QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002
Commission file number 000-30571
ARDEN REALTY
LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Maryland
95-4599813
(State or other jurisdiction of incorporation
(I.R.S. Employer Identification
No.)
or organization)
11601 Wilshire Boulevard,
4th Floor
Los Angeles, California 90025-1740
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (310) 966-2600
Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
X
No
- -----
- -----
As of August 12, 2002 there
were 66,392,544 shares of the registrant’s common partnership units, issued
and outstanding.
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited) and
December 31, 2001......................................................... 3
Consolidated Statements of Income for the three and six months ended
June 30, 2002 and 2001 (unaudited)........................................ 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 (unaudited)........................................ 5
Notes to Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................. 24
PART II. OTHER INFORMATION.....................................................................25
SIGNATURES............................................................................26
June 30, December 31,
2002 2001
------------ ------------
Assets (unaudited)
Investment in real estate:
Land.................................................................... $ 469,165 $ 447,753
Buildings and improvements.............................................. 2,051,859 1,975,427
Tenant improvements and leasing commissions............................. 286,490 251,201
------------ ------------
2,807,514 2,674,381
Less: accumulated depreciation and amortization........................ (349,724) (293,385)
------------ ------------
2,457,790 2,380,996
Properties under development............................................ 148,487 133,012
Properties held for disposition, net.................................... -- 108,972
------------ ------------
Net investment in real estate......................................... 2,606,277 2,622,980
Cash and cash equivalents.................................................. 14,351 37,041
Restricted cash............................................................ 18,948 18,768
Rent and other receivables, net of allowance of $8,936 and $3,770 at
June 30, 2002 and December 31, 2001, respectively....................... 4,494 9,685
Due from general partner................................................... 2,788 2,258
Mortgage notes receivable, net of discount................................. 13,149 13,495
Deferred rent.............................................................. 42,009 38,989
Prepaid financing costs, expenses and other assets, net of amortization.... 18,977 20,485
------------ ------------
Total assets.......................................................... $ 2,720,993 $ 2,763,701
------------ ------------
------------ ------------
Liabilities
Mortgage loans payable..................................................... $ 572,082 $ 573,452
Unsecured lines of credit.................................................. 88,350 180,350
Unsecured term loan........................................................ 75,000 --
Unsecured senior notes, net of discount.................................... 497,871 497,681
Accounts payable and accrued expenses...................................... 37,787 43,002
Security deposits.......................................................... 18,688 19,683
------------ ------------
Total liabilities..................................................... 1,289,778 1,314,168
Minority interests......................................................... 2,832 2,866
Partners' Capital
Preferred partner 2,000,000 Series B Cumulative Redeemable Preferred Units
outstanding at June 30, 2002 and December 31, 2001...................... 50,000 50,000
General and limited partners, 66,380,544 and 65,936,810 common units
outstanding at June 30, 2002 and December 31, 2001, respectively........ 1,391,064 1,405,800
Deferred compensation...................................................... (12,681) (9,133)
------------ ------------
Total partners' capital............................................... 1,428,383 1,446,667
------------ ------------
Total liabilities and partners' capital............................... $ 2,720,993 $ 2,763,701
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
3
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenue...................................... $ 102,635 $ 102,980 $ 204,899 $ 206,101
Property operating expenses.................. 30,918 29,274 61,144 59,116
---------- ---------- ---------- ----------
71,717 73,706 143,755 146,985
General and administrative expenses.......... 2,652 2,480 5,286 5,048
Interest expense............................. 21,584 21,081 42,981 42,239
Depreciation and amortization................ 28,822 24,176 55,205 48,322
Interest and other income.................... (512) (764) (1,052) (1,625)
---------- ---------- ---------- ----------
Income before gain and minority interests.... 19,171 26,733 41,335 53,001
Gain on sale of properties................... 81 3,551 1,273 3,551
---------- ---------- ---------- ----------
Income before minority interests............. 19,252 30,284 42,608 56,552
Minority interests........................... (32) (33) (61) (83)
---------- ---------- ---------- ----------
Net income................................... $ 19,220 $ 30,251 $ 42,547 $ 56,469
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income allocated to:
Preferred units......................... $ 1,078 $ 1,078 $ 2,156 $ 2,156
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Common units............................ $ 18,142 $ 29,173 $ 40,391 $ 54,313
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per common operating partnership unit:
Basic.........................................$ 0.27 $ 0.44 $ 0.61 $ 0.83
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted.......................................$ 0.27 $ 0.44 $ 0.61 $ 0.82
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common operating partnership units
outstanding:
Basic......................................... 66,273 65,822 66,140 65,822
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted....................................... 66,850 66,127 66,610 66,084
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements.
4
Six Months Ended
June 30,
------------------------
2002 2001
---------- ----------
Operating Activities:
Net income................................................................ $ 42,547 $ 56,469
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interests...................................................... 61 83
Gain on sale of property................................................ (1,273) (3,551)
Depreciation and amortization........................................... 55,205 48,322
Amortization of loan costs.............................................. 1,901 1,753
Non-cash compensation expense........................................... 560 850
Changes in operating assets and liabilities:
Rent and other receivables........................................... 5,537 1,636
Due from general partner............................................. (530) (443)
Deferred rent........................................................ (3,020) (3,113)
Prepaid financing costs, expenses and other assets................... (599) (3,295)
Accounts payable and accrued expenses................................ (5,425) (2,906)
Security deposits.................................................... (995) 295
---------- ----------
Net cash provided by operating activities................................. 93,969 96,100
---------- ----------
Investing Activities:
Improvements to investment in real estate................................. (58,412) (86,162)
Proceeds from sale of property............................................ 21,919 18,755
---------- ----------
Net cash used in investing activities..................................... (36,493) (67,407)
---------- ----------
Financing Activities:
Proceeds from term loan................................................... 75,000 --
Repayments of mortgage loans.............................................. (1,370) (1,317)
Proceeds from unsecured lines of credit.................................. 30,500 99,500
Repayments of unsecured lines of credit.................................. (122,500) (59,500)
Proceeds from issuance of common operating partnership units............. 6,351 89
Distributions to preferred operating partnership unit holders............ (2,156) (2,156)
Distributions to common operating partnership unit holders............... (65,716) (62,860)
Increase in restricted cash.............................................. (180) (371)
Distributions to minority interests...................................... (95) (91)
---------- ----------
Net cash used in financing activities.................................... (80,166) (26,706)
---------- ----------
Net increase (decrease) in cash and cash equivalents....................... (22,690) 1,987
Cash and cash equivalents at beginning of period........................... 37,041 5,432
---------- ----------
Cash and cash equivalents at end of period................................. $ 14,351 $ 7,419
---------- ----------
---------- ----------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest, net of amounts capitalized... $ 44,961 $ 42,638
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
5
1. Description of Business
The terms "us," "we" and "our" as used in these financial statements refer to Arden Realty Limited Partnership. The term
"Arden Realty" refers to Arden Realty, Inc.
We own, manage, lease, develop, renovate and acquire commercial properties located in Southern California.
Arden Realty, a real estate investment trust, or REIT, is our sole general partner and, as of June 30, 2002,
owned 97.4% of our common partnership units, or common OP Units. Arden Realty conducts substantially all
of its operations through us and our subsidiaries.
As of June 30, 2002 our portfolio consisted of 130 primarily suburban office properties, consisting of 214 buildings with
approximately 18.0 million net rentable square feet and two properties with approximately 566,000 square
feet under development. As of June 30, 2002, our properties were 89.9% occupied.
Arden Realty's interest in us entitles it to share in cash distributions from, and in our profits and
losses in proportion to its percentage ownership. Certain individuals and entities own our remaining
common OP Units, including Messrs. Ziman and Coleman, our Chairman and Chief Executive Officer and
our President and Chief Operating Officer, respectively, together with other entities and persons who
were issued common OP Units in connection with our acquisition of specific properties previously owned
by those entities and persons. Each limited partner holding common OP Units is entitled to cause us to
redeem the limited partner's common OP Units for cash. Arden Realty, however, may, instead of paying
cash, elect to exchange those common OP Units for shares of its common stock on a one-for-one basis,
subject to certain limitations. With each redemption or exchange of common OP Units, Arden Realty's
percentage interest in us will increase.
