---

---




SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13


OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934





For the quarter ended September 30, 2001





Commission file number 1-12193





ARDEN REALTY, INC.


(Exact name of registrant as specified in its charter)





Maryland

95-4578533(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)





11601 Wilshire Boulevard,


4th Floor


Los Angeles, California 90025-1740


(Address
and zip code of principal executive offices)





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





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





As of November 9, 2001 there were 63,795,575 shares of
the registrants common stock, $.01 par value, issued and outstanding.





---

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ARDEN REALTY, INC.





FORM 10-Q





TABLE OF CONTENTS





Page No.PART I.

FINANCIAL INFORMATIONItem 1.

Financial Statements


3Consolidated Balance Sheets as of September 30, 2001 (unaudited) and      December 31, 2000


3Consolidated Statements of Income for the three and nine months ended      September 30, 2001 and 2000 (unaudited)


4Consolidated Statements of Cash Flows for the nine months ended September 30,      2001 and 2000 (unaudited)


5Notes to Consolidated Financial Statements


6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of      Operations


10Item 3.

Quantitative and Qualitative Disclosure about Market Risks


24PART II.

OTHER INFORMATION


25SIGNATURES


26




2


---




Part I.    FINANCIAL INFORMATION





Item 1.    Financial Statements





ARDEN REALTY, INC.





CONSOLIDATED BALANCE SHEETS


(in thousands, except share amounts)





September 30, 2001

December 31, 2000(unaudited)ASSETSInvestment in real estate:Land


$    446,224



$    466,426Buildings and improvements


1,927,049



1,985,950Tenant improvements and leasing commissions



244,440



225,6202,617,713



2,677,996Less: accumulated depreciation and amortization


(272,498
)


(227,463
)2,345,215



2,450,533Properties under development


160,616



93,384Properties held for disposition, net


126,104



59,649Net
investment in real estate


2,631,935



2,603,566Cash and cash equivalents


11,409



5,432Restricted cash


21,051



19,367Rent and other receivables


11,158



13,198Mortgage notes receivable, net of discount


13,579



13,761Deferred rent


37,229



31,588Prepaid financing costs, expenses and other assets, net of amortization


20,243



18,685Total
assets


$2,746,604



$2,705,597LIABILITIESMortgage loans payable


$    574,121



$    576,055Unsecured lines of credit


313,350



253,350Unsecured senior notes, net of discount


348,534



348,364Accounts payable and accrued expenses


35,113



37,415Security deposits


19,764



19,470Dividends payable


31,250



29,596Total
liabilities


1,322,132



1,264,250Minority interests


84,809



86,176STOCKHOLDERS EQUITYPreferred stock, $.01 par value 20,000,000 shares authorized, none issued






Common stock, $.01 par value, 100,000,000 shares authorized, 63,775,575 and      63,646,871
issued and outstanding, respectively


640



637Additional paid-in capital


1,348,788



1,363,407Deferred compensation


(9,765
)


(8,873
)Total
stockholders equity


1,339,663



1,355,171Total
liabilities and stockholders equity


$2,746,604



$2,705,597





See accompanying notes to consolidated financial statements.




3


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ARDEN REALTY, INC.





CONSOLIDATED STATEMENTS OF INCOME


(in thousands, except per share data)


(unaudited)





Three Months Ended September 30,

Nine Months Ended September 30,2001

2000

2001

2000Revenue

$105,831


$99,031


$311,932


$281,565Property operating expenses

32,016


29,516


91,132


81,58473,815


69,515


220,800


199,981General and administrative expenses

2,505


2,297


8,087


5,956Interest expense

20,819


20,345


63,058


56,967Depreciation and amortization

25,854


22,528


74,176


63,952Interest and other income

(706
)

(948
)

(2,331
)

(2,573
)Income before gain and minority interests

25,343


25,293


77,810


75,679Gain on sale of properties

24





3,575


Income before minority interests

25,367


25,293


81,385


75,679Minority interests

(1,878
)

(1,921
)

(5,806
)

(5,618
)Net
income

$   23,489


$23,372


$   75,579


$   70,061Net income per common share:Basic

$        0.37


$     0.37


$        1.19


$        1.11Diluted

$        0.37


$     0.37


$        1.18


$        1.10Weighted average common shares outstanding:Basic

63,761


63,438


63,692


63,365Diluted

64,121


63,798


63,959


63,547














See accompanying notes to consolidated financial statements.




4


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ARDEN REALTY, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)





Nine Months Ended September 30,2001

2000Operating Activities:Net income

$   75,579


$   70,061Adjustments to reconcile net income to net cash provided by operating activities:Minority interests

5,806


5,618Gain on sale of properties

(3,575
)

Depreciation and amortization

74,176


63,952Amortization of loan costs

2,645


2,687Non-cash compensation expense

1,393


212Changes in operating assets and liabilities:Rent and
other receivables

2,068


1,046Deferred
rent

(5,641
)

(5,672
)Prepaid
financing costs, expenses and other assets

(3,879
)

(7,515
)Accounts
payable and accrued expenses

(2,302
)

8,581Security
deposits

294


4,067Net cash provided by
operating activities

146,564


143,037Investing Activities:Improvements to investment in real estate

(125,087
)

(178,728
)Proceeds from disposition of properties

26,365


Net cash used in investing activities

(98,722
)

(178,728
)Financing Activities:Proceeds from mortgage loans




43,336Repayments of mortgage loans

(1,934
)

(167,111
)Proceeds from unsecured lines of credit

123,500


201,500Repayments of unsecured lines of credit

(63,500
)

(201,000
)Proceeds from issuance of common stock

102


Proceeds from unsecured senior notes, net of discount




249,150Distributions to preferred operating partnership unit holders

(3,234
)

(3,234
)Increase in restricted cash

(1,684
)

(3,020
)Distributions to minority interests

(3,132
)

(2,408
)Dividends paid

(91,983
)

(87,079
)Net cash (used in) provided by financing activities

(41,865
)

30,134Net increase (decrease) in cash and cash equivalents

5,977


(5,557
)Cash and cash equivalents at beginning of period

5,432


7,056Cash and cash equivalents at end of period

$   11,409


$      1,499Supplemental Disclosure of Cash Flow Information:Cash paid during the period for interest, net of amounts capitalized

$   65,460


$   55,164





See accompanying notes to consolidated financial statements.




