Section 1: 10-K (10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12675 (Kilroy Realty Corporation)
Commission file number 000-54005 (Kilroy Realty, L.P.)
KILROY REALTY CORPORATION
KILROY REALTY, L.P.
(Exact name of registrant as specified in its charter)
Kilroy Realty Corporation
Maryland
95-4598246
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
Kilroy Realty, L.P.
Delaware
95-4612685
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (310) 481-8400
Securities registered pursuant to Section 12(b) of the Act:
Registrant
Title of each class
Kilroy Realty Corporation
Common Stock, $.01 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Registrant
Kilroy Realty, L.P.
Common Units Representing Limited Partnership Interests
Title of each class
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Kilroy Realty Corporation Yes x No ¨ Kilroy Realty, L. P. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Kilroy Realty Corporation Yes ¨ No x Kilroy Realty, L. P. Yes ¨ No x
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.
Kilroy Realty Corporation Yes x No ¨ Kilroy Realty, L. P. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).
Kilroy Realty Corporation Yes x No ¨ Kilroy Realty, L. P. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Kilroy Realty Corporation
x
Large accelerated filer
o
Emerging growth company
o Accelerated filer
o
Non-accelerated filer
o Smaller reporting company
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Kilroy Realty, L.P.
o
Large accelerated filer
o
Emerging growth company
o Accelerated filer
x
Non-accelerated filer
o Smaller reporting company
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Kilroy Realty Corporation Yes ¨ No x Kilroy Realty, L. P. Yes ¨ No x
The aggregate market value of the voting and non-voting shares of common stock held by non-affiliates of Kilroy Realty Corporation was approximately $7,557,990,980 based on
the quoted closing price on the New York Stock Exchange for such shares on June 30, 2018.
There is no public trading market for the common units of limited partnership interest of Kilroy Realty, L.P. As a result, the aggregate market value of the common units of limited
partnership interest held by non-affiliates of Kilroy Realty, L.P. cannot be determined.
As of February 8, 2019, 100,964,220 shares of Kilroy Realty Corporation’s common stock, par value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Kilroy Realty Corporation’s Proxy Statement with respect to its 2019 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the
registrant’s fiscal year are incorporated by reference into Part III of this Form 10-K.
EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2018 of Kilroy Realty Corporation and Kilroy Realty, L.P. Unless stated
otherwise or the context otherwise requires, references to “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” mean Kilroy Realty Corporation, a
Maryland corporation, and its controlled and consolidated subsidiaries, and references to “Kilroy Realty, L.P.” or the “Operating Partnership” mean Kilroy Realty,
L.P., a Delaware limited partnership, and its controlled and consolidated subsidiaries.
The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of December 31, 2018, the Company owned an
approximate 98.0% common general partnership interest in the Operating Partnership. The remaining approximate 2.0% common limited partnership interests are owned
by non-affiliated investors and certain directors and officers of the Company. As the sole general partner of the Operating Partnership, the Company exercises
exclusive and complete discretion over the Operating Partnership’s day-to-day management and control and can cause it to enter into certain major transactions
including acquisitions, dispositions, and refinancings and cause changes in its line of business, capital structure and distribution policies.
There are a few differences between the Company and the Operating Partnership that are reflected in the disclosures in this Form 10-K. We believe it is important
to understand the differences between the Company and the Operating Partnership in the context of how the Company and the Operating Partnership operate as an
interrelated, consolidated company. The Company is a REIT, the only material asset of which is the partnership interests it holds in the Operating Partnership. As a
result, the Company generally does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to
time and guaranteeing certain debt of the Operating Partnership. The Company itself is not directly obligated under any indebtedness, but generally guarantees all of
the debt of the Operating Partnership. The Operating Partnership owns substantially all of the assets of the Company either directly or through its subsidiaries,
conducts the operations of the Company’s business and is structured as a limited partnership with no publicly-traded equity. Except for net proceeds from equity
issuances by the Company, which the Company generally contributes to the Operating Partnership in exchange for units of partnership interest, the Operating
Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of
indebtedness or through the issuance of units of partnership interest.
Noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the
Company and those of the Operating Partnership. The common limited partnership interests in the Operating Partnership are accounted for as partners’ capital in the
Operating Partnership’s financial statements and, to the extent not held by the Company, as noncontrolling interests in the Company’s financial statements. The
Operating Partnership’s financial statements reflect the noncontrolling interest in Kilroy Realty Finance Partnership, L.P., a Delaware limited partnership (the “Finance
Partnership”). This noncontrolling interest represents the Company’s 1% indirect general partnership interest in the Finance Partnership, which is directly held by
Kilroy Realty Finance, Inc., a wholly owned subsidiary of the Company. The differences between stockholders’ equity, partners’ capital and noncontrolling interests
result from the differences in the equity issued by the Company and the Operating Partnership, and in the Operating Partnership’s noncontrolling interest in the
Finance Partnership.
We believe combining the annual reports on Form 10-K of the Company and the Operating Partnership into this single report results in the following benefits:
• Combined reports better reflect how management and the analyst community view the business as a single operating unit;
• Combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in
the same manner as management;
• Combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and
• Combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
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To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate
sections for each of the Company and the Operating Partnership:
•
•
•
•
•
Item 6. Selected Financial Data – Kilroy Realty Corporation;
Item 6. Selected Financial Data – Kilroy Realty, L.P.;
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations:
◦ —Liquidity and Capital Resources of the Company; and
◦ —Liquidity and Capital Resources of the Operating Partnership;
consolidated financial statements;
the following notes to the consolidated financial statements:
◦ Note 8, Secured and Unsecured Debt of the Company;
◦ Note 9, Secured and Unsecured Debt of the Operating Partnership;
◦ Note 11, Noncontrolling Interests on the Company’s Consolidated Financial Statements;
◦ Note 12, Noncontrolling Interests on the Operating Partnership’s Consolidated Financial Statements;
◦ Note 13, Stockholders’ Equity of the Company;
◦ Note 14, Partners’ Capital of the Operating Partnership;
◦ Note 21, Net Income Available to Common Stockholders Per Share of the Company;
◦ Note 22, Net Income Available to Common Unitholders Per Unit of the Operating Partnership;
◦ Note 23, Supplemental Cash Flow Information of the Company;
◦ Note 24, Supplemental Cash Flow Information of the Operating Partnership;
◦ Note 26, Quarterly Financial Information of the Company (Unaudited); and
◦ Note 27, Quarterly Financial Information of the Operating Partnership (Unaudited).
This report also includes separate sections under Item 9A. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for the Company and the
Operating Partnership to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the
Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and
18 U.S.C. §1350.
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Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
TABLE OF CONTENTS
PART I
PART II
Market for Kilroy Realty Corporation’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market for Kilroy Realty, L.P.’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data – Kilroy Realty Corporation
Selected Financial Data – Kilroy Realty, L.P.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
SIGNATURES
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
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PART I
This document contains certain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, including, among other things, statements or information concerning our plans, objectives, capital resources,
portfolio performance, results of operations, projected future occupancy and rental rates, lease expirations, debt maturities, potential investments, strategies such as
capital recycling, development and redevelopment activity, projected construction costs, projected construction commencement and completion dates, projected
square footage of space that could be constructed on undeveloped land that we own, projected rentable square footage of or number of units in properties under
construction or in the development pipeline, anticipated proceeds from capital recycling activity or other dispositions and anticipated dates of those activities or
dispositions, projected increases in the value of properties, dispositions, future executive incentive compensation, pending, potential or proposed acquisitions, plans
to grow our net operating income and funds from operations, our ability to re-lease properties at or above current market rates, anticipated market conditions,
demographics and other forward-looking financial data, as well as the discussion in “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations -Factors That May Influence Future Results of Operations.” Forward-looking statements are based on our current expectations, beliefs and
assumptions, and are not guarantees of future performance. Forward-looking statements are inherently subject to uncertainties, risks, changes in circumstances,
trends and factors that are difficult to predict, many of which are outside of our control. Accordingly, actual performance, results and events may vary materially from
those indicated or implied in the forward-looking statements, and you should not rely on the forward-looking statements as predictions of future performance, results
or events. All forward-looking statements are based on information that was available and speak only as of the dates on which they were made. We assume no
obligation to update any forward-looking statement that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are
required to do so in connection with our ongoing requirements under federal securities laws.
In addition, this report contains information and statistics regarding, among other things, the industry, markets, submarkets and sectors in which we operate, the
percentage by which certain leases are above or below applicable market rents and the number of square feet of office and other space that could be developed from
specific parcels of undeveloped land. We obtained this information and these statistics from various third-party sources and our own internal estimates. We believe
that these sources and estimates are reliable but have not independently verified them and cannot guarantee their accuracy or completeness.
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ITEM 1.
BUSINESS
The Company
We are a self-administered REIT active in premier office and mixed-use submarkets along the West Coast. We own, develop, acquire and manage real estate
assets, consisting primarily of Class A properties in the coastal regions of Greater Los Angeles, Orange County, San Diego County, the San Francisco Bay Area and
Greater Seattle, which we believe have strategic advantages and strong barriers to entry. Class A real estate encompasses attractive and efficient buildings of high
quality that are attractive to tenants, are well-designed and constructed with above-average material, workmanship and finishes and are well-maintained and managed.
We qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). We own our interests in all of our real estate assets through the Operating
Partnership and the Finance Partnership and generally conduct substantially all of our operations through the Operating Partnership.
Our stabilized portfolio of operating properties was comprised of the following properties at December 31, 2018:
Stabilized Office Properties
94
13,232,580
482
94.4 %
96.6 %
Number of
Buildings
Rentable
Square Feet
Number of
Tenants
Percentage
Occupied
Percentage Leased
Stabilized Residential Property
Number of
Buildings
Number of Units
2018 Average Occupancy
1
200
79.7 %
Our stabilized portfolio includes all of our properties with the exception of development and redevelopment properties currently committed for construction, under
construction or in the tenant improvement phase, undeveloped land and real estate assets held for sale. We define redevelopment properties as those properties for
which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which
is a higher economic return on the property. We define properties in the tenant improvement phase as properties that we are developing or redeveloping where the
project has reached cold shell condition and is ready for tenant improvements, which may require additional major base building construction before being placed in
service. Projects in the tenant improvement phase are added to our stabilized portfolio once the project reaches the earlier of 95% occupancy or one year from the date
of the cessation of major base building construction activities. Costs capitalized to construction in progress for development and redevelopment properties are
transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets at the historical cost of the
property as the projects are placed in service.
As of December 31, 2018, the following properties were excluded from our stabilized portfolio. We did not have any redevelopment properties or properties held
for sale at December 31, 2018.
Number of
Properties/Projects
Estimated Rentable
Square Feet (1)
(unaudited)
In-process development projects - tenant improvement (2)
In-process development projects - under construction (3)
________________________
(1) Estimated rentable square feet upon completion.
(2) Includes 88,000 square feet of Production, Distribution, and Repair (“ PDR”) space.
(3) In addition to the estimated office and PDR rentable square feet noted above, development projects under construction also include 96,000 square feet of retail space and 801 residential
1,150,000
1,290,000
2
3
units.
Our stabilized portfolio also excludes our future development pipeline, which as of December 31, 2018, was comprised of five potential development sites,
representing approximately 73 gross acres of undeveloped land.
As of December 31, 2018, all of our properties and development projects were owned and all of our business was conducted in the state of California with the
exception of eight office properties and one development project under construction located in the state of Washington. All of our properties and development
projects are 100% owned, excluding four office properties owned by three consolidated property partnerships, and one project held in a Variable
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Interest Entity (“VIE”) which we consolidated for financial reporting purposes (see Note 2 “Basis of Presentation and Significant Accounting Policies” to our
consolidated financial statements included in this report). The one project held in a VIE was to facilitate a transaction intended to qualify as a like-kind exchange
pursuant to Section 1031 of the Code (“Section 1031 Exchange”) to defer taxable gains on dispositions for federal and state income tax purposes that closed in January
2019. Two of the three property partnerships, 100 First Street Member, LLC (“100 First LLC”) and 303 Second Street Member, LLC (“303 Second LLC”), each owned
one office property in San Francisco, California through subsidiary REITs. As of December 31, 2018, the Company owned a 56% common equity interest in both 100
First LLC and 303 Second LLC. The third property partnership, Redwood City Partners, LLC (“Redwood LLC”), owned two office properties in Redwood City,
California. As of December 31, 2018, the Company owned an approximate 93% common equity interest in Redwood LLC. The remaining interests in all three property
partnerships were owned by unrelated third parties. All three property partnerships are consolidated entities.
We own our interests in all of our real estate assets through the Operating Partnership and the Finance Partnership and generally conduct substantially all of our
operations through the Operating Partnership of which we owned a 98.0% common general partnership interest as of December 31, 2018. The remaining 2.0% common
limited partnership interest in the Operating Partnership as of December 31, 2018 was owned by non-affiliated investors and certain of our executive officers and
directors. Kilroy Realty Finance, Inc., a wholly owned subsidiary of the Company, is the sole general partner of the Finance Partnership and owns a 1.0% common
general partnership interest in the Finance Partnership. The Operating Partnership owns the remaining 99.0% common limited partnership interest. With the exception
of the Operating Partnership and our consolidated property partnerships, all of our subsidiaries are wholly-owned.
Available Information; Website Disclosure; Corporate Governance Documents
Kilroy Realty Corporation was incorporated in the state of Maryland on September 13, 1996 and Kilroy Realty, L.P. was organized in the state of Delaware on
October 2, 1996. Our principal executive offices are located at 12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064. Our telephone number at that
location is (310) 481-8400. Our website is www.kilroyrealty.com. The information found on, or otherwise accessible through, our website is not incorporated into, and
does not form a part of, this annual report on Form 10-K or any other report or document we file with or furnish to the SEC. All reports we will file with the SEC are
available free of charge via EDGAR through the SEC website at www.sec.gov. All reports that we will file with the SEC will also be available free of charge on our
website at www.kilroyrealty.com as soon as reasonably practicable after we file those materials with, or furnish them to, the SEC.
The following documents relating to corporate governance are also available free of charge on our website under “Investors —Overview —Corporate
Governance” and available in print to any security holder upon request:
• Corporate Governance Guidelines;
• Code of Business Conduct and Ethics;
• Audit Committee Charter;
•
Executive Compensation Committee Charter;
• Nominating / Corporate Governance Committee Charter; and
• Corporate Social Responsibility and Sustainability Committee Charter.
You may request copies of any of these documents by writing to:
Attention: Investor Relations
Kilroy Realty Corporation
12200 West Olympic Boulevard, Suite 200
Los Angeles, California 90064
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We intend to disclose on our website under “Investors —Overview —Corporate Governance” any amendment to, or waiver of, any provisions of our Code of
Business Conduct and Ethics applicable to the directors and/or officers of the Company that would otherwise be required to be disclosed under the rules of the
Securities and Exchange Commission or the New York Stock Exchange.
Business and Growth Strategies
Growth Strategies. We believe that a number of factors and strategies will enable us to continue to achieve our objectives of long-term sustainable growth in
Net Operating Income (defined below) and FFO (defined below) as well as maximization of long-term stockholder value. These factors and strategies include:
•
•
•
•
•
•
the quality, geographic location, physical characteristics and operating sustainability of our properties;
our ability to efficiently manage our assets as a low cost provider of commercial real estate through our seasoned management team possessing core
capabilities in all aspects of real estate ownership, including property management, leasing, marketing, financing, accounting, legal, and construction and
development management;
our access to development, redevelopment, acquisition and leasing opportunities as a result of our extensive experience and significant working relationships
with major West Coast property owners, corporate tenants, municipalities and landowners given our over 70-year presence in the West Coast markets;
our active development program and our future development pipeline of undeveloped land sites (see “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations —Factors That May Influence Future Results of Operations” for additional information pertaining to the
Company’s in-process and future development pipeline);
our capital recycling program (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital
Resources of the Operating Partnership” for additional information pertaining to the Company’s capital recycling program and related property and land
dispositions);
our ability to capitalize on inflection points in a real estate cycle to add quality assets to our portfolio at substantial discounts to long-term value, through
either acquisition, development or redevelopment; and
•
our strong financial position that has and will continue to allow us to pursue attractive acquisition and development and redevelopment opportunities.
“Net Operating Income” is defined as consolidated operating revenues (rental income, tenant reimbursements and other property income) less consolidated
operating expenses (property expenses, real estate taxes, provision for bad debts and ground leases). “FFO” is Funds From Operations available to common
stockholders and common unitholders calculated in accordance with the white paper on FFO approved by the Board of Governors of the National Association of Real
Estate Investment Trusts (“NAREIT”). (See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of
Operations” and “—Non-GAAP Supplemental Financial Measures: Funds From Operations” for a reconciliation of these measures to generally accepted accounting
principles (“GAAP”) net income available to common stockholders.)
Operating Strategies. We focus on enhancing long-term growth in Net Operating Income and FFO from our properties by:
• maximizing cash flow from our properties through active leasing, early renewals and effective property management;
•
structuring leases to maximize returns;
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• managing portfolio credit risk through effective underwriting, including the use of credit enhancements and interests in collateral to mitigate portfolio credit
risk;
• managing operating expenses through the efficient use of internal property management, leasing, marketing, financing, accounting, legal, and construction
and development management functions;
• maintaining and developing long-term relationships with a diverse tenant base;
•
•
continuing to effectively manage capital improvements to enhance our properties’ competitive advantages in their respective markets and improve the
efficiency of building systems;
continuing to expand our management team with individuals who have extensive regional and product-type experience and are highly knowledgeable in their
respective markets and product types; and
•
attracting and retaining motivated employees by providing financial and other incentives to meet our operating and financial goals.
Development and Redevelopment Strategies. We and our predecessors have developed office properties primarily located in California since 1947. As of
December 31, 2018, we had two projects in the tenant improvement phase totaling approximately 1.2 million square feet of office and PDR space and three projects
under construction totaling approximately 1.3 million square feet of office space, 801 residential units and 96,000 square feet of retail space. In addition, our future
development pipeline was comprised of five potential development sites representing approximately 73 gross acres of undeveloped land on which we believe we have
the potential to develop over 5.0 million square feet of office, life science, laboratory and retail space, depending upon economic conditions. Our strategy with respect
to development is to:
•
•
own land sites in highly populated, amenity rich locations that are attractive to a broad array of tenants;
be the premier provider of modern and collaborative office and mixed-use projects on the West Coast with a focus on design and environment;
• maintain a disciplined approach by commencing development when appropriate based on market conditions, focusing on pre-leasing, developing in stages or
phasing, and cost control;
•
•
•
reinvest capital from dispositions of selective assets into new state-of-the-art development and acquisition opportunities with higher cash flow and rates of
return;
execute on our development projects under construction and future development pipeline, including expanding entitlements; and
evaluate redevelopment opportunities in supply-constrained markets because such efforts generally achieve similar returns to new development with reduced
entitlement risk and shorter construction periods.
We may engage in the additional development or redevelopment of office and mixed-use properties when market conditions support a favorable risk-adjusted
return on such development or redevelopment. We expect that our significant working relationships with tenants, municipalities and landowners on the West Coast
will give us further access to development and redevelopment opportunities. We cannot ensure that we will be able to successfully develop or redevelop any of our
properties or that we will have access to additional development or redevelopment opportunities.
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Acquisition Strategies. We believe we are well positioned to acquire opportunistic properties and development and redevelopment opportunities as the result
of our extensive experience, strong financial position and ability to access capital. We continue to focus on growth opportunities in West Coast markets populated by
knowledge and creative based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services.
Against the backdrop of market volatility, we expect to manage a strong balance sheet, execute on our development program and selectively evaluate opportunities
that add immediate Net Operating Income to our portfolio or play a strategic role in our future growth and that:
•
•
•
provide attractive yields and significant potential for growth in cash flow from property operations;
present growth opportunities in our existing or other strategic markets; and
demonstrate the potential for improved performance through intensive management, repositioning, capital investment and leasing that should result in
increased occupancy and rental revenues.
Financing Strategies. Our financing policies and objectives are determined by our board of directors. Our goal is to limit our dependence on leverage and
maintain a conservative ratio of debt-to-total market capitalization. As of December 31, 2018, our total debt as a percentage of total market capitalization was 31.4%,
which was calculated based on the quoted closing price per share of the Company’s common stock of $62.88 on December 31, 2018 (see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the Company —Capitalization” for additional
information). Our financing strategies include:
• maintaining financial flexibility, including a low secured to unsecured debt ratio;
• maximizing our ability to access a variety of both public and private capital sources;
• maintaining a staggered debt maturity schedule in which the maturity dates of our debt are spread over several years to limit risk exposure at any particular
point in the capital and credit market cycles;
•
completing financing in advance of the need for capital;
• managing interest rate exposure by generally maintaining a greater amount of fixed-rate debt as compared to variable-rate debt; and
• maintaining our credit ratings.
We utilize multiple sources of capital, including borrowings under our unsecured revolving credit facility, unsecured term loan facility, proceeds from the issuance
of public or private debt or equity securities and other bank and/or institutional borrowings and our capital recycling program, including strategic venture sources.
There can be no assurance that we will be able to obtain capital as needed on terms favorable to us or at all. (See the discussion under the caption “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations —Factors That May Influence Future Results of Operations” and “Item 1A.
Risk Factors.”)
Sustainability Strategies. We make excellence in sustainability a core competence by:
• managing our properties to offer the maximum degree of utility and operational efficiency to our tenants. We offer tenant sustainability programs focused on
helping our tenants reduce their energy and water consumption and increase their recycling diversion rates. Many of our assets are in zones that have been
impacted by drought and, as such, face the risk of increased water costs and fines for high consumption. We endeavor to mitigate these risks through
comprehensive, proactive water reduction efforts throughout our portfolio, including domestic fixture upgrades, cooling tower optimizations, a
comprehensive leak detection program and irrigation systems retrofits. We also incorporate green lease language into 100% of our new leases, including a
cost recovery clause for resource-efficiency related capital expenditures in full-service gross leases, which seek to align tenant and landlord interests on
energy, water and waste efficiency. Green leases (also known as aligned leases, high performance leases or energy efficient leases) aim to align the financial
and energy incentives of building owners and tenants so they can work together to save money, conserve resources
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and ensure the efficient operation of buildings. We were honored in 2014 to be part of the inaugural class of Green Lease Leaders, the Institute for Market
Transformation’s (“IMT’s”) program to encourage green leasing in real estate. In 2016, IMT honored us again with two Green Lease Leaders Team
Transaction awards, and we earned an additional Green Lease Leaders Award at the Gold level in 2018. Energy consumption, water consumption, and
greenhouse gas (“GHG”) emissions data for the periods indicated based on the most recent available information, assured by DNV GL Business Assurance
USA, Inc., are as follows:
Energy consumption:*
Energy Consumption Data
Coverage as % of Total Floor
Area (2)
Total Energy Consumed by
Floor Area with Data Coverage
(MWh) (3)
% of Energy Generated From
Renewable Sources (4)
Like-for-Like Change in Energy
Consumption of Floor Area with
Data Coverage (5)
% of Eligible Portfolio that has Obtained an
Energy Rating and is Certified to ENERGY
STAR (6)
96 %
97 %
92 %
382,688
381,295
254,518
3 %
3 %
3 %
(1 )%
(2 )%
(5 )%
73 %
68 %
65 %
Year (1)
2017
2016
2015
Water consumption:*
Year (1)
2017
2016
2015
Water Withdrawal Data Coverage as a % of Total Floor
Area (7)
Total Water Withdrawn by Portfolio (m3) (8)
Like-for-like Change in Water Withdrawn for Floor Area
with Data Coverage (5)
98 %
94 %
94 %
898,990
856,290
908,822
— %
(2 )%
(11 )%
GHG Emissions:*
Year (1)
Scope 1 GHG Data Coverage as a % of Total Floor Area (9)
Scope 1 GHG Emissions (Tonnes CO2) (10)
Like-for-like Change in Scope 1 GHG Emissions Data (5)
2017
2016
100 %
100 %
4,641
4,059
6 %
N/A
Year (1)
Scope 2 GHG Data Coverage as a % of Total Floor Area (11)
Scope 2 GHG Emissions (Tonnes CO2) (12)
Like-for-like Change in Scope 2 GHG Emissions Data (5)
2017
2016
99 %
97 %
42,947
44,145
(10 )%
N/A
________________________
*
Energy consumption, water consumption and GHG emissions data was assured by way of a Type 2, moderate level assurance assessment, using the AA1000AS (2008) assurance
standard in connection with the assurance of the content of our sustainability report by DNV GL Business Assurance USA, Inc. GHG emissions reporting follows the World
Business Council for Sustainable Development (WBSCD)/World Resources Institute (WRI) Greenhouse Gas Protocol.
(1) Full 2018 calendar year energy, water and GHG emissions data is not available until after March 30, 2019.
(2) Percentage based on gross square footage of portfolio floor area with complete energy consumption data coverage as of the end of the applicable year. Floor area is considered
to have complete energy consumption data coverage when energy consumption data (i.e., energy types and amounts consumed) is obtained by the Company for all types of
energy consumed in the relevant floor area during the fiscal year, regardless of when such data was obtained.
(3) Energy includes energy purchased from sources external to the Company and its tenants or produced by the Company or its tenants themselves (self-generated) and energy
from all sources, including direct fuel usage, purchased electricity, and heating, cooling and steam energy. Total energy consumption based on floor area with complete energy
consumption data coverage as of the end of the applicable year.
(4) Renewable sources include renewable energy the Company directly produced and renewable energy the Company purchased if purchased through a renewable power purchase
agreement that explicitly includes renewable energy certificates (“ RECs”) or Guarantees of Origin (“ GOs”), a Green-e Energy Certified utility or supplier program or other
green power products that explicitly include RECs or GOs or for which Green-e Energy Certified RECs are paired with grid electricity. Percentage is based total energy
consumption during applicable year.
(5) Data reported on a like-for-like comparison excludes assets that have been acquired or disposed over the past twenty-four months as of the end of the applicable year.
10
(6) Eligible portfolio represents our office and residential properties that have had 50% or greater occupancy for 12 consecutive months at any point during the applicable year.
Percentage is based on rentable square footage of our eligible portfolio that has obtained an energy rating and is certified to ENERGY STAR® as of the end of the applicable
year.
(7) Percentage based on gross square footage of portfolio floor area with complete water withdrawal data coverage as of the end of the applicable year. Floor area is considered to
have complete water withdrawal data coverage when water withdrawal data (i.e., amounts withdrawn) is obtained by the Company for the relevant floor area during the fiscal
year, regardless of when such data was obtained.
(8) Water sources include surface water (including water from wetlands, rivers, lakes and oceans), groundwater, rainwater collected directly and stored by the Company, wastewater
obtained from other entities, municipal water supplies or supply from other water utilities. Total water withdrawal based on floor area with complete water withdrawal data
coverage as of the end of the applicable year.
(9) Percentage based on gross square footage of portfolio floor area with complete Scope 1 GHG emissions data coverage as of the end of the applicable year. Floor area is
considered to have complete Scope 1 GHG emissions data coverage when GHG emission data (i.e., amounts emitted) is obtained by the Company for the relevant floor area
during the fiscal year, regardless of when such data was obtained.
(10) Scope 1 emissions represent those produced by onsite natural gas consumption procured by the Company.
(11) Percentage based on gross square footage of portfolio floor area with complete Scope 2 GHG emissions data coverage as of the end of the applicable year. Floor area is
considered to have complete Scope 2 GHG emissions data coverage when GHG emission data is obtained by the Company for the relevant floor area during the fiscal year,
regardless of when such data was obtained.
(12) Scope 2 emissions represent those produced by onsite electricity consumption procured by the Company. The Scope 2 emissions were calculated using a location-based method
per the GHG Protocol Scope 2 Guidance.
•
•
•
building our current development projects to Leadership in Energy and Environmental Design (“LEED”) specifications. All of our office development projects
are now designed to achieve LEED certification, either LEED Platinum or Gold.
actively pursuing LEED certification for approximately 1.3 million square feet of office space under construction. In addition, an analysis of energy
performance is included in our standard due diligence process for acquisitions, and reducing energy use year over year is a comprehensive goal of our
operational strategy. This is accomplished through systematic energy auditing, mechanical, lighting and other building upgrades, optimizing operations and
engaging tenants. During the past few years, we have significantly enhanced the sustainability profile of our portfolio, ending 2018 with 63% of our
properties LEED certified and 79% of our properties ENERGY STAR certified (in each case as a percentage of our total rentable square feet as of December 31,
2018). During 2018, the Company was recognized for our sustainability efforts with multiple industry leadership awards, including NAREIT’s 2018 Office
Leader in the Light Award for the fifth consecutive year, and in 2018 it won NAREIT’s Most Innovative Leader in the Light Award as well. In addition, the
Company was recognized with the ENERGY STAR Partner of the Year Sustained Excellence Award for the fifth time. The Company was also recognized by
GRESB as the North American sustainability leader in the listed office sector, and we continue to be listed on the Dow Jones Sustainability World Index.
identifying climate change as a risk to our business, an opportunity for long-term value creation and a key driver in long-term strategic business decisions.
These risks and opportunities include policy, market, technology and reputational concerns and are a focus area for the Board and management. Climate-
related risks and opportunities are governed by the Board through the Corporate Social Responsibility and Sustainability Committee (the “Committee”). In
2018, the Committee endorsed the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) and tasked management with
assessing and reporting against climate related risk for the Company. Recognizing the importance of reducing the Company’s greenhouse gas impact on the
environment, we have committed to achieving carbon neutral operations by December 31, 2020. This means that the entirety of our scope 1 and scope 2
emissions will be offset by this date through a combination of energy efficiency measures and both onsite and offsite renewables. This exceeds our carbon
reduction goals previously validated by Science-Based Targets. Science-Based Targets is a collaboration between the Carbon Disclosure Project, the United
Nations Global Compact, the World Resources Institute and the World Wide Fund for Nature, which independently assesses and approves the carbon
reduction goals of companies.
11
Significant Tenants
As of December 31, 2018, our 15 largest tenants in terms of annualized base rental revenues represented approximately 45.7% of our total annualized base rental
revenues, defined as annualized monthly contractual rents from existing tenants as of December 31, 2018. Annualized base rental revenue includes the impact of
straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-
funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense reimbursement
revenue.
For further information on our 15 largest tenants and the composition of our tenant base, see “Item 2. Properties —Significant Tenants.”
Competition
We compete with several developers, owners, operators and acquirers of office, undeveloped land and other commercial real estate, including mixed-use and
residential real estate, many of which own properties similar to ours in the same submarkets in which our properties are located. For further discussion of the potential
impact of competitive conditions on our business, see “Item 1A. Risk Factors.”
Segment and Geographic Financial Information
During 2018 and 2017, we had one reportable segment, our office properties segment. For information about our office property revenues and long-lived assets
and other financial information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations.”
As of December 31, 2018, all of our properties and development projects were owned and all of our business was conducted in the state of California with the
exception of eight office properties and one development project under construction located in the state of Washington. As of December 31, 2018, all of our properties
and development projects were 100% owned, excluding four office properties owned by three consolidated property partnerships and a property held in a VIE to
facilitate a Section 1031 Exchange that closed in January 2019, which have been consolidated for financial reporting purposes (see Note 2 “Basis of Presentation and
Significant Accounting Policies” to our consolidated financial statements included in this report for further information).
Employees
As of December 31, 2018, we employed 276 people through the Operating Partnership, Kilroy Services, LLC, and Kilroy Realty TRS, Inc. We believe that relations
with our employees are good.
Environmental Regulations and Potential Liabilities
Government Regulations Relating to the Environment. Many laws and governmental regulations relating to the environment are applicable to our properties,
and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently and may adversely affect us.
Existing conditions at some of our properties. Independent environmental consultants have conducted Phase I or similar environmental site assessments on all
of our properties. We generally obtain these assessments prior to the acquisition of a property and may later update them as required for subsequent financing of the
property, if a property is slated for disposition, or as requested by a tenant. Consultants are required to perform Phase I assessments to American Society for Testing
and Materials standards then-existing for Phase I site assessments and typically include a historical review, a public records review, a visual inspection of the
surveyed site, and the issuance of a written report. These assessments do not generally include any soil or groundwater sampling or subsurface investigations;
however, if a Phase I does recommend that soil or groundwater samples be taken or other subsurface investigations take place, we generally perform such
recommended actions. Depending on the age of the property, the Phase I may have included an assessment of asbestos-containing materials or a separate hazardous
materials survey may have been conducted.
12
For properties where asbestos-containing materials were identified or suspected, an operations and maintenance plan was generally prepared and implemented.
Historical operations at or near some of our properties, including the presence of underground or above ground storage tanks, various sites uses that involved
hazardous substances, the landfilling of hazardous substances and solid waste, and migration of contamination from other sites, may have caused soil or groundwater
contamination. In some instances, the prior owners of the affected properties conducted remediation of known contamination in the soils on our properties, we are
required to conduct further environmental clean-up and environmental closure activities at certain properties, and residual contamination could pose environmental,
health, and safety risks if not appropriately addressed. We may need to investigate or remediate contaminated soil, soil gas, landfill gas, and groundwater, and we may
also need to conduct landfill closure and post-closure activities, including, for example, the implementation of groundwater and methane monitoring systems and
impervious cover, and the costs of such work could exceed projected or budgeted amounts. To protect the health and safety of site occupants and others, we may be
required to implement and operate safeguards, including, for example, vapor intrusion mitigation systems and building protection systems to address methane. We
may need to modify our methods of construction or face increased construction costs as a result of environmental conditions, and we may face obligations under
agreements with governmental authorities with respect to the management of such environmental conditions. If releases from our sites migrate offsite, or if our site
redevelopment activities cause or contribute to a migration of hazardous substances, neighbors or others could make claims against us, such as for property damage,
personal injury, or cost recovery.
As of December 31, 2018, we had accrued environmental remediation liabilities of approximately $83.2 million recorded on our consolidated balance sheets in
connection with certain of our in-process and future development projects. The accrued environmental remediation liabilities represent the costs we estimate we will
incur when we perform environmental clean-up and closure activities and commence development at various development acquisition sites. These estimates, which we
developed with the assistance of third party experts, consist primarily of the removal of contaminated soil, performing environmental closure activities, constructing
remedial systems and other related costs since we are required to dispose of any existing contaminated soil, and sometimes perform other environmental closure or
remedial activities, when we develop new buildings at these sites. It is possible that we could incur additional environmental remediation costs in connection with
these development projects. However, potential additional environmental costs cannot be reasonably estimated at this time and certain changes in estimates could
occur as the site conditions, final project timing, design elements, actual soil conditions and other aspects of the projects, which may depend upon municipal and
other approvals beyond the control of the Company, are determined. See Note 18 “Commitments and Contingencies” to our consolidated financial statements included
in this report for additional information.
Other than the accrued environmental liabilities recorded in connection with certain of our development projects, we are not aware of any such condition, liability,
or concern by any other means that would give rise to material environmental liabilities. However, our assessments may have failed to reveal all environmental
conditions, liabilities, or compliance concerns; there may be material environmental conditions, liabilities, or compliance concerns that arose at a property after the
review was completed; future laws, ordinances, or regulations may impose material additional environmental liability; and environmental conditions at our properties
may be affected in the future by tenants, third parties, or the condition of land or operations near our properties, such as the presence of underground storage tanks or
migrating plumes. We cannot be certain that costs of future environmental compliance will not have an adverse effect on our financial condition, results of operations,
cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Use of hazardous materials by some of our tenants. Some of our tenants handle hazardous substances and wastes on our properties as part of their routine
operations. Environmental laws and regulations may subject these tenants, and potentially us, to liability resulting from such activities. We generally require our
tenants in their leases to comply with these environmental laws and regulations and to indemnify us for any related liabilities. As of December 31, 2018, other than
routine cleaning materials, approximately 4-6% of our tenants handled hazardous substances and/or wastes on approximately 1-3% of the aggregate square footage of
our properties as part of their routine operations. These tenants are primarily involved in the life sciences business. The hazardous substances and wastes are
primarily comprised of diesel fuel for emergency generators and small quantities of lab and light manufacturing chemicals including, but not limited to, alcohol,
ammonia, carbon dioxide, cryogenic gases, dichlorophenol, methane, naturalyte
13
acid, nitrogen, nitrous oxide, and oxygen which are routinely used by life science companies. We are not aware of any material noncompliance, liability, or claim
relating to hazardous or toxic substances or petroleum products in connection with any of our properties, and management does not believe that on-going activities
by our tenants will have a material adverse effect on our operations.