As our sole general partner, Arden Realty generally has the exclusive power under our partnership
agreement to manage us and conduct our business, subject to limited exceptions. Our existence as a limited partnership
cannot be terminated until the year 2096 without the approval of a majority of our partners or in connection with the sale of
all or substantially all of our assets, a business combination, a judicial decree or the redemption of
all the OP Units held by our limited partners.
We are a Maryland limited
partnership. Arden Realty is a Maryland corporation. Arden Realty’s common
stock is listed on the New York Stock Exchange under the symbol “ARI.”
2. Interim Financial Data
The accompanying consolidated condensed financial statements should be read in conjunction with our 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The accompanying financial information reflects all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year.
3. New Accounting Standards
In October 2001, the Financial Accounting Standards Board issued Statement No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", which is required to be adopted in fiscal years beginning after December 15, 2001. Statement No. 144 supercedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and provide a single accounting model for long-lived assets to be disposed of. We adopted Statement No. 144 on January 1, 2002 and its adoption did not have a significant impact on our consolidated financial statements.
6
4. Property Dispositions
The following table sets forth information regarding our disposition activities during the three and six months ended June 30, 2002.
Property Sales Price
Property County Submarket Date of Sale Type Square Feet (in thousands)
- ------------- ------ --------- ------------ -------- ----------- --------------
Harbor Corporate Los Angeles Torrance March 7, 2002 Office 63,925 $ 6,900
Center
Renaissance Court Los Angeles Simi / Conejo April 16, 2002 Office 61,245 8,300
Valley
6800 Owensmouth Los Angeles West San Fernando May 1, 2002 Office 80,014 8,400
Valley ------- -------
Total 205,184 $ 23,600
------- -------
------- -------
5. Outstanding Indebtedness
A summary of our outstanding indebtedness as of June 30, 2002 and December 31, 2001 is as follows:
Stated Annual
June 30, Interest Rate at Rate Number of
2002 December 31, June 30, 2002 Fixed/ Properties
Type of Debt (unaudited) 2001 (unaudited) Floating Securing Loan Maturity
----------- ----------- ----------------- -------------- ------------- --------
(in thousands)
Mortgage Loans Payable:
Fixed Rate
Mortgage Financing I(1).... $ 175,000 $ 175,000 7.52% Fixed 18 6/04
Mortgage Financing III(2).. 136,100 136,100 6.74% Fixed 22 4/08
Mortgage Financing IV(2)... 111,200 111,200 6.61% Fixed 12 4/08
Mortgage Financing V(3).... 109,211 110,253 6.94% Fixed 12 4/09
Mortgage Financing VI(3)... 21,942 22,036 7.54% Fixed 3 4/09
Activity Business Center(3) 7,661 7,737 8.85% Fixed 1 5/06
145 South Fairfax(3)....... 3,969 3,987 8.93% Fixed 1 1/27
Marin Corporate Center(3).. 2,909 2,966 9.00% Fixed 1 7/15
Conejo Business Center(3).. 2,854 2,911 8.75% Fixed (Note 4) 7/15
Conejo Business Center(3).. 1,236 1,262 7.88% Fixed (Note 4) 7/15
----------- -----------
572,082 573,452
Unsecured Lines of Credit:
Floating Rate
Wells Fargo-$275 mm(1)..... 88,350 105,350 3.03% LIBOR + 1.15% (Note 5) -- 4/03
Lehman Brothers-$75 mm(6).. -- 75,000 -- LIBOR + 1.30% -- --
City National Bank-$10 mm(1) -- -- -- Prime Rate - 0.875% -- 8/03
----------- -----------
88,350 180,350
Unsecured Term Loan:
Floating Rate
Wells Fargo-$75 mm(1),(8).. 75,000 -- 3.13% LIBOR + 1.25% -- 6/04
Unsecured Senior Notes:
Fixed Rate
2005 Notes(7).............. 199,718 199,667 8.88% Fixed -- 3/05
2010 Notes(7).............. 49,683 49,663 9.15% Fixed -- 3/10
2010 Notes(7).............. 99,303 99,262 8.50% Fixed -- 11/10
2007 Notes(7).............. 149,167 149,089 7.00% Fixed -- 11/07
----------- -----------
497,871 497,681
----------- -----------
Total Debt.............. $ 1,233,303 $ 1,251,483
----------- -----------
----------- -----------
- ----------
(1) Requires monthly payments of interest only, with outstanding principal balance due upon maturity.
(2) Requires monthly payments of interest only for five years and monthly payments of principal and interest thereafter.
(3) Requires monthly payments of principal and interest.
(4) Both mortgage loans are secured by the Conejo Business Center property.
(5) This line of credit also has an annual 25 basis point facility fee on the entire $275 million commitment amount.
(6) This line of credit was repaid in June 2002.
(7) Requires semi-annual interest payments only, with principal balance due upon maturity.
(8) This loan has a two-year extension option.
On June 13, 2002, we closed on a $75 million unsecured term loan with Wells Fargo. This loan matures in June 2004, has a two-year extension option and bears interest at LIBOR + 1.25% during the initialterm and LIBOR + 1.45% during the extension period. The proceeds from this loan were used to repay the outstanding balance on our Lehman Brothers unsecured line of credit that was scheduled to mature in July 2002.
7
6. Partners' Capital
An operating partnership unit, or 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.
On January 1, 2002, we extended the vesting period of a total of 477,600 unvested restricted stock awards
granted to several key executive officers in 2000 and 2001, from their initial four-year and five-year vesting
periods to a ten-year vesting period from their initial grant date.
On February 28, 2002 we issued a total of 182,500 restricted stock awards to several key executive officers.
Holders of these shares have full voting rights and will receive any dividends paid but are prohibited from
selling or transferring unvested shares. Of the 182,500 restricted shares awarded, 15,500 shares vest
equally over three years and 167,000 shares vest equally over ten years. We recorded a deferred compensation
charge of approximately $4.7 million, based on the market value of these shares on the date of award and will
amortize the compensation charge to expense on a straight-line basis over the respective vesting periods.
On September 7, 1999, we completed a $50 million private placement of 8 5/8% Series B Cumulative
Redeemable Preferred operating partnership units, or Preferred OP Units, to an institutional investor. The
Preferred OP Units are callable by us after five years and are exchangeable after ten years by the holder into our
8 5/8% Series B Cumulative Redeemable Preferred Stock, on a one-for-one basis. The Preferred OP Units have no
stated maturity or mandatory redemption and are subordinate to all debt. We used the net proceeds from this
private placement to repay a portion of our lines of credit.
On April 24, 2002, we made a distribution of $0.505 per common unit. In addition, on June 30, 2002
we made a distribution of approximately $1.1 million to our preferred unit holders.
7. Revenue from Rental Operations and Property Expenses
Revenue from rental operations and property expenses are summarized as follows (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------- ------------------------------
2002 2001 2002 2001
--------------- ---------------- --------------- --------------
(unaudited)
Revenue from Rental Operations:
Scheduled cash rents............. $ 86,978 $ 85,225 $ 174,314 $ 170,331
Straight-line rents.............. 2,135 2,149 3,785 4,510
Tenant reimbursements............ 6,347 5,352 13,297 10,902
Parking, net of expenses ........ 5,383 5,558 10,533 10,863
Other rental operations.......... 1,792 4,696 2,970 9,495
--------- --------- --------- ---------
102,635 102,980 204,899 206,101
--------- --------- --------- ---------
Property Expenses:
Repairs and maintenance.......... 9,604 9,228 19,049 18,236
Utilities........................ 8,009 7,366 15,857 14,758
Real estate taxes................ 7,234 7,272 14,612 14,686
Insurance........................ 2,104 1,495 3,764 2,711
Ground rent...................... 270 233 338 1,384
Administrative................... 3,697 3,680 7,524 7,341
--------- --------- --------- ---------
30,918 29,274 61,144 59,116
--------- --------- --------- ---------
$ 71,717 $ 73,706 $ 143,755 $ 146,985
--------- --------- --------- ---------
--------- --------- --------- ---------
8. Subsequent Events
On August 6, 2002, we acquired Gateway Towers, an office property located in Torrance,
California, containing approximately 433,000 net rentable square feet for approximately $66.0 million.
