ITEM 1. BUSINESS
(a) GENERAL
The terms "Arden Realty", "us", "we" and "our" as used in this report refer to Arden Realty, Inc. We were incorporated in Maryland in May 1996. We completed our initial public offering in October 1996. Commencing with our taxable year ended December 31, 1996, we have operated and qualified as a real estate investment trust, or REIT, for federal income tax purposes. We are a self-administered and self-managed REIT, that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. We are the sole general partner of Arden Realty Limited Partnership, or the Operating Partnership, and as of December 31, 2000, owned 96.7% of the Operating Partnership's common partnership units. We conduct substantially all of our operations through the Operating Partnership and its consolidated subsidiaries.
(b) INDUSTRY SEGMENTS
We are currently involved in only one industry segment, namely the operation of commercial real estate located in Southern California. All of the financial information contained in this report relates to this industry segment.
(c) DESCRIPTION OF BUSINESS
We are a full-service real estate organization managed by 11 senior executive officers who have experience in the real estate industry ranging from 8 to 30 years and who collectively have an average of 18 years of experience. We perform all property management, construction management, accounting, finance and acquisition activities and a majority of our leasing transactions for our portfolio with our staff of approximately 300 employees.
As of December 31, 2000, we were Southern California's largest publicly traded office landlord as measured by total net rentable square feet owned. Since our formation in 1996, we have acquired 118 properties containing approximately 14.5 million net rentable square feet for a total purchase price of approximately $1.9 billion. As of December 31, 2000, our portfolio consisted of 142 primarily office properties containing approximately 18.7 million net rentable square feet and three properties with approximately 725,000 net rentable square feet under development. As of December 31, 2000, our properties were approximately 95.5% leased.
PORTFOLIO MANAGEMENT
We perform all portfolio management activities, including management of all lease negotiations, construction management of tenant improvements, or tenant build-outs, property renovations, capital expenditures and on-site property management for our portfolio. We directly manage these activities from approximately 45 management offices located throughout our portfolio. The activities of these management offices are supervised by four regional offices with oversight by our corporate office to ensure consistency of the application of our operating policies and procedures. Each regional office is strategically located within the Southern California submarkets where our properties are located and is managed by a regional manager who is responsible for supervising the day-to-day activities of our management offices. Each regional office is staffed with leasing, property management, building engineering, construction and information systems specialists, our Regional Service Teams. By maintaining a regionally focused organizational structure headed by seasoned managers, we are able to quickly respond to our tenants' needs and market opportunities.
All of our management and regional offices are networked with our corporate office and have access to the Internet and our e-mail, accounting and lease management systems. Our accounting and lease management systems employ the latest technology and allow both corporate and field personnel access to tenant and prospective tenant-related information to enhance responsiveness and communication of marketing and leasing activity for each property.
We currently lease approximately 70% of our properties using our in-house staff. We employ outside brokers who are monitored by our regional managers for the remainder of our properties. Our in-house
leasing program allows us to closely monitor rental rates and lease terms for new and renewal leases and reduce third-party leasing commissions.
BUSINESS STRATEGIES
Our primary business strategy is to actively manage our portfolio to achieve gains in rental rates and occupancy, to 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 in submarkets that add value and fit strategically into our portfolio. We may also sell existing mature or slow growth properties and deploy the proceeds into investments that we believe will generate higher yields.
Through our corporate office and regional offices, we implement our business strategies by:
o using integrated decision making to provide pro-active solutions to the space needs of users in the markets where we have extensive real estate and technical expertise;
o emphasizing quality service, tenant satisfaction and retention;
o employing intensive property marketing and leasing programs; and
o 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 improved operating results of our portfolio.
INTEGRATED DECISION MAKING
We use a multidisciplinary approach to our decision making by having our management, leasing, construction management, acquisition, disposition and finance teams coordinate their activities to enhance responsiveness to market opportunities and to provide pro-active solutions to the space needs of users in the submarkets where we have extensive real estate and technical expertise. This integrated approach permits us to analyze the specific requirements of existing and prospective tenants and the economic terms and costs for each transaction on a timely and efficient basis. We are therefore able to commit to leasing, development, acquisition or disposition terms quickly, which facilitates an efficient completion of lease negotiation and tenant build-out, shorter vacancy periods after lease expirations and the timely completion of development, acquisition or disposition transactions.
QUALITY SERVICE AND TENANT SATISFACTION
We strive to provide quality service through our multidisciplinary operating approach resulting in timely responses to our tenants' needs. Our seasoned on-site teams interact and resolve most issues relating to tenant satisfaction and day-to-day operations. For portfolio-wide operational and administrative functions, our corporate office provides support to all regional offices and provides immediate response for critical operational issues. This customer service approach has contributed to an average tenant retention rate of approximately 75% since our formation.
AGGRESSIVE LEASING
The concentration of many of our properties within particular office submarkets and our relationships with a broad array of tenants and outside brokers enable us to pursue aggressive leasing strategies, to effectively monitor the office space requirements of existing and prospective tenants and to offer tenants a variety of space alternatives across our portfolio. In 2000, we signed approximately 1,000 leases for approximately 4.5 million net rentable square feet, including approximately 513,000 square feet of net absorption. We consider net absorption to consist of the total square feet of new and renewal leases signed less the total square feet of leases expired during a particular period.
COST CONTROL AND OPERATING EFFICIENCIES
The size and geographic focus of our portfolio permits us to enhance portfolio value by controlling operating costs. 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 particular submarkets and the maintenance of a centralized purchasing and accounting system for cost control at each of our properties.
GROWTH STRATEGIES
Based on our geographic focus in Southern California and our evaluation of local market conditions, we believe the following key factors provide us with opportunities to maximize returns:
o the sound fundamentals of the Southern California real estate market, as measured by declining vacancy rates and increasing rental rates, particularly in the submarkets where our properties are located;
o the limited construction of new office properties in the Southern California region due to substantial building construction limitations and a minimum of developable land in many key submarkets; and
o the strong diversification of the Southern California economy and our tenant base minimizes the dependence on any one industry segment.
INTERNAL GROWTH
We believe that opportunities exist to increase cash flow from our existing portfolio. We intend to pursue internal growth by:
o leasing space and renewing leases as they expire at increasing rents and maximizing scheduled rent increases throughout the new lease term;
o maintaining or improving current occupancy levels throughout our portfolio by active management and aggressive leasing;
o controlling operating expenses through active cost control management and systems;
o realizing economies of scale and concentration due to the size and geographic focus of our portfolio; and
o sourcing new and innovative revenue streams while providing high quality services to our tenants.
Maintaining or Improving Current Occupancy
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. Our in-house leasing teams, working with outside leasing brokers, continuously monitor each market to identify strong prospective tenants who are in need of new or additional space. We also strive to be responsive to the needs of existing tenants through our on-site professional management staff and by providing them 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 re-leased their space, leased additional space to support their expansion needs, or moved to other space within our portfolio.
Leasing Space and Renewing Leases as They Expire at Increasing Rents
Rental rates for the majority of our leases are significantly lower than the current market rental rates. In 2000, vacancy rates decreased and average rental rates increased in our markets. During 2000, for all leases expiring that we renewed or released, rates increased approximately 20% over the expiring rates. Although it is difficult to predict future trends, we believe we will have opportunities to increase cash flow by renewing
or re-leasing space as leases expire at higher rents and to maximize scheduled rent increases throughout the new lease terms.
Cost Control Management and Systems
We plan to continue controlling our operating expenses through active management at all of our properties. We focus on cost control in various areas of our operations. We continuously monitor the operating performance of our properties and employ energy-enhancing and expense recovery technologies when appropriate. These system enhancements include:
o lighting retrofits;
o replacement of inefficient heating, ventilation and air conditioning systems;
o computer-driven energy management systems that monitor and react to the climatic requirements of individual properties;
o automated security systems that allow us to provide security services to our tenants at a lower cost;
o enhancement of billing systems, which enable us to more efficiently recover operating expenses from our tenants; and
o on-going preventive maintenance programs to operate our building systems efficiently, thereby reducing operating costs.
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 Regional Service Teams are often responsible for several properties, which spreads administrative and maintenance costs over those properties and reduces per square foot expenses. In addition, we believe that parking operations, building services and supplies contracted or purchased in bulk on a portfolio-wide basis will facilitate further benefits from these economies of scale and concentration.
Sourcing Additional Revenue While Providing High Quality Services to Tenants
By implementing the next generation of technology in our properties, we believe we will be able to further increase occupancy, tenant retention and rents in the future. In 1998, we entered into an agreement with a national technology/access management firm that has successfully marketed our rooftop space to telecommunications providers as antennae sites resulting in additional revenue and providing additional voice and data technology options to our tenants. In 1999, we entered into an agreement with a premium broadband internet access and applications services provider to deploy its building-centric, fiber optic network in a majority of our portfolio, at their cost. During 2000 we completed the installation of this network. In addition to high speed Internet services, this network provides our tenants with a wide range of next generation business applications and e-commerce tools, including video and audio conferencing, e-mail and unified messaging.
EXTERNAL GROWTH
We believe in the sound fundamentals, diversity and potential of the Southern California commercial real estate market, and we intend to continue to focus 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 selective development, renovation and acquisition opportunities.
Subject to capital availability and market conditions, our approach is to seek development, renovation and acquisition opportunities in Southern California submarkets where we have an existing presence and where the following conditions exist:
o low vacancy rates;
o opportunities for rising rents due to employment growth and population movements;
o a minimal amount of developable land; and
o significant barriers to entry because of constraints on new development, including challenging local entitlement processes, strictly enforced height and density restrictions and governmental requirements resulting in significant additional construction costs.
COMPETITION
We compete with other owners and developers of office properties to attract tenants to our properties and obtain suitable land for development. Ownership of competing properties is currently diversified among many different types, from publicly traded companies and institutional investors, including other REITs, to small enterprises and individual owners. No one owner or group of owners currently dominate or significantly influence the markets in which we operate. See "Risk Factors - Competition affects occupancy levels, rents and the cost of land which could adversely affect our revenues."
CALIFORNIA ELECTRIC UTILITY DEREGULATION
Problems associated with deregulation of the electric industry in California have resulted in intermittent service interruptions and significantly higher costs in some areas. Approximately 55% of our buildings and 56% of the total net rentable square footage of our portfolio are located within municipalities that either do not produce their own power or have not entered into long term fixed price contracts. These properties may be subject to intermittent service interruptions or rate increases from their utility providers. The remaining portion of our portfolio is located in areas that are not expected to be subject to intermittent electric service interruptions and significant electric rate increases.
Approximately 19% of our buildings and 15% of the total net rentable square footage of our portfolio are subject to leases that require our tenants to pay all utility costs and the remainder provide that our tenants will reimburse us for utility costs in excess of a base year amount. We estimate that we will be able to recover approximately 90% of any utility cost increases from our tenants. See "Risk Factors - Rising energy costs and power outages in California may have an adverse effect on our operations and revenue."