5


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ARDEN REALTY, INC.





NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS





September 30, 2001


(unaudited)





1.    Description of Business





The terms Arden Realty, us,
we and our as used in this report refer to Arden Realty, Inc. Through our controlling interest in Arden Realty Limited Partnership, or the Operating Partnership, and our other subsidiaries, we own, manage, lease, develop,
renovate and acquire commercial office properties located in Southern California. As of September 30, 2001, our portfolio was comprised of 138 primarily suburban office properties with approximately 18.3 million net rentable square feet and three
properties with approximately 725,000 net rentable square feet under development.





The accompanying consolidated condensed financial statements include our accounts, and the accounts of the Operating Partnership and our other subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.





The minority interests at September 30, 2001 and December 31, 2000 consisted of limited partnership interests in the Operating Partnership of approximately 3.3%, exclusive of
ownership interests of our preferred unit holders.





2.    Interim Financial Data





The accompanying consolidated condensed financial statements should be read in
conjunction with our 2000 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The accompanying financial information reflects all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a
fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year.





3.    New Accounting Standards





In 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. We adopted Statement No. 133, on January 1, 2001 and its
adoption did not impact our consolidated results of operations or financial position.





As of September 30, 2001 we had no outstanding interest rate cap or swaps or other types of derivative instruments.





In October 2001, the Financial Accounting Standards Board issued Statement No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets, which is required to be adopted in fiscal years beginning after December 15, 2001. Statement No. 144 on asset impairment supercedes Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provide a single accounting model for long-lived assets to disposed of. We are currently in the process of completing its evaluation of the impact of Statement No. 144 on its
earnings and financial position and does not expect that the impact to be material. We will adopt Statement No. 144 on January 1, 2002.




6


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4.    Property Dispositions





The following table sets forth information regarding our disposition activities for the three and nine
months ended September 30, 2001.





Property

County

Submarket

Date of Sale

Property Type

Square Feet

Gross Sales Price (in thousands)One Venture

Orange County

South County

May 1, 2001

Office

43,324


$   8,232Ontario AirportCommerce Center

San Bernardino

Ontario

May 1, 2001

Industrial

213,127


11,000Rancho Plaza

Los Angeles

Simi/Conejo Valley

Sept. 28, 2001

Office

24,057


3,100Hunter Business Center

Riverside

Inland Empire East

Sept. 28, 2001

Office

106,782


4,900Total









387,290


$27,232





We recorded an
approximate $3.6 million gain on the sale of these properties.




7


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|5. |  | Mortgage Loans Payable, Unsecured Lines of Credit and Unsecured Senior Notes
|-- |  | ----------------------------------------------------------------------------




A summary of our outstanding indebtedness as of September 30, 2001 and December 31, 2000 is as follows:





Type of Debt

September 30, 2001 (unaudited)

December 31, 2000

Stated Annual Interest Rate at September 30, 2001

Rate Fixed/Floating

Number of Properties Securing Loan

Maturity Month/ Year(in thousands)Mortgage Loans Payable:Fixed Rate Mortgage Financing I(1)


$    175,000



$    175,000



7.52
%


Fixed


18



6/04Mortgage Financing III(2)


136,100



136,100



6.74
%


Fixed


22



4/08Mortgage Financing IV(2)


111,200



111,200



6.61
%


Fixed


12



4/08Mortgage Financing V(3)


110,761



112,212



6.94
%


Fixed


12



4/09Mortgage Financing VI(3)


22,105



22,241



7.54
%


Fixed


3



4/09Activity Business Center(3)


7,775



7,881



8.85
%


Fixed


1



5/06145South Fairfax(3)


3,996



4,021



8.93
%


Fixed


1



1/27Marin Corporate Center(3)


2,984



3,071



9.00
%


Fixed


1



7/15Conejo Business Center(3)


2,929



3,017



8.75
%


Fixed


(Note 4)



7/15Conejo Business Center(3)


1,271



1,312



7.88
%


Fixed


(Note 4)



7/15574,121



576,055Unsecured Lines of Credit:Floating RateWells Fargo(1)


238,350



172,350



3.84
%


LIBOR + 1.15% (Note 5)






4/03Lehman Brothers(1),(6)


75,000



75,000



4.87
%


LIBOR + 1.30%






7/02City National Bank(1)






6,000







Prime Rate  0.875%






8/02313,350



253,350Unsecured Senior Notes:Fixed Rate2005 Notes(7)


199,641



199,564



8.88
%


Fixed






3/052010 Notes(7)


49,652



49,622



9.15
%


Fixed






3/102010 Notes(7)


99,241



99,178



8.50
%


Fixed






11/10348,534



348,364Total Debt


$1,236,005



$1,177,769


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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 point 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.
|--- |  | --------------------------------------------------------------------------------------




On June 27, 2001, Arden Realty and the Operating Partnership filed a Form S-3 shelf registration statement with the Securities and
Exchange Commission, or SEC, providing for the issuance of up to $400 million of debt securities by the Operating Partnership and $257.2 million of our $.01 par value common stock or our $.01 par value preferred stock. The terms of these securities
will be determined at the time of any debt or equity offering. This registration statement was declared effective by the SEC on July 24, 2001.




8


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|6.Stockholders |  | Equity
|--------------- |  | ------




On July 2, 2001 we issued a total of 94,500 restricted stock awards to several key executive officers and outside directors. Holders of these shares have full voting rights and
will receive any dividends paid but are prohibited from selling or transferring unvested shares. These shares vest equally over five years on the anniversary date of the award. We recorded a deferred compensation charge of approximately $2.5
million, based on the market value of these shares on the date of award and will amortize the compensation charge to expense on a straight-line basis over the five year vesting period.