Gateway Towers consists of two buildings that were approximately 93% leased and includes an additional
5-acre development parcel. The proceeds for this acquisition were funded from property dispositions and borrowings under our Wells Fargo
unsecured line of credit.
On August 9, 2002, we renewed and increased our unsecured line of credit with a group of banks led by Wells Fargo.
The renewed line of credit provides for borrowings up to $310 million with an option to increase the amount to
$350 million and bears interest at a rate ranging between LIBOR + 0.80% and LIBOR + 1.25% (including an annual
facility fee ranging from 0.15% to 0.40% based on the aggregate amount of the facility) depending on our
unsecured debt rating. This new credit facility replaces the previous $275 million unsecured line of credit that
was scheduled to mature in April 2003. This line of credit matures in April 2006. In addition, as long as we
maintain an unsecured debt rating of BBB-/Baa3 or better, the agreement contains a competitive bid option, whereby
the lenders may bid on the interest rate to be charged for up to $150.0 million of the unsecured line of credit.
We also have the option to convert the interest rate on this line of credit to the higher of Wells Fargo's prime
rate or the Federal Funds rate plus 0.5%.
On July 15, 2002, each non-employee director was granted 1,000 shares of restricted stock under our Stock Option
and Incentive Plan as part of their annual compensation. The fair market value on the date of the grant for
restricted shares was $25.09 per share. These restricted stock awards will vest equally on the anniversary date
of the awards over five years.
8
The following discussion relates to our consolidated financial statements and should be read in conjunction with the financial statements and related notes thereto included in our 2001 Annual Report on Form 10-K.
We are a full service real estate organization that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. We are managed by 9 senior executive officers who have experience in the real estate industry ranging from 10 to 33 years and who collectively have an average of 19 years experience. We perform all property and development management, accounting, finance and acquisition activities and a majority of our leasing transactions with our staff of approximately 300 employees.
As of June 30, 2002, Arden Realty was Southern California's largest publicly traded office landlord as measured by total net rentable square feet owned. As of that date, our portfolio was comprised of 130 primarily suburban office properties, consisting of 214 buildings with approximately 18.0 million net rentable square feet and two properties with approximately 566,000 net rentable square feet under development. As of June 30, 2002, our properties were approximately 89.9% occupied.
Our primary business strategy is to actively manage our portfolio to achieve gains in rental rates and occupancy, control operating expenses and to maximize income from ancillary operations and services. When market conditions permit, we may also selectively develop or acquire new properties that add value and fit strategically into our portfolio. We may also sell existing properties and redeploy the proceeds into investments that we believe will generate higher long-term value.
9
RESULTS OF OPERATIONS
Our financial position and operating results are primarily comprised of our portfolio of commercial properties and income derived from those properties. Therefore, the comparability of financial data from period to period will be affected by the timing of property developments, acquisitions and dispositions.
Comparison of the three months ended June 30, 2002 to the three months ended June 30, 2001 (in thousands, except number of properties and percentages):
Three Months Ended
June 30,
-------------------------- Dollar Percent
2002 2001 Change Change
-------- -------- -------- ---------
(unaudited)
Revenue
Revenue from rental operations:
Scheduled cash rents............ $ 86,978 $ 85,225 $ 1,753 2%
Straight-line rents............. 2,135 2,149 (14) (1)
Tenant reimbursements........... 6,347 5,352 995 19
Parking, net of expense......... 5,383 5,558 (175) (3)
Other rental operations......... 1,792 4,696 (2,904) (62)
-------- -------- -------- ---------
Total......................... 102,635 102,980 (345) (1)
Interest and other income.......... 512 764 (252) (33)
-------- -------- -------- ---------
Total revenue................. $ 103,147 $ 103,744 $ (597) (1)%
-------- -------- -------- ---------
Expenses
Property expenses:
Repairs and maintenance......... $ 9,604 $ 9,228 $ 376 4%
Utilities....................... 8,009 7,366 643 9
Real estate taxes............... 7,234 7,272 (38) (1)
Insurance....................... 2,104 1,495 609 41
Ground rent..................... 270 233 37 16
Administrative.................. 3,697 3,680 17 1
-------- -------- -------- ---------
Total property expenses....... 30,918 29,274 1,644 6%
General and administrative........ 2,652 2,480 172 7%
Interest.......................... 21,584 21,081 503 2
Depreciation and amortization..... 28,822 24,176 4,646 19
-------- -------- -------- ---------
Total expenses................ $ 83,976 $ 77,011 $ 6,965 9%
-------- -------- -------- ---------
-------- -------- -------- ---------
Number of Properties:
Sold during period................. (2) (2)
Owned at end of period............. 130 140
Net Rentable Square Feet:
Sold during period................. (141) (256)
Owned at end of period............. 18,042 18,402
Variances from rental operations and property expenses are discussed on the next page.
Interest and other income decreased by approximately $252,000 for the three months ended June 30, 2002 as compared to the same period in 2001, primarily due to lower effective interest rates in 2002 on investment of our restricted cash balances required by mortgage loans.
General and administrative expenses as a percentage of total revenues were approximately 2.6% for the three months ended June 30, 2002, as compared to approximately 2.4% for the same period in 2001.
Interest expense increased approximately $503,000, or 2%, during the three months ended June 30, 2002, as compared to the same period in 2001. This increase was primarily due to lower interest capitalized during 2002 resulting from fewer properties under development in 2002, including ceasing the capitalization of interest in our 6080 Center Drive development property in May 2002, which was partially offset by lower effective interest rates in 2002.
Depreciation and amortization expense increased by approximately $4.6 million or 19% during the three months ended June 30, 2002, as compared to the same period in 2001, primarily due to depreciation related to a property placed in service in the fourth quarter of 2001 and depreciation expense recorded in 2002 related to properties previously held for sale in 2001.
10
Variances for Revenue from Rental Operations and Property Expenses
The decrease in revenue from rental operations and property expenses for the three months ended June 30, 2002 as compared to the same period in 2001 was primarily due to a 4.1% reduction in the average occupancy and the timing of lease termination settlements and other non-recurring items in our portfolio of 129 properties that we owned for all of the three month periods ended June 30, 2001 and 2002.
Following is a summary of the decrease in revenue from rental operations and property operating expenses that relates to the fourteen properties that were either sold or placed in service after March 31, 2001 and for the 129 non-development properties we owned for all of the three month periods ended June 30, 2001 and 2002 (unaudited and in thousands, except for number of properties):
Non-Development Properties
Properties Sold or Owned for all of the
Placed in Service Three Months Ended
Total Variance after March 31, 2001 June 30, 2002 and 2001 (1)
-------------- -------------------- ---------------------------
Revenue from Rental Operations:
Scheduled cash rents........... $ 1,753 $ 1,065 $ 688
Straight-line rents............ (14) 618 (632)
Tenant reimbursements.......... 995 693 302
Parking, net of expenses....... (175) (250) 75
Other rental operations........ (2,904) (1,309) (1,595)
--------- ---------- ----------
$ (345) $ 817 $ (1,162)
--------- ---------- ----------
--------- ---------- ----------
Property Expenses:
Repairs and maintenance........ $ 376 $ 180 $ 196
Utilities...................... 643 82 561
Real estate taxes.............. (38) 108 (146)
Insurance...................... 609 1 608
Ground rent.................... 37 -- 37
Administrative................. 17 95 (78)
--------- ---------- ----------
$ 1,644 $ 466 $ 1,178
--------- ---------- ----------
--------- ---------- ----------
Other Data:
Number of properties........... 14 129
Net rentable square feet....... 1,020 17,880
- ----------
(1) See analysis for these properties below.