Since 1999, Arden has applied considerable resources to energy enhancement programs with the aim of reducing energy consumption, enhancing efficiency and lowering operating costs. For the past two years, we have been recognized by the Environmental Protection Agency with the national Commercial Real Estate Partner of the Year award for our performance in the Energy Star Program. The competition involves top commercial real estate landlords throughout the United States and rigorous bench-marking procedures that track individual building energy efficiency. Of the 215 total Energy Star designated office buildings awarded nationally, 93 were awarded in California, of those, we had 80 award-winning buildings and were cited for having the most energy efficient buildings within a single portfolio in the nation.
We are also working with other companies to provide new applications of Distributed Generation, or on-site energy systems, such as solar microturbines, natural gas reciprocating engines, fuel cells and other "green" power alternatives. Lastly, we maintain ongoing communication with our tenants to assist them in ways to lower consumption in their workplace.
EMPLOYEES
As of December 31, 2000, we had approximately 300 full-time employees that perform all of our property management, construction management, accounting, finance and acquisition activities and a majority of our leasing transactions.
(D) FOREIGN OPERATIONS
We do not engage in any foreign operations or derive any revenue from foreign sources.
ITEM 2.
ITEM 2. PROPERTIES
Existing Portfolio
Our portfolio consists of 142 primarily office properties, containing approximately 18.7 million net rentable square feet, that individually range from approximately 12,000 -- 600,000 net rentable square feet. Of the 142 properties in our portfolio, 137 or 96% are office properties. All our properties are located in Southern California and most are in suburban areas in close proximity to main thoroughfares. We believe that our properties are located within desirable and established business communities and are well maintained. Our properties offer an array of amenities including high speed internet access, security, parking, conference facilities, on-site management, food services and health clubs.
Following is a summary of our property portfolio as of December 31, 2000:
- ---------- (1) Calculated as monthly contractual base rent under existing leases as of December 31, 2000, multiplied by 12 and divided by leased net rentable square feet; for those leases where rent has not yet commenced or which are in a free rent period, the first month in which rent is to be received is used to determine annualized base rent.
(2) Excludes 47 properties and approximately 4.1 million net rentable square feet under triple net and modified gross leases. Triple net and modified gross leases are those where tenants pay not only base rent but also some or all real estate taxes and operating expenses of the leased property. If these properties and square footage had been included, our total weighted average annualized base rent per leased net rentable square foot would be $19.75.
Development Properties
In addition to the properties listed above, we currently have three properties under development containing approximately 725,000 net rentable square feet. These properties are located in the Howard Hughes Center, a 70-acre commercial development located two miles north of Los Angeles International Airport and immediately adjacent to the San Diego Freeway (I-405), with on- and off-ramps that directly serve the site.
The following table summarizes information about our properties under development as of December 31, 2000.
- ---------- (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 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.
In addition to the properties above, we have preliminary architectural designs completed for additional build-to-suit buildings at the Howard Hughes Center totaling an additional approximately 425,000 net rentable square feet. 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 approximately 170,000 net rentable 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 or proceeds from our lines of credit.
Acquisitions
We did not acquire any properties in 2000.
Dispositions
On October 13, 2000, we sold a 76,000 net rentable square foot retail property located in Thousand Oaks, California, for approximately $12.0 million and recorded a gain of approximately $2.1 million.
As of December 31, 2000, we had approximately $59.6 million of properties held for sale. We intend to reinvest the net proceeds from the sale of these mature or slow growth assets into higher yielding investments.
The following table presents specific information regarding our 142 properties as of December 31, 2000:
- ---------- (1) Calculated as monthly contractual base rent under existing leases as of December 31, 2000, multiplied by 12 and divided by leased net rentable square feet, for those leases where rent has not yet commenced or which are in a free rent period, the first month in which rent is to be received is used to determine annualized base rent.
(2) We lease the land underlying those properties or their parking structures pursuant to long term ground leases.
(3)Amounts for 2730 Wilshire exclude the 100%-occupied 12,740 square foot, 16-unit apartment complex we also own.
Tenant Information
As of December 31, 2000, we had over 3,000 tenants, with no one tenant representing more than 2.1% of the aggregate annualized base rent of our properties, and only two tenants individually representing more than 1.0% of our aggregate annualized base rent. Our properties are leased to local, national and foreign companies engaged in a variety of businesses including financial services, entertainment, health care services, accounting, law, education, publishing and local, state and federal government entities.
Our leases are typically structured for terms of three, five or ten years. Leases typically contain provisions permitting tenants to renew expiring leases at prevailing market rates. Approximately 78% of our total leased rentable square footage is under full service gross leases under which tenants typically pay for all real estate taxes and operating expenses above those for an established base year or expense stop. Our remaining square footage is under triple net and modified gross leases. Triple net and modified gross leases are those where tenants pay not only base rent, but also some or all real estate taxes and operating expenses of the leased property. Tenants generally reimburse us the full direct cost, without regard to a base year or expense stop, for use of lighting, heating and air conditioning during non-business hours, and for on-site monthly employee and visitor parking. We are generally responsible for structural repairs.
The following table presents information as of December 31, 2000 derived from the twenty largest tenants at our properties, based on the percentage of aggregate portfolio annualized base rent:
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(1) Excludes two leases with a division of Vivendi Universal Publishing for approximately 217,000 square feet comprising approximately 1.22% of the aggregate portfolio leased square footage with a weighted average lease term of 120 months that will begin in 2001. Assuming these leases had been in place at December 31, 2000, this tenant would have ranked first in our list of largest tenants with approximately 2.25% of aggregate annualized base rent.
(2) Annualized base rent is calculated as monthly contractual base rent under existing leases as of December 31, 2000, 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.
(3) The weighted average calculation is based on net rentable square footage leased by each tenant.
Lease Distribution
The following table presents information relating to the distribution of the leases for our 142 properties, based on leased net rentable square feet, as of December 31, 2000:
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(1) Base rent is determined 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 presents a summary schedule of the total lease expirations for our 142 properties for leases in place at December 31, 2000. This table assumes that none of the tenants exercise renewal options or termination rights, if any, at or prior to the scheduled expirations:
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(1) Base rent is determined 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.
ITEM 3.
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 cash flows, financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth quarter of the year ended December 31, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange, or NYSE, under the symbol "ARI." On March 23, 2001, the last reported sales price per share of common stock on the NYSE was $63,658,200, and there were approximately 174 registered holders of record of our common stock. The table below sets forth the quarterly high and low closing sales price per share of our common stock as reported on the NYSE and the cash dividends per share we declared with respect to each period.
We pay quarterly cash dividends to common stockholders at the discretion of our Board of Directors. The amount of each quarterly cash dividend depends on our funds from operations, financial condition and capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as the Board of Directors deems relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
You should read the following consolidated financial and operating data for Arden Realty and the following combined financial and operating data for the Arden Predecessors together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements included elsewhere in this Form 10-K. The properties held by the Arden Predecessors were directly or indirectly contributed to us by Arden Realty Group, Inc. and a group of affiliated entities in the formation transactions completed prior to our initial public offering of common stock in October 1996.
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(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 generally accepted accounting principles, or GAAP, as an indicator of our financial performance or as a substitute for cash flow from operating activities determined in accordance with GAAP 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 make distributions or to service our debt.
The White Paper on funds from operations approved by the Board of Governors of NAREIT in October 1999 defines funds from operations as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We compute funds from operations in accordance with standards established by the White Paper which may differ from the standards used by other REITs and, accordingly, our funds from operations may not be comparable to other REITs.
(2) As used in this Form 10-K, earnings before interest, taxes, depreciation and amortization, or EBITDA, means revenue less property operating expenses and general and administrative expenses. EBITDA does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to operating income or net income as an indicator of performance or as a substitute for cash flow from operating activities determined in accordance with GAAP as a measure of our liquidity. We have included information with respect to EBITDA because we understand that this information may be used as one measure of operating performance.
(3) Fixed charges consist of interest costs, whether expensed or capitalized, amortization of deferred financing costs, amortization of discounts or premiums related to indebtedness and preferred unit distributions.
(4) The ratios of earnings to fixed charges were computed by dividing earnings by fixed charges. For this purpose, earnings have been calculated by adding fixed charges, excluding capitalized interest and preferred unit distributions, to income or loss before extraordinary items.
(5) Excludes dividends payable.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion should be read in conjunction with Item 6, Selected Financial Data, and our historical consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.
We are a self-administered and self-managed real estate investment trust that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California. We are a full-service real estate organization managed by 11 senior executive officers who have experience in the real estate industry ranging from 8 to 30 years and who collectively have an average of 18 years experience. We perform all property management, construction management, accounting, finance and acquisition activities and a majority of our leasing transactions with our staff of approximately 300 employees.
As of December 31, 2000, we are Southern California's largest publicly traded office landlord as measured by total net rentable square feet owned. As of that date, our portfolio consisted of 142 primarily suburban office properties containing approximately 18.7 million net rentable square feet and three properties with approximately 725,000 net rentable square feet under development. As of December 31, 2000, our properties were approximately 95.5% leased.
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 mature or slow growth properties and redeploy the proceeds into investments that we believe will generate higher yields.
Results Of Operations
Our financial position and operating results are primarily comprised of our portfolio of commercial properties and income derived from those properties. Therefore, the comparability of financial data from period to period will be affected by the timing of significant property renovations, development, acquisitions and dispositions.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT NUMBER OF PROPERTIES AND PERCENTAGES)
Variances for revenue from rental operations and property expenses are discussed below.
Interest and other income increased by approximately $705,000 in 2000 as compared to 1999, primarily due to increases in management fees for owner associations we manage and from higher interest income earned in 2000 on higher restricted cash balances required by mortgage loans entered into after January 1, 1999.
General and administrative expenses were approximately $9.3 million, or 2.4% of total revenue, in 2000 as compared to $7.4 million, or 2.2% of total revenue, in 1999. This increase was primarily related to higher personnel costs in 2000, including approximately $590,000 in non-cash compensation expense from restricted stock awards granted to several key executives.
Interest expense increased approximately $18.2 million in 2000 as compared to 1999. This increase was primarily due to both higher outstanding balances in 2000 resulting from the funding of acquisitions, tenant improvement, leasing commission costs and development and renovation projects placed in service during the periods presented, and higher average interest rates in 2000.
Depreciation and amortization expense increased by approximately $17.4 million in 2000, primarily due to depreciation related to properties acquired in 1999, newly developed and renovated properties, and capital expenditures, tenant improvements and leasing commissions placed in service in 2000.
VARIANCES FOR REVENUE FROM RENTAL OPERATIONS AND PROPERTY OPERATING EXPENSES
The increase in revenue from rental operations and property operating expenses in 2000 as compared to 1999 was partially due to the four properties we acquired during 1999, a development property placed in service in the third quarter of 2000, a property sold in the fourth quarter of 2000 and the five properties under renovation for all or a portion of the periods presented. Operating results for properties under renovation may significantly vary from period to period depending on the status of the renovation and occupancy levels maintained during the renovation.
Following is a summary of the increase in revenue from rental operations and property operating expenses that relates to the eleven properties that were either acquired, sold or placed in service after January 1, 1999 or were under renovation for all or a portion of the period beginning after January 1, 1999 and for the 132 non-renovation properties we owned for all 1999 and 2000 (in thousands, except number of properties).
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(1) See analysis of Properties Owned for all of 1999 and 2000 below.
