1,267 28 18.81
Von Karman Corporate Center....... 93.6% 6,647 30 15.73
1503 South Coast.................. 95.4% 871 23 15.07
Anaheim City Centre(3)............ 93.6% 3,039 12 18.51
Crown Cabot....................... 100.0% 3,767 37 21.68
625 The City...................... 98.6% 2,538 33 18.41
One Venture....................... 65.5% 623 8 21.95
Orange Financial Center........... 96.9% 5,740 42 19.39
21
24
PERCENTAGE
OF TOTAL
PORTFOLIO
YEAR(S) APPROXIMATE NET
BUILT/ NET RENTABLE RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET SQUARE FEET
- ---------------------------------- ----------------------------------- ---------------- ---------- ------------ -----------
Centerpointe La Palma............. North County La Palma 1986,88,90 597,550 3.2%
Lambert Office Plaza.............. North County Brea 1986/97 32,807 0.2%
Savi Tech Center.................. North County Yorba Linda 1989 341,446 1.9%
Yorba Linda Business Park......... North County Yorba Linda 1988 167,142 0.9%
---------- -----
Subtotal/Weighted Average --
Orange County................. 3,202,241 17.8%
SAN DIEGO COUNTY
Imperial Bank Tower(3)............ Downtown San Diego 1982/96 540,413 2.9%
Foremost Professional Plaza....... I-15 Corridor San Diego 1992 60,534 0.3%
Activity Business Center.......... I-15 Corridor San Diego 1987 167,045 0.9%
Bernardo Regency.................. I-15 Corridor San Diego 1986 47,916 0.3%
Carlsbad Corporate Center......... North Coast Carlsbad 1996 125,000 0.7%
10180 Scripps Ranch............... I-15 Corridor San Diego 1978/96 43,560 0.2%
Cymer Technology Center........... Rancho
I-15 Corridor Bernardino 1986 155,612 0.9%
10965-93 Via Frontera............. Rancho
I-15 Corridor Bernardino 1982/97 77,920 0.4%
Poway Industrial.................. I-15 Corridor Poway 1991/96 112,000 0.6%
Balboa Corporate Center........... Mission Valley/Kearny Mesa San Diego 1990 69,890 0.4%
Panorama Corporate Center......... Mission Valley/Kearny Mesa San Diego 1991 133,245 0.7%
Ruffin Corporate Center........... Mission Valley/Kearny Mesa San Diego 1990 45,059 0.3%
Skypark Office Plaza.............. Mission Valley/Kearny Mesa San Diego 1986 202,164 1.1%
Governor Park Plaza............... North City San Diego 1986 104,065 0.6%
Westridge......................... North City San Diego 1984/96 48,850 0.3%
5120 Shoreham..................... North City San Diego 1984 37,759 0.2%
Sorrento Valley Science Park...... North City San Diego 1984 181,207 1.0%
Torreyanna Science Park........... North City La Jolla 1980/97 81,204 0.5%
Uniden Building................... North City San Diego 1990 28,119 0.2%
Genesee Executive Park............ North City San Diego 1984 155,820 0.9%
10251 Vista Sorrento.............. North City San Diego 1981/95 69,386 0.4%
---------- -----
Subtotal/Weighted Average --
San Diego County.............. 2,486,768 13.8%
VENTURA COUNTY
Center Promenade.................. West County Ventura 1982 174,837 0.9%
1000 Town Center.................. West County Oxnard 1989 107,653 0.6%
Solar Drive Business Park......... West County Oxnard 1982 125,132 0.7%
ANNUALIZED
ANNUALIZED NUMBER BASE RENT
PERCENT BASE RENT(1) OF PER LEASED
PROPERTY NAME LEASED ($000S) LEASES SQUARE FOOT
- ---------------------------------- ------- ------------ ------ -----------
Centerpointe La Palma............. 95.0% $ 9,486 83 $16.72
Lambert Office Plaza.............. 85.5% 500 8 17.82
Savi Tech Center.................. 100.0% 2,611 4 7.65
Yorba Linda Business Park......... 96.5% 1,188 61 7.36
----- -------- ----- ------
Subtotal/Weighted Average --
Orange County................. 96.1% $ 46,712 443 $15.18
SAN DIEGO COUNTY
Imperial Bank Tower(3)............ 90.2% $ 8,548 66 $17.54
Foremost Professional Plaza....... 91.0% 1,125 39 20.42
Activity Business Center.......... 92.4% 1,717 40 11.12
Bernardo Regency.................. 92.2% 784 19 17.75
Carlsbad Corporate Center......... 100.0% 1,628 1 13.02
10180 Scripps Ranch............... 100.0% 381 1 8.75
Cymer Technology Center...........
100.0% 1,659 2 10.66
10965-93 Via Frontera.............
93.4% 639 5 8.78
Poway Industrial.................. 100.0% 605 1 5.40
Balboa Corporate Center........... 100.0% 728 1 10.42
Panorama Corporate Center......... 100.0% 2,237 1 16.79
Ruffin Corporate Center........... 100.0% 407 1 9.57
Skypark Office Plaza.............. 94.4% 3,205 13 16.08
Governor Park Plaza............... 98.6% 1,603 18 15.40
Westridge......................... 100.0% 566 4 11.59
5120 Shoreham..................... 100.0% 639 1 16.92
Sorrento Valley Science Park...... 100.0% 2,677 10 14.77
Torreyanna Science Park........... 100.0% 1,608 1 19.80
Uniden Building................... 100.0% 330 2 11.74
Genesee Executive Park............ 90.0% 3,007 17 21.44
10251 Vista Sorrento.............. 100.0% 1,060 1 15.28
----- -------- ----- ------
Subtotal/Weighted Average --
San Diego County.............. 95.7% $ 35,153 244 $14.77
VENTURA COUNTY
Center Promenade.................. 89.6% $ 2,424 55 $15.47
1000 Town Center.................. 100.0% 2,123 13 19.72
Solar Drive Business Park......... 97.1% 2,114 41 17.40
22
25
PERCENTAGE
OF TOTAL
PORTFOLIO
YEAR(S) APPROXIMATE NET
BUILT/ NET RENTABLE RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET SQUARE FEET
- ---------------------------------- ----------------------------------- ---------------- ---------- ------------ -----------
Camarillo Business Center......... West County Camarillo 1984/1997 154,216 0.9%
---------- -----
Subtotal/Weighted Average --
Ventura County................ 561,838 3.1%
RIVERSIDE AND SAN BERNARDINO
COUNTIES
Centrelake Plaza.................. Inland Empire West Ontario 1989 110,763 0.6%
Tower Plaza I..................... Temecula Temecula 1988 72,350 0.4%
Tower Plaza II.................... Temecula Temecula 1983 19,301 0.1%
Tower Plaza III................... Temecula Temecula 1983 12,483 0.1%
Chicago Avenue Business Park...... Inland Empire East Riverside 1986 47,482 0.3%
Hunter Business Park.............. Inland Empire East Riverside 1990 106,782 0.6%
Havengate Center.................. Inland Empire East Rancho Cucamonga 1985 80,557 0.4%
HDS Plaza......................... Inland Empire East San Bernardino 1987 104,178 0.6%
---------- -----
Subtotal/Weighted Average --
Riverside and San Bernardino
Counties...................... 553,896 3.1%
KERN COUNTY
Parkway Center.................... Bakersfield Bakersfield 1992,95 61,333 0.3%
California Twin Center............ Bakersfield Bakersfield 1983 155,189 0.9%
---------- -----
Subtotal/Weighted Average --
Kern County................... 216,522 1.2%
---------- -----
Total/ Weighted Average -- Office
(Excluding properties under
renovation)..................... 16,380,034 91.1%
INDUSTRIAL
RIVERSIDE AND SAN BERNARDINO
COUNTIES
Ontario Airport Commerce Center... Inland Empire West Ontario 1987/97 213,127 1.3%
Highlands I....................... Temecula Temecula 1988 26,856 0.1%
Highlands II...................... Temecula Temecula 1990 41,210 0.2%
---------- -----
Total/Weighted
Average-- Industrial............ 281,193 1.6%
ANNUALIZED
ANNUALIZED NUMBER BASE RENT
PERCENT BASE RENT(1) OF PER LEASED
PROPERTY NAME LEASED ($000S) LEASES SQUARE FOOT
- ---------------------------------- ------- ------------ ------ -----------
Camarillo Business Center......... 92.4% $ 2,121 21 $14.89
----- -------- ----- ------
Subtotal/Weighted Average --
Ventura County................ 94.0% $ 8,782 130 $16.63
RIVERSIDE AND SAN BERNARDINO
COUNTIES
Centrelake Plaza.................. 77.7% $ 1,543 17 $17.94
Tower Plaza I..................... 89.1% 1,004 19 15.56
Tower Plaza II.................... 97.0% 221 22 11.83
Tower Plaza III................... 75.0% 108 20 11.50
Chicago Avenue Business Park...... 86.4% 569 6 13.86
Hunter Business Park.............. 77.1% 517 13 6.29
Havengate Center.................. 71.9% 913 9 15.77
HDS Plaza......................... 87.1% 1,505 14 16.59
----- -------- ----- ------
Subtotal/Weighted Average --
Riverside and San Bernardino
Counties...................... 81.3% $ 6,380 120 $14.17
KERN COUNTY
Parkway Center.................... 90.5% $ 993 9 $17.89
California Twin Center............ 96.7% 3,518 11 23.44
----- -------- ----- ------
Subtotal/Weighted Average --
Kern County................... 94.9% $ 4,511 20 $21.95
----- -------- ----- ------
Total/ Weighted Average -- Office
(Excluding properties under
renovation)..................... 92.5% $273,550 2,780 $18.05
INDUSTRIAL
RIVERSIDE AND SAN BERNARDINO
COUNTIES
Ontario Airport Commerce Center... 97.7% $ 1,277 44 $ 6.13
Highlands I....................... 100.0% 250 9 9.32
Highlands II...................... 100.0% 366 13 8.89
----- -------- ----- ------
Total/Weighted
Average-- Industrial............ 98.2% $ 1,893 66 $ 6.86
23
26
PERCENTAGE
OF TOTAL
PORTFOLIO
YEAR(S) APPROXIMATE NET
BUILT/ NET RENTABLE RENTABLE
PROPERTY NAME SUBMARKET LOCATION RENOVATED SQUARE FEET SQUARE FEET
- ---------------------------------- ----------------------------------- ---------------- ---------- ------------ -----------
RETAIL
RIVERSIDE AND SAN BERNARDINO
COUNTIES
Tower Plaza Retail................ Temecula Temecula 1970/97 133,481 0.7%
Los Angeles West
Howard Hughes Spectrum............ Marina Area/Culver City/LAX Los Angeles 1993 36,959 100.0%
---------- -----
Total-Retail...................... 170,440 0.9%
---------- -----
Total Industrial and Retail....... 451,633 2.5%
---------- -----
Portfolio Total (excluding
renovations).................... 16,831,667 93.6%
RENOVATIONS
Westwood Center(5)(6)............. Westwood/West Los Angeles Los Angeles 1965 313,000 1.8%
5200 West Century(6).............. Marina Area/Culver City/LAX Los Angeles 1982 310,910 1.8%
Tourney Pointe(6)(7).............. Santa Clarita Valley Valencia 1985/98 219,991 1.2%
535 Brand Boulevard(6)............ East San Fernando Valley/Tri-Cities Glendale 1973/92 109,187 0.6%
299 Euclid(6)..................... East San Fernando Valley/Tri-Cities Pasadena 1983 73,400 0.4%
1821 Dyer Boulevard(6)............ Greater Airport Area Irvine 1980/88 115,061 0.6%
---------- -----
Total Renovations................. 1,141,549 6.4%
Total Office (including
renovations).................... 17,521,583 97.5%
---------- -----
Portfolio total................... 17,973,216 100.0%
========== =====
ANNUALIZED
ANNUALIZED NUMBER BASE RENT
PERCENT BASE RENT(1) OF PER LEASED
PROPERTY NAME LEASED ($000S) LEASES SQUARE FOOT
- ---------------------------------- ------- ------------ ------ -----------
RETAIL
RIVERSIDE AND SAN BERNARDINO
COUNTIES
Tower Plaza Retail................ 88.7% $ 1,291 21 $10.91
Los Angeles West
Howard Hughes Spectrum............ 100.0% 909 1 24.60
----- -------- ----- ------
Total-Retail...................... 91.1% $ 2,200 22 $14.17
----- -------- ----- ------
Total Industrial and Retail....... 95.6% $ 4,093 88 $ 9.48
----- -------- ----- ------
Portfolio Total (excluding
renovations).................... 92.6% $277,643 2,868 $17.81
RENOVATIONS
Westwood Center(5)(6)............. 0.0% N/A N/A N/A
5200 West Century(6).............. 62.6% $ 2,976 33 $15.29
Tourney Pointe(6)(7).............. 5.5% 266 1 21.96
535 Brand Boulevard(6)............ 52.8% 1,111 9 19.27
299 Euclid(6)..................... 100.0% 1,743 4 23.75
1821 Dyer Boulevard(6)............ 56.2% 1,151 1 17.80
----- -------- ----- ------
Total Renovations................. 38.4% $ 7,247 48 $16.53
Total Office (including
renovations).................... 89.1% $280,797 2,828 $17.99
----- -------- ----- ------
Portfolio total................... 89.2% $284,890 2,916 $17.77
===== ======== ===== ======
- ---------------
(1) Except for 299 Euclid and 1821 Dyer Boulevard, annualized base rent is
calculated as monthly contractual base rent under existing leases as of
December 31, 1998, 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. The calculation
for 299 Euclid and 1821 Dyer Boulevard includes estimated operating expense
reimbursements.
(2) At January 1, 1998, we owned a 75% interest in this property and on March
25, 1998 exercised our option to purchase the remaining 25% interest for
$27.5 million, resulting in a total acquisition cost of approximately $110.7
million.
(3) We lease the land underlying these Properties and/or their parking
structures pursuant to long term ground leases.
(4) Above amounts for 2730 Wilshire exclude the 100%-occupied 12,740 square
foot, 16-unit apartment complex we also own.
(5) We own a 97.5% interest in this property.
(6) Property is currently under renovation.
(7) We own a 99.3% interest in this property.
24
27
TENANT INFORMATION
Our 138 Properties are leased to over 2,900 tenants which are engaged in a
variety of businesses, including financial services, entertainment, health care
services, accounting, law, computer technology, education and publishing. The
following table sets forth certain information as of December 31, 1998 derived
from the 20 largest tenants at our Properties (based on percentage of aggregate
portfolio annualized base rent):
WEIGHTED PERCENTAGE OF PERCENTAGE OF
AVERAGE AGGREGATE AGGREGATE
REMAINING PORTFOLIO PORTFOLIO
NUMBER OF LEASE TERM LEASED ANNUALIZED
TENANT LEASES IN MONTHS SQUARE FEET BASE RENT
------ --------- ---------- ------------- -------------
State of California.................................. 29 58 1.66% 1.61%
Wells Fargo Bank..................................... 4 93 0.66% 1.16%
University of Phoenix, Inc........................... 9 61 1.17% 1.14%
Walt Disney Pictures & Television, Inc............... 2 52 0.94% 1.14%
Foote, Cone & Belding -- Honig, Inc.................. 2 56 0.40% 1.05%
Chevron USA, Inc..................................... 1 20 0.65% 0.97%
GTE (Consolidated Entities).......................... 5 23 1.00% 0.90%
Atlantic Richfield Company........................... 2 92 0.79% 0.80%
Community Healthcare Alliance........................ 1 56 0.84% 0.79%
McDonnell Douglas Corp............................... 1 82 1.70% 0.78%
Maritz............................................... 4 29 0.68% 0.77%
Pepperdine University................................ 2 48 0.58% 0.74%
State Compensation Insurance Fund.................... 1 51 0.71% 0.73%
Sony (Consolidated Entities)......................... 4 60 0.72% 0.72%
Omnicom Group, Inc................................... 1 58 0.32% 0.71%
U.S. Government...................................... 16 28 0.60% 0.64%
Salomon Smith Barney................................. 6 85 0.44% 0.63%
Cymer, Inc........................................... 1 132 0.97% 0.58%
Pacific Southwest Bank............................... 1 108 0.78% 0.57%
Aurora Biosciences Corp.............................. 1 117 0.51% 0.57%
-- --- ----- -----
Total/Weighted Average (1)................. 93 66 16.12% 17.00%
== === ===== =====
- ---------------
(1) Weighted average calculation based on rentable square footage leased by each
tenant.
25
28
LEASE DISTRIBUTIONS
The following table sets forth information relating to the distribution of the
leases for our 138 Properties, based on rentable square feet under lease, as of
December 31, 1998:
AVERAGE
PERCENTAGE ANNUALIZED BASE PERCENTAGE
OF AGGREGATE BASED RENT RENT PER OF AGGREGATE
PERCENTAGE OF SQUARE PORTFOLIO OF SQUARE PORTFOLIO
SQUARE FEET UNDER NUMBER OF ALL FOOTAGE OF LEASED LEASES(1) FOOT ANNUALIZED
LEASE LEASES LEASES LEASES SQUARE FEET ($000S) OF LEASES BASE RENT
----------------- --------- ------------- ---------- ------------ ----------- --------- ------------
2,500 or less............... 1,566 53.71% 2,153,029 13.47% $ 42,009 $19.51 13.88%
2,501 - 5,000............... 611 20.96% 2,125,565 13.30% 41,802 19.67 13.82%
5,001 - 7,500............... 227 7.78% 1,394,439 8.72% 26,837 19.25 8.87%
7,501 - 10,000.............. 157 5.38% 1,349,603 8.44% 24,305 18.01 8.03%
10,001 - 20,000.............. 226 7.75% 3,079,048 19.26% 60,445 19.63 19.98%
20,001 - 40,000.............. 75 2.57% 2,066,091 12.93% 38,354 18.56 12.68%
40,001 and over.............. 54 1.85% 3,816,940 23.88% 68,809 18.03 22.74%
----- ------ ---------- ------ -------- ------ ------
Total/Weighted Average... 2,916 100.00% 15,984,715 100.00% $302,561 $18.93 100.00%
===== ====== ========== ====== ======== ====== ======
- ---------------
(1) Base rent is as of the date of lease expiration, including all fixed
contractual base rent increases; increases tied to indices such as the
Consumer Price Index are not included.