11
Same Properties
Following is a comparison of property operating data computed under the GAAP basis and cash basis of accounting for the 129 non-development properties we owned for the entire three month periods ended June 30, 2002 and 2001 (in thousands, except number of properties and percentages):
Three Months Ended
June 30,
-------------------------- Dollar Percent
2002 2001 Change Change
------------ ------------ -------------- ------------
(unaudited)
GAAP Basis:
Revenue from rental operations......... $ 97,922 $ 99,084 ($ 1,162) (1.2%)
Property operating expenses............ 29,651 28,473 1,178 4.1%
--------- --------- ---------- ------
$ 68,271 $ 70,611 ($ 2,340) (3.3%)
--------- --------- ---------- ------
--------- --------- ---------- ------
Cash Basis (1):
Revenue from rental operations......... $ 96,467 $ 96,997 ($ 530) (0.5%)
Property operating expenses............ 29,651 28,473 1,178 4.1%
--------- --------- ---------- ------
$ 66,816 $ 68,524 ($ 1,708) (2.5%)
--------- --------- ---------- ------
--------- --------- ---------- ------
Number of non-development properties... 129 129
Average occupancy......................
90.3% 94.4%
Net rentable square feet............... 17,880 17,880
- ----------
(1) Excludes straight-line rent adjustments.
Revenue from rental operations for these properties, computed on a GAAP basis, decreased by approximately $1.2 million, or 1.2%, during the second quarter of 2002 as compared to the same period in 2001. This decrease was primarily due to a $1.6 million decrease in revenue from other rental operations in 2002 which was partially offset by a $56,000 increase in rental revenue, a $300,000 increase in tenant reimbursements and a $75,000 increase in parking income. Revenue from other rental operations decreased primarily due to lower lease termination settlements and other non-recurring items in 2002. Rental revenue increased primarily due to rental rate growth attained on new and renewed leases which were partially offset by the decrease in average occupancy. Tenant reimbursements increased in 2002 primarily due to recovery billings for higher property expenses in 2002 as discussed below which was partially offset by the timing of prior year reconciliations. Parking income increased primarily due to increases in rates which were partially offset by the decrease in average occupancy.
Straight-line rents for these properties in 2002 was approximately $632,000 less than in 2001. The decrease in straight-line rents in 2002 was primarily due to the turning over of straight-line rents for older leases throughout our same property portfolio and increases in our deferred rent reserves.
Property expenses for these properties increased by approximately $1.2 million, or 4.1%, during the three months ended June 30, 2002, compared to the same period in 2001, primarily due to an approximate $561,000 increase in utility expenses and a $608,000 increase in insurance expense. The increase in utility expenses was due primarily to rate increases that went into effect in May of 2001. Insurance expense increased due to increases in industry-wide insurance rates in 2002and premiums related to a $100 million terrorism insurance policy acquired in the second quarter of 2002. As noted above, the increase in property expenses was the primary reason for the $300,000 increase in tenant reimbursements.
12
Comparison of the six months ended June 30, 2002 to the six months ended June 30, 2001 (in thousands, except number of properties and percentages):
Six Months Ended
June 30,
------------------------- Dollar Percent
2002 2001 Change Change
---------- ---------- ------- --------
(unaudited)
Revenue
Revenue from rental operations:
Scheduled cash rents.................. $ 174,314 $ 170,331 $ 3,983 2%
Straight-line rents................... 3,785 4,510 (725) (16)
Tenant reimbursements................. 13,297 10,902 2,395 22
Parking, net of expenses.............. 10,533 10,863 (330) (3)
Other rental operations............... 2,970 9,495 (6,525) (69)
----------- ----------- ----------- -----
204,899 206,101 (1,202) (1)
Interest and other income............... 1,052 1,625 (573) (35)
----------- ----------- ----------- -----
Total revenue......................... $ 205,951 $ 207,726 $ (1,775) (1)%
----------- ----------- ----------- -----
----------- ----------- ----------- -----
Expenses
Property operating expenses:
Repairs and maintenance............... $ 19,049 $ 18,236 $ 813 4%
Utilities............................. 15,857 14,758 1,099 7
Real estate taxes..................... 14,612 14,686 (74) (1)
Insurance............................. 3,764 2,711 1,053 39
Ground rent........................... 338 1,384 (1,046) (76)
Administrative........................ 7,524 7,341 183 2
----------- ----------- ----------- -----
Total property operating expenses.. 61,144 59,116 2,028 3
General and administrative.............. 5,286 5,048 238 5
Interest................................ 42,981 42,239 742 2
Depreciation and amortization........... 55,205 48,322 6,883 14
----------- ----------- ----------- -----
Total expenses........................ $ 164,616 $ 154,725 $ 9,891 6%
----------- ----------- ----------- -----
----------- ----------- ----------- -----
Number of Properties:
Sold during period...................... (3) (2)
Owned at end of period.................. 130 140
Net Rentable Square Feet:
Sold during period...................... (205) (256)
Owned at end of period.................. 18,042 18,402
Variances from rental operations and property expenses are discussed on the next page.
Interest and other income decreased approximately $573,000 for the six months ended June 30, 2002 as
compared to the same period in 2001, primarily due to lower effective interest rates in 2002 on
investment of our restricted cash balances required by mortgage loans.
General and administrative expenses on a percentage of total revenues were approximately 2.6% for the six months ended June 30, 2002, as compared to approximately 2.4% for the same period in 2001.
Interest expense increased approximately $742,000 or 2% during the six months ended June 30, 2002, as compared to the same period in 2001. This increase was primarily due to lower interest capitalized in 2002 resulting from fewer properties under development in 2002, including ceasing the capitalization of interest in our 6080 Center Drive development property in May 2002, which was partially offset by lower effective interest rates in 2002.
Depreciation and amortization expense increased by approximately $6.9 million or 14% during the six months ended June 30, 2002 compared to the same period in 2001, primarily due to depreciation related to a newly developed property, capital expenditures, tenant improvements and leasing commissions placed in service subsequent to December 31, 2000 and depreciation expense recorded in 2002 related to properties previously held for sale in 2001.
13
Variances for Revenue from Rental Operations and Property Expenses
The decrease in revenue from rental operations and property expenses for the six months ended June 30, 2002 as compared to the same period in 2001 was primarily due to a 3.5% reduction in the average occupancy and the timing of lease termination settlements and other non-recurring items in our portfolio of 129 properties that we owned for all of the six month periods ended June 30, 2001 and 2002.
Following is a summary of the decrease in revenue from rental operations and property operating expenses that relates to the fourteen properties that were either sold or placed in service after December 31, 2000 and for the 129 non-development properties we owned for all of the six month periods ended June 30, 2001 and 2002 (unaudited and in thousands, except for number of properties):
Non-Development
Properties Owned
Properties Sold or for all of the
Placed in Service Six Months Ended
Total Variance after December 31, 2000 June 30, 2002 and 2001 (1)
-------------- ----------------------- --------------------------
Revenue from Rental Operations:
Scheduled cash rents............ $ 3,983 $ 2,511 $ 1,472
Straight-line rents............. (725) 1,095 (1,820)
Tenant reimbursements........... 2,395 651 1,744
Parking, net of expenses........ (330) (134) (196)
Other rental operations......... (6,525) (2,084) (4,441)
---------- ---------- ----------
$ (1,202) $ 2,039 $ (3,241)
---------- ---------- ----------
---------- ---------- ----------
Property Operating Expenses:
Repairs and maintenance......... $ 813 $ 383 $ 430
Utilities....................... 1,099 123 976
Real estate taxes............... (74) 194 (268)
Insurance....................... 1,053 3 1,050
Ground rent..................... (1,046) -- (1,046)
Administrative.................. 183 18 165
---------- ---------- ----------
$ 2,028 $ 721 $ 1,307
---------- ---------- ----------
---------- ---------- ----------
Other Data:
Number of properties............ 14 129
Net rentable square feet........ 1,020 17,880
- ----------
(1) See analysis for these properties below.