PROPERTIES OWNED FOR ALL OF 1999 AND 2000
Following is a comparison of property operating data computed under the GAAP basis and cash basis for the 132 non-renovation properties we owned for all of 1999 and 2000 (in thousands, except number of properties and percentages).
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(1) Excludes straight-line rent adjustments.
Revenue from rental operations for these properties, computed on a GAAP basis, increased by approximately $21.1 million, or 6.6%, during 2000, compared to 1999. Approximately $18.7 million of this increase was from rental revenue, of which $17.0 million was related to scheduled rents and $1.7 million was from straight-line rent. Approximately 55% of the increase in scheduled rents was due to increases in rental rates in 2000 and the remaining 45% was related to higher average occupancy in 2000. The increase in straight-line rent was primarily due to new leases and extensions signed with higher rental rate escalations than in 1999. Revenue from rental operations was also higher due to an approximate $2.3 million increase in tenant reimbursements, a $2.5 million increase in parking income net of an approximate $2.4 million decrease in other revenue from rental operations. In addition to recoveries of approximately $688,000 from increases in utility rates for our San Diego properties, tenant reimbursements and parking income primarily increased due to the approximate 1.2% increase in average occupancy in 2000, while other rental operations decreased primarily due to lower lease termination settlement fees in 2000.
Excluding only the straight-line rent adjustment for these properties, revenue from rental operations computed on a cash basis, increased by approximately $19.4 million or 6.2%.
Property operating expenses for these properties increased by approximately $3.9 million, or 4.1%, during 2000, compared to 1999, primarily due to higher real estate taxes, repairs and maintenance, contingent ground rent and property administrative expenses in 2000. Real estate taxes increased by approximately $2.2 million in 2000 due to normal annual increases and final assessments on certain properties. Repairs and maintenance increased by $533,000 primarily due to the 1.2% increase in average occupancy in 2000. Ground rent expense increased by $323,000 due to higher operating income from one of our properties with a participating ground lease. Property administrative expenses, comprised primarily of personnel and related costs, were approximately $666,000 higher in 2000, primarily due to our continued focus on raising our portfolio-wide occupancy. Utility costs increased by approximately $135,000 in 2000 due to both higher average occupancy and rate increases for our San Diego properties, partially offset by savings achieved from energy enhancing capital improvements completed during 1999.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT NUMBER OF PROPERTIES AND PERCENTAGES)
The increase in revenue from rental operations and property expenses in 1999 is primarily from properties acquired during 1998 and 1999. The 1998 amounts do not include a full year of operations for the 66 properties we acquired during 1998 or for the four properties we acquired during 1999.
Following is a summary of the 1999 increase in revenue from rental operations and property expenses that relate to the 70 properties that we acquired during 1998 and 1999 and for the 72 properties we owned for all of 1998 and 1999 (in thousands, except number of properties).
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(1) See analysis of Properties Owned for all of 1998 and 1999 below.
Interest and other income decreased by approximately $700,000 in 1999 as compared to 1998, primarily due to lower interest income earned on mortgage notes receivable acquired in September 1997.
General and administrative expenses were approximately $7.4 million, or 2.2% of total revenue, in 1999 as compared to $6.7 million, or 2.3% of total revenue, in 1998. General and administrative expenses as a percentage of total revenue decreased in 1999 compared to 1998 primarily due to benefits achieved from economies of scale and concentration over a larger property portfolio.
Interest expense increased approximately $16.8 million in 1999 as compared to 1998. This increase was due to higher outstanding debt balances in 1999, primarily to fund property acquisitions and tenant improvement build-outs, which was partially offset by slightly lower effective interest rates in 1999.
Depreciation and amortization expense increased by approximately $18.0 million in 1999, primarily due to the 70 properties we acquired in 1998 and 1999.
PROPERTIES OWNED FOR ALL OF 1998 AND 1999
Following is a comparison of property operating data computed on a GAAP basis and cash basis for the 72 non-renovation properties we owned for the entire twelve months ended December 31, 1999 and 1998 (in thousands, except number of properties and percentages).
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(1) Excludes straight-line rent adjustments.
Revenue from rental operations for the 72 properties we owned for all of 1998 and 1999 computed on a GAAP basis increased by approximately $17.3 million in 1999 compared to 1998. This increase was primarily due to increases in rental rates and a four percentage point increase in average occupancy in 1999 for this pool of properties representing approximately 10.3 million net rentable square feet. This increase in occupancy not only contributed to higher rental revenue but also resulted in higher tenant expense reimbursements, parking income and miscellaneous tenant charges. Miscellaneous tenant charges include revenue from after-hour utility billings, signage, satellite income and lease termination settlements. Lease termination settlements totaled approximately $9.7 million in 1999 compared to $4.1 million in 1998 for these properties.
Excluding only the straight-line rent adjustments for these properties, revenue from rental operations, computed on a cash basis, increased by approximately $18.2 million for the reasons described above.
Property operating expenses for these properties increased by approximately $4.9 million in 1999 compared to 1998, primarily due to higher repairs, maintenance and administrative and overhead expenses. These increases were primarily related to the four percentage point increase in average occupancy in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash provided by operating activities increased by $21.8 million to $192.2 million for the year ended December 31, 2000, as compared to $170.4 million for the year ended December 31, 1999, primarily due to improved operating results for the 132 properties we owned for all of 1999 and 2000, as well as the net operating results of the eleven properties we developed, renovated or acquired subsequent to January 1, 1999.
Cash used in investing activities decreased by approximately $67.0 million to $216.0 million in 2000 compared to $283.6 million in 1999. This decrease was primarily due to $89.8 million used in 1999 to acquire four properties which was partially offset by an increase of approximately $14.4 million used in 2000 for capital expenditures related to our increased development and renovation activity and additional costs associated with tenant improvement build-outs resulting from occupancy gains achieved in 2000.
Cash provided by financing activities decreased by $93.5 million to $22.2 million, as compared to $115.7 million in 1999. This decrease was primarily due to the timing of an equity issuance. In September 1999, we issued $50 million in 8-5/8% Series B Cumulative Redeemable Preferred Operating Units. Cash provided by financing activities for the year ended December 31, 2000 consisted primarily of net proceeds from our offerings of unsecured senior notes, partially offset by repayments of mortgage loans, paydowns of our unsecured lines of credit and distributions to our stockholders and minority interests.
Capital Commitments
As of December 31, 2000, we had approximately $14.1 million outstanding in capital commitments related to tenant improvements, development and property-related capital expenditures. We expect to fund short term capital commitments through cash flow generated by operating activities and proceeds from asset sales or proceeds from our lines of credit.
Available Borrowings, Cash Balances and Capital Resources
On May 3, 2000, we extended our unsecured line of credit with a group of banks led by Wells Fargo. The extended line of credit provides for borrowings up to $275 million with an option to increase the amount to $325 million and bears interest at a rate ranging between LIBOR plus 1.15% and LIBOR plus 1.80% (including an annual facility fee ranging from .20% to .40% based on the aggregate amount of the facility) depending on our unsecured debt rating. In addition, as long as we maintain an unsecured debt rating of BBB-/Baa3 or better, the agreement contains a competitive bid option, whereby the Lenders under this line of credit may bid on the interest rate to be charged for up to $137.5 million of the unsecured line of credit. Under certain circumstances, we also have the option to convert the interest rate on this line of credit to the prime rate plus 0.5%. This line of credit matures in April 2003. As of December 31, 2000, there was approximately $172.4 million outstanding on this line of credit and approximately $102.6 million was available for additional borrowings.
In July 2000, we closed on a $75 million unsecured line of credit with Lehman Brothers. Borrowings on this new line of credit bear interest at a rate ranging between LIBOR plus 1.05% and LIBOR plus 1.70%, depending on our unsecured debt rating. We also have the option to convert the interest rate to the prime rate plus 0.5%. This line of credit matures in July 2002 with an option to extend the maturity date for one year. Proceeds from this line of credit have been used to reduce the outstanding balance under our $275 million line of credit. As of December 31, 2000, there was $75 million outstanding on this line of credit.
In August 2000, we extended our unsecured line of credit with a total commitment of $10 million from City National Bank to August 2001. This line of credit accrues interest at the City National Bank Prime Rate less 0.875%. As of December 31, 2000, there was an outstanding balance of $6.0 million on this line of credit, and $4.0 million was available for additional borrowing. Proceeds from this line of credit have been used, among other things, to provide funds for tenant improvements and capital expenditures and provide for working capital and other purposes.
As of December 31, 2000 we had $106.6 million available under our unsecured lines of credit.
On March 17, 2000, we issued $250 million of senior unsecured notes in two tranches. One tranche was for $200 million at an interest rate of 8.875% due in March 2005 and the other tranche was for $50 million at an interest rate of 9.150% due in March 2010. These notes are our senior unsecured obligations and pay interest semi-annually on March 1, and September 1, of each year. Net proceeds from this offering were used to repay two prepayable term loans to an affiliate of Lehman Brothers and a mortgage loan and to reduce the outstanding balance under our unsecured lines of credit. These senior unsecured notes were issued in a private placement in reliance upon an exemption from registration provided by Rule 144A under the Securities Act. We subsequently filed a registration statement that became effective on May 10, 2000 and all privately placed notes were exchanged for notes registered under the Securities Act.
On November 20, 2000, we completed a private placement of $100 million 8.50% senior notes due in November 2010, with interest payable semi-annually on November 15 and May 15 of each year. We used the net proceeds from this private placement to reduce the outstanding balance on one of our unsecured lines of credit and to repay a construction loan related to our development of the 6060 Center Drive project. These senior unsecured notes were issued in a private placement in reliance upon an exemption from registration provided by
Rule 144A under the Securities Act. We subsequently filed a registration statement that became effective on March 29, 2001 and are currently exchanging these privately placed notes for registered notes. We expect to complete this exchange offer by April 26, 2001.
The following is a summary of scheduled principal payments for our total outstanding indebtedness as of December 31, 2000 (in thousands):
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(1) Consists primarily of $75.0 million outstanding on our Lehman Brothers line of credit which has a one year extension.
(2) Consists primarily of $172.4 million outstanding on our Wells Fargo line of credit.
The following is other information related to our indebtedness as of December 31, 2000 (in thousands, except percentage and interest rate data):
Unsecured and Secured Debt:
Floating and Fixed Rate Debt:
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(1) Includes amortization of prepaid financing costs.
As of December 31, 2000, we had approximately $24.8 million in cash and cash equivalents, including $19.4 million in restricted cash, including $13.9 million in interest-bearing cash deposits required by some of our mortgage loans payable. In addition, we had $5.5 million in cash impound accounts for real estate taxes and insurance as required by several of our mortgage loans payable.
We may sell mature or slow growth assets over the next twelve to twenty-four months. Due to market conditions beyond our control, it is difficult to predict the actual period and amount of these asset sales. At the time any such sales proceeds are realized, we expect to redeploy such amounts into investments that we believe will generate higher yields, which may include development of office buildings, acquisitions or repurchase of our common stock. In addition, we expect to use a portion of any proceeds to pay down portions of our debt in order to maintain our conservative leverage and coverage ratios.