LEASE EXPIRATIONS
The following table sets forth a summary schedule of the total lease
expirations for our 138 Properties for leases in place at January 1, 1999. This
table assumes that none of the tenants exercise renewal options or termination
rights, if any, at or prior to the scheduled expirations:
AVERAGE
PERCENTAGE BASE PERCENTAGE
SQUARE OF AGGREGATE ANNUALIZED RENT PER OF AGGREGATE
NUMBER OF FOOTAGE OF PORTFOLIO BASE RENT OF SQUARE FOOT PORTFOLIO
YEAR OF LEASE LEASES EXPIRING LEASED EXPIRING LEASES OF EXPIRING ANNUALIZED
EXPIRATION EXPIRING LEASES SQUARE FEET ($000S)(1) LEASES BASE RENT
------------- --------- ---------- ------------ --------------- ------------ ------------
Month-to-Month............... 214 504,242 3.15% $ 8,189 $16.24 2.71%
1999......................... 562 2,099,373 13.13% 35,866 17.08 11.85%
2000......................... 570 2,230,962 13.96% 41,313 18.52 13.65%
2001......................... 512 2,267,357 14.18% 44,394 19.58 14.67%
2002......................... 358 2,161,960 13.53% 40,511 18.74 13.39%
2003......................... 350 2,661,485 16.65% 55,053 20.69 18.20%
2004......................... 129 1,394,306 8.72% 25,890 18.57 8.56%
2005......................... 72 1,060,386 6.63% 17,360 16.37 5.74%
2006......................... 33 392,107 2.45% 8,569 21.85 2.83%
2007......................... 30 398,898 2.50% 8,021 20.11 2.65%
2008......................... 27 308,269 1.93% 8,326 27.01 2.75%
2009......................... 10 210,252 1.32% 4,047 19.25 1.34%
2010+........................ 49 295,118 1.85% 5,022 17.02 1.66%
----- ---------- ------ -------- ------ ------
Total/Weighted
Average.......... 2,916 15,984,715 100.00% $302,561 $18.93 100.00%
===== ========== ====== ======== ====== ======
- ---------------
(1) Base rent is as of the date of lease expiration, including all fixed
contractual base rent increases; increases tied to indices such as the
Consumer Price Index are not included.
26
29
ITEM 3. LEGAL PROCEEDINGS
We are not presently subject to any material litigation nor, to our knowledge,
is any litigation threatened against us, other than routine litigation arising
in the ordinary course of business, some of which is expected to be covered by
liability insurance and all of which collectively is not expected to have a
material adverse effect on our consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter
of the year ended December 31, 1998.
27
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock began trading on the New York Stock Exchange ("NYSE") on
October 4, 1996 under the symbol "ARI." On March 15, 1999, the last reported
sales price per share of Common Stock on the NYSE was $22 3/8, and there were
approximately 156 holders of record of the Common Stock. The table below sets
forth the quarterly high and low closing sales price per share of Common Stock
reported on the NYSE and the distributions per share we declared with respect to
each period.
DISTRIBUTIONS
HIGH LOW DECLARED
---- --- -------------
1996
Fourth Quarter (from October 9)............................. $27 5/8 $22 $0.36(1)
1997
First Quarter............................................... 29 1/2 26 1/4 0.40
Second Quarter.............................................. 27 3/8 23 3/4 0.40
Third Quarter............................................... 31 3/8 25 13/16 0.40
Fourth Quarter.............................................. 32 1/4 28 5/8 0.40
1998
First Quarter............................................... 30 7/8 27 1/2 0.42
Second Quarter.............................................. 28 13/16 25 3/16 0.42
Third Quarter............................................... 26 3/4 19 15/16 0.42
Fourth Quarter.............................................. 23 5/8 20 1/8 0.42
- ---------------
(1) We paid a distribution of $.36 per share of Common Stock on January 15,
1997, to Stockholders of record on December 31, 1996. The distribution was
for the period from October 9, 1996 through December 31, 1996 and is
approximately equivalent to a quarterly distribution of $.40 per share and
an annual distribution of $1.60 per share.
28
31
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated/combined financial data
for Arden Realty and the Arden Predecessors (in thousands except per share
amounts) and should be read in conjunction with the consolidated/combined
financial statements included elsewhere in this Form 10-K.
ARDEN REALTY, INC. ARDEN PREDECESSORS
------------------------------------ -------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEARS ENDED OCTOBER 9, JANUARY 1, FOR THE YEARS ENDED
DECEMBER 31, 1996 TO 1996 TO DECEMBER 31,
------------------- DECEMBER 31, OCTOBER 8, --------------------
1998 1997 1996 1996 1995 1994
-------- -------- -------------- -------------- --------- --------
OPERATING DATA:
Revenues................................ $281,067 $133,817 $19,434 $39,135 $10,236 $5,867
Property operating expenses............. 86,570 44,332 6,005 14,224 3,340 2,191
-------- -------- ------- ------- ------- ------
194,497 89,485 13,429 24,911 6,896 3,676
General and administrative expense...... 6,665 4,322 753 1,758 1,377 689
Interest expense........................ 43,403 19,511 1,280 24,521 5,537 1,673
Loss on valuation of derivative......... -- 3,111 -- -- -- --
Depreciation and amortization........... 51,822 20,260 3,108 5,264 1,898 1,143
Interest and other income............... (3,515) (1,630) (138) (1,330) (1,457) (685)
Equity in net loss (income) of
noncombined entities.................. -- -- -- 336 116 (201)
-------- -------- ------- ------- ------- ------
Income (loss) before minority interests
and extraordinary items............... 96,122 43,911 8,426 (5,638) (575) 1,057
Minority interests' share of loss
(income) of Arden Predecessors........ -- -- -- 721 (1) 1
Minority interests...................... (5,447) (4,281) (993) -- -- --
-------- -------- ------- ------- ------- ------
Income (loss) before extraordinary
items................................. 90,675 39,630 7,433 (4,917) (576) 1,058
Extraordinary (loss) gain on early
extinguishment of debt, net of
minority interests' share............. -- -- (13,105) 1,877 -- --
-------- -------- ------- ------- ------- ------
Net income (loss)....................... $ 90,675 $ 39,630 $(5,672) $(3,040) $ (576) $1,058
======== ======== ======= ======= ======= ======
Earnings per share:
Net income (loss) per common share:
Income before extraordinary item...... $ 1.55 $ 1.43 $ .34
Extraordinary item -- loss on early
extinguishment of debt.............. -- -- (.60)
-------- -------- -------
Net income (loss) per common share:
Basic............................... $ 1.55 $ 1.43 $ (.26)
======== ======== =======
Diluted............................. $ 1.54 $ 1.41 $ (.26)
======== ======== =======
Weighted average common shares
outstanding:
Basic............................... 58,660 27,794 21,680
======== ======== =======
Diluted............................. 58,814 28,039 21,680
======== ======== =======
Cash dividends declared................. $ 1.68 $ 1.60 $ .36
======== ======== =======
29
32
ARDEN REALTY, INC. ARDEN PREDECESSORS
---------------------------------- ------------------
DECEMBER 31, DECEMBER 31,
---------------------------------- ------------------
1998 1997 1996 1995 1994
---------- ---------- -------- -------- -------
BALANCE SHEET DATA:
Commercial properties, net of
accumulated depreciation....... $2,238,069 $1,203,172 $529,568 $160,874 $34,977
Total assets..................... 2,331,919 1,284,004 551,256 182,379 46,090
Mortgage loans payable and
unsecured lines of credit...... 840,477 477,566 155,000 168,451 32,944
Total liabilities................ 902,307 515,048 173,612 174,163 34,148
Minority interests............... 56,222 95,973 45,667 100 99
Total Stockholders'
Equity/owners' equity.......... 1,373,390 672,983 331,977 8,116 11,843
30
33
ARDEN REALTY, INC.
AND
ARDEN PREDECESSORS
(IN THOUSANDS, EXCEPT NUMBER OF PROPERTIES AND PERCENTAGES)
ARDEN REALTY, INC. ARDEN PREDECESSORS
-------------------------------------------- -----------------------------------------
FOR THE YEARS ENDED FOR THE PERIOD FOR THE YEARS ENDED
DECEMBER 31, OCTOBER 9, 1996 TO FOR THE PERIOD DECEMBER 31,
----------------------- DECEMBER 31, JANUARY 1, 1996 TO --------------------
1998 1997 1996 OCTOBER 8, 1996 1995 1994
----------- --------- ------------------ ------------------ --------- --------
OTHER DATA:
Funds from
Operations(1)........... $ 147,369 $ 67,282 $ 11,534 $ (374) $ 1,323 $ 2,200
Company's Share
Percentage.............. 95.3% 90.3% 88.2% N/A N/A N/A
----------- --------- --------- --------- --------- --------
Company's Share of Funds
from Operations......... $ 140,443 $ 60,756 $ 10,173 $ (374) $ 1,323 $ 2,200
=========== ========= ========= ========= ========= ========
Cash flows from operating
activities.............. 143,588 35,116 8,665 7,387 (8,819) 834
Cash flows from investing
activities.............. (1,099,517) (659,670) (164,763) (119,083) (123,358) (17,921)
Cash flows from financing
activities.............. 955,207 622,222 163,730 119,908 132,356 16,845
Number of Properties owned
at period end........... 138 72 33 22 17 8
Gross rentable square feet
of Properties owned at
end of period........... 17,973 10,307 5,443 3,739 2,634 1,130
Occupancy of Properties
owned at end of
period.................. 88% 84% 85% 88% 88% 82%
- ---------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 (the "White Paper") defines Funds from Operations as net income
(loss) computed in accordance with generally accepted accounting principles
("GAAP"), excluding gains (or losses) from debt restructuring and unusual
items, plus real estate related depreciation and amortization. We believe
Funds from Operations is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides
investors with an understanding of our ability to incur and service debt, to
make capital expenditures and to fund other cash needs. Our computation of
Funds from Operations may differ from the methodology for calculating Funds
from Operations utilized by other equity REITs and, accordingly, may not be
comparable to such other REITs. Funds from Operations should not be
considered as an alternative to net income (determined in accordance with
GAAP), as an indication of our financial performance or as an alternative to
cash flows from operating activities (determined in accordance with GAAP) as
a measure of our liquidity.
31
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following discussion should be read in conjunction with our historical
consolidated financial statements and the combined financial statements of the
Arden Predecessors and related notes thereto included elsewhere in this Form
10-K.
Since our initial public offering in October 1996, we have pursued a strategy
of acquiring under-performing commercial properties, properties in need of
renovation, properties which provide attractive yields with stable cash flow,
and more recently, fully entitled commercial undeveloped real estate, all in
Southern California submarkets where we can utilize our local market expertise.
We have also used our active in-house management, leasing and finance expertise
to maximize growth in cash flow. In particular, for the year ended December 31,
1998, we have:
- Raised approximately $744.7 million of equity in a series of four public
offerings. Proceeds from these offerings, net of underwriters' discount,
advisory fees and offering costs aggregating approximately $38.1 million,
were approximately $706.6 million.
- Acquired 66 commercial properties, with 7.7 million rentable square feet for
approximately $1.0 billion.
- Acquired the undeveloped commercial property portions of the 70-acre Howard
Hughes Center and a building containing an executive health and athletic
club tenant (the "Center") for approximately $38.6 million. The Center,
located in West Los Angeles, California, is a mixed-use development
currently containing three office buildings, the building containing the
health and athletic club tenant and entitlements for an additional 1.3
million square feet of office space.
- Refinanced $200 million of variable rate mortgage debt that matured on July
1, 1998 (the "Lehman Bridge Loan II"), with two-fixed rate mortgage loans
totaling $236.7 million. In October 1998, we borrowed an additional $10.6
million under one of these mortgage loans to repay outstanding indebtedness
and reduced the annual fixed rate from 6.74% to 6.61% on $111.2 million of
these borrowings.
- Increased the operating margin from our Properties by over 2% in 1998 to 69%
from 67% in 1997.
- Increased the total occupancy in our portfolio by 5.6% (excluding the six
properties under renovation), that included net absorption of approximately
900,000 square feet.
We intend to continue focusing on maximizing growth in cash flow and on
enhancing the value of our portfolio of commercial properties. These objectives
will be pursued by active management of our existing portfolio and by
acquisitions of underperforming office and industrial properties, properties in
need of renovation and properties that provide attractive yields with stable
cash flows in submarkets where we can utilize our local market expertise. We may
also continue to develop new properties when market conditions permit in
submarkets where we have extensive local market expertise.
RECENT DEVELOPMENTS
In January 1999, along with Lowe Enterprise as the construction manager, we
commenced construction on a 240,000 square foot office building at Howard Hughes
Center that is scheduled for completion in the first quarter of 2000.
On January 29, 1999 the Lehman Bridge Loan I was expanded to $111.4 million.
Pursuant to the fifth amendment to the Lehman Bridge Loan I, the loan bears
interest at LIBOR plus 2.25% per annum (effective rate of 7.19% at January 29,
1999), requires monthly payments of interest only, and matures on April 20,
1999.
32
35
On February 2,1999, we executed a $115 million loan commitment with Mass
Mutual Life Insurance Company (the "Mass Mutual Loan"). The Mass Mutual Loan is
secured by 12 Properties, has a ten year term and bears interest at a fixed rate
of 6.94% (7.049% including the amortization of loan fees) and requires monthly
payments of principal and interest amortized over a 25 year period. The
estimated funding date for the Mass Mutual Loan is March 31, 1999. Proceeds from
this loan will be used to repay a portion of our lines of credit and the Lehman
Bridge Loan I.
RESULTS OF OPERATIONS
Our financial position and operating results are primarily comprised of our
portfolio of commercial properties and income derived therefrom. Therefore,
financial data from period to period will be affected by the timing of
significant property acquisitions. Due to Arden Realty's and the Arden
Predecessors' aggressive acquisition program through 1998, there has been
significant variability in financial data from period to period.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER
31, 1997
(IN THOUSANDS).
YEAR ENDED DECEMBER 31,
------------------------ DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---------- ---------- -------- -------
REVENUE
Revenue from rental operations:
Rental........................................ $250,467 $118,085 $132,382 112%
Tenant reimbursements......................... 9,505 5,945 3,560 60%
Parking, net of expense....................... 12,223 7,397 4,826 65%
Other rental operations....................... 8,872 2,390 6,482 271%
-------- -------- -------- ----
Total................................. 281,067 133,817 147,250 110%
Interest and other income..................... 3,515 1,630 1,885 116%
-------- -------- -------- ----
Total revenue......................... $284,582 $135,447 $149,135 110%
======== ======== ======== ====
EXPENSES
Property expenses:
Repairs and maintenance....................... $ 27,141 $ 15,154 $ 11,987 79%
Utilities..................................... 26,559 14,321 12,238 85%
Real estate taxes............................. 19,433 8,003 11,430 143%
Insurance..................................... 4,110 2,125 1,985 93%
Ground rent................................... 714 314 400 127%
Marketing and other........................... 8,613 4,415 4,198 95%
-------- -------- -------- ----
Total property expenses............... 86,570 44,332 42,238 95%
General and administrative.................... 6,665 4,322 2,343 54%
Interest...................................... 43,403 19,511 23,892 122%
Loss on valuation of derivative............... -- 3,111 (3,111) (100)%
Depreciation and amortization................. 51,822 20,260 31,562 156%
-------- -------- -------- ----
Total expenses........................ $188,460 $ 91,536 $ 96,924 106%
======== ======== ======== ====
OTHER DATA:
Number of Properties:
Acquired during period..................... 66 39 27 N/A
Owned at end of period..................... 138 72 66 N/A
Square feet (in thousands):
Acquired during period..................... 7,666 4,864 2,802 N/A
Owned at end of period..................... 17,973 10,307 7,666 N/A
33
36
The increase in revenue from rental operations and property expenses in 1998
is primarily from properties acquired during 1997 and 1998. The 1997 amounts do
not include a full year of operations for the 39 properties we acquired during
1997 or the 66 properties we acquired during 1998.
Following is a summary of the 1998 increase in revenue from rental operations
and property expenses that relates to properties which we acquired during 1997
and 1998 and for properties owned for all of 1997 and 1998 (in thousands).
PROPERTIES PROPERTIES
ACQUIRED DURING OWNED FOR ALL OF
TOTAL VARIANCE 1997 AND 1998 1997 AND 1998(1)
-------------- --------------- -----------------
REVENUE FROM RENTAL OPERATIONS:
Rental.......................................... $132,382 $131,760 $ 622
Tenant reimbursements........................... 3,560 4,931 (1,371)
Parking, net of expense......................... 4,826 4,811 15
Other rental operations......................... 6,482 4,683 1,799
-------- -------- -------
$147,250 $146,185 $ 1,065
======== ======== =======
PROPERTY EXPENSES:
Repairs and maintenance......................... $ 11,987 $ 13,117 $(1,130)
Utilities....................................... 12,238 12,587 (349)
Real estate taxes............................... 11,430 11,061 369
Insurance....................................... 1,985 2,126 (141)
Ground rent..................................... 400 374 26
Marketing and other............................. 4,198 4,901 (703)
-------- -------- -------
$ 42,238 $ 44,166 $(1,928)
======== ======== =======
OTHER DATA:
Number of Properties............................ N/A 105 33
Square feet (in thousands)...................... N/A 2,530 5,443
- ---------------
(1) See the Same Properties analysis below.
Interest and other income increased by approximately $1.9 million in 1998 as
compared to 1997, primarily due to higher interest income earned on mortgage
notes receivable acquired in September 1997 and on cash deposits required by
certain of our mortgage loans.
General and administrative expenses were approximately $6.7 million or 2.4% of
total revenue in 1998 as compared to $4.3 million or 3.2% of total revenue in
1997. General and administrative expenses as a percentage of total revenue
decreased in 1998 compared to 1997 primarily due to benefits achieved from
economies of scale and concentration over a larger property portfolio.
Interest expense increased approximately $23.9 million in 1998 as compared to
1997. This increase was due to higher outstanding debt balances in 1998
primarily to fund property acquisitions, which was partially offset by slightly
lower effective interest rates in 1998 (See "-- Liquidity and Capital
Resources").
In September 1997, we recorded a loss of approximately $3.1 million related to
the retirement of agreements to convert certain floating rate debt liabilities
to fixed rate liabilities. The underlying variable rate liabilities were repaid
in full with proceeds from an equity offering in July 1997.