On September 13, 2001, we declared a third quarter dividend of $0.49 per share to stockholders of record
on September 28, 2001, which equates to $1.96 per share on an annualized basis.





7.    Revenue from
Rental Operations and Property Expenses





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





Three Months Ended September 30,

Nine Months Ended September 30,2001

2000

2001

2000(unaudited)Revenue from Rental Operations:Scheduled cash rents

$   87,541

$81,880

$257,873

$236,054Straight-line rents

2,428

2,330

6,937

5,672Tenant reimbursements

5,769

4,403

16,671

12,213Parking, net of expenses

5,768

4,812

16,631

13,199Other rental operations

4,325

5,606

13,820

14,427105,831

99,031

311,932

281,565Property Expenses:Repairs and maintenance

8,892

8,668

27,128

25,965Utilities

10,514

9,570

25,272

22,206Real estate taxes

7,308

6,857

21,994

19,449Insurance

1,500

1,056

4,211

3,140Ground rent

240

222

1,624

1,016Administrative

3,562

3,143

10,903

9,80832,016

29,516

91,132

81,584$   73,815

$69,515

$220,800

$199,981





8.    Related Party Transactions





On July 19, 2001 and September 28, 2001, four officers executed promissory notes
totaling approximately $416,000 primarily for the purpose of meeting payroll taxes due upon the vesting of stock grants. These notes mature between July 19, 2006 and September 28, 2011 and bear interest at an annual rate of between 5.75% and 6.00%.
These loans are personally guaranteed by the respective officers and are included as part of other receivables in our balance sheet at September 30, 2001.





9.    Subsequent Event





On November 9, 2001, the Operating Partnership completed a public offering of $150 million, 7.00% unsecured notes due 2007, from the shelf registration statement described in note
5 above, with interest payable semiannually on May 15 and November 15 of each year. The Operating Partnership used the net proceeds to reduce the outstanding balance on one of the unsecured lines of credit.




9


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





Overview





The following
discussion relates to our consolidated financial statements and should be read in conjunction with the financial statements and related notes thereto included in our 2000 Annual Report on Form 10-K.





We are a self-administered and self-managed real estate investment trust that owns, manages, leases,
develops, renovates and acquires commercial properties located in Southern California. We are 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 September 30, 2001, 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 138 primarily suburban office properties containing approximately 18.3 million net rentable
square feet and three properties with approximately 725,000 net rentable square feet under development. As of September 30, 2001, our properties were approximately 93.5% occupied.





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




10


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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 three months ended September 30, 2001 to the three months ended September 30, 2000 (in thousands, except number of properties and
percentages):
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------




Three Months Ended September 30,

Dollar Change

Percent Change2001

2000(unaudited)Revenue:Revenue from rental operations:Scheduled cash rents

$   87,541


$81,880

$5,661



7
%Straight-line rents

2,428


2,330

98



4Tenant reimbursements

5,769


4,403

1,366



31Parking, net of expense

5,768


4,812

956



20Other rental operations

4,325


5,606

(1,281
)


(23
)Total

105,831


99,031

6,800



7Interest and other income

706


948

(242
)


(26
)Total
revenue

$106,537


$99,979

$6,558



7
%Expenses:Property expenses:Repairs and maintenance

$      8,892


$   8,668

$     224



3
%Utilities

10,514


9,570

944



10Real estate taxes

7,308


6,857

451



7Insurance

1,500


1,056

444



42Ground rent

240


222

18



8Administrative

3,562


3,143

419



13Total
property expenses

32,016


29,516

2,500



8
%General and administrative

2,505


2,297

208



9
%Interest

20,819


20,345

474



2Depreciation and amortization

25,854


22,528

3,326



15Total
expenses

$   81,194


$74,686

$6,508



9
%Number of Properties:Sold during period

(2
)

Owned at end of period

138


142Net Rentable Square Feet:Sold during period

(131
)

Owned at end of period

18,271


18,492





General and
administrative expenses increased approximately $208,000 for the three months ended September 30, 2001 as compared to the same period in 2000. This increase was primarily related to higher personnel costs in 2001, including non-cash compensation
expense from restricted stock awards granted to several key executives in December of 2000 and July of 2001.





Interest expense increased approximately $474,000 or 2% during the three months ended September 30, 2001, as compared to the same period in 2000. This increase was primarily due to
higher outstanding balances in




11


---

2001, resulting from the funding of tenant improvements and leasing commission costs and development and renovation projects placed in service subsequent to July 1, 2000 which were partially
offset by lower effective interest rates in 2001.





Depreciation and
amortization expense increased by approximately $3.3 million or 15% during the three months ended September 30, 2001 compared to the same period in 2000, primarily due to depreciation related to newly developed and renovated properties, and capital
expenditures, tenant improvements and leasing commissions placed in service subsequent to July 1, 2000.





Variances for
Revenue from Rental Operations and Property Expenses





The
increase in revenue from rental operations and property expenses for the three months ended September 30, 2001 as compared to the same period in 2000 was partially due to a development property placed in service in the third quarter of 2000, a
property sold in the fourth quarter of 2000, two properties sold in the second quarter of 2001 and one property 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 five properties that were either sold or placed in
service after July 1, 2000 or were under renovation for all or a portion of the period beginning after July 1, 2000 and for the 138 non-renovation/development properties we owned for all of the three month periods ended September 30, 2001 and 2000
(unaudited and in thousands, except for number of properties).