14
Same Properties
Following is a comparison of property operating data computed under the GAAP Basis and Cash Basis for the 129 non-development properties we owned for the entire six month periods ended June 30, 2002 and 2001 (in thousands, except number of properties and percentages):
Six Months Ended
June 30,
------------------------------ Dollar Percent
2002 2001 Change Change
------------- ------------- ------------- -----------
(unaudited)
GAAP Basis:
Revenue from rental operations.......... $ 195,912 $ 199,153 ($ 3,241) (1.6%)
Property operating expenses............. 58,723 57,416 1,307 2.3
--------- --------- ---------- ------
$ 137,189 $ 141,737 ($ 4,548) (3.2%)
--------- --------- ---------- ------
--------- --------- ---------- ------
Cash Basis (1):
Revenue from rental operations.......... $ 193,301 $ 194,722 ($ 1,421) (0.7%)
Property operating expenses............. 58,723 57,416 1,307 2.3
--------- --------- ---------- ------
$ 134,578 $ 137,306 ($ 2,728) (2.0%)
--------- --------- ---------- ------
--------- --------- ---------- ------
Number of non-development properties.... 129 129
Average occupancy....................... 90.9% 94.4%
Net rentable square feet................ 17,880 17,880
- ----------
(1) Excludes straight-line rent adjustments.
Revenue from rental operations for these properties, computed on a GAAP basis, increased by approximately $3.2 million, or 1.6%, during the first quarter of 2002 as compared to the same period in 2001. The decrease was primarily due to a $4.4 million decrease in revenue from other rental operations, a $348,000 decrease in rental revenue and a $196,000 decrease in parking income which was partially offset by a $1.7 million increase in tenant reimbursements. The decrease in revenue from other rental operations was due to lower lease termination settlements and other non-recurring items in 2002. Rental revenue decreased due to our decrease in average occupancy in 2002 that was partially offset by rent growth attained in 2002 on new and renewed leases while parking income decreased primarily due to our average decrease in occupancy. Tenant reimbursements increased in 2002 primarily due to recovery billings for higher property expenses in 2002 as discussed below and for 2001 reconciliation billings.
Straight-line rents for these properties in 2002 was approximately $1.8 million less than in 2001. The decrease in straight-line rents in 2002 was primarily due to the turning over of straight-line rents for older leases throughout our same property portfolio and increases in our deferred rent reserves.
Property expenses for these properties increased by approximately $1.3 million, or 2.3%, during the six months ended June 30, 2002, compared to the same period in 2001, primarily due to a $976,000 increase in utility expenses, a $430,000 increase in repairs and maintenance and a $1.0 million increase in insurance expense in 2002 which was partially offset by a $1.0 million decrease in ground rent expense. The increase in utility expenses was due to rate increases enacted in May 2001. Repairs and maintenance increased in 2002 primarily due to increases in janitorial costs while insurance expense increased due to increases in industry-wide insurance rates in 2002 and premiums related to a $100 million terrorism insurance policy acquired in the second quarter of 2002. Ground rent expense decreased due to lower operating income from one of our properties with a participating ground lease. As noted above, the increase in property expenses was the primary reason for the $1.7 million increase in tenant reimbursements.
15
Liquidity and Capital Resources
Cash Flows
Cash provided by operating activities decreased by approximately $2.1 million to $94.0 million for the six months ended June 30, 2002, as compared to $96.1 million for the same period in 2001, primarily due to the loss of operating cash flows on ten properties sold in 2001 and one property we sold in the first quarter of 2002 and two properties we sold in the second quarter of 2002 which was partially offset by a reduction in tenant receivables in 2002 as a result of our collection efforts and from cash flows for a development property places in service in the fourth quarter of 2001.
Cash used in investing activities decreased by approximately $30.9 million to $36.5 million for the six months ended June 30, 2002 compared to $67.4 million for the same period in 2001. This decrease was primarily due to the decrease in construction activity in 2002 as a result of our completion of a development project in the fourth quarter of 2001.
Cash used in financing activities increased by approximately $53.5 million to $80.2 million for the six months ended June 30, 2002, as compared to $26.7 million for the same period in 2001. This increase was primarily due to the timing of borrowings and repayments under our unsecured lines of credit.
Available Borrowings, Cash Balance and Capital Resources
We have an unsecured line of credit with a total commitment of $10 million from City National Bank.
This line of credit accrues interest at the City National Bank Prime Rate less 0.875% and is scheduled
to mature on August 1, 2003. Proceeds from this line of credit are used, among other things, to provide
funds for tenant improvements and capital expenditures and provide for working capital and other corporate
purposes. As of June 30, 2002, there was no outstanding balance on this line of credit and $10 million was
available for additional borrowings.
On March 7, 2002, we sold an approximate 64,000 square foot office property located in Torrance,
California for approximately $6.9 million. On April 16, 2002, we sold an approximate 60,000 square
foot office building located in Westlake, California for approximately $8.3 million. On May 1, 2002
we also completed the sale of an approximate 80,000 square foot office property located in Canoga Park,
California for approximately $8.4 million. The net proceeds from these dispositions were used to
reduce the outstanding balance on our Wells Fargo unsecured line of credit.
On June 13, 2002, we closed on a $75 million unsecured term loan with Wells Fargo. This loan matures
in June 2004, has a two-year extension option and bears interest at LIBOR + 1.25% during the initial
term and LIBOR + 1.45% during the extension period. The proceeds from this loan were used to repay the
outstanding balance on our Lehman Brothers unsecured line of credit that was scheduled to mature in
July 2002.
On August 6, 2002, we acquired Gateway Towers, an office property located in Torrance,
California, containing approximately 433,000 net rentable square feet for approximately $66.0 million.
Gateway Towers consists of two buildings that were approximately 93% leased and includes an additional
5-acre development parcel. The proceeds for this acquisition were funded from property dispositions and
borrowings under our Wells Fargo unsecured line of credit.
On August 9, 2002, we renewed and increased our unsecured line of credit with a group of banks led by Wells Fargo.
The renewed line of credit provides for borrowings up to $310 million with an option to increase
the amount to $350 million and bears interest at a rate ranging between LIBOR + 0.80% and LIBOR + 1.25% (including
an annual facility fee ranging from 0.15% to 0.40% based on the aggregate amount of the facility) depending on our
unsecured debt rating. This new credit facility replaces the previous $275 million unsecured line of credit that
was scheduled to mature in April 2003. This line of credit matures in April 2006. In addition, as long as we
maintain an unsecured debt rating of BBB-/Baa3 or better, the agreement contains a competitive bid option, whereby
the lenders may bid on the interest rate to be charged for up to $150.0 million of the unsecured line of credit.
We also have the option to convert the interest rate on this line of credit to the higher of Wells Fargo's prime
rate or the Federal Funds rate plus 0.5%.
16
Following is a summary of scheduled principal payments for our total debt outstanding as of June 30, 2002 (in thousands):
Year Amount
------ ---------
2002................................................... 1,398
2003................................................... 93,648(1)
2004................................................... 257,062
2005................................................... 207,678
2006................................................... 15,063
2007................................................... 158,681
2008................................................... 230,305
2009................................................... 111,980
2010................................................... 150,565
2011................................................... 710
Thereafter............................................. 6,213
------------
Total................................................ $ 1,233,303
------------
------------
- ----------
(1) Consists primarily of $88.4 million outstanding on our Wells Fargo line of credit whose maturity
was extended to 2006 on August 9, 2002.
Following is certain other information related to our outstanding indebtedness as of June 30, 2002 (in thousands, except percentage data):
Unsecured and Secured Debt:
- --------------------------
Weighted
Average
Balance Percent Interest Rate (1)
-------------- --------------- -------------------
Unsecured Debt...................... $ 661,221 54% 7.41%
Secured Debt........................ 572,082 46% 7.36%
----------- ----- -----
Total Debt.......................... $ 1,233,303 100% 7.38%
----------- ----- -----
----------- ----- -----
Floating and Fixed Rate Debt:
- ----------------------------
Weighted
Average
Balance Percent Interest Rate (1)
-------------- --------------- -------------------
Floating Rate Debt.................. $ 163,350 13% 3.97%
Fixed Rate Debt..................... 1,069,953 87% 7.91%
----------- ----- -----
Total Debt.......................... $ 1,233,303 100% 7.38%
----------- ----- -----
----------- ----- -----
- ----------
(1) Includes amortization of prepaid financing costs.