Depreciation and amortization expense increased by approximately $31.6 million
in 1998, primarily due to the 105 Properties we acquired in 1997 and 1998.
34
37
SAME PROPERTIES
Following is a comparison of property operating data computed under generally
accepted accounting principles ("GAAP Basis") and excluding the straight-line
rent adjustment ("Cash Basis") for the 33 properties that we owned for the
entire twelve month periods ended December 31, 1998 and 1997 (in thousands):
YEAR ENDED
DECEMBER 31,
-------------------- DOLLAR PERCENT
1998 1997 CHANGE CHANGE
-------- -------- ------- -------
GAAP BASIS:
Revenue from rental operations.................. $101,505 $100,440 $ 1,065 1%
Property expenses............................... 31,421 33,349 (1,928) (6)%
-------- -------- ------- --
$ 70,084 $ 67,091 $ 2,993 5%
======== ======== ======= ==
CASH BASIS(1):
Revenue from rental operations.................. $100,554 $ 98,701 $ 1,853 2%
Property expenses............................... 31,421 33,349 (1,928) (6)%
-------- -------- ------- --
$ 69,133 $ 65,352 $ 3,781 6%
======== ======== ======= ==
- ---------------
(1) Excludes straight-line rent adjustments.
Revenue from rental operations for these properties computed on a GAAP basis
increased by approximately $1.1 million in 1998 compared to 1997, primarily due
to increases in occupancy, rental rates and higher miscellaneous tenant charges.
These increases were partially offset by lower tenant expense reimbursements
from resetting base years for leases that were retenanted in 1998 and the
reversing effect of straight-line rent adjustments on certain properties in
1998.
Excluding only the straight-line rent adjustments for these properties,
revenue from rental operations, computed on a Cash Basis, increased by
approximately $1.9 million for the reasons described above.
Property operating expenses for these properties decreased by approximately
$1.9 million in 1998 compared to 1997, primarily due to repairs, maintenance and
marketing and overhead expense reductions achieved primarily from economies of
scale and concentration over a larger property portfolio.
35
38
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996 (IN THOUSANDS).
We believe for a meaningful analysis of the financial statements to be made,
certain transactions which occurred in 1996 should be considered in a manner
which makes each accounting period comparable. Accordingly, the revenue and
expenses for certain noncombined entities for the period from January 1, 1996 to
October 8, 1996 have been included as though they were combined, with
intercompany management fees relating to the noncombined entities of $704,000
eliminated in 1996 in the following discussion. The following section discusses
the results of operations, as adjusted and in thousands.
YEAR ENDED DECEMBER 31,
----------------------- DOLLAR PERCENT
1997 1996 CHANGE CHANGE
---------- --------- ------- -------
REVENUE
Revenue from rental operations:
Rental.......................................... $118,085 $62,156 $55,929 90%
Tenant reimbursements........................... 5,945 3,076 2,869 93%
Parking, net of expense......................... 7,397 4,948 2,449 49%
Other rental operations......................... 2,390 1,305 1,085 83%
-------- ------- ------- ---
Total................................... 133,817 71,485 62,332 87%
Interest and other income....................... 1,630 1,468 162 11%
-------- ------- ------- ---
Total revenue........................... $135,447 $72,953 $62,494 86%
======== ======= ======= ===
EXPENSES
Property expenses:
Repairs and maintenance......................... $ 15,154 $ 7,287 $ 7,867 108%
Utilities....................................... 14,321 7,054 7,267 103%
Real estate taxes............................... 8,003 3,741 4,262 114%
Insurance....................................... 2,125 3,049 (924) (30)%
Ground rent..................................... 314 189 125 66%
Marketing and other............................. 4,415 3,451 964 28%
-------- ------- ------- ---
Total property expenses................. 44,332 24,771 19,561 79%
General and administrative...................... 4,322 2,512 1,810 72%
Interest........................................ 19,511 33,157 (13,646) (41)%
Loss on valuation of derivative................. 3,111 -- 3,111 100%
Depreciation and amortization................... 20,260 11,078 9,182 83%
-------- ------- ------- ---
Total expenses.......................... $ 91,536 $71,518 $20,018 28%
======== ======= ======= ===
OTHER DATA:
Number of Properties:
Acquired during period....................... 39 16 23 N/A
Owned at end of period....................... 72 33 39 N/A
Square feet (in thousands):
Acquired during period....................... 4,864 2,809 2,055 N/A
Owned at end of period....................... 10,307 5,443 4,864 N/A
The increase in revenue from rental operations and property expenses in 1997
is primarily from properties acquired during 1996 and 1997. The 1996 amounts do
not include a full year of operations for the 16 properties that were acquired
during 1996 or the 39 properties we acquired in 1997.
36
39
Following is a summary of the increase in revenue from rental operations and
property operating expenses in 1997 that relates to properties acquired during
1996 and 1997 and for properties which were owned for all of 1996 and 1997 (in
thousands):
PROPERTIES PROPERTIES
ACQUIRED DURING OWNED FOR ALL OF
TOTAL VARIANCE 1996 AND 1997 1996 AND 1997(1)
-------------- --------------- ----------------
REVENUE FROM RENTAL OPERATIONS:
Rental........................................... $55,929 $55,086 $ 843
Tenant reimbursements............................ 2,869 2,342 527
Parking, net of expense.......................... 2,449 2,187 262
Other rental operations.......................... 1,085 915 170
------- ------- ------
$62,332 $60,530 $1,802
======= ======= ======
PROPERTY EXPENSES
Repairs and maintenance.......................... $ 7,867 $ 7,377 $ 490
Utilities........................................ 7,267 7,050 217
Real estate taxes................................ 4,262 4,073 189
Insurance........................................ (924) 62 (986)
Ground Rent...................................... 125 67 58
Marketing and other.............................. 964 1,365 (401)
------- ------- ------
$19,561 $19,994 $ (433)
======= ======= ======
OTHER DATA:
Number of Properties............................. N/A 55 17
Square feet (in thousands)....................... N/A 7,673 2,634
- ---------------
(1) See Same Properties analysis below.
General and administrative expenses were approximately $4.3 million or 3.2% of
total revenue in 1997 as compared to $2.5 million or 3.4% of total revenue in
1996. General and administrative expenses as a percentage of total revenue
decreased in 1997 compared to 1996 primarily due to benefits achieved from
economies of scale and concentration over a larger property portfolio.
Interest expense decreased approximately $13.6 million or 41% in 1997 as
compared to 1996, primarily as a result of lower outstanding debt balances in
1997. We used the net proceeds of approximately $737.9 million from equity
offerings in October 1996 and July 1997 to repay outstanding indebtedness and
acquire additional properties.
In September 1997, we recorded a loss of approximately $3.1 million related to
the retirement of agreements to convert certain floating rate debt liabilities
to fixed rate liabilities. The underlying variable rate liabilities were repaid
in full with proceeds from an equity offering in July 1997.
Depreciation and amortization expense increased $9.2 million or 83% in 1997,
primarily due to 1996 and 1997 acquisitions.
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SAME PROPERTIES
Following is a comparison of property operating data computed under generally
accepted accounting principles ("GAAP Basis") and excluding the straight-line
rent adjustment ("Cash Basis") for the 17 properties which were owned for the
entire twelve month periods ended December 31, 1997 and 1996 (in thousands):
YEAR ENDED
DECEMBER 31,
------------------ DOLLAR PERCENT
1997 1996 CHANGE CHANGE
------- ------- ------ -------
GAAP BASIS:
Revenue from rental operations..................... $51,086 $49,284 $1,802 4%
Property expenses.................................. 16,898 17,331 (433) (2)%
------- ------- ------ --
$34,188 $31,953 $2,235 7%
======= ======= ====== ==
CASH BASIS(1):
Revenue from rental operations..................... $50,743 $47,669 $3,074 (6)%
Property expenses.................................. 16,898 17,331 (433) (2)%
------- ------- ------ --
$33,845 $30,338 $3,507 12%
======= ======= ====== ==
- ---------------
(1) Excludes straight-line rent adjustments
Revenue from rental operations for these properties computed on a GAAP basis
increased by approximately $1.8 million in 1997 compared to 1996, primarily due
to increases in occupancy, rental rates and higher miscellaneous tenant charges,
partially offset by the reversing effect of straight-line rent adjustments on
certain properties in 1997.
Excluding only the straight-line rent adjustments for these properties,
revenue from rental operations, computed on a Cash Basis, increased by
approximately $3.1 million for the reasons described above.
Property operating expenses for these properties decreased by approximately
$.4 million in 1997 compared to 1996, primarily due to insurance and marketing
and overhead expense reductions primarily achieved from economies of scale and
concentration over a larger property portfolio.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Cash provided by operating activities increased by $108.5 million to $143.6
million for the year ended December 31, 1998, as compared to $35.1 million for
the year ended December 31, 1997, primarily due to operating results from the
105 properties acquired in 1997 and 1998. Cash used in investing activities
increased by $439.8 million to $1.1 billion in 1998 compared to $659.7 million
in 1997, due to property acquisitions and an increase in capital expenditures on
properties owned. Cash provided by financing activities increased by $333.0
million to $955.2 million, as compared to $622.2 million in 1997. Cash provided
by financing activities for the year ended December 31, 1998 consisted primarily
of net proceeds from mortgage loans, unsecured lines of credit, and the issuance
of 26,296,047 shares of common stock, partially offset by distributions to
stockholders and minority interests. Cash provided by financing activities for
the year ended December 31, 1997 consisted primarily of net proceeds from
mortgage loans, unsecured lines of credit and the issuance of 13,896,666 shares
of common stock, partially offset by distributions to shareholders and minority
interests.
CAPITAL COMMITMENTS
As of December 31, 1998 we had approximately $8.1 million outstanding in
capital commitments related to tenant improvements, renovation costs, and
property related capital expenditures.
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41
AVAILABLE BORROWINGS, CASH BALANCE AND CAPITAL RESOURCES
We have a $300 million unsecured line of credit (the "Amended Credit
Facility") from a group of banks led by Wells Fargo. The Amended Credit Facility
bears interest at a rate ranging between LIBOR plus 1.2% and LIBOR plus 1.45%
(effective rate of 6.75% at December 31, 1998) depending on the leverage ratio
of the Company. If we achieve an investment grade unsecured debt rating, the
interest rate may be lowered to between LIBOR plus 0.9% and LIBOR plus 1.15%
depending on the debt rating. Under certain circumstances, we have the option to
convert the interest rate from LIBOR to the prime rate plus 0.5%. In addition,
the Amended Credit Facility has a commitment fee ranging from .125% to .25% on
the unused balance. The Amended Credit Facility matures on June 1, 2000. As of
December 31, 1998, the aggregate outstanding balance on the Amended Credit
Facility was $296.4 million, and $3.6 million was available for additional
borrowing. Proceeds from the Amended Credit Facility have been used, among other
things, to provide funds for tenant improvements and capital expenditures and
provide for working capital and other corporate purposes.
We also have an unsecured line of credit with a total commitment of $10.0
million from City National Bank (the "City National Bank Credit Facility"). The
City National Bank Credit Facility accrues interest at the City National Bank
Prime Rate less 0.875% (effective rate of 7.4% at December 31, 1998), and is
scheduled to mature on August 1, 1999. Proceeds from the City National Bank
Credit Facility will be used, among other things, to provide funds for tenant
improvements and capital expenditures and provide for working capital and other
corporate purposes. As of December 31, 1998, there was no outstanding balance on
the City National Bank Credit Facility.
On June 8, 1998 we repaid, through two special purpose subsidiaries, our $200
million Lehman Bridge Loan II with two new mortgage loans totaling $236.7
million. The additional proceeds were used to repay $22.0 million on our lines
of credit and to repay $5.6 million on the Lehman Bridge Loan I. The $136.1
million ("Mortgage Financing III") and $100.6 million ("Mortgage Financing IV")
mortgage loans payable to an affiliate of Lehman Brothers are non-recourse and
secured by fully cross-collateralized and cross-defaulted first mortgage liens
on 22 and 12 of our Properties ("Mortgage Financing III, and IV, Properties"),
respectively. The Mortgage Financing III and IV mortgage loans each have a
thirty year term, bear interest at a fixed rate of 6.74% (6.93% including the
amortization of costs associated with the settlement of a related treasury rate
lock agreement and amortization of related loan fees) per annum, require
interest only payments through April 2003, and thereafter require monthly
payments of principal and interest amortized over a 25 year period through
maturity and are anticipated to be repaid within ten years of issuance. If the
Mortgage Financing III and IV mortgage loans are not repaid within ten years of
issuance, the interest rate will increase by at least 5% per annum and all
excess cash flow (as defined) from the Mortgage Financing III and IV Properties
must be used to pay down outstanding principal. The Mortgage Financing III and
IV mortgage loans require us to maintain a cash reserve for tenant improvements
of approximately $2.7 million and $3.3 million, respectively, and to comply with
certain customary financial covenants, ongoing operational restrictions, and
certain cash management procedures. In October 1998, pursuant to the execution
of certain leasing transactions, we borrowed an additional $10.6 million and
reduced the annual fixed rate to 6.61% under the Mortgage Financing IV loan.
In connection with the Mortgage Financing III and IV mortgage loans, we
entered into a treasury rate lock agreement (the "Swap Agreement") with a
notional amount of $100 million and locked in the United States 10 year treasury
rate at 6.174%. On April 16,1998 we settled the Swap Agreement for $4.5 million
and are amortizing the cost of settling the Swap Agreement over the term of the
related mortgage loans payable.
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Following is a summary of scheduled principal payments for our mortgage loans
as of December 31, 1998 (in thousands):
YEAR AMOUNT
---- --------
1999............................. $ 82,161
2000............................. 743
2001............................. 808
2002............................. 5,879
2003............................. 14,299
Thereafter....................... 440,137
--------
Total.................. $544,027
========
Following is certain other information related to our indebtedness as of
December 31, 1998 (in thousands, except percentage data):
UNSECURED AND SECURED DEBT ANALYSIS
WEIGHTED AVERAGE
BALANCE PERCENT INTEREST RATE(1)
-------- ------- ----------------
Unsecured Debt................... $296,450 35% 7.06%
Secured Debt..................... 544,027 65% 7.28%
-------- ---- -----
Total/Weighted Average........... $840,477 100% 7.20%
======== ==== =====
FLOATING AND FIXED RATE DEBT ANALYSIS
WEIGHTED AVERAGE
BALANCE PERCENT INTEREST RATE(1)
-------- ------- ----------------
Floating Rate.................... $377,828 45% 6.89%
Fixed Rate....................... 462,649 55% 7.46%
-------- ---- -----
Total/Weighted Average........... $840,477 100% 7.20%
======== ==== =====
- ---------------
(1) Includes amortization of prepaid financing costs.
As of December 31, 1998, we had approximately $17 million in cash and cash
equivalents, including $10 million in restricted cash, representing interest
bearing cash deposits required by three of our mortgage loans payable. In
addition, we had $2.4 million in cash impound accounts for real estate taxes and
insurance as required by several of our mortgage loans payable.
As of December 31, 1998, we had $13.6 million available under our lines of
credit and the capacity to issue up to $255.3 million of our common stock
pursuant to a Registration Statement filed with the Securities and Exchange
Commission in January 1998.
On January 29, 1999, the Lehman Bridge Loan I was expanded to $111.4 million.
Pursuant to the fifth amendment to the Lehman Bridge Loan I, the loan bears
interest at LIBOR plus 2.25% per annum (effective rate of 7.19% on January 29,
1999), requires monthly payments of interest only, and matures on April 20,
1999.
On February 2, 1999, we executed a $115 million loan commitment with Mass
Mutual Life Insurance Company (the "Mass Mutual Loan"). The Mass Mutual Loan is
secured by 12 Properties, has a ten year term and bears interest at a fixed rate
of 6.94% (7.049% including the amortization of loan fees) and requires monthly
payments of principal and interest totaling $815,935 and is amortized over a 25
year period. The estimated funding date for the Mass Mutual Loan is March 31,
1999. Proceeds from this loan will be used to repay a portion of our lines of
credit and the Lehman Bridge Loan I.
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We expect to continue meeting our short-term liquidity and capital
requirements generally through our net cash provided by operating activities and
from proceeds from our lines of credit. We believe that the net cash provided by
operating activities will continue to be sufficient to pay any distributions
necessary to enable us to continue qualifying as a REIT. We also believe that
the foregoing sources of capital will be sufficient to fund our short-term
liquidity needs for the foreseeable future, including recurring non-revenue
enhancing capital expenditures, tenant improvements and leasing commissions.
We expect to meet certain long-term liquidity and capital requirements such as
scheduled debt payments, renovation costs, property acquisitions and other
non-recurring capital expenditures through long-term secured and unsecured
indebtedness and the issuance of additional equity securities.
FUNDS FROM OPERATIONS
We consider Funds from Operations, as defined by the National Association of
Real Estate Investment Trusts ("NAREIT"), to be a useful financial measure of
the operating performance for an equity REIT. We believe that Funds from
Operations provides investors with an additional basis to evaluate the ability
of a REIT to incur and service debt and to fund acquisitions and other capital
expenditures. Funds from Operations does not represent net income or cash flows
from operations as defined by generally accepted accounting principles ("GAAP")
and it should not be considered as an alternative to these indicators in
evaluating our liquidity or operating performance.
The following table reflects the calculation of our Funds from Operations for
the years ended December 31, 1998 and 1997 and for the period October 9, 1996 to
December 31, 1996 and for the Arden Predecessors for the period January 1, 1996
to October 8, 1996 (in thousands):
ARDEN REALTY, INC. ARDEN PREDECESSORS
------------------------------------------ ------------------
FOR THE YEARS ENDED FOR THE PERIOD FOR THE PERIOD
DECEMBER 31, OCTOBER 9, 1996 JANUARY 1, 1996
--------------------- TO TO
1998 1997 DECEMBER 31, 1996 OCTOBER 8, 1996
-------- ------- ----------------- ------------------
Funds from Operations:
Net Income (loss)................. $ 90,675 $39,630 $ 7,433 $(5,638)
Depreciation and amortization..... 51,822 20,260 3,108 5,264
Minority Interest................. 4,872(a) 4,281 993 --
Loss on valuation of derivative... -- 3,111 -- --
-------- ------- ------- -------
Funds from Operations.......... 147,369 67,282 11,534 (374)
Company's share percentage........ 95.3% 90.3% 88.2% --
-------- ------- ------- -------
Company's share of Funds from
Operations........................ $140,443 $60,756 $10,173 $ (374)
======== ======= ======= =======
- ---------------
(a) Excludes $575,000 in distributions made to the former minority partners in
the World Savings Center office property.