Costs related to government regulation and private litigation over environmental matters. Under applicable environmental laws and regulations, we may be
liable for the costs of removal, remediation, or disposal of certain hazardous or toxic substances present or released on our properties. These laws could impose
liability without regard to whether we are responsible for, or even knew of, the presence or release of the hazardous materials. Government investigations and
remediation actions may have substantial costs, and the presence or release of hazardous substances on a property could result in governmental clean-up actions,
personal injury actions, or similar claims by private plaintiffs.
Potential environmental liabilities may exceed our environmental insurance coverage limits, transactional indemnities or holdbacks. We carry what we
believe to be commercially reasonable environmental insurance. Our environmental insurance policies are subject to various terms, conditions and exclusions.
Similarly, in connection with some transactions we obtain environmental indemnities and holdbacks that may not be honored by the indemnitors, may be less than the
resulting liabilities or may otherwise fail to address the liabilities adequately. Therefore, we cannot provide any assurance that our insurance coverage or transactional
indemnities will be sufficient or that our liability, if any, will not have a material adverse effect on our financial condition, results of operations, cash flows, quoted
trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Litigation
Lawsuits have been filed in San Francisco County Superior Court in connection with the vertical and differential settlement experienced at the Millennium Tower
property located at 301 Mission Street in San Francisco, California, a building not owned by the Company but located in proximity to the Company’s property located
at 350 Mission Street. Among the claims asserted in the complex lawsuits are claims that acts by various entities, including entities affiliated with other neighboring
properties, contributed to the settlement that Millennium Tower has experienced. In October 2017, two defendants named in the lawsuits asserted cross-claims for
equitable indemnification against certain of the Company’s entities in connection with the development and construction-related activities at our neighboring 350
Mission Street property. One of those parties has voluntarily dismissed its cross-claims against the Company’s entities. We dispute the allegations and intend to
vigorously defend against these claims.
14
ITEM 1A. RISK FACTORS
The following section sets forth material factors that may adversely affect our business and operations. The following factors, as well as the factors discussed in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Factors That May Influence Future Results of Operations” and
other information contained in this report, should be considered in evaluating us and our business.
Risks Related to our Business and Operations
Global market, economic and geopolitical conditions may adversely affect our business, results of operations, liquidity and financial condition and those of
our tenants. Our business may be adversely affected by global market, economic and geopolitical conditions, including general global economic and political
uncertainty and dislocations in the credit markets. If these conditions become more volatile or worsen, our and our tenant’s business, results of operations, liquidity
and financial condition and those of our tenants may be adversely affected as a result of the following consequences, among others:
•
•
•
•
•
the financial condition of our tenants, many of which are technology; life science and healthcare; finance, insurance and real estate; media and professional
business and other service firms, may be adversely affected, which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational
failures or for other reasons;
significant job losses in the financial and professional services industries may occur, which may decrease demand for our office space, causing market rental
rates and property values to be negatively impacted;
our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition
and development opportunities and refinance existing debt, reduce our returns from our acquisition and development activities and increase our future
interest expense;
reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may
reduce the availability of unsecured loans; and
one or more lenders under the Operating Partnership’s unsecured revolving credit facility could refuse to fund their financing commitment to us or could fail
and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all.
All of our properties are located in California and greater Seattle, Washington and we may therefore be susceptible to adverse economic conditions and
regulations, as well as natural disasters, in those areas. Because all of our properties are concentrated in California and greater Seattle, we may be exposed to greater
economic risks than if we owned a more geographically dispersed portfolio. Further, within California, our properties are concentrated in Greater Los Angeles, Orange
County, San Diego County and the San Francisco Bay Area, exposing us to risks associated with those specific areas. We are susceptible to adverse developments in
the economic and regulatory environments of California and greater Seattle (such as periods of economic slowdown or recession, business layoffs or downsizing,
industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation and
other factors), as well as adverse weather conditions and natural disasters that occur in those areas (such as earthquakes, wind, landslides, droughts, fires and other
events). For example, many of our assets are in zones that have been impacted by drought and, as such, face the risk of increased water costs and potential fines
and/or penalties for high consumption. In addition, California is also regarded as more litigious and more highly regulated and taxed than many other states, which
may reduce demand for office space in California.
Any adverse developments in the economy or real estate market in California and the surrounding region, or in greater Seattle or any decrease in demand for
office space resulting from the California or greater Seattle regulatory or business environment could impact our ability to generate revenues sufficient to meet our
operating expenses or other obligations, which would adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our
securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
15
Our performance and the market value of our securities are subject to risks associated with our investments in real estate assets and with trends in the real
estate industry. Our economic performance and the value of our real estate assets and, consequently the market value of the Company’s securities, are subject to the
risk that our properties may not generate revenues sufficient to meet our operating expenses or other obligations. A deficiency of this nature would adversely impact
our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay
dividends and distributions to our security holders.
Events and conditions applicable to owners and operators of real estate that are beyond our control and could impact our economic performance and the value of
our real estate assets may include:
•
•
•
•
•
•
•
•
•
•
•
•
local oversupply or reduction in demand for office, mixed-use or other commercial space, which may result in decreasing rental rates and greater concessions
to tenants;
inability to collect rent from tenants;
vacancies or inability to rent space on favorable terms or at all;
inability to finance property development and acquisitions on favorable terms or at all;
increased operating costs, including insurance premiums, utilities and real estate taxes;
costs of complying with changes in governmental regulations;
the relative illiquidity of real estate investments;
declines in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing;
changing submarket demographics;
changes in space utilization by our tenants due to technology, economic conditions and business culture;
the development of harmful mold or other airborne toxins or contaminants that could damage our properties or expose us to third-party liabilities; and
property damage resulting from seismic activity or other natural disasters.
We depend upon significant tenants, and the loss of a significant tenant could adversely affect our financial condition, results of operations, ability to borrow
funds and cash flows. As of December 31, 2018, our 15 largest tenants represented approximately 45.7% of total annualized base rental revenues. See further
discussion on the composition of our tenants by industry and our largest tenants under “Item 2. Properties —Significant Tenants.”
Our financial condition, results of operations, ability to borrow funds and cash flows would be adversely affected if any of our significant tenants fails to renew
its lease(s), renew its lease(s) on terms less favorable to us, or becomes bankrupt or insolvent or otherwise unable to satisfy its lease obligations.
Downturn in tenants’ businesses may reduce our revenues and cash flows. For the year ended December 31, 2018, we derived approximately 98.7% of our
revenues from rental income and tenant reimbursements. A tenant may experience a downturn in its business, which may weaken its financial condition and result in
its failure to make timely rental payments or result in defaults under our leases. In the event of default by a tenant, we may experience delays in enforcing our rights as
landlord and may incur substantial costs in protecting our investment.
The bankruptcy or insolvency of a major tenant also may adversely affect the income produced by our properties. If any tenant becomes a debtor in a case under
federal bankruptcy law, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might permit the tenant to reject and terminate
its lease with us. Our
16
claim against the tenant for unpaid and future rent could be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the
lease. Therefore, our claim for unpaid rent would likely not be paid in full. Any losses resulting from the bankruptcy of any of our existing tenants could adversely
impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to
pay dividends and distributions to our security holders.
A large percentage of our tenants operate in a concentrated group of industries and downturns in these industries could adversely affect our financial
condition, results of operations and cash flows. As of December 31, 2018, as a percentage of our annualized base rental revenue, 48% of our tenants operated in the
technology industry, 14% in the life science and health care industries, 14% in the media industry, 9% in the finance, insurance and real estate industries, 7% in the
professional, business and other services industries and 8% in other industries. As we continue our development and potential acquisition activities in markets
populated by knowledge and creative based tenants in the technology and media industries, our tenant mix could become more concentrated, further exposing us to
risks associated with those industries. For a further discussion of the composition of our tenants by industry, see “Item 2. Properties —Significant Tenants.” An
economic downturn in any of these industries, or in any industry in which a significant number of our tenants currently or may in the future operate, could negatively
impact the financial condition of such tenants and cause them to fail to make timely rental payments or default on lease obligations, fail to renew their leases or renew
their leases on terms less favorable to us, become bankrupt or insolvent, or otherwise become unable to satisfy their obligations to us. As a result, a downturn in an
industry in which a significant number of our tenants operate could adversely affect our financial conditions, result of operations and cash flows.
We may be unable to renew leases or re-lease available space. Most of our income is derived from the rent earned from our tenants. We had office space
representing approximately 5.6% of the total square footage of our stabilized office properties that was not occupied as of December 31, 2018. In addition, leases
representing approximately 11.5% and 11.8% of the leased rentable square footage of our properties are scheduled to expire in 2019 and 2020, respectively. Of the
leases scheduled to expire in 2019, 66% of the rentable square footage scheduled to expire was re-leased as of December 31, 2018. Above market rental rates on some
of our properties may force us to renew or re-lease expiring leases at rates below current lease rates. We cannot provide any assurance that leases will be renewed,
available space will be re-leased or that our rental rates will be equal to or above the current rental rates. If the average rental rates for our properties decrease, existing
tenants do not renew their leases, or available space is not re-leased, our financial condition, results of operations, cash flows, the quoted trading price of our
securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders could be adversely affected. For
additional information on our scheduled lease expirations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —
Factors That May Influence Future Results of Operations.”
We are subject to governmental regulations that may affect the development, redevelopment and use of our properties. Our properties are subject to regulation
under federal laws, such as the Americans with Disabilities Act of 1990 (the “ADA”), pursuant to which all public accommodations must meet federal requirements
related to access and use by disabled persons, and state and local laws addressing earthquake, fire and life safety requirements. Although we believe that our
properties substantially comply with requirements under applicable governmental regulations, none of our properties have been audited or investigated for
compliance by any regulatory agency. If we were not in compliance with material provisions of the ADA or other regulations affecting our properties, we might be
required to take remedial action, which could include making modifications or renovations to our properties. Federal, state, or local governments may also enact future
laws and regulations that could require us to make significant modifications or renovations to our properties. If we were to incur substantial costs to comply with the
ADA or any other regulations, our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt
service obligations and to pay dividends and distributions to our security holders could be adversely affected.
Our properties are subject to land use rules and regulations that govern our development, redevelopment and use of our properties, such as Title 24 of the
California Code of Regulations (“Title 24”), which prescribes building energy efficiency standards for residential and nonresidential buildings in the State of California.
If we were not in compliance with material provisions of Title 24 or other regulations affecting our properties, we might be required to take remedial action, which could
include making modifications or renovations to our properties. Changes in the existing land use rules and regulations and approval process that restrict or delay our
ability to develop, redevelop or use our properties (such as potential restrictions on the use and/or density of new developments, water use and other uses and
activities)
17
or that prescribe additional standards could have an adverse effect on our financial position, results of operations, cash flows, the quoted trading price of our
securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
We may not be able to meet our debt service obligations. As of December 31, 2018, we had approximately $3.0 billion aggregate principal amount of indebtedness,
of which $76.3 million in principal payments will be paid during the year ended December 31, 2019. Of this amount, $74.3 million was paid in February 2019 upon
repayment of a mortgage note at par. Our total debt at December 31, 2018 represented 31.4% of our total market capitalization (which we define as the aggregate of our
long-term debt and the market value of the Company’s common stock and the Operating Partnership’s common units of limited partnership interest, or common units,
based on the closing price per share of the Company’s common stock as of that date). For the calculation of our market capitalization and additional information on
debt maturities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the
Company —Capitalization” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources
of the Operating Partnership —Liquidity Uses.”
Our ability to make payments on and to refinance our indebtedness and to fund our operations, working capital, and capital expenditures, depends on our ability
to generate cash flow in the future. Our cash flow is subject to general economic, industry, financial, competitive, operating, legislative, regulatory, environmental and
other factors, many of which are beyond our control.
The instruments and agreements governing some of our outstanding indebtedness (including borrowings under the Operating Partnership’s unsecured revolving
credit facility, unsecured term loan facility and note purchase agreements) contain provisions that require us to repurchase for cash or repay that indebtedness under
specified circumstances or upon the occurrence of specified events (including upon the acquisition by any person or group of more than a specified percentage of the
aggregate voting power of all the Company’s issued and outstanding voting stock, upon certain changes in the composition of a majority of the members of the
Company’s Board, if the Company or one of its wholly-owned subsidiaries ceases to be the sole general partner of the Operating Partnership or if the Company ceases
to own, directly or indirectly, at least 60% of the voting equity interests in the Operating Partnership), and our future debt agreements and debt securities may contain
similar provisions or may require that we repay or repurchase or offer to repurchase for cash the applicable indebtedness under specified circumstances or upon the
occurrence of specified changes of control of the Company or the Operating Partnership or other events. We may not have sufficient funds to pay our indebtedness
when due (including upon any such required repurchase, repayment or offer to repurchase), and we may not be able to arrange for the financing necessary to make
those payments or repurchases on favorable terms or at all. In addition, our ability to make required payments on our indebtedness when due (including upon any
such required repurchase, repayment or offer to repurchase) may be limited by the terms of other debt instruments or agreements. Our failure to pay amounts due in
respect of any of our indebtedness when due would generally constitute an event of default under the instrument governing that indebtedness, which could permit
the holders of that indebtedness to require the immediate repayment of that indebtedness in full and, in the case of secured indebtedness, could allow them to sell the
collateral securing that indebtedness and use the proceeds to repay that indebtedness. Moreover, any acceleration of or default in respect of any of our indebtedness
could, in turn, constitute an event of default under other debt instruments or agreements, thereby resulting in the acceleration and required repayment of that other
indebtedness. Any of these events could materially adversely affect our ability to make payments of principal and interest on our indebtedness when due and could
prevent us from making those payments altogether.
We cannot assure you that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us in an amount
sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs, including cash distributions to stockholders necessary to
maintain the Company’s REIT qualification. Additionally, if we incur additional indebtedness in connection with future acquisitions or for any other purpose, our debt
service obligations could increase.
We may need to refinance all or a portion of our indebtedness on or before maturity. Our ability to refinance our indebtedness or obtain additional financing will
depend on, among other things:
•
our financial condition, results of operations and market conditions at the time; and
18
•
restrictions in the agreements governing our indebtedness.
As a result, we may not be able to refinance our indebtedness on commercially reasonable terms or at all. If we do not generate sufficient cash flow from
operations, and additional borrowings or refinancings or proceeds of asset sales or other sources of cash are not available to us, we may not have sufficient cash to
enable us to meet all of our obligations. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity financing,
delaying capital expenditures, or entering into strategic acquisitions and alliances. Any of these events or circumstances could have a material adverse effect on our
financial condition, results of operations, cash flows, the trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and
distributions to our security holders. In addition, foreclosures could create taxable income without accompanying cash proceeds, which could require us to borrow or
sell assets to raise the funds necessary to pay amounts due on our indebtedness and to meet the REIT distribution requirements discussed below, even if such
actions are not on favorable terms.
The covenants in the agreements governing the Operating Partnership’s unsecured revolving credit facility, unsecured term loan facility and note purchase
agreements may limit our ability to make distributions to the holders of our common stock. The Operating Partnership’s $750.0 million unsecured revolving credit
facility, $150.0 million unsecured term loan facility and note purchase agreements contain financial covenants that could limit the amount of distributions payable by
us on our common stock and any preferred stock we may issue in the future. We rely on cash distributions we receive from the Operating Partnership to pay
distributions on our common stock and any preferred stock we may issue in the future and to satisfy our other cash needs. The agreements governing the unsecured
revolving credit facility, the unsecured term loan facility and the note purchase agreements provide that, if the Operating Partnership fails to pay any principal of, or
interest on, any borrowings or other amounts payable under such agreement when due or during any other event of default under such revolving credit facility, loan
facility and the unsecured private placement notes, the Operating Partnership may make only those partnership distributions that result in distributions to us in an
amount sufficient to permit us to make distributions to our stockholders that we reasonably believe are necessary to (a) maintain our qualification as a REIT for federal
and state income tax purposes and (b) avoid the payment of federal or state income or excise tax. Any limitation on our ability to make distributions to our
stockholders, whether as a result of these provisions in the unsecured revolving credit facility, the unsecured term loan facility, the note purchase agreements or
otherwise, could have a material adverse effect on the market value of our common stock.
A downgrade in our credit ratings could materially adversely affect our business and financial condition. The credit ratings assigned to the Operating
Partnership’s debt securities and any preferred stock we may issue in the future could change based upon, among other things, our results of operations and financial
condition. These ratings are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any rating will not be changed or withdrawn by a
rating agency in the future if, in its judgment, circumstances warrant. Moreover, these credit ratings do not apply to our common stock and are not recommendations
to buy, sell or hold our common stock or any other securities. If any of the credit rating agencies that have rated the Operating Partnership’s debt securities or any
preferred stock we may issue in the future downgrades or lowers its credit rating, or if any credit rating agency indicates that it has placed any such rating on a so-
called “watch list” for a possible downgrading or lowering or otherwise indicates that its outlook for that rating is negative, it could have a material adverse effect on
our costs and availability of capital, which could in turn have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of
our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
We face significant competition, which may decrease the occupancy and rental rates of our properties. We compete with several developers, owners and
operators of office, undeveloped land and other commercial real estate, including mixed-use and residential real estate, many of which own properties similar to ours in
the same submarkets in which our properties are located but which have lower occupancy rates than our properties. Therefore, our competitors have an incentive to
decrease rental rates until their available space is leased. If our competitors offer space at rental rates below the rates currently charged by us for comparable space, we
may be pressured to reduce our rental rates below those currently charged in order to retain tenants when our tenant leases expire. As a result, our financial condition,
results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and
distributions to our security holders may be adversely affected.
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In order to maintain the quality of our properties and successfully compete against other properties, we must periodically spend money to maintain, repair
and renovate our properties, which reduces our cash flows. If our properties are not as attractive to current and prospective tenants in terms of rent, services,
condition or location as properties owned by our competitors, we could lose tenants or suffer lower rental rates. As a result, we may from time to time be required to
make significant capital expenditures to maintain the competitiveness of our properties. There can be no assurances that any such expenditure would result in higher
occupancy or higher rental rates, or deter existing tenants from relocating to properties owned by our competitors.
Potential casualty losses, such as earthquake losses, may adversely affect our financial condition, results of operations and cash flows. We carry
comprehensive liability, fire, extended coverage, rental loss, and terrorism insurance covering all of our properties. Management believes the policy specifications and
insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for generally uninsurable losses
such as loss from riots or acts of God. In addition, all of our properties are located in earthquake-prone areas. We carry earthquake insurance on our properties in an
amount and with deductibles that management believes are commercially reasonable. However, the amount of our earthquake insurance coverage may not be
sufficient to cover losses from earthquakes. We may also discontinue earthquake insurance on some or all of our properties in the future if the cost of premiums for
earthquake insurance exceeds the value of the coverage discounted for the risk of loss. If we experience a loss that is uninsured or which exceeds policy limits, we
could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. Further, if the damaged properties are
subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if the properties were irreparable.
We may not be able to rebuild our existing properties to their existing specifications if we experience a substantial or comprehensive loss of such properties. In
the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications.
Further, reconstruction or improvement of such property could potentially require significant upgrades to meet zoning and building code requirements or be subject to
environmental and other legal restrictions.
Our business is subject to risks associated with climate change and our sustainability strategies. Climate change could trigger extreme weather and changes in
precipitation, temperature, and air quality, all of which may result in physical damage to, or a decrease in demand for, our properties located in the areas affected by
these conditions. Should the impact of climate change be severe or occur for lengthy periods of time, our financial condition or results of operations would be
adversely affected.
Recognizing the importance of climate change and reducing our greenhouse gas impact on the environment, our sustainability strategies include a commitment to
achieving carbon neutral operations by December 31, 2020. This means that the entirety of our scope 1 and scope 2 emissions will be offset by this date through a
combination of energy efficiency measures and both onsite and offsite renewables. Scope 1 emissions represent those produced by onsite natural gas consumption
procured by us, and Scope 2 emissions represent those produced by onsite electricity consumption procured by us. Our own efforts to reduce our greenhouse gas
impact on the environment and/or comply with changes in federal and state laws and regulations on climate change could result in significant capital expenditures to
improve the energy efficiency of our existing properties or properties we may acquire. Changes to such law and regulations could also result in increased operating
costs at our properties (for example, through increased utility costs). Moreover, if we are unable to achieve carbon neutral operations by our targeted date or comply
with laws and regulations on climate change, our reputation among our tenants and investors may be damaged and we may incur fines and/or penalties.
In addition, many of our assets are in zones that have been impacted by drought and, as such, face the risk of increased water costs and potential fines and/or
penalties for high consumption. We endeavor to mitigate these risks through comprehensive, proactive water reduction efforts throughout our portfolio, including
domestic fixture upgrades, cooling tower optimizations, a comprehensive leak detection program and irrigation systems retrofits. We also incorporate green lease
language into 100% of our new leases, including a cost recover clause for resource-efficiency related capital expenditures in full-service gross leases, which aim to
align our and our tenant’s interests on energy, water and waste efficiency. In addition, we are building our current development projects to LEED specifications, and
all of our office development projects are now designed to achieve LEED certification, either LEED Platinum or Gold. However, there can be no assurances that we will
successfully mitigate the risk of increased water costs and potential
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fines and/or penalties for high consumption or that we will be able to fully recoup any capital expenditures we incur in connection with our green leases. Moreover,
there can be no assurance that our development projects will be able to achieve the anticipated LEED certifications or that any of our sustainability strategies will
result in reduced operating costs, higher occupancy or higher rental rates or deter our existing tenants from relocating to properties owned by our competitors.
We are subject to environmental and health and safety laws and regulations, and any costs to comply with, or liabilities arising under, such laws and
regulations could be material. As an owner, operator, manager, acquirer and developer of real properties, we are subject to environmental and health and safety laws
and regulations. Certain of these laws and regulations impose joint and several liability, without regard to fault, for investigation and clean-up costs on current and
former owners and operators of real property and persons who have disposed of or released hazardous substances into the environment. At some of our properties,
there are asbestos-containing materials, or tenants routinely handle hazardous substances as part of their operations. In addition, historical operations and conditions,
including the presence of underground storage tanks, various site uses that involved hazardous substances, the landfilling of hazardous substances and solid waste,
and migration of contamination from other sites, have caused soil or groundwater contamination at or near some of our properties. Although we believe that the prior
owners of the affected properties or other persons may have conducted remediation of known contamination at many of these properties, not all such contamination
has been remediated, further clean-up or environmental closure activities at certain of these properties is or may be required, and residual contamination could pose
environmental, health, and safety risks if not appropriately addressed. We may need to investigate or remediate contaminated soil, soil gas, landfill gas, and
groundwater, and we may also need to conduct landfill closure and post-closure activities, including, for example, the implementation of groundwater and methane
monitoring systems and impervious cover, and the costs of such work could exceed projected or budgeted amounts. To protect the health and safety of site
occupants and others, we may be required to implement and operate safeguards, including, for example, vapor intrusion mitigation systems and building protection
systems to address methane. We may need to modify our methods of construction or face increased construction costs as a result of environmental conditions, and
we may face obligations under agreements with governmental authorities with respect to the management of such environmental conditions. If releases from our sites
migrate offsite, or if our site redevelopment activities cause or contribute to a migration of hazardous substances, neighbors or others could make claims against us,
such as for property damage, personal injury, cost recovery, or natural resources damage. As of December 31, 2018, we had accrued environmental remediation
liabilities of approximately $83.2 million recorded on our consolidated balance sheets in connection with certain of our in-process and future development projects.
The accrued environmental remediation liabilities represent the costs we estimate we will incur when we commence development at various development acquisition
sites. These estimates, which we developed with the assistance of third party experts, consist primarily of the removal of contaminated soil, performing environmental
closure activities, construction remedial systems, and other related costs since we are required to dispose of any existing contaminated soil, and sometimes perform
other environmental closure or remedial activities, when we develop new office properties as these sites. It is possible that we could incur additional environmental
remediation costs in connection with future development projects. However, potential additional environmental costs cannot be reasonably estimated at this time and
certain changes in estimates could occur as the site conditions, final project timing, design elements, actual soil conditions and other aspects of the projects, which
may depend upon municipal and other approvals beyond the control of the Company, are determined. Unknown or unremediated contamination or compliance with
existing or new environmental or health and safety laws and regulations could require us to incur costs or liabilities that could be material. See “Item 1. Business —
Environmental Regulations and Potential Liabilities” and Note 18 “Commitments and Contingencies” to our consolidated financial statements included in this report.
We may be unable to complete acquisitions and successfully operate acquired properties. We continually evaluate the market of available properties and may
continue to acquire office or mixed-use properties and undeveloped land when strategic opportunities exist. Our ability to acquire properties on favorable terms and
successfully operate them is subject to various risks, including the following:
• we may potentially be unable to acquire a desired property because of competition from other real estate investors with significant capital, including both
publicly traded and private REITs, institutional investment funds and other real estate investors;
•
even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price;
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•
even if we enter into agreements for the acquisition of a desired property, we may be unable to complete such acquisitions because they remain subject to
customary conditions to closing, including the completion of due diligence investigations to management’s satisfaction;
• we may be unable to finance acquisitions on favorable terms or at all;
• we may spend more than budgeted amounts in operating costs or to make necessary improvements or renovations to acquired properties;
• we may lease acquired properties at economic lease terms different than projected;
• we may acquire properties that are subject to liabilities for which we may have limited or no recourse; and
• we may be unable to complete an acquisition after making a nonrefundable deposit and incurring certain other acquisition-related costs.
If we cannot finance property acquisitions on favorable terms or operate acquired properties to meet financial expectations, our financial condition, results of
operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our
security holders could be adversely affected.
There are significant risks associated with property acquisition, development and redevelopment. We may be unable to successfully complete and operate
acquired, developed and redeveloped properties, and it is possible that:
• we may be unable to lease acquired, developed or redeveloped properties on lease terms projected at the time of acquisition, development or redevelopment
or within budgeted timeframes;
•
the operating expenses at acquired, developed or redeveloped properties may be greater than projected at the time of acquisition, development or
redevelopment, resulting in our investment being less profitable than we expected;
• we may not commence or complete development or redevelopment properties on schedule or within budgeted amounts or at all;
• we may not be able to develop or redevelop the estimated square footage and other features of our development and redevelopment properties;
• we may suspend development or redevelopment projects after construction has begun due to changes in economic conditions or other factors, and this may
result in the write-off of costs, payment of additional costs or increases in overall costs when the development or redevelopment project is restarted;
• we may expend funds on and devote management’s time to acquisition, development or redevelopment properties that we may not complete and as a result
we may lose deposits or fail to recover expenses already incurred;
• we may encounter delays or refusals in obtaining all necessary zoning, land use, and other required entitlements, and building, occupancy, and other required
governmental permits and authorizations;
• we may encounter delays, refusals, unforeseen cost increases and other impairments resulting from third-party litigation; and
• we may fail to obtain the financial results expected from properties we acquire, develop or redevelop.
If one or more of these events were to occur in connection with our acquired properties, undeveloped land, or development or redevelopment properties under
construction, we could be required to recognize an impairment loss.
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These events could also have an adverse impact on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability
to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
While we historically have acquired, developed and redeveloped office properties in California markets, over the past few years we have acquired properties in
greater Seattle, where we currently have eight properties and one development project under construction, and may in the future acquire, develop or redevelop
properties for other uses and expand our business to other geographic regions where we expect the development or acquisition of property to result in favorable risk-
adjusted returns on our investment. Presently, we do not possess the same level of familiarity with other outside markets, which could adversely affect our ability to
acquire, develop or redevelop properties or to achieve expected performance.
We face risks associated with the development of mixed-use commercial properties. We are currently developing, and in the future may develop, properties either
alone or through joint ventures that are known as “mixed-use” developments. This means that in addition to the development of office space, the project may also
include space for residential, retail or other commercial purposes. Generally, we have less experience developing and managing non-office real estate. As a result, if a
development project includes non-office space, we may develop that space ourselves or seek to partner with a third-party developer with more experience. If we do not
partner with such a developer, or if we choose to develop the space ourselves, we would be exposed to specific risks associated with the development and ownership
of non-office real estate. In addition, if we elect to participate in the development through a joint venture, we may be exposed to the risks associated with the failure of
the other party to complete the development as expected, which could require that we identify another joint venture partner and/or complete the project ourselves
(including providing any necessary financing). In the case of residential properties, these risks include competition for prospective tenants from other operators
whose properties may be perceived to offer a better location or better amenities or whose rent may be perceived as a better value given the quality, location and
amenities that the tenant seeks. With residential properties, we will also compete against apartments, condominiums and single-family homes that are for sale or rent.
Because we have less experience with residential properties, we may retain third parties to manage these properties. If we decide to wholly own a non-office project
and hire a third-party manager, we could be dependent on that party and its key personnel to provide services to us, and we may not find a suitable replacement if the
management agreement is terminated, or if key personnel leave or otherwise become unavailable to us.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers' financial condition, and
disputes between us and our co-venturers and could expose us to potential liabilities and losses. In addition to the 100 First LLC and 303 Second LLC strategic
ventures and the Redwood City Partners, LLC venture, we may continue to co-invest in the future with third parties through partnerships, joint ventures or other
entities, or through acquiring non-controlling interests in, or sharing responsibility for, managing the affairs of a property, partnership, joint venture or other entity,
which may subject us to risks that may not be present with other methods of ownership, including the following:
• we would not be able to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity, which would allow for
impasses on decisions that could restrict our ability to sell or transfer our interests in such entity or such entity’s ability to transfer or sell its assets;
•
•
•
•
partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions, which could delay construction or development
of a property or increase our financial commitment to the partnership or joint venture;
partners or co-venturers may pursue economic or other business interests, policies or objectives that are competitive or inconsistent with ours;
if we become a limited partner or non-managing member in any partnership or limited liability company, and such entity takes or expects to take actions that
could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity;
disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or
directors from focusing their time and effort on our business; and
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• we may, in certain circumstances, be liable for the actions of our third-party partners or co-venturers.
We own certain properties subject to ground leases and other restrictive agreements that limit our uses of the properties, restrict our ability to sell or
otherwise transfer the properties and expose us to the loss of the properties if such agreements are breached by us, terminated or not renewed. As of December 31,
2018, we owned thirteen office buildings, located on various land parcels and in various regions, which we lease individually on a long-term basis. As of December 31,
2018, we had approximately 2.0 million aggregate rentable square feet, or 15.3% of our total stabilized portfolio, of rental space located on these leased parcels and we
may in the future invest in additional properties that are subject to ground leases or other similar restrictive arrangements. Many of these ground leases and other
restrictive agreements impose significant limitations on our uses of the subject property, restrict our ability to sell or otherwise transfer our interests in the property or
restrict our leasing of the property. These restrictions may limit our ability to timely sell or exchange the properties, impair the properties’ value or negatively impact
our ability to find suitable tenants for the properties. In addition, if we default under the terms of any particular lease, we may lose the ownership rights to the property
subject to the lease. Upon expiration of a lease, we may not be able to renegotiate a new lease on favorable terms, if at all. The loss of the ownership rights to these
properties or an increase of rental expense could have an adverse effect on our financial condition, results of operations, cash flow, the quoted trading price of our
securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
Real estate assets are illiquid, and we may not be able to sell our properties when we desire. Our investments in our properties are relatively illiquid, limiting our
ability to sell our properties quickly in response to changes in economic or other conditions. In addition, the Code generally imposes a 100% prohibited transaction tax
on the Company on profits derived from sales of properties held primarily for sale to customers in the ordinary course of business, which effectively limits our ability
to sell properties other than on a selected basis. These restrictions on our ability to sell our properties could have an adverse effect on our financial condition, results
of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our
security holders.
We may invest in securities related to real estate, which could adversely affect our ability to pay dividends and distributions to our security holders. We may
purchase securities issued by entities that own real estate and may, in the future, also invest in mortgages. In general, investments in mortgages are subject to several
risks, including:
•
•
•
borrowers may fail to make debt service payments or pay the principal when due;
the value of the mortgaged property may be less than the principal amount of the mortgage note securing the property; and
interest rates payable on the mortgages may be lower than our cost for the funds used to acquire these mortgages.
Owning these securities may not entitle us to control the ownership, operation and management of the underlying real estate. In addition, we may have no control
over the distributions with respect to these securities, which could adversely affect our ability to pay dividends and distributions to our security holders.
We face risks associated with short-term liquid investments. From time to time, we have significant cash balances that we invest in a variety of short-term
investments that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. These investments may include
(either directly or indirectly):
•
•
•
•
direct obligations issued by the U.S. Treasury;
obligations issued or guaranteed by the U.S. government or its agencies;
taxable municipal securities;
obligations (including certificates of deposits) of banks and thrifts;
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•
•
•
•
commercial paper and other instruments consisting of short-term U.S. dollar denominated obligations issued by corporations and banks;
repurchase agreements collateralized by corporate and asset-backed obligations;
both registered and unregistered money market funds; and
other highly rated short-term securities.
Investments in these securities and funds are not insured against loss of principal. Under certain circumstances we may be required to redeem all or part of our
investment, and our right to redeem some or all of our investment may be delayed or suspended. In addition, there is no guarantee that our investments in these
securities or funds will be redeemable at par value. A decline in the value of our investment or a delay or suspension of our right to redeem may have a material
adverse effect on our results of operations or financial condition.
Future terrorist activity or engagement in war by the United States may have an adverse effect on our financial condition and operating results. Terrorist
attacks in the United States and other acts of terrorism or war, may result in declining economic activity, which could harm the demand for and the value of our
properties. In addition, the public perception that certain locations are at greater risk for attack, such as major airports, ports and rail facilities, may decrease the
demand for and the value of our properties near these sites. A decrease in demand could make it difficult for us to renew or re-lease our properties at these sites at
lease rates equal to or above historical rates. Terrorist activities also could directly impact the value of our properties through damage, destruction, or loss, and the
availability of insurance for these acts may be less, and cost more, which could adversely affect our financial condition. To the extent that our tenants are impacted by
future attacks, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases.
Terrorist acts and engagement in war by the United States also may adversely affect the markets in which our securities trade and may cause further erosion of
business and consumer confidence and spending, and may result in increased volatility in national and international financial markets and economies. Any one of
these events may cause a decline in the demand for our office leased space, delay the time in which our new or renovated properties reach stabilized occupancy,
increase our operating expenses, such as those attributable to increased physical security for our properties, and limit our access to capital or increase our cost of
raising capital.
The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) will subject us to substantial additional federal
regulation. There are significant corporate governance and executive compensation-related requirements that have been, and will in the future be, imposed on
publicly-traded companies under the Dodd-Frank Act. Several of these provisions require the SEC to adopt additional rules and regulations in these areas. For
example, the Dodd-Frank Act requires publicly-traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden
parachute” payments. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of
management’s time from other business activities. In addition, if stockholders do not vote to approve our executive compensation practices and/or our equity plan
amendments, these actions may interfere with our ability to attract and retain key personnel who are essential to our future success. Provisions of the Dodd-Frank Act
that directly affect other participants in the real estate and capital markets, such as banks, investment funds and interest rate hedge providers, could also have indirect,
but material, impacts on our business that cannot now be predicted. In addition, in February 2017, the U.S. President ordered the Secretary of the U.S. Treasury to
review certain existing rules and regulations, such as those promulgated under the Dodd-Frank Act; however, the implications of that review are not yet known and
none of the rules and regulations promulgated under the Dodd-Frank Act have been modified or rescinded as of the date of this report. Given the uncertainty
associated with both the results of the existing Dodd-Frank Act requirements and the manner in which additional provisions of the Dodd-Frank Act will be
implemented by various regulatory agencies and through regulations, the full extent of the impact of such requirements on our operations is unclear. Accordingly, the
changes resulting from the Dodd-Frank Act may impact the profitability of business activities, require changes to certain business practices, or otherwise adversely
affect our financial condition, results of operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations and to
pay dividends and distributions to our security holders.