Total interest incurred and the amount capitalized was as follows (unaudited and in thousands):
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------- ---------------------------------
2002 2001 2002 2001
---------- ---------- --------- ----------
Total interest incurred......... $ 23,114 $ 23,449 $ 46,098 $ 47,195
Amount capitalized.............. (1,530) (2,368) (3,117) (4,956)
---------- ---------- --------- ----------
Amount expensed................. $ 21,584 $ 21,081 $ 42,981 $ 42,239
---------- ---------- --------- ----------
---------- ---------- --------- ----------
17
As of June 30, 2002, we had $33.3 million in cash and cash equivalents, including $18.9 million in restricted cash. Restricted cash consisted of $13.6 million in interest bearing cash deposits required by five of our mortgage loans payable and $5.3 million in cash impound accounts for real estate taxes and insurance as required by several of our mortgage loans payable.
We expect to continue meeting our short-term liquidity and capital requirements generally through net cash provided by operating activities and proceeds from our lines of credit. We believe the foregoing sources of liquidity will be sufficient to fund our short-terms liquidity needs over the next twelve months, including recurring non-revenue enhancing capital expenditures, tenant improvements and leasing commissions.
We expect to meet our long-term liquidity and capital requirements such as scheduled principal repayments, development costs, property acquisitions, if any, and other non-recurring capital expenditures through net cash provided by operations, refinancing of existing indebtedness and/or the issuance of long-term debt and equity securities.
18
Funds from Operations and Funds Available for Distribution
The following table reflects the calculation of our funds from operations and our funds available for distribution for the three-month and six-month periods ended June 30, 2002 and 2001 (in thousands):
For the For the
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Funds From Operations:(1) (unaudited)
Net income..................................... $ 19,220 $ 30,251 $ 42,547 $ 56,469
Depreciation and amortization of real estate
assets....................................... 28,822 24,176 55,205 48,322
Gain on sale of properties..................... (81) (3,551) (1,273) (3,551)
Income allocated to preferred units............ (1,078) (1,078) (2,156) (2,156)
------------ ------------ ------------ ------------
Funds From Operations............................ $ 46,883(2) $ 49,798(2) $ 94,323(2) $ 99,084(2)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Funds Available for Distribution:(3)
Funds From Operations......................... $ 46,883 $ 49,798 $ 94,323 $ 99,084
Non-cash compensation expense................. 315 425 560 850
Amortization of prepaid financing costs....... 964 880 1,901 1,746
Straight-line rent adjustment................. (2,135) (2,149) (3,785) (4,510)
Capital expenditure, tenant improvement
and leasing commission reserve.............. (9,500) (7,800) (18,200) (15,500)
------------ ------------ ------------ ------------
Funds Available for Distribution................. $ 36,527 $ 41,154 $ 74,799 $ 81,670
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average common
units outstanding - Diluted................. 66,850 66,127 66,610 66,084
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- ----------
(1) We consider funds from operations, as defined by the National Association of Real Estate Investment
Trusts, or NAREIT, to be a useful financial measure of our operating performance. We believe that
funds from operations provides investors with an additional basis to evaluate our ability to service
debt and to fund acquisitions and other capital expenditures. Funds from operations should not be
considered an alternative to net income determined in accordance with GAAP, as an indicator of our
financial performance, as a substitute for cash flow from operating activities determined in
accordance with GAAP or as a measure of our liquidity. Funds from operations also is not necessarily
indicative of funds available to fund our cash needs, including our ability to service our debt.
The White Paper on funds from operations approved by the Board of Governors of NAREIT in April 2002
defines funds from operations as net income or loss computed in accordance with GAAP, excluding
extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating
property plus real estate-related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. We compute funds from operations in accordance
with standards established by the White Paper which may differ from the standards used by other
real estate companies and, accordingly, our funds from operations may not be comparable to other
real estate companies.
(2) Includes non-cash compensation expense of $315,000 for the three months ended June 30, 2002,
$425,000 for the three months ended June 30, 2001, $560,000 for six months ended June 30, 2002
and $850,000 for the six months ended June 30, 2001.
(3) Funds available for distribution consists of funds from operations excluding non-cash
compensation expense, amortization of prepaid financing costs, straight-line rents and less a
reserve for capital expenditures, tenant improvements and leasing commissions.
19
Portfolio and Lease Information
The following tables set forth certain information regarding our properties as of June 30, 2002.
Net Operating Income
---------------------------------
For the Three For the Six
Months Ended Months Ended
Location Number of Properties Approximate Net Rentable Square Feet June 30, 2002 June 30, 2002
------------------- ---------------------------- -------------------------------------- -------------- ---------------
(unaudited)
Industrial Industrial
and % of and % of Total % of Total % of
Office Retail Total Total Office Retail Total Total (000's) Total (000's) Total
------ ---------- ----- ----- ------ ---------- ----- ----- ------- ----- ------- -----
Los Angeles County
West.............. 29 1 30 23% 4,697,608 36,959 4,734,567 26% $ 28,561 40% $ 56,540 39%
North............. 29 - 29 22% 3,231,591 - 3,231,591 18% 11,395 16% 23,925 17%
South............. 15 - 15 12% 2,625,031 - 2,625,031 15% 8,033 11% 15,657 11% --- --- --- ---- ---------- ------- ---------- ---- -------- ---- -------- ----
Subtotal......... 73 1 74 57% 10,554,230 36,959 10,591,189 59% 47,989 67% 96,122 67%
Orange County....... 24 - 24 19% 3,708,926 - 3,708,926 20% 12,118 17% 24,598 17%
San Diego County.... 21 - 21 16% 2,486,777 - 2,486,777 14% 8,116 11% 15,854 11%
Ventura/Kern 6 - 6 4% 778,363 - 778,363 4% 2,267 3% 4,838 3%
Counties............
Riverside/San
Bernardino 4 1 5 4% 342,980 133,481 476,461 3% 1,227 2% 2,343 2%
Counties............
--- --- --- ---- ---------- ------- ---------- ---- -------- ---- -------- ----
Total.......... 128 2 130(1) 100% 17,871,276 170,440 18,041,716(1) 100% $ 71,717 100% $143,755 100%
--- --- --- ---- ---------- ------- ---------- ---- -------- ---- -------- ----
--- --- --- ---- ---------- ------- ---------- ---- -------- ---- -------- ----
----------
(1) Including two properties currently under development, our total portfolio consists of 132 properties
and approximately 18.6 million rentable square feet.
Annualized Base Rent
Location Percent Occupied Percent Leased Per Leased Square Foot (1)
- -------------------------- ------------------------ -------------------------- -------------------------------------
Industrial Industrial Industrial Full Service
and and and Gross
Office Retail Total Office Retail Total Office Retail Total Leases(2)
------- ---------- ----- ------ ---------- ----- ------- ---------- ----- ------------
Los Angeles County:
West................... 89.3% 100.0% 89.4% 89.8% 100.0% 89.9% $27.46 $24.60 $27.43 $27.54
North.................. 88.6% - 88.6% 88.7% - 88.7% 20.97 - 20.97 21.95
South.................. 88.0% - 88.0% 89.0% - 89.0% 18.48 - 18.48 19.79
Orange County............. 92.9% - 92.9% 93.2% - 93.2% 18.10 - 18.10 21.26
San Diego County.......... 88.7% - 88.7% 88.8% - 88.8% 17.80 - 17.80 21.07
Ventura/Kern Counties..... 93.8% - 93.8% 94.6% - 94.6% 18.18 - 18.18 18.40
Riverside/San
Bernardino Counties....... 92.0% 86.5% 90.4% 92.5% 86.5% 90.8% 18.48 11.69 16.66 18.89
----- ----- ----- ----- ----- ----- ------ ------ ------ ------
Total/Weighted Average. 89.9% 89.4% 89.9% 90.3% 89.4% 90.3% $21.08 $14.82 $21.02 $22.97
----- ----- ----- ----- ----- ----- ------ ------ ------ ------
----- ----- ----- ----- ----- ----- ------ ------ ------ ------
- ----------
(1) Based on monthly contractual base rent under existing leases as of June 30, 2002, multiplied by 12 and
divided by leased net rentable square feet; for those leases where rent has not yet commenced or which
are in a free rent period, the first month in which rent is to be received is used to determine
annualized base rent.