Total Variance

Properties Sold, Placed in Service or Under Renovation after July 1, 2000(2)

Non-Renovation/Development Properties Owned for all of the Three Months Ended September 30, 2001 and 2000(1)Revenue from Rental Operations:Scheduled cash rents

$5,661



$1,659




$   4,002Straight-line rents

98



219




(121
)Tenant reimbursements

1,366



(319
)



1,685Parking, net of operations

956



265




691Other rental operations

(1,281
)


(17
)



(1,264
)$6,800



$1,807




$   4,993Property Expenses:Repairs and maintenance

$     224



$    229




$             (5
)Utilities

944



81




863Real estate taxes

451



273




178Insurance

444



28




416Ground rent

18



1




17Administrative

419



129




290$2,500



$    741




$   1,759Other Data:Number of properties





5




138Net rentable square feet





887




17,847


---

|(1) |  | See analysis for these properties below.
|--- |  | ----------------------------------------

|(2) |  | Excludes two properties sold on September 28, 2001.
|--- |  | ---------------------------------------------------



12


---




Same Properties





Following is a comparison of property operating data computed under the GAAP basis and cash basis of accounting for the 138
non-renovation/development properties we owned for the entire three month periods ended September 30, 2001 and 2000 (in thousands, except number of properties and percentages):





Three Months Ended September 30,

Dollar Change

Percent Change2001

2000(unaudited)GAAP Basis:Revenue from rental operations

$97,165


$92,172


$4,993


5.4
%Property expenses

30,102


28,343


1,759


6.2
%$67,063


$63,829


$3,234


5.1
%Cash Basis (1):Revenue from rental operations

$96,078


$90,964


$5,114


5.6
%Property expenses

30,102


28,343


1,759


6.2
%$65,976


$62,621


$3,355


5.4
%Number of non-renovation/development properties

138


138Average occupancy

93.8
%

93.9
%Net rentable square feet

17,847


17,847


---

|(1) |  | Excludes straight-line rent adjustments.
|--- |  | ----------------------------------------




Revenue from rental operations for these properties, computed on a GAAP basis, increased by approximately $5.0 million, or 5.4%, during the three months ended September 30, 2001,
compared to the same period in 2000. Approximately $3.9 million of this difference was related to higher rental revenue in 2001, of which $4.0 million was related to scheduled rents, partially offset by a $121,000 decrease in straight-line rents.
The increase in scheduled rents is primarily attributable to increases in rental rates in 2001. Revenue from rental operations was also higher due to an approximate $1.7 million increase in tenant reimbursements, a $691,000 increase in parking
income offset by a $1.3 million decrease in revenue from other rental operations. Tenant reimbursements were higher primarily due to higher operating expenses in 2001, as discussed below. Parking income increased in 2001 primarily due to increases
in parking rates, while revenue from other rental operations decreased due to the timing of revenue from non-scheduled sources. Revenue from other rental operations includes after-hour utility billings, signage and lease termination settlements.





Excluding only the straight-line rent adjustment for these
properties, revenue from rental operations for the three months ended September 30, 2001, computed on a cash basis, increased by approximately $5.1 million or 5.6%.





Property expenses for these properties increased by approximately $1.8 million, or 6.2%, during the three months ended September 30, 2001,
compared to the same period in 2000, primarily due to an approximate $863,000 increase in utility expenses, a $178,000 increase in real estate taxes, a $416,000 increase in insurance expense and a $290,000 increase in administrative expenses in
2001. The increase in utility expenses was due primarily to rate increases in 2001. Real estate taxes increased in 2001 due to normal annual increases and final assessments on certain properties. Insurance expense increased due to increases in
industry-wide insurance rates in 2001, while administrative expenses increased primarily due to higher personnel costs in 2001. As noted above, the increase in property expenses was the primary reason for the $1.7 million increase in tenant
reimbursements.




13


---




| | Comparison of the nine months ended September 30, 2001 to the nine months ended September 30, 2000 (in thousands, except number of properties and
percentages):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------




Nine Months Ended September 30,

Dollar Change

Percent Change2001

2000(unaudited)Revenue:Revenue from rental operations:Scheduled cash rents

$257,873


$236,054

$21,819



9
%Straight-line rents

6,937


5,672

1,265



22Tenant reimbursements

16,671


12,213

4,458



37Parking, net of expenses

16,631


13,199

3,432



26Other rental operations

13,820


14,427

(607
)


4311,932


281,565

30,367



11Interest and other income

2,331


2,573

(242
)


9Total
revenue

$314,263


$284,138

30,125



11
%Expenses:Property operating expenses:Repairs and maintenance

$   27,128


$   25,965

1,163



4
%Utilities

25,272


22,206

3,066



14Real estate taxes

21,994


19,449

2,545



13Insurance

4,211


3,140

1,071



34Ground rent

1,624


1,016

608



60Marketing and other

10,903


9,808

1,095



11Total
property operating expenses

91,132


81,584

9,548



12General and administrative

8,087


5,956

2,131



36Interest

63,058


56,967

6,091



11Depreciation and amortization

74,176


63,952

10,224



16Total
expenses

$236,453


$208,459

$27,994



13
%Number of Properties:Sold during period

(4
)

Completed and placed in service during period




1Owned at end of period

138


143Net Rentable Square Feet:Sold during period

(387
)

Completed and placed in service during period




242Owned at end of period

18,271


18,734





General and
administrative expenses increased approximately $2.1 million for the nine months ended September 30, 2001 as compared to the same period in 2000. This increase was primarily related to higher personnel costs in 2001, including approximately $1.1
million in non-cash compensation expense from restricted stock awards granted to several key executives in July and December of 2000 and July of 2001 and approximately $467,000 in salaries for employees hired after January 1, 2000.





Interest expense increased approximately $6.1 million or 11% during the nine
months ended September 30, 2001, as compared to the same period in 2000. This increase was primarily due to higher outstanding balances in 2001, resulting from the funding of tenant improvements and leasing commission costs and development and
renovation projects placed in service subsequent to January 1, 2000 which was partially offset by lower effective interest rates in 2001.




14


---




Depreciation and amortization
expense increased by approximately $10.2 million or 16% during the nine months ended September 30, 2001 compared to the same period in 2000, primarily due to depreciation related to newly developed and renovated properties, capital expenditures,
tenant improvements and leasing commissions placed in service subsequent to January 1, 2000.





The increase in revenue from rental operations and property operating expenses for the nine months ended September 30, 2001 as compared to the same period in 2000 was partially due
to a development property placed in service in the third quarter of 2000, a property sold in the fourth quarter of 2000, two properties sold in the second quarter of 2001 and three 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 seven properties we either sold or placed in service or were under renovation after January 1, 2000 and for the 136 non-renovation properties we owned for all of the nine month periods ended September 30, 2001 and 2000 (unaudited
and in thousands, except for number of properties).