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Our property taxes could increase due to reassessment or property tax rate changes. We are required to pay state and local taxes on our properties. In addition,
the real property taxes on our properties may increase as our properties are reassessed by taxing authorities or as property tax rates change. For example, under a
current California law commonly referred to as “Proposition 13,” property tax reassessment generally occurs as a result of a “change in ownership” of a property, as
specifically defined for purposes of those rules. Because the property taxing authorities may not determine whether there has been a “change in ownership” or the
actual reassessed value of a property for a period of time after a transaction has occurred, we may not know the impact of a potential reassessment for a considerable
amount of time following a particular transaction or construction of a new property. Therefore, the amount of property taxes we are required to pay could increase
substantially from the property taxes we currently pay or have paid in the past, including on a retroactive basis. In addition, from time to time voters and lawmakers
have announced initiatives to repeal or amend Proposition 13 to eliminate its application to commercial property and/or introduce split tax roll legislation. Such
initiatives, if successful, would increase the assessed value and/or tax rates applicable to commercial property in California, including our properties. An increase in
the assessed value of our properties or our property tax rates could adversely impact our financial condition, results of operations, cash flows, the quoted trading
price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
Unfavorable resolution of litigation matters and disputes could have a material adverse effect on our financial condition. From time to time, we are involved in
legal proceedings, lawsuits and other claims. We may also be named as defendants in lawsuits allegedly arising out of our actions or the actions of our operators,
vendors, contractors, tenants or other contractual parties in which such parties have agreed to indemnify, defend and hold us harmless from and against various
claims, litigation and liabilities arising in connection with their respective businesses and/or added as an additional insured under certain insurance policies. An
unfavorable resolution of any legal proceeding, lawsuit or other claim could have a negative effect on our financial condition, results of operations, cash flow and the
quoted trading price of our securities. Regardless of its outcome, legal proceedings, lawsuits and other claims may result in substantial costs and expenses and
significantly divert the attention of our management. There can be no assurance that we will be able to prevail, or achieve a favorable settlement or outcome. There can
also be no assurance that our insurance or the insurance and/or any contractual indemnities of our operators, vendors, contractors, tenants or other contractual
parties will be enough to cover all of our defense costs or any resulting liabilities. In addition, litigation, government proceedings or environmental matters could lead
to increased costs or interruption of our normal business operations.
Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting. The
design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or
misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial
reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time.
Deficiencies, including any material weakness, in our internal control over financial reporting that may occur in the future could result in misstatements of our results
of operations, restatements of our financial statements, or otherwise adversely impact our financial condition, results of operations, cash flows, the quoted trading
price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our
information technology (IT) networks and related systems. We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over
the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other
significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion,
including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks
and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform
day-to-day operations (including managing our building systems), and, in some cases, may be critical to the operations of certain of our tenants. There can be no
assurance that our efforts to maintain the security and integrity of these types of IT networks and related systems will be effective or that attempted security breaches
or disruptions would not be successful or damaging. Like other businesses, we have been and expect to continue to be subject to unauthorized access, mishandling or
misuse, computer viruses or malware, cyber attacks and other events
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of varying degrees. Historically, these events have not adversely affected our operations or business and were not individually or in the aggregate material.
However, in the future, events such as these or other significant disruptions involving our IT networks and related systems could, among other things:
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result in unauthorized access to, destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information
of ours or others, including personally identifiable and account information that could be used to compete against us or for disruptive, destructive or
otherwise harmful purposes and outcomes;
result in unauthorized access to or changes to our financial accounting and reporting systems and related data;
result in the theft of funds;
result in our inability to maintain building systems relied on by our tenants;
require significant management attention and resources to remedy any damage that results;
subject us to regulatory penalties or claims for breach of contract, damages, credits, penalties or terminations of leases or other agreements; or
damage our reputation among our tenants and investors.
These events could have an adverse impact on our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability
to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
An increase in interest rates could increase our interest costs on variable rate debt and new debt and could adversely affect our ability to refinance existing
debt, conduct development, redevelopment and acquisition activity and recycle capital. As of December 31, 2018, we had an unsecured revolving credit facility and
an unsecured term loan facility bearing interest at variable rates on any amounts drawn and outstanding. These facilities comprised approximately 6.6% of our total
outstanding debt at December 31, 2018 and were subject to variable interest rates and therefore subject to interest rate risk. In addition, we may incur additional
variable rate debt in the future. If interest rates increase, so could our interest costs for any variable rate debt and for new debt. This increased cost could make the
financing of any development, redevelopment and acquisition activity costlier. Rising interest rates could also limit our ability to refinance existing debt when it
matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. In addition, an increase in interest rates
could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to recycle capital and our portfolio promptly in response to
changes in economic or other conditions.
We manage a portion of our exposure to interest rate risk by accessing debt with staggered maturities, and we may in the future mitigate this risk through the use
of derivative instruments, including interest rate swap agreements or other interest rate hedging agreements, including swaps, caps and floors. While these
agreements are intended to lessen the impact of rising interest rates on us, they also expose us to the risks that counter parties may fail to honor their obligations, that
we could incur significant costs associated with the settlement of these agreements, that the amount of income we earn from hedging transactions may be limited by
federal tax provisions governing REITs, that these agreements may cause us to pay higher interest rates on our debt obligations than would otherwise be the case and
that underlying transactions could fail to qualify as highly-effective cash flow hedges under the accounting guidance. As a result, failure to hedge effectively against
interest rate risk, if we choose to engage in such activities, could adversely affect our financial condition, results of operations, cash flows, the quoted trading price of
our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
The trading price of our common stock may fluctuate significantly. The trading price of our common stock may fluctuate significantly. Between January 1, 2018
and February 8, 2019, the closing sale price of Company’s common
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stock on the New York Stock Exchange, or the NYSE, ranged from a low of $59.46 to a high of $77.34 per share. The trading price of our common stock may fluctuate in
response to many factors, including:
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actual or anticipated variations in our operating results, funds from operations, cash flows, liquidity or distributions;
our ability to successfully execute on our development plans;
our ability to successfully complete acquisitions and operate acquired properties;
earthquakes;
changes in our earnings estimates or those of analysts;
publication of research reports about us, the real estate industry generally or the office and residential sectors in which we operate;
the failure to maintain our current credit ratings or comply with our debt covenants;
increases in market interest rates;
changes in market valuations of similar companies;
adverse market reaction to any debt or equity securities we may issue or additional debt we incur in the future;
additions or departures of key management personnel;
actions by institutional investors;
speculation in the press or investment community;
high levels of volatility in the credit markets;
general market and economic conditions; and
the realization of any of the other risk factors included in this report.
Many of the factors listed above are beyond our control. These factors may cause the trading price of our common stock to decline, regardless of our financial
condition, results of operations, business or prospects. We cannot assure you that the trading price of our common stock or the amount of dividends we pay on our
common stock will not decline in the future, and it may be difficult for investors to resell shares of our common stock at prices they find attractive, or at all.
Changes in accounting pronouncements could adversely affect our operating results, in addition to the reported financial performance of our tenants.
Uncertainties posed by various initiatives of accounting standard-setting by the Financial Accounting Standards Board (“FASB”) and the SEC, which establish and
govern accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these
standards that govern the preparation of our financial statements, including the adoption of the lease accounting standard.
Proposed and/or future changes in accounting standards could have a material impact on our reported financial condition and results of operations. In some
cases, we could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial statements.
Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of operations or could impact our tenants’ business
decisions in leasing real estate.
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We face risks associated with our tenants and contractual counterparties being designated “Prohibited Persons” by the Office of Foreign Assets Control.
Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) maintains a list of
persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”). OFAC regulations and other laws prohibit conducting business or
engaging in transactions with Prohibited Persons (the “OFAC Requirements”). Certain of our loan and other agreements require us to comply with OFAC
Requirements. Our leases and other agreements, in general, require the other party to comply with OFAC Requirements. If a tenant or other party with whom we
contract is placed on the OFAC list, we may be required by the OFAC Requirements to terminate the lease or other agreement. Any such termination could result in a
loss of revenue or a damage claim by the other party that the termination was wrongful.
The actual density of our undeveloped land holdings and/or any particular land parcel may not be consistent with our potential density estimates. As of
December 31, 2018, we estimate that our five future potential development sites, representing approximately 73 gross acres of undeveloped land, provide more than 5.0
million square feet of potential density. We caution you not to place undue reliance on the potential density estimates for our undeveloped land holdings and/or any
particular land parcel because they are based solely on our estimates, using data currently available to us, and our business plans as of December 31, 2018. The actual
density of our undeveloped land holdings and/or any particular land parcel may differ substantially from our estimates based on numerous factors, including our
inability to obtain necessary zoning, land use and other required entitlements, as well as building, occupancy and other required governmental permits and
authorizations, and changes in the entitlement, permitting and authorization processes that restrict or delay our ability to develop, redevelop or use undeveloped land
holdings at anticipated density levels. Moreover, we may strategically choose not to develop, redevelop or use our undeveloped land holdings to their maximum
potential density or may be unable to do so as a result of factors beyond our control, including our ability to obtain capital on terms that are acceptable to us, or at all,
to fund our development and redevelopment activities. We can provide no assurance that the actual density of our undeveloped land holdings and/or any particular
land parcel will be consistent with our potential density estimates. For additional information on our development program, see “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations —Factors That May Influence Future Results of Operations.”
Loss of our key personnel could harm our operations and financial performance and adversely affect the quoted trading price of our securities. The leadership
and performance of our executive and senior officers play a key role in the success of the Company. They are integral to the Company’s success for many reasons,
including that each has a strong national or regional reputation in our industry and investment community. In addition, they have significant relationships with
investors, lenders, tenants and industry personnel, which benefit the Company.
Risks Related to Our Organizational Structure
Our growth depends on external sources of capital that are outside of our control and the inability to obtain capital on terms that are acceptable to us, or at
all, could adversely affect our financial condition and results of operations. The Company is required under the Code to distribute at least 90% of its taxable income
(subject to certain adjustments and excluding any net capital gain), and the Operating Partnership is required to make distributions to the Company to allow the
Company to satisfy these REIT distribution requirements. Because of these distribution requirements, the Operating Partnership is required to make distributions to
the Company, and we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently,
management relies on third-party sources of capital to fund our capital needs. We may not be able to obtain financing on favorable terms or at all. Any additional debt
we incur will increase our leverage. Access to third-party sources of capital depends, in part, on general market conditions and the availability of credit, the market’s
perception of our growth potential, our current and expected future earnings, our cash flows and cash distributions and the quoted trading price of our securities. If
we cannot obtain capital from third-party sources, our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability
to satisfy our debt service obligations and to pay dividends and distributions to our security holders may be adversely affected.
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Our common limited partners have limited approval rights, which may prevent us from completing a change of control transaction that may be in the best
interests of all our security holders. The Company may not withdraw as the Operating Partnership’s general partner or transfer its general partnership interest in the
Operating Partnership without the approval of the holders of at least 60% of the units representing common limited partnership interests, including the common units
held by the Company in its capacity as the Operating Partnership’s general partner. In addition, the Company may not engage in a merger, consolidation or other
combination or the sale of substantially all of its assets or such similar transaction, without the approval of the holders of 60% of the common units, including the
common units held by the Company in its capacity as the Operating Partnership’s general partner. The right of our common limited partners to vote on these
transactions could limit our ability to complete a change of control transaction that might otherwise be in the best interest of all our security holders.
In certain circumstances, our limited partners must approve our dissolution and the disposition of properties contributed by the limited partners. For as long
as limited partners own at least 5% of all of the Operating Partnership’s partnership interests, we must obtain the approval of limited partners holding a majority of the
units representing common limited partnership interests before we may dissolve. As of December 31, 2018, limited partners owned approximately 2.0% of the Operating
Partnership’s partnership interests, of which 0.8% was owned by John Kilroy. In addition, we agreed to use commercially reasonable efforts to minimize the tax
consequences to certain common limited partners resulting from the repayment, refinancing, replacement, or restructuring of debt, or any sale, exchange, or other
disposition of any of our other assets. The exercise of one or more of these approval rights by the limited partners could delay or prevent us from completing a
transaction that may be in the best interest of all our security holders.
The Chairman of our board of directors and our President and Chief Executive Officer has substantial influence over our affairs. John Kilroy is the Chairman of
our board of directors and our President and Chief Executive Officer. John Kilroy beneficially owned, as of December 31, 2018, approximately 1.5% of the total
outstanding shares of our common stock. The percentage of outstanding shares of common stock beneficially owned includes 234,664 shares of common stock,
501,512 restricted stock units (“RSUs”) that were vested and held by John Kilroy at December 31, 2018, and assumes the exchange into shares of our common stock of
the 783,192 common units of the Operating Partnership held by John Kilroy (which may be exchanged for an equal number of shares of our common stock).
Pursuant to the Company’s charter, no stockholder may own, actually or constructively, more than 7.0% (by value or by number of shares, whichever is more
restrictive) of our outstanding common stock without obtaining a waiver from the board of directors. The board of directors has waived the ownership limits with
respect to John Kilroy, members of his family and some of their affiliated entities. These named individuals and entities may own either actually or constructively, in
the aggregate, up to 19.6% of our common stock, excluding Operating Partnership units that are exchangeable into shares of our common stock. Consequently, John
Kilroy has substantial influence over the Company, and because the Company is the manager of the Operating Partnership, over the Operating Partnership, and could
exercise his influence in a manner that is not in the best interest of our stockholders, noteholders or unitholders. Also, John Kilroy may, in the future, have a
substantial influence over the outcome of any matters submitted to our stockholders or unitholders for approval.
There are restrictions on the ownership of the Company’s capital stock that limit the opportunities for a change of control at a premium to existing security
holders. Provisions of the Maryland General Corporation Law, the Company’s charter and bylaws and the Operating Partnership’s partnership agreement may delay,
deter, or prevent a change of control of the Company, or the removal of existing management. Any of these actions might prevent our security holders from receiving a
premium for their shares of common stock or common units over the then-prevailing market price of the shares of our common stock.
In order for the Company to qualify as a REIT under the Code, its stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more
than 50% of the value of the outstanding shares of the Company’s stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). The Company’s charter
contains restrictions on the ownership and transfer of its capital stock that are intended to assist the Company in complying with these requirements and continuing
to qualify as a REIT. No single stockholder may own, either actually or constructively, absent a waiver
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from the board of directors, more than 7.0% (by value or by number of shares, whichever is more restrictive) of the Company’s outstanding common stock.
The constructive ownership rules under the Code are complex and may cause stock owned actually or constructively by a group of related individuals and/or
entities to be owned constructively by one individual or entity. As a result, the acquisition of less than the applicable ownership limit of a particular class of the
Company’s capital stock could, nevertheless, cause that individual or entity, or another individual or entity, to constructively own stock in excess of, and thereby
subject such stock to, the applicable ownership limit.
The board of directors may waive the ownership limits if it is satisfied that the excess ownership would not jeopardize the Company’s REIT status and if it
believes that the waiver would be in our best interest. The board of directors has waived the ownership limits with respect to John Kilroy, members of his family and
some of their affiliated entities. These named individuals and entities may own either actually or constructively, in the aggregate, up to 19.6% of our outstanding
common stock, excluding common units that are exchangeable into shares of common stock.
If anyone acquires shares in excess of any ownership limits without a waiver, the transfer to the transferee will be void with respect to the excess shares, the
excess shares will be automatically transferred to a trust for the benefit of a qualified charitable organization, and the purported transferee or owner will have no rights
with respect to those excess shares.
The Company’s charter contains provisions that may delay, deter or prevent a change of control transaction. The following provisions of the Company’s
charter may delay or prevent a change of control over us, even if a change of control might be beneficial to our security holders, deter tender offers that may be
beneficial to our security holders, or limit security holders’ opportunity to receive a potential premium for their shares and/or units if an investor attempted to gain
shares beyond the Company’s ownership limits or otherwise to effect a change of control:
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the Company’s charter authorizes the board of directors to issue up to 30,000,000 shares of the Company’s preferred stock, including convertible preferred
stock, without stockholder approval. The board of directors may establish the preferences, rights and other terms, including the right to vote and the right to
convert into common stock any shares issued. The issuance of preferred stock could delay or prevent a tender offer or a change of control even if a tender
offer or a change of control was in our security holders’ interest; and
the Company’s charter states that any director, or the entire board of directors, may be removed from office at any time, but only for cause and then only by
the affirmative vote of the holders of at least two thirds of the votes of the Company’s capital stock entitled to be cast in the election of directors.
The board of directors may change investment and financing policies without stockholder or unitholder approval. Our board of directors determines our major
policies, including policies and guidelines relating to our acquisition, development and redevelopment activities, leverage, financing, growth, operations,
indebtedness, capitalization and distributions to our security holders. Our board of directors may amend or revise these and other policies and guidelines from time to
time without stockholder or unitholder approval. Accordingly, our stockholders and unitholders will have limited control over changes in our policies and those
changes could adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt
service obligations and to pay dividends and distributions to our security holders.
We are not limited in our ability to incur debt. Our financing policies and objectives are determined by the board of directors. Our goal is to limit our dependence
on leverage and maintain a conservative ratio of debt to total market capitalization. However, our organizational documents do not limit the amount or percentage of
indebtedness, funded or otherwise, that we may incur. As of December 31, 2018, we had approximately $3.0 billion aggregate principal amount of indebtedness
outstanding, which represented 31.4% of our total market capitalization. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations —Liquidity and Capital Resources of the Company —Capitalization” for a calculation of our market capitalization. These ratios may be increased or
decreased without the consent of our unitholders or stockholders. Increases in the amount of debt outstanding would result in an increase in our debt service costs,
which could adversely affect cash flow and our ability to pay dividends and distributions to our security holders. Higher leverage also increases the risk of default on
our obligations and limits our ability to obtain additional financing in the future.
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We may issue additional common units and shares of capital stock without unitholder or stockholder approval, as applicable, which may dilute unitholder or
stockholder investment. The Company may issue shares of our common stock, preferred stock or other equity or debt securities without stockholder approval,
including the issuance of shares to satisfy REIT dividend distribution requirements. Similarly, the Operating Partnership may offer its common or preferred units for
contributions of cash or property without approval by our stockholders or the Operating Partnership’s unitholders. Existing security holders have no preemptive
rights to acquire any of these securities, and any issuance of equity securities under these circumstances may dilute a unitholder's or stockholder's investment.
The market price of our common stock may be adversely affected by future offerings of debt and equity securities by us or the Operating Partnership. In the
future, we may increase our capital resources by offering our debt securities and preferred stock, the Operating Partnership’s debt securities and equity securities and
our or the Operating Partnership’s other borrowings. Upon our liquidation, dissolution or winding-up, holders of such debt securities, our preferred stock and
Operating Partnership’s equity securities, and lenders with respect to other borrowings by us and the Operating Partnership, will be entitled to receive distributions of
our available assets prior to the holders of our common stock and it is possible that, after making distributions on these other securities and borrowings, no assets
would be available for distribution to holders of our common stock. In addition, the Operating Partnership’s debt and equity securities and borrowings are structurally
senior to our common stock, our debt securities and borrowings are senior in right of payment to our common stock, and any preferred stock we may issue in the
future may have a preference over our common stock, and all payments (including dividends, principal and interest) and liquidating distributions on such securities
and borrowings could limit our ability to pay dividends or make other distributions to the holders of our common stock. Because any decision to issue securities and
make borrowings in the future will depend on market conditions and other factors, some of which may be beyond our control, we cannot predict or estimate the
amount, timing or nature of our or the Operating Partnership’s future offerings or borrowings. Such future offerings or borrowings may reduce the market price of our
common stock.
Sales of a substantial number of shares of the Company’s securities, or the perception that this could occur, could result in decreasing the quoted trading
price per share of the Company’s common stock and of the Operating Partnership’s publicly-traded notes. Management cannot predict whether future issuances of
shares of the Company’s common stock, or the availability of shares for resale in the open market will result in decreasing the market price per share of the Company’s
common stock. As of December 31, 2018, 100,746,988 shares of the Company’s common stock were issued and outstanding.
As of December 31, 2018, the Company had reserved for future issuance the following shares of common stock: 2,025,287 shares issuable upon the exchange, at
the Company’s option, of the Operating Partnership’s common units; approximately 0.6 million shares remained available for grant under our 2006 Incentive Award
Plan (see Note 15 “Share-Based Compensation” to our consolidated financial statements included in this report); approximately 1.7 million shares issuable upon
settlement of time-based RSUs; a maximum of 1.6 million shares contingently issuable upon settlement of RSUs subject to the achievement of market and/or
performance conditions; and 25,500 shares issuable upon exercise of outstanding options. The Company has a currently effective registration statement registering 9.2
million shares of our common stock for possible issuance under our 2006 Incentive Award Plan. The Company has a currently effective registration statement
registering 1,649,760 shares of our common stock for possible issuance to and resale by certain holders of the Operating Partnership’s common units. That registration
statement also registers 94,441 shares of common stock held by John Kilroy for possible resale. Consequently, if and when the shares are issued, they may be freely
traded in the public markets.
Risks Related to Taxes and the Company’s Status as a REIT
Loss of the Company’s REIT status would have significant adverse consequences to us and the value of the Company’s common stock. The Company currently
operates in a manner that is intended to allow it to qualify as a REIT for federal income tax purposes under the Code. If the Company were to lose its REIT status, the
Company would face adverse tax consequences that would substantially reduce the funds available for distribution to its stockholders for each of the years involved
because:
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the Company would not be allowed a deduction for dividends paid to its stockholders in computing the Company’s taxable income and would be subject to
federal income tax at regular corporate rates;
the Company could be subject to increased state and local taxes; and
unless entitled to relief under statutory provisions, the Company could not elect to be taxed as a REIT for four taxable years following the year during which
the Company was disqualified.
In addition, if the Company failed to qualify as a REIT, it would not be required to make distributions to its stockholders. As a result of all these factors, the
Company’s failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could adversely affect the value and quoted trading
price of the Company’s common stock.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative
interpretations. The complexity of these provisions and of the applicable Treasury regulations that have been promulgated under the Code is greater in the case of a
REIT that, like the Company, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control
may affect the Company’s ability to continue to qualify as a REIT. For example, to qualify as a REIT, at least 95% of the Company’s gross income in any year must be
derived from qualifying sources. Also, the Company must make distributions to its stockholders aggregating annually at least 90% of the Company’s net taxable
income (subject to certain adjustments and excluding any net capital gains). In addition, legislation, new regulations, administrative interpretations or court decisions
may adversely affect the Company’s security holders or the Company’s ability to qualify as a REIT for federal income tax purposes or the desirability of an investment
in a REIT relative to other investments. Although management believes that we are organized and operate in a manner to permit the Company to continue to qualify as
a REIT, we cannot provide assurances that the Company has qualified or will continue to qualify as a REIT for tax purposes. We have not requested and do not plan
to request a ruling from the Internal Revenue Service (“IRS”) regarding the Company’s qualification as a REIT.
To maintain the Company’s REIT status, we may be forced to borrow funds during unfavorable market conditions. To qualify as a REIT, the Company generally
must distribute to its stockholders at least 90% of the Company’s net taxable income each year (subject to certain adjustments and excluding any net capital gains),
and the Company will be subject to regular corporate income taxes to the extent that it distributes less than 100% of its net capital gains or distributes at least 90%, but
less than 100%, of its net taxable income each year. In addition, the Company will be subject to a 4% nondeductible excise tax on the amount, if any, by which
distributions it pays in any calendar year are less than the sum of 85% of its ordinary income, 95% of its net capital gains, and 100% of its undistributed income from
prior years. To maintain the Company’s REIT status and avoid the payment of federal income and excise taxes, the Operating Partnership may need to borrow funds
and distribute or loan the proceeds to the Company so it can meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable
for these borrowings. These borrowing needs could result from differences in timing between the actual receipt of income and inclusion of income for federal income
tax purposes, or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments.
If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable or if we are unable to identify and complete the acquisition
of a suitable replacement property to effect a Section 1031 Exchange, we may face adverse consequences, and if the laws applicable to such transactions are
amended or repealed, we may not be able to dispose of properties on a tax deferred basis. When possible, we dispose of properties in transactions that are intended
to qualify as Section 1031 Exchanges. It is possible that the qualification of a transaction as a Section 1031 Exchange could be successfully challenged and determined
to be currently taxable or that we may be unable to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange. In such
case, our taxable income and earnings and profits would increase. This could increase the dividend income to our stockholders by reducing any return of capital they
received. In some circumstances, we may be required to pay additional dividends or, in lieu of that, corporate income tax, possibly including interest and penalties. As
a result, we may be required to borrow funds in order to pay additional dividends or taxes and the payment of such taxes could cause us to have less cash available to
distribute to our stockholders. In addition, if a Section 1031 Exchange were later to be determined to be taxable, we may be required to amend our tax returns for the
applicable year in question, including any information
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reports we sent our stockholders. Moreover, under the Tax Cuts and Jobs Act (the “2017 Tax Legislation”), for exchanges completed after December 31, 2017, unless
the property was disposed of or received in the exchange on or before such date, Section 1031 of the Code permits exchanges of real property only. It is possible that
additional legislation could be enacted that could further modify or repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult or not
possible for us to dispose of properties on a tax deferred basis.
Dividends payable by REITs, including us, generally do not qualify for the reduced tax rates available for some dividends. “Qualified dividends” payable to
U.S. stockholders that are individuals, trusts and estates generally are subject to tax at preferential rates. Subject to limited exceptions, dividends payable by REITs are
not eligible for these reduced rates and are taxable at ordinary income tax rates. The more favorable rates applicable to regular corporate qualified dividends could
cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT
corporations that pay dividends, which could adversely affect the value of the shares of REITs, including the shares of our capital stock. However, non-corporate
stockholders, including individuals, generally may deduct up to 20% of dividends from a REIT, other than capital gain dividends and dividends treated as qualified
dividend income, for taxable years beginning after December 31, 2017 and before January 1, 2026.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal
income tax purposes. A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other
dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold
any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain
statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our
properties or that we will always be able to make use of the available safe harbors.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments. To qualify as a
REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of
our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. If we fail to comply with one or more of the asset tests at the end of
any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our
REIT qualification and suffering adverse tax consequences. In order to meet these tests, we may be required to forego investments we might otherwise make or to
liquidate otherwise attractive investments. Thus, compliance with the REIT requirements may hinder our performance and reduce amounts available for distribution to
our stockholders.
Legislative or regulatory action could adversely affect our stockholders or us. In recent years, numerous legislative, judicial and administrative changes have
been made to the federal income tax laws applicable to investments in REITs and similar entities. Additional changes to tax laws are likely to continue to occur in the
future, and any such changes may adversely impact our ability to qualify as a REIT, our tax treatment as a REIT, our ability to comply with contractual obligations or
the tax treatment of our stockholders and limited partners. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change,
making an investment in such other entities more attractive relative to an investment in a REIT.
The 2017 Tax Legislation has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their
stockholders. Changes made by the 2017 Tax Legislation that could affect us and our stockholders include:
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temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate has been reduced from
39.6% to 37% for taxable years beginning after December 31, 2017 and before January 1, 2026;
permanently eliminating the progressive corporate tax rate structure, which previously imposed a maximum corporate tax rate of 35%, and replacing it with a
flat corporate tax rate of 21%;
34
•
•
•
•
•
•
•
permitting a deduction for certain pass-through business income, including dividends received by our stockholders from us that are not designated by us as
capital gain dividends or qualified dividend income, which will allow individuals, trusts, and estates to deduct up to 20% of such amounts for taxable years
beginning after December 31, 2017 and before January 1, 2026;
reducing the highest rate of withholding with respect to our distributions to non-U.S. stockholders that are treated as attributable to gains from the sale or
exchange of U.S. real property interests from 35% to 21%;
limiting our deduction for net operating losses arising in taxable years beginning after December 31, 2017 to 80% of REIT taxable income determined without
regard to the dividends paid deduction;
generally limiting the deduction for net business interest expense in excess of 30% of a business’ “adjusted taxable income,” except for taxpayers (including
most equity REITs) that engage in certain real estate businesses and elect out of this rule (provided that such electing taxpayers must use an alternative
depreciation system with longer depreciation periods);
eliminating the corporate alternative minimum tax, for taxable years after December 31, 2017;
requiring us to take into account certain income no later than when we take it into account on applicable financial statements, even if the financial statements
take such income into account before it accrues under otherwise applicable Code rules; and
repealing the performance-based compensation exception to the $1 million deduction limit on executive compensation and expanding the scope of employees
to whom the limit applies.
Many of these changes that are applicable to us are effective with our 2018 taxable year, without any transition periods or grandfathering for existing transactions.
The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing
regulations by the U.S. Treasury Department and IRS, any of which could lessen or increase the impact of the legislation. In addition, it is unclear how these U.S.
federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.
While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on
a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact that the recent tax legislation as a whole will have on us.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
35
ITEM 2. PROPERTIES
General
Our stabilized portfolio of operating properties was comprised of the following properties at December 31, 2018:
Stabilized Office Properties
94
13,232,580
482
94.4 %
96.6 %
Number of
Buildings
Rentable
Square Feet
Number of
Tenants
Percentage
Occupied
Percentage Leased
Stabilized Residential Property
Number of
Buildings
Number of Units
2018 Average Occupancy
1
200
79.7 %
Our stabilized portfolio includes all of our properties with the exception of development and redevelopment properties currently committed for construction, under
construction or in the tenant improvement phase, undeveloped land and real estate assets held for sale. We define redevelopment properties as those properties for
which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which
is a higher economic return on the property. We define properties in the tenant improvement phase as properties that we are developing or redeveloping where the
project has reached cold shell condition and is ready for tenant improvements, which may require additional major base building construction before being placed in
service. Projects in the tenant improvement phase are added to our stabilized portfolio once the project reaches the earlier of 95% occupancy or one year from the date
of the cessation of major base building construction activities. Costs capitalized to construction in progress for development and redevelopment properties are
transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets at the historical cost of the
property as the projects are placed in service.
As of December 31, 2018, the following properties were excluded from our stabilized portfolio. We did not have any redevelopment properties or properties held
for sale at December 31, 2018.
Number of
Properties/Projects
Estimated Rentable
Square Feet (1)
(unaudited)
In-process development projects - tenant improvement (2)
In-process development projects - under construction (3)
________________________
(1) Estimated rentable square feet upon completion.
(2) Includes 88,000 square feet of Production, Distribution, and Repair (“ PDR”) space.
(3) In addition to the estimated office and PDR rentable square feet noted above, development projects under construction also include 96,000 square feet of retail space and 801 residential
1,150,000
1,290,000
2
3
units.
Our stabilized portfolio also excludes our future development pipeline, which as of December 31, 2018, was comprised of five potential development sites,
representing approximately 73 gross acres of undeveloped land.
As of December 31, 2018, all of our properties and development projects were owned and all of our business was conducted in the state of California with the
exception of eight office properties and one development project under construction located in the state of Washington. All of our properties and development
projects are 100% owned, excluding four office properties owned by three consolidated property partnerships and one office property held in a Variable Interest Entity
(“VIE”) which we consolidated for financial reporting purposes that was established to facilitate a Section 1031 Exchange that closed in January 2019.
We own our interests in all of our real estate assets through the Operating Partnership and the Finance Partnership. All our properties are held in fee, except for
the thirteen office buildings that are held subject to four long-term ground leases for the land (see Note 18 “Commitments and Contingencies” to our consolidated
financial statements included in this report for additional information regarding our ground lease obligations).
In general, the office properties are leased to tenants on a full service gross, modified gross or triple net basis. Under a full service gross lease, we are obligated to
pay the tenant’s proportionate share of real estate taxes, insurance
36
and operating expenses up to the amount incurred during the tenant’s first year of occupancy (“Base Year”) or a negotiated amount approximating the tenant’s pro-
rata share of real estate taxes, insurance and operating expenses (“Expense Stop”). The tenant pays its pro-rata share of increases in expenses above the Base Year or
Expense Stop. A modified gross lease is similar to a full service gross lease, except tenants are obligated to pay their proportionate share of certain operating expenses,
usually electricity, directly to the service provider. In addition, some office properties, primarily in the greater Seattle region and certain properties in certain
submarkets in San Francisco, are leased to tenants on a triple net basis, pursuant to which the tenants pay their proportionate share of real estate taxes, operating
costs and utility costs.
We believe that all of our properties are well maintained and do not require significant capital improvements. As of December 31, 2018, we managed all of our
office properties through internal property managers.
Office Properties
The following table sets forth certain information relating to each of the stabilized office properties owned as of December 31, 2018.