(2) Excludes 39 properties with approximately 3.9 million square feet under triple net and modified gross
leases.
20
As of June 30, 2002
2007 and
2002 2003 2004 2005 2006 Thereafter
------- ------- ------- ------- ------- ----------
Los Angeles West.... Expiring SF (1) 234,212 594,317 771,745 874,451 380,396 1,362,747
% of Leased SF (2) 1.4% 3.7% 4.7% 5.4% 2.3% 8.4%
Rent per SF (3) 22.63 26.65 27.15 28.85 30.36 34.82
Los Angeles North... Expiring SF (1) 190,109 521,003 631,417 409,479 337,181 731,038
% of Leased SF (2) 1.2% 3.2% 3.9% 2.5% 2.1% 4.5%
Rent per SF (3) 19.07 21.53 21.65 22.61 24.58 23.57
Los Angeles South... Expiring SF (1) 158,525 279,965 488,266 602,666 247,494 512,471
% of Leased SF (2) 1.0% 1.7% 3.0% 3.7% 1.5% 3.1%
Rent per SF (3) 18.44 19.02 20.25 15.24 22.80 22.63
------- ------- ------- ------- ------- -------
Subtotal -
Los Angeles County% Expiring SF (1) 582,846 1,395,285 1,891,428 1,886,596 965,071 2,606,256
of Leased SF (2) 3.6% 8.6% 11.6% 11.6% 5.9% 16.0%
Rent per SF (3) 20.33 23.21 23.53 23.15 26.40 29.27
Orange County..... Expiring SF (1) 392,518 685,113 670,065 500,362 639,006 528,986
% of Leased SF (2) 2.4% 4.2% 4.1% 3.1% 4.0% 3.3%
Rent per SF (3) 13.79 18.15 17.72 21.30 20.64 24.22
San Diego County.. Expiring SF (1) 132,946 605,780 262,956 390,973 145,082 623,987
% of Leased SF (2) 0.8% 3.7% 1.6% 2.4% 0.9% 3.8%
Rent per SF (3) 20.51 18.45 18.76 15.35 26.54 22.06
All Others........ Expiring SF (1) 53,994 155,593 343,748 147,470 230,904 215,178
% of Leased SF (2) 0.3% 0.9% 2.1% 0.9% 1.4% 1.3%
Rent per SF (3) 18.63 19.29 18.33 19.65 19.09 18.24
------- ------- ------- ------- ------- -------
Total Portfolio..... Expiring SF (1) 1,162,304 2,841,771 3,168,197 2,925,401 1,980,063 3,974,407
% of Leased SF (2) 7.1% 17.4% 19.4% 18.0% 12.2% 24.4%
Rent per SF (3) 18.06 20.76 21.34 21.61 23.70 26.87
- --------------
(1) Represents the rentable square footage of expiring leases. For 2002, represents expirations from
July 1, 2002 through December 31, 2002, not including month-to-month tenants.
(2) Percentage of total rentable square footage expiring during the period.
(3) Represents annualized ending cash rents of expiring leases.
For the For the
Three Months Ended Six Months Ended
------------------------- ------------------------
June 30, 2002 June 30, 2002
Net Absorption (square feet)................... (201,244) (424,448)
--------- ---------
--------- ---------
Retention Rate................................. 70% 71%
--------- ---------
--------- ---------
Cash Rent Growth(1):
Expiring Rate............................... $ 19.23 $ 20.04
--------- ---------
--------- ---------
New / Renewed Rate.......................... $ 21.15 $ 22.61
--------- ---------
--------- ---------
Increase.................................... 10% 13%
--------- ---------
--------- ---------
GAAP Rent Growth(2):
Expiring Rate............................... $ 18.67 $ 19.46
--------- ---------
--------- ---------
New / Renewed Rate.......................... $ 22.01 $ 23.54
--------- ---------
--------- ---------
Increase.................................... 18% 21%
--------- ---------
--------- ---------
Weighted Average Lease Term in Months.......... 53 51
--------- ---------
--------- ---------
Tenant Improvements and Commissions (per square
foot):
New(3)...................................... $ 17.44 $ 16.88
--------- ---------
--------- ---------
Renewal..................................... $ 9.28 $ 9.03
--------- ---------
--------- ---------
Recurring Capital Expenditures(4) (per square
foot).......................................... $ 0.04 $ 0.12
--------- ---------
--------- ---------
-----------------
(1) Represents the difference between initial market rents on new and renewed leases as compared to the expiring cash
rents on the same space.
(2) Represents estimated cash rent growth adjusted for straight-line rents.
(3) Excludes all newly developed square footage or square footage vacant at acquisition.
(4) Represents non-incremental building improvements and leasing costs required to maintain current revenues.
Recurring capital expenditures do not include immediate building improvements that were taken into
consideration when underwriting the purchase of a building or which are incurred to bring a building up to
"operating standards."
21
The following table presents information as of June 30, 2002 regarding our ten largest tenants based on the percentage of aggregate portfolio annualized base rent:
Percentage
Weighted of Percentage
Average Aggregate of Aggregate
Remaining Portfolio Portfolio Annualized
Number of Lease Term Leased Annualized Net Rentable Base Rent
Tenant Leases In Months Square Feet Base Rent(1) Square Feet (in thousands)
- ------------------------------------ --------- ------------ ------------ ------------- ------------- --------------
Vivendi Universal................... 4 94 1.40% 2.31% 231,681 $ 8,111
State of California................. 39 49 2.03 1.99 336,418 6,986
University of Phoenix............... 20 28 1.45 1.30 240,162 4,575
Univision........................... 2 232 1.01 1.21 166,363 4,247
Ceridian Corporation................ 4 89 0.83 0.88 137,695 3,098
SBC Communications.................. 7 33 0.83 0.86 137,440 3,016
Sony................................ 8 19 0.82 0.81 135,029 2,869
Atlantic Richfield.................. 13 50 0.77 0.76 126,830 2,659
Verizon Communications Inc.......... 8 26 0.95 0.74 156,612 2,610
U.S. Government..................... 21 46 0.71 0.73 117,368 2,584
--- --- ----- ----- --------- ------
Total/Weighted Average(2)........... 126 66 10.80% 11.59% 1,785,598 40,755
--- --- ----- ----- --------- ------
--- --- ----- ----- --------- ------
- -----------------
(1) Annualized base rent is calculated as monthly contractual base rent under existing leases as of June 30, 2002,
multiplied by 12; for those leases where rent has not yet commenced or which are in a free rent period, the first
month in which rent is to be received is used to determine annualized base rent.
(2) The weighted average calculation is based on net rentable square footage leased by each tenant.
22
As of June 30, 2002
Estimated Estimated
Costs Percent Estimated Year 1 Estimated Year 1
Incurred Estimated Leased Shell Estimated Stabilized Year 1 Annual
Square To Date Total Cost(1) at Completion Stabilization Cash NOI(3) Annual GAAP
Property Feet (in thousands) (in thousands) 8/6/02 Date Date(2) (in thousands) Cash Yield Yield(4)
- ------------------------- ------- -------------- -------------- -------- ---------- ------------- -------------- ---------- ----------
Howard Hughes Center:
6080 Center Drive....... 283,000 $ 72,981 $ 77,100 89%(5) Complete 3rd Qtr 2002 $ 8,200 10.6% 11.8%
6100 Center Drive....... 283,000 58,207 81,500 -- Complete 2nd Qtr 2003 $ 7,500 9.2% 10.2%
Unallocated
Acquisition And
Master Plan Costs(1).. -- 17,299 19,800
------- -------- ----------
Total Development
Properties......... 566,000 $148,487 $ 178,400
------- -------- ----------
------- -------- ----------
- ----------
(1) Estimated total cost includes purchase and closing costs, capital expenditures, tenant improvements,
leasing commissions and carrying costs during development, as well as an allocation of land and master
plan costs. Unallocated acquisition and master plan costs consists of unallocated land costs and
master plan costs that will be allocated to future development projects at the Howard Hughes Center.