Total Variance

Properties Sold, Placed in Service or Under Renovation after January 1, 2000(2)

Non-Renovation/Development Properties Owned for all of the Nine Months Ended September 30, 2001 and 2000(1)Revenue from Rental Operations:Scheduled cash rents


$21,818




$   9,725




$12,093Straight-line rents


1,266




1,321




(55
)Tenant reimbursements


4,458




(300
)



4,758Parking, net of operations


3,432




888




2,544Other rental operations


(607
)



1,181




(1,788
)$30,367




$12,815




$17,552Property Operating Expenses:Repairs and maintenance


$   1,163




$       906




$       257Utilities


3,066




651




2,415Real estate taxes


2,545




1,018




1,527Insurance


1,071




113




958Ground rent


608




384




224Administrative


1,095




458




637$   9,548




$   3,530




$   6,018Other Data:Number of properties







7




136Net rentable square feet







1,216




17,518


---

(1)

See analysis for these properties below.(2)

Excludes two properties sold on September 28, 2001.




15


---




Same Properties





Following is a comparison of property operating data computed under the GAAP Basis and Cash Basis for the 136 non-renovation/development
properties we owned for the entire nine month periods ended September 30, 2001 and 2000 (in thousands, except number of properties and percentages):





Nine Months Ended September 30,

Dollar Change

Percent Change2001

2000(unaudited)GAAP Basis:Revenue from rental operations

$285,293

$267,741

$17,552


6.6%Property operating expenses

84,224

78,206

6,018


7.7%$201,069

$189,535

$11,534


6.1%Cash Basis (1):Revenue from rental operations

$280,582

$262,975

$17,607


6.7%Property operating expenses

84,224

78,206

6,018


7.7%$196,358

$184,769

$11,589


6.3%Number of non-renovation/development properties

136

136Average occupancy

94.5%

94.3%Net rentable square feet

17,518

17,518


---

|(1) |  | Excludes straight-line rent adjustments.
|--- |  | ----------------------------------------




Revenue from rental operations for these properties, computed on a GAAP basis, increased by approximately $17.6 million, or 6.6%, during the nine months ended September 30, 2001,
compared to the same period in 2000. Approximately $12.0 million of this difference was related to higher rental revenue in 2001. The increase in rental revenue was primarily attributable to increases in rental rates in 2001. Revenue from rental
operations was also higher due to an approximate $4.8 million increase in tenant reimbursements and an approximate $2.5 million increase in parking income offset by an approximate $1.8 million decrease in revenue from other rental operations. Tenant
reimbursements increased primarily due to higher operating expenses in 2001, as discussed below. Parking income increased in 2001 primarily due to increases in parking rates, while revenue from other rental operations decreased due to the timing of
revenues from non-scheduled sources. Revenue from other rental operations includes after-hour utility billings, signage and lease termination settlements.





Straight-line rents for these properties in 2001 were approximately $55,000 less than in 2000.





Property expenses for these properties increased by approximately $6.0 million, or 7.7%, during the nine
months ended September 30, 2001, compared to the same period in 2000, primarily due to a $2.4 million increase in utility expenses, a $1.5 million increase in real estate taxes, a $958,000 increase in insurance expense and a $637,000 increase in
administrative expenses in 2001. The increase in utility expenses was primarily due to rate increases in 2001. Real estate taxes increased in 2001 due to normal annual increases and final assessments on certain properties. Insurance expense
increased due to increases in industry-wide insurance rates in 2001, while administrative expenses increased primarily due to higher personal costs in 2001. As noted above, the increase in operating expenses was the primary reason for the $4.8
million increase in tenant reimbursements.








Liquidity and Capital
Resources





| | Cash Flows
| | ----------




Cash provided by operating activities increased by approximately $3.6 million to $146.6 million for the nine months ended September 30, 2001, as compared to $143.0 million for the
same period in 2000, primarily due to




16


---

improved operating results for the 136 properties we owned for both nine month periods presented and from cash flows for four development/renovation properties placed in service subsequent to
January 1, 2000. This increase was partially offset by the loss of operating cash flows on a property we sold in the fourth quarter of 2000 and two properties we sold in the second quarter of 2001.





Cash used in investing activities decreased by approximately $80.0 million to $98.7 million for the nine
months ended September 30, 2001 compared to $178.7 million for the same period in 2000. This decrease was primarily due to the completion of several of our development and renovation projects after September 30, 2000, which was partially offset by
the proceeds from the sale of four properties in 2001.





Cash from
financing activities decreased by approximately $72.0 million to an outflow of $41.9 million for the nine months ended September 30, 2001, as compared to an inflow of $30.1 million for the same period in 2000. This decrease was primarily due to the
timing of the issuance of $250 million in senior unsecured notes in March of 2000.





| | Available Borrowings, Cash Balance and Capital Resources
| | --------------------------------------------------------




We have an unsecured line of credit with a group of banks led by Wells Fargo. This 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 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 greater of the Federal Funds rate plus 0.5% or
Wells Fargos prime rate. This line of credit matures in April 2003. As of September 30, 2001, there was approximately $238.4 million outstanding on this line of credit and approximately $36.6 million was available for additional borrowings.





We also have a $75 million unsecured line of credit with Lehman
Brothers. Borrowings on this 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. As of September 30, 2001, there was $75 million outstanding on this line of credit.





We also have an unsecured line of credit with a total commitment of $10 million from City National Bank. This line of credit accrues
interest at the City National Bank Prime Rate less 0.875% and is scheduled to mature on August 1, 2002. Proceeds from this line of credit are used, among other things, to provide funds for tenant improvements and capital expenditures and provide for
working capital and other corporate purposes. As of September 30, 2001, there was no outstanding balance on this line of credit and $10 million was available for additional borrowings.