The White Paper on Funds from Operations approved by the Board of Governors of
NAREIT in March 1995 (the "White Paper") defines Funds from Operations as net
income (loss) computed in accordance with GAAP, excluding gains (or losses) from
debt restructuring and unusual items, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. We consider Funds from Operations an appropriate measure of
performance of an equity REIT because it is predicated on cash flow analyses. We
compute Funds from Operations in accordance with standards established by the
White Paper which may differ from the methodology for calculating Funds from
Operations utilized by other equity REITs and, accordingly, may not be
comparable to such other REITs. Funds from Operations should not be considered
as an alternative to net income (determined in accordance with GAAP) as an
indicator of our financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of our
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liquidity, nor is it indicative of funds available to fund our cash needs,
including our ability to make distributions.
IMPACT OF YEAR 2000
Any of our computer programs that have date-sensitive software may not be able
to distinguish the year 2000 from the year 1900 if those programs use two digits
rather than four digits to define the year. This could result in a system
failure or miscalculations causing disruption of operations, including, among
other things, a temporary inability to process transactions, send tenant
invoices, provide services to our Properties and tenants, or engage in similar
normal business activities.
The accounting software we are currently using is not Year 2000 compliant.
However, we have completed an assessment of our accounting software needs and
have elected to install a different accounting software package that is both
Year 2000 compliant and provides other features not available with our current
software package. We plan to install the Year 2000 compliant version of this
software in the second and third quarters of 1999. We estimate the total costs
associated with installing this Year 2000 compliant accounting software to be
between $400,000 to $600,000. The hardware used to run our accounting software
is Year 2000 compliant.
We have completed an inventory of the computer hardware and software
(collectively, the "System Components") used to run the operating systems (i.e.
security, energy, elevator and safety) at our Properties. This process included
determining which System Components are date-sensitive. We have also contacted
the manufacturers of the date-sensitive System Components to determine if they
are Year 2000 compliant. We plan to test the date-sensitive System Components
represented to be Year 2000 compliant, and reprogram or replace the
date-sensitive System Components found not be Year 2000 compliant by the end of
the third quarter of 1999. We estimate the total costs associated with this
phase of our Year 2000 Program to be between $200,000 and $500,000.
We believe our principal risks associated with the Year 2000 issue include the
risk of disruption of our operations due to operational failures of third
parties, including tenants, utility providers, vendors and financial
institutions. We are currently surveying material vendors and tenants regarding
the Year 2000 compliance status of their computer hardware and software. We will
review the results of this survey, assess the impact of the results on our
operations and take whatever action is deemed necessary. As this phase of our
Year 2000 program is not yet complete, we cannot presently assess the associated
risks and estimated costs.
Upon completion of our Year 2000 readiness program, we will consider the
necessity of implementing a contingency plan to mitigate any adverse effects
associated with the Year 2000 issue. Our ability to complete the Year 2000
modifications outlined above prior to any anticipated impact on our operating
systems is based on numerous assumptions of future events and is dependent upon
numerous factors, including the ability of third party software and hardware
manufacturers to make necessary modifications to current versions of their
products, the availability of resources to install and test the modified systems
and other factors. Accordingly, there can be no guarantee that these
modifications will be successful.
EXPOSURE TO ENVIRONMENTAL LIABILITIES
In connection with the acquisition of all of our properties, we have obtained
Phase I environmental assessments to ascertain the existence of any
environmental liabilities or other issues. The Phase I environmental assessments
of our properties have not revealed any environmental liabilities that we
believe would have a material adverse effect on our financial condition or
results of operations taken as a whole, nor are we aware of any material
environmental liabilities.
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INFLATION
Our leases generally require tenants to pay a majority of property operating
expenses in excess of base amounts. The majority of our leases contain effective
annual rent escalations that are either fixed or variable (based on the consumer
price index or other index.) Accordingly, we do not believe that our earnings or
cash flow are subject to any significant risk of inflation. An increase in
inflation, however, could result in an increase in our variable rate borrowing
cost, including borrowings under our unsecured lines of credit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The primary
market risk to which we are exposed is interest rate risk, which is sensitive to
many factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors that are
beyond our control.
INTEREST RATE RISK
In order to modify and manage the interest characteristics of our outstanding
debt and limit the effects of interest rates on our operations, we may utilize a
variety of financial instruments, including interest rate swaps, caps, floors
and other interest rate exchange contracts. The use of these types of
instruments to hedge our exposure to changes in interest rates carries
additional risks such as counter-party credit risk and legal enforceability of
hedging contracts. We do not enter into any transactions for speculative or
trading purposes.
Certain of our future earnings, cash flows and fair values relating to
financial instruments are dependent upon prevailing market rates of interest,
such as LIBOR. Based on interest rates and outstanding balance at December 31,
1998, a 1% increase in interest rates on our $377.8 million of floating rate
debt would decrease annual future earnings and cash flows by approximately $3.8
million and would not have an impact on its fair value. A 1% decrease in
interest rates on our $377.8 million of floating rate debt would increase annual
future earnings and cash flows by approximately $3.8 million and would not have
an impact on its fair value. A 1% increase or decrease in interest rates on our
secured note receivable would not have a material impact on annual future
earnings, cash flows and its fair value.
These amounts are determined by considering the impact of the hypothetical
interest rates on our borrowing cost. These analyses do not consider the effects
of the reduced level of overall economic activity that could exist in such an
environment. Further, in the event of a change of such magnitude, we would
consider taking actions to further mitigate our exposure to the change. However,
due to the uncertainty of the specific actions that would be taken and their
possible effects, the sensitivity analysis assumes no changes in our capital
structure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X are
included in this Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
Certain information required by Part III is omitted from this Report in that
we will file a definitive proxy statement within 120 days after the end of our
fiscal year pursuant to Regulation 14A for our Annual Meeting of Stockholders to
be held on May 18, 1999 (the "Proxy Statement") and the information included
therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the section captioned "Proposal I; Election of
Directors" of the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section captioned "Executive Compensation" of
the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section captioned "Principal and Management
Stockholders" of the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section captioned "Certain Relationships and
Related Transactions" of the Proxy Statement is incorporated herein by
reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1 and 2) FINANCIAL STATEMENTS AND SCHEDULE
The following consolidated financial information is included as a separate
section of this Annual Report on Form 10-K:
PAGE
----
ARDEN REALTY, INC. AND THE ARDEN PREDECESSORS
Report of Independent Auditors............................ F-1
Consolidated Balance Sheets as of December 31, 1998 and
December 31, 1997...................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 and for the period October
9, 1996 to December 31, 1996 and Combined Statement of
Operations for the period January 1, 1996 to October 8,
1996................................................... F-3
Consolidated Statements of Stockholders' Equity for years
ended December 31, 1998 and 1997 and for the period
October 9, 1996 to December 31, 1996 and Combined
Statement of Owners' Equity for the period January 1,
1996 to October 8, 1996................................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 and for the period October
9, 1996 to December 31, 1996 and Combined Statement of
Cash Flows for the period January 1, 1996 to October 8,
1996................................................... F-5
Notes to Financial Statements............................. F-6
Schedule III -- Commercial Properties and Accumulated
Depreciation........................................... F-18
All other schedules are omitted since the required information is not present
in amounts sufficient to require submission of the schedule or because the
information required is included in the financial statements and notes thereto.
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(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Articles of Incorporation as filed as
an exhibit to Registration Statement on Form S-11 (No.
333-8163) and incorporated herein by reference.
3.2 Articles Supplementary of the Class A Junior Participating
Preferred Stock as filed as an exhibit to the current report
on Form 8-K, dated August 26, 1998, and incorporated herein
by reference.
3.3 By-Laws of Registrant as filed as an exhibit to Registration
Statement on Form S-11 (No. 333-8163) and incorporated
herein by reference.
3.4 Certificate of Amendment of the Bylaws of Arden Realty, Inc.
dated July 14, 1998, filed as an exhibit to the Company's
quarterly report on Form 10-Q filed with the Commission on
August 14, 1998.
4.1 Rights Agreement, dated as of August 14, 1998, between Arden
Realty, Inc. and the Bank of New York as filed as an exhibit
to the current report on Form 8-K, dated August 26, 1998,
and incorporated herein by reference.
10.1 Amended and Restated Agreement of Limited Partnership of the
Operating Partnership as filed as an exhibit to Registration
Statement on Form S-11 (No. 333-8163) and incorporated
herein by reference.
10.2 1996 Stock Option and Incentive Plan of Arden Realty, Inc.
and Arden Realty Limited Partnership as filed as an exhibit
to Registration Statement on Form S-11 (No. 333-8163) and
incorporated herein by reference.
10.2.1 Amendment Number 1 to the 1996 Stock Option and Incentive
Plan of Arden Realty, Inc. and Arden Realty Limited
Partnership as filed as an exhibit to the Company's Schedule
14A filed with the Commission on June 23, 1998 and
incorporated herein by reference.
10.3 Form of Officers and Directors Indemnification Agreement as
filed as an exhibit to Registration Statement on Form S-11
(No. 333-8163) and incorporated herein by reference.
10.4 Warrant Agreement dated as of March 2, 1998 by and among
Arden Realty, Inc., a Maryland corporation and AEW/LBA
Acquisition Co. II, LLC, a California limited liability
company as filed as an exhibit to Form 8-K filed on March
16, 1998 and incorporated herein by reference.
10.5 Loan Agreement by and between Arden Realty Finance III, LLC,
a Delaware limited liability company and Lehman Brothers
Realty Corporation, a Delaware corporation and incorporated
herein by reference.
10.6 Mortgage Note, dated June 8, 1998 for $136,100,000 by and
between Arden Realty Finance III,L.L.C., a Delaware limited
liability company ("Maker"), and Lehman Brothers Realty
Corporation, a Delaware corporation. (Exhibit B. to Exhibit
10.4 above).
10.7 Tenant Estoppel Certificate (Exhibit C. to Exhibit 10.4
above).
10.8 Subordination, Non-Disturbance and Attornment Agreement
(Exhibit D. to Exhibit 10.4 above).
10.9 Deed of Trust, Assignment of Rents and Leases, Security
Agreement, and Fixture Filing dated as of June 8, 1998 made
by Arden Realty Finance III, L.L.C. as Grantor, to
Commonwealth Land Title Company as Trustee for the benefit
of Lehman Brothers Realty Corporation as Beneficiary, filed
as an exhibit to the Company's quarterly report on Form 10-Q
filed with the Commission on August 14, 1998 and
incorporated herein by reference.
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49
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.10 Assignment of Leases and Rents dated June 8, 1998, by and
between Arden Realty Finance III, L.L.C., a Delaware limited
liability company ("Assignor"), and Lehman Brothers Realty
Corporation, a Delaware corporation, its successors and
assigns ("Assignee"), filed as an exhibit to the Company's
quarterly report on Form 10-Q filed with the Commission on
August 14, 1998 and incorporated herein by reference.
10.11 Collateral Assignment of Management Agreement and
Subordination Agreement (the "Agreement") dated as of June
8, 1998 among Arden Realty Finance III, L.L.C., a Delaware
limited liability company ("Borrower"), Lehman Brothers
Realty Corporation, a Delaware corporation, ("Lender"), and
Arden Realty Limited Partnership, a Maryland limited
partnership ("Manager"), filed as an exhibit to the
Company's quarterly report on Form 10-Q filed with the
Commission on August 14, 1998 and incorporated herein by
reference.
10.12 Security Agreement ("Security Agreement") is entered into as
of June 8, 1998 by and between Arden Realty Finance III,
L.L.C., a Delaware limited liability company ("Debtor"), and
Lehman Brothers Realty Corporation, a Delaware corporation
("Secured Party"), filed as an exhibit to the Company's
quarterly report on Form 10-Q filed with the Commission on
August 14, 1998 and incorporated herein by reference.
10.13 Environmental Indemnity Agreement ("Agreement") dated June
8, 1998 by Arden Realty Finance III, L.L.C., a Delaware
limited liability company ("Indemnitor"), in favor of Lehman
Brothers Realty Corporation, a Delaware corporation
("Lender"), filed as an exhibit to the Company's quarterly
report on Form 10-Q filed with the Commission on August 14,
1998 and incorporated herein by reference.
10.14 Letter agreement between Lehman Brothers Realty Corporation,
or an affiliate thereof ("Lender"), Arden Realty Finance
III, L.L.C. ("Borrower"), Arden Realty, Inc. (the "REIT")
and Arden Realty Limited Partnership (the "Operating
Partnership"), filed as an exhibit to the Company's
quarterly report on Form 10-Q filed with the Commission on
August 14, 1998 and incorporated herein by reference.
10.15 Loan Agreement by and between Arden Realty Finance IV, LLC,
a Delaware limited liability company and Lehman Brothers
Realty Corporation, a Delaware corporation, filed as an
exhibit to the Company's quarterly report on Form 10-Q filed
with the Commission on August 14, 1998 and incorporated
herein by reference.
10.16 Mortgage Note, dated June 8, 1998 for $100,600,000 by and
between Arden Realty Finance IV, L.L.C., a Delaware limited
liability company ("Maker"), and Lehman Brothers Realty
Corporation, a Delaware corporation (Exhibit B to Exhibit
10.14 above).
10.17 Tenant Estoppel Certificate (Exhibit C. to Exhibit 10.14
above).
10.18 Subordination, Non-Disturbance and Attornment Agreement
(Exhibit D. to Exhibit 10.4 above).
10.19 Deed of Trust, Assignment of Rents and Leases, Security
Agreement, and Fixture Filing dated as of June 8, 1998 made
by Arden Realty Finance IV, L.L.C. as Grantor, to
Commonwealth Land Title Company as Trustee for the benefit
of Lehman Brothers Realty Corporation as Beneficiary, filed
as an exhibit to the Company's quarterly report on Form 10-Q
filed with the Commission on August 14, 1998 and
incorporated herein by reference.
10.20 Assignment of Leases and Rents ("Assignment") dated June 8,
1998, by and between Arden Realty Finance IV, L.L.C., a
Delaware limited liability company ("Assignor"), and Lehman
Brothers Realty Corporation, a Delaware corporation, its
successors and assigns ("Assignee"), filed as an exhibit to
the Company's quarterly report on Form 10-Q filed with the
Commission on August 14, 1998 and incorporated herein by
reference.
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EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.21 Collateral Assignment of Management Agreement and
Subordination Agreement (the "Agreement") dated as of June
8, 1998 among Arden Realty Finance IV, L.L.C., a Delaware
limited liability company ("Borrower"), Lehman Brothers
Realty Corporation, a Delaware corporation, ("Lender"), and
Arden Realty Limited Partnership, a Maryland limited
partnership ("Manager"), filed as an exhibit to the
Company's quarterly report on Form 10-Q filed with the
Commission on August 14, 1998 and incorporated herein by
reference.
10.22 Security Agreement ("Security Agreement") is entered into as
of June 8, 1998 by and between Arden Realty Finance IV,
L.L.C., a Delaware limited liability company ("Debtor"), and
Lehman Brothers Realty Corporation, a Delaware corporation
("Secured Party"), filed as an exhibit to the Company's
quarterly report on Form 10-Q filed with the Commission on
August 14, 1998 and incorporated herein by reference.
10.23 Environmental Indemnity Agreement ("Agreement") dated June
8, 1998 by Arden Realty Finance IV, L.L.C., a Delaware
limited liability company ("Indemnitor"), in favor of Lehman
Brothers Realty Corporation, a Delaware corporation
("Lender"), filed as an exhibit to the Company's quarterly
report on Form 10-Q filed with the Commission on August 14,
1998 and incorporated herein by reference.
10.24 Letter agreement between Lehman Brothers Realty Corporation,
or an affiliate thereof ("Lender"), Arden Realty Finance IV,
L.L.C. ("Borrower"), Arden Realty, Inc. (the "REIT") and
Arden Realty Limited Partnership (the "Operating
Partnership"), filed as an exhibit to the Company's
quarterly report on Form 10-Q filed with the Commission on
August 14, 1998 and incorporated herein by reference.
10.25 Amended and Restated Employment Agreement dated August 4,
1998, between Arden Realty and Mr. Richard S. Ziman, filed
as an exhibit to the Company's quarterly report on Form
10-Q/A filed with the Commission on December 15, 1998 and
incorporated herein by reference.
10.26 Amended and Restated Employment Agreement dated August 4,
1998, between Arden Realty and Mr. Victor J. Coleman, filed
as an exhibit to the Company's quarterly report on Form
10-Q/A filed with the Commission on December 15, 1998 and
incorporated herein by reference.
10.27 Amended and Restated Employment Agreement dated August 4,
1998, between Arden Realty and Ms. Diana M. Laing, filed as
an exhibit to the Company's quarterly report on Form 10-Q/A
filed with the Commission on December 15, 1998 and
incorporated herein by reference.
10.28 Amended and Restated Employment Agreement dated August 4,
1998, between Arden Realty and Mr. Andrew Sobel, filed as an
exhibit to the Company's quarterly report on Form 10-Q/A
filed with the Commission on December 15, 1998 and
incorporated herein by reference.
10.29 Amended and Restated Employment Agreement dated August 4,
1998, between Arden Realty and Mr. Herbert Porter, filed as
an exhibit to the Company's quarterly report on Form 10-Q/A
filed with the Commission on December 15, 1998 and
incorporated herein by reference.
10.30 Promissory Note dated August 14, 1998, between Arden Realty
and Ms. Diana M. Laing, filed as an exhibit to the Company's
quarterly report on Form 10-Q/A filed with the Commission on
December 15, 1998 and incorporated herein by reference.
10.31 Promissory Note dated August 14, 1998, between Arden Realty
and Mr. Andrew J. Sobel, filed as an exhibit to the
Company's quarterly report on Form 10-Q/A filed with the
Commission on December 15, 1998 and incorporated herein by
reference.
48
51
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.32 Pledge Agreement dated August 14, 1998, between Arden Realty
and Ms. Diana M. Laing, filed as an exhibit to the Company's
quarterly report on Form 10-Q/A filed with the Commission on
December 15, 1998 and incorporated herein by reference.