Property Location
Greater Los Angeles
2829 Townsgate Road,
Thousand Oaks, California
2240 E. Imperial Highway,
El Segundo, California
2250 E. Imperial Highway,
El Segundo, California
2260 E. Imperial Highway,
El Segundo, California
909 N. Pacific Coast Highway,
El Segundo, California
999 N. Pacific Coast Highway,
El Segundo, California
6115 W. Sunset Blvd.,
Los Angeles, California
6121 W. Sunset Blvd.,
Los Angeles, California
1525 N. Gower St.,
Los Angeles, California
1575 N. Gower St.,
Los Angeles, California
1500 N. El Centro Ave.,
Los Angeles, California
6255 Sunset Blvd,
Los Angeles, California
3750 Kilroy Airport Way,
Long Beach, California
3760 Kilroy Airport Way,
Long Beach, California
3780 Kilroy Airport Way,
Long Beach, California
3800 Kilroy Airport Way,
Long Beach, California
3840 Kilroy Airport Way,
Long Beach, California
3880 Kilroy Airport Way,
Long Beach, California
3900 Kilroy Airport Way,
Long Beach, California
8560 West Sunset Blvd, West Hollywood,
California
No. of
Buildings
Year Built/
Renovated
Rentable
Square Feet
Percentage
Occupied at
12/31/2018 (1)
Annualized
Base Rent
(in $000’s) (2)
Annualized Rent
Per Square Foot (2)
(3)
(4)
(7)
(4)
(8)
(9)
(10)
(5)
(4)
(11)
(3)
(12)
(13)
(3)
(3)
(3)
(3)
(14)
(3)
(3)
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1990
1983/ 2008
1983
1983/ 2012
1972/ 2005
1962/ 2003
1938/ 2015
1938/ 2015
2016
2016
2016
1971/ 1999
1989
1989
1989
2000
1999
1987/ 2013
1987
1963/ 2007
37
84,098
122,870
298,728
298,728
244,136
128,588
26,105
91,173
9,610
251,245
104,504
323,920
10,457
165,278
219,777
192,476
136,026
96,035
129,893
71,875
80.5 % $
1,984
$
100.0 %
100.0 %
100.0 %
99.5 %
96.9 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
97.6 %
100.0 %
94.0 %
78.9 %
96.1 %
100.0 %
100.0 %
91.4 %
100.0 %
3,950
10,206
10,510
7,658
3,844
1,615
4,612
652
16,169
7,104
13,750
158
4,827
4,909
5,917
4,882
2,839
3,092
5,187
29.31
32.15
34.31
35.18
31.90
32.19
61.88
50.59
67.88
64.36
67.98
44.82
47.28
31.57
29.67
31.99
35.89
29.56
26.08
72.79
Property Location
8570 West Sunset Blvd, West Hollywood,
California
8580 West Sunset Blvd, West Hollywood,
California
8590 West Sunset Blvd, West Hollywood,
California
12100 W. Olympic Blvd.,
Los Angeles, California
12200 W. Olympic Blvd.,
Los Angeles, California
12233 W. Olympic Blvd.,
Los Angeles, California
12312 W. Olympic Blvd.,
Los Angeles, California
1633 26th Street,
Santa Monica, California
2100/2110 Colorado Avenue,
Santa Monica, California
3130 Wilshire Blvd.,
Santa Monica, California
501 Santa Monica Blvd.,
Santa Monica, California
Subtotal/Weighted Average –
Los Angeles and Ventura Counties
Orange County
2211 Michelson,
Irvine, California
Subtotal/Weighted Average –
Orange County
San Diego County
12225 El Camino Real,
Del Mar, California
12235 El Camino Real,
Del Mar, California
12340 El Camino Real,
Del Mar, California
12348 High Bluff Drive,
Del Mar, California
12390 El Camino Real,
Del Mar, California
12400 High Bluff Drive,
Del Mar, California
12770 El Camino Real,
Del Mar, California
12780 El Camino Real,
Del Mar, California
12790 El Camino Real,
Del Mar, California
3579 Valley Centre Drive,
Del Mar, California
3611 Valley Centre Drive,
Del Mar, California
3661 Valley Centre Drive,
Del Mar, California
3721 Valley Centre Drive,
Del Mar, California
3811 Valley Centre Drive,
Del Mar, California
13280 Evening Creek Drive South,
I-15 Corridor, California
13290 Evening Creek Drive South,
I-15 Corridor, California
No. of
Buildings
Year Built/
Renovated
Rentable
Square Feet
Percentage
Occupied at
12/31/2018 (1)
Annualized
Base Rent
(in $000’s) (2)
Annualized Rent
Per Square Foot (2)
(15)
(5)
(5)
(3)
(3)
(16)
(6)
(17)
(3)
(3)
(18)
(19)
(4)
(4)
(20)
(21)
(4)
(4)
(3)
(6)
(22)
(4)
(23)
(24)
(25)
(6)
(26)
(4)
1
1
1
1
1
1
1
1
3
1
1
33
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2002/ 2007
2002/ 2007
2002/ 2007
2003
2000
1980/ 2011
1950/ 1997
1972/ 1997
1992/ 2009
1969/ 1998
1974
2007
1998
1998
2002
1999
2000
2004
2016
2013
2013
1999
2000
2001
2003
2000
2008
2008
43,603
7,126
56,095
152,048
150,832
151,029
76,644
43,857
102,864
90,074
76,803
99.2 %
100.0 %
87.6 %
100.0 %
91.9 %
94.3 %
100.0 %
— %
100.0 %
96.0 %
82.7 %
2,607
—
1,437
8,502
7,026
5,357
4,096
—
4,357
3,682
4,242
3,956,497
95.1 % $
155,171
$
271,556
271,556
58,401
53,751
89,272
38,806
70,140
209,220
73,032
140,591
78,836
52,418
129,656
128,364
115,193
112,067
41,196
61,180
38
89.6 % $
89.6 % $
8,993
$
8,993
$
100.0 % $
2,041
$
88.9 %
45.8 %
100.0 %
44.9 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
2,225
1,780
1,314
1,296
10,671
3,392
6,883
3,263
2,058
5,518
6,025
5,310
5,199
1,132
1,453
68.53
—
30.95
55.92
67.46
56.73
53.44
—
42.36
42.58
66.80
42.68
37.67
37.67
34.95
46.57
43.52
33.86
41.15
51.00
53.16
48.96
41.39
39.26
42.56
49.60
46.09
46.39
27.47
23.75
Property Location
13480 Evening Creek Drive North,
I-15 Corridor, California
13500 Evening Creek Drive North,
I-15 Corridor, California
13520 Evening Creek Drive North,
I-15 Corridor, California
2305 Historic Decatur Road,
Point Loma, California
4690 Executive Drive,
UTC, California
Subtotal/Weighted Average –
San Diego County
San Francisco Bay Area
4100 Bohannon Drive,
Menlo Park, California
4200 Bohannon Drive,
Menlo Park, California
4300 Bohannon Drive,
Menlo Park, California
4400 Bohannon Drive,
Menlo Park, California
4500 Bohannon Drive,
Menlo Park, California
4600 Bohannon Drive,
Menlo Park, California
4700 Bohannon Drive,
Menlo Park, California
1290-1300 Terra Bella Avenue,
Mountain View, California
331 Fairchild Drive,
Mountain View, California
680 E. Middlefield Road,
Mountain View, California
690 E. Middlefield Road,
Mountain View, California
1701 Page Mill Road,
Palo Alto, California
3150 Porter Drive,
Palo Alto, California
900 Jefferson Avenue,
Redwood City, California
900 Middlefield Road,
Redwood City, California
100 First Street,
San Francisco, California
201 Third Street,
San Francisco, California
250 Brannan Street,
San Francisco, California
301 Brannan Street,
San Francisco, California
303 Second Street,
San Francisco, California
333 Brannan Street,
San Francisco, California
350 Mission Street,
San Francisco, California
360 Third Street,
San Francisco, California
345 Brannan Street,
San Francisco, California
345 Oyster Point Boulevard,
South San Francisco, California
No. of
Buildings
Year Built/
Renovated
Rentable
Square Feet
Percentage
Occupied at
12/31/2018 (1)
Annualized
Base Rent
(in $000’s) (2)
Annualized Rent
Per Square Foot (2)
(3)
(3)
(27)
(28)
(3)
(5)
(5)
(5)
(5)
(5)
(5)
(5)
(5)
(6)
(6)
(6)
(5)
(6)
(5)
(5)
(29)
(30)
(4)
(4)
(31)
(32)
(5)
(33)
(4)
(5)
1
1
1
1
1
21
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2008
2004
2004
2009
1999
1985
1987
1988
1988
1990
1990
1989
1961
2013
2014
2014
2015
1998
2015
2015
1988
1983
1907/ 2001
1909/ 1989
1988
2016
2016
2013
2015
2001
39
154,157
137,658
146,701
107,456
47,846
94.4 %
24.2 %
94.2 %
100.0 %
91.4 %
5,037
1,220
4,667
3,694
1,424
2,045,941
89.3 % $
75,602
$
47,379
45,451
63,079
48,146
63,078
48,147
63,078
114,175
87,147
170,090
170,823
128,688
36,897
228,505
118,764
467,095
346,538
100,850
82,834
740,047
185,602
455,340
429,796
110,030
40,410
100.0 % $
1,719
$
100.0 %
100.0 %
100.0 %
100.0 %
93.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
97.3 %
97.5 %
98.8 %
100.0 %
100.0 %
91.3 %
100.0 %
99.7 %
84.5 %
99.7 %
100.0 %
2,171
3,203
1,567
2,041
2,603
2,275
5,152
4,185
7,729
7,763
8,461
2,051
13,670
6,835
30,124
23,142
6,912
4,733
40,942
9,423
24,027
19,592
8,273
2,192
34.61
36.59
35.82
34.38
32.58
41.92
36.27
47.77
50.78
37.38
32.35
58.16
36.07
45.12
48.03
45.44
45.44
65.75
55.59
59.82
59.38
69.11
68.53
68.53
57.14
60.82
50.77
53.19
54.11
75.40
54.24
Property Location
347 Oyster Point Boulevard,
South San Francisco, California
349 Oyster Point Boulevard,
South San Francisco, California
505 N. Mathilda Avenue,
Sunnyvale, California
555 N. Mathilda Avenue,
Sunnyvale, California
599 N. Mathilda Avenue,
Sunnyvale, California
605 N. Mathilda Avenue,
Sunnyvale, California
Subtotal/Weighted Average –
San Francisco
Greater Seattle
601 108th Avenue NE,
Bellevue, Washington
10900 NE 4th Street,
Bellevue, Washington
837 N. 34th Street,
Lake Union, Washington
701 N. 34th Street,
Lake Union, Washington
801 N. 34th Street,
Lake Union, Washington
320 Westlake Avenue North,
Lake Union, Washington
321 Terry Avenue North,
Lake Union, Washington
401 Terry Avenue North,
Lake Union, Washington
Subtotal/Weighted Average –
Greater Seattle
No. of
Buildings
Year Built/
Renovated
Rentable
Square Feet
Percentage
Occupied at
12/31/2018 (1)
Annualized
Base Rent
(in $000’s) (2)
Annualized Rent
Per Square Foot (2)
(5)
(5)
(5)
(5)
(5)
(5)
(34)
(35)
(5)
(36)
(6)
(5)
(5)
(6)
1
1
1
1
1
1
31
1
1
1
1
1
1
1
1
8
1998
1999
2014
2014
2000
2014
2000
1983
2008
1998
1998
2007
2013
2003
94
39,780
65,340
212,322
212,322
76,031
162,785
100.0%
52.2%
100.0%
100.0%
100.0%
100.0%
2,158
1,961
9,449
9,449
3,610
7,244
5,160,569
96.4% $
274,656
$
488,470
428,557
111,580
138,994
169,412
184,644
135,755
140,605
89.7% $
15,887
$
89.1%
83.0%
100.0%
100.0%
100.0%
100.0%
100.0%
13,491
3,284
4,098
5,789
6,822
5,680
7,008
1,798,017
13,232,580
93.6% $
94.4% $
62,059
576,481
$
$
54.24
57.51
44.50
44.50
47.48
44.50
55.63
36.67
35.46
35.46
29.49
34.17
36.95
41.84
49.84
37.04
46.90
TOTAL/WEIGHTED AVERAGE
_________________
(1) Based on all leases at the respective properties in effect as of December 31, 2018. Includes month-to-month leases as of December 31, 2018.
(2) Annualized base rental revenue includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of
deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense
reimbursement revenue. Excludes month-to-month leases and vacant space as of December 31, 2018. Includes 100% of annualized base rent of consolidated property partnerships.
(3) For these properties, the leases are written on a full service gross basis.
(4) For these properties, the leases are written on a modified gross basis.
(5) For these properties, the leases are written on a triple net basis.
(6) For these properties, the leases are written on a modified net basis.
(7) For this property, leases of approximately 264,000 rentable square feet are written on a modified gross basis and approximately 35,000 rentable square feet are written on a full service
gross basis.
(8) For this property, leases of approximately 238,000 rentable square feet are written on a full service gross basis and approximately 5,000 rentable square feet are written on a triple net
basis.
(9) For this property, leases of approximately 115,000 rentable square feet are written on a full service gross basis and approximately 9,000 rentable square feet are written on a gross basis.
(10) For this property, leases of approximately 15,000 rentable square feet are written on a triple net basis, approximately 6,000 rentable square feet are written on a gross basis, and
approximately 5,000 rentable square feet are written on a full service gross basis.
(11) For this property, leases of approximately 236,000 rentable square feet are written on a modified gross basis and approximately 15,000 rentable square feet are written on a full service
gross basis.
(12) For this property, leases of approximately 295,000 rentable square feet are written on a full service gross basis, approximately 16,000 rentable square feet are written on a triple net basis
and approximately 5,000 rentable square feet are written on a modified gross basis.
(13) For this property, leases of approximately 7,000 rentable square feet are written on a full service gross basis and approximately 4,000 rentable square feet are written on a modified gross
basis.
(14) For this property, leases of approximately 50,000 rentable square feet are written on a full service gross basis and approximately 46,000 rentable square feet are written on a modified net
basis.
(15) For this property, leases of approximately 34,000 rentable square feet are written on a full service gross basis and approximately 8,000 rentable square feet are written on a triple net
basis.
40
(16) For this property, leases of approximately 108,000 rentable square feet are written on a modified gross basis, approximately 25,000 rentable square feet are written on a gross basis and
approximately 8,000 rentable square feet are written on a full service gross basis.
(17) As of the date of this report, 30,642 rentable square feet is leased.
(18) For this property, leases of approximately 60,000 rentable square feet are written on a full service gross basis, and approximately 4,000 rentable square feet are written on a triple net
basis.
(19) For this property, leases of approximately 235,000 rentable square feet are written on a full service gross basis and approximately 8,000 rentable square feet are written on a modified
gross basis.
(20) For this property, leases of approximately 23,000 rentable square feet are written on a modified gross basis and approximately 18,000 rentable square feet are written on a full service
gross basis.
(21) For this property, leases of approximately 36,000 rentable square feet are written on a full service gross basis and approximately 3,000 rentable square feet are written on a modified gross
basis.
(22) For this property, leases of approximately 69,000 rentable square feet are written on a modified gross basis and approximately 9,000 rentable square feet are written on a full service gross
basis.
(23) For this property, leases of approximately 125,000 rentable square feet are written on a modified gross basis and approximately 5,000 rentable square feet are written on a full service
gross basis.
(24) For this property, leases of approximately 80,000 rentable square feet are written on a modified gross basis and approximately 48,000 rentable square feet are written on a full service
gross basis.
(25) For this property, leases of approximately 92,000 rentable square feet are written on a modified gross basis and approximately 24,000 rentable square feet are written on a full service
gross basis.
(26) For this property, leases of approximately 37,000 rentable square feet are written on a full service gross basis and approximately 4,000 rentable square feet are written on a modified gross
basis.
(27) For this property, leases of approximately 101,000 rentable square feet are written on a modified gross basis and approximately 37,000 rentable square feet are written on a full service
gross basis.
(28) For this property, leases of approximately 81,000 rentable square feet are written on a full service gross basis, approximately 23,000 rentable square feet are written on a gross basis and
approximately 4,000 rentable square feet are written on a modified gross basis.
(29) For this property, leases of approximately 210,000 rentable square feet are written on a modified gross basis, approximately 164,000 rentable square feet are written on a full service
gross basis, approximately 73,000 rentable square feet are written on a gross basis, and approximately 8,000 rentable square feet are written on a triple net basis.
(30) For this property, leases of approximately 186,000 rentable square feet are written on a full service gross basis, approximately 134,000 rentable square feet are written on a modified
gross basis, approximately 11,000 rentable square feet are written on a triple net basis and approximately 2,000 rentable square feet are written on a gross basis.
(31) For this property, leases of approximately 357,000 rentable square feet are written on a modified gross basis, approximately 257,000 rentable square feet are written on a full service
gross basis, approximately 38,000 rentable square feet are written on a gross basis and approximately 24,000 rentable square feet are written on a triple net basis.
(32) For this property, leases of approximately 182,000 rentable square feet are written on a modified gross basis and approximately 4,000 rentable square feet are written on a triple net basis.
(33) For this property, leases of approximately 360,000 rentable square feet are written on a modified gross basis and approximately 2,000 rentable square feet are written on a triple net basis.
(34) For this property, leases of approximately 427,000 rentable square feet are written on a triple net basis, approximately 7,000 rentable square feet are written on a modified gross basis and
approximately 5,000 rentable square feet is written on a full service gross basis.
(35) For this property, leases of approximately 233,000 rentable square feet are written on a triple net basis and approximately 149,000 rentable square feet are written on a full service gross
basis.
(36) For this property, leases of approximately 108,000 rentable square feet are written on a triple net basis and approximately 29,000 rentable square feet are written on a full service gross
basis.
41
TENANT IMPROVEMENT (1)
Office
San Francisco Bay Area
100 Hooper (3)
TOTAL:
UNDER CONSTRUCTION
Office
Greater Seattle
333 Dexter
Mixed-Use
Greater Los Angeles
Hollywood development - Office (5)
Hollywood development - Residential (5)
San Diego County
One Paseo - Phases I & II (Retail and
Residential)
One Paseo - Phase III (Office)
TOTAL:
In-Process Development Projects and Future Development Pipeline
The following table sets forth certain information relating to our in-process development pipeline as of December 31, 2018.
Location
Construction Start
Date
Estimated
Stabilization Date (2)
Estimated Rentable
Square Feet
Office %
Leased
Office %
Occupied
Total Project %
Leased
The Exchange on 16th (4)
Mission Bay
2Q 2015
SOMA
4Q 2016
2Q 2019
3Q 2019 -
3Q 2020
400,000
100%
100%
750,000
1,150,000
100%
100%
—%
30%
86%
99%
95%
Location
Construction Start
Date
Estimated Stabilization Date (2)
Estimated Rentable
Square Feet
Office %
Leased
Retail %
Leased
South Lake Union
2Q 2017
3Q 2020
650,000
—%
N/A
Hollywood
Hollywood
Del Mar
Del Mar
1Q 2018
4Q 2018
4Q 2016
4Q 2018
1Q 2021
4Q 2020
1Q 2019 -
3Q 2020
2Q 2021
355,000
193 Resi Units
100%
N/A
96,000 Retail
608 Resi Units
285,000
N/A
42%
37%
N/A
N/A
91%
N/A
91%
_______________________
(1) Represents projects that have reached cold shell condition and are ready for tenant improvements, which may require additional major base building construction before being placed in
service.
(2) For office and retail, represents the earlier of anticipated 95% occupancy date or one year from substantial completion of base building components. For residential, represents when
construction is complete and the project is available for occupancy. For multi-phase projects, interest and carry cost capitalization may cease and recommence driven by various factors,
including tenant improvement construction and other tenant related timing or project scope.
(3) The office component of this project, which consists of approximately 312,000 rentable square feet, is 100% leased to Adobe Systems, Inc. and the lease commenced in October 2018.
The remaining PDR space of approximately 88,000 rentable square feet is 38% leased and 18% occupied.
(4) The Company has an executed 15-year lease for 100% of the office space with Dropbox, Inc.
(5) In the fourth quarter, the Company signed a 12-year lease for 100% of the office space with Netflix, Inc.
42
The following table sets forth certain information relating to our future development pipeline as of December 31, 2018.
Future Development Pipeline
San Diego County
2100 Kettner
9455 Towne Centre Drive
Santa Fe Summit – Phases II and III
San Francisco Bay Area
Kilroy Oyster Point
Flower Mart
Location
Approx. Developable Square Feet (1)
Little Italy
University Towne Center
56 Corridor
South San Francisco
SOMA
175,000
150,000
600,000
2,500,000
TBD
_______________________
(1) The developable square feet and scope of projects could change materially from estimated data provided due to one or more of the following: any significant changes in the economy,
market conditions, our markets, tenant requirements and demands, construction costs, new supply, regulatory and entitlement processes or project design.
Significant Tenants
The following table sets forth information about our 15 largest tenants based upon annualized base rental revenues, as defined below, as of December 31, 2018.
Tenant Name
Region
Annualized Base Rental
Revenue(1)(2)
(in thousands)
Percentage of Total
Annualized Base Rental
Revenue(1)
Lease Expiration Date
LinkedIn Corporation / Microsoft Corporation
Adobe Systems Inc.
salesforce.com, inc.
DIRECTV, LLC
Box, Inc.
Dropbox, Inc.
Okta, Inc.
Riot Games, Inc.
Synopsys, Inc.
Viacom International, Inc.
Cisco Systems, Inc.
Concur Technologies
Capital One, N.A.
AMN Healthcare, Inc.
Stanford University School of Medicine
Total
San Francisco Bay Area / Greater
Seattle
$
San Francisco Bay Area / Greater
Seattle
San Francisco Bay Area
Greater Los Angeles
San Francisco Bay Area
San Francisco Bay Area
San Francisco Bay Area
Greater Los Angeles
San Francisco Bay Area
Greater Los Angeles
San Francisco Bay Area
Greater Seattle
San Francisco Bay Area
San Diego County
San Francisco Bay Area
$
34,096
26,751
23,449
23,152
22,441
22,234
17,129
15,514
15,492
13,718
10,792
10,643
9,170
9,001
8,461
262,043
5.9%
4.6%
4.1%
4.0%
3.9%
3.9%
3.0%
2.7%
2.7%
2.4%
1.9%
1.9%
1.6%
1.6%
1.5%
45.7%
Various (3)
Various (4)
Various (5)
September 2027
Various (6)
Various (7)
October 2028
Various (8)
August 2030
December 2028
May 2023
Various (9)
September 2024
July 2027
September 2029
_______________________________________
(1) Annualized base rental revenue includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of
deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases, and expense
reimbursement revenue. Excludes month-to-month leases and vacant space as of December 31, 2018.
(2) Includes 100% of the annualized base rental revenues of consolidated property partnerships.
(3) The LinkedIn Corporation / Microsoft Corporation leases, which contribute $4.3 million, $3.6 million and $26.2 million, expire in February 2019, October 2024, and September 2026,
respectively.
(4) The Adobe Systems Inc. leases, which contribute $5.8 million and $21.0 million, expire in July 2031 and August 2031, respectively.
(5) The salesforce.com, inc. leases, which contribute $12.9 million, $5.7 million and $4.8 million, expire in March 2029, December 2030 and September 2032, respectively.
(6) The Box, Inc. leases, which contribute $2.0 million and $20.4 million, expire in August 2021 and June 2028, respectively.
(7) The Dropbox, Inc. leases, which contribute $4.7 million and $17.5 million, expire in January 2019 and August 2019, respectively. The table above does not include the executed lease
with Dropbox, Inc. at The Exchange on 16th which will commence in phases beginning in the second half of 2019. Refer to "In-Process Development Projects and Future Development
Pipeline" above.
43
(8) The Riot Games leases, which contribute $5.7 million, $2.1 million, and $7.7 million, expire in September 2020, November 2020, and November 2024, respectively.
(9) The Concur Technologies leases, which contribute $1.8 million and $8.8 million, expire in April 2025 and December 2025, respectively.
The following pie chart sets forth the composition of our tenant base by industry and as a percentage of our annualized base rental revenue based on the North
American Industry Classification System as of December 31, 2018.
Our West Coast markets are dynamic and populated with innovative and creative tenants, including but not limited to technology, entertainment and digital
media. While technology companies comprise 48% of our office portfolio base rent, technology is a broad concept that encompasses diverse industries including
software, social media, hardware, cloud computing, internet media and technology services.
44
Lease Expirations
The following table sets forth a summary of our office lease expirations for each of the next ten years beginning with 2019, assuming that none of the tenants
exercise renewal options or termination rights. See further discussion of our lease expirations under “Item 1A. Risk Factors” and “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations —Factors that May Influence Future Results of Operations”.
Lease Expirations
Year of Lease Expiration
2019 (3)
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029 and beyond
Total (4)
# of Expiring Leases
Total Square Feet
% of Total Leased Square Feet
Annualized Base
Rent (000’s)(1) (2)
% of Total Annualized
Base Rent (1)
Annualized Rent per
Square Foot (1)
98
96
83
52
71
44
24
25
19
16
22
550
1,410,267
1,445,161
862,910
639,915
1,271,112
897,244
409,532
1,365,016
1,134,864
816,535
2,016,209
12,268,765
11.5% $
11.8%
7.0%
5.2%
10.4%
7.3%
3.3%
11.1%
9.3%
6.7%
16.4%
100.0% $
63,201
58,889
37,914
27,523
66,383
42,339
20,104
56,863
47,434
53,663
102,170
576,483
11.0% $
10.2%
6.6%
4.7%
11.5%
7.3%
3.5%
9.9%
8.2%
9.3%
17.8%
100.0% $
44.81
40.75
43.94
43.01
52.22
47.19
49.09
41.66
41.80
65.72
50.67
46.99
_______________________
(1) Annualized base rent includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred
revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense reimbursement
revenue. Additionally, the underlying leases contain various expense structures including full service gross, modified gross and triple net. Amounts represent percentage of total portfolio
annualized contractual base rental revenue.
(2) Includes 100% of annualized based rent of consolidated property partnerships.
(3) Adjusting for leasing transactions executed as of December 31, 2018 but not yet commenced, the 2019 expirations would be reduced by 929,141 square feet.
(4) For leases that have been renewed early with existing tenants, the expiration date and annualized base rent information presented takes into consideration the renewed lease terms.
Excludes leases not commenced as of December 31, 2018, space leased under month-to-month leases, storage leases, vacant space and future lease renewal options not executed as of
December 31, 2018.
Secured Debt
As of December 31, 2018, the Operating Partnership had three outstanding mortgage notes payable which were secured by certain of our properties. Our secured
debt represents an aggregate indebtedness of approximately $335.8 million. On February 11, 2019, the Company repaid at par a secured mortgage note payable due in
June 2019 for $74.3 million. See additional information regarding our secured debt in “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital Resources—Liquidity Sources,” Notes 8 and 9 to our consolidated financial statements and Schedule III—Real Estate
and Accumulated Depreciation included in this report. Management believes that, as of December 31, 2018, the value of the properties securing the applicable secured
obligations in each case exceeded the principal amount of the outstanding obligation.
ITEM 3.
LEGAL PROCEEDINGS
We and our properties are subject to routine litigation incidental to our business. These matters are generally covered by insurance. As of December 31, 2018, we
are not a defendant in, and our properties are not subject to, any legal proceedings that we believe, if determined adversely to us, would have a material adverse effect
upon our financial condition, results of operations, or cash flows.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
45
PART II
ITEM 5.
MARKET FOR KILROY REALTY CORPORATION’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “KRC.” As of the date this report was filed, there were
approximately 87 registered holders of the Company’s common stock. The following table illustrates dividends declared during 2018 and 2017 as reported on the
NYSE.
2018
First quarter
Second quarter
Third quarter
Fourth quarter
2017
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
Per Share Common
Stock Dividends
Declared
0.4250
0.4550
0.4550
0.4550
Per Share Common
Stock Dividends
Declared
0.3750
0.4250
0.4250
0.4250
The Company pays distributions to common stockholders quarterly each January, April, July and October, at the discretion of the board of directors. Distribution
amounts depend on our FFO, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other
factors as the board of directors deems relevant.
The Company did not make any purchases of equity securities during the three month period leading up to December 31, 2018.
46
MARKET FOR KILROY REALTY, L.P.’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for the Operating Partnership’s common units. As of the date this report was filed, there were 21 holders of record of
common units (including through the Company’s general partnership interest).
The following table reports the distributions per common unit declared during the years ended December 31, 2018 and 2017.
2018
First quarter
Second quarter
Third quarter
Fourth quarter
2017
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
Per Unit Common
Unit Distribution
Declared
0.4250
0.4550
0.4550
0.4550
Per Unit Common
Unit Distribution
Declared
0.3750
0.4250
0.4250
0.4250
During 2018 and 2017, the Operating Partnership redeemed 51,906 and 304,350 common units, respectively, for the same number of shares of the Company’s
common stock.
47
PERFORMANCE GRAPH
The following line graph compares the change in cumulative stockholder return on shares of the Company’s common stock to the cumulative total return of the
NAREIT All Equity REIT Index, the Standard & Poor’s 500 Stock Index, and the SNL REIT Office Index for the five-year period ended December 31, 2018. We include
an additional index, the SNL REIT Office Index, to the performance graph since management believes it provides additional information to investors about our
performance relative to a more specific peer group. The SNL REIT Office Index is a published and widely recognized index that comprises 25 office equity REITs,
including us. The graph assumes the investment of $100 in us and each of the indices on December 31, 2013 and, as required by the SEC, the reinvestment of all
distributions. The return shown on the graph is not necessarily indicative of future performance.
48
ITEM 6.
SELECTED FINANCIAL DATA – KILROY REALTY CORPORATION
The following tables set forth selected consolidated financial and operating data on a historical basis for the Company. The following data should be read in
conjunction with our financial statements and notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included in this report.
The consolidated balance sheet data as of December 31, 2018, 2017 and 2016 and the consolidated statement of operations data for all periods presented, and the
consolidated statement of cash flows data for the years ended December 31, 2018, 2017 and 2016 have been derived from the historical consolidated financial
statements of Kilroy Realty Corporation audited by an independent registered public accounting firm. The consolidated balance sheet data as of December 31, 2015
and 2014 and the consolidated statement of cash flows data for the years ended December 31, 2015 and 2014 have been derived from the historical consolidated
financial statements of Kilroy Realty Corporation and adjusted for the impact of subsequent accounting changes requiring retrospective application, if any.
Kilroy Realty Corporation Consolidated
(in thousands, except share, per share, square footage and occupancy data)
Statements of Operations Data:
Total revenues from continuing operations
Income from continuing operations
Income from discontinued operations (1)
Net income available to common stockholders
Per Share Data:
Weighted average shares of common stock outstanding – basic
Weighted average shares of common stock outstanding – diluted
Income from continuing operations available to common stockholders per share of
common stock – basic
Income from continuing operations available to common stockholders per share of
common stock – diluted
Net income available to common stockholders per share – basic
$
$
$
$
2018
2017
2016
2015
2014
Year Ended December 31,
$
747,298
277,926
—
258,415
$
719,001
180,615
—
151,249
$
642,572
303,798
—
280,538
$
581,275
238,604
—
220,831
521,725
59,313
124,495
166,969
99,972,359
100,482,365
98,113,561
98,727,331
92,342,483
93,023,034
89,854,096
90,395,775
83,090,235
84,967,720
2.56
$
1.52
$
3.00
$
2.44
$
0.52
Net income available to common stockholders per share – diluted
Dividends declared per share (2)
________________________
(1) The Company adopted Financial Accounting Standards Board (“ FASB”) Accounting Standards Update (“ ASU”) No. 2014-08 effective January 1, 2015. As a result, results of operations
for properties classified as held for sale and/or disposed of subsequent to January 1, 2015 are presented in continuing operations. Prior to January 1, 2015, properties classified as held for
sale and/or disposed of are presented in discontinued operations.
$
$
2.55
2.56
2.55
1.790
$
$
$
$
1.51
1.52
1.51
1.650
$
$
$
$
2.97
3.00
2.97
3.375
$
$
$
$
2.42
2.44
2.42
1.400
$
$
$
$
0.51
1.99
1.95
1.400
(2) Dividends declared for the year ended December 31, 2016 includes a special dividend of $1.90 per share of common stock that was paid on January 13, 2017.
49
Balance Sheet Data:
Total real estate held for investment, before accumulated depreciation and
amortization
Total assets (1)
Total debt (1)
Total preferred stock
Total noncontrolling interests (2)
Total equity (2)
Other Data:
Funds From Operations (3) (4)
Cash flows provided by (used in):
Operating activities
Investing activities (5)
Financing activities
Office Property Data:
Rentable square footage
Occupancy
Residential Property Data:
2018
2017
2016
2015
2014
December 31,
$
$
$
$
8,426,632
7,765,707
2,932,601
—
271,354
4,201,261
$
7,417,777
6,802,838
2,347,063
—
259,523
3,960,316
$
7,060,754
6,706,633
2,320,123
192,411
216,322
3,759,317
$
6,328,146
5,926,430
2,225,469
192,411
63,620
3,234,586
6,057,932
5,621,262
2,456,939
192,411
57,726
2,723,936
360,491
$
346,787
$
333,742
$
316,612
$
250,744
$
410,043
(808,915)
503,108
$
347,012
(359,102)
(171,241)
$
345,054
(579,420)
427,291
$
272,008
(337,241)
23,471
245,253
(476,031)
244,587
13,232,580
13,720,597
14,025,856
13,032,406
14,096,617
94.4%
95.2%
96%
94.8%
94.4%
Number of units
Average occupancy (6)
_______________________
(1) On January 1, 2016, the Company adopted FASB ASU No. 2015-03 and 2015-15 which require deferred financing costs, except costs paid for the unsecured line of credit, to be
reclassified as a reduction to the debt liability balance instead of being reported as an asset as historically presented. As a result, total assets and total debt have been adjusted from prior
amounts reported to reflect this change for all periods presented.
200
70.2%
200
46.0%
200
79.7%
N/A
N/A
N/A
N/A
(2) Includes the noncontrolling interests of the common units of the Operating Partnership and consolidated property partnerships (see Note 2 “ Basis of Presentation and Significant
Accounting Policies” to our consolidated financial statements included in this report for additional information).
(3) We calculate FFO in accordance with the White Paper on FFO approved by the Board of Governors of NAREIT. The White Paper defines FFO as net income or loss calculated in
accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains and losses from sales of depreciable real estate and impairment write-downs associated with depreciable
real estate, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustment for
unconsolidated partnerships and joint ventures. Our calculation of FFO includes the amortization of deferred revenue related to tenant-funded tenant improvements and excludes the
depreciation of the related tenant improvement assets. We also add back net income attributable to noncontrolling common units of the Operating Partnership because we report FFO
attributable to common stockholders and common unitholders.
We believe that FFO is a useful supplemental measure of our operating performance. The exclusion from FFO of gains and losses from the sale of operating real estate assets allows
investors and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those operating results between periods. Also,
because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons of operating performance to other REITs. However, other
REITs may use different methodologies to calculate FFO, and accordingly, our FFO may not be comparable to all other REITs.
Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably over time. Since real
estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies
using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets, we believe that FFO along with the required GAAP
presentations provides a more complete measurement of our performance relative to our competitors and a more appropriate basis on which to make decisions involving operating,
financing and investing activities than the required GAAP presentations alone would provide.
However, FFO should not be viewed as an alternative measure of our operating performance because it does not reflect either depreciation and amortization costs or the level of capital
expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs and could materially impact our results from
operations.
Adjustments to arrive at FFO were as follows: net income attributable to noncontrolling common units of the Operating Partnership, net income attributable to noncontrolling interests
in consolidated property partnerships, depreciation and amortization of real estate assets, gains on sales of depreciable real estate and FFO attributable to noncontrolling interests in
consolidated property partnerships. For additional information, see “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Non-GAAP
Supplemental Financial Measure: Funds From Operations” including a reconciliation of the Company’s GAAP net income available for common stockholders to FFO for the periods
presented.
(4) FFO includes amortization of deferred revenue related to tenant-funded tenant improvements of $18.4 million, $16.8 million, $13.2 million, $13.3 million and $11.0 million for the
years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
(5) On January 1, 2017, the Company adopted FASB ASU No. 2016-18 which requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents,
and amounts generally described as restricted cash or restricted cash equivalents. As a result, cash flows provided by (used in) investing activities have been adjusted from prior amounts
reported to reflect this change for all periods presented.
(6) For the year ended December 31, 2016, represents occupancy at December 31, 2016.
50
SELECTED FINANCIAL DATA – KILROY REALTY, L.P.
The following tables set forth selected consolidated financial and operating data on a historical basis for the Operating Partnership. The following data should be
read in conjunction with our financial statements and notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in this report.
The consolidated balance sheet data as of December 31, 2018, 2017 and 2016 and the consolidated statement of operations data for all periods presented have
been derived from the historical consolidated financial statements of Kilroy Realty, L.P. audited by an independent registered public accounting firm. The consolidated
balance sheet data as of December 31, 2015 and 2014 have been derived from the historical consolidated financial statements of Kilroy Realty, L.P. and adjusted for the
impact of subsequent accounting changes requiring retrospective application, if any.
Kilroy Realty, L.P. Consolidated
(in thousands, except unit, per unit, square footage and occupancy data)
Statements of Operations Data:
Total revenues from continuing operations
Income from continuing operations
Income from discontinued operations (1)
Net income available to common unitholders
Per Unit Data:
Weighted average common units outstanding – basic
Weighted average common units outstanding – diluted
2018
2017
2016
2015
2014
Year Ended December 31,
$
$
747,298
277,926
—
263,210
$
719,001
180,615
—
154,077
$
642,572
303,798
—
286,813
$
581,275
238,604
—
224,887
521,725
59,313
124,495
170,298
102,025,276
102,535,282
100,246,567
100,860,337
94,771,688
95,452,239
91,645,578
92,187,257
84,894,498
86,771,983
2.56
$
1.52
$
2.99
$
2.44
$
0.52
Income from continuing operations available to common unitholders per common unit
– basic
$
Income from continuing operations available to common unitholders per common unit
– diluted
Net income available to common unitholders per unit – basic
$
$
Net income available to common unitholders per unit – diluted
Distributions declared per common unit (2)
________________________
(1) The Company adopted FASB ASU No. 2014-08 effective January 1, 2015. As a result, results of operations for properties classified as held for sale and/or disposed of subsequent to
$
$
January 1, 2015 are presented in continuing operations. Prior to January 1, 2015, properties classified as held for sale and/or disposed of are presented in discontinued operations.
(2) The year ended December 31, 2016 includes a special distribution of $1.90 per common unit that was paid on January 13, 2017.
51
2.55
2.56
2.55
1.790
$
$
$
$
1.51
1.52
1.51
1.650
$
$
$
$
2.96
2.99
2.96
3.375
$
$
$
$
2.42
2.44
2.42
1.400
$
$
$
$
0.51
1.99
1.94
1.400
Balance Sheet Data:
Total real estate held for investment, before accumulated depreciation and
amortization
Total assets (1)
Total debt (1)
Total preferred capital
Total noncontrolling interests (2)
Total capital (2)
Other Data:
Cash flows provided by (used in):
Operating activities
Investing activities (3)
Financing activities
Office Property Data:
Rentable square footage
Occupancy
Residential Property Data:
2018
2017
2016
2015
2014
December 31,
$
$
8,426,632
7,765,707
2,932,601
—
197,561
4,201,261
$
7,417,777
6,802,838
2,347,063
—
186,375
3,960,316
$
7,060,754
6,706,633
2,320,123
192,411
135,138
3,759,317
$
6,328,146
5,926,430
2,225,469
192,411
10,566
3,234,586
6,057,932
5,621,262
2,456,939
192,411
9,625
2,723,936
410,043
(808,915)
503,108
347,012
(359,102)
(171,241)
345,054
(579,420)
427,291
272,008
(337,241)
23,471
245,253
(476,031)
244,587
13,232,580
13,720,597
14,025,856
13,032,406
14,096,617
94.4%
95.2%
96%
94.8%
94.4%
Number of units
Average occupancy (4)
_______________________
(1) On January 1, 2016, the Company adopted FASB ASU No. 2015-03 and 2015-15 which require deferred financing costs, except costs paid for the unsecured line of credit, to be
reclassified as a reduction to the debt liability balance instead of being reported as an asset as historically presented. As a result, total assets and total debt have been adjusted from prior
amounts reported to reflect this change for all periods presented.
200
46.0%
200
70.2%
200
79.7%
N/A
N/A
N/A
N/A
(2) Includes the noncontrolling interests in consolidated property partnerships and subsidiaries (see Note 2 “ Basis of Presentation and Significant Accounting Policies” to our consolidated
financial statements included in this report for additional information).
(3) On January 1, 2017, the Company adopted FASB ASU No. 2016-18 which requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents,
and amounts generally described as restricted cash or restricted cash equivalents. As a result, cash flows provided by (used in) investing activities have been adjusted from prior amounts
reported to reflect this change for all periods presented.
(4) For the year ended December 31, 2016, represents occupancy at December 31, 2016.