On May 2, 2001, we sold an approximate 43,000 square foot office property located in Irvine, California
for approximately $8.2 million. On that date, we also sold an approximate 213,000 square foot industrial property located in Ontario, California for approximately $11.0 million. On September 28, 2001, we sold an approximate 24,000 square foot office
property located in Simi Valley, California for approximately $3.1 million. On that date, we also sold an approximate 107,000 square foot office property located in Riverside, California for approximately $4.9 million. The net proceeds from the May
and September 2001 dispositions were used to reduce the outstanding balance on our Wells Fargo unsecured line of credit.





On June 27, 2001, Arden Realty and the Operating Partnership filed a Form S-3 shelf registration statement with the Securities and Exchange Commission, or SEC, providing for the
issuance of up to $400 million of debt




17


---

securities by the Operating Partnership and $257.2 million of our $.01 par value common stock or our $.01 par value preferred stock. The terms of these securities will be determined at the time
of any debt or equity offering. This registration statement was declared effective by the SEC on July 24, 2001.





On November 9, 2001, the Operating Partnership completed a public offering of $150 million, 7.00% unsecured notes due 2007, from the shelf registration statement, with interest
payable semi-annually on May 15 and November 15 of each year. The Operating Partnership used the net proceeds to reduce the outstanding balance on one of its unsecured lines of credit.





Following is a summary of scheduled principal payments for our total debt outstanding as of September
30, 2001 (in thousands):





Year

Amount2001

$             7282002

77,618
(1)2003

243,804
(2)2004

182,2182005

207,8342006

15,2202007

8,8122008

230,3052009

111,9802010

150,565Thereafter

6,921Total

$1,236,005


---

|(1) |  | Consists primarily of $75.0 million outstanding on our Lehman Brothers line of credit which has a one-year extension option.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

|(2) |  | Consists primarily of $238.4 million outstanding on our Wells Fargo line of credit.
|--- |  | -----------------------------------------------------------------------------------




Following is certain other information related to our indebtedness as of September 30, 2001 (in thousands, except percentage data):





Unsecured and Secured Debt:Balance

Percent

Weighted Average Interest Rate(1)Unsecured Debt

$    661,884


54
%



6.98
%Secured Debt

574,121


46
%



7.36
%Total Debt

$1,236,005


100
%



7.15
%Floating and Fixed Rate Debt:Balance

Percent

Weighted Average Interest Rate(1)Floating Rate Debt

$    313,350


25
%



4.61
%Fixed Rate Debt

922,655


75
%



8.02
%Total Debt

$1,236,005


100
%



7.15
%


---

|(1) |  | Includes amortization of prepaid financing costs.
|--- |  | -------------------------------------------------



18


---




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





For the Three Months Ended September 30,

For the Nine Months Ended September 30,2001

2000

2001

2000Total interest incurred

$23,074


$23,476


$70,269


$66,660Amount capitalized

(2,255
)

(3,131
)

(7,211
)

(9,693
)Amount expensed

$20,819


$20,345


$63,058


$56,967





As of September 30,
2001, we had $32.5 million in cash and cash equivalents, including $21.1 million in restricted cash. Restricted cash consisted of $13.7 million in interest bearing cash deposits required by five of our mortgage loans payable and $7.4 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 12 to 24 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 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.




19


---




Funds from Operations and Funds Available for Distribution





The following table reflects the calculation of our funds from operations and our
funds available for distribution for the three-month periods ended September 30, 2001 and 2000 (in thousands):





For the Three Months Ended September 30,

For the Nine Months Ended September 30,2001

2000

2001

2000(unaudited)Funds From Operations:(1)Net income

$23,489


$23,372


$   75,579


$   70,061Depreciation and amortization of real estate assets

25,854


22,528


74,176


63,952Gain on sale of properties

(24
)




(3,575
)

Minority interest

1,878


1,921


5,806


5,618Income allocated to preferred units

(1,078
)

(1,078
)

(3,234
)

(3,234
)Funds From Operations(2)

$50,119


$46,743


$148,752


$136,397Funds Available for Distribution:(3)Funds From Operations

$50,119


$46,743


$148,752


$136,397Straight-line rent adjustment

(2,428
)

(2,330
)

(6,937
)

(5,672
)Capital expenditure, tenant improvement and leasing commission      reserve

(7,900
)

(7,600
)

(23,400
)

(23,094
)Funds Available for Distribution

$39,791


$36,813


$118,415


$107,631Weighted average shares and common units outstandingDiluted

66,278


65,966


66,125


65,703


---

|(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) |  | Includes non-cash compensation expense of $545,000 and $1.4 million for the three and nine months ended September 30, 2001, respectively, and $178,000 for the three and nine
months ended September 30, 2000.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20


---




Portfolio and Lease Information





The following tables set forth certain information regarding our properties as of September 30, 2001.





PORTFOLIO SUMMARY





Net Operating IncomeLocation

Number of Properties

Approximate Net Rentable Square Feet

For the Three Months Ended September 30, 2001

For the Nine Months Ended September 30, 2001Office

Industrial and Retail

Total

% of Total

Office

Industrial and Retail

Total

% of Total

Total

% of Total

Total

% of Total(in thousands)

(in thousands and unaudited)Los Angeles CountyWest


28



1


29


21
%

4,536


37


4,573


25
%

$28,400

38
%

$  79,932

36
%North


32






32


23
%

3,386





3,386


18
%

11,627

16
%

36,535

17
%South


16






16


12
%

2,689





2,689


15
%

8,563

12
%

26,429

12
%Subtotal


76



1


77


56
%

10,611


37


10,648


58
%

48,590

66
%

142,896

65
%Orange County


24






24


18
%

3,709





3,709


20
%

12,243

17
%

38,423

17
%SanDiego County


21






21


15
%

2,487





2,487


14
%

9,709

13
%

27,903

13
%Ventura/Kern Counties


6






6


4
%

778





778


4
%

1,911

3
%

6,501

3
%Riverside/SanBernardino Counties


7



3


10


7
%

447


202


649


4
%

1,362

1
%

5,077

2
%Total


134



4


138
(1)

100
%

18,032


239


18,271
(1)