10.33 Pledge Agreement dated August 14, 1998, between Arden Realty
and Mr. Andrew J. Sobel, filed as an exhibit to the
Company's quarterly report on Form 10-Q/A filed with the
Commission on December 15, 1998 and incorporated herein by
reference.
10.34 Restricted Stock Agreement dated August 14, 1998, between
Arden Realty and Ms. Diana M. Laing, filed as an exhibit to
the Company's quarterly report on Form 10-Q/A filed with the
Commission on December 15, 1998 and incorporated herein by
reference.
10.35 Restricted Stock Agreement dated August 14, 1998, between
Arden Realty and Mr. Andrew J. Sobel, filed as an exhibit to
the Company's quarterly report on Form 10-Q/A filed with the
Commission on December 15, 1998 and incorporated herein by
reference.
10.36 Agreement for Purchase and Sale by and among AEW/LAB
Acquisition Co., LLC, a California limited liability
company, AEW/LBA Acquisition Co. II, LLC, a California
limited liability company, Cal Portfolio VI, L.L.C., a
Delaware limited liability company, AEW/LBA Acquisition Co.
IV, LLC, a California limited liability company, Spectrum
Chicago Avenue, LLC, a California limited liability company,
Spectrum Waples Street, LLC, a California limited liability
company, Spectrum Lambert Plaza, LLC, a California limited
liability company, and Arden Realty, Inc., a incorporated
herein by reference.
10.37 Closing Agreement dated March 2, 1998 as filed as an exhibit
to Form 8-K filed on March 16, 1998 and incorporated herein
by reference.
10.38 Miscellaneous Rights Agreement among the Company, the
Operating Partnership, NAMIZ, Inc. and Mr. Ziman as filed as
an exhibit to Registration Statement on Form S-11 (No.
333-8163) and incorporated herein by reference.
10.39 Credit Facility documentation consisting of First Amended
and Restated Revolving Credit Agreement by and among the
Operating Partnership and Chase Manhatten Bank, Lehman
Brothers Realty Corporation and Wells Fargo Bank as filed as
an exhibit to Registration Statement of Form S-11 (No.
333-30059) and incorporated herein by reference.
10.40 Mortgage Financing documentation consisting of Loan
Agreement by and between the Company's special purpose
financing subsidiary and Lehman Brothers Realty Corporation
(the Loan Agreement includes the Mortgage Note, Deed of
Trust, and form of Tenant Estoppel Certificate and Agreement
as exhibits) as filed as an exhibit to Registration
Statement of Form S-11 (No. 333-30059) and incorporated
herein by reference.
21.1 Subsidiary of Registrant as filed as an exhibit to
Registration Statement on Form S-11 (No. 333-8163) and
incorporated herein by reference.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None
49
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 25, 1999.
ARDEN REALTY, INC.
By: /s/ RICHARD S. ZIMAN
------------------------------------
Richard S. Ziman
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ RICHARD S. ZIMAN Chairman of the Board, Chief March 25, 1999
- ----------------------------------------------------- Executive Officer and Director
Richard S. Ziman
/s/ VICTOR J. COLEMAN President, Chief Operating March 25, 1999
- ----------------------------------------------------- Officer and Director
Victor J. Coleman
/s/ DIANA M. LAING Chief Financial Officer and March 25, 1999
- ----------------------------------------------------- Secretary
Diana M. Laing
/s/ RICHARD S. DAVIS Senior Vice President and March 25, 1999
- ----------------------------------------------------- Chief Accounting Officer
Richard S. Davis
/s/ CARL D. COVITZ Director March 25, 1999
- -----------------------------------------------------
Carl D. Covitz
/s/ LARRY S. FLAX Director March 25, 1999
- -----------------------------------------------------
Larry S. Flax
/s/ PETER S. GOLD Director March 25, 1999
- -----------------------------------------------------
Peter S. Gold
/s/ STEVEN C. GOOD Director March 25, 1999
- -----------------------------------------------------
Steven C. Good
/s/ KENNETH B. ROATH Director March 25, 1999
- -----------------------------------------------------
Kenneth B. Roath
50
53
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Arden Realty, Inc.
We have audited the accompanying consolidated balance sheets of Arden Realty,
Inc. as of December 31, 1998 and 1997 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years ended December
31, 1998 and 1997 and for the period October 9, 1996 to December 31, 1996, and
the related combined statement of operations, owners' equity and cash flows of
the Arden Predecessors for the period January 1, 1996 to October 8, 1996. Our
audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and the financial statement schedule are
the responsibility of the management of Arden Realty, Inc. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arden Realty, Inc.
at December 31, 1998 and 1997 and the consolidated results of its operations and
its cash flows for the years ended December 31, 1998 and 1997 and for the period
October 9, 1996 to December 31, 1996 and the combined results of operations and
cash flows of the Arden Predecessors for the period January 1, 1996 to October
8, 1996, in conformity with generally accepted accounting principles. Also, in
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 2, 1999 except for
Note 9, as to which the date is
March 9, 1999
F-1
54
ARDEN REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------------------
1998 1997
---------- ----------
ASSETS
Commercial properties:
Land...................................................... $ 491,342 $ 241,440
Buildings and improvements................................ 1,776,068 975,791
Tenant improvements....................................... 55,413 21,801
---------- ----------
2,322,823 1,239,032
Less: accumulated depreciation............................ (84,754) (35,860)
---------- ----------
2,238,069 1,203,172
Cash and cash equivalents................................... 4,578 5,300
Restricted cash............................................. 12,409 4,040
Rent and other receivables.................................. 9,024 10,203
Mortgage notes receivable, net of discount of $2,463 and
$2,931, respectively...................................... 14,329 14,430
Deferred rent............................................... 17,004 8,811
Prepaid financing and leasing costs, net of accumulated
amortization of $7,425 and $2,649, respectively........... 32,759 12,680
Prepaid expenses and other assets........................... 3,747 25,368
---------- ----------
Total assets........................................... $2,331,919 $1,284,004
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage loans payable...................................... $ 544,027 $ 237,166
Unsecured lines of credit................................... 296,450 240,400
Accounts payable and accrued expenses....................... 21,687 16,458
Security deposits........................................... 13,933 6,847
Dividends payable........................................... 26,210 14,177
---------- ----------
Total liabilities...................................... 902,307 515,048
---------- ----------
Minority interests.......................................... 56,222 95,973
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 20,000,000 shares
authorized, none issued................................... -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
62,407,737 and 35,796,704 issued and outstanding,
respectively.............................................. 624 358
Additional paid-in capital.................................. 1,374,813 672,625
Notes receivable from officers for purchases of common
stock..................................................... (2,047) --
---------- ----------
Total stockholders' equity............................. 1,373,390 672,983
---------- ----------
Total liabilities and stockholders' equity............. $2,331,919 $1,284,004
========== ==========
See accompanying notes to financial statements.
F-2
55
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND
ARDEN PREDECESSORS COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ARDEN REALTY, INC. ARDEN PREDECESSORS
----------------------------------------- ------------------
FOR THE YEARS ENDED FOR THE PERIOD FOR THE PERIOD
DECEMBER 31, OCTOBER 9, 1996 JANUARY 1, 1996
-------------------- TO TO
1998 1997 DECEMBER 31, 1996 OCTOBER 8, 1996
-------- -------- ----------------- ------------------
Revenue............................. $281,067 $133,817 $19,434 $39,135
Property operating expenses......... 86,570 44,332 6,005 14,224
-------- -------- ------- -------
194,497 89,485 13,429 24,911
General and administrative.......... 6,665 4,322 753 1,758
Interest............................ 43,403 19,511 1,280 24,521
Loss on valuation of derivative..... -- 3,111 -- --
Depreciation and amortization....... 51,822 20,260 3,108 5,264
Interest and other income........... (3,515) (1,630) (138) (1,330)
Equity in net loss of noncombined
entities.......................... -- -- -- 336
-------- -------- ------- -------
Income (loss) before minority
interests and extraordinary
items............................. 96,122 43,911 8,426 (5,638)
Minority interests' share of loss of
Arden Predecessors................ -- -- -- 721
Minority interests.................. (5,447) (4,281) (993) --
-------- -------- ------- -------
Income (loss) before extraordinary
items............................. 90,675 39,630 7,433 (4,917)
Extraordinary (loss) gain on early
extinguishment of debt, net of
minority interests' share of
$1,798 for the period October 9,
1996 to December 31, 1996......... -- -- (13,105) 1,877
-------- -------- ------- -------
Net income (loss)................... $ 90,675 $ 39,630 $(5,672) $(3,040)
======== ======== ======= =======
Net income (loss) per common share:
Income before extraordinary item.... $ 1.55 $ 1.43 $ .34
Extraordinary loss on early
extinguishment of debt............ -- -- (.60)
-------- -------- -------
Net income (loss) per common share:
Basic............................... $ 1.55 $ 1.43 $ (.26)
======== ======== =======
Diluted............................. $ 1.54 $ 1.41 $ (.26)
======== ======== =======
Weighted average common shares:
Basic............................... 58,660 27,794 21,680
Diluted............................. 58,814 28,039 21,680
See accompanying notes to financial statements.
F-3
56
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTES
RETAINED RECEIVABLE
COMMON STOCK ADDITIONAL EARNINGS FROM TOTAL
-------------------- PAID-IN (ACCUMULATED) OFFICERS- STOCKHOLDERS'
SHARES AMOUNTS CAPITAL DEFICIT SHAREHOLDERS EQUITY
---------- ------- ---------- ------------- ------------ -------------
Balance at October 8, 1996................. 100
Retirement of originally issued shares... (100)
Common stock bonus to certain
employees.............................. 5,000
Sale of common stock, net of offering
costs of $36,181....................... 21,674,500 $217 $ 397,092 $ 397,309
Distributions paid to Arden
Predecessors........................... -- -- (16,554) (16,554)
Allocation of minority interests in
operating partnership.................. -- -- (35,301) (35,301)
Net loss................................. -- -- -- $ (5,672) (5,672)
Dividends declared and payable........... -- -- (7,805) -- (7,805)
---------- ---- ---------- -------- ------- ----------
Balance at December 31, 1996............... 21,679,500 217 337,432 (5,672) 331,977
---------- ---- ---------- -------- ------- ----------
Common stock issued in connection with
the exercise of options................ 146,666 1 2,933 -- 2,934
Stock Option compensation................ -- -- 92 -- 92
Sale of common stock, net of offering
costs of $18,588....................... 13,750,000 138 340,493 -- 340,631
OP units converted....................... 220,538 2 3,425 3,427
Net income............................... -- -- -- 39,630 39,630
Dividends declared and payable........... -- -- (11,750) (33,958) (45,708)
---------- ---- ---------- -------- ------- ----------
Balance at December 31, 1997............... 35,796,704 358 672,625 -- 672,983
---------- ---- ---------- -------- ------- ----------
Sale of common stock, net of offering
costs of $38,076....................... 26,296,047 263 706,319 -- 706,582
OP units converted....................... 229,880 2 3,897 -- 3,899
Warrants................................. -- -- 3,600 -- 3,600
Notes receivable from officers for
purchase of common stock............... 85,106 1 1,999 -- $(2,047) (47)
Net income............................... -- -- -- 90,675 -- 90,675
Dividends declared and payable........... -- -- (13,627) (90,675) -- (104,302)
---------- ---- ---------- -------- ------- ----------
Balance at December 31, 1998............... 62,407,737 $624 $1,374,813 $ -- $(2,047) $1,369,790
========== ==== ========== ======== ======= ==========
ARDEN PREDECESSORS
COMBINED STATEMENT OF OWNERS' EQUITY
(IN THOUSANDS)
OWNERS' EQUITY
--------------
Balance at December 31, 1995................................ $ 8,116
Owners' contributions..................................... 2,923
Owners' distributions..................................... (2,309)
Net loss for the period January 1, to October 8, 1996..... (3,040)
-------
Balance at October 8, 1996.................................. $ 5,690
=======
See accompanying notes to financial statements.
F-4
57
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS AND
ARDEN PREDECESSORS
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
ARDEN
ARDEN REALTY, INC. PREDECESSORS
-------------------------------------------- ------------------
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 9, 1996 TO FOR THE PERIOD
----------------------- DECEMBER 31, JANUARY 1, 1996 TO
1998 1997 1996 OCTOBER 8, 1996
----------- --------- ------------------ ------------------
OPERATING ACTIVITIES:
Net income (loss)........................................ $ 90,675 $ 39,630 $ (5,672) $ (3,040)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss (gain) on early extinguishment of
debt................................................. -- -- 13,105 (1,877)
Minority interests..................................... 5,447 4,281 993 --
Equity in net loss of noncombined entities............. -- -- -- 336
Loss allocable to minority interests of Arden
Predecessors......................................... -- -- -- (721)
Depreciation and amortization.......................... 51,822 20,260 3,108 5,264
Amortization of loan costs and fees.................... 1,941 823 8 202
Changes in operating assets and liabilities:
Rents and other receivables.......................... 1,280 (22,340) 557 (1,866)
Restricted cash...................................... (8,369) (4,040) -- 2,166
Deferred rent........................................ (8,193) (2,742) (618) (1,735)
Prepaid financing and leasing costs.................. (24,821) (10,796) (1,201) (1,243)
Prepaid expenses and other assets.................... 21,491 (3,497) 499 (1,136)
Accounts payable and accrued expenses................ 5,229 10,280 (2,911) 2,883
Deferred interest.................................... -- -- -- 7,607
Security deposits.................................... 7,086 3,257 797 547
----------- --------- --------- ---------
Net cash provided by operating activities................ 143,588 35,116 8,665 7,387
----------- --------- --------- ---------
INVESTING ACTIVITIES:
Acquisitions and improvements to commercial properties... (1,119,517) (639,670) (164,763) (119,083)
Escrow deposit........................................... 20,000 (20,000) -- --
----------- --------- --------- ---------
Net cash used in investing activities.................... (1,099,517) (659,670) (164,763) (119,083)
----------- --------- --------- ---------
FINANCING ACTIVITIES:
Cash from contributed net assets......................... -- -- 23,707 --
Distributions to Arden Predecessors in exchange for
partnership assets..................................... -- -- (16,554) --
Proceeds from mortgage loans............................. 677,520 308,202 104,000 120,485
Repayment of mortgage loans.............................. (370,659) (175,036) (368,471) (5,051)
Proceeds from secured line of credit..................... -- 28,700 -- --
Repayment of secured line of credit...................... -- (28,700) -- --
Proceeds from unsecured lines of credit.................. 413,350 443,500 51,000 5,188
Repayments of unsecured lines of credit.................. (357,300) (254,100) (3,737) (2,264)
Payments of additional interest.......................... -- -- (23,524) --
Proceeds from issuance of common stock, net of offering
costs.................................................. 706,582 343,565 397,309 --
Distributions to and contributions from minority
interests, net......................................... (22,017) (3,534) -- 936
Dividends paid........................................... (92,269) (40,375) -- --
Owners' contributions from and distributions to, net..... -- -- -- 614
----------- --------- --------- ---------
Net cash provided by financing activities................ 955,207 622,222 163,730 119,908
----------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents..... (722) (2,332) 7,632 8,212
Cash and cash equivalents at beginning of period......... 5,300 7,632 -- 790
----------- --------- --------- ---------
Cash and cash equivalents at end of period............... $ 4,578 $ 5,300 $ 7,632 $ 9,002
=========== ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest, net of amount
capitalized............................................ $ 48,206 $ 19,191 $ 3,130 $ 15,719
=========== ========= ========= =========
See accompanying notes to financial statements.
F-5
58
ARDEN REALTY, INC.
AND
ARDEN PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
Description of Business
The terms "Arden Realty", "us", "we" and "our" as used in these financial
statements refer to Arden Realty, Inc. Through our controlling interest in Arden
Realty Limited Partnership (the "Operating Partnership") and our other
subsidiaries, we are engaged in owning, acquiring, managing, leasing, and
renovating commercial properties located in Southern California. As of December
31, 1998, our portfolio of properties included 138 commercial properties with
approximately 18 million rentable square feet (the "Properties").
Organization and Formation of the Company
Arden Realty was incorporated in Maryland in May 1996 to continue and expand
the real estate business of Arden Realty Group, Inc. and a group of affiliated
entities (the "Arden Predecessors"). On October 9, 1996, we completed an initial
public offering (the "IPO") of 21,674,500 shares of $.01 par value common stock.
Concurrent with consummation of the IPO, Arden Realty and the Operating
Partnership, together with the Partners and members of the Arden Predecessors
(collectively, the "Participants"), engaged in certain formation transactions.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Arden Realty, the Operating Partnership, and its other subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The minority interests at December 31, 1998 and December 31, 1997 include
limited partnership interests in the Operating Partnership of approximately 4.3%
and 9.7%, respectively.
The Arden Predecessors were not a legal entity but rather a combination of
partnerships and an affiliated real estate management corporation. The
properties and entities were all managed by Messrs. Ziman and Coleman. In those
instances where the financial interests held by Messrs. Ziman, Coleman, Gilbert
and their affiliates were also controlling interests, the entities have been
combined in the accompanying financial statements. Minority interests have been
recorded for those entities that the affiliated Participants control but were
not wholly-owned. Where controlling interests were not held by these affiliated
Participants, or the Arden Predecessors did not have unilateral right to
refinance the debt on the property, the entities were accounted for as
investments in noncombined entities utilizing the equity method of accounting.
Risks and Uncertainties
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-6
59
Our Properties are all located in Southern California. As a result of our
geographic concentration, the operations of these Properties could be affected
by the economic conditions in this region.
Commercial Properties
Our Properties are stated at the lower of cost or estimated fair value.
Write-downs to estimated fair value would be recognized when impairment
indicators are present and a property's estimated undiscounted future cash flow,
before interest charges, is less than its book value. In that situation, we
would recognize an impairment loss to the extent the carrying amount exceeded
the fair value of the property. Based on our assessment, no write-downs to
estimated fair value were necessary.
Repair and maintenance costs are charged to expense as incurred and
significant replacements and betterments are capitalized.
Depreciation is calculated under the straight-line method using forty-year
lives for buildings and ten-year lives for building improvements. Amortization
of tenant improvements is calculated using the straight-line method over the
term of the related lease.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities
of three months or less when acquired.