52
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto
appearing elsewhere in this report. The results of operations discussion is combined for the Company and the Operating Partnership because there are no material
differences in the results of operations between the two reporting entities.
Forward-Looking Statements
Statements contained in this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts may
be forward-looking statements. Forward-looking statements include, among other things, statements or information concerning our plans, objectives, capital
resources, portfolio performance, results of operations, projected future occupancy and rental rates, lease expirations, debt maturities, potential investments, strategies
such as capital recycling, development and redevelopment activity, projected construction costs, projected construction commencement and completion dates,
projected square footage of space that could be constructed on undeveloped land that we own, projected rentable square footage of or number of units in properties
under construction or in the development pipeline, anticipated proceeds from capital recycling activity or other dispositions and anticipated dates of those activities
or dispositions, projected increases in the value of properties, dispositions, future executive incentive compensation, pending, potential or proposed acquisitions,
plans to grow our Net Operating Income and FFO, our ability to re-lease properties at or above current market rates, anticipated market conditions and demographics
and other forward-looking financial data, as well as the discussion in “—Factors That May Influence Future Results of Operations,” “—Liquidity and Capital
Resource of the Company,” and “—Liquidity and Capital Resources of the Operating Partnership.” Forward-looking statements can be identified by the use of words
such as “believes,” “expects,” “projects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” and the
negative of these words and phrases and similar expressions that do not relate to historical matters. Forward-looking statements are based on our current expectations,
beliefs and assumptions, and are not guarantees of future performance. Forward-looking statements are inherently subject to uncertainties, risks, changes in
circumstances, trends and factors that are difficult to predict, many of which are outside of our control. Accordingly, actual performance, results and events may vary
materially from those indicated or implied in the forward-looking statements, and you should not rely on the forward-looking statements as predictions of future
performance, results or events. Numerous factors could cause actual future performance, results and events to differ materially from those indicated in the forward-
looking statements, including, among others:
•
•
•
•
•
•
•
•
•
global market and general economic conditions and their effect on our liquidity and financial conditions and those of our tenants;
adverse economic or real estate conditions generally, and specifically, in the States of California and Washington;
risks associated with our investment in real estate assets, which are illiquid, and with trends in the real estate industry;
defaults on or non-renewal of leases by tenants;
any significant downturn in tenants’ businesses;
our ability to re-lease property at or above current market rates;
costs to comply with government regulations, including environmental remediations;
the availability of cash for distribution and debt service and exposure to risk of default under debt obligations;
increases in interest rates and our ability to manage interest rate exposure;
53
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the availability of financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue development,
redevelopment and acquisition opportunities and refinance existing debt;
a decline in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing, and which
may result in write-offs or impairment charges;
significant competition, which may decrease the occupancy and rental rates of properties;
potential losses that may not be covered by insurance;
the ability to successfully complete acquisitions and dispositions on announced terms;
the ability to successfully operate acquired, developed and redeveloped properties;
the ability to successfully complete development and redevelopment projects on schedule and within budgeted amounts;
delays or refusals in obtaining all necessary zoning, land use and other required entitlements, governmental permits and authorizations for our development
and redevelopment properties;
increases in anticipated capital expenditures, tenant improvement and/or leasing costs;
defaults on leases for land on which some of our properties are located;
adverse changes to, or enactment or implementations of, tax laws or other applicable laws, regulations or legislation, as well as business and consumer
reactions to such changes;
risks associated with joint venture investments, including our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and
disputes between us and our co-venturers;
environmental uncertainties and risks related to natural disasters; and
our ability to maintain our status as a REIT.
The factors included in this report are not exhaustive and additional factors could adversely affect our business and financial performance. For a discussion of
additional factors that could materially adversely affect the Company’s and the Operating Partnership’s business and financial performance, see the discussion below
as well as “Item 1A. Risk Factors,” and in our other filings with the SEC. All forward-looking statements are based on information that was available and speak only as
of the dates on which they were made. We assume no obligation to update any forward-looking statement that becomes untrue because of subsequent events, new
information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws.
Company Overview
We are a self-administered REIT active in premier office and mixed-use submarkets along the West Coast. We own, develop, acquire and manage real estate
assets, consisting primarily of Class A properties in the coastal regions of Greater Los Angeles, Orange County, San Diego County, the San Francisco Bay Area and
Greater Seattle, which we believe have strategic advantages and strong barriers to entry. We own our interests in all of our real properties through the Operating
Partnership and the Finance Partnership and generally conduct substantially all of our operations through the Operating Partnership. We owned an approximate 98.0%
and 97.9% general partnership interest in the Operating Partnership as of December 31, 2018 and 2017, respectively. All of our properties are held in fee except for the
thirteen office buildings that are held subject to long-term ground leases for the land (see Note 18 “Commitments
54
and Contingencies” to our consolidated financial statements included in this report for additional information regarding our ground lease obligations).
2018 Operating and Development Highlights
2018 was an excellent year across the Company. We achieved a Company record in annual leasing and continued to create value in our operating and
development platforms that we believe will drive future earnings and dividend growth.
Leasing. During 2018, we executed new and renewal leases totaling 2.8 million square feet within our stabilized portfolio with an increase in GAAP rents of 36.0%
and an increase in cash rents of 14.8%. The occupancy of our stabilized office portfolio was 94.4% as of December 31, 2018. We also signed approximately 0.6 million
square feet of leases in our development portfolio.
Development. We continued to execute on our development program during 2018, with two development projects progressing from the construction phase to the
tenant improvement phase, commencing construction on two projects and acquiring a 39-acre waterfront development site in South San Francisco for approximately
$308.2 million. The site is fully entitled for 2.5 million square feet of office and laboratory space. See “—Factors that May Influence Future Operations” for additional
information.
Capital Recycling Program. We have continued to utilize our capital recycling program to provide additional capital to finance development expenditures, fund
potential acquisitions, repay long-term debt and for other general corporate purposes. Our general strategy is to target the disposition of non-core properties or those
that have limited upside for us and redeploy the capital into acquisitions and/or development projects where we can create additional value to generate higher returns
(see “—Factors that May Influence Future Operations” for additional information).
In connection with this strategy, during 2018, we generated gross sales proceeds totaling approximately $373.0 million through the sale of 11 office buildings.
Operating Property Acquisitions. We remain a disciplined buyer of office properties and development opportunities and continue to focus on value-add
opportunities in West Coast markets populated by knowledge and creative based tenants in a variety of industries, including technology, media, health care, life
sciences, entertainment and professional services. During 2018, we acquired three office buildings in South San Francisco and an office building in San Francisco
totaling 255,560 rentable square feet of office and laboratory space in two separate transactions for a total purchase price of approximately $257.0 million.
2018 Financing Highlights
In 2018, we raised approximately $783.8 million in new equity and debt, entered into forward equity sale agreements to sell 5,000,000 shares of common stock,
commenced a new $500.0 million at-the-market stock offering program and redeemed approximately $250.0 million in more expensive debt. Refer to our 2018 Financing
Highlights in “—Liquidity and Capital Resources of the Operating Partnership” for a list of financing transactions completed in 2018 and Notes 9 and 13, “Secured and
Unsecured Debt of the Operating Partnership” and “Stockholders’ Equity of the Company,” respectively, to our consolidated financial statements included in this
report for additional information regarding our debt and capital market activity.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires us to make estimates, assumptions, and judgments that affect the reported amounts of
assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for
the reporting periods.
Certain accounting policies are considered to be critical accounting policies. Critical accounting policies are those policies that require our management team to
make significant estimates and/or assumptions about matters that are uncertain at the time the estimates and/or assumptions are made or where we are required to
make significant judgments
55
and assumptions with respect to the practical application of accounting principles in our business operations. Critical accounting policies are by definition those
policies that are material to our financial statements and for which the impact of changes in estimates, assumptions, and judgments could have a material impact to our
financial statements.
The following critical accounting policies discussion reflects what we believe are the most significant estimates, assumptions, and judgments used in the
preparation of our consolidated financial statements. This discussion of our critical accounting policies is intended to supplement the description of our accounting
policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating
significant estimates, assumptions, and judgments. For further discussion of our significant accounting policies, see Note 2 “Basis of Presentation & Significant
Accounting Policies” to our consolidated financial statements included in this report.
Rental Revenue Recognition
Rental revenue for office operating properties is our principal source of revenue. The timing of when we commence rental revenue recognition for office and life
science properties depends largely on our conclusion as to whether we are or the tenant is the owner for accounting purposes of tenant improvements at the leased
property. When we conclude that we are the owner of tenant improvements for accounting purposes, we record the cost to construct the tenant improvements as an
asset, and we commence rental revenue recognition when the tenant takes possession of or controls the finished space, which is typically when the improvements
being recorded as our asset are substantially complete.
The determination of whether we are or the tenant is the owner of tenant improvements for accounting purposes is subject to significant judgment. In making that
determination, we consider numerous factors and perform a detailed evaluation of each individual lease. No one factor is determinative in reaching a conclusion. The
factors we evaluate include but are not limited to the following:
• whether the lease agreement requires landlord approval of how the tenant improvement allowance is spent prior to installation of the tenant improvements;
• whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what the tenant improvement allowance was
spent on prior to payment by the landlord for such tenant improvements;
• whether the tenant improvements are unique to the tenant or reusable by other tenants;
• whether the tenant is permitted to alter or remove the tenant improvements without the consent of the landlord or without compensating the landlord for any
lost utility or diminution in fair value; and
• whether the ownership of the tenant improvements remains with the landlord or remains with the tenant at the end of the lease term.
In addition, we also record the cost of certain tenant improvements paid for or reimbursed by tenants when we conclude that we are the owner of such tenant
improvements using the factors discussed above. For these tenant-funded tenant improvements, we record the amount funded or reimbursed by tenants as deferred
revenue, which is amortized and recognized as rental revenue over the term of the related lease beginning upon substantial completion of the leased premises. During
the years ended December 31, 2018, 2017, and 2016, we capitalized $22.5 million, $22.0 million and $22.3 million, respectively, of tenant-funded tenant improvements.
The amount of tenant-funded tenant improvements recorded in any given year varies based upon the mix of specific leases executed and/or commenced during the
reporting period. For the years ended December 31, 2018, 2017, and 2016, we recognized $18.4 million, $16.8 million and $13.2 million, respectively, of non-cash rental
revenue related to the amortization of deferred revenue recorded in connection with tenant-funded tenant improvements.
When we conclude that we are not the owner and the tenant is the owner of certain tenant improvements for accounting purposes, we record our contribution
towards those tenant-owned improvements as a lease incentive, which
56
is amortized as a reduction to rental revenue on a straight-line basis over the term of the related lease, and rental revenue recognition begins when the tenant takes
possession of or controls the space.
Our determination as to whether we are or the tenant is the owner of tenant improvements for accounting purposes is made on a lease-by-lease basis and has a
significant impact on the amount of non-cash rental revenue that we record related to the amortization of deferred revenue for tenant-funded tenant improvements, and
also has a significant effect on the timing of commencement of revenue recognition.
For residential properties, we commence revenue recognition upon occupancy of the premises by the tenant. Residential rental revenue is recognized on a
straight-line basis over the term of the related lease, net of any concessions.
Tenant Reimbursement Revenue
Reimbursements from tenants consist of amounts due from tenants for common area maintenance, real estate taxes, and other recoverable costs, including capital
expenditures. Calculating tenant reimbursement revenue requires an in-depth analysis of the complex terms of each underlying lease. Examples of judgments and
estimates used when determining the amounts recoverable include:
•
•
•
•
estimating the final expenses, net of accruals, that are recoverable;
estimating the fixed and variable components of operating expenses for each building;
conforming recoverable expense pools to those used in establishing the base year or base allowance for the applicable underlying lease; and
concluding whether an expense or capital expenditure is recoverable pursuant to the terms of the underlying lease.
During the year, we accrue estimated tenant reimbursement revenue in the period in which the tenant reimbursable costs are incurred based on our best estimate
of the amounts to be recovered. Throughout the year, we perform analyses to properly match tenant reimbursement revenue with reimbursable costs incurred to date.
Additionally, during the fourth quarter of each year, we perform preliminary reconciliations and accrue additional tenant reimbursement revenue or refunds.
Subsequent to year end, we perform final detailed reconciliations and analyses on a lease-by-lease basis and bill or refund each tenant for any cumulative annual
adjustments in the first and second quarters of each year for the previous year’s activity. Our historical experience for the years ended December 31, 2017 and 2016 has
been that our final reconciliation and billing process resulted in final amounts that approximated the total annual tenant reimbursement revenues recognized.
Allowances for Uncollectible Current Tenant Receivables and Deferred Rent Receivables
Tenant receivables and deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and deferred rent receivables.
Current tenant receivables consist primarily of amounts due for contractual lease payments and reimbursements of common area maintenance expenses, property
taxes, and other costs recoverable from tenants. Deferred rent receivables represent the amount by which the cumulative straight-line rental revenue recorded to date
exceeds cash rents billed to date under the lease agreement. As of December 31, 2018 and 2017, current receivables were carried net of an allowance for uncollectible
tenant receivables of $4.6 million and $2.3 million, respectively, for each period and deferred rent receivables were carried net of an allowance for deferred rent of $3.3
million and $3.2 million, respectively.
Management’s determination of the adequacy of the allowance for uncollectible tenant receivables and the allowance for deferred rent receivables is performed
using a methodology that incorporates a specific identification analysis and an aging analysis and considers the current economic and business environment. This
determination requires significant judgment and estimates about matters that are uncertain at the time the estimates are made, including the creditworthiness of
specific tenants, specific industry trends and conditions, and general economic trends and
57
conditions. Since these factors are beyond our control, actual results can differ from our estimates, and such differences could be material.
With respect to the allowance for uncollectible tenant receivables, the specific identification methodology analysis relies on factors such as the age and nature of
the receivables, the payment history and financial condition of the tenant, our assessment of the tenant’s ability to meet its lease obligations, and the status of
negotiations of any disputes with the tenant. With respect to the allowance for deferred rent receivables, given the longer-term nature of these receivables, the
specific identification methodology analysis evaluates each of our significant tenants and any tenants on our internal watchlist and relies on factors such as each
tenant’s financial condition and its ability to meet its lease obligations. We evaluate our reserve levels quarterly based on changes in the financial condition of tenants
and our assessment of the tenant’s ability to meet its lease obligations, overall economic conditions, and the current business environment.
For the years ended December 31, 2018, 2017 and 2016, we recorded a total provision for bad debts for both current tenant receivables and deferred rent
receivables of approximately 0.4%, 0.5% and 0.0%, respectively, of rental revenue. In addition, for the year ended December 31, 2018, we recorded an additional
provision for bad debts of approximately 0.4% related to a note receivable. In the event our estimates were not accurate and we had to change our allowances by 1%
of revenue from continuing operations, the potential impact to our net income available to common stockholders would be approximately $7.5 million, $7.2 million and
$6.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Acquisitions
Subsequent to our adoption of Financial Accounting Standards Board Accounting Standards Update (“ASU”) No. 2017-01 (“ASU 2017-01”) on January 1, 2017,
which was adopted on a prospective basis, acquisitions of operating properties and development and redevelopment opportunities generally no longer meet the
definition of a business and are accounted for as asset acquisitions. For these asset acquisitions, we record the acquired tangible and intangible assets and assumed
liabilities based on each asset’s and liability’s relative fair value at the acquisition date of the total purchase price plus any capitalized acquisition costs. We record the
acquired tangible and intangible assets and assumed liabilities of acquisitions of operating properties and development and redevelopment opportunities that meet the
accounting criteria to be accounted for as business combinations at fair value at the acquisition date.
We assess and consider fair value based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates that
we deem appropriate. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market
and economic conditions. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land and
improvements, buildings and improvements, construction in progress and identified tangible and intangible assets and liabilities associated with in-place leases,
including tenant improvements, leasing costs, value of above-market and below-market operating leases and ground leases, acquired in-place lease values and tenant
relationships, if any.
The fair value of land and improvements is derived from comparable sales of land and improvements within the same submarket and/or region. The fair value of
buildings and improvements, tenant improvements and leasing costs considers the value of the property as if it was vacant as well as current replacement costs and
other relevant market rate information.
The fair value of the above-market or below-market component of an acquired in-place operating lease is based upon the present value (calculated using a market
discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) management’s
estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term
of the lease for above-market operating leases and the initial non-cancellable term plus the term of any below-market fixed rate renewal options, if applicable, for below-
market operating leases. The amounts recorded for above-market operating leases are included in deferred leasing costs and acquisition-related intangible assets, net
on the balance sheet and are amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable leases. The amounts recorded
for below-market operating leases are included in deferred revenue and acquisition-related liabilities, net on the balance sheet and are amortized on a straight-line basis
58
as an increase to rental income over the remaining term of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. Our below-
market operating leases generally do not include fixed rate or below-market renewal options. If a lease were to be terminated or if termination were determined to be
likely prior to its contractual expiration (for example resulting from bankruptcy), amortization of the related above-market or below-market lease intangible would be
accelerated.
The fair value of acquired in-place leases is derived based on management’s assessment of lost revenue and costs incurred for the period required to lease the
“assumed vacant” property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to:
(1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable
operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the
assumed lease-up period. Factors we consider in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, current
market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses, and estimates
of lost rental revenue during the expected lease-up periods based on current market demand at market rates. In estimating costs to execute similar leases, we consider
leasing commissions, legal and other related expenses. The amount recorded for acquired in-place leases is included in deferred leasing costs and acquisition-related
intangible assets, net on the balance sheet and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases. If a
lease were to be terminated or if termination were determined to be likely prior to its contractual expiration (for example resulting from bankruptcy), amortization of the
related unamortized in-place lease intangible would be accelerated.
The determination of the fair value of any debt assumed in connection with a property acquisition is estimated by discounting the future cash flows using interest
rates available for the issuance of debt with similar terms and remaining maturities.
The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of acquisitions requires us to make significant judgments
and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported
amounts of the allocation of our acquisition related assets and liabilities and the related depreciation and amortization expense recorded for such assets and liabilities.
In addition, because the value of above and below market leases are amortized as either a reduction or increase to rental income, respectively, our judgments for these
intangibles could have a significant impact on our reported rental revenues and results of operations.
Subsequent to our adoption of ASU 2017-01 on January 1, 2017, transaction costs associated with our acquisitions are capitalized as part of the purchase price of
the acquisition. Prior to our adoption of ASU 2017-01, acquisition costs associated with all operating property acquisitions and those development and redevelopment
acquisitions that met the criteria to be accounted for as business combinations were expensed as incurred and costs associated with development acquisitions
accounted for as asset acquisitions were capitalized as part of the cost of the asset. During the years ended December 31, 2018, 2017 and 2016, we capitalized $3.8
million, $4.6 million, and $0.5 million, respectively, of acquisition costs. During the year ended December 31, 2016, we expensed $1.9 million of acquisition costs.
Evaluation of Asset Impairment
We evaluate our real estate assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a given asset may
not be recoverable. We evaluate our real estate assets for impairment on a property-by-property basis. Indicators we use to determine whether an impairment
evaluation is necessary include:
•
•
low occupancy levels, forecasted low occupancy levels or near term lease expirations at a specific property;
current period operating or cash flow losses combined with a historical pattern or future projection of potential continued operating or cash flow losses at a
specific property;
59
•
•
•
•
•
•
deterioration in rental rates for a specific property as evidenced by sudden significant rental rate decreases or continuous rental rate decreases over
numerous quarters, which could signal a continued decrease in future cash flow for that property;
deterioration of a given rental submarket as evidenced by significant increases in market vacancy and/or negative absorption rates or continuous increases in
market vacancy and/or negative absorption rates over numerous quarters, which could signal a decrease in future cash flow for properties within that
submarket;
significant increases in property sales yields, continuous increases in property sales yields over several quarters, or recent property sales at a loss within a
given submarket, each of which could signal a decrease in the market value of properties;
significant change in strategy or use of a specific property or any other event that could result in a decreased holding period, including classifying a property
as held for sale, or significant development delay;
evidence of material physical damage to the property; and
default by a significant tenant when any of the other indicators above are present.
When we evaluate for potential impairment our real estate assets to be held and used, we first evaluate whether there are any indicators of impairment. If any
impairment indicators are present for a specific real estate asset, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the real
estate asset to the real estate asset’s estimated undiscounted future cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is
less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair value of the real estate asset, less estimated
costs to sell, is less than the net carrying value of the real estate asset. We also perform an impairment loss calculation for real estate assets held for sale to determine
if the fair value of the real estate asset, less estimated costs to sell, is less than the net carrying value of the real estate asset. Our impairment loss calculation compares
the net carrying amount of the real estate asset to the real estate asset’s estimated fair value, which may be based on estimated discounted future cash flow
calculations or third-party valuations or appraisals. We recognize an impairment loss if the amount of the asset’s net carrying amount exceeds the asset’s estimated
fair value less costs to sell. If we recognize an impairment loss, the estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset, the
new cost basis will be depreciated (amortized) over the remaining useful life of that asset.
Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make assumptions and to apply judgment to
estimate future cash flow and property fair values, including selecting the discount or capitalization rate that reflects the risk inherent in future cash flow. Estimating
projected cash flow is highly subjective as it requires assumptions related to future rental rates, tenant allowances, operating expenditures, property taxes, capital
improvements, and occupancy levels. We are also required to make a number of assumptions relating to future economic and market events and prospective operating
trends. Determining the appropriate capitalization rate also requires significant judgment and is typically based on many factors including the prevailing rate for the
market or submarket, as well as the quality and location of the properties. Further, capitalization rates can fluctuate resulting from a variety of factors in the overall
economy or within regional markets. If the actual net cash flow or actual market capitalization rates significantly differ from our estimates, the impairment evaluation for
an individual asset could be materially affected.
For each property where such an indicator occurred and/or for properties within a given submarket where such an indicator occurred, we completed an impairment
evaluation. After completing this process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period were in
excess of carrying value and, therefore, we did not record any impairment losses for these properties.
Cost Capitalization and Depreciation
We capitalize costs associated with development and redevelopment activities, capital improvements, and tenant improvements, including internal compensation
costs. In addition, for development and redevelopment projects, we
60
also capitalize the following costs during periods in which activities necessary to prepare the project for its intended use are in progress: interest costs based on the
weighted average interest rate of our outstanding indebtedness for the period, real estate taxes and insurance. For the years ended December 31, 2018, 2017 and 2016,
we capitalized $24.2 million, $23.2 million and $19.0 million, respectively, of internal costs to our qualifying development projects.
Amounts capitalized are depreciated or amortized over estimated useful lives determined by management. We depreciate buildings and improvements based on
the estimated useful life of the asset, and we amortize tenant improvements over the shorter of the estimated useful life or estimated remaining life of the related lease.
All capitalized costs are depreciated or amortized using the straight-line method.
Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant
judgment. Expenditures that meet one or more of the following criteria generally qualify for capitalization:
•
•
•
provide benefit in future periods;
extend the useful life of the asset beyond our original estimates; and
increase the quality of the asset beyond our original estimates.
Our historical experience has demonstrated that we have not had material write-offs of assets and that our depreciation and amortization estimates have been
reasonable and appropriate.
Share-Based Incentive Compensation Accounting
At December 31, 2018, the Company had one share-based incentive compensation plan, the Kilroy Realty 2006 Incentive Award Plan, which is described more
fully in Note 15 “Share-Based Compensation” to our consolidated financial statements included in this report. The Executive Compensation Committee determines
compensation for Executive Officers. Compensation cost for all share-based awards, including options, requires an estimate of fair value on the grant date and
compensation cost is recognized on a straight-line basis over the service vesting period, which represents the requisite service period. The grant date fair value for
compensation programs that contain market conditions, like modifiers based on total stockholder return (a “market condition”), are performed using complex pricing
valuation models that require the input of assumptions, including judgments to estimate expected stock price volatility, expected life, and forfeiture rate. Specifically,
the grant date fair value of share-based compensation programs that include market conditions are calculated using a Monte Carlo simulation pricing model and the
grant date fair value of stock option grants are calculated using the Black-Scholes valuation model. Additionally, certain of our market condition share-based
compensation programs also contain pre-defined financial performance conditions, including FFO per share, FAD per share growth, and debt to EBITDA ratio goals
which can impact the number of restricted stock units ultimately earned. This variability relating to the level of the performance condition achieved requires
management’s judgment and estimates, which impacts compensation cost recognized for these awards during the performance period. As of December 31, 2018, the
performance condition for certain of our outstanding market condition share-based compensation programs has been met and compensation cost for these awards is
no longer variable. For these awards, although the number of restricted stock units ultimately earned remains variable subject to the ultimate achievement level of the
market condition, compensation cost is no longer variable for these awards as the market condition was already taken into consideration as part of the grant date fair
value calculation. As of December 31, 2018, there are certain outstanding share-based compensation awards where the performance conditions have not all yet been
met. For these awards, compensation cost and the number of restricted stock units ultimately earned remains variable.
For the years ended December 31, 2018, 2017, and 2016 we recorded approximately $23.5 million, $14.5 million, and $16.6 million, respectively, of compensation cost
related to programs that were subject to such valuation models. If the valuation of the grant date fair value for such programs changed by 10%, the potential impact to
our net income available to common stockholders would be approximately $2.0 million, $1.1 million, and $1.4 million for the years ended December 31, 2018, 2017, and
2016, respectively.
61
Factors That May Influence Future Results of Operations
Development Program
We believe that a portion of our long-term future growth will continue to come from the completion of our in-process development projects and, subject to market
conditions, executing on our future development pipeline, including expanding entitlements. Over the past several years, we increased our focus on development
opportunities and expanded our future development pipeline through targeted acquisitions of development opportunities on the West Coast. This includes the
acquisition of a 39-acre fully-entitled development site in South San Francisco, California on June 1, 2018 for a cash purchase price of approximately $308.2 million as
discussed in “—Acquisitions” below.
We have a proactive planning process by which we continually evaluate the size, timing, costs and scope of our development program and, as necessary, scale
activity to reflect the economic conditions and the real estate fundamentals that exist in our submarkets. We expect to execute on our development program with
prudence and will be pursuing opportunities with attractive economic returns in strategic locations with proximity to public transportation or transportation access
and retail amenities and in markets with strong fundamentals and visible demand. We plan to develop in phases as appropriate and we generally favor starting projects
with pre-leasing activity, as appropriate.
In-Process Development Projects - Tenant Improvement
During the year ended December 31, 2018, the following two development projects progressed from the under construction phase to the tenant improvement
phase:
•
•
100 Hooper, SOMA, San Francisco, California, which we acquired in July 2015 and commenced construction on in November 2016. This project encompasses
approximately 312,000 square feet of office and approximately 88,000 square feet of production, distribution and repair (“PDR”) space configured in two
buildings with a total estimated investment of approximately $270.0 million. The office portion of the project is 100% leased to Adobe Systems Inc. and the
PDR space is 38% leased. We commenced revenue recognition on the lease with Adobe Systems Inc. on October 1, 2018 and cash rents will commence in the
first quarter of 2019 through the second quarter of 2020. The project is currently expected to be stabilized in the second quarter of 2019.
The Exchange on 16th, Mission Bay, San Francisco, California, which we acquired in May 2014 and commenced construction on in June 2015. This project
will encompass approximately 750,000 gross rentable square feet consisting of 736,000 square feet of office space and 14,000 square feet of retail space at a
total estimated investment of $585.0 million. The office space in the project is 100% pre-leased to Dropbox, Inc. Cash rents will commence in the third quarter
of 2019 through the first quarter of 2020. The estimated stabilization dates for Phase I, Phase II, and Phase III are the third quarter of 2019, the fourth quarter
of 2019, and the third quarter of 2020, respectively.
In-Process Development Projects - Under Construction
As of December 31, 2018, we had three projects in our in-process development pipeline that were under construction.
• Hollywood development, Hollywood, California, which we acquired in 2013. We commenced construction on the office component of this mixed-use project
in January 2018, which includes the project’s overall infrastructure and site work and approximately 355,000 square feet of office space for a total estimated
investment of $300.0 million. The office space of this project is 100% pre-leased to Netflix, Inc. We commenced construction on the residential component of
the project in December 2018, which encompasses 193 residential units at a total estimated investment of $195.0 million. The residential component is
currently expected to be completed in the fourth quarter of 2020.
•
333 Dexter, South Lake Union, Washington, which we acquired in February 2015 and commenced construction on in June 2017. This project encompasses
approximately 650,000 square feet of office space at a total
62
estimated investment of $380.0 million. Construction is currently in progress and the cold shell is currently estimated to be ready for tenant improvements in
the second half of 2019.
• One Paseo - Del Mar Heights, San Diego, California, which we acquired in November 2007. We commenced construction on the retail and residential
components of this mixed-use project in December 2016, which includes site work and related infrastructure for the entire project, as well as 608 residential
units and approximately 96,000 square feet of retail space. The total estimated investment for the retail and residential components of the project is
approximately $470.0 million. The project is expected to be stabilized in phases beginning in the first quarter of 2019 for the retail space through the third
quarter of 2020 for the residential units. As of the date of this report, the retail space of the project was 91% leased. We commenced construction on the
office component of the project in December 2018, which encompasses 285,000 square feet of office space at a total estimated investment of $205.0 million. As
of the date of this report, the office component of the project was 42% pre-leased.
Future Development Pipeline
As of December 31, 2018, our future development pipeline included five future projects located in the San Francisco Bay Area and San Diego County with an
aggregate cost basis of approximately $773.2 million, at which we believe we could develop more than 5.0 million rentable square feet for a total estimated investment
of approximately $3.5 billion to $5.0 billion, depending on successfully obtaining entitlements and market conditions.
The following table sets forth information about our future development pipeline.
Future Development Pipeline
San Diego County
2100 Kettner
9455 Towne Centre Drive
Santa Fe Summit – Phases II and III
San Francisco Bay Area
Kilroy Oyster Point
Flower Mart
TOTAL:
Location
Approx. Developable Square Feet /
Resi Units (1)
Total Costs
as of 12/31/2018
($ in millions) (2)
Little Italy
University Towne Center
56 Corridor
South San Francisco
SOMA
175,000
150,000
600,000
2,500,000
TBD
$
$
26.0
16.4
79.9
399.7
251.2
773.2
________________________
(1) The developable square feet and scope of projects could change materially from estimated data provided due to one or more of the following: any significant changes in the economy,
market conditions, our markets, tenant requirements and demands, construction costs, new supply, regulatory and entitlement processes or project design.
(2) Represents cash paid and costs incurred, including accrued liabilities in accordance with GAAP, as of December 31, 2018.
Fluctuations in our development activities could cause fluctuations in the average development asset balances qualifying for interest and other carrying cost and
internal cost capitalization in future periods. During the years ended December 31, 2018 and 2017, we capitalized interest on in-process development projects and
future development pipeline projects with an average aggregate cost basis of approximately $1.6 billion and $1.0 billion, respectively, as it was determined these
projects qualified for interest and other carrying cost capitalization under GAAP. For the years ended December 31, 2018 and 2017, we capitalized $68.1 million and
$46.5 million, respectively, of interest to our qualifying development projects. For the years ended December 31, 2018 and 2017, we capitalized $24.2 million and $23.2
million respectively, of internal costs to our qualifying redevelopment and development projects.
Capital Recycling Program. We continuously evaluate opportunities for the potential disposition of non-core properties and undeveloped land in our portfolio
or the formation of strategic ventures with the intent of recycling the proceeds generated into capital used to fund new operating and development acquisitions, to
finance development and redevelopment expenditures, to repay long-term debt and for other general corporate purposes. As part of this strategy, we attempt to enter
into Section 1031 Exchanges and other tax deferred transaction structures, when possible, to defer some or all of the taxable gains on the sales, if any, for federal and
state income tax purposes. See the “Liquidity and
63
Capital Resources of the Operating Partnership – Liquidity Sources” section for further discussion of our capital recycling activities.
In connection with our capital recycling strategy, during 2018, we completed the sale of 11 office properties to unaffiliated third parties for total gross sales
proceeds of $373.0 million. During 2017, we completed the sale of 11 office properties and one undeveloped land parcel to unaffiliated third parties for total gross sales
proceeds of $186.6 million.
The timing of any potential future disposition or strategic venture transactions will depend on market conditions and other factors, including but not limited to
our capital needs and our ability to defer some or all of the taxable gains on the sales. We cannot assure that we will dispose of any additional properties, enter into
any additional strategic ventures, or that we will be able to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange
or be able to use other tax deferred structures in connection with our strategy. See the “Liquidity and Capital Resources of the Operating Partnership – Liquidity
Sources” section for further information.
Acquisitions. As part of our growth strategy, which is highly dependent on market conditions and business cycles, among other factors, we continue to evaluate
strategic opportunities and remain a disciplined buyer of development and redevelopment opportunities as well as value-add operating properties. We continue to
focus on growth opportunities in West Coast markets populated by knowledge and creative based tenants in a variety of industries, including technology, media,
healthcare, life sciences, entertainment and professional services. Against the backdrop of market volatility, we expect to manage a strong balance sheet, execute on
our development program and selectively evaluate opportunities that either add immediate Net Operating Income to our portfolio or play a strategic role in our future
growth.
During the year ended December 31, 2018, we acquired four office buildings in two transactions for a cash purchase price of $257.0 million. In addition, we
acquired a 39-acre development site for a cash purchase price of approximately $308.2 million from an unrelated seller. During the year ended December 31, 2017, we
acquired a 1.2 acre development site for $19.4 million in cash. We generally finance our acquisitions through proceeds from the issuance of debt and equity securities,
borrowings under our unsecured revolving credit facility, proceeds from our capital recycling program, the assumption of existing debt and cash flows from
operations.
We cannot provide assurance that we will enter into any agreements to acquire properties, or undeveloped land, or that the potential acquisitions contemplated
by any agreements we may enter into in the future will be completed. In addition, acquisitions are subject to various risks and uncertainties and we may be unable to
complete an acquisition after making a nonrefundable deposit or incurring acquisition-related costs.
Incentive Compensation. Our Executive Compensation Committee determines compensation, including cash bonuses and equity incentives, for our executive
officers. For 2018, the annual cash bonus program was structured to allow the Executive Compensation Committee to evaluate a variety of key quantitative and
qualitative metrics at the end of the year and make a determination based on the Company’s and management’s overall performance. Our Executive Compensation
Committee also grants equity incentive awards from time to time that include performance-based and/or market-measure based vesting requirements and time-based
vesting requirements. As a result, accrued incentive compensation and compensation expense for future awards may be affected by our operating and development
performance, financial results, stock price, performance against applicable performance-based vesting goals, market conditions, liquidity measures, and other factors.
Consequently, we cannot predict the amounts that will be recorded in future periods related to such incentive compensation.
As of December 31, 2018, there was approximately $60.5 million of total unrecognized compensation cost related to outstanding nonvested shares of restricted
common stock and RSUs issued under share-based compensation arrangements. Those costs are expected to be recognized over a weighted-average period of
3.0 years. The $60.5 million of unrecognized compensation cost does not reflect the future compensation cost for any potential share-based awards that may be issued
subsequent to December 31, 2018. Share-based compensation expense for potential future awards could be affected by our operating and development performance,
financial results, stock price, performance against applicable performance-based vesting goals, market conditions and other factors.
64
Information on Leases Commenced and Executed
Leasing Activity and Changes in Rental Rates. The amount of net rental income generated by our properties depends principally on our ability to maintain the
occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties, newly acquired properties with vacant
space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental
rates in our submarkets. Negative trends in one or more of these factors could adversely affect our rental income in future periods. The following tables set forth
certain information regarding leasing activity for our stabilized portfolio during the year ended December 31, 2018.
For Leases Commenced
Number of
Leases (3)
1st & 2nd Generation (1)(2)
Rentable
Square Feet (3)
New
Renewal
New
Renewal
2nd Generation (1)(2)
Retention Rates
(4)
TI/LC per
Sq. Ft. (5)
TI/LC per
Sq. Ft. / Year
Changes in
Rents (6)(7)
Changes in
Cash Rents (8)
Weighted Average
Lease Term (in
months)
Year Ended December
31, 2018
79
58
1,033,085
1,161,596
49.1% $
47.09
$
7.24
25.4%
10.7%
78
For Leases Executed (9)
1st & 2nd Generation (1)(2)
2nd Generation (1)(2)
Number of Leases (3)
Rentable Square Feet (3)
New
Renewal
New
Renewal
TI/LC per Sq.
Ft. (5)
TI/LC Per Sq. Ft. /
Year
Changes in
Rents (6)(7)
Changes in
Cash Rents (8)
Weighted Average
Lease Term
(in months)
Year Ended December 31,
2018
89
58
1,667,447
1,161,596
$
56.90
$
7.11
36.0%
14.8%
96
_______________________
(1) Includes 100% of consolidated property partnerships.