We expect to continue meeting our short-term liquidity and capital requirements generally through net cash provided by operating activities and proceeds from our lines of credit or proceeds from asset sales. We believe that the net cash provided by operating activities will continue to be sufficient to pay any distributions necessary to enable us to continue qualifying as a REIT. We also believe the foregoing sources of liquidity will be
sufficient to fund our short-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, proceeds from asset sales and/or the issuance of long-term debt and equity securities.
Funds From Operations and Funds Available for Distribution
The following table reflects the calculation of our funds from operations for the years ended December 31, 2000, 1999 and 1998 (in thousands):
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(1) We consider funds from operations, as defined by The National Association of Real Estate Investment Trusts, or NAREIT, to be a useful financial measure of our operating performance. We believe that funds from operations provides investors with an additional basis to evaluate our ability to service debt and to fund acquisitions and other capital expenditures. Funds from operations should not be considered an alternative to net income determined in accordance with GAAP, as an indicator of our financial performance, as a substitute for cash flow from operating activities determined in accordance with GAAP or as a measure of our liquidity. Funds from operations also is not necessarily indicative of funds available to fund our cash needs, including our ability to service our debt.
The White Paper on funds from operations approved by the Board of Governors of NAREIT in October 1999 defines funds from operations as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We compute funds from operations in accordance with standards established by the White Paper which may differ from the standards used by other REITs and, accordingly, our funds from operations may not be comparable to other REITs.
(2) Excludes $575,000 in distributions made to the former minority partners in the World Savings office property.
(3) Includes $586,000 in non-cash compensation expense.
(4) Funds available for distribution consists of funds from operations, excluding straight-line rent adjustments and less a reserve for capital expenditures, tenant improvements and leasing commissions
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. National and local economic trends may affect demand for our properties. The timing and extent of changes in the national and local economy and their effects on our properties and results of operations are difficult to accurately predict. Some sectors of the national and California economy, particularly the sectors containing technology and Internet companies, are reported to be experiencing slower growth, reduced earnings or increased losses. Problems associated with deregulation of the electric industry in California have resulted in intermittent service interruptions and significantly higher costs in some areas of the state. As of the date of this Form 10-K, we have not noted any material trends or effects arising from these national and regional issues on our ability to lease and renew available space, to increase rental rates as leases expire and to collect amounts due from our tenants. 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. See "Risk Factors - Our operating performance and property values will be affected by changes in the economic climate in Southern California," - "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."
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 and Section 21E of the Exchange Act pertaining to, among other things, our future results of operations, cash available for distribution, acquisitions, lease renewals, property development, property renovation, capital requirements and general business, industry and economic conditions applicable to us. Also, documents we subsequently file with the Securities and 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 you, however, that this list of factors may not be exhaustive, particularly with respect to future filings.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the exposure or loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
Interest Rate Risk.
Even though we currently have no such agreements, in order to modify and manage the interest characteristics of our outstanding debt and limit the effects of interest rates on our operations, we may use a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks such as counter-party credit risk and legal enforceability of hedging contracts. We do not enter into any transactions for speculative or trading purposes.
Some of our future earnings, cash flows and fair values relating to financial instruments are dependent upon prevailing market rates of interest, such as LIBOR. Based on interest rates and outstanding balances as of December 31, 2000, a 1% increase in interest rates on our $253.4 million of floating rate debt would decrease annual future earnings and cash flows by approximately $2.5 million and would not have an impact on the fair value of the floating rate debt. A 1% decrease in interest rates on our $253.4 million of floating rate debt would increase annual future earnings and cash flows by approximately $2.5 million and would not have an impact on the fair value of the floating rate debt. A 1% increase or decrease in interest rates on our secured notes receivable would not have a material impact on annual future earnings, cash flows and the fair value of the secured notes receivable. The weighted average interest rate on our floating debt as of December 31, 2000 was 8.58%
Our fixed rate debt totaled $924.4 million as of December 31, 2000 with a weighted average interest rate of 8.02%. and an unrealized loss of approximately $25.9 million for a total fair value of approximately $898.5 million. A 1% decrease in interest rates on our $924.4 million of fixed rate debt would decrease its fair value by approximately $45.2 million and would not have an impact on annual future earnings and cash flows. A 1% increase in interest rates in our $924.4 million of fixed rate debt would increase its fair value by approximately $45.2 million and would not have an impact of annual 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 sensitivity analysis assumes no changes in our capital structure.
RISK FACTORS
In addition to the other information contained or incorporated by reference in this Form 10-K readers should carefully consider the following risk factors.
REAL ESTATE INVESTMENT RISKS
An inability to retain tenants or rent space upon lease expirations may adversely affect our ability to service our debt.
Through 2005, 2,729 leases, including month-to-month leases comprising 73% of our leased net rentable square footage and 73% of our annualized base rents at December 31, 2000 will expire as follows:
If we are unable to promptly relet or renew leases for all or a substantial portion of this space, or if the rent upon renewal or reletting are significantly lower than expected, our cash flow and business could be adversely affected.
Our operating performance and property values will be affected by changes in the economic climate 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 that are unique to or particularly affect the Southern California economy and real estate market, which may adversely affect our business.
Competition affects occupancy levels rents and cost of land which could adversely affect our revenues.
Many 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 we are. Although ownership of these competing properties is currently diversified among many different types, from publicly traded companies and institutional investors to small enterprises and individual owners, and no one or group of owners currently dominate or significantly influence the market, consolidation of owners could create efficiencies and marketing advantages for the consolidated group that could adversely affect us. These competitive advantages, the number of competitors and the number of competitive commercial properties in a particular area could have a material adverse effect on the rents we can charge, our ability to lease space in our existing properties or at newly acquired or developed properties and the prices we have to pay for developable land.
The financial condition and solvency of our tenants may reduce our cash flow.
Tenants may experience a downturn in their business which may cause them to miss rental payments when due or to seek the protection of bankruptcy laws, which could result in rejection and termination of their leases or a delay in recovering possession of their premises. Although we have not experienced material losses from tenant bankruptcies, we cannot assure you 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 a timely manner.
Because real estate investments are illiquid, we may not be able to sell properties when appropriate.
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, may under specified circumstances impose a 100% prohibited transaction tax on the profits derived from our sale of properties held for fewer than four years, which could affect our ability to sell our properties.
Rising energy costs and power outages in California may have an adverse effect on our operations and revenue.
Problems associated with deregulation of the electric industry in California have resulted in intermittent service interruptions and significantly higher costs in some areas. Approximately 55% of our buildings and approximately 56% of the total net rentable square footage of our portfolio are located within municipalities that either do not produce their own power or have not entered into long term fixed price contracts. These properties may be subject to intermittent service interruptions or significant rate increases from their utility providers. The remaining portion of our portfolio is located in areas that are not expected to be subject to intermittent electric service interruptions and significant electric rate increases.
Approximately 19% of our buildings and 15% of the total net rentable square footage of our portfolio are subject to leases that require our tenants to pay all utility costs. The remainder of our leases provide that tenants will reimburse us for utility costs in excess of a base year amount. We estimate that we will be able to recover approximately 90% of any utility cost increases from our tenants.
Although we have not experienced any material losses resulting from electric deregulation, it is possible that some of our tenants will not fulfill their lease obligations and reimburse us for their share of any significant electric rate increases and that we will not be able to retain or replace our tenants if energy problems in California continue.
Increases in taxes and regulatory compliance costs may reduce our revenue.
Except for our triple net leases, we may not be able to pass all real estate tax increases through to some of our tenants. Therefore, any tax increases may adversely affect our cash flow and our ability to pay or refinance our debt obligations. Our properties are also subject to various federal, California and local regulatory requirements, such as requirements of the Americans with Disabilities Act, and California 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. We cannot assure you, however, that these requirements will not be changed or that new requirements will not be imposed that would require significant unanticipated expenditures by us and could have an adverse effect on our cash flow and the amounts available for distributions and to our business.
We may acquire properties through partnerships or joint ventures with third parties that could result in financial dependency and management conflicts.
Although we currently do not have plans to do so, we may participate with other entities in property ownership through joint ventures or partnerships in the future. Depending on the characteristics and business objectives of the joint venture or partnership, we may not have voting control over the joint venture or partnership. Partnership or joint venture investments may, under certain circumstances, involve risks not otherwise present, including:
o our partners or co-venturers might become bankrupt;
o our 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
o our partners or co-venturers may be in a position to take action contrary to our instructions or requests contrary to our policies or objectives.
Neither the limited partnership agreement of our operating partnership nor our governing documents prevent us from participating in joint ventures with our affiliates. Because a joint venture with an affiliate may not be negotiated in a traditional arm's length transaction, terms of the joint venture may not be as favorable to us as we could obtain if we entered into a joint venture with an outside third party.
We may not be able to integrate or finance our acquisitions.
As we acquire additional properties, we will be subject to risks associated with managing new properties, including building systems not operating as expected, delay in or failure to lease vacant space and tenants failing to renew leases as they expire. In addition, our ability to manage our growth effectively will require us to successfully integrate our new acquisitions into our existing accounting systems and property management structure. We cannot assure you that we will be able to succeed with that integration or effectively manage additional properties or that newly acquired properties will perform as expected. Changing market conditions, including competition from other purchasers of suburban office properties, may diminish our opportunities for attractive additional acquisitions. Moreover, acquisition costs of a property may exceed original estimates, possibly making the property uneconomical.
Our acquisitions and renovations may not perform as expected.
Although we currently have no plans to significantly expand or renovate our properties, we may do so in the future. Expansion and renovation projects may inconvenience and displace existing tenants, require us to engage in time consuming up-front planning and engineering activities and expend capital, and require us to obtain various government and other approvals, the receipt of which cannot be assured. While our 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 that may not be completed.
Our development activities may be more expensive than anticipated and may not yield our anticipated results.
We currently have three properties under development at the Howard Hughes Center in Los Angeles, California. The estimated total costs for these three properties is approximately $204.2 million. In addition, we have preliminary architectural designs completed for additional build-to-suit buildings at the Howard Hughes Center and have completed preliminary designs on a build-to-suit office building at our Long Beach Airport Business Park, but do not intend to commence construction on any of these projects 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. We also intend to review, from time to time, other opportunities for developing and constructing office buildings and other commercial properties in accordance with our development and underwriting policies.
We expect to finance our development activities over the next 24 months through net cash provided by operating activities, proceeds from asset sales or proceeds from our lines of credit.
Risks associated with our development activities may include:
o abandonment of development opportunities due to a lack of financing or other reasons;
o construction costs of a property exceeding original estimates, possibly making the property uneconomical;
o occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable;
o construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs; and
o 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.
We are not subject to any limit on the amount or percentage of our assets that may be invested in any single property or any single geographic area.
Our governing documents do not restrict the amount or percentage of our assets that we may invest in a single property or geographic area. All of our properties are currently in Southern California and we have no immediate plans to invest outside of Southern California. This lack of diversification in our investments makes us more highly susceptible to changes affecting the Southern California economy and real estate markets or damages from regional events such as earthquakes.
We may not be able to expand into new markets successfully.
While our business is currently limited 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 manage, lease, develop or acquire properties in new localities.
FINANCING RISKS
Our significant amount of debt could limit our operational flexibility or otherwise adversely affect our financial condition.