Restricted Cash
Restricted cash primarily consists of $10 million in cash deposits as required
by certain of our mortgage loans payable and $2.4 million in impound accounts
for real estate taxes and insurance, as required by certain of our mortgage
loans payable.
Prepaid Financing and Leasing Costs
Costs associated with leasing properties are capitalized and amortized to
expense on a straight-line basis over the related lease term. Costs associated
with obtaining long-term financing are capitalized and amortized to interest
expense over the term of the related loan.
Revenue Recognition
Minimum rent, including rental abatements and contractual fixed increases
attributable to operating leases, is recognized on a straight-line basis over
the term of the related lease. Amounts expected to be received in later years
are included in deferred rents. Property operating expense reimbursements due
from tenants for common area maintenance, real estate taxes and other
recoverable costs are recognized in the period the related expenses are
incurred.
Industry Segments
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information," ("Statement 131") which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards for
the way that public business enterprises report information about operating
segments. Statement 131 also establishes standards for related disclosure about
products and services, geographic areas, and major customers. We evaluate
performance and allocate resources primarily based on the net operating income
of our individual properties. However, because each of our Properties has
similar economic characteristics, facilities, services and tenants, the
properties have been aggregated into a single Property segment. Since we operate
as a single segment, the implementation of Statement 131 did not have an impact
on how we report our results of operations.
F-7
60
Income Taxes
Prior to October 9, 1996 the combined and noncombined entities that made up
the Arden Predecessors consisted of a Subchapter S corporation, limited
liability companies and partnerships. Taxable income for such entities was
recorded on the separate tax returns of the shareholders, membership unit
holders and individual partners and, accordingly, no provision for income taxes
was recorded in the accompanying financial statements of the Arden Predecessors.
Arden Realty generally will not be subject to federal income taxes as long as
we continue to qualify as a real estate investment trust ("REIT"). A REIT will
generally not be subject to federal income taxation on that portion of income
that qualifies as REIT taxable income and to the extent that it distributes such
taxable income to its stockholders and complies with certain requirements. As a
REIT, we are allowed to reduce taxable income by all or a portion of
distributions to stockholders and must distribute at least 95% of our taxable
income to qualify as a REIT. As dividends have eliminated taxable income, and
compliance with certain requirements have been met, no Federal income tax
provision has been reflected in the accompanying consolidated financial
statements. State income tax requirements are essentially the equivalent of the
Federal rules.
During 1998 and 1997, we declared dividends of $1.68 and $1.60 per share,
respectively. For federal income tax purposes $1.53 and $1.45 per share was
reported to shareholders as ordinary income for 1998 and 1997, respectively. A
total of $.38 per share of the fourth quarter 1998 dividend will be reported to
shareholders in 1999.
Fair Value of Financial Instruments
Our disclosures of estimated fair value of financial instruments at December
31, 1998 were determined using available market information and appropriate
valuation methodologies. Considerable judgment is necessary to interpret market
data and develop estimated fair value. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
Cash equivalents, accounts payable, the lines of credit and other financial
instruments are carried at amounts which reasonably approximate their fair value
amounts. Our mortgage notes payable have an estimated aggregate fair value which
approximates their carrying value. Estimated fair value is based on interest
rates currently available for issuance of debt with similar terms and remaining
maturities.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
3. COMMERCIAL PROPERTIES
During 1998 we acquired 66 commercial properties containing approximately 7.7
million rentable square feet, all located in Southern California for a total
cost, including the purchase price and closing costs, of approximately $1.0
billion.
We capitalize interest and taxes related to buildings under construction and
renovation to the extent such assets qualify for capitalization.
F-8
61
Total interest incurred and the amount capitalized was as follows (in
thousands):
ARDEN REALTY, INC.
--------------------------------------------
FOR THE YEAR ENDED FOR THE PERIOD ARDEN PREDECESSORS
DECEMBER 31, OCTOBER 9, 1996 TO FOR THE PERIOD
----------------------- DECEMBER 31, JANUARY 1, 1996 TO
1998 1997 1996 OCTOBER 8, 1996
------------ ------- ------------------ ------------------
Total interest incurred.................. $52,323 $20,689 $1,337 $24,521
Interest capitalized..................... (8,920) (1,178) (57) --
------- ------- ------ -------
Interest expensed........................ $43,403 $19,511 $1,280 $24,521
======= ======= ====== =======
Sixty six of the commercial properties with a carrying value of approximately
$1.1 billion are encumbered by mortgage loans totaling $544 million (See Note
7).
Office space in our properties is generally leased to tenants under lease
terms which provide for the tenants to pay for increases in operating expenses
in excess of specified amounts.
Future minimum lease payments to be received under noncancelable operating
leases existing as of December 31, 1998, are as follows:
1999........................ $ 264,184,000
2000........................ 232,011,000
2001........................ 194,088,000
2002........................ 156,299,000
2003........................ 112,525,000
Thereafter.................. 1,321,153,000
The above future minimum lease payments do not include specified payments for
tenant reimbursements of operating expenses.
We lease the land underlying either the office buildings and/or parking
structures of six of our buildings. Ground lease expense was approximately $2.0
million, $1.6 million, and $0.3 million for the years ended December 31, 1998
and 1997, and for the period from October 9, 1996 to December 31, 1996,
respectively. Future minimum ground lease payments due under existing ground
leases are as follows:
1999......................... $ 2,049,000
2000......................... 1,716,000
2001......................... 1,717,000
2002......................... 1,754,000
2003......................... 1,754,000
Thereafter................... 120,092,000
4. INVESTMENTS IN NONCOMBINED ENTITIES
The Arden Predecessors' affiliates did not own controlling financial interests
in certain of the Arden Predecessors. These investments were accounted for
utilizing the equity method of accounting. Under this accounting method, the net
equity investment of these affiliates was reflected in the combined balance
sheet, and the combined statements of operations included the affiliates' share
of net income or loss from the entities. Subsequent to the IPO, we acquired the
nonaffiliated Participants' interests
F-9
62
and accordingly, consolidate the accounts of these properties. The affiliates'
ownership interest in each entity was as follows:
AFFILIATES'
OWNERSHIP
ENTITY %
------ -----------
Bristol Encino Associates, LLC............................ 20.9%
222 Harbor Associates, LLC................................ 26.3
Beverly Ventura Associates, L.P........................... 50.0
5000 Spring Associates Tenancy in Common.................. 77.5
Although these affiliates owned a 77.5% interest in 5000 Spring Associates
Tenancy-in-Common, they did not have unilateral right to refinance the property.
As a result, this investment was accounted for utilizing equity accounting.
Condensed operating information is presented below for all noncombined
entities.
CONDENSED COMBINED STATEMENT OF OPERATIONS OF NONCOMBINED ENTITIES
FOR THE PERIOD JANUARY 1, 1996 TO OCTOBER 8, 1996
(IN THOUSANDS)
Revenues.................................................. $14,274
-------
Expenses:
Property operating expenses............................. 6,053
Interest................................................ 7,356
Depreciation and amortization........................... 2,705
-------
Total expenses.................................. 16,114
-------
Net loss........................................ $(1,840)
=======
The significant accounting policies used by the noncombined entities were
similar to those used by the Arden Predecessors.
5. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses at December 31, 1997 included a $20 million deposit made in
connection with acquisition of the LBA Portfolio. The deposit was funded with a
draw on the Credit Facility (See Note 8).
6. MORTGAGE NOTES RECEIVABLE
In September 1997, the Company purchased two mortgage notes receivable,
secured by a single commercial office property, with an aggregate balance of
approximately $17.6 million, for approximately $14.4 million. The notes bear
interest at the Eleventh District Cost of Funds plus 3.25% per annum (effective
rate of 8.0% and 8.2% at December 31, 1998 and 1997, respectively), require
monthly payments of principal, interest, and additional net cash flow from the
property (as defined) and mature on May 31, 2004.
7. MORTGAGE LOANS PAYABLE
In January 1998, we borrowed $60 million from Lehman Brothers Realty
Corporation (the "Lehman Bridge Loan I") in connection with the acquisition of
our 9100 Wilshire Property. In June 1998, we repaid $5.6 million on the Lehman
Bridge Loan I with proceeds from two of our mortgage loans payable to Lehman
Brothers and their affiliates (as described below). In September 1998, the
Lehman Bridge Loan I was expanded to $81.4 million. The Lehman Bridge Loan I is
secured by seven of our properties, bears interest at LIBOR plus .75% per annum
(effective rate of 5.814% at
F-10
63
December 31, 1998), requires monthly payments of interest only, and matures on
February 20, 1999. On January 29, 1999, the Lehman Bridge Loan I was expanded to
$111.4 million. Pursuant to the fifth amendment to the Lehman Bridge Loan I, the
loan bears interest at LIBOR plus 2.25% per annum (effective rate of 7.19% on
January 29, 1999), requires monthly payments of interest only, and matures on
April 20, 1999.
On February 2, 1999, we executed a $115 million loan commitment with Mass
Mutual Life Insurance Company (the "Mass Mutual Loan"). The Mass Mutual Loan is
secured by 12 Properties, has a ten year term and bears interest at fixed rate
of 6.94% (7.049% including the amortization of loan fees) and requires monthly
payments of principal and interest totaling $815,935 and is amortized over a 25
year period. The estimated funding date for the Mass Mutual Loan is March 31,
1999. Proceeds from this loan will be used to repay a portion of our lines of
credit and the Lehman Bridge Loan I.
At December 31, 1998 we had three mortgage loans payable to Lehman Brothers
and their affiliates, secured by fully cross-collateralized and cross-defaulted
first mortgage liens on 18, 22 and 12 of our properties, respectively. As of
December 31, 1998, one of the loans totaling $175 million bears interest at
7.52%, requires monthly payments of interest only, with all principal
anticipated to be repaid on June 2004. Two of the loans totaling $247.3 million
bear interest at 6.61% to 6.74%, require monthly payments of interest only for
five years and monthly payments of principal and interest thereafter, with all
principal anticipated to be repaid on June 2008. These mortgage loans required
us to maintain cash deposits aggregating $10 million and $4 million at December
31, 1998 and 1997, respectively, and to comply with certain financial covenants,
ongoing operational restrictions, and certain cash management procedures.
In connection with two of our mortgage loans payable to Lehman Brothers and
their affiliates, we entered into a treasury rate lock agreement (the "Swap
Agreement") with a notional amount of $100 million and locked in the United
States 10 year treasury rate at 6.174%. On April 16, 1998 we settled the Swap
Agreement for $4.5 million and are amortizing the cost of settling the Swap
Agreement over the term of two of the related mortgage loans payable to Lehman
Brothers.
During the year ended December 31, 1997, we assumed five mortgage notes
payable, with an aggregate balance of approximately $17.2 million in connection
with the acquisition of certain properties. The notes bear interest ranging from
7.0% to 9.0% per annum and mature at various dates through 2027. Four of the
notes with an aggregate balance of $12.2 million require monthly payments of
principal and interest and one note with a balance of $5.0 million requires
monthly payments of interest only. As of December 31, 1998 and 1997, the
outstanding balances under these notes payable was approximately $16.9 million
and $17.1 million, respectively.
During the year ended December 31, 1998, we assumed approximately $23.6
million in mortgage notes payable in connection with the acquisition of certain
properties. The notes bear interest rates ranging from 8.09% to 8.85% per annum
maturing at various dates through 2006 and require monthly payments of principal
and interest. As of December 31, 1998 the outstanding balances under these notes
payable were approximately $23.3 million.
F-11
64
Following is a summary of scheduled principal payments for our mortgage loans
as of December 31, 1998:
YEAR ENDED
DECEMBER 31, AMOUNT
------------ ------------
1999......................... $ 82,161,000
2000......................... 743,000
2001......................... 808,000
2002......................... 5,879,000
2003......................... 14,299,000
Thereafter................... 440,137,000
------------
$544,027,000
============
8. UNSECURED LINES OF CREDIT
As of December 31, 1998 and 1997 we had an unsecured line of credit (the
"Credit Facility") in the amount of $300 million with a group of banks led by
Wells Fargo Bank (the "Lenders"). The interest rate of the Credit Facility
ranges between LIBOR plus 1.2% and LIBOR plus 1.45% depending on our leverage
ratio (effective rate of 6.75% and 7.52% at December 31, 1998 and 1997,
respectively). If we achieve an unsecured investment grade debt rating, the
interest rate may be lowered to between LIBOR plus 0.9% and LIBOR plus 1.15%
depending on such debt rating. Under certain circumstances, we have the option
to convert the interest rate from LIBOR to the prime rate plus 0.5%. The
outstanding balance of the Credit Facility was $296.4 million and $230.4 million
at December 31, 1998 and 1997, respectively.
The Credit Facility is subject to customary conditions to borrowing; contains
representations, warranties and defaults customary in REIT financings; and
contains financial covenants, including requirements for a minimum tangible net
worth, maximum liabilities to asset values, and minimum interest, unsecured
interest and fixed charge coverage ratios (all calculated as defined in the
Credit Facility documentation), and requirements to maintain a pool of
unencumbered properties which meet certain defined characteristics and are
approved by the Lenders. The Credit Facility also contains restrictions on,
among other things, indebtedness, investments, distributions, liens and mergers.
In addition, the Credit Facility has a commitment fee ranging from .125% to .25%
on the unused balance. The Credit Facility matures on June 1, 2000. Proceeds
from the Credit Facility will be used, among other things, to provide funds for
tenant improvements and capital expenditures and provide for working capital and
other corporate purposes.
As of December 31, 1998 and 1997 we also had an unsecured line of credit in
the amount of $10 million with City National Bank (the "City National Bank
Credit Facility"). The interest rate is the City National Bank Prime Rate less
0.875% (effective rate of 7.4% and 7.6% at December 31, 1998 and 1997,
respectively) and is scheduled to mature on August 1, 1999. The outstanding
balance of the City National Bank Credit Facility was $10 million at December
31, 1997. There was no outstanding balance at December 31, 1998.
9. STOCKHOLDERS' EQUITY
On January 12, 1998, we filed a form S-3 Registration Statement (the
"Registration Statement") with the Securities Exchange Commission to offer in
one or more series, shares of our $.01 par value common stock with an aggregate
public offering price of up to $1.0 billion. This Registration Statement was
declared effective on January 21, 1998.
F-12
65
During 1998, we completed four equity offerings under the Registration
Statement, as follows
(in thousands):
NUMBER GROSS FEES
DATE OF SHARES PROCEEDS AND COSTS NET PROCEEDS
------- --------- -------- --------- ------------
Unit Trust(a)........................ 2/18/98 882 $ 24,970 $ 1,349 $ 23,621
Public Offering...................... 2/19/98 23,000 651,188 32,982 618,206
Unit Trust(a)........................ 2/23/98 1,304 37,000 1,945 35,055
Unit Trust(a)........................ 4/23/98 1,110 31,500 1,800 29,700
------ -------- ------- --------
26,296(b) $744,658 $38,076 $706,582
====== ======== ======= ========
- ---------------
(a) Shares of common stock issued to the trustees of unrelated registered unit
investment trusts.
(b) Excludes 229,880 shares issued in connection with Operating Partnership Unit
conversions and 85,106 shares issued to officers for purchases of common
stock .
An Operating Partnership Unit (OP Unit) and a share of 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.
In December 1997, the Operating Partnership issued 849,280 OP Units valued at
approximately $24.7 million in connection with the acquisition of a 469,115
square foot office property in Los Angeles, and 220,538 OP Units were exchanged
for Common Stock.
During 1998, we issued 300,255 OP units, valued at approximately $8.2 million
in connection with certain Property acquisitions. In March 1998, we also issued
warrants, which expire on March 2, 2001, to purchase 2.5 million shares of our
Common Stock at a price of $29.59 per share, subject to adjustment, in
connection with a portfolio acquisition.
In April 1998, we redeemed 542,382 of these OP units at a cost of
approximately $16.3 million in cash based on the original issuance price of the
OP Units.
In August 1998, we declared a dividend distribution of one preferred share
purchase right on each outstanding share of our common stock. Subject to limited
exceptions, these rights will be exercisable if a person or group (an "Acquiring
Person") acquires 15% or more of our common stock or announces a tender offer
for 15% or more of our common stock. Under certain circumstances, each right
will entitle stockholders to buy one one-hundredth of a share of our newly
created Class A Junior Participating Preferred Stock at an exercise price of
$75. Our Board of Directors will be entitled to redeem the Rights at $.01 per
Right at any time before a person has acquired 15% or more of the outstanding
common stock. The Rights Plan will expire in August 2008.
If a person becomes an Acquiring Person, each right will entitle its holder to
purchase, at the right's then-current exercise price, a number of our common
shares having a market value at that time of twice the Right's exercise price.
Rights held by the Acquiring Person will become void and will not be exercisable
to purchase shares at the bargain purchase price. If we are acquired in a merger
or other business combination transaction which has not been approved by our
Board of Directors, each right will entitle its holder to purchase, at the
right's then-current exercise price, a number of the acquiring company's common
shares having a market value at that time of twice the right's exercise price.
On March 9, 1999, we declared a first quarter dividend of $.445 per share to
shareholders of record on March 31, 1999.
10. COMMITMENTS AND CONTINGENCIES
Capital Commitments
As of December 31, 1998 we had approximately $8.1 million outstanding in
capital commitments related to tenant improvements, renovation costs, and
general property related capital expenditures.
F-13
66
Litigation
We do not believe there is any litigation threatened against us other than
routine litigation arising out of the ordinary course of business, some of which
is expected to be covered by liability insurance and all of which is not
expected to have a material adverse effect on our consolidated financial
statements.
Concentration of Credit Risk
We maintain our cash and cash equivalents at financial institutions. The
combined account balances at each institution periodically exceed FDIC insurance
coverage, and as a result, there is a concentration of credit risk related to
amounts on deposit in excess of FDIC insurance coverage. Management believes
that the risk is not significant.
We generally do not require collateral or other security from our tenants,
other than security deposits.
11. RELATED PARTY TRANSACTIONS
Property Acquisitions
In March 1997, we purchased a 109,187 square foot office property from a
shareholder for approximately $10.2 million.
Notes Receivable from Officers
Under our stock option plan (Note 14), on August 14, 1998 we issued 42,553
shares of Common Stock to both Ms. Laing and Mr. Sobel. In consideration for the
issuance of such Common Stock, Ms. Laing and Mr. Sobel executed Promissory Notes
(the "Notes") in the amount of $1.0 million each.