(2) First generation leasing includes space where we have made capital expenditures that result in additional revenue generated when the space is re-leased. Second generation leasing includes
space where we have made capital expenditures to maintain the current market revenue stream.
(3) Represents leasing activity for leases that commenced or were signed during the period, including first and second generation space, net of month-to-month leases. Excludes leasing on
new construction.
(4) Calculated as the percentage of space either renewed or expanded into by existing tenants or subtenants at lease expiration.
(5) Tenant improvements and leasing commissions per square foot exclude tenant-funded tenant improvements.
(6) Calculated as the change between GAAP rents for new/renewed leases and the expiring GAAP rents for the same space. Excludes leases for which the space was vacant longer than one
year or vacant when the property was acquired.
(7) Excludes commenced and executed leases of approximately 471,880 and 386,587 rentable square feet, respectively, for the year ended December 31, 2018, for which the space was
vacant longer than one year or being leased for the first time. Space vacant for more than one year is excluded from our change in rents calculations to provide a more meaningful market
comparison.
(8) Calculated as the change between stated rents for new/renewed leases and the expiring stated rents for the same space. Excludes leases for which the space was vacant longer than one year
or vacant when the property was acquired.
(9) For the year ended December 31, 2018, 38 new leases totaling 1,138,133 rentable square feet were signed but not commenced as of December 31, 2018.
As of December 31, 2018, we believe that the weighted average cash rental rates for our total stabilized portfolio, are approximately 20% below the current average
market rental rates. Individual properties within any particular submarket presently may be leased either above, below, or at the current market rates within that
submarket, and the average rental rates for individual submarkets may be above, below, or at the average cash rental rate of our portfolio.
Our rental rates and occupancy are impacted by general economic conditions, including the pace of regional economic growth and access to capital. Therefore,
we cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current market rates.
Additionally, decreased demand and other negative trends or unforeseeable events that impair our ability to timely renew or re-lease space could have further negative
effects on our future financial condition, results of operations, and cash flows.
65
2019
2020
2021
2022
2023
Total
Year
2019 (4)
2020
Scheduled Lease Expirations. The following tables set forth certain information regarding our lease expirations for our stabilized portfolio for the next five years
and by region for the next two years.
Year of Lease Expiration
Number of
Expiring
Leases
Total Square Feet
% of Total Leased Sq. Ft.
Lease Expirations (1)
98
96
83
52
71
400
1,410,267
1,445,161
862,910
639,915
1,271,112
5,629,365
Annualized Base Rent (2)
(3)
63,201
58,889
37,914
27,523
66,383
253,910
11.5% $
11.8%
7.0%
5.2%
10.4%
45.9% $
% of Total Annualized
Base Rent (2)
Annualized Base Rent per Sq. Ft.
(2)
44.81
40.75
43.94
43.01
52.22
45.10
11.0% $
10.2%
6.6%
4.7%
11.5%
44.0% $
Region
# of
Expiring Leases
Total
Square Feet
% of Total
Leased Sq. Ft.
Annualized
Base Rent (2)(3)
% of Total
Annualized
Base Rent (2)
Annualized Rent
per Sq. Ft. (2)
Greater Los Angeles
Orange County
San Diego
San Francisco Bay Area
Greater Seattle
Total
Greater Los Angeles
Orange County
San Diego
San Francisco Bay Area
Greater Seattle
Total
52
5
16
16
9
98
49
5
16
21
5
96
279,163
74,181
174,063
721,554
161,306
1,410,267
457,339
38,526
263,513
566,361
119,422
1,445,161
2.3% $
0.6%
1.4%
5.9%
1.3%
11.5% $
3.8% $
0.3%
2.1%
4.6%
1.0%
11.8% $
9,533
3,137
6,648
38,313
5,570
63,201
18,372
1,238
10,455
26,263
2,561
58,889
1.7% $
0.5%
1.2%
6.6%
1.0%
11.0% $
3.2% $
0.2%
1.8%
4.6%
0.4%
10.2% $
34.15
42.29
38.19
53.10
34.53
44.81
40.17
32.13
39.68
46.37
21.44
40.75
________________________
(1) For leases that have been renewed early with existing tenants, the expiration date and annualized base rent information presented takes into consideration the renewed lease terms.
Excludes leases not commenced as of December 31, 2018, space leased under month-to-month leases, storage leases, vacant space and future lease renewal options not executed as of
December 31, 2018.
(2) Annualized base rent includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred
revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases, and expense reimbursement
revenue. Additionally, the underlying leases contain various expense structures including full service gross, modified gross and triple net. Percentages represent percentage of total
portfolio annualized contractual base rental revenue. For additional information on tenant improvement and leasing commission costs incurred by the Company for the current reporting
period, please see further discussion under the caption “ Information on Leases Commenced and Executed.”
(3) Includes 100% of annualized base rent of consolidated property partnerships.
(4) Adjusting for leases executed as of December 31, 2018 but not yet commenced, the 2019 expirations would be reduced by 929,141 square feet.
In addition to the 0.7 million rentable square feet, or 5.6%, of currently available space in our stabilized portfolio, leases representing approximately 11.5% and
11.8% of the occupied square footage of our stabilized portfolio are scheduled to expire during 2019 and 2020, respectively. The leases scheduled to expire in 2019 and
2020 represent approximately 2.9 million rentable square feet, or 21.2%, of our total annualized base rental revenue. Individual properties within any particular
submarket presently may be leased either above, below, or at the current quoted market rates within that submarket. Our ability to re-lease available space depends
upon both general market conditions and the market conditions in the specific regions in which individual properties are located.
Approximately 1.4 million rentable square feet, or 11.0%, of our total annualized base rental revenue is scheduled to expire in 2019. As of December 31, 2018, we
had executed leases for 0.9 million rentable square feet of the expiring 1.4 million rentable square feet. For the 0.9 million leased rentable square feet, we believe that the
weighted average cash rental rates are approximately 15.0% below market. We believe the weighted average cash rental rates for the remaining 0.5 million expiring
rentable feet are approximately 25% below current average market rental rates.
66
For the approximately 1.4 million rentable square feet, or 10.2%, of our total annualized base rental revenue scheduled to expire in 2020, we believe that the
weighted average cash rental rates for our overall portfolio are approximately 20% below current average market rental rates.
Stabilized Portfolio Information
As of December 31, 2018, our stabilized portfolio was comprised of 94 office properties encompassing an aggregate of approximately 13.2 million rentable square
feet and 200 residential units at our residential tower in Hollywood, California. Our stabilized portfolio includes all of our properties with the exception of development
and redevelopment properties currently committed for construction, under construction or in the tenant improvement phase, undeveloped land and real estate assets
held for sale. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or
acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We define properties in the tenant improvement
phase as properties that we are developing or redeveloping where the project has reached cold shell condition and is ready for tenant improvements, which may
require additional major base building construction before being placed in service. Projects in the tenant improvement phase are added to our stabilized portfolio once
the project reaches the earlier of 95% occupancy or one year from the date of the cessation of major base building construction activities. Costs capitalized to
construction in progress for development and redevelopment properties are transferred to land and improvements, buildings and improvements, and deferred leasing
costs on our consolidated balance sheets as the historical cost of the property as the projects are placed in service.
We did not have any redevelopment or held for sale properties at December 31, 2018. Our stabilized portfolio also excludes our future development pipeline, which
as of December 31, 2018 was comprised of five potential development sites, representing approximately 73 gross acres of undeveloped land on which we believe we
have the potential to develop more than 5.0 million rentable square feet, depending upon economic conditions.
As of December 31, 2018, the following properties were excluded from our stabilized portfolio:
Number of
Properties/Projects
Estimated Rentable
Square Feet (1)
In-process development projects - tenant improvement (2)
In-process development projects - under construction (3)
________________________
(1) Estimated rentable square feet upon completion.
(2) Includes 88,000 square feet of Production, Distribution, and Repair (“ PDR”) space.
(3) In addition to the estimated office and PDR rentable square feet noted above, development projects under construction also include 96,000 square feet of retail space and 801 residential
1,150,000
1,290,000
3
2
units.
The following table reconciles the changes in the rentable square feet in our stabilized office portfolio of operating properties from December 31, 2017 to December
31, 2018:
Total as of December 31, 2017
Acquisitions
Dispositions
Remeasurement
Total as of December 31, 2018 (1)
________________________
(1) Includes four properties owned by consolidated property partnerships (see Note 2 “ Basis of Presentation and Significant Accounting Policies” to our consolidated financial statements
included in this report for additional information).
67
Number of
Buildings
Rentable
Square Feet
101
4
(11)
—
94
13,720,597
255,560
(772,246)
28,669
13,232,580
Occupancy Information
The following table sets forth certain information regarding our stabilized portfolio:
Stabilized Portfolio Occupancy
Region
Greater Los Angeles
Orange County
San Diego County
San Francisco Bay Area
Greater Seattle
Total Stabilized Portfolio
Number of
Buildings
33
1
21
31
8
94
Rentable Square Feet
12/31/2018
12/31/2017
12/31/2016
Occupancy at (1)
3,956,497
271,556
2,045,941
5,160,569
1,798,017
13,232,580
95.1%
89.6%
89.3%
96.4%
93.6%
94.4%
93.3%
86.6%
97.4%
96.1%
95.4%
95.2%
95.0%
97.8%
93.2%
97.6%
97.2%
96.0%
Average Occupancy
Year Ended December 31,
2018
2017
Stabilized Portfolio (1)
Same Store Portfolio (2)
Residential Portfolio (3)
__________________________________
(1) Occupancy percentages reported are based on our stabilized office portfolio as of the end of the period presented and exclude occupancy percentages of properties held for sale.
(2) Occupancy percentages reported are based on office properties owned and stabilized as of January 1, 2017 and still owned and stabilized as of December 31, 2018. See discussion under
94.1%
94.1%
79.7%
94.1%
94.5%
70.2%
“ Results of Operations” for additional information.
(3) Our residential portfolio consists of our 200-unit residential tower located in Hollywood, California.
68
Results of Operations
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Net Operating Income
Management internally evaluates the operating performance and financial results of our stabilized portfolio based on Net Operating Income. We define
“Net Operating Income” as consolidated operating revenues (rental income, tenant reimbursements and other property income) less consolidated operating expenses
(property expenses, real estate taxes, provision for bad debts and ground leases).
Net Operating Income is considered by management to be an important and appropriate supplemental performance measure to net income because we believe it
helps both investors and management to understand the core operations of our properties excluding corporate and financing-related costs and non-cash depreciation
and amortization. Net Operating Income is an unlevered operating performance metric of our properties and allows for a useful comparison of the operating
performance of individual assets or groups of assets. This measure thereby provides an operating perspective not immediately apparent from GAAP income from
operations or net income. In addition, Net Operating Income is considered by many in the real estate industry to be a useful starting point for determining the value of
a real estate asset or group of assets. Other real estate companies may use different methodologies for calculating Net Operating Income, and accordingly, our
presentation of Net Operating Income may not be comparable to other real estate companies. Because of the exclusion of the items shown in the reconciliation below,
Net Operating Income should only be used as a supplemental measure of our financial performance and not as an alternative to GAAP income from operations or net
income.
Management further evaluates Net Operating Income by evaluating the performance from the following property groups:
•
Same Store Properties – includes the consolidated results of all of the office properties that were owned and included in our stabilized portfolio for two
comparable reporting periods, i.e., owned and included in our stabilized portfolio as of January 1, 2017 and still owned and included in the stabilized
portfolio as of December 31, 2018, including our residential tower in Hollywood, California;
• Development Properties – includes the results generated by one office development project that was added to the stabilized portfolio in the first quarter
of 2017 and our in-process and future development projects, including a project in the tenant improvement phase at which revenue recognition
commenced in the fourth quarter of 2018;
• Acquisition Properties – includes the results, from the dates of acquisition through the periods presented, for the four office buildings we acquired
during 2018; and
• Disposition Properties – includes the results of the eleven properties disposed of in the fourth quarter of 2018 and the eleven properties disposed of in
2017.
The following table sets forth certain information regarding the property groups within our stabilized office portfolio as of December 31, 2018.
Group
Same Store Properties
Development Properties - Stabilized (1)
Acquisition Properties
Total Stabilized Portfolio
________________________
(1) Excludes development projects in the tenant improvement phase, our in-process development projects and future development projects.
69
# of Buildings
Rentable
Square Feet
87
3
4
94
12,611,661
365,359
255,560
13,232,580
The following table summarizes our Net Operating Income, as defined, for our total portfolio for the years ended December 31, 2018 and 2017.
Year Ended December 31,
2018
2017
Dollar
Change
Percentage
Change
($ in thousands)
Reconciliation of Net Income Available to Common Stockholders to Net Operating
Income, as defined:
Net Income Available to Common Stockholders
Preferred dividends
Original issuance costs of redeemed preferred stock
Net income attributable to Kilroy Realty Corporation
Net income attributable to noncontrolling common units of the Operating Partnership
Net income attributable to noncontrolling interests in consolidated property partnerships
Net income
Unallocated expense (income):
General and administrative expenses
Depreciation and amortization
Interest income and other net investment loss (gain)
Interest expense
Loss on early extinguishment of debt
Net gain on sales of land
Gains on sales of depreciable operating properties
Net Operating Income, as defined
$
$
258,415
—
—
258,415
5,193
14,318
277,926
$
$
90,471
254,281
559
49,721
12,623
(11,825)
(142,926)
$
107,166
151,249
5,774
7,589
164,612
3,223
12,780
180,615
$
60,581
245,886
(5,503)
66,040
5,312
(449)
(39,507)
(5,774)
(7,589)
93,803
1,970
1,538
97,311
29,890
8,395
6,062
(16,319)
7,311
(11,376)
(103,419)
70.9 %
(100.0)
(100.0)
57.0
61.1
12.0
53.9 %
49.3
3.4
(110.2)
(24.7)
137.6
2,533.6
261.8
$
530,830
$
512,975
$
17,855
3.5 %
70
The following tables summarize our Net Operating Income, as defined, for our total portfolio for the years ended December 31, 2018 and 2017.
Operating revenues:
Rental income
$
Tenant reimbursements
Other property income
Total
Property and related expenses:
Property expenses
Real estate taxes
Provision for bad debts
Ground leases
Total
Net Operating Income, as
defined
2018
2017
Year Ended December 31,
Same
Store
Develop-ment
Acquisitions
Disposi-tions
Total
Same
Store
Develop-ment
Acquisitions
Disposi-tions
Total
(in thousands)
(in thousands)
$
596,479
73,094
9,243
678,816
$ 31,426
1,230
11
32,667
$
6,458
1,378
210
8,046
$ 22,268
5,280
221
27,769
121,663
62,648
5,742
6,176
196,229
6,025
4,168
17
—
10,210
598
1,072
—
—
1,670
5,501
2,932
(74 )
—
8,359
656,631
80,982
9,685
747,298
133,787
70,820
5,685
6,176
216,468
$
$
577,084
69,659
7,221
653,964
$ 21,380
—
1,013
22,393
117,816
58,554
2,962
6,337
185,669
4,279
3,552
—
—
7,831
—
—
—
—
—
—
—
—
—
$
$ 35,432
6,900
312
42,644
7,876
4,343
307
—
12,526
633,896
76,559
8,546
719,001
129,971
66,449
3,269
6,337
206,026
$
482,587
$ 22,457
$
6,376
$ 19,410
$
530,830
$
468,295
$ 14,562
$
—
$ 30,118
$
512,975
Year Ended December 31, 2018 as compared to the Year Ended December 31, 2017
Same Store
Development
Acquisitions
Dispositions
Total
Dollar
Change
Percent Change
Dollar
Change
Percent Change
Dollar
Change
Percent
Change
Dollar
Change
Percent Change
Dollar
Change
Percent Change
($ in thousands)
Operating revenues:
Rental income
Tenant reimbursements
Other property income
Total
Property and related expenses:
Property expenses
Real estate taxes
Provision for bad debts
Ground leases
Total
Net Operating Income,
as defined
$ 19,395
3,435
2,022
24,852
3.4 % $ 10,046
1,230
4.9
(1,002 )
28.0
3.8
10,274
3,847
4,094
2,780
(161 )
10,560
3.3
7.0
93.9
(2.5 )
5.7
1,746
616
17
—
2,379
47.0 % $
100.0
(98.9 )
45.9
40.8
17.3
100.0
—
30.4
6,458
1,378
210
8,046
598
1,072
—
—
1,670
100.0 % $ (13,164 )
(1,620 )
(91 )
(14,875 )
100.0
100.0
100.0
(37.2 )% $ 22,735
4,423
(23.5 )
1,139
28,297
(29.2 )
(34.9 )
100.0
100.0
—
—
100.0
(2,375 )
(1,411 )
(381 )
—
(4,167 )
(30.2 )
(32.5 )
(124.1 )
—
(33.3 )
3,816
4,371
2,416
(161 )
10,442
3.6 %
5.8
13.3
3.9
2.9
6.6
73.9
(2.5 )
5.1
$ 14,292
3.1 % $
7,895
54.2 % $
6,376
100.0 % $ (10,708 )
(35.6 )% $ 17,855
3.5 %
71
Net Operating Income increased $17.9 million, or 3.5%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017 primarily resulting
from:
• An increase of $14.3 million attributable to the Same Store Properties primarily resulting from:
• An increase in rental income of $19.4 million primarily due to the following:
◦
◦
$20.2 million increase due primarily to new leases and renewals at higher overall average rental rates across all regions; partially offset by
$0.6 million decrease due to lower occupancy primarily resulting from lease expirations for one tenant in the Greater Seattle region and one
tenant in the San Diego region;
• An increase in tenant reimbursements of $3.4 million primarily due to:
◦
◦
◦
◦
$2.6 million increase due to higher recurring expenses related to security, parking, janitorial, contract services, insurance and repairs and
maintenance at certain properties;
$0.6 million increase due to $1.2 million of higher annual property taxes in 2018 primarily in the Greater Seattle region; offset by $0.6 million lower
supplemental taxes primarily due to two properties in the San Francisco Bay area;
$0.8 million increase due to new triple net tenants replacing base year tenants and higher occupancy primarily in the Greater Seattle region;
offset by
$0.6 million decrease due to higher abated tenant reimbursements as compared to the prior year in addition to decreased tenant reimbursements
related to base year adjustments;
• An increase in other property income of $2.0 million primarily due to higher early lease termination fees for three leases each in different regions, partially
offset by
• An increase in property and related expenses of $10.6 million primarily resulting from:
• An increase of $3.8 million in property expenses primarily resulting from:
◦
$4.5 million increase in certain recurring operating costs due to increased demand and higher rates related to security, parking, janitorial,
contract services and insurance, as well as higher repairs and maintenance and various other reimbursable expenses; offset by
◦
$0.6 million decrease in non-reimbursable expenses primarily due to non-recurring parking costs incurred in 2017;
• An increase of $4.1 million in real estate taxes primarily due to:
◦
◦
$2.4 million increase in supplemental taxes primarily due to a reduction in 2017 supplemental taxes at one property that was redeveloped in 2013;
$1.6 million from regular annual property tax increases in 2018;
• An increase of $2.8 million in provision for bad debts primarily due to a provision recorded for one tenant partially offset by a decrease in the
provision for another tenant due to the assignment of its lease to a credit tenant. During the year ended December 31, 2018, we recorded a $7.0
million increase in the provision for bad debts related to one tenant based on our discussions with this tenant and consistent with our accounting
policies. As of December 31, 2018, our lease with this tenant represented approximately 1% of our total annualized base rental revenues.
72
• An increase of $7.9 million attributable to the Development Properties;
• An increase of $6.4 million attributable to the Acquisition Properties; and
• A decrease of $10.7 million attributable to the Disposition Properties.
Other Expenses and Income
General and Administrative Expenses
General and administrative expenses increased by approximately $29.9 million, or 49.3%, for the year ended December 31, 2018 compared to the year ended
December 31, 2017 primarily due to the following:
• An increase of $12.1 million relating to accrued executive retirement benefits;
• An increase of $11.5 million due to higher stock compensation amortization as well as higher compensation and office expenses related to the growth of the
Company; and
• An increase of $6.5 million resulting from higher professional service costs primarily related to legal fees incurred in connection with a previously disclosed
litigation matter.
Depreciation and Amortization
Depreciation and amortization increased by approximately $8.4 million, or 3.4%, for the year ended December 31, 2018 compared to the year ended December 31,
2017, primarily due to the following:
• An increase of $6.6 million attributable to the Same Store Properties;
• An increase of $4.7 million attributable to the Acquisition Properties;
• An increase of $2.8 million attributable to the Development Properties; partially offset by
• A decrease of $5.7 million attributable to the Disposition Properties.
Interest Expense
The following table sets forth our gross interest expense, including debt discounts/premiums and deferred financing cost amortization and capitalized interest,
including capitalized debt discounts/premiums and deferred financing cost amortization for the years ended December 31, 2018 and 2017.
Year Ended December 31,
2018
2017
Dollar
Change
Percentage
Change
Gross interest expense
Capitalized interest and deferred financing costs
Interest expense
$
$
$
117,789
(68,068 )
49,721
$
($ in thousands)
$
112,577
(46,537 )
66,040
$
5,212
(21,531 )
(16,319 )
4.6 %
46.3
(24.7 )%
Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased $5.2 million, or 4.6%, for the year ended December 31, 2018
as compared to the year ended December 31, 2017, primarily due to an increase in the average outstanding debt balance for the year ended December 31, 2018.
Capitalized interest and deferred financing costs increased $21.5 million, or 46.3%, for the year ended December 31, 2018 compared to the year ended December 31,
2017, primarily attributable to an increase in the average development
73
asset balances qualifying for interest capitalization during 2018 as compared to 2017. During the years ended December 31, 2018 and 2017, we capitalized interest on in-
process development projects and future development pipeline projects with an average aggregate cost basis of approximately $1.6 billion and $1.0 billion,
respectively.
Loss on Early Extinguishment of Debt
In November 2018, we early redeemed the $250.0 million aggregate principal amount of our outstanding 6.625% unsecured senior notes that were scheduled to
mature on June 1, 2020. In connection with our early redemption, we incurred a loss on early extinguishment of debt of $12.6 million, which was comprised of a premium
paid to the note holders at the redemption date of $11.8 million and a write-off of the unamortized discount and deferred financing costs of $0.8 million.
In December 2017, we early redeemed the $325.0 million aggregate principal amount of our outstanding 4.800% unsecured senior notes that were scheduled to
mature on July 15, 2018. In connection with our early redemption, we incurred a loss on early extinguishment of debt of $5.3 million, which was comprised of a premium
paid to the note holders at the redemption date of $5.0 million and a write-off of the unamortized discount and deferred financing costs of $0.3 million.
Net income attributable to noncontrolling interests in consolidated property partnerships
Net income attributable to noncontrolling interests in consolidated property partnerships increased $1.5 million for the year ended December 31, 2018 compared to
the year ended December 31, 2017 due to the inclusion of interest expense in 2017 for a mortgage note secured by one of the properties held by the property
partnerships that was repaid in the fourth quarter of 2017. The amounts reported for the years ended December 31, 2018 and 2017 are comprised of the noncontrolling
interest’s share of net income for 100 First Member, LLC (“100 First LLC”) and 303 Second Street Member, LLC (“303 Second LLC”) and the noncontrolling interest’s
share of net income for Redwood LLC. See Note 11 “Noncontrolling Interests on the Company's Consolidated Financial Statements” to our consolidated financial
statements included in this report for additional information.
Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016
Management evaluated Net Operating Income for the year ended December 31, 2017 compared to the year ended December 31, 2016 by evaluating the
performance from the following property groups:
•
Same Store Properties – includes the results of all of the office properties that were owned and included in our stabilized portfolio for two comparable
reporting periods, i.e., owned and included in our stabilized portfolio as of January 1, 2016 and still owned and included in the stabilized portfolio as of
December 31, 2017;
•
Stabilized Development Properties – includes the results generated by the following:
◦ One office development project that was added to the stabilized portfolio in the first quarter of 2017;
◦ Two office development projects that were completed and stabilized in March 2016;
◦ Our residential project that was completed in June 2016; and
◦ One office development project that was added to the stabilized portfolio in the fourth quarter of 2016;
• Acquisition Properties – includes the results, from the dates of acquisition through the periods presented, for the four office and three retail buildings we
acquired during 2016; and
• Dispositions, and Other Properties – includes the results of the ten properties disposed of in the third quarter of 2017, the one property disposed of
during the first quarter of 2017, the six properties disposed of in 2016 and expenses for certain of our in-process, near-term and future development
projects.
74
The following table sets forth certain information regarding the property groups within our stabilized portfolio as of December 31, 2017:
Group
Same Store Properties
Stabilized Development Properties
Acquisition Properties
Total Stabilized Portfolio
# of Buildings
Rentable
Square Feet
88
6
7
101
12,182,805
1,079,333
458,459
13,720,597
The following table summarizes our Net Operating Income, as defined, for our total portfolio for the years ended December 31, 2017 and 2016.
Reconciliation of Net Income Available to Common Stockholders to Net Operating
Income, as defined:
Net Income Available to Common Stockholders
Preferred dividends
Original issuance costs of redeemed preferred stock
Net income attributable to Kilroy Realty Corporation
Net income attributable to noncontrolling common units of the Operating
Partnership
Net income attributable to noncontrolling interests in consolidated property
partnerships
Net income
Unallocated expense (income):
General and administrative expenses
Acquisition-related expenses
Depreciation and amortization
Interest income and other net investment gains
Interest expense
Loss on early extinguishment of debt
Net (gain) loss on sales of land
Gains on sales of depreciable operating properties
Net Operating Income, as defined
Year Ended December 31,
2017
2016
Dollar
Change
Percentage
Change
($ in thousands)
$
151,249
5,774
7,589
164,612
3,223
12,780
180,615
$
60,581
—
245,886
(5,503)
66,040
5,312
(449)
(39,507)
$
512,975
280,538 $
13,250
—
293,788
(129,289)
(7,476)
7,589
(129,176)
6,635
(3,412)
3,375
303,798 $
9,405
(123,183)
57,029
1,902
217,234
(1,764)
55,803
—
295
(164,302)
469,995 $
3,552
(1,902)
28,652
(3,739)
10,237
5,312
(744)
124,795
42,980
(46.1)%
(56.4)
100.0
(44.0)
(51.4)
278.7
(40.5)%
6.2
(100.0)
13.2
212.0
18.3
100.0
(252.2)
(76.0)
9.1 %
$
$
$
75
The following tables summarize our Net Operating Income, as defined, for our total portfolio for the years ended December 31, 2017 and 2016.
Same
Store
Stabilized
Develop-ment
2017
Acquisitions
(in thousands)
Year Ended December 31,
Dispositi-ons &
Other
Total
Same
Store
Stabilized
Develop-ment
2016
Acquisitions
(in thousands)
Dispositi-ons &
Other
Total
Operating revenues:
Rental income
$
Tenant reimbursements
Other property income
Total
Property and related expenses:
$
520,312
57,411
6,093
583,816
$ 72,411
10,027
345
82,783
29,358
7,687
821
37,866
$ 11,815
1,434
1,287
14,536
$
Property expenses
Real estate taxes
Provision for bad debts
Ground leases
Total
104,428
47,543
1,755
3,927
157,653
17,900
10,553
(101)
—
28,352
4,992
6,321
1,471
2,410
15,194
2,651
2,032
144
—
4,827
633,896
76,559
8,546
719,001
129,971
66,449
3,269
6,337
206,026
$
$
515,813
50,472
1,499
567,784
$ 36,737
7,363
93
44,193
$
4,250
922
53
5,225
$ 17,613
2,322
5,435
25,370
97,672
45,468
(124)
3,356
146,372
10,913
6,408
116
—
17,437
477
446
50
83
1,056
4,870
2,884
(42)
—
7,712
574,413
61,079
7,080
642,572
113,932
55,206
—
3,439
172,577
Net Operating Income, as
defined
$
426,163
$ 54,431
$
22,672
$
9,709
$
512,975
$
421,412
$ 26,756
$
4,169
$ 17,658
$
469,995
Year Ended December 31, 2017 as compared to the Year Ended December 31, 2016
Same Store
Stabilized Development
Acquisitions
Dispositions & Other
Total
Dollar
Change
Percent
Change
Dollar
Change
Percent
Change
Dollar
Change
Percent
Change
Dollar
Change
Percent Change
Dollar
Change
Percent
Change
($ in thousands)
Operating revenues:
Rental income
Tenant reimbursements
Other property income
Total
Property and related expenses:
Property expenses
Real estate taxes
Provision for bad debts
Ground leases
Total
Net Operating Income,
as defined
________________________
* Percentage not meaningful
$
4,499
6,939
4,594
16,032
0.9% $ 35,674
2,664
13.7
252
306.5
38,590
2.8
97.1 % $ 25,108
6,765
36.2
271.0
87.3
32,641
768 NM*
624.7
590.8% $
733.7
6,756
2,075
1,879
571
11,281
6.9
4.6
NM*
17.0
7.7
6,987
4,145
(217)
—
10,915
64.0
64.7
(187.1)
—
62.6
946.5
4,515
5,875 NM*
1,421 NM*
2,327 NM*
14,138 NM*
(5,798)
(888)
(4,148)
(10,834)
(2,219)
(852)
186
—
(2,885)
(32.9)% $ 59,483
15,480
(38.2)
1,466
76,429
(76.3)
(42.7)
(45.6)
(29.5)
442.9
—
(37.4)
16,039
11,243
3,269
2,898
33,449
10.4%
25.3
20.7
11.9
14.1
20.4
100.0
84.3
19.4
$
4,751
1.1% $ 27,675
103.4 % $ 18,503
443.8% $
(7,949)
(45.0)% $ 42,980
9.1%
Net Operating Income increased $43.0 million, or 9.1%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016 primarily resulting
from:
• An increase of $4.8 million attributable to the Same Store Properties primarily resulting from:
• An increase in rental income of $4.5 million primarily due to the following:
◦
$14.3 million increase due primarily to new leases and renewals at higher overall average rental rates in the San Francisco Bay Area, Greater Los
Angeles and Greater Seattle regions; partially offset by
◦
$9.8 million decrease due to lease expirations and early terminations primarily in the San Francisco Bay Area;
• An increase in tenant reimbursements of $6.9 million primarily due to:
76
◦
◦
◦
◦
$3.8 million increase due to higher recurring expenses related to utilities, security, parking, contract services, repairs and maintenance and
property taxes at certain properties;
$0.9 million increase due to higher reimbursable supplemental in 2017 at two properties related to supplemental property tax adjustments and
$1.6 million increase due to lower reimbursable supplemental taxes in 2016 as a result of a change in estimate at one property;
$1.1 million increase due to lower abated tenant reimbursements as compared to the prior year in addition to increased tenant reimbursements
from tenants with 2016 base years; partially offset by
$0.5 million decrease due to lower occupancy primarily for two properties in the Greater Seattle region that are 100% and 83% leased as of the
date of this filing;
• An increase in other property income of $4.6 million primarily due to early lease termination fees in the San Francisco Bay Area and San Diego regions, of
which $2.3 million was attributed to one lease; partially offset by
• An increase in property and related expenses of $11.3 million primarily resulting from:
• An increase of $6.8 million in property expenses primarily resulting from:
◦
◦
$5.1 million increase in certain recurring operating costs due to increased demand and higher rates related to utilities, security, parking and
contract services, as well as higher repairs and maintenance and various other reimbursable expenses;
$1.2 million increase in non-reimbursable expenses primarily due to $0.5 million of non-recurring legal expenses and a $0.4 million increase due to
non-recurring parking facility costs;
◦
$0.5 million increase in property management personnel costs;
• An increase of $2.1 million in real estate taxes primarily due to:
◦
◦
◦
$1.8 million from regular annual property tax increases in 2017;
$2.9 million of lower supplemental taxes at three properties in the San Francisco Bay Area region in 2016; partially offset by
$2.6 million reduction in 2017 supplemental taxes at one property that was redeveloped in 2013;
• An increase of $1.9 million in provision for bad debts primarily related to one tenant; and
• An increase of $0.6 million in ground rent primarily due to higher percentage ground rent for one of our ground leases in the Greater Seattle Area due
to higher operating revenues at the related property;
• An increase of $27.7 million attributable to the Stabilized Development Properties;
• An increase of $18.5 million attributable to the Acquisition Properties; and
• A decrease of $7.9 million attributable to the Dispositions & Other Properties primarily due to the following:
◦
◦
$5.0 million of other property income received in 2016 relating to a property damage settlement; and
$2.9 million of lower Net Operating Income primarily due dispositions that occurred in the third quarter of 2017.
77
Other Expenses and Income
General and Administrative Expenses
General and administrative expenses increased by approximately $3.6 million, or 6.2%, for the year ended December 31, 2017 compared to the year ended
December 31, 2016 primarily due to the following:
• An increase of approximately $2.3 million related to higher payroll costs and office expenses related to the growth of the company; and
• An increase of $1.3 million attributable to compensation expense related to the mark-to-market adjustment for the Company’s deferred compensation plan. The
compensation expense was offset by gains on the underlying marketable securities included in interest income and other net investment gains in the
consolidated statements of operations.
Depreciation and Amortization
Depreciation and amortization increased by approximately $28.7 million, or 13.2%, for the year ended December 31, 2017 compared to the year ended December 31,
2016, primarily due to the following:
• An increase of $3.9 million attributable to the Same Store Properties;
• An increase of $9.7 million attributable to the Stabilized Development Properties;
• An increase of $18.0 million attributable to the Acquisition Properties; partially offset by
• A decrease of $2.9 million attributable to the Dispositions & Other Properties.
Interest Expense
The following table sets forth our gross interest expense, including debt discounts/premiums and deferred financing cost amortization and capitalized interest,
including capitalized debt discounts/premiums and deferred financing cost amortization for the years ended December 31, 2017 and 2016.
Gross interest expense
Capitalized interest and deferred financing costs
Interest expense
Year Ended December 31,
2017
2016
Dollar
Change
Percentage
Change
$
$
$
112,577
(46,537)
66,040
$
($ in thousands)
105,263 $
(49,460)
55,803 $
7,314
2,923
10,237
6.9%
5.9
18.3%
Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased $7.3 million, or 6.9%, for the year ended December 31, 2017
as compared to the year ended December 31, 2016, primarily due to an increase in the average outstanding debt balance for the year ended December 31, 2017. Our
weighted average interest rate, including loan fee amortization, was 4.5% and 4.6% for the years ended December 31, 2017 and 2016, respectively.
Capitalized interest decreased $2.9 million, or 5.9%, for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily attributable to a
decrease in the average development asset balances qualifying for interest capitalization during 2017 as compared to 2016.
Loss on Early Extinguishment of Debt
In December 2017, we early redeemed the $325.0 million aggregate principal amount of our outstanding 4.800% unsecured senior notes that were scheduled to
mature on July 15, 2018. In connection with our early redemption, we incurred a loss on early extinguishment of debt of $5.3 million which was comprised of $5.0 million
representing the premium paid to the note holders at the redemption date $0.3 million for the write-off of unamortized discount and deferred financing costs.
Net income attributable to noncontrolling interests in consolidated property partnerships
78
Net income attributable to noncontrolling interests in consolidated property partnerships increased $9.4 million for the year ended December 31, 2017 compared to
the year ended December 31, 2016. The amount reported for the years ended December 31, 2017 and 2016 are comprised of the noncontrolling interest’s share of net
income for 100 First Member, LLC (“100 First LLC”) and 303 Second Street Member, LLC (“303 Second LLC”) for the period subsequent to the transaction closing
dates on August 30, 2016 and November 30, 2016, respectively (see Note 11 “Noncontrolling Interests on the Company's Consolidated Financial Statements” to our
consolidated financial statements included in this report for additional information), in addition to the noncontrolling interest’s share of net income for Redwood LLC.
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Liquidity and Capital Resources of the Company
In this “Liquidity and Capital Resources of the Company” section, the term the “Company” refers only to Kilroy Realty Corporation on an unconsolidated basis
and excludes the Operating Partnership and all other subsidiaries.
The Company’s business is operated primarily through the Operating Partnership. Distributions from the Operating Partnership are the Company’s primary source
of capital. The Company believes the Operating Partnership’s sources of working capital, specifically its cash flow from operations and borrowings available under its
unsecured revolving credit facility and funds from its capital recycling program, including strategic ventures, are adequate for it to make its distribution payments to
the Company and, in turn, for the Company to make its dividend payments to its common stockholders for the next twelve months. Cash flows from operating
activities generated by the Operating Partnership for the year ended December 31, 2018 were sufficient to cover the Company’s payment of cash dividends to its
stockholders. However, there can be no assurance that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to
meet its needs, including its ability to make distributions to the Company. The unavailability of capital could adversely affect the Operating Partnership’s ability to
make distributions to the Company, which would in turn, adversely affect the Company’s ability to pay cash dividends to its stockholders.