We have a significant amount of debt. As of December 31, 2000, we had total debt of approximately $1.2 billion, consisting of approximately $576 million in secured debt and approximately $602 million of unsecured debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
Our substantial indebtedness could:
o require us to dedicate a substantial portion of our cash flow to pay our debt, thereby reducing the availability of our cash flow to fund distributions, working capital, capital expenditures, acquisition and development activity and other business purposes;
o make it more difficult for us to satisfy our debt obligations;
o limit our ability to refinance our debt and obtain additional debt financing; and
o increase our vulnerability to general adverse economic and real estate industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and the real estate industry.
We may be able to incur substantially more debt which would increase the risks associated with our substantial leverage.
Despite current indebtedness levels, we may still be able to incur substantially more debt in the future. Neither the limited partnership agreement of our operating partnership nor our charter or bylaws limit the amount or the percentage of indebtedness that we may incur. We may borrow up to a maximum of $360 million under our three lines of credit. In addition, we have the option to increase our $275 million unsecured line of credit by $50 million. If we exercised the option, we would be able to borrow up to $410 million under our three lines of credit. As of December 31, 2000, we had the ability to borrow an additional approximately $106.6 million under these three lines of credit. If new debt is added to our current debt levels, the related risks that we now face could intensify and could increase the risk of default on our indebtedness.
Scheduled debt payments could adversely affect our financial condition.
Our cash flow could be insufficient to meet required payments of principal and interest when due. In addition, we may not be able to refinance existing indebtedness, which in virtually all cases requires substantial principal payments at maturity, and, if we can refinance, the terms of the refinancing might not be as favorable as the terms of our existing indebtedness. As of December 31, 2000, approximately $8.5 million of principal will be coming due over the next twelve months. If principal payments cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow will not be sufficient in all years to repay all maturing debt and continue to service and repay our debt obligations.
Rises in interest rates could adversely affect our financial condition.
An increase in prevailing interest rates would have an immediate effect on the interest rates charged on our variable rate debt which rise and fall upon changes in interest rates. At December 31, 2000, approximately 22% of our debt was variable rate debt. Increases in interest rates would also impact the refinancing of our fixed rate debt. If interest rates are higher when our fixed debt becomes due, we may be forced to borrow at the higher rates. If prevailing interest rates or other factors result in higher interest rates, the increased interest expense would adversely affect our cash flow and our ability to service our debt, including the exchange notes. As a protection against rising interest rates, we may enter into agreements such as interest rate swaps, caps, floors and other interest rate exchange contracts. These agreements, however, increase our risks as to the other parties to the agreements not performing or that the agreements could be unenforceable. As of December 31, 2000, we were not a party to any such agreements.
Many of our properties are subject to mortgage financing which could result in foreclosure if we are unable to pay or refinance the mortgages when due.
We currently have outstanding five mortgage financings totaling $556.8 million that are secured by 67 of our properties. The properties in each of these financings are fully cross-collateralized and cross-defaulted. To the extent two or more mortgages are cross-defaulted, a default in one mortgage will trigger a default in the other mortgages. The cross-defaults can give the lender a number of remedies depending on the circumstances such as the right to increase the interest rate, demand additional collateral, accelerate the maturity date of the mortgages or foreclose on and sell the properties. To the extent two or more mortgages are cross-collateralized, a default in one mortgage will allow the mortgage lender to foreclose upon and sell the properties that are not the primary collateral for the loan in default. Five additional properties are subject to single property mortgages totaling approximately $19.3 million at December 31, 2000. If we are unable to meet our obligations under these mortgages, we could be forced to pay higher interest rates or provide additional collateral or the properties subject to the mortgages could be foreclosed upon and sold, which could have a material adverse effect on us and our ability to pay or refinance our debt obligations.
TAX RISKS
Our desire to qualify as a REIT restricts our ability to accumulate cash that might be used in future periods to make debt payments or to fund future growth.
In order to qualify as a REIT and avoid federal income tax liability, we must distribute to our stockholders at least 95% of our net taxable income, (90% beginning January 1, 2001) excluding net capital gain, and to avoid income taxation, our distributions must not be less than 100% of our net taxable income, including capital gains. To avoid excise tax liability, our distributions to our shareholders for the year must exceed the sum of 85% of its ordinary income, 95% of its capital gain net income, and any undistributed taxable income from prior years. As a result of these distribution requirements, we do not expect to accumulate significant amounts of cash. Accordingly, these distributions could significantly reduce the cash available to us in subsequent periods to make payments on our debt obligations and to fund future growth.
Our operating partnership intends to qualify as a partnership, but we cannot guarantee that it will qualify.
Our Operating Partnership intends to qualify as a partnership for federal income tax purposes. However, if the Operating Partnership were a "publicly traded partnership," it would be treated as a corporation instead of a partnership for federal income tax purposes unless at least 90% of its income is qualifying income as defined in the Internal Revenue Code. The income requirements applicable to REITs and the definition of "qualifying income" for purposes of this 90% test are similar in most respects. Qualifying income for the 90% test generally includes passive income, such as specified types of real property rents, dividends and interest. We believe that the Operating Partnership would meet this 90% test, but we cannot guarantee that it would. If the Operating Partnership were to be taxed as a corporation, it would incur substantial tax liabilities and we would fail to qualify as a REIT for federal income tax purposes.
We may suffer adverse tax consequences and be unable to attract capital if we fail to qualify as a REIT.
We believe that since our taxable year ended December 31, 1996, we have been organized and operated, and intend to continue to operate, so as to qualify for taxation as a REIT under the Internal Revenue Code. Although we believe that we have been and will continue to be organized and have operated and will continue to operate so as to qualify for taxation as a REIT, we cannot assure you that we have been or will continue to be organized or operated in a manner so as to qualify or remain so qualified. For us to qualify as a REIT, we must satisfy numerous requirements established under highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations and tests regarding various factual matters and circumstances not entirely within Arden Realty's control. The complexity of these provisions and of the applicable Treasury Regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT, like us, that hold our assets through an investment in a partnership. 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 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 depends on our ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Internal Revenue Code, the results of which have not been and will not be reviewed by our tax counsel.
If we failed 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 specific statutory provisions, we also would be disqualified as a REIT for the four taxable years following the year during which qualification was lost. If we were disqualified as a REIT, our ability to raise additional capital could be significantly impaired. This could reduce the funds we would have available to pay distributions to our stockholders and to service our debt.
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. For example, if we have net income from a prohibited transaction, specifically sales or other taxable dispositions of property held primarily for sale to customers in the ordinary course of business, that income will be subject to a 100% tax.
OTHER RISKS
We are subject to agreements and policies that may deter change in control offers that might be attractive to our stockholders.
Certain provisions of our charter and bylaws as well as our stockholder rights plan, which is described below, may delay, defer or prevent a third party from making offers to acquire us or control over us. For example, such provisions may:
o deter tender offers for our common stock, which offers may be attractive to the stockholders; and
o 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.
Our charter contains a provision designed to prevent a concentration of ownership among our stockholders that would cause us to fail to qualify as a REIT. Under the Internal Revenue 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, including specific kinds of entities, at any time during the last half of our taxable year. In addition, if we, or an owner of 10% or more of our common 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 from that tenant will not be qualifying income for purposes of the REIT gross income tests. In order to protect us against the risk of losing REIT status, the ownership limit included in our charter 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. 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.
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. Our Board of Directors has waived our ownership limit with respect to Mr. Ziman and certain family members and affiliates and has permitted these parties to actually and constructively own up to 13.0% of the outstanding shares of common stock.
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.
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.
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 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.
Each right entitles 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 person or group seeking to acquire 15% or more of our common stock 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.
We may change 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 management. Although we have no present intention to do so, these policies could be amended or revised at any time and from time to time at the discretion of our management and Board of Directors without a vote of our stockholders. In addition, we may change policies with respect to conflicts of interest provided that the changes are consistent with applicable legal requirements. A change in these policies could adversely affect our financial condition, results of operations and market price of our common stock.
Losses in excess of our insurance coverage or uninsured losses could adversely affect our cash flow.
We carry comprehensive liability, fire, extended coverage and rental loss insurance policies which currently cover all of our properties with specifications and insured limits that we believe are adequate and appropriate under the circumstances. Some losses, however, are generally not insured against because it is not economically feasible to do so. 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 recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the property. Any loss would adversely affect our cash flow with respect to the property subject to the loss. Moreover, we would generally be liable for any unsatisfied obligations other than non-recourse obligations with respect to the property subject to the loss.
An earthquake could adversely affect our business.
All of our properties are located in Southern California which is a high risk geographical area for earthquakes. Depending upon its magnitude, an earthquake could severely damage our properties which would adversely affect our business. We maintain earthquake insurance for our properties and the resulting business interruption. We cannot assure you that our insurance will be sufficient if there is a major earthquake.
Our properties may be subject to environmental liabilities.
Under federal, state and local environmental laws, 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 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 of responsibility. These costs 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 against the property. 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. Some laws create a lien on the contaminated site in favor of the government for damages and costs incurred in connection with the contamination. Finally, third parties may have claims against the owner of the site based on damages and costs resulting from environmental contamination emanating from that site.
Specific 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 liable for those costs.
In the past few years, independent environmental consultants have conducted or updated Phase I environmental assessments and other environmental investigations as appropriate at some of our properties. These environmental site assessments and investigations 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 samplings were performed where warranted.
The environmental site assessments and investigations have identified a total of 28 properties in our portfolio, representing approximately 26.7% of the total net rentable square feet of the portfolio, affected by environmental concerns. These environmental concerns include properties that may be impacted by known or suspected (a) contamination caused by third party sources or (b) soil and/or groundwater contamination which has been or is being remediated, and (c) those containing underground storage tanks, asbestos, or some known or suspected amount of indoor air contaminants.
Of these properties, one is believed to be affected by contamination caused by third party sources and houses underground storage tanks, one contains friable asbestos, 14 contain non-friable asbestos, nine house underground storage tanks, and three contain known or suspected indoor air contaminants. The property affected by contamination is affected primarily by petroleum and solvent substances, and a third party has indemnified us for any and all problems associated with this contamination. With regard to those properties affected by asbestos, asbestos does not pose a health hazard if it is not disturbed in such a way to cause an airborne release of asbestos. Asbestos is friable when it can be crumbled, pulverized or reduced to powder by hand pressure, and non-friable when hand pressure cannot release encapsulated asbestos fibers. Friable asbestos is more likely to be released into the air than no-friable asbestos. We manage all asbestos in ways that minimize its potential to become airborne or otherwise threaten human health. Regarding underground storage tanks, subsurface leakage of the materials contained within the tank constitutes the primary risk posed by these devices. We comply with all applicable laws, including double-wall construction, testing protocols, placement of tanks within bermed areas, and the installation of leak and spill detection equipment, to minimize the risks posed by underground storage tanks.
The environmental site assessments and investigations 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 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.
We believe that our properties are in compliance in all material respects with all federal, state and local laws 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. It is possible that future laws will impose material environmental liabilities on us and that the current environmental condition of our properties will 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.
ITEM 8.
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.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III is incorporated by reference from our definitive proxy statement for our 2001 Annual Meeting of Stockholders.
ITEM 10.