100
%

$73,815

100
%

$220,800

100
%


---

|(1) |  | Including three office properties currently under development, our total portfolio consists of 141 properties and approximately 19.0 million net rentable square feet.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------




PORTFOLIO OCCUPANCY AND LEASING SUMMARY





Location

Percent Occupied

Percent Leased

Annualized Base Rent Per Leased Square Foot(1)Office

Industrial and Retail

Total

Office

Industrial and Retail

Total

Office

Industrial and Retail

Total

Full Service Gross Leases(2)Los Angeles County:West


94.2
%



100.0
%


94.3
%


94.4
%



100.0
%


94.4
%

$27.06


$24.60


$27.03


$27.06North


88.4
%







88.4
%


89.2
%







89.2
%

20.89





20.89


21.78South


93.1
%







93.1
%


93.1
%







93.1
%

18.17





18.17


19.34Orange County


97.0
%







97.0
%


97.1
%







97.1
%

17.61





17.61


20.66SanDiego County


96.3
%







96.3
%


97.8
%







97.8
%

17.40





17.40


20.61Ventura/Kern Counties


94.1
%







94.1
%


94.3
%







94.3
%

17.90





17.90


18.07Riverside/San Bernardino Counties


89.6
%



70.7
%


83.7
%


92.6
%



70.7
%


85.8
%

17.98


13.26


16.77


18.68Total/ Weighted Average


93.7
%



75.2
%


93.5
%


94.2
%



75.2
%


94.0
%

$20.65


$15.60


$20.60


$22.53


---

|(1) |  | Based on monthly contractual base rent under existing leases as of September 30, 2001, 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 43 properties and approximately 3.8 million square feet under triple net and modified gross leases.
|--- |  | ------------------------------------------------------------------------------------------------------------



21


---




LEASE EXPIRATIONS





As of September 30, 2001





2001

2002

2003

2004

2005

2006 and ThereafterLos Angeles County:West

Expiring SF(1)

93,216


749,824


605,985


713,593


774,836



1,299,291% of Leased SF(2)

2.2
%

17.4
%

14.0
%

16.5
%

17.9
%


30.1
%Rent per SF(3)

$    22.77


$       22.88


$       26.14


$       26.85


$       31.03



$       34.53North

Expiring SF(1)

72,994


413,624


510,035


664,266


464,888



864,365% of Leased SF(2)

2.4
%

13.7
%

16.9
%

22.0
%

15.4
%


28.6
%Rent per SF(3)

$    22.74


$       19.71


$       21.65


$       21.45


$       22.23



$       24.57South

Expiring SF(1)

116,088


303,720


399,170


476,711


627,595



537,913% of Leased SF(2)

4.6
%

12.1
%

15.9
%

19.0
%

25.1
%


21.5
%Rent per SF(3)

$    21.22


$       18.43


$       19.20


$       20.44


$       15.00



$       21.85Subtotal

Expiring SF(1)

282,298


1,467,168


1,515,190


1,854,570


1,867,319



2,701,569% of Leased SF(2)

2.9
%

14.9
%

15.4
%

18.8
%

19.0
%


27.5
%Rent per SF(3)

$    22.12


$       21.06


$       22.80


$       23.27


$       23.45



$       28.82Orange County

Expiring SF(1)

77,332


589,262


705,411


632,411


435,875



1,101,703% of Leased SF(2)

2.1
%

16.4
%

19.6
%

17.6
%

12.1
%


30.6
%Rent per SF(3)

$    15.94


$       14.98


$       18.21


$       18.08


$       21.64



$       22.22SanDiego County

Expiring SF(1)

22,538


311,820


635,096


252,275


388,127



805,922% of Leased SF(2)

0.9
%

12.8
%

26.1
%

10.4
%

16.0
%


33.1
%Rent per SF(3)

$    20.49


$       18.20


$       18.58


$       18.41


$       16.09



$       22.46AllOthers

Expiring SF(1)

50,043


163,779


167,595


372,976


138,769



387,847% of Leased SF(2)

3.9
%

12.7
%

13.0
%

28.9
%

10.7
%


30.0
%Rent per SF(3)

$    17.33


$       17.43


$       18.49


$       18.05


$       19.85



$       19.57Total Portfolio

Expiring SF(1)

432,211


2,532,029


3,023,292


3,112,232


2,830,090



4,997,041% of Leased SF(2)

2.5
%

14.8
%

17.6
%

18.1
%

16.5
%


29.1
%Rent per SF(3)

$    20.38


$       19.06


$       20.60


$       21.19


$       21.98



$       25.62


---

|(1) |  | Represents the square footage of expiring leases. For 2001, represents expirations from October 1, 2001 through December 31, 2001, not including month-to-month tenants.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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




LEASING ACTIVITY





For the Three and Nine Months Ended September 30, 2001





Net Absorption (square feet)

Retention Rate(1)

Cash Rent Growth(2)

GAAP Rent Growth(3)

Weighted Average Lease Term (in months)

Tenant Improvements and Commissions (per square foot)New(4)

RenewalThree Months Ended 9/30/01


(161,386
)



72
%



21
%



29
%



47


$14.42


$7.58Nine Months Ended 9/30/01


(165,839
)



74
%



23
%



31
%



51


$14.28


$8.46


---

|(1) |  | Percentage of leased square feet in which tenants were retained at lease expiration.
|--- |  | ------------------------------------------------------------------------------------

|(2) |  | Represents the difference between initial market rents on new and renewal leases as compared to the expiring cash rents on the same space.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

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

|(4) |  | Excludes all first generation space.
|--- |  | ------------------------------------



22


---




DEVELOPMENT SUMMARY





As of September 30, 2001





Property

Square Feet

Costs Incurred To Date

Estimated Total Cost(1)

Percent Leased at 10/30/01

Estimated Shell Completion Date

Estimated Stabilization Date(2)

Estimated Year 1 Stabilized Cash NOI(3)

Estimated Year 1 Annual Cash Yield

Estimated Year 1 Annual GAAP Yield(4)(in thousands)

(in thousands)