The Notes are recourse and secured by the shares of Common Stock issued to Ms.
Laing and Mr. Sobel, bear interest at 6% per annum with all accrued interest and
principal due on August 14, 2004. Provided that Ms. Laing and Mr. Sobel are
still employed by Arden Realty, the outstanding principal amount of the Notes
will be forgiven as follows; August 14, 2001, $100,000; August 14, 2002,
$166,667; August 14, 2003, $200,000; and August 14, 2004, $200,000.
Additionally, provided that Ms. Laing and Mr. Sobel are still employed by Arden
Realty, all accrued and unpaid interest and the outstanding principal amount of
the Notes will be forgiven upon a change in control (as defined) of Arden Realty
or upon the death or disability of Ms. Laing or Mr. Sobel.
F-14
67
12. REVENUE FROM RENTAL OPERATIONS AND PROPERTY OPERATING EXPENSES
Revenue from rental operations and property operating expenses are summarized
as follows (in thousands):
ARDEN REALTY, INC. ARDEN PREDECESSORS
------------------------------------------ ------------------
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 9, 1996 TO FOR THE PERIOD
-------------------- DECEMBER 31, JANUARY 1, 1996 TO
1998 1997 1996 OCTOBER 8, 1996
-------- -------- ------------------ ------------------
REVENUE FROM RENTAL OPERATIONS:
Rental............................. $250,467 $118,085 $17,041 $32,287
Tenant reimbursements.............. 9,505 5,945 803 2,031
Parking, net of expenses........... 12,223 7,397 1,215 3,692
Other rental operations............ 8,872 2,390 375 1,125
-------- -------- ------- -------
281,067 133,817 19,434 39,135
-------- -------- ------- -------
PROPERTY OPERATING EXPENSES:
Repairs and maintenance............ 27,141 15,154 1,980 3,092
Utilities.......................... 26,559 14,321 1,844 3,456
Real estate taxes.................. 19,433 8,003 1,033 2,031
Insurance.......................... 4,110 2,125 290 2,460
Ground rent........................ 714 314 78 806
Marketing and other................ 8,613 4,415 780 2,379
-------- -------- ------- -------
86,570 44,332 6,005 14,224
-------- -------- ------- -------
$194,497 $ 89,485 $13,429 $24,911
======== ======== ======= =======
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share amounts):
FOR THE YEARS ENDED FOR THE PERIOD
DECEMBER 31, OCTOBER 9, 1996 TO
-------------------- DECEMBER 31,
1998 1997 1996
-------- -------- ------------------
Net income (loss)...................................... $90,675 $39,630 $(5,672)
======= ======= =======
Weighted average shares -- basic....................... 58,660 27,794 21,680
Weighted average dilutive stock options................ 153 245 --
------- ------- -------
Weighted average shares -- diluted..................... 58,814 28,039 21,680
======= ======= =======
Basic net income (loss) per share...................... $ 1.55 $ 1.43 $ (0.26)
======= ======= =======
Diluted net income (loss) per share.................... $ 1.54 $ 1.41 $ (0.26)
======= ======= =======
14. STOCK OPTION PLAN
We have elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee and directors stock options because, as discussed
below, the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123") requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under Statement 123, because the exercise price of
employee and director stock options granted by the Company equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
F-15
68
We established a stock option plan for the purpose of attracting and retaining
executive officers, directors and other key employees. As of December 31, 1998,
1,348,334 of our authorized shares have been reserved for issuance under such
plan.
All holders of the above options have a ten year period to exercise and all
options were granted at exercise prices equal to the market prices at the date
of the grant.
Pro forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if we had accounted for our
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and for the period of October 9, 1996 to December 31, 1996, respectively:
Risk-free interest rate of 5.68%, 5.81% and 6.7%; dividend yield of 7.25%, 5.2%
and 5.8%; volatility factor of the expected market price of our common stock of
.268, .194, and .23. The weighted average expected life of the options ranges
between eight and ten years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
our employee and director stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee and director stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The Company's pro
forma information follows (in thousands, except earnings per share information):
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, FOR THE PERIOD OCTOBER 9, 1996
1998 1997 TO DECEMBER 31, 1996
------------------ ------------------ ------------------------------
Pro forma income before extraordinary
items................................... $88,711 $38,711 $ 7,189
Extraordinary loss on early extinguishment
of debt................................. -- -- (13,105)
------- ------- --------
Net income (loss)......................... $88,711 $38,711 $ (5,916)
======= ======= ========
Pro forma income before extraordinary
items per share......................... $ 1.51 $ 1.39 $ .33
Extraordinary loss on early extinguishment
of debt................................. -- -- (.60)
------- ------- --------
Pro forma net income (loss) per share..... $ 1.51 $ 1.39 $ (.27)
======= ======= ========
A summary of our stock option activity, and related information for the years
ended December 31, 1998, 1997, and for the period October 9, 1996 to December
31, 1996 follows:
1998 1997 1996
-------------------------- -------------------------- --------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000S) EXERCISE PRICE (000S) EXERCISE PRICE (000S) EXERCISE PRICE
------- ---------------- ------- ---------------- ------- ----------------
Outstanding, beginning of
period..................... 1,303 $25.27 930 $20.15 -- $ --
Granted...................... 685 26.23 556 32.09 930 20.15
Exercised.................... -- -- (147) 20.00 -- --
Forfeited.................... -- -- (36) 20.00 -- --
------ ------ ------ ------ ----- ------
Outstanding at end of year... 1,988 $25.42 1,303 $25.27 930 $20.15
====== ====== ====== ====== ===== ======
Weighted-average fair value
of options granted......... $ 3.27 $ 3.72 $3.40
F-16
69
Exercise prices for options outstanding as of December 31, 1998 ranged from
$20.00 to $32.25. The weighted average remaining contractual life of those
options is 9.2 years.
15. EMPLOYEE RETIREMENT SAVINGS PLAN
Effective June 12, 1997, we adopted a retirement savings plan pursuant to
Section 401(k) of the Internal Revenue Code ("Code"), whereby participants may
contribute a portion of their compensation to their respective retirement
accounts, in an amount not to exceed the maximum allowed under the Code. The
plan provides for matching contributions by Arden Realty, which amounted to
approximately $187,000 in 1998 and $71,000 in 1997. Plan participants are
immediately vested in their contribution and are vested equally over four years
in the matching contributions by Arden Realty.
16. QUARTERLY RESULTS
Following is a summary of our revenue and expenses for the years ended
December 31, 1998 and 1997. Revenue and expenses have fluctuated significantly
from quarter to quarter primarily due to property acquisitions made during 1998
and 1997 (unaudited).
FOR THE QUARTER ENDED (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
-----------------------------------------------------------------------
MARCH 31, 1998 JUNE 30, 1998 SEPTEMBER 30, 1998 DECEMBER 31, 1998
-------------- ------------- ------------------ -----------------
Revenue................................. $ 54,759 $ 70,503 $ 76,738 $ 79,067
Property operating expenses............. (16,738) (21,543) (24,072) (24,217)
General and administrative.............. (1,635) (1,388) (1,564) (2,078)
Interest expense........................ (8,612) (10,539) (11,988) (12,264)
Depreciation and amortization........... (11,296) (12,930) (12,954) (14,642)
Interest and other income............... 1,458 695 680 682
Minority interests...................... (1,752) (1,183) (1,253) (1,259)
-------- -------- -------- --------
Net Income.............................. $ 16,184 $ 23,615 $ 25,587 $ 25,289
======== ======== ======== ========
Net income per share:
Basic.............................. $ .34 $ .38 $ .41 $ .41
Diluted............................ $ .34 $ .38 $ .41 $ .40
FOR THE QUARTER ENDED (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
-----------------------------------------------------------------------
MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 DECEMBER 31, 1997
-------------- ------------- ------------------ -----------------
Revenue................................. $ 24,916 $ 29,704 $ 36,431 $ 42,766
Property operating expenses............. (7,894) (9,544) (11,737) (15,157)
General and administrative.............. (918) (931) (979) (1,494)
Interest expense........................ (3,024) (5,883) (4,816) (5,788)
Loss on valuation of derivative......... -- -- (3,111) --
Depreciation and amortization........... (3,562) (4,458) (5,241) (6,999)
Interest and other income............... 54 59 450 1,067
Minority interests...................... (1,134) (1,090) (881) (1,176)
-------- -------- -------- --------
Net Income.............................. $ 8,438 $ 7,857 $ 10,116 $ 13,219
======== ======== ======== ========
Net income per share:
Basic.............................. $ .39 $ .36 $ .31 $ .37
Diluted............................ $ .38 $ .36 $ .31 $ .37
F-17
70
ARDEN REALTY, INC.
SCHEDULE III -- COMMERCIAL PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SQUARE FOOT DATA)
COSTS CAPITALIZED
INITIAL COSTS BASIS STEP-UP SUBSEQUENT TO
------------------------ ------------- ACQUISITION
SQUARE BUILDINGS AND BUILDINGS AND -----------------
FOOTAGE LAND IMPROVEMENTS LAND IMPROVEMENTS IMPROVEMENTS(2)
---------- -------- ------------- ------ ------------- -----------------
Century Park Center................ 243,404 $ 7,189 $ 16,742 $ -- $ -- $ 6,378
Beverly Atrium..................... 61,314 4,127 11,513 117 328 894
Woodland Hills Financial Center.... 224,955 6,566 14,754 365 880 2,972
Anaheim City Centre................ 175,391 515 11,199 94 2,075 1,352
425 West Broadway.................. 71,589 1,500 4,436 305 918 345
1950 Sawtelle...................... 103,772 1,988 7,263 -- -- 1,241
Bristol Plaza...................... 84,014 1,820 3,380 257 485 1,122
16000 Ventura...................... 174,841 1,700 17,189 185 1,929 1,734
5000 Spring........................ 163,358 -- 11,658 -- 424 1,882
70 South Lake...................... 100,133 1,360 9,097 -- -- 1,088
Westwood Terrace................... 135,943 2,103 16,850 -- -- 1,021
5601 Lindero Canyon................ 105,830 2,577 6,067 -- -- 1,672
The New Wilshire................... 202,704 1,200 19,902 -- -- 2,760
Calabasas Commerce Center.......... 123,121 1,262 9,725 -- -- 1,010
Long Beach--DF&G................... 272,013 -- 14,452 -- -- 164
Skyview Center..................... 391,675 6,514 33,701 -- -- 3,144
400 Corporate Pointe............... 164,598 3,382 17,527 75 390 1,650
5832 Bolsa......................... 49,355 690 3,526 15 80 169
9665 Wilshire...................... 158,684 6,697 22,230 139 473 1,714
Imperial Bank Tower................ 540,413 3,722 35,184 64 625 5,368
100 West Broadway.................. 191,727 4,570 15,255 -- -- 922
12501 East Imperial Highway........ 122,175 4,508 5,532 -- -- 166
303 Glenoaks....................... 175,449 6,500 18,132 -- -- 977
10351 Santa Monica................. 96,251 3,080 7,906 -- -- 564
2730 Wilshire...................... 67,820 3,515 5,944 -- -- 616
Grand Avenue Plaza................. 84,500 620 2,832 -- -- 3,741
Burbank Executive Plaza............ 60,395 1,100 4,384 -- -- 1,389
California Federal Building........ 82,467 1,500 5,981 -- -- 516
Center Promenade................... 174,837 2,310 9,266 -- -- 1,109
Los Angeles Corporate Center....... 389,293 26,781 15,139 -- -- 889
5200 West Century.................. 310,910 2,080 9,360 -- -- 5,014
Sumitomo Bank Building............. 110,641 2,560 10,257 -- -- 525
10350 Santa Monica................. 42,292 861 3,456 -- -- 144
535 N. Brand Blvd.................. 109,187 1,600 8,779 -- -- 6,431
10780 Santa Monica................. 92,486 2,625 7,997 -- -- 583
California Twin Center............. 155,189 4,680 14,877 -- -- 912
TOTAL COSTS
------------------------
BUILDINGS AND ACCUMULATED YEAR BUILT/
LAND IMPROVEMENTS TOTAL DEPRECIATION(1) ENCUMBRANCES RENOVATED
-------- ------------- ---------- --------------- ------------ -----------
Century Park Center................ $ 7,189 $ 23,120 $ 30,309 $ 5,355 $ -- 1972/94
Beverly Atrium..................... 4,244 12,735 16,979 2,284 5,268(3) 1989
Woodland Hills Financial Center.... 6,931 18,606 25,537 3,578 14,564(3) 1972/95
Anaheim City Centre................ 609 14,626 15,235 2,178 8,914(3) 1986/91
425 West Broadway.................. 1,805 5,699 7,504 724 4,733(3) 1984
1950 Sawtelle...................... 1,988 8,504 10,492 1,199 7,285(3) 1988/95
Bristol Plaza...................... 2,077 4,987 7,064 659 4,082(3) 1982
16000 Ventura...................... 1,885 20,852 22,737 2,505 10,828(3) 1980/96
5000 Spring........................ -- 13,964 13,964 2,226 -- 1989/95
70 South Lake...................... 1,360 10,185 11,545 964 6,677(3) 1982/94
Westwood Terrace................... 2,103 17,871 19,974 1,570 -- 1988
5601 Lindero Canyon................ 2,577 7,739 10,316 1,158 6,225(3) 1989
The New Wilshire................... 1,200 22,662 23,862 2,161 11,566(3) 1986
Calabasas Commerce Center.......... 1,262 10,735 11,997 915 8,103(3) 1990
Long Beach--DF&G................... -- 14,616 14,616 1,142 -- 1987/95
Skyview Center..................... 6,514 36,845 43,359 3,390 27,604(3) 1981/87/95
400 Corporate Pointe............... 3,457 19,567 23,024 1,478 15,583(3) 1987
5832 Bolsa......................... 705 3,775 4,480 289 2,675(3) 1985
9665 Wilshire...................... 6,836 24,417 31,253 1,961 -- 1972/92/93
Imperial Bank Tower................ 3,786 41,177 44,963 3,539 -- 1982/96
100 West Broadway.................. 4,570 16,177 20,747 1,210 15,120(3) 1987/96
12501 East Imperial Highway........ 4,508 5,698 10,206 368 7,186(3) 1978/94
303 Glenoaks....................... 6,500 19,109 25,609 1,251 13,104(3) 1983/96
10351 Santa Monica................. 3,080 8,470 11,550 471 5,541(3) 1984
2730 Wilshire...................... 3,515 6,560 10,075 341 -- 1985
Grand Avenue Plaza................. 620 6,573 7,193 335 -- 1979/80
Burbank Executive Plaza............ 1,100 5,773 6,873 794 3,350(3) 1983
California Federal Building........ 1,500 6,497 7,997 4 5,026(3) 1978
Center Promenade................... 2,310 10,375 12,685 549 -- 1982
Los Angeles Corporate Center....... 26,781 16,028 42,809 929 21,043(3) 1984/86
5200 West Century.................. 2,080 14,374 16,454 214 -- 1982
Sumitomo Bank Building............. 2,560 10,782 13,342 563 -- 1970/90-91
10350 Santa Monica................. 861 3,600 4,461 193 2,280(3) 1979
535 N. Brand Blvd.................. 1,600 15,210 16,810 0 -- 1973/92
10780 Santa Monica................. 2,625 8,580 11,205 513 -- 1984
California Twin Center............. 4,680 15,789 20,469 864 -- 1983
F-18
71
COSTS CAPITALIZED
INITIAL COSTS BASIS STEP-UP SUBSEQUENT TO
------------------------ ------------- ACQUISITION
SQUARE BUILDINGS AND BUILDINGS AND -----------------
FOOTAGE LAND IMPROVEMENTS LAND IMPROVEMENTS IMPROVEMENTS(2)
---------- -------- ------------- ------ ------------- -----------------
Whittier Financial Center.......... 135,415 $ 3,575 $ 10,798 $ -- $ -- $ 1,256
6800 Owensmouth.................... 80,014 1,725 5,851 -- -- 300
Clarendon Crest.................... 43,063 1,300 3,951 -- -- 148
Noble Professional Center.......... 51,828 1,657 5,096 -- -- 163
South Bay Centre................... 202,830 4,775 14,365 -- -- 1,159
8383 Wilshire...................... 417,463 13,570 45,505 -- -- 1,454
Parkway Center..................... 61,333 1,480 5,941 -- -- 204
CenterPointe La Palma.............. 597,550 16,011 64,400 -- -- 1,319
299 Euclid......................... 73,400 1,050 6,110 -- -- 2,243
Carlsberg Corporate Center......... 103,506 2,937 9,063 -- -- 810
Harbor Corporate Center............ 63,925 870 3,538 -- -- 195
1000 Town Center................... 107,653 2,800 11,260 -- -- 161
Mariner Court...................... 105,436 2,350 9,461 -- -- 250
Pacific Gateway II................. 223,731 6,287 19,191 -- -- 1,260
1821 Dyer.......................... 115,061 1,808 5,474 -- -- 1,311
Crown Cabot........................ 172,900 7,056 21,360 -- -- 2,100
120 Spalding....................... 60,656 2,775 8,544 -- -- 1,606
South Bay Technology Center........ 104,815 1,600 4,782 -- -- 499
1370 Valley Vista.................. 84,081 2,698 8,141 -- -- 215