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.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section captioned "Executive Compensation" of the definitive proxy statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section captioned "Principal and Management Stockholders" of the definitive proxy statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section captioned "Certain Relationships and Related Transactions" of the definitive proxy statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
The following consolidated financial information is included as a separate section of this Annual Report on Form 10-K:
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.
(b) REPORTS ON FORM 8-K
The Company filed the following report on Form 8-K during the quarter ended December 31, 2000.
Form 8-K was filed on November 20, 2000. Under Item 9 - Regulation FD Disclosure, we reported that our operating partnership placed $100 million of 8.5% senior unsecured notes due November 2010.
Exhibit Number Description - -------------- -----------
3.1* Amended and Restated Articles of Incorporation as filed as an exhibit to Arden Realty Registration Statement on Form S-11 (No. 333-8163).
3.2* Articles Supplementary of Class A Junior Participating Preferred Stock as filed as an exhibit to the current report on Form 8-K, dated August 26, 1998.
3.3* Articles Supplementary of the 8 5/8 Series B Cumulative Redeemable Preferred Stock dated September 7, 1999, filed as an exhibit to Arden Realty's 10-K dated March 27, 2000.
3.4* By-laws of Registrant as filed as an exhibit to Arden Realty's on Form S-11 (No. 333-8163).
3.5* Certificate of Amendment of the By-laws of Arden Realty dated July 14, 1998, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q dated August 14, 1998.
3.6* Certificate of Amendment of the Bylaws of Arden Realty dated March 17, 2000, filed as an exhibit on Form 10-Q dated May 11, 2000.
4.1* Rights Agreement, dated August 14, 1998, between Arden Realty and The Bank of New York, as filed as an exhibit to Arden Realty's current report on Form 8-K dated August 26, 1998.
4.2* Indenture between Arden Realty Limited Partnership and The Bank of New York, as trustee, dated March 14, 2000 as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-35406).
4.3 First amendment to Rights Agreement.
10.1* 1996 Stock Option and Incentive Plan of Arden Realty, Inc. and Arden Realty Limited Partnership as filed as an exhibit to Arden Realty's registration statement on Form S-11 (No. 333-8163).
10.2* 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 Arden Realty's Schedule 14A filed with the Commission on June 23, 1998.
10.3* Form of Officers and Directors Indemnification Agreement as filed as an exhibit to Arden Realty's registration statement on Form S-11 (No. 333-8163).
Exhibit Number Description - -------------- -----------
10.4* Loan Agreement dated June 8, 1998 by and between Arden Realty Finance III, L.L.C., a Delaware 10.4* limited liability company and Lehman Brothers Realty Corporation, a Delaware corporation filed as an exhibit to Arden Realty's quarterly report of Form 10-Q filed with the Commission on August 14, 1998.
10.5* 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, and Lehman Brothers Realty Corporation, a Delaware corporation. (Exhibit B. to Exhibit 10.4 above).
10.6* Tenant Estoppel Certificate (Exhibit C. to Exhibit 10.4 above).
10.7* Subordination, Non-Disturbance and Attornment Agreement (Exhibit D. to Exhibit 10.4 above).
10.8* 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.9* Assignment of Leases and Rents dated June 8, 1998, by and between Arden Realty Finance III, L.L.C., a Delaware limited liability company and Lehman Brothers Realty Corporation, a Delaware corporation, its successors and assigns filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.10* Collateral Assignment of Management Agreement and Subordination 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.11* 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 and Lehman Brothers Realty Corporation, a Delaware corporation, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.12* Environmental Indemnity Agreement dated June 8, 1998 by Arden Realty Finance III, L.L.C., a Delaware limited liability company, in favor of Lehman Brothers Realty Corporation, a Delaware corporation, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
Exhibit Number Description - -------------- -----------
10.13* Letter agreement between Lehman Brothers Realty Corporation, Arden Realty Finance III, L.L.C., Arden Realty and Arden Realty Limited Partnership, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.14* 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.15* 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).
10.16* Tenant Estoppel Certificate (Exhibit C. to Exhibit 10.14 above).
10.17* Subordination, Non-Disturbance and Attornment Agreement (Exhibit D. to Exhibit 10.14 above).
10.18* 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.19* Assignment of Leases and Rents 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.20* Collateral Assignment of Management Agreement and Subordination 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, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
Exhibit Number Description - -------------- -----------
10.21* Security Agreement is entered into as of June 8, 1998 by and between Arden Realty Finance IV, 10.21* L.L.C., a Delaware limited liability company ("Debtor"), and Lehman Brothers Realty Corporation, a Delaware corporation ("Secured Party"), filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.22* Environmental Indemnity 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.23* Letter agreement between Lehman Brothers Realty Corporation, Arden Realty Finance IV, L.L.C., Arden Realty and Arden Realty Limited Partnership, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.24*# Amended and Restated Employment Agreement dated August 4, 1998, between Arden Realty and Mr. Richard S. Ziman, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q/A filed with the Commission on December 15, 1998.
10.25*# Amended and Restated Employment Agreement dated August 4, 1998, between Arden Realty and Mr. Victor J. Coleman, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q/A filed with the Commission on December 15, 1998.
10.26*# Amended and Restated Employment Agreement dated August 4, 1998, between Arden Realty and Mr. Herbert Porter, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q/ A filed with the Commission on December 15, 1998.
10.27*# Amended and Restated Employment Agreement dated January 1, 1999, between Arden Realty and Mr. Robert Peddicord, filed as a exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 8, 2000.
10.28* Miscellaneous Rights Agreement among Arden Realty, Arden Realty Limited Partnership, NAMIZ, Inc. and Mr. Ziman, filed as an exhibit to Arden Realty's registration statement on Form S- II (No. 333-8163).
10.29* Credit Facility documentation consisting of Second Amended and Restated Revolving Credit Agreement by and among Arden Realty Limited Partnership and a group of banks led by Wells Fargo Bank as filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on May 12, 2000.
Exhibit Number Description - -------------- -----------
10.30* Mortgage Financing documentation consisting of Loan Agreement by and between Arden Realty's 10.30* 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 Arden Realty's registration statement of Form S-11 (No. 333-30059).
10.31* Promissory Note, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V, L.L.C. filed as an exhibit to Arden Realty's current report Form 8-K filed with the Commission on April 20, 1999.
10.32* Deed of Trust and Security Agreement, dated as of March 30, 1999, with Arden Realty Finance V, L.L.C. as the Trustor and Massachusetts Mutual Life Insurance Company as the Beneficiary filed as an exhibit to Arden Realty's current report on Form 8-K filed with the Commission on April 20, 1999.
10.33* Assignment of Leases and Rents, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V, L.L.C. filed as an exhibit to Arden Realty's current report on Form 8-K filed with the Commission on April 20, 1999.
10.34* Subordination of Management Agreement, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V. L.L.C. filed as an exhibit to Arden Realty's current report on Form 8-K filed with the Commission on April 20, 1999.
10.35* Environmental Indemnification and Hold Harmless Agreement, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V, L.L.C. filed as an exhibit to Arden Realty's current report on Form 8-K filed with the Commission on April 20, 1999.
10.35* Form of Arden Realty Limited Partnership's unsecured 8.875% senior note due 2005, dated March 17, 2000 filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-35406).
10.36* Form of Arden Realty Limited Partnership's unsecured 9.150% senior note due 2010, dated March 17, 2000 filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-35406).
10.37* Senior Unsecured Credit Agreement between Arden Realty Limited Partnership and Lehman Brothers Inc. dated July 27, 2000 filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on November 12, 2000.
Exhibit Number Description - -------------- -----------
10.38* Registration Rights Agreement between Arden Realty Limited Partnership and the initial purchasers 10.38* set forth therein dated as of March 17, 2000, filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-35406).
10.39* Purchase Agreement between Arden Realty Limited Partnership and the initial purchasers set forth therein dated as of March 14, 2000, filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-35406).
10.40* Registration Rights Agreement between Arden Realty Limited Partnership and Lehman Brothers Inc. dated as of November 20, 2000 as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.41* Purchase Agreement between Arden Realty Limited Partnership and Lehman Brothers Inc. dated as of November 15, 2000 as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.42* Amended and Restated Employment Agreement dated May 27, 1999, between Arden Realty and Mr. Randy J. Noblitt as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.43* Amended and Restated Employment Agreement dated July 27, 2000, by and between Arden Realty and Mr. Richard S. Ziman as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.44* Amended and Restated Employment Agreement dated July 27, 2000, by and between Arden Realty and Mr. Victor J. Coleman as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.45*# Amendment to the 1996 Stock Option and Incentive Plan of Arden Realty, Inc. and Arden Realty Limited Partnership as filed as an exhibit to Arden Realty's Schedule 14A filed with the Commission on April 25, 2000.
10.46* Form of Arden Realty Limited Partnership's unsecured 8.50% senior note due 2010, dated November 20, 2000 as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.47 Admission of New Partners and Amendment to Limited Partnership Agreement entered into as of the 20th day of December, 2000, by and between Arden Realty Limited Partnership and the persons identified as the "New Partners" therein.
Exhibit Number Description - -------------- -----------
21.1* Subsidiaries of Arden Realty Limited Partnership as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
23.1 Consent of Ernst & Young LLP
- ------------------
(*) Incorporated by reference.
(#) Management contract or compensatory plan or arrangement required to be identified by Item 14(a)3.
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 24, 2000.
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.
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, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the management of Arden Realty, Inc. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2000 and 1999 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
Los Angeles, California /s/ ERNST & YOUNG LLP January 30, 2001
ARDEN REALTY, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes to financial statements.
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes to financial statements.
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
See accompanying notes to financial statements.
ARDEN REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes to financial statements.
ARDEN REALTY, INC.
NOTES TO CONSOLIDATED 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. We are a self-administered and self-managed real estate investment trust, or REIT, that owns, manages, leases, develops, renovates and acquires commercial properties located in Southern California.
Organization and Formation of the Company
We were incorporated in Maryland in May 1996 and are the sole general partner of Arden Realty Limited Partnership, or 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. Commencing with our taxable year ended December 31, 1996, we have operated and qualified as a REIT for federal income tax purposes.
Since our formation in 1996, we have acquired 118 properties containing approximately 14.5 million net rentable square feet for a total purchase price of approximately $1.9 billion. As of December 31, 2000, our portfolio consisted of 142 primarily suburban office properties containing approximately 18.7 million net rentable square feet and three properties with approximately 725,000 net rentable square feet under development. As of December 31, 2000, our properties were approximately 95.5% leased.
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 our subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The minority interests at December 31, 2000 and December 31, 1999 consisted of limited partnership interests in the Operating Partnership of approximately 3.3%, exclusive of ownership interests of our preferred units holders.
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.
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.
Segment Information
We view our operations as principally one segment, namely the operation of commercial real estate located in Southern California, and the financial information disclosed herein represents all of the financial information related to this principal operating segment.
Commercial Properties
Our properties are stated at depreciated cost. When indicators of impairment exist, write-downs to estimated fair value would be recognized if a property's estimated undiscounted future cash flows, before interest charges, are less than its book value. Properties held for disposition are carried at the lower of
depreciated cost or fair value. Based on our assessment, no write-downs to estimated fair value were necessary as of December 31, 2000 and 1999, respectively.