We have entitlements to construct an additional approximately 425,000 net rentable square feet of
office space and have two parcels entitled for hotel development at the Howard Hughes Center.
(2) We consider a property to be stabilized in the quarter when the property is at least 95% leased.
(3) We consider Stabilized Cash NOI to be the rental revenues from the property less the operating expenses
of the property on a cash basis before deducting financing costs (interest and principal payments) after
the property is at least 95% leased.
(4) We consider the Estimated Year 1 Annual GAAP Yield to be the property's Stabilized Cash NOI adjusted for
straight-line rents during its first year in service over the property's estimated total costs.
(5) As of August 6, 2002, 6080 Center Drive was 73% occupied and 89% leased.
In addition to the properties above, we have preliminary architectural designs completed for additional build-to-suit buildings at the Howard Hughes Center totaling approximately 425,000 net rentable square feet of office space. Build-to-suit buildings consist of properties constructed to the tenant's specifications in return for the tenant's long-term commitment to the property. We do not intend to commence construction on any additional build-to-suit buildings at the Howard Hughes Center until development plans and budgets are finalized and build-to-suit tenant leases are signed with terms allowing us to achieve yields commensurate with the project's development risk.
In addition to our development at the Howard Hughes Center, we have completed preliminary designs and are marketing an approximate 170,000 square foot build-to-suit office building at our Long Beach Airport Business Park. We do not intend to commence construction on this project until a build-to-suit tenant lease is signed with terms allowing us to achieve yields commensurate with the project's development risk.
We expect to finance our development activities over the next 24 months through net cash provided by operating activities, proceeds from asset sales and proceeds from our lines of credit.
Current Economic Climate
Our short and long-term liquidity is significantly impacted by the operating results of our properties, all of which are located in Southern California. Our ability to lease available space and increase rates when leases expire is largely dependent on the demand for office space in the markets where our properties are located. We believe current uncertainty over the national and Southern California economic environment is exerting downward pressures on the demand for Southern California commercial office space. We are experiencing these downward pressures due to several factors as follows:
o Occupancy and rental rates have compressed in recent months due to the state of the local economy;
o Larger tenants are taking more time to make their leasing decisions reflecting the uncertainty in the economy;
o Some tenants are under-utilizing their existing space and can therefore expand internally before they need new space;
23
o Sublease space, although stabilizing, stands at about 3% of total inventory throughout Southern California; and
o Over-building in some sub-markets has pushed vacancy rates in those sub-markets to very high levels.
These factors have contributed to a decrease in the occupancy of our portfolio from 92.2% as of December 31, 2001 to 89.9% as of June 30, 2002. Furthermore, problems associated with deregulation of the electric industry in California have also resulted in significantly higher utility costs in some areas of the state.
The timing and extent of future changes in the national and local economy and their effects on our properties and results of operations are difficult to accurately predict. It is possible, however, that these national and regional issues may more directly affect us and our operating results in the future, making it more difficult for us to lease and renew available space, to increase or maintain rental rates as leases expire and to collect amounts due from our tenants. For additional information, see "Risk Factors - Further declines in the economic activity of Southern California will adversely affect our operating results," "- The financial condition and solvency of our tenants may reduce our cash flow," and "- Rising energy costs and power outages in California may have an adverse effect on our operations and revenue" sections of our 2001 annual report on Form 10-K.
Market risk is the exposure or loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
Interest Rate Risk
Even though we currently have no such agreements, in order to modify and manage the interest characteristics of our outstanding debt and limit the effects of interest rates on our operations, we may use a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks such as counter-party credit risk and legal enforceability of hedging contracts. We do not enter into any transactions for speculative or trading purposes.
Some of our future earnings, cash flows and fair values relating to financial instruments are dependent upon prevailing market rates of interest, such as LIBOR. Based on interest rates and outstanding balances as of June 30, 2002, a 1% increase in interest rates on our $163.4 million of floating rate debt would decrease annual future earnings and cash flows by approximately $1.6 million and would not have an impact on the fair value of the floating rate debt. Conversely, a 1% decrease in interest rates on our $163.4 million of floating rate debt would increase annual future earnings and cash flows by approximately $1.6 million and would not have an impact on the fair value of the floating rate debt. A 1% increase or decrease in interest rates would not have a material impact on future earnings, cash flows and the fair value of the secured notes receivable. The weighted average interest rate on our floating debt as of June 30, 2002 was 3.97%.
Our fixed rate debt totaled $1,070.0 million as of June 30, 2002 with a weighted average interest rate of 7.91% and a total fair value of approximately $1,107.5 million. A 1% decrease in interest rates would increase the fair value of our fixed rate debt by approximately $46.2 million and would not have an impact on future earnings and cash flows. A 1% increase in interest rates would decrease the fair value of our fixed rate debt by approximately $43.6 million and would not have an impact on future earnings and cash flows.
These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in that environment. Further, in the event of a change of this magnitude, we would consider taking actions to further mitigate our exposure to the change. Due to the uncertainty of the specific actions that would be taken and their possible effects, however, this sensitive analysis assumes no changes in our capital structure.
24
We are presently subject to various lawsuits, claims and proceedings of a nature considered normal to our
ordinary course of business. We expect most of these legal proceedings to be covered by our liability insurance.
The most significant of these contingencies not covered by insurance is described below.
In December 2001, the owner of the entertainment center at our Howard Hughes Center project asserted a
claim against us for indemnification arising out of a Los Angeles Superior Court judgment against them, which
invalidated a transfer of in-lieu credits that Arden Realty made in August of 1999 as part of our sale of the land
for the entertainment center. The value of these in-lieu credits was approximately $6.0 million and were
transferred to satisfy certain Transportation Impact Assessment fees related to the entertainment center. The
owner of the entertainment center is currently appealing the judgment.
Based on our review of the current facts and circumstances and advice of our outside counsel, we are not able to
express an opinion as to the ultimate outcome of this matter. However, we do not believe that the resolution of
this matter or any of our ongoing legal proceedings will have a material adverse effect on our consolidated
results of operations, cash flow or financial position.
On June 11, 2002 the Board of Directors of Arden Realty, Inc. approved the formation of an independent directors nominating
committee. The committee will be comprised of independent directors who are not up for election the following year.
On July 24, 2002 the Board of Directors of Arden Realty, Inc. authorized a common stock repurchase program
pursuant to which Arden Realty would be authorized to purchase up to $75 million of its common stock over the next
12 months. Arden Realty may repurchase shares from time to time in open market transactions at prevailing prices
or in privately negotiated transactions in compliance with the SEC's Rule 106-18, subject to market conditions,
applicable legal requirements and other factors.
10.20* Amended and Restated Employment Agreement dated March 29, 2002, between Mr. Andrew Sobel and Arden Realty, Inc.
10.40* Form of Promissory Note entered into February 18, 2002 between Arden Realty, Inc. and Mr. Andrew Sobel.
10.41
Term Loan Agreement between Arden Realty Limited Partnership and Wells Fargo Bank, National
Association dated as of June 12, 2002.
(*)
Incorporated by reference from Arden Realty, Inc.'s quarterly report on Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2002.
25
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ARDEN REALTY LIMITED PARTNERSHIP
By: Arden Realty, Inc.
Its: General Partner
Date: August 14, 2002 By: /s/ Andrew J. Sobel
----------------------------
Andrew J. Sobel
Executive Vice President - Strategic Planning
and Operations
Date: August 14, 2002 By: /s/ Richard S. Davis
----------------------------
Richard S. Davis
Senior Vice President and
Chief Financial Officer
26