Renaissance Court.................. 61,245 1,580 5,477 -- -- 545
Foremost Professional Plaza........ 60,534 2,049 6,196 -- -- 189
Northpoint......................... 104,235 1,800 20,272 -- -- 116
Thousand Oaks Plaza................ 13,434 444 1,343 -- -- 19
Rancho Plaza....................... 24,057 711 2,213 -- -- 28
Pennsfield Plaza................... 21,202 800 2,383 -- -- 15
Conejo Business Park............... 69,017 2,489 7,359 -- -- 41
Marin Corporate Center............. 51,360 1,956 5,915 -- -- 107
Evergreen Plaza.................... 75,722 2,489 6,911 -- -- 202
145 South Fairfax.................. 54,429 1,825 5,551 -- -- 289
Bernardo Regency................... 47,916 1,625 4,937 -- -- 139
City Centre........................ 302,519 8,250 24,951 -- -- 684
Wilshire Pacific Plaza............. 100,122 3,750 11,317 -- -- 516
Glendale Corporate Center.......... 108,209 2,750 12,734 -- -- 199
World Savings Center............... 469,115 -- 110,382 -- -- 3,353
9201 Sunset........................ 139,711 7,180 21,666 -- -- 2,115
Sunset Pointe Plaza................ 58,105 2,075 6,362 -- -- 159
Activity Business Center........... 167,045 3,650 11,303 -- -- 164
Westlake Gardens................... 49,639 1,831 5,550 -- -- 1,065
9100 Wilshire...................... 326,227 16,250 48,950 -- -- 1,771
Westwood Center.................... 313,000 3,100 26,201 -- -- 6,542
1919 Santa Monica.................. 44,096 2,580 7,772 -- -- 176
600 Corporate Pointe............... 273,339 8,575 35,325 -- -- 876
TOTAL COSTS
------------------------
BUILDINGS AND ACCUMULATED YEAR BUILT/
LAND IMPROVEMENTS TOTAL DEPRECIATION(1) ENCUMBRANCES RENOVATED
-------- ------------- ---------- --------------- ------------ -----------
Whittier Financial Center.......... $ 3,575 $ 12,054 $ 15,629 $ 684 $ -- 1967/82
6800 Owensmouth.................... 1,725 6,151 7,876 328 -- 1986
Clarendon Crest.................... 1,300 4,099 5,399 210 -- 1990
Noble Professional Center.......... 1,657 5,259 6,916 286 3,580(3) 1985/93
South Bay Centre................... 4,775 15,524 20,299 827 -- 1984
8383 Wilshire...................... 13,570 46,959 60,529 2,334 -- 1971/93
Parkway Center..................... 1,480 6,145 7,625 316 5,029(3) 1992/95
CenterPointe La Palma.............. 16,011 65,719 81,730 3,129 35,140(3) 1986/88/90
299 Euclid......................... 1,050 8,353 9,403 103 5,000 1983
Carlsberg Corporate Center......... 2,937 9,873 12,810 420 -- 1979
Harbor Corporate Center............ 870 3,733 4,603 142 -- 1985
1000 Town Center................... 2,800 11,421 14,221 471 -- 1989
Mariner Court...................... 2,350 9,711 12,061 414 -- 1989
Pacific Gateway II................. 6,287 20,451 26,738 637 18,939 1982/90
1821 Dyer.......................... 1,808 6,785 8,593 84 -- 1980/88
Crown Cabot........................ 7,056 23,460 30,516 921 -- 1989
120 Spalding....................... 2,775 10,150 12,925 154 -- 1984
South Bay Technology Center........ 1,600 5,281 6,881 219 -- 1984
1370 Valley Vista.................. 2,698 8,356 11,054 310 5,532(3) 1988
Renaissance Court.................. 1,580 6,022 7,602 145 -- 1981/92
Foremost Professional Plaza........ 2,049 6,385 8,434 231 -- 1992
Northpoint......................... 1,800 20,388 22,188 758 -- 1991
Thousand Oaks Plaza................ 444 1,362 1,806 934 -- 1988
Rancho Plaza....................... 711 2241 2,952 2 -- 1987
Pennsfield Plaza................... 800 2398 3,198 1 -- 1989
Conejo Business Park............... 2,489 7400 9,889 5 4,604 1991
Marin Corporate Center............. 1,956 6,022 7,978 8 3,257 1986
Evergreen Plaza.................... 2,489 7,113 9,602 7 -- 1979/96
145 South Fairfax.................. 1,825 5,840 7,665 214 4,079 1984
Bernardo Regency................... 1,625 5,076 6,701 181 -- 1986
City Centre........................ 8,250 25,635 33,885 751 -- 1982
Wilshire Pacific Plaza............. 3,750 11,833 15,583 334 2,657 1976/87
Glendale Corporate Center.......... 2,750 12,933 15,683 379 -- 1985
World Savings Center............... -- 113,735 113,735 3,062 -- 1983
9201 Sunset........................ 7,180 23,781 30,961 449 -- 1963/92-95
Sunset Pointe Plaza................ 2,075 6,521 8,596 171 3,855(3) 1988
Activity Business Center........... 3,650 11,467 15,117 299 8,142 1987
Westlake Gardens................... 1,831 6,615 8,446 104 -- 1998
9100 Wilshire...................... 16,250 50,721 66,971 1,420 32,782 1971/90
Westwood Center.................... 3,100 32,743 35,843 0 15,167 1965
1919 Santa Monica.................. 2,580 7,948 10,528 189 3,724(3) 1991
600 Corporate Pointe............... 8,575 36,201 44,776 862 17,584(3) 1989
F-19
72
COSTS CAPITALIZED
INITIAL COSTS BASIS STEP-UP SUBSEQUENT TO
------------------------ ------------- ACQUISITION
SQUARE BUILDINGS AND BUILDINGS AND -----------------
FOOTAGE LAND IMPROVEMENTS LAND IMPROVEMENTS IMPROVEMENTS(2)
---------- -------- ------------- ------ ------------- -----------------
150 East Colorado.................. 61,168 $ 1,988 $ 5,841 $ -- $ -- $ 186
5161 Lankershim.................... 178,317 5,016 25,568 -- -- 2,102
1501 Hughes Way.................... 77,060 1,348 4,058 -- -- 284
3901 Via Oro....................... 53,195 692 2,081 -- -- 879
Huntington Beach Plaza I & II...... 52,186 1,109 3,317 -- -- 56
Fountain Valley Plaza.............. 107,252 2,949 9,377 -- -- 340
3300 Irvine Avenue................. 74,224 2,215 6,697 -- -- 308
Von Karman Corporate Center........ 451,477 11,513 34,783 -- -- 1,189
1503 South Coast................... 60,605 1,570 4,731 -- -- 77
One Venture........................ 43,324 1,137 3,492 -- -- 489
625 The City....................... 139,806 4,792 14,470 -- -- 480
Orange Financial Center............ 305,439 10,379 34,415 -- -- 883
Lambert Office Plaza............... 32,807 1,095 3,296 -- -- 27
Carlsbad Corporate Center.......... 125,000 3,722 15,061 -- -- 1,975
Balboa Corporate Center............ 69,890 2,759 8,303 -- -- 68
Panorama Corporate Center.......... 133,245 6,512 19,593 -- -- 177
Ruffin Corporate Center............ 45,059 1,766 5,315 -- -- 43
Skypark Office Plaza............... 202,164 5,733 21,608 -- -- 407
Governor Office Plaza.............. 104,065 3,382 10,177 -- -- 463
5120 Shoreham...................... 37,759 1,224 4,073 -- -- 41
Sorrento Valley Science............ 181,207 6,841 21,067 -- -- 336
Torreyana Science Park............. 81,204 5,035 15,148 -- -- 129
Uniden Building.................... 28,119 1,010 3,027 -- -- 85
10251 Vista Sorrento............... 69,386 1,839 7,202 -- -- 59
Camarillo Business Center.......... 154,216 3,522 10,602 -- -- 594
Centrelake Plaza................... 110,763 1,570 9,473 -- -- 796
Tower Plaza I...................... 72,350 2,080 6,280 -- -- 183
Tower Plaza II..................... 19,301 265 802 -- -- 42
Tower Plaza III.................... 12,483 172 520 -- -- 29
Chicago Avenue Business Park....... 47,482 1,223 3,687 -- -- 74
Havengate Center................... 80,557 1,913 5,759 -- -- 59
HDS Plaza.......................... 104,178 2,604 7,838 -- -- 127
5702 Bolsa......................... 27,731 589 1,775 -- -- 18
5672 Bolsa......................... 11,968 254 767 -- -- 22
5632 Bolsa......................... 21,568 458 1,381 -- -- 13
Huntington Commerce Center......... 67,551 992 2,997 -- -- 38
Savi Tech Center................... 341,446 8,280 24,911 -- -- 223
Yorba Linda Business Park.......... 167,142 2,629 7,913 -- -- 91
Cymer Technology Center............ 155,612 5,446 16,387 -- -- 153
Poway Industrial................... 112,000 1,876 5,646 -- -- 49
10180 Scripps Ranch................ 43,560 1,165 3,507 -- -- 36
10965-93 Via Frontera.............. 77,920 1,792 5,391 -- -- 49
TOTAL COSTS
------------------------
BUILDINGS AND ACCUMULATED YEAR BUILT/
LAND IMPROVEMENTS TOTAL DEPRECIATION(1) ENCUMBRANCES RENOVATED
-------- ------------- ---------- --------------- ------------ -----------
150 East Colorado.................. $ 1,988 $ 6,027 $ 8,015 $ 153 $ -- 1979/97
5161 Lankershim.................... 5,016 27,670 32,686 695 13,573(3) 1985/97
1501 Hughes Way.................... 1,348 4,342 5,690 54 -- 1983/97
3901 Via Oro....................... 692 2,960 3,652 40 -- 1986/97
Huntington Beach Plaza I & II...... 1,109 3,373 4,482 82 1,950(3) 1984/96
Fountain Valley Plaza.............. 2,949 9,717 12,666 274 4,833(3) 1982
3300 Irvine Avenue................. 2,215 7,005 9,220 179 3,244(3) 1981/97
Von Karman Corporate Center........ 11,513 35,972 47,485 895 17,180(3) 1981/84
1503 South Coast................... 1,570 4,808 6,378 99 2,262(3) 1979/97
One Venture........................ 1,137 3,981 5,118 82 -- 1990/97
625 The City....................... 4,792 14,950 19,742 375 7,055(3) 1985/97
Orange Financial Center............ 10,379 35,298 45,677 876 18,184(3) 1985/95
Lambert Office Plaza............... 1,095 3,323 4,418 79 -- 1986/97
Carlsbad Corporate Center.......... 3,722 17,036 20,758 647 9,327(3) 1996
Balboa Corporate Center............ 2,759 8,371 11,130 199 3,000 1990
Panorama Corporate Center.......... 6,512 19,770 26,282 470 10,000 1991
Ruffin Corporate Center............ 1,766 5,358 7,124 127 -- 1990
Skypark Office Plaza............... 5,733 22,015 27,748 528 7,000 1986
Governor Office Plaza.............. 3,382 10,640 14,022 254 5,425(3) 1986
5120 Shoreham...................... 1,224 4,114 5,338 148 -- 1984
Sorrento Valley Science............ 6,841 21,403 28,244 545 7,000 1984
Torreyana Science Park............. 5,035 15,277 20,312 363 9,500(3) 1980/97
Uniden Building.................... 1,010 3,112 4,122 64 -- 1990
10251 Vista Sorrento............... 1,839 7,261 9,100 173 3,882(3) 1981/95
Camarillo Business Center.......... 3,522 11,196 14,718 255 -- 1984/97
Centrelake Plaza................... 1,570 10,269 11,839 202 -- 1989
Tower Plaza I...................... 2,080 6,463 8,543 155 -- 1988
Tower Plaza II..................... 265 844 1,109 21 -- 1983
Tower Plaza III.................... 172 549 721 13 -- 1983
Chicago Avenue Business Park....... 1,223 3,761 4,984 92 -- 1986
Havengate Center................... 1,913 5,818 7,731 139 -- 1985
HDS Plaza.......................... 2,604 7,965 10,569 193 -- 1987
5702 Bolsa......................... 589 1,793 2,382 43 941(3) 1987/97
5672 Bolsa......................... 254 789 1,043 19 330(3) 1987
5632 Bolsa......................... 458 1,394 1,852 33 845(3) 1987
Huntington Commerce Center......... 992 3,035 4,027 73 1,502(3) 1987
Savi Tech Center................... 8,280 25,134 33,414 597 14,728(3) 1989
Yorba Linda Business Park.......... 2,629 8,004 10,633 191 4,377(3) 1988
Cymer Technology Center............ 5,446 16,540 21,986 393 10,918(3) 1986
Poway Industrial................... 1,876 5,695 7,571 135 3,233(3) 1991/96
10180 Scripps Ranch................ 1,165 3,543 4,708 84 1,997(3) 1978/96
10965-93 Via Frontera.............. 1,792 5,440 7,232 129 2,841(3) 1982/97
F-20
73
COSTS CAPITALIZED
INITIAL COSTS BASIS STEP-UP SUBSEQUENT TO
------------------------ ------------- ACQUISITION
SQUARE BUILDINGS AND BUILDINGS AND -----------------
FOOTAGE LAND IMPROVEMENTS LAND IMPROVEMENTS IMPROVEMENTS(2)
---------- -------- ------------- ------ ------------- -----------------
Westridge.......................... 48,850 $ 1,807 $ 5,591 $ -- $ -- $ 201
Ontario Airport Commerce Center.... 213,127 2,398 7,194 -- -- 173
Highlands I........................ 26,856 470 1,418 -- -- 47
Highlands II....................... 41,210 793 2,394 -- -- 27
Hunter Business Park............... 106,782 1,148 3,439 -- -- 216
Tower Plaza Retail................. 133,481 4,531 13,660 -- -- 569
Howard Hughes...................... 36,959 30,865 7,529 -- -- 6,101
11075 Santa Monica................. 35,696 1,225 3,746 -- -- 63
Continental Grand.................. 235,926 7,125 40,451 -- -- 432
Calabasas Tech Center.............. 273,526 11,513 34,591 -- -- 309
100 Oceangate Tower................ 210,907 3,080 20,386 -- -- 125
Lyons Plaza........................ 61,203 2,078 6,267 -- -- 67
Genesee Executive Park............. 155,820 6,750 20,178 -- -- 393
Solar Drive Business Park.......... 125,132 4,250 12,770 -- -- 103
91 Freeway Center.................. 94,516 2,900 9,179 -- -- 47
601 South Glenoaks................. 72,524 2,450 7,519 -- -- 16
Tourney Pointe..................... 219,991 6,002 21,334 -- -- 701
Mini Suites........................ -- -- -- -- -- 89
---------- -------- ---------- ------ ------ --------
17,985,956 $489,726 $1,701,375 $1,616 $8,607 $121,499
========== ======== ========== ====== ====== ========
TOTAL COSTS
------------------------
BUILDINGS AND ACCUMULATED YEAR BUILT/
LAND IMPROVEMENTS TOTAL DEPRECIATION(1) ENCUMBRANCES RENOVATED
-------- ------------- ---------- --------------- ------------ -----------
Westridge.......................... $ 1,807 $ 5,792 $ 7,599 $ 152 $ 2,972(3) 1984/96
Ontario Airport Commerce Center.... 2,398 7,367 9,765 181 -- 1987/97
Highlands I........................ 470 1,465 1,935 34 -- 1988
Highlands II....................... 793 2,421 3,214 58 -- 1990
Hunter Business Park............... 1,148 3,655 4,803 64 -- 1990
Tower Plaza Retail................. 4,531 14,229 18,760 341 -- 1970/97
Howard Hughes...................... 30,865 13,630 44,495 384 100 1993
11075 Santa Monica................. 1,225 3,809 5,034 81 -- 1983
Continental Grand.................. 7,125 40,883 48,008 893 -- 1986
Calabasas Tech Center.............. 11,513 34,900 46,413 676 -- 1990
100 Oceangate Tower................ 3,080 20,511 23,591 554 -- 1971/93/94
Lyons Plaza........................ 2,078 6,334 8,412 106 -- 1990
Genesee Executive Park............. 6,750 20,571 27,321 298 -- 1984
Solar Drive Business Park.......... 4,250 12,873 17,123 154 -- 1982
91 Freeway Center.................. 2,900 9,226 12,126 110 -- 1986/97
601 South Glenoaks................. 2,450 7,535 9,985 90 -- 1990
Tourney Pointe..................... 6,002 22,035 28,037 41 -- 1985/98
Mini Suites........................ -- 89 89 -- -- --
-------- ---------- ---------- ------- --------
$491,342 $1,831,481 $2,322,823 $84,754 $544,027
======== ========== ========== ======= ========
- ---------------
(1) The depreciable life for buildings and improvements ranges from ten to forty
years. Tenant improvements are depreciated over the remaining term of the
lease.
(2) Includes total capitalized interest of $10.8 million.
(3) All of these Properties are collateral for Arden Realty's $422.3 million
Mortgage Financings. The encumbrance allocated to an individual property is
based on the related individual release price.
F-21
74
ARDEN REALTY, INC.
AND
ARDEN PREDECESSORS
SCHEDULE III -- COMMERCIAL PROPERTIES AND ACCUMULATED DEPRECIATION
The changes in real estate for each of the periods in the three years ended
December 31, 1998 are as follows:
ARDEN
ARDEN REALTY, INC. PREDECESSORS
------------------------------------------------------ ------------------
FOR THE YEARS ENDED DECEMBER 31, FOR THE PERIOD FOR THE PERIOD
--------------------------------- OCTOBER 9, 1996 TO JANUARY 1, 1996 TO
1998 1997 DECEMBER 31, 1996 OCTOBER 8, 1996
--------------- --------------- ------------------ ------------------
Real estate balance at beginning of
period................................ $1,239,032 $ 546,707 $283,579 $164,170
Improvements............................ 76,488 23,642 2,366 6,626
Deletions............................... (44) (335) -- --
Consolidation of non-combined
entities(1)........................... -- -- 96,935 --
Acquisition of properties............... 1,007,347 669,018 153,604 112,783
Consideration paid in exchange for
interests of non-affiliates........... -- -- 10,223 --
---------- ---------- -------- --------
Balance at end of period................ $2,322,823 $1,239,032 $546,707 $283,579
========== ========== ======== ========
The changes in accumulated depreciation, exclusive of amounts relating to
equipment, autos, and furniture and fixtures for each of the periods in the
three years ended December 31, 1998 are as follows:
ARDEN
ARDEN REALTY, INC. PREDECESSORS
---------------------------------------- ------------------
FOR THE YEARS ENDED
DECEMBER 31, FOR THE PERIOD FOR THE PERIOD
------------------- OCTOBER 9, 1996 TO JANUARY 1, 1996 TO
1998 1997 DECEMBER 31, 1996 OCTOBER 8, 1996
-------- -------- ------------------ ------------------
Balance at beginning of period............... $35,860 $17,139 $ 8,345 $3,296
Depreciation for period...................... 48,938 19,056 2,948 5,049
Deletions.................................... (44) (335) -- --
Consolidation of non-combined entities (1)... -- -- 5,846 --
------- ------- ------- ------
Balance at end of period..................... $84,754 $35,860 $17,139 $8,345
======= ======= ======= ======
- ---------------
(1) The non-combined entities were consolidated as a result of Arden Realty
purchasing the controlling interests as part of the Formation Transactions.
F-22