Repair and maintenance costs are charged to expenses as incurred and significant replacements and betterments are capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of a an asset or increase its operating efficiency. Significant replacements and betterments represent costs that extend an asset's useful life or increase its operating efficiency.
Depreciation is calculated under the straight-line method using forty-year lives for buildings, ten-year lives for building improvements and five-year lives for furniture, fixtures and equipment. Amortization of tenant improvements is calculated using the straight-line method over the term of the related lease.
Costs associated with leasing properties are capitalized and amortized to expense on a straight-line basis over the related lease term.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less when acquired.
Restricted Cash
Restricted cash at December 31, 2000 and 1999 primarily consists of $13.9 million and $13.7 million, respectively, in cash deposits as required by certain of our mortgage loans payable and $5.5 million and $4.8 million, respectively, in impound accounts for real estate taxes and insurance, as required by certain of our mortgage loans payable.
Prepaid Financing Costs
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.
Income Taxes
We generally will not be subject to federal income taxes as long as we continue to qualify as a 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 (90% beginning January 1, 2001) 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 2000, 1999 and 1998, we declared dividends of $1.86, $1.78 and $1.68 per share, respectively
Fair Value of Financial Instruments
Our disclosures of estimated fair value of financial instruments at December 31, 2000 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 or estimation methodologies may have a material effect on the estimated fair value amounts.
Our cash equivalents, mortgage notes receivable, accounts payable and other financial instruments are carried at amounts that reasonably approximate their fair value amounts.
The estimated fair value of our notes payable is as follows (in thousands):
The estimated fair value is based on interest rates available at each of the dates presented for issuance of debt with similar terms and remaining maturities. The estimated fair value amounts of our notes payable above are not necessarily indicative of the amounts that we could realize in a current market exchange. The unrealized gains in our notes payable are presented for disclosure purposes and are not reflected in our balance sheets or results of operations.
New Accounting Standards
In June 1998, June 1999 and June 2000, respectively, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of Statement No. 133," and Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of Statement No. 133." These statements outline the accounting treatment for all derivative activity. In October 2000, the SEC issued "Frequently Asked Questions on Staff Accounting Bulletin No. 101 on Revenue Recognition." This document formalizes the position of the SEC staff regarding key topics about income recognition. We adopted SAB 101 on October 1, 2000 and its adoption did not impact our financial results. We adopted on January 1, 2001 Statement No. 133 and do not expect adoption to have a significant effect on our consolidated results of operations or financial position.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation.
3. COMMERCIAL PROPERTIES
Acquisitions
We did not acquire any properties in 2000.
Dispositions
On October 13, 2000, we sold a 76,000 net rentable square foot retail property located in Thousand Oaks, California, for approximately $12.0 million and recorded a gain of approximately $2.1 million.
Capitalized Interest
We capitalize interest and taxes related to buildings under construction and renovation to the extent those assets qualify for capitalization.
Total interest incurred and the amount capitalized for the years ended December 31, 2000, 1999, and 1998 were as follows (in thousands):
Future Minimum Lease Payments
Future minimum lease payments to be received under noncancelable operating leases existing as of December 31, 2000, are as follows (in thousands):
The above future minimum lease payments do not include payments received for tenant reimbursements of specified operating expenses.
We lease the land underlying the office buildings or parking structures at six of our buildings. Ground lease expense, including amounts netted against parking revenues, was approximately $2.3 million, $1.7 million and $2.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. Future minimum ground lease payments due under existing ground leases are as follows (in thousands):
4. MORTGAGE NOTES RECEIVABLE
In September 1997, we 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, require monthly payments of principal, interest, and additional net cash flow from the office property and mature on May 31, 2004. These notes had an effective interest rate of 8.84% at December 31, 2000.
5. MORTGAGE LOANS AND UNSECURED INDEBTEDNESS
A summary of mortgage loans payable, unsecured lines of credit and unsecured senior notes is as follows:
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(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 points facility fee on the entire $275 million commitment amount.
(6) This line of credit has a one-year extension option.
(7) Requires semi-annual interest payments only, with principal balance due upon maturity.
Unsecured Lines of Credit
On May 3, 2000, we extended our unsecured line of credit with a group of banks led by Wells Fargo. The extended line of credit provides for borrowings up to $275 million with an option to increase the amount to $325 million and bears interest at a rate ranging between LIBOR plus 1.15% and LIBOR plus 1.80% (including an annual facility fee ranging from .20% to .40% based on the aggregate amount of the facility) depending on our unsecured debt rating. In addition, as long as we maintain an unsecured debt rating of BBB-/Baa3 or better, the agreement contains a competitive bid option, whereby the lenders on this of line of credit may bid on the interest rate to be charged for up to $137.5 million of the unsecured line of credit. Under certain circumstances, we also have the option to convert the interest rate on this line of credit to the prime rate plus 0.5%. This line of credit matures in April 2003. As of December 31, 2000, there was approximately $172.4 million outstanding on this line of credit and approximately $102.6 million was available for additional borrowings.
This line of credit 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 Wells Fargo line of credit documentation, and requirements to maintain a pool of unencumbered properties that meet certain defined characteristics and are approved by the group of banks led by Wells Fargo Bank. This line of credit also contains restrictions on, among other things, indebtedness, investments, distributions, liens and mergers. Proceeds from this line of credit have been used to provide funds for tenant improvements and capital expenditures and to provide for working capital and other purposes.
In July 2000, we closed on a $75 million unsecured line of credit with Lehman Brothers. Borrowings on this new line of credit bear interest at a rate ranging between LIBOR plus 1.05% and LIBOR plus 1.70%, depending on our unsecured debt rating. We also have the option to convert the interest rate to the prime rate plus 0.5%. This line of credit matures on July 27, 2002 with an option to extend the maturity date for one year. Proceeds from this line of credit have been used to reduce the outstanding balance under our $275 million line of credit. As of December 31, 2000, there was $75 million outstanding on this line of credit.
In August 2000, we extended our unsecured line of credit with a total commitment of $10 million from City National Bank to August 2001. This line of credit accrues interest at the City National Bank Prime Rate less 0.875%. As of December 31, 2000, there was $6 million outstanding on this line of credit and $4 million was available for additional borrowing. Proceeds from this line of credit have been used, among other things, to provide funds for tenant improvement and capital expenditures and provide for working capital and other purposes.
Unsecured Senior Notes
On March 17, 2000, our Operating Partnership issued $250 million of senior unsecured notes in two tranches. One tranche was for $200 million at an interest rate of 8.875% due in March 2005 and the other tranche was for $50 million at an interest rate of 9.150% due in March 2010. These notes are our senior unsecured obligations and pay interest semi-annually on March 1, and September 1, of each year. Net proceeds from this offering were used to repay two prepayable term loans to an affiliate of Lehman Brothers and a mortgage loan and to reduce the outstanding balance under our unsecured lines of credit. These senior unsecured notes were issued in a private placement in reliance upon an exemption from registration provided by Rule 144A under the Securities Act. Our operating partnership subsequently filed a registration statement that became effective on May 10, 2000 and all privately placed notes were exchanged for notes registered under the Securities Act.
On November 20, 2000, our Operating Partnership completed a private placement of $100 million 8.50% senior notes due 2010, with interest payable semi-annually on November 15 and May 15 of each year. We used the net proceeds from this private placement to reduce the outstanding balance on one of our unsecured lines of credit and to repay a construction loan related to our development of the 6060 Center Drive Project. These senior unsecured notes were issued in a private placement in reliance upon an exemption from registration provided by Rule 144A under the Securities Act. Our Operating Partnership subsequently filed a registration statement that became effective on March 29, 2001 and is currently exchanging these privately placed notes for registered notes. We expect to complete this exchange offer by April 26, 2001.
Following is a summary of scheduled principal payments for our total debt outstanding as of December 31, 2000 (in thousands):
6. STOCKHOLDERS' EQUITY
During 2000, we issued a total of 373,000 restricted stock awards to several key executive officers. The restriction on these shares prohibits the sale or transfer of such shares and lapses equally over four years for 100,000 shares and over five years for 273,000 shares. We have recorded a deferred compensation charge of approximately $9.5 million, based on the market value of these shares on the date of award, in the accompanying consolidated statement of stockholders' equity and will amortize such charge on a straight-line basis over the restriction period for each award. In 2000, we recorded $586,000 in non-cash compensation expense related to these restricted stock awards.
On September 7, 1999, our Operating Partnership 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.
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.
A dividend was declared on December 1, 2000 to stockholders of record on December 31, 2000 of $0.465 per common share, for the quarter ended December 31, 2000. This dividend was paid on January 27, 2001. Arden Realty declared dividends of $1.86 per common share for the year ended December 31, 2000.
7. COMMITMENTS AND CONTINGENCIES
Capital Commitments
As of December 31, 2000, we had approximately $14.1 million outstanding in capital commitments related to tenant improvements, renovation costs and general property-related capital expenditures.
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.
8. RELATED PARTY TRANSACTIONS
Promissory Notes Receivable from Officers
In August 1998, we issued 85,106 shares of common stock, related to the issuance of 42,553 shares of common stock to each of two executive officers. In consideration for the issuance of the common stock, the executive officers executed promissory notes in the amount of $1 million each. The promissory notes were recourse and secured by the shares of common stock issued to the executive officers.
Mr. Andrew J. Sobel resigned as Executive Vice President and Director of Property Operations effective February 18, 2000. At the time of his resignation, Mr. Sobel surrendered the common stock underlying his promissory note and executed a new promissory note in the amount of $223,887, representing the difference between the value of the common stock surrendered and the unpaid principal and interest on his original promissory note. The new promissory note bears interest at 6.56%, with all accrued interest and principal due on February 18, 2002. In addition, effective with his termination, Arden Realty and Mr. Sobel entered into a consulting and non-competition agreement for a term of two years. Under this agreement, Mr. Sobel received compensation of $6,000 per month which was applied against the unpaid interest and principal on the new promissory note. In July 2000, Mr. Sobel returned to Arden Realty as Executive Vice President, terminating the consulting and non-competition agreement described above, and is in the process of finalizing a new employment agreement with Arden Realty addressing, among other things, the promissory note.
Ms. Diana Laing resigned as Executive Vice President and Chief Financial Officer effective July 1, 2000. At the time of her resignation, Ms. Laing surrendered stock options valued at approximately $59,000 as well as the 42,553 shares of Arden Realty's common stock underlying her promissory note. The value of the options and shares surrendered by Ms. Laing equaled the unpaid principal and interest of her promissory note.
9. REVENUE FROM RENTAL OPERATIONS AND PROPERTY OPERATING EXPENSES
Revenue from rental operations and property operating expenses for the years ended December 31, 2000, 1999 and 1998 are summarized as follows (in thousands):
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income per share for the years ended December 31, 2000, 1999 and 1998 (in thousands, except per share amounts):
11. 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 our 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 APB 25, because the exercise price of employee and director stock options we granted equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
We established a stock option plan for the purpose of attracting and retaining executive officers, directors and other key employees. As of December 31, 2000, 6,500,000 of our authorized shares of common stock have been reserved for issuance under that plan.