(in thousands)Howard Hughes CenterUnivision Building

159,000


$   42,977



$   51,700



100%


Complete

3rd Qtr 2001


$5,200



10.1%



11.9%6080 Center Drive

283,000


68,578



74,100



76%(5)


Complete

1st Qtr 2002


$8,400



11.3%



12.3%6100 Center Drive

283,000


33,691



79,000






2nd Qtr 2002

2nd Qtr 2003


$8,850



11.2%



12.2%Unallocated Acquisition     Master Plan Costs(1)




15,370



19,800Total Development
           Properties

725,000


$160,616



$224,600


---

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

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

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

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

|(5) |  | As of October 30, 2001, 6080 Center Drive was 66% occupied and 76% leased.
|--- |  | --------------------------------------------------------------------------




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





In
addition to our development at the Howard Hughes Center, we have completed preliminary designs and are marketing an approximate 170,000 square foot build-to-suit office building at our Long Beach Airport Business Park. We do not intend to commence
construction on this project until a build-to-suit tenant lease is signed with terms allowing us to achieve yields commensurate with the projects development risk.





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





Current Economic Climate





Our short and long-term liquidity is significantly impacted by the operating results of our properties,
all of which are located in Southern California. Our ability to lease available space and increase rates when leases expire is largely dependent on the demand for office space in the markets where our properties are located. National and local
economic trends may affect demand for our properties and our ability to collect amounts due from our tenants, including the following:





| |  |  | Many sectors of the national and California economy are reported to be experiencing slower growth, reduced earnings or increased losses.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



23


---




| |  |  | Problems associated with deregulation of the electric industry in California have resulted in significantly higher costs in some areas of the state.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | We believe uncertainty over the current national and California economic environment and the September 11th attack on the World Trade Center and Pentagon are causing tenants to
take longer to commit to leasing transactions, resulting in a decrease in the occupancy of our portfolio from 94.3% occupied as of June 30, 2001 to 93.5% occupied as of September 30, 2001.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The timing and extent of future changes in the national and local economy and their effects on our
properties and results of operations are difficult to accurately predict. It is possible, however, that these national and regional issues may more directly affect us and our operating results in the future, making it more difficult for us to lease
and renew available space, to increase or maintain rental rates as leases expire and to collect amounts due from our tenants. For additional information, see Risk Factors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 sections of our 2000 Annual Report on Form 10-K.





Item 3.    Quantitative and Qualitative Disclosure about Market Risk





Market risk is the exposure or loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk
to which we are exposed is interest rate risk, which is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.





Interest Rate Risk.





Even though we currently have no such agreements, in order to modify and manage the interest characteristics of our outstanding debt and limit the effects of
interest rates on our operations, we may use a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in
interest rates carries additional risks such as counter-party credit risk and legal enforceability of hedging contracts. We do not enter into any transactions for speculative or trading purposes.





Some of our future earnings, cash flows and fair values relating to financial instruments are dependent
upon prevailing market rates of interest, such as LIBOR. Based on interest rates and outstanding balances as of September 30, 2001, a 1% increase in interest rates on our $313.4 million of floating rate debt would decrease annual future earnings and
cash flows by approximately $3.1 million and would not have an impact on the fair value of the floating rate debt. A 1% decrease in interest rates on our $313.4 million of floating rate debt would increase annual future earnings and cash flows by
approximately $3.1 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 September 30, 2001 was 4.61%.





Our fixed rate debt totaled $922.7 million as of September 30, 2001 with a weighted average interest rate of 8.02% and an unrealized loss of approximately
$45.9 million for a total fair value of approximately $876.8 million. A 1% decrease in interest rates on our $922.7 million of fixed rate debt would decrease its fair value by approximately $40.6 million and would not have an impact on annual future
earnings and cash flows. A 1% increase in interest rates in our $922.7 million of fixed rate debt would increase its fair value by approximately $40.6 million and would not have an impact on 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.




24


---




Part II    OTHER INFORMATION





Item 1.    Legal Proceedings





None





Item 2.    Changes in Securities





None





Item
3.    Defaults Upon Senior Securities





None





Item 4.    Submission of Matters to a Vote of Securities Holders





None





Item 5.    Other Information





None





Item 6.    Exhibits and
Reports on Form 8-K





(a)  Exhibits





10.48


Second Amended and Restated 1996 Stock Option and Incentive Plan of Arden Realty, Inc. and Arden
     Realty Limited Partnership dated September 20th, 2001.10.49
*

Form of Promissory Note entered into on July 19, 2001 and September 28, 2001 between Arden
     Realty Limited Partnership and Richard Ziman, Victor Coleman, Andrew Sobel and Robert      Peddicord, respectively.21.1


Subsidiaries of Arden Realty, Inc


---

|* |  | Incorporated by reference from Arden Realty Limited Partnerships current report on Form 10-Q filed on November 13, 2001.
|- |  | -------------------------------------------------------------------------------------------------------------------------




(b)  Reports on Form 8-K





| | None
| | ----



25


---




SIGNATURES





Pursuant to the requirements
of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





| | AR | DEN REALTY, INC.
| | -- | ----------------




| | /s/    ANDREW J. SOBEL
| | ----------------------

|Date: November 12, 2001 | By | :
|----------------------- | -- | -

| | Andrew J. Sobel
| | ---------------

| | Executive Vice PresidentStrategic Planning
| | -------------------------------------------

| | and Operations
| | --------------




| | /s/    DANIEL S. BOTHE
| | ----------------------

|Date: November 12, 2001 | By | :
|----------------------- | -- | -

| | Daniel S. Bothe
| | ---------------

| | Senior Vice President and
| | -------------------------

| | Chief Financial OfficerCapital Markets
| | ---------------------------------------




| | /s/    RICHARD S. DAVIS
| | -----------------------

|Date: November 12, 2001 | By | :
|----------------------- | -- | -

| | Richard S. Davis
| | ----------------

| | Senior Vice President,
| | ----------------------

| | Chief Financial OfficerOperations and Treasurer
| | ------------------------------------------------



26