All holders of the above options have a ten-year period to exercise such options 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 Arden Realty had accounted for its 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 2000, 1999 and 1998, respectively: risk-free interest rate of 6.13%, 6.67% and 5.68% dividend yield of 7.75%, 5.79% and 7.25% and a volatility factor of the expected market price of Arden Realty's common stock of .198, .245 and .268. The weighted average expected life of the options ranges between eight and 10 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 our 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. Our pro forma information for the years ended December 31, 2000, 1999 and 1998 follows (in thousands, except earnings per share information):
A summary of Arden Realty's stock option activity, and related information for the years ended December 31, 2000, 1999 and 1998 follows:
Exercise prices for options outstanding as of December 31, 2000 ranged from $19.13 to $32.25. The weighted average remaining contractual life of those options is 6.3 years.
12. EMPLOYEE RETIREMENT SAVINGS PLAN
Effective June 12, 1997, we adopted a retirement savings plan pursuant to Section 401(k) of the Internal Revenue 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 us, which amounted to approximately $517,000 in 2000, $385,000 in 1999 and $187,000 in 1998. Plan participants are immediately vested in their contributions and are vested equally over four years in matching contributions by us.
13. SUBSEQUENT EVENT -- UNAUDITED
Dividend Declaration
On March 6, 2001, we declared a first quarter dividend of $0.49 per share to shareholders of record on March 30, 2001.
14. QUARTERLY RESULTS
Following is a quarterly summary of our revenue and expenses for the years ended December 31, 2000, 1999 and 1998. Revenue and expenses have fluctuated significantly from quarter to quarter primarily due to our development, renovation and acquisition activity (unaudited).
15. SCHEDULE OF COMMERCIAL PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT SQUARE FOOT DATA)
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(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 $33.0 million.
(3) All of these properties are collateral for Arden Realty's $556.8 million mortgage financings. The encumbrance allocated to an individual property is based on the related individual release price.
ARDEN REALTY, INC.
16. SCHEDULE OF COMMERCIAL PROPERTIES AND ACCUMULATED DEPRECIATION
The changes in our investment in commercial properties and related accumulated depreciation for each of the periods in the three years ended December 31, are as follows (in thousands):
Exhibit Number Description - -------------- -----------
3.1* Amended and Restated Articles of Incorporation as filed as an exhibit to Arden Realty Registration Statement on Form S-11 (No. 333-8163).
3.2* Articles Supplementary of Class A Junior Participating Preferred Stock as filed as an exhibit to the current report on Form 8-K, dated August 26, 1998.
3.3* Articles Supplementary of the 8 5/8 Series B Cumulative Redeemable Preferred Stock dated September 7, 1999, filed as an exhibit to Arden Realty's 10-K dated March 27, 2000.
3.4* By-laws of Registrant as filed as an exhibit to Arden Realty's on Form S-11 (No. 333-8163).
3.5* Certificate of Amendment of the By-laws of Arden Realty dated July 14, 1998, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q dated August 14, 1998.
3.6* Certificate of Amendment of the Bylaws of Arden Realty dated March 17, 2000, filed as an exhibit on Form 10-Q dated May 11, 2000.
4.1* Rights Agreement, dated August 14, 1998, between Arden Realty and The Bank of New York, as filed as an exhibit to Arden Realty's current report on Form 8-K dated August 26, 1998.
4.2* Indenture between Arden Realty Limited Partnership and The Bank of New York, as trustee, dated March 14, 2000 as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-35406).
4.3 First amendment to Rights Agreement.
10.1* 1996 Stock Option and Incentive Plan of Arden Realty, Inc. and Arden Realty Limited Partnership as filed as an exhibit to Arden Realty's registration statement on Form S-11 (No. 333-8163).
10.2* 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 Arden Realty's Schedule 14A filed with the Commission on June 23, 1998.
10.3* Form of Officers and Directors Indemnification Agreement as filed as an exhibit to Arden Realty's registration statement on Form S-11 (No. 333-8163).
Exhibit Number Description - -------------- -----------
10.4* Loan Agreement dated June 8, 1998 by and between Arden Realty Finance III, L.L.C., a Delaware 10.4* limited liability company and Lehman Brothers Realty Corporation, a Delaware corporation filed as an exhibit to Arden Realty's quarterly report of Form 10-Q filed with the Commission on August 14, 1998.
10.5* 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, and Lehman Brothers Realty Corporation, a Delaware corporation. (Exhibit B. to Exhibit 10.4 above).
10.6* Tenant Estoppel Certificate (Exhibit C. to Exhibit 10.4 above).
10.7* Subordination, Non-Disturbance and Attornment Agreement (Exhibit D. to Exhibit 10.4 above).
10.8* 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.9* Assignment of Leases and Rents dated June 8, 1998, by and between Arden Realty Finance III, L.L.C., a Delaware limited liability company and Lehman Brothers Realty Corporation, a Delaware corporation, its successors and assigns filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.10* Collateral Assignment of Management Agreement and Subordination 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.11* 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 and Lehman Brothers Realty Corporation, a Delaware corporation, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.12* Environmental Indemnity Agreement dated June 8, 1998 by Arden Realty Finance III, L.L.C., a Delaware limited liability company, in favor of Lehman Brothers Realty Corporation, a Delaware corporation, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
Exhibit Number Description - -------------- -----------
10.13* Letter agreement between Lehman Brothers Realty Corporation, Arden Realty Finance III, L.L.C., Arden Realty and Arden Realty Limited Partnership, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.14* 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.15* 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).
10.16* Tenant Estoppel Certificate (Exhibit C. to Exhibit 10.14 above).
10.17* Subordination, Non-Disturbance and Attornment Agreement (Exhibit D. to Exhibit 10.14 above).
10.18* 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.19* Assignment of Leases and Rents 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.20* Collateral Assignment of Management Agreement and Subordination 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, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
Exhibit Number Description - -------------- -----------
10.21* Security Agreement is entered into as of June 8, 1998 by and between Arden Realty Finance IV, 10.21* L.L.C., a Delaware limited liability company ("Debtor"), and Lehman Brothers Realty Corporation, a Delaware corporation ("Secured Party"), filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.22* Environmental Indemnity 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 Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.23* Letter agreement between Lehman Brothers Realty Corporation, Arden Realty Finance IV, L.L.C., Arden Realty and Arden Realty Limited Partnership, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 14, 1998.
10.24*# Amended and Restated Employment Agreement dated August 4, 1998, between Arden Realty and Mr. Richard S. Ziman, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q/A filed with the Commission on December 15, 1998.
10.25*# Amended and Restated Employment Agreement dated August 4, 1998, between Arden Realty and Mr. Victor J. Coleman, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q/A filed with the Commission on December 15, 1998.
10.26*# Amended and Restated Employment Agreement dated August 4, 1998, between Arden Realty and Mr. Herbert Porter, filed as an exhibit to Arden Realty's quarterly report on Form 10-Q/ A filed with the Commission on December 15, 1998.
10.27*# Amended and Restated Employment Agreement dated January 1, 1999, between Arden Realty and Mr. Robert Peddicord, filed as a exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on August 8, 2000.
10.28* Miscellaneous Rights Agreement among Arden Realty, Arden Realty Limited Partnership, NAMIZ, Inc. and Mr. Ziman, filed as an exhibit to Arden Realty's registration statement on Form S- II (No. 333-8163).
10.29* Credit Facility documentation consisting of Second Amended and Restated Revolving Credit Agreement by and among Arden Realty Limited Partnership and a group of banks led by Wells Fargo Bank as filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on May 12, 2000.
Exhibit Number Description - -------------- -----------
10.30* Mortgage Financing documentation consisting of Loan Agreement by and between Arden Realty's 10.30* 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 Arden Realty's registration statement of Form S-11 (No. 333-30059).
10.31* Promissory Note, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V, L.L.C. filed as an exhibit to Arden Realty's current report Form 8-K filed with the Commission on April 20, 1999.
10.32* Deed of Trust and Security Agreement, dated as of March 30, 1999, with Arden Realty Finance V, L.L.C. as the Trustor and Massachusetts Mutual Life Insurance Company as the Beneficiary filed as an exhibit to Arden Realty's current report on Form 8-K filed with the Commission on April 20, 1999.
10.33* Assignment of Leases and Rents, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V, L.L.C. filed as an exhibit to Arden Realty's current report on Form 8-K filed with the Commission on April 20, 1999.
10.34* Subordination of Management Agreement, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V. L.L.C. filed as an exhibit to Arden Realty's current report on Form 8-K filed with the Commission on April 20, 1999.
10.35* Environmental Indemnification and Hold Harmless Agreement, dated as of March 30, 1999, between Massachusetts Mutual Life Insurance Company and Arden Realty Finance V, L.L.C. filed as an exhibit to Arden Realty's current report on Form 8-K filed with the Commission on April 20, 1999.
10.35* Form of Arden Realty Limited Partnership's unsecured 8.875% senior note due 2005, dated March 17, 2000 filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-35406).
10.36* Form of Arden Realty Limited Partnership's unsecured 9.150% senior note due 2010, dated March 17, 2000 filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-35406).
10.37* Senior Unsecured Credit Agreement between Arden Realty Limited Partnership and Lehman Brothers Inc. dated July 27, 2000 filed as an exhibit to Arden Realty's quarterly report on Form 10-Q filed with the Commission on November 12, 2000.
Exhibit Number Description - -------------- -----------
10.38* Registration Rights Agreement between Arden Realty Limited Partnership and the initial purchasers 10.38* set forth therein dated as of March 17, 2000, filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-35406).
10.39* Purchase Agreement between Arden Realty Limited Partnership and the initial purchasers set forth therein dated as of March 14, 2000, filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-35406).
10.40* Registration Rights Agreement between Arden Realty Limited Partnership and Lehman Brothers Inc. dated as of November 20, 2000 as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.41* Purchase Agreement between Arden Realty Limited Partnership and Lehman Brothers Inc. dated as of November 15, 2000 as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.42* Amended and Restated Employment Agreement dated May 27, 1999, between Arden Realty and Mr. Randy J. Noblitt as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.43* Amended and Restated Employment Agreement dated July 27, 2000, by and between Arden Realty and Mr. Richard S. Ziman as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.44* Amended and Restated Employment Agreement dated July 27, 2000, by and between Arden Realty and Mr. Victor J. Coleman as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.45*# Amendment to the 1996 Stock Option and Incentive Plan of Arden Realty, Inc. and Arden Realty Limited Partnership as filed as an exhibit to Arden Realty's Schedule 14A filed with the Commission on April 25, 2000.
10.46* Form of Arden Realty Limited Partnership's unsecured 8.50% senior note due 2010, dated November 20, 2000 as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
10.47 Admission of New Partners and Amendment to Limited Partnership Agreement entered into as of the 20th day of December, 2000, by and between Arden Realty Limited Partnership and the persons identified as the "New Partners" therein.
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21.1* Subsidiaries of Arden Realty Limited Partnership as filed as an exhibit to Arden Realty Limited Partnership's registration statement on Form S-4 (No. 333-53376).
23.1 Consent of Ernst & Young LLP
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(*) Incorporated by reference.
(#) Management contract or compensatory plan or arrangement required to be identified by Item 14(a)3.