The Company is a well-known seasoned issuer and the Company and the Operating Partnership have an effective shelf registration statement that provides for
the public offering and sale from time to time by the Company of its preferred stock, common stock, depositary shares, warrants and guarantees of debt securities and
by the Operating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for
opportunities to raise capital, and, as circumstances warrant, the Company and the Operating Partnership may issue securities of all of these types in one or more
offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs.
When the Company receives proceeds from the sales of its preferred or common stock, it generally contributes the net proceeds from those sales to the Operating
Partnership in exchange for corresponding preferred or common partnership units of the Operating Partnership. The Operating Partnership may use these proceeds
and proceeds from the sale of its debt securities to repay debt, including borrowings under its unsecured revolving credit facility, to develop new or existing
properties, to make acquisitions of properties or portfolios of properties, or for general corporate purposes.
As the sole general partner with control of the Operating Partnership, the Company consolidates the Operating Partnership for financial reporting purposes, and
the Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities and the revenues and
expenses of the Company and the Operating Partnership are substantially the same on their respective financial statements. The section entitled “Liquidity and Capital
Resources of the Operating Partnership” should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a
consolidated basis and how the Company is operated as a whole.
Distribution Requirements
The Company is required to distribute 90% of its taxable income (subject to certain adjustments and excluding net capital gains) on an annual basis to maintain
qualification as a REIT for federal income tax purposes and is required to pay income tax at regular corporate rates to the extent it distributes less than 100% of its
taxable income (including capital gains). As a result of these distribution requirements, the Operating Partnership cannot rely on retained earnings to fund its on-going
operations to the same extent as other companies whose parent companies are not REITs. In addition, the Company may be required to use borrowings under the
Operating Partnership’s revolving credit facility, if necessary, to meet REIT distribution requirements and maintain its REIT status. The Company may also need to
continue to raise capital in the equity markets to fund the Operating Partnership’s working capital needs, as well as potential developments of new or existing
properties or acquisitions.
The Company intends to continue to make, but has not committed to make, regular quarterly cash distributions to common stockholders, and through the
Operating Partnership, common unitholders from the Operating Partnership’s cash flow from operating activities. All such distributions are at the discretion of the
Board of Directors. In 2018, the Company’s distributions exceeded 100% of its taxable income, resulting in a return of capital to its stockholders. As the Company
intends to maintain distributions at a level sufficient to meet the REIT distribution requirements and
80
minimize its obligation to pay income and excise taxes, it will continue to evaluate whether the current levels of distribution are sufficient to do so for 2019. In addition,
in the event the Company is unable to identify and complete the acquisition of suitable replacement properties to effect Section 1031 Exchanges or is unable to
successfully complete Section 1031 Exchanges to defer some or all of the taxable gains related to property dispositions, the Company may elect to distribute a special
dividend to its common stockholders and common unitholders in order to minimize or eliminate income taxes on such gains. The Company considers market factors
and its performance in addition to REIT requirements in determining its distribution levels. Amounts accumulated for distribution to stockholders are invested
primarily in interest-bearing accounts and short-term interest-bearing securities, which is consistent with the Company’s intention to maintain its qualification as a
REIT. Such investments may include, for example, obligations of the Government National Mortgage Association, other governmental agency securities, certificates of
deposit, and interest-bearing bank deposits.
On December 11, 2018, the Board of Directors declared a regular quarterly cash dividend of $0.455 per share of common stock. The regular quarterly cash dividend
is payable to stockholders of record on December 31, 2018 and a corresponding cash distribution of $0.455 per Operating Partnership units is payable to holders of the
Operating Partnership’s common limited partnership interests of record on December 31, 2018, including those owned by the Company. The total cash quarterly
dividends and distributions paid on January 15, 2019 were $46.8 million.
Debt Covenants
The covenants contained within certain of our unsecured debt obligations generally prohibit the Company from paying dividends during an event of default in
excess of an amount which results in distributions to us in an amount sufficient to permit us to pay dividends to our stockholders that we reasonably believe are
necessary to (a) maintain our qualification as a REIT for federal and state income tax purposes and (b) avoid the payment of federal or state income or excise tax.
81
Capitalization
As of December 31, 2018, our total debt as a percentage of total market capitalization was 31.4%, which was calculated based on the closing price per share of the
Company’s common stock of $62.88 on December 31, 2018 as shown in the following table:
Debt: (1)
Unsecured Line of Credit
Unsecured Term Loan Facility
Unsecured Senior Notes due 2023
Unsecured Senior Notes due 2024
Unsecured Senior Notes due 2025
Unsecured Senior Notes Series A & B due 2026
Unsecured Senior Notes due 2028
Unsecured Senior Notes due 2029
Unsecured Senior Notes Series A & B due 2027 & 2029
Secured debt
Total debt
Shares/Units at
December 31, 2018
Aggregate
Principal
Amount or
$ Value
Equivalent
($ in thousands)
% of Total
Market
Capitalization
$
45,000
150,000
300,000
425,000
400,000
250,000
400,000
400,000
250,000
335,811
2,955,811
0.5 %
1.6
3.2
4.5
4.3
2.6
4.3
4.3
2.6
3.5
31.4
Equity and Noncontrolling Interests in the Operating Partnership: (2)
Common limited partnership units outstanding (2)
Shares of common stock outstanding (3) (4)
Total Equity and Noncontrolling Interests in the Operating Partnership
2,025,287
100,746,988
127,350
6,334,971
6,462,321
9,418,132
1.3
67.3
68.6
100.0 %
Total Market Capitalization
________________________
(1) Represents gross aggregate principal amount due at maturity before the effect of the following at December 31, 2018: $17.4 million of unamortized deferred financing costs on the
unsecured term loan facility, unsecured senior notes and secured debt, $6.6 million of unamortized discounts for the unsecured senior notes and $0.8 million of unamortized premiums for
the secured debt.
$
(2) Includes common units of the Operating Partnership not owned by the Company; does not include noncontrolling interests in consolidated property partnerships.
(3) Value based on closing price per share of our common stock of $62.88 as of December 31, 2018.
(4) In August, the Company completed a public offering of 5,000,000 shares of common stock priced at $72.10 per share structured as a forward sale. Shares of common stock outstanding do
not include any amounts related to this public offering as the Company has not issued any shares of our common stock under the related forward sale agreements as of the date of this
report.
Liquidity and Capital Resources of the Operating Partnership
In this “Liquidity and Capital Resources of the Operating Partnership” section, the terms “we,” “our,” and “us” refer to the Operating Partnership or the Operating
Partnership and the Company together, as the context requires.
General
Our primary liquidity sources and uses are as follows:
Liquidity Sources
• Net cash flow from operations;
• Borrowings under the Operating Partnership’s unsecured revolving credit facility and term loan facility;
•
Proceeds from our capital recycling program, including the disposition of nonstrategic assets and the formation of strategic ventures;
82
•
•
Proceeds from additional secured or unsecured debt financings; and
Proceeds from public or private issuance of debt or equity securities.
Liquidity Uses
• Development and redevelopment costs;
• Operating property or undeveloped land acquisitions;
•
Property operating and corporate expenses;
• Capital expenditures, tenant improvement and leasing costs;
• Debt service and principal payments, including debt maturities;
• Distributions to common security holders;
• Repurchases and redemptions of outstanding common stock of the Company; and
• Outstanding debt repurchases, redemptions and repayments.
General Strategy
Our general strategy is to maintain a conservative balance sheet with a strong credit profile and to maintain a capital structure that allows for financial flexibility
and diversification of capital resources. We manage our capital structure to reflect a long-term investment approach and utilize multiple sources of capital to meet our
long-term capital requirements. We believe that our current projected liquidity requirements for the next twelve-month period, as set forth above under the caption “—
Liquidity Uses,” will be satisfied using a combination of the liquidity sources listed above, although there can be no assurance in this regard. We believe our
conservative leverage and staggered debt maturities provide us with financial flexibility and enhance our ability to obtain additional sources of liquidity if necessary,
and, therefore, we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may
finance, as necessary, with future public and private issuances of debt and equity securities.
2018 Capital and Financing Transactions
We continue to be active in the capital markets and our capital recycling program to finance our acquisition and development activity and our continued desire to
extend our debt maturities. This was primarily a result of the following activity:
Capital Recycling Program
• During the year ended December 31, 2018, we completed the sale of 11 office buildings to unaffiliated third parties for gross sales proceeds totaling
approximately $373.0 million.
Capital Markets / Debt Transactions
•
In addition to obtaining funding from our capital recycling program during 2018, we successfully completed the following financing and capital raising
activities to fund our continued growth. We continued to strengthen our balance sheet and lower our overall cost of capital.
• Borrowed the full $150.0 million borrowing capacity of our unsecured term loan facility;
• Completed the previously existing at-the-market stock offering program (the “2014 At-The-Market Program”), and commenced a new at-the-market
stock offering program (the “2018 At-The-Market Program”) under which we may currently offer and sell shares of our common stock with an
aggregate gross sales price of up to $500.0 million. During 2018, a total of 1,817,195 shares of common stock
83
were issued under both programs for aggregate net proceeds of $132.1 million. Under the 2018 At-The-Market-Program, we may, at our discretion,
enter into forward equity sale agreements;
•
•
•
Issued $50.0 million of 8-year 4.30% unsecured senior notes and $200.0 million of 8-year 4.35% unsecured senior notes maturing in July 2026 and
October 2026, respectively, in connection with a private placement;
Entered into forward equity sale agreements in connection with an underwritten public offering of 5,000,000 common shares at an initial gross
offering price of $360.5 million, or $72.10 per share. The full amount of this offering remains available for future settlement as of the date of this filing;
Issued $400.0 million aggregate principal amount of 10-year, 4.750% senior unsecured notes maturing in December 2028 in an underwritten public
offering; and
• Completed the early redemption of all $250.0 million of the Company’s 6.625% unsecured senior notes due June 2020, resulting in a $12.6 million loss
on early extinguishment of debt.
84
Liquidity Sources
Unsecured Revolving Credit Facility and Term Loan Facility
The following table summarizes the balance and terms of our unsecured revolving credit facility as of December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
Outstanding borrowings
Remaining borrowing capacity
Total borrowing capacity (1)
Interest rate (2)
Facility fee-annual rate (3)
Maturity date
$
$
(in thousands)
$
45,000
705,000
750,000
$
3.48%
0.200%
July 2022
—
750,000
750,000
2.56%
_______________
(1) We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional $600.0 million under an accordion feature under
the terms of the unsecured revolving credit facility and unsecured term loan facility.
(2) Our unsecured revolving credit facility interest rate was calculated based on the contractual rate of LIBOR plus 1.000% as of December 31, 2018 and 2017, respectively.
(3) Our facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, we incurred debt origination and legal costs. As of
December 31, 2018 and 2017, $4.7 million and $6.0 million of unamortized deferred financing costs, respectively, which are included in prepaid expenses and other assets, net on our
consolidated balance sheets, remained to be amortized through the maturity date of our unsecured revolving credit facility.
We intend to borrow under the unsecured revolving credit facility as necessary for general corporate purposes, to finance development and redevelopment
expenditures, to fund potential acquisitions and to potentially repay long-term debt.
In the first quarter of 2018, we borrowed the full $150.0 million borrowing capacity of our unsecured term loan facility. In connection with the funding of the
outstanding borrowings, we transferred $30.0 million of outstanding borrowings under the unsecured revolving credit facility to the balance of our unsecured term
loan facility. As a result, only $120.0 million of cash proceeds were received from the funding of the unsecured term loan facility. The following table summarizes the
balance and terms of our unsecured term loan facility as of December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
Outstanding borrowings
Remaining borrowing capacity
Total borrowing capacity (1)
$
$
(in thousands)
$
150,000
—
150,000
$
—
150,000
150,000
Interest rate (2)
Undrawn facility fee-annual rate (3)
Maturity date
________________________
(1) As of December 31, 2018 and 2017, $0.9 million and $1.2 million of unamortized deferred financing costs, respectively, remained to be amortized through the maturity date of our
July 2022
3.49%
0.200%
2.66%
unsecured term loan facility.
(2) Our unsecured term loan facility interest rate was calculated based on the contractual rate of LIBOR plus 1.100% as of December 31, 2018 and 2017.
(3) Prior to borrowing the full capacity of our unsecured term loan facility, the undrawn facility fee was calculated based on any unused borrowing capacity and was paid on a quarterly basis.
Capital Recycling Program
In connection with our capital recycling strategy, through December 31, 2018, we completed the sale of 11 properties to unaffiliated third parties for gross sales
proceeds totaling approximately $373.0 million. During 2017, we completed the sale of 11 office properties and one undeveloped land parcel located in San Diego,
California to unaffiliated third
85
parties for total gross sales proceeds of $186.6 million. See “—Factors that May Influence Future Operations” and Note 4 “Dispositions” to our consolidated financial
statements included in this report for additional information.
We currently anticipate that in 2019 we could raise additional capital through our dispositions program ranging from approximately $150 million to $350 million.
However, any potential future disposition transactions will depend on market conditions and other factors including but not limited to our capital needs and our ability
to defer some or all of the taxable gains on the sales. In addition, we cannot assure you that we will dispose of any additional properties or that we will be able to
identify and complete the acquisition of suitable replacement properties to effect Section 1031 Exchanges to defer some or all of the taxable capital gains related to our
capital recycling program.
Forward Equity Offering
On August 8, 2018, the Company entered into forward equity sale agreements with certain financial institutions acting as forward purchasers in connection with
an offering of 5,000,000 shares of common stock at an initial gross offering price of $360.5 million, or $72.10 per share, before underwriting discounts, commissions and
offering expenses. The forward purchasers borrowed and sold an aggregate of 5,000,000 shares in the offering. The Company did not receive any proceeds from the
sale of its shares of common stock by the forward purchasers at the time of the offering. The Company currently expects to fully physically settle the forward sale
agreements and receive cash proceeds upon one or more settlement dates, at the Company’s discretion, prior to the final settlement date under the forward sale
agreements of August 1, 2019. The forward sale price that we expect to receive upon physical settlement of the forward equity sale agreements, which was initially
$71.68 per share, will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers’ stock
borrowing costs and (iii) the Company’s scheduled dividends during the term of the forward equity sale agreements. The full amount of this offering remains available
for future settlement as of the date of this report.
At-The-Market Stock Offering Program
During the year ended December 31, 2018, the Company completed the 2014 At-The-Market Program and in June 2018 commenced the 2018 At-The-Market
Program under which we may offer and sell shares of our common stock with an aggregate gross sales price of up to $500.0 million. Under the 2018 At-The-Market-
Program, the Company may, at its discretion, enter into forward equity sale agreements (see “Note 13. Stockholders’ Equity of the Company” to our consolidated
financial statements included in this report for additional information). During the year ended December 31, 2018, under the 2014 At-The-Market Program, we sold
1,369,729 shares of common stock and completed the program. Since commencement of the 2018 At-The-Market Program through December 31, 2018, we have sold
447,466 shares of common stock, none of which were sold under forward equity sale agreements. Approximately $466.2 million remains available to be sold under this
program.
The following table sets forth information regarding sales of our common stock under our at-the-market offering programs for the years ended December 31, 2018
and 2017:
Shares of common stock sold during the year
Weighted average price per share of common stock
Aggregate gross proceeds
Aggregate net proceeds after selling commissions
Year Ended December 31,
2018
2017
(in millions, except share and per share data)
$
$
$
1,817,195
73.64
133.8
132.1
$
$
$
235,077
75.40
17.7
17.5
The proceeds from sales were used to fund development expenditures, acquisitions, and general corporate purposes, including repayment of borrowings under
the unsecured revolving credit facility. Actual future sales will depend upon a variety of factors, including, but not limited to market conditions, the trading price of the
Company’s common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under this program.
86
Shelf Registration Statement
As discussed above under “—Liquidity and Capital Resources of the Company,” the Company is a well-known seasoned issuer and the Company and the
Operating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred
stock, common stock, depository shares and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts.
The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and the Operating
Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among
other things, market conditions, available pricing and capital needs. When the Company receives proceeds from the sales of its preferred or common stock, it generally
contributes the net proceeds from those sales to the Operating Partnership in exchange for corresponding preferred or common partnership units of the Operating
Partnership. The Operating Partnership may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under its
unsecured revolving credit facility, to develop new or existing properties, to make acquisitions of properties or portfolios of properties, or for general corporate
purposes.
Unsecured Senior Notes - Private Placement
In May 2018, the Operating Partnership entered into a purchase agreement in a private placement (the “2018 Note Purchase Agreement”) in connection with the
issuance and sale of $50.0 million principal amount of the Operating Partnership’s 4.30% Senior Notes, Series A, due July 18, 2026 (the “Series A Notes due 2026”), and
$200.0 million principal amount of the Operating Partnership’s 4.35% Senior Notes, Series B, due October 18, 2026 (the “Series B Notes due 2026” and, together with
the Series A Notes due 2026, the “Series A and B Notes due 2026”). The Company drew the full amount of the Series A Notes due 2026 on July 18, 2018. On October
22, 2018, the Company drew the full amount of the Series B Notes due 2026. As of December 31, 2018, there was $50.0 million and $200.0 million issued and outstanding
aggregate principal amount of Series A and B Notes due 2026, respectively.
Unsecured Senior Notes - Registered Offerings
In November 2018, the Operating Partnership engaged in an underwritten public offering in connection with the issuance and sale of $400.0 million aggregate
principal amount of 4.750% senior notes due 2028. The notes will pay interest semi-annually at a rate of 4.750% per annum on June 15 and December 15 each year,
commencing on June 15, 2019, and mature on December 15, 2028. The Operating Partnership intends to allocate an amount equal to the net proceeds from the offering
to one or more Eligible Green Projects (as defined in the prospectus supplement related to the offering). Pending the allocation of an amount equal to the net proceeds
from the offering to Eligible Green Projects, a portion of the net proceeds were used to early redeem the $250.0 million aggregate principal amount of our outstanding
6.625% unsecured senior notes that were scheduled to mature on June 1, 2020.
87
Unsecured and Secured Debt
The aggregate principal amount of the unsecured and secured debt of the Operating Partnership outstanding as of December 31, 2018 was as follows:
Unsecured Line of Credit
Unsecured Term Loan Facility
Unsecured Senior Notes due 2023
Unsecured Senior Notes due 2024
Unsecured Senior Notes due 2025
Unsecured Senior Notes Series A & B due 2026
Unsecured Senior Notes due 2028
Unsecured Senior Notes due 2029
Unsecured Senior Notes Series A & B due 2027 & 2029
Secured Debt
Total Unsecured and Secured Debt
Less: Unamortized Net Discounts and Deferred Financing Costs (1)
Total Debt, Net
Aggregate Principal
Amount Outstanding (1)
(in thousands)
45,000
150,000
300,000
425,000
400,000
250,000
400,000
400,000
250,000
335,811
2,955,811
(23,210 )
2,932,601
$
$
________________________
(1) Includes $17.4 million of unamortized deferred financing costs on the unsecured term loan facility, unsecured senior notes, and secured debt, $6.6 million of unamortized discounts for the
unsecured senior notes and $0.8 million of unamortized premiums for the secured debt. Excludes unamortized deferred financing costs on the unsecured revolving credit facility.
Debt Composition
The composition of the Operating Partnership’s aggregate debt balances between secured and unsecured and fixed-rate and variable-rate debt as of December 31,
2018 and 2017 was as follows:
Percentage of Total Debt (1)
Weighted Average Interest Rate(1)
December 31, 2018
December 31, 2017
December 31, 2018
December 31, 2017
Secured vs. unsecured:
Unsecured (2)
Secured
Variable-rate vs. fixed-rate:
Variable-rate (2)
Fixed-rate (3)
88.6%
11.4%
6.6%
93.4%
85.6%
14.4%
—%
100.0%
Stated rate (3)
GAAP effective rate (4)
GAAP effective rate including debt issuance costs
________________________
(1) As of the end of the period presented.
(2) As of December 31, 2017, there were no outstanding balances on both the unsecured revolving credit facility and the unsecured term loan facility.
(3) Excludes the impact of the amortization of any debt discounts/premiums and deferred financing costs
(4) Includes the impact of the amortization of any debt discounts/premiums, excluding deferred financing costs.
88
4.0%
4.4%
3.5%
4.1%
4.1%
4.0%
4.2%
4.2%
4.4%
—%
4.2%
4.2%
4.2%
4.4%
Liquidity Uses
Contractual Obligations
The following table provides information with respect to our contractual obligations as of December 31, 2018. The table: (i) indicates the maturities and scheduled
principal repayments of our secured and unsecured debt outstanding as of December 31, 2018; (ii) indicates the scheduled interest payments of our fixed-rate debt as
of December 31, 2018; (iii) provides information about the minimum commitments due in connection with our ground lease obligations and other lease and contractual
commitments; and (iv) provides estimated development commitments as of December 31, 2018. Note that the table does not reflect our available debt maturity
extension options and reflects gross aggregate principal amounts before the effect of unamortized discounts/premiums. We did not have any variable-rate debt
outstanding as of December 31, 2018.
Payment Due by Period
Less than
1 Year
(2019)
2-3 Years
(2020-2021)
4-5 Years
(2022-2023)
More than
5 Years
(After 2023)
Total
Principal payments: secured debt (1)
Principal payments: unsecured debt (2)
Interest payments: fixed-rate debt (3)
Interest payments: variable-rate debt (4)
Interest payments: unsecured revolving credit facility (5)
Ground lease obligations (6)
Lease and other contractual commitments (7)
Development commitments (8)
$
$
$
$
$
76,309
—
109,479
5,235
1,566
5,154
168,000
412,000
777,743
10,479
—
217,461
10,470
3,132
10,308
9,000
371,000
631,850
(in thousands)
11,329
495,000
205,682
3,083
922
10,308
100
—
726,424
237,694
2,125,000
323,736
—
—
233,619
—
—
2,920,049
335,811
2,620,000
856,358
18,788
5,620
259,389
177,100
783,000
5,056,066
Total
___________
(1) Represents gross aggregate principal amount before the effect of the unamortized premium and deferred financing costs of approximately $0.8 million and $1.0 million as of December
$
$
$
$
$
31, 2018.
(2) Represents gross aggregate principal amount before the effect of the unamortized discount and deferred financing costs of approximately $6.6 million and $16.3 million as of December
31, 2018.
(3) As of December 31, 2018, 93.4% of our debt was contractually fixed. The information in the table above reflects our projected interest rate obligations for these fixed-rate payments
based on the contractual interest rates on an accrual basis and scheduled maturity dates.
(4) As of December 31, 2018, 5.1% of our debt bore interest at variable rates which was incurred under the unsecured term loan facility. The variable interest rate payments are based on the
contractual rate of LIBOR plus 1.100% as of December 31, 2018. The information in the table above reflects our projected interest rate obligations for these variable-rate payments
based on the outstanding principal balance as of December 31, 2018, the scheduled interest payment dates and the contractual maturity date.
(5) As of December 31, 2018, 1.5% of our debt bore interest at variable rates which was incurred under the unsecured revolving credit facility. The variable interest rate payments are based
the contractual rate of LIBOR plus 1.000% as of December 31, 2018. The information in the table above reflects our projected interest rate obligations for these variable-rate payments
based on the outstanding principal balances as of December 31, 2018, the scheduled interest payment dates and the contractual maturity date.
(6) Reflects minimum lease payments through the contractual lease expiration date before the impact of extension options. See Note 18 “ Commitments and Contingencies” to our
consolidated financial statements included in this report for further information.
(7) Amounts represent cash commitments under signed leases and contracts for operating properties, excluding tenant-funded tenant improvements, and for other contractual commitments.
The timing of these expenditures may fluctuate.
(8) Amounts represent commitments under signed leases for pre-leased development projects and contractual commitments for projects in the tenant improvement phase and under
construction as of December 31, 2018. The timing of these expenditures may fluctuate based on the ultimate progress of construction. We may start additional construction in 2019 (see
“ —Development” for additional information).
Other Liquidity Uses
Development
As of December 31, 2018, we had three development projects under construction. These projects have a total estimated investment of approximately $1.6 billion,
of which we have incurred approximately $798.8 million and committed an additional $653.0 million as of December 31, 2018. In addition, as of December 31, 2018, we
had two
89
development projects in the tenant improvement phase. These projects have a total estimated investment of approximately $855.0 million of which we have incurred
approximately $710.0 million, net of retention, and committed an additional $129.0 million as of December 31, 2018. Including the information in the table above we
currently believe we may spend between $500.0 million to $600.0 million on development projects throughout 2019. Ultimate timing of these expenditures may fluctuate
given construction progress and leasing status of the projects. We expect that any material additional development activities will be funded with borrowings under
the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program, or
strategic venture opportunities.
Debt Maturities
We believe our conservative leverage and staggered debt maturities provide us with financial flexibility and enhance our ability to obtain additional sources of
liquidity if necessary, and, therefore, we believe we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition
opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities. However, we can provide no assurance that
we will have access to the public or private debt or equity markets in the future on favorable terms or at all. In February 2019, we repaid, at par, a secured mortgage
note payable with a balance of $74.5 million at December 31, 2018 that was due to mature in June 2019. Our next debt maturities occur in July 2022.
Potential Future Acquisitions
During the year ended December 31, 2018, we acquired four office buildings and a 39-acre development site for a total of $565.2 million in cash. During 2017, we
acquired a 1.2 acre development site in the Little Italy neighborhood of San Diego, California for $19.4 million in cash. These transactions were funded through various
capital raising activities and liquidity as discussed in “—Liquidity Sources”
As discussed in the section “—Factors That May Influence Future Results of Operations - Acquisitions,” we continue to evaluate strategic opportunities and
remain a disciplined buyer of development and redevelopment opportunities as well as value-add operating properties, dependent on market conditions and business
cycles, among other factors. We continue to focus on growth opportunities in West Coast markets populated by knowledge and creative based tenants in a variety of
industries, including technology, media, healthcare, life sciences, entertainment and professional services. Any material acquisitions will be funded with borrowings
under the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program,
the formation of strategic ventures or through the assumption of existing debt. We cannot provide assurance that we will enter into any agreements to acquire
properties, or undeveloped land, or that the potential acquisitions contemplated by any agreements we may enter into in the future will be completed.
Share Repurchases
On February 23, 2016, the Company’s Board of Directors approved a 4,000,000 share increase to the Company’s existing share repurchase program bringing the
total current repurchase authorization to 4,988,025 shares. As of December 31, 2018, 4,935,826 shares remain eligible for repurchase under the Company’s share
repurchase program. Under this program, repurchases may be made in open market transactions at prevailing prices or through privately negotiated transactions. We
may elect to repurchase shares of our common stock under this program in the future depending upon various factors, including market conditions, the trading price
of our common stock and our other uses of capital. This program does not have a termination date, and repurchases may be discontinued at any time. We intend to
fund repurchases, if any, primarily with the proceeds from property dispositions.
Potential Future Leasing Costs and Capital Improvements
The amounts we incur for tenant improvements and leasing costs depend on leasing activity in each period. Tenant improvements and leasing costs generally
fluctuate in any given period depending on factors such as the type and condition of the property, the term of the lease, the type of the lease, the involvement of
external leasing agents and overall market conditions. Capital expenditures may fluctuate in any given period subject to the nature, extent and timing of improvements
required to maintain our properties.
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For properties within our stabilized portfolio, excluding our development properties, we believe we could spend approximately $15.0 million to $20.0 million in
capital improvements, tenant improvements and leasing costs in 2019, in addition to the lease and contractual commitments included in our contractual obligations
table above. The amount we ultimately spend will depend on leasing activity during 2019.
The following table sets forth our historical actual capital expenditures, and tenant improvements and leasing costs for deals commenced, excluding tenant-
funded tenant improvements, for renewed and re-tenanted space within our stabilized portfolio for each of the years ended December 31, 2018, 2017 and 2016 on a per
square foot basis.
Office Properties:(1)
Capital Expenditures:
Capital expenditures per square foot
Tenant Improvement and Leasing Costs (2)
Replacement tenant square feet (3)
Tenant improvements per square foot commenced
Leasing commissions per square foot commenced
Total per square foot
Renewal tenant square feet
Tenant improvements per square foot commenced
Leasing commissions per square foot commenced
Total per square foot
Total per square foot per year
$
$
$
$
$
$
$
$
Average remaining lease term (in years)
________________________
(1) Excludes development properties and includes 100% of consolidated property partnerships.
(2) Includes tenants with lease terms of 12 months or longer. Excludes leases for month-to-month and first generation tenants.
(3) Excludes leases for which the space was vacant for longer than one year, or vacant when the property was acquired by the Company.
Year Ended December 31,
2018
2017
2016
2.00
$
1.18
$
1.58
717,427
41.87
14.77
56.64
1,161,596
26.64
14.55
41.19
7.24
6.5
$
$
$
$
$
$
$
825,653
55.10
16.36
71.46
944,865
21.66
6.80
28.46
8.09
6.0
$
$
$
$
$
$
$
583,461
40.98
14.30
55.28
476,011
10.66
7.90
18.56
7.05
5.5
Capital expenditures per square foot increased in 2018 as compared to 2017 due to an increase in general building improvements during 2018 primarily in the
Greater Los Angeles, San Diego and Greater Seattle markets, driven by tenant-related, market-ready and repositioning work. We currently anticipate capital
expenditures for 2019 to be more consistent with 2016 levels. Replacement tenant improvements and leasing commissions decreased in 2018 as compared to 2017
primarily due to the number of large leases commenced and related higher replacement costs in 2017. Renewal tenant improvements and leasing commissions per
square foot increased in 2018 as compared to 2017 primarily due to the number of large leases renewed in the San Francisco Bay Area and Greater Seattle markets, as
well as higher overall rental rates on leases signed in 2018. We currently anticipate tenant improvement and leasing commissions for 2019 to be slightly higher than
2018 levels due to the leases executed in 2018, including early renewals of 2019 lease expirations; however, ultimate costs incurred will depend upon market conditions
in each of our submarkets and actual leasing activity.
Distribution Requirements
For a discussion of our dividend and distribution requirements, see “Liquidity and Capital Resources of the Company —Distribution Requirements.”
Factors That May Influence Future Sources of Capital and Liquidity of the Company and the Operating Partnership
We continue to evaluate sources of financing for our business activities, including borrowings under the unsecured revolving credit facility, issuance of public
and private equity securities, unsecured debt and fixed-rate secured mortgage financing, proceeds from the disposition of selective assets through our capital
recycling program, and the formation of strategic ventures. However, our ability to obtain new financing or refinance existing borrowings on favorable terms could be
impacted by various factors, including the state of the macro economy, the state of the credit and equity
91
markets, significant tenant defaults, a decline in the demand for office properties, a decrease in market rental rates or market values of real estate assets in our
submarkets, and the amount of our future borrowings. These events could result in the following:
• Decreases in our cash flows from operations, which could create further dependence on the unsecured revolving credit facility;
• An increase in the proportion of variable-rate debt, which could increase our sensitivity to interest rate fluctuations in the future; and
• A decrease in the value of our properties, which could have an adverse effect on the Operating Partnership’s ability to incur additional debt, refinance
existing debt at competitive rates, or comply with its existing debt obligations.
In addition to the factors noted above, the Operating Partnership’s credit ratings are subject to ongoing evaluation by credit rating agencies and may be changed
or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. In the event that the Operating Partnership’s credit ratings are downgraded,
we may incur higher borrowing costs and may experience difficulty in obtaining additional financing or refinancing existing indebtedness.
Debt Covenants
The unsecured revolving credit facility, unsecured term loan facility, unsecured term loan, unsecured senior notes and certain other secured debt arrangements
contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Key existing financial covenants and their covenant levels
include:
Unsecured Credit and Term Loan Facility and Private Placement Notes (as defined in the applicable Credit
Agreements):
Total debt to total asset value
Fixed charge coverage ratio
Unsecured debt ratio
Unencumbered asset pool debt service coverage
Unsecured Senior Notes due 2023, 2024, 2025, 2028 and 2029 (as defined in the applicable Indentures):
Total debt to total asset value
Interest coverage
Secured debt to total asset value
Unencumbered asset pool value to unsecured debt
Covenant
less than 60%
greater than 1.5x
greater than 1.67x
greater than 1.75x
less than 60%
greater than 1.5x
less than 40%
greater than 150%
Actual Performance
as of December 31, 2018
28%
3.4x
3.06x
4.43x
34%
9.6x
4%
299%
The Operating Partnership was in compliance with all of its debt covenants as of December 31, 2018. Our current expectation is that the Operating Partnership will
continue to meet the requirements of its debt covenants in both the short and long term. However, in the event of an economic slowdown or continued volatility in the
credit markets, there is no certainty that the Operating Partnership will be able to continue to satisfy all the covenant requirements.
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Consolidated Historical Cash Flow Summary
The following summary discussion of our consolidated historical cash flow is based on the consolidated statements of cash flows in Item 15. “Exhibits and
Financial Statement Schedules” and is not meant to be an all-inclusive discussion of the changes in our cash flow for the periods presented below. Changes in our
cash flow include changes in cash and cash equivalents and restricted cash. Our historical cash flow activity for the year ended December 31, 2018 as compared to the
year ended December 31, 2017 is as follows:
Year Ended December 31,
2018
2017
Dollar
Change
Percentage
Change
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Operating Activities
$
$
$
410,043
(808,915 )
503,108
104,236
$
($ in thousands)
$
347,012
(359,102 )
(171,241 )
(183,331 ) $
63,031
(449,813 )
674,349
287,567
18.2 %
125.3 %
393.8 %
156.9 %
Our cash flows from operating activities depends on numerous factors including the occupancy level of our portfolio, the rental rates achieved on our leases, the
collectability of rent and recoveries from our tenants, the level of operating expenses, the impact of property acquisitions, completed development projects and related
financing activities, and other general and administrative costs. Our net cash provided by operating activities increased by $63.0 million, or 18.2%, for the year ended
December 31, 2018 compared to the year ended December 31, 2017 primarily as a result of net changes in other assets and liabilities related to the timing of
expenditures.
Investing Activities
Our cash flows from investing activities is generally used to fund development and operating property acquisitions, expenditures for development projects, and
recurring and nonrecurring capital expenditures for our operating properties, net of proceeds received from dispositions of real estate assets. Our net cash used in
investing activities increased by $449.8 million, or 125.3%, for the year ended December 31, 2018 compared to the year ended December 31, 2017, primarily due to
development and operating property acquisitions totaling $568.6 million for the year ended December 31, 2018 compared to $19.8 million for the year ended
December 31, 2017, as well as an increase in spending on development projects and operating property leasing and capital expenditures during the year ended
December 31, 2018, partially offset by $181.8 million of higher net proceeds received from dispositions during the year ended December 31, 2018.
Financing Activities
Our cash flows from financing activities is principally impacted by our capital raising activities, net of dividends and distributions paid to common and preferred
security holders. During the year ended December 31, 2018 we had net cash provided by financing activities of $503.1 million compared to net cash used in financing
activities during the year ended December 31, 2017 of $171.2 million, primarily due to higher borrowings and issuances of unsecured debt during the year ended
December 31, 2018, as well as $200.0 million of cash paid to redeem the Company’s Series G Preferred Stock and Series H Preferred stock and $184.3 million of special
dividends paid during the year ended December 31, 2017.
Off-Balance Sheet Arrangements
As of December 31, 2018 and as of the date this report was filed, we did not have any off-balance sheet transactions, arrangements, or obligations, including
contingent obligations.
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Non-GAAP Supplemental Financial Measure: Funds From Operations
We calculate FFO in accordance with the White Paper on FFO approved by the Board of Governors of NAREIT. The White Paper defines FFO as net income or
loss calculated in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains and losses from sales of depreciable real estate and impairment
write-downs associated with depreciable real estate, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustment for unconsolidated partnerships and joint ventures. Our calculation of FFO includes the amortization of
deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets. We also add back net income
attributable to noncontrolling common units of the Operating Partnership because we report FFO attributable to common stockholders and common unitholders.
We believe that FFO is a useful supplemental measure of our operating performance. The exclusion from FFO of gains and losses from the sale of operating real
estate assets allows investors and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those
operating results between periods. Also, because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons
of operating performance to other REITs. However, other REITs may use different methodologies to calculate FFO, and accordingly, our FFO may not be comparable
to all other REITs.
Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably
over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of
operating results for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate
assets, we believe that FFO along with the required GAAP presentations provides a more complete measurement of our performance relative to our competitors and a
more appropriate basis on which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide.
However, FFO should not be viewed as an alternative measure of our operating performance because it does not reflect either depreciation and amortization costs
or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs and
could materially impact our results from operations.
The following table presents our FFO for the years ended 2018, 2017, 2016, 2015 and 2014:
Net income available to common stockholders
Adjustments:
Net income attributable to noncontrolling common units of the Operating
Partnership
Net income attributable to noncontrolling interests in consolidated property
partnerships
Depreciation and amortization of real estate assets
Gains on sales of depreciable real estate
Funds From Operations attributable to noncontrolling interests in consolidated
property partnerships
Funds From Operations (1) (2)
Year ended December 31,
2018
2017
2016
2015
2014
$
258,415
$
151,249
$
280,538
$
220,831
$
166,969
(in thousands)
5,193
3,223
6,635
4,339
3,589
14,318
249,882
(142,926)
12,780
241,862
(39,507)
3,375
213,156
(164,302)
184
201,480
(109,950)
—
202,108
(121,922)
(24,391)
(22,820)
(5,660)
(272)
—
$
360,491
$
346,787
$
333,742
$
316,612
$
250,744
_______________________
(1) Reported amounts are attributable to common stockholders, common unitholders and restricted stock unitholders.
(2) FFO available to common stockholders and unitholders includes amortization of deferred revenue related to tenant-funded tenant improvements of $18.4 million, $16.8 million, $13.2
million, $13.3 million and $11.0 million for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
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The following table presents our weighted average shares of common stock and common units outstanding for the years ended 2018, 2017, 2016, 2015 and 2014:
Weighted average shares of common stock outstanding
Weighted average common units outstanding
Effect of participating securities – nonvested shares and restricted stock units
Total basic weighted average shares / units outstanding
Effect of dilutive securities – Exchangeable Notes, shares issuable under
executed forward equity sale agreements, stock options and contingently
issuable shares
Total diluted weighted average shares / units outstanding
Inflation
Year Ended December 31,
2018
2017
99,972,359
2,052,917
1,142,053
103,167,329
98,113,561
2,133,006
1,196,044
101,442,611
2016
92,342,483
2,429,205
1,139,669
95,911,357
2015
89,854,096
1,791,482
1,170,571
92,816,149
2014
83,090,235
1,804,263
1,228,807
86,123,305
510,006
103,677,335
613,770
102,056,381
680,551
96,591,908
541,679
93,357,828
1,877,485
88,000,790
The majority of the Company’s leases require tenants to pay for recoveries and escalation charges based upon the tenant’s proportionate share of, and/or
increases in, real estate taxes and certain operating costs, which reduce the Company’s exposure to increases in operating costs resulting from inflation.
New Accounting Pronouncements
For a discussion of new accounting pronouncements see Note 2 “Basis of Presentation and Significant Accounting Policies” to our consolidated financial
statements included in this report.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk we face is interest rate risk. We seek to mitigate this risk by following established risk management policies and procedures. These
policies include maintaining prudent amounts of debt, including a greater amount of fixed-rate debt as compared to variable-rate debt in our portfolio, and may include
the periodic use of derivative instruments. As of December 31, 2018 and 2017, we did not have any interest-rate sensitive derivative assets or liabilities. Information
about our changes in interest rate risk exposures from December 31, 2017 to December 31, 2018 is incorporated herein by reference from “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the Operating Partnership.”
Interest Rate Risk
As of December 31, 2018, 6.6% of our total outstanding debt of $3.0 billion (before the effects of debt discounts, premiums and deferred financing costs) was
subject to variable interest rates. The remaining 93.4% bore interest at fixed rates. All of our interest rate sensitive financial instruments are held for purposes other
than trading purposes. In general, interest rate fluctuations applied to our variable-rate debt will impact our future earnings and cash flows. Conversely, interest rate
fluctuations applied to our fixed-rate debt will generally not impact our future earnings and cash flows, unless such instruments mature or are otherwise terminated and
need to be refinanced. However, interest rate fluctuations will impact the fair value of the fixed-rate debt instruments.
We generally determine the fair value of our secured debt, unsecured debt, and unsecured line of credit by performing discounted cash flow analyses using an
appropriate market discount rate. We calculate the market rate by obtaining period-end treasury rates for maturities that correspond to the maturities of our fixed-rate
debt and then adding an appropriate credit spread based on information obtained from third-party financial institutions. These credit spreads take into account
factors, including but not limited to, our credit profile, the tenure of the debt, amortization period, whether the debt is secured or unsecured, and the loan-to-value ratio
of the debt to the collateral, amongst other factors. These calculations are significantly affected by the assumptions used, including the discount rate, credit spreads
and estimates of future cash flow. We calculate the market rate of our unsecured revolving credit facility and unsecured term loan facility by obtaining the period-end
London Interbank Offered Rate (“LIBOR”) and then adding an appropriate credit spread based on our credit ratings, and the amended terms of our unsecured
revolving credit facility and unsecured term loan facility agreement. We determine the fair value of each of our publicly traded unsecured senior notes based on their
quoted trading price at the end of the reporting period, if such prices are available. See Note 19 “Fair Value Measurements and Disclosures” and Note 2 “Basis of
Presentation and Significant Accounting Policies” in the consolidated financial statements included in this report for additional information on the fair value of our
financial assets and liabilities as of December 31, 2018 and December 31, 2017.
At December 31, 2018, the total outstanding balance of our variable-rate debt was comprised of borrowings on our unsecured revolving facility of $45.0 million
and unsecured term loan facility of $150.0 million, which were indexed to LIBOR plus a spread of 1.00% (weighted average interest rate of 3.48%) and LIBOR plus a
spread of 1.10% (weighted average interest rate of 3.49%), respectively. As of December 31, 2017, there were no outstanding balances on both our $750.0 million
unsecured revolving credit facility and our $150.0 million unsecured term loan facility, but both were available for borrowing at the following variable rates: LIBOR plus
a spread of 1.00% (weighted average interest rate of 2.56%) and LIBOR plus a spread of 1.10% (weighted average interest rate of 2.66%), respectively. Assuming no
changes in the outstanding balance of our existing variable-rate debt as of December 31, 2018, a 100 basis point increase in the LIBOR rate would have increased our
projected annual interest expense, before the effect of capitalization, by approximately $2.0 million.
The total carrying value of our fixed-rate debt was approximately $2.7 billion and $2.3 billion as of December 31, 2018 and 2017, respectively. The total estimated
fair value of our fixed-rate debt was approximately $2.7 billion and $2.4 billion as of December 31, 2018 and 2017, respectively. For sensitivity purposes, a 100 basis
point increase in the discount rate equates to a decrease in the total fair value of our fixed-rate debt of approximately $165.3 million, or 6.1%, as of December 31, 2018.
Comparatively, a 100 basis point increase in the discount rate equates to a decrease in the total fair value of our fixed-rate debt of approximately $145.0 million, or 6.0%,
as of December 31, 2017.
96
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the
calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate
that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a
paced market transition plan to SOFR from LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to
derivatives and cash markets exposed to LIBOR. As our variable-rate debt is indexed to LIBOR, we are monitoring this activity and evaluating the related risks.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at Item 15. “Exhibits and Financial Statement Schedules.”
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
97
ITEM 9A. CONTROLS AND PROCEDURES
Kilroy Realty Corporation
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure
that information required to be disclosed in the Company’s reports under the Exchange Act is processed, recorded, summarized, and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of December 31, 2018, the
end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of that time, the
disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes that occurred during the fourth quarter of the most recent year covered by this report in the Company’s internal control over financial
reporting identified in connection with the evaluation referenced above that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected
by our board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that: (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being
made only in accordance with authorizations of management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is
supported by written policies and procedures and by an appropriate segregation of responsibilities and duties. The Company has used the criteria set forth in the
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission to assess our internal control
over financial reporting. Based upon this assessment, management concluded that internal control over financial reporting operated effectively as of December 31,
2018.
Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has audited the Company’s financial statements and has issued a report on
the effectiveness of the Company’s internal control over financial reporting.
98
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kilroy Realty Corporation
Los Angeles, California
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Kilroy Realty Corporation (the “Company”) as of December 31, 2018, based on criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the financial statements as of
and for the year ended December 31, 2018, of the Company and our report dated February 14, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 14, 2019
99
Kilroy Realty, L.P.
The Operating Partnership maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are
designed to ensure that information required to be disclosed in the Operating Partnership’s reports under the Exchange Act, is processed, recorded, summarized and
reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the
Chief Executive Officer and Chief Financial Officer of its general partner, as appropriate, to allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As required by SEC Rule 13a-15(b), the Operating Partnership carried out an evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer of its general partner, of the effectiveness of the design and operation of the disclosure controls and
procedures as of December 31, 2018, the end of the period covered by this report. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of its
general partner concluded, as of that time, the disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes that occurred during the fourth quarter of the most recent year covered by this report in the Operating Partnership’s internal
control over financial reporting identified in connection with the evaluation referenced above that have materially affected, or are reasonably likely to materially affect,
the Operating Partnership’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer of the
Operating Partnership’s general partner and effected by the board of directors, management, and other personnel of its general partner to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control
over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the
consolidated financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is
supported by written policies and procedures and by an appropriate segregation of responsibilities and duties. The Operating Partnership has used the criteria set
forth in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission to assess our
internal control over financial reporting. Based upon this assessment, management concluded that internal control over financial reporting operated effectively as of
December 31, 2018.
Deloitte & Touche LLP, the Operating Partnership’s independent registered public accounting firm, has audited the Operating Partnership’s financial statements
and has issued a report on the effectiveness of the Operating Partnership’s internal control over financial reporting.
100
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Kilroy Realty, L.P.
Los Angeles, California
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Kilroy Realty, L.P. (the “Operating Partnership”) as of December 31, 2018, based on criteria established
in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the
Operating Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the financial statements as of
and for the year ended December 31, 2018, of the Operating Partnership and our report dated February 14, 2019, expressed an unqualified opinion on those financial
statements.
Basis for Opinion
The Operating Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Operating Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 14, 2019
101
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by Item 10 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to
be held in May 2019.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to
be held in May 2019.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to
be held in May 2019.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to
be held in May 2019.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to
be held in May 2019.
102
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) Financial Statements and Schedules
PART IV
The following consolidated financial information is included as a separate section of this annual report on Form 10-K:
Report of Independent Registered Public Accounting Firm – Kilroy Realty Corporation
Consolidated Balance Sheets as of December 31, 2018 and 2017 – Kilroy Realty Corporation
Consolidated Statements of Operations for the Years ended December 31, 2018, 2017 and 2016 – Kilroy Realty Corporation
Consolidated Statements of Equity for the Years ended December 31, 2018, 2017 and 2016 – Kilroy Realty Corporation
Consolidated Statements of Cash Flows for the Years ended December 31, 2018, 2017 and 2016 – Kilroy Realty Corporation
Report of Independent Registered Public Accounting Firm – Kilroy Realty, L.P.
Consolidated Balance Sheets as of December 31, 2018 and 2017 – Kilroy Realty, L.P.
Consolidated Statements of Operations for the Years ended December 31, 2018, 2017 and 2016 – Kilroy Realty, L.P.
Consolidated Statements of Capital for the Years ended December 31, 2018, 2017 and 2016 – Kilroy Realty, L.P.
Consolidated Statements of Cash Flows for the Years ended December 31, 2018, 2017 and 2016 – Kilroy Realty, L.P.
Notes to Consolidated Financial Statements
Schedule II – Valuation and Qualifying Accounts
Schedule III – Real Estate and Accumulated Depreciation
F - 2
F - 3
F - 4
F - 5
F - 6
F - 7
F - 8
F - 9
F - 10
F - 11
F - 12
F - 60
F - 61
All other schedules are omitted because 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.
(3) Exhibits
Exhibit
Number
3.(i)1
3.(i)2
3.(i)3
3.(i)4
3.(i)5
3.(ii)1
Description
Kilroy Realty Corporation Articles of Restatement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter
ended June 30, 2012)
Certificate of Limited Partnership of Kilroy Realty, L.P. (previously filed by Kilroy Realty, L.P., as an exhibit to the General Form for
Registration of Securities on Form 10 as filed with the Securities and Exchange Commission on August 18, 2010)
Amendment to the Certificate of Limited Partnership of Kilroy Realty, L.P. (previously filed by Kilroy Realty, L.P., as an exhibit to the General
Form for Registration of Securities on Form 10 as filed with the Securities and Exchange Commission on August 18, 2010)
Articles Supplementary reclassifying shares of the Series G Preferred Stock of the Company (previously filed by Kilroy Realty Corporation as
an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 23, 2017)
Articles Supplementary reclassifying shares of the Series H Preferred Stock of the Company (previously filed by Kilroy Realty Corporation
as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 23, 2017)
Fifth Amended and Restated Bylaws of Kilroy Realty Corporation (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K
as filed with the Securities and Exchange Commission on February 1, 2017)
103
3.(ii)2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
Seventh Amended and Restated Agreement of Limited Partnership of Kilroy Realty, L.P. dated August 15, 2012, as amended (previously filed
by Kilroy Realty Corporation on Form 10-Q for the quarter ended June 30, 2014)
Kilroy Realty Corporation Form of Certificate for Common Stock (previously filed by Kilroy Realty Corporation as an exhibit to the
Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
Registration Rights Agreement, dated January 31, 1997 (previously filed by Kilroy Realty Corporation as an exhibit to the Registration
Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
Form of Certificate for Partnership Units of Kilroy Realty, L.P. (previously filed by Kilroy Realty, L.P., as an exhibit to the General Form for
Registration of Securities on Form 10 as filed with the Securities and Exchange Commission on August 18, 2010)
Registration Rights Agreement, dated July 31, 2012 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter
ended June 30, 2012)
Officers’ Certificate pursuant to Sections 101, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy Realty, L.P., as issuer,
Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “3.800%
Notes due 2023,” including the form of 3.800% Notes due 2023 and the form of related guarantee (previously filed by Kilroy Realty
Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on January 14, 2013)
Indenture, dated March 1, 2011, by and among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National
Association, as trustee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit to the Registration Statement on
Form S-3 as filed with the Securities and Exchange Commission on October 2, 2013)
Supplemental Indenture, dated July 5, 2011, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank
National Association, as trustee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit to the Registration
Statement on Form S-3 as filed with the Securities and Exchange Commission on October 2, 2013)
Officers’ Certificate pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy Realty, L.P., as issuer,
Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “4.25%
Senior Notes due 2029,” including the form of 4.25% Senior Notes due 2029 and the form of related guarantee (previously filed by Kilroy
Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 6,
2014)
Officers’ Certificate, dated September 16, 2015, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among
Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of
securities entitled “4.375% Senior Notes due 2025,” including the form of 4.375% Senior Notes due 2025 and the form of related guarantee
(previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange
Commission on September 16, 2015)
Officers’ Certificate, dated December 11, 2017, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy
Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of
securities entitled “3.450% Senior Notes due 2024,” including the form of 3.450% Senior Notes due 2024 and the form of related guarantee
(previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange
Commission on December 11, 2017)
Officers’ Certificate, dated November 29, 2018, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, as amended
and supplemented, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as
trustee, establishing a series of securities entitled “4.750% Senior Notes due 2028,” including the form of 4.750% Senior Note due 2028 and
the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with
the Securities and Exchange Commission on November 29, 2018)
The Company is party to agreements in connection with long-term debt obligations, none of which individually exceeds ten percent of the
total assets of the Company on a consolidated basis. Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Company agrees to furnish
copies of these agreements to the Commission upon request
104
10.1
10.2†
10.3
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries (previously filed by Kilroy
Realty Corporation as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
1997 Stock Option and Incentive Plan of the Registrant and Kilroy Realty, L.P. (previously filed by Kilroy Realty Corporation as an exhibit to
the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
License Agreement by and among the Registrant and the other persons named therein (previously filed by Kilroy Realty Corporation as an
exhibit to the Registration Statement on Amendment No. 4 to Form S-11 (No. 333-15553))
Form of Restricted Stock Award Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the
Securities and Exchange Commission on February 8, 2007)
Kilroy Realty Corporation Stock Award Deferral Program (previously filed by Kilroy Realty Corporation as an exhibit to Form 8-K as filed
with the Securities and Exchange Commission on January 2, 2008)
Form of Indemnification Agreement of Kilroy Realty Corporation with certain officers and directors (previously filed by Kilroy Realty
Corporation as an exhibit on Form 10-K for the year ended December 31, 2009)
Kilroy Realty Corporation Form of Stock Option Grant Notice and Stock Option Agreement (previously filed by Kilroy Realty Corporation as
an exhibit on Form 8-K as filed with the Securities and Exchange Commission on February 24, 2012)
Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended
June 30, 2013)
Form of Stock Award Deferral Program Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form
10-Q for the quarter ended June 30, 2013)
Form of Performance-Vest Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the
quarter ended March 31, 2014)
Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended
March 31, 2014)
Form of Restricted Stock Unit Agreement for Non-Employee Members of the Board of Directors (previously filed by Kilroy Realty
Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2014)
Form of Performance-Vest Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the
quarter ended March 31, 2015)
Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended
March 31, 2015)
Form of Restricted Stock Unit Agreement for Non-Employee Members of the Board of Directors (previously filed by Kilroy Realty
Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2015)
Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty,
L.P. and Jeffrey C. Hawken effective as of December 31, 2015 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-K for
the year ended December 31, 2015)
Kilroy Realty Corporation 2006 Incentive Award Plan Restricted Stock Unit Agreement by and between Kilroy Realty Corporation and
Jeffrey C. Hawken, dated January 9, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended
March 31, 2016)
Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty,
L.P. and Tyler H. Rose effective as of January 28, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the
quarter ended March 31, 2016)
Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty,
L.P. and Justin W. Smart effective as of January 28, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the
quarter ended March 31, 2016)
105
10.20†
10.21†
10.22†
10.23†
10.24†*
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34†
10.35
10.36†
10.37
10.38
Kilroy Realty Corporation Director Compensation Policy effective as of April 1, 2018 (previously filed by Kilroy Realty Corporation as an
exhibit on Form 10-Q for the quarter ended March 31, 2018.
Employment Agreement, as amended and restated December 27, 2018, by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and
John B. Kilroy, Jr. (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities
and Exchange Commission on December 31, 2018)
Kilroy Realty Corporation 2006 Incentive Award Plan Restricted Stock Unit Agreement by and between Kilroy Realty Corporation and John
B. Kilroy, Jr., dated December 27, 2018 (with retirement as to Time-Based RSUs) (previously filed by Kilroy Realty Corporation and Kilroy
Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 31, 2018)
Kilroy Realty Corporation 2006 Incentive Award Plan Restricted Stock Unit Agreement by and between Kilroy Realty Corporation and John
B. Kilroy, Jr., dated December 27, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as
filed with the Securities and Exchange Commission on December 31, 2018)
Form of Restricted Stock Unit Agreement for 2006 Incentive Award Plan
Note Purchase Agreement dated September 14, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with
the Securities and Exchange Commission on September 14, 2016)
Amendment to Note Purchase Agreement dated May 11, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an
exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 14, 2018)
Form of Time Sharing Agreement of Kilroy Realty, L.P. (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the
quarter ended September 30, 2016)
Promissory Note, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K
for the year ended December 31, 2017)
Loan Agreement, dated November 29, 2016, by and between KR WMC, LLC and Massachusetts Mutual Life Insurance Company
(previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated November 29, 2016 (previously filed by Kilroy
Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
Assignment of Leases and Rents, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an
exhibit on Form 10-K for the year ended December 31, 2017)
Recourse Guaranty Agreement, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit
on Form 10-K for the year ended December 31, 2017)
Environmental Indemnification Agreement, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P.,
as an exhibit on Form 10-K for the year ended December 31, 2017)
Kilroy Realty Corporation 2007 Deferred Compensation Plan, as amended and restated effective January 1, 2017 (previously filed by Kilroy
Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2016)
General Partner Guaranty Agreement, dated February 17, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an
exhibit on Form 10-Q for the quarter ended March 31, 2017)
Kilroy Realty 2006 Incentive Award Plan (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities
and Exchange Commission on May 23, 2017)
Second Amended and Restated Credit Agreement dated as of July 24, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty,
L.P., as an exhibit on Form 10-Q for the quarter ended June 30, 2017)
Second Amended and Restated Guaranty dated as of July 24, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as
an exhibit on Form 10-Q for the quarter ended on June 30, 2017)
106
10.39
10.40
10.41
10.42
21.1*
21.2*
23.1*
23.2*
24.1*
31.1*
31.2*
31.3*
31.4*
32.1*
32.2*
32.3*
32.4*
101.1
Note Purchase Agreement dated May 11, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-
K as filed with the Securities and Exchange Commission on May 14, 2018)
Sales Agreement, dated June 5, 2018, between and among Kilroy Realty Corporation, Kilroy Realty, L.P. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Citigroup Global Markets Inc., Jefferies LLC, J.P. Morgan Securities LLC, Raymond James & Associates, Inc., RBC
Capital Markets, LLC, Scotia Capital (USA) Inc. and SMBC Nikko Securities America, Inc. as Agents, and the Forward Purchasers
(previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange
Commission on June 5, 2018)
Forward Sale Agreement dated August 8, 2018, among Kilroy Realty Corporation and Barclays Bank PLC, as Forward Purchaser (previously
filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on
August 13, 2018)
Forward Sale Agreement dated August 8, 2018, among Kilroy Realty Corporation and Citibank, N.A., as Forward Purchaser (previously filed
by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on
August 13, 2018)
List of Subsidiaries of Kilroy Realty Corporation
List of Subsidiaries of Kilroy Realty, L.P.
Consent of Deloitte & Touche LLP for Kilroy Realty Corporation
Consent of Deloitte & Touche LLP for Kilroy Realty, L.P.
Power of Attorney (included on the signature page of this Form 10-K)
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty Corporation
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty Corporation
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty, L.P.
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty, L.P.
Section 1350 Certification of Chief Executive Officer of Kilroy Realty Corporation
Section 1350 Certification of Chief Financial Officer of Kilroy Realty Corporation
Section 1350 Certification of Chief Executive Officer of Kilroy Realty, L.P.
Section 1350 Certification of Chief Financial Officer of Kilroy Realty, L.P.
The following Kilroy Realty Corporation and Kilroy Realty, L.P. financial information for the year ended December 31, 2018, formatted in
XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated
Statements of Changes in Equity, (iv) Consolidated Statements of Capital, (v) Consolidated Statements of Cash Flows and (vi) Notes to the
Consolidated Financial Statements.(1)
*
†
(1)
Filed herewith
Management contract or compensatory plan or arrangement.
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the
Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.
107
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Kilroy Realty Corporation has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on February 14, 2019.
SIGNATURES
KILROY REALTY CORPORATION
By
/s/ Heidi R. Roth
Heidi R. Roth
Executive Vice President and Chief Accounting Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that we, the undersigned directors and officers of Kilroy Realty Corporation, do hereby severally constitute and
appoint John Kilroy, Jeffrey C. Hawken, Tyler H. Rose and Heidi R. Roth, and each of them, as our true and lawful attorneys-in-fact and agents, each with full powers
of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in
our names in the capacities indicated below, which said attorneys-in-fact and agents, or any of them, may deem necessary or advisable to enable Kilroy Realty
Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission,
in connection with this Annual Report on Form 10-K, including specifically, but without limitation, the power and authority to sign for us or any of us, in our names in
the capacities indicated below, any and all amendments hereto; and we do each hereby ratify and confirm all that said attorneys-in-fact and agents or their substitutes,
or any one of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Name
Title
Date
/s/ John Kilroy
John Kilroy
/s/ Tyler H. Rose
Tyler H. Rose
/s/ Heidi R. Roth
Heidi R. Roth
/s/ Edward F. Brennan, PhD
Edward F. Brennan, PhD
/s/ Jolie Hunt
Jolie Hunt
/s/ Scott S. Ingraham
Scott S. Ingraham
/s/ Gary R. Stevenson
Gary R. Stevenson
/s/ Peter B. Stoneberg
Peter B. Stoneberg
Chairman of the Board, President and Chief
Executive Officer (Principal Executive
Officer)
February 14, 2019
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 14, 2019
Executive Vice President and Chief
Accounting Officer (Principal Accounting
Officer)
Director
Director
Director
Director
Director
108
February 14, 2019
February 12, 2019
February 12, 2019
February 12, 2019
February 12, 2019
February 12, 2019
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Kilroy Realty, L.P. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on February 14, 2019.
SIGNATURES
KILROY REALTY, L.P.
By
/s/ Heidi R. Roth
Heidi R. Roth
Executive Vice President and Chief Accounting Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that we, the undersigned directors and officers of Kilroy Realty Corporation, as sole general partner and on behalf
of Kilroy Realty, L.P., do hereby severally constitute and appoint John Kilroy, Jeffrey C. Hawken, Tyler H. Rose and Heidi R. Roth, and each of them, as our true and
lawful attorneys-in-fact and agents, each with full powers of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys-in-fact and agents, or any of them, may
deem necessary or advisable to enable Kilroy Realty Corporation, as sole general partner and on behalf of Kilroy Realty, L.P., to comply with the Securities Exchange
Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-
K, including specifically, but without limitation, the power and authority to sign for us or any of us, in our names in the capacities indicated below, any and all
amendments hereto; and we do each hereby ratify and confirm all that said attorneys-in-fact and agents or their substitutes, or any one of them, shall do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Name
Title
Date
/s/ John Kilroy
John Kilroy
/s/ Tyler H. Rose
Tyler H. Rose
/s/ Heidi R. Roth
Heidi R. Roth
/s/ Edward F. Brennan, PhD
Edward F. Brennan, PhD
/s/ Jolie Hunt
Jolie Hunt
/s/ Scott S. Ingraham
Scott S. Ingraham
/s/ Gary R. Stevenson
Gary R. Stevenson
/s/ Peter B. Stoneberg
Peter B. Stoneberg
Chairman of the Board, President and Chief
Executive Officer (Principal Executive
Officer)
February 14, 2019
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 14, 2019
Executive Vice President and Chief
Accounting Officer (Principal Accounting
Officer)
Director
Director
Director
Director
Director
109
February 14, 2019
February 12, 2019
February 12, 2019
February 12, 2019
February 12, 2019
February 12, 2019
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2018 AND 2017
AND FOR THE THREE YEARS ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Equity for the Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years ended December 31, 2018, 2017 and 2016
FINANCIAL STATEMENTS OF KILROY REALTY, L.P.:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Capital for the Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements for Kilroy Realty Corporation and Kilroy Realty, L.P.
Schedule II – Valuation and Qualifying Accounts for Kilroy Realty Corporation and Kilroy Realty, L.P.
Schedule III – Real Estate and Accumulated Depreciation for Kilroy Realty Corporation and
Kilroy Realty, L.P.
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F - 60
F - 61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kilroy Realty Corporation
Los Angeles, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kilroy Realty Corporation (the “Company”) as of December 31, 2018 and 2017, the related
consolidated statements of operations, equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes and the
schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal
control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2019, expressed an unqualified opinion on the Company's internal control
over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks
of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 14, 2019
We have served as the Company’s auditor since 1995.
F - 2
KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
December 31, 2018
December 31, 2017
REAL ESTATE ASSETS (Notes 2, 3 and 4):
Land and improvements
Buildings and improvements
Undeveloped land and construction in progress
Total real estate assets held for investment
Accumulated depreciation and amortization
Total real estate assets held for investment, net
CASH AND CASH EQUIVALENTS (Note 23)
RESTRICTED CASH (Notes 4 and 23)
MARKETABLE SECURITIES (Notes 16 and 19)
CURRENT RECEIVABLES, NET (Note 6)
DEFERRED RENT RECEIVABLES, NET (Note 6)
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 3 and 5)
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 7)
TOTAL ASSETS
LIABILITIES AND EQUITY
LIABILITIES:
Secured debt, net (Notes 8, 9 and 19)
Unsecured debt, net (Notes 8, 9 and 19)
Unsecured line of credit (Notes 8, 9 and 19)
Accounts payable, accrued expenses and other liabilities (Note 18)
Accrued dividends and distributions (Notes 13 and 28)
Deferred revenue and acquisition-related intangible liabilities, net (Notes 3, 5 and 10)
Rents received in advance and tenant security deposits
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 18)
EQUITY (Notes 11 and 13):
Stockholders’ Equity:
Common stock, $.01 par value, 150,000,000 shares authorized,
100,746,988 and 98,620,333 shares issued and outstanding, respectively
Additional paid-in capital
Distributions in excess of earnings
Total stockholders’ equity
Noncontrolling Interests (Note 11):
Common units of the Operating Partnership
Noncontrolling interests in consolidated property partnerships (Note 2)
Total noncontrolling interests
Total equity
TOTAL LIABILITIES AND EQUITY
$
$
$
$
$
1,160,138
5,207,984
2,058,510
8,426,632
(1,391,368 )
7,035,264
51,604
119,430
21,779
20,176
267,007
197,574
52,873
7,765,707
335,531
2,552,070
45,000
374,415
47,559
149,646
60,225
3,564,446
$
$
1,007
3,976,953
(48,053 )
3,929,907
78,991
192,363
271,354
4,201,261
7,765,707
$
1,076,172
4,908,797
1,432,808
7,417,777
(1,264,162 )
6,153,615
57,649
9,149
20,674
16,926
246,391
183,728
114,706
6,802,838
340,800
2,006,263
—
249,637
43,448
145,890
56,484
2,842,522
986
3,822,492
(122,685 )
3,700,793
77,948
181,575
259,523
3,960,316
6,802,838
See accompanying notes to consolidated financial statements.
F - 3
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended December 31,
2018
2017
2016
REVENUES:
Rental income
Tenant reimbursements
Other property income (Note 18)
Total revenues
EXPENSES:
Property expenses
Real estate taxes
Provision for bad debts (Note 20)
Ground leases (Notes 5 and 18)
General and administrative expenses (Note 15)
Acquisition-related expenses (Note 2)
Depreciation and amortization (Notes 2 and 5)
Total expenses
OTHER (EXPENSES) INCOME:
Interest income and other net investment (loss) gain (Note 19)
Interest expense (Note 9)
Loss on early extinguishment of debt (Note 9)
Net gain (loss) on sales of land (Note 4)
Gains on sales of depreciable operating properties (Note 4)
Total other income (expenses)
NET INCOME
Net income attributable to noncontrolling common units of the Operating Partnership (Notes 2 and 11)
Net income attributable to noncontrolling interests in consolidated property partnerships (Notes 2 and 11)
Total income attributable to noncontrolling interests
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
Preferred dividends (Note 13)
Original issuance costs of redeemed preferred stock and preferred units (Note 13)
Total preferred dividends
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
Net income available to common stockholders per share – basic (Note 21)
Net income available to common stockholders per share – diluted (Note 21)
Weighted average shares of common stock outstanding – basic (Note 21)
Weighted average shares of common stock outstanding – diluted (Note 21)
$
$
$
$
$
656,631
80,982
9,685
747,298
133,787
70,820
5,685
6,176
90,471
—
254,281
561,220
(559)
(49,721)
(12,623)
11,825
142,926
91,848
277,926
(5,193)
(14,318)
(19,511)
258,415
—
—
—
258,415
$
633,896
76,559
8,546
719,001
129,971
66,449
3,269
6,337
60,581
—
245,886
512,493
5,503
(66,040)
(5,312)
449
39,507
(25,893)
180,615
(3,223)
(12,780)
(16,003)
164,612
(5,774)
(7,589)
(13,363)
574,413
61,079
7,080
642,572
113,932
55,206
—
3,439
57,029
1,902
217,234
448,742
1,764
(55,803)
—
(295)
164,302
109,968
303,798
(6,635)
(3,375)
(10,010)
293,788
(13,250)
—
(13,250)
280,538
3.00
2.97
92,342,483
93,023,034
$
151,249
2.56
$
2.55
$
99,972,359
100,482,365
1.52
1.51
98,113,561
98,727,331
$
$
$
See accompanying notes to consolidated financial statements.
F - 4
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share and per share/unit data)
Common Stock
Preferred
Stock
Number
of
Shares
Common
Stock
Additional
Paid-in
Capital
Distributions
in Excess of
Earnings
$
192,411
92,258,690
$
923
$
3,047,894
$
(70,262 )
$
451,398
286,500
(137,126 )
109,044
250,933
4
3
(1 )
1
2
31,113
1,827
26,624
12,205
(8,874 )
(1 )
8,891
328,997
8,973
293,788
(13,250 )
Total
Stock-
holders’
Equity
3,170,966
293,788
31,117
1,827
26,624
12,208
(8,875 )
—
—
8,893
328,997
—
8,973
(13,250 )
Noncontrolling
Interests
$
$
63,620
10,010
48,033
(8,893 )
124,452
(3,615 )
(8,973 )
Total
Equity
3,234,586
303,798
31,117
1,827
26,624
12,208
(8,875 )
—
48,033
—
453,449
(3,615 )
—
(13,250 )
192,411
93,219,439
932
3,457,649
BALANCE AS OF DECEMBER 31, 2015
Net income
Issuance of common stock
Issuance of share-based compensation awards
Non-cash amortization of share-based compensation
Exercise of stock options
Repurchase of common stock, stock options and restricted stock units
Settlement of restricted stock units for shares of common stock
Issuance of common units in connection with acquisition
Exchange of common units of the Operating Partnership
Initial contributions by noncontrolling interest in consolidated property
partnership, net of transaction costs
Distributions to noncontrolling interests in consolidated property partnerships
Adjustment for noncontrolling interest in the Operating Partnership
Preferred dividends and distributions
Dividends declared per share of common stock and common unit ($3.375 per
share/unit)
BALANCE AS OF DECEMBER 31, 2016
Net income
Redemption of Series G & H Preferred stock
(192,411 )
Issuance of common stock
Issuance of share-based compensation awards
Non-cash amortization of share-based compensation
Exercise of stock options
Settlement of restricted stock units for shares of common stock
Repurchase of common stock, stock options and restricted stock units
Exchange of common units of the Operating Partnership
Contributions from noncontrolling interests in consolidated property
partnerships
Distributions to noncontrolling interests in consolidated property partnerships
Adjustment for noncontrolling interest in the Operating Partnership
Preferred dividends and distributions
Dividends declared per share of common stock and common unit ($1.65 per
share/unit)
BALANCE AS OF DECEMBER 31, 2017
Net income
Issuance of common stock (Note 13)
Issuance of share-based compensation awards (Note 15)
Non-cash amortization of share-based compensation (Note 15)
Exercise of stock options
Settlement of restricted stock units for shares of common stock (Note 15)
Repurchase of common stock and restricted stock units (Note 15)
Exchange of common units of the Operating Partnership
Contributions from noncontrolling interests in consolidated property
partnerships
Distributions to noncontrolling interests in consolidated property partnerships
Adjustment for noncontrolling interest in the Operating Partnership (Note 2)
Dividends declared per share of common stock and common unit ($1.79 per
share/unit) (Notes 13 and 28)
4,662,577
285,000
317,848
(168,881 )
304,350
—
98,620,333
1,817,195
1,000
488,354
(231,800 )
51,906
46
4
3
(2 )
3
986
18
—
4
(2 )
1
(318,273 )
(318,273 )
(8,312 )
(326,585 )
(107,997 )
164,612
(7,589 )
(5,774 )
3,542,995
164,612
(200,000 )
326,058
5,890
26,319
12,179
—
(12,986 )
10,939
—
—
(3,502 )
(5,774 )
216,322
16,003
(10,939 )
54,604
3,759,317
180,615
(200,000 )
326,058
5,890
26,319
12,179
—
(12,986 )
—
54,604
(16,542 )
(16,542 )
3,502
—
(5,774 )
(165,937 )
(165,937 )
(3,427 )
(169,364 )
326,012
5,890
26,319
12,175
(3 )
(12,984 )
10,936
—
(3,502 )
3,822,492
(122,685 )
258,415
130,675
3,926
35,890
41
(4 )
(16,551 )
1,961
(1,477 )
(183,783 )
3,700,793
258,415
130,693
3,926
35,890
41
—
(16,553 )
1,962
—
—
(1,477 )
259,523
19,511
(1,962 )
8,273
3,960,316
277,926
130,693
3,926
35,890
41
—
(16,553 )
—
8,273
(11,803 )
(11,803 )
1,477
—
(183,783 )
3,929,907
$
(3,665 )
271,354
$
(187,448 )
4,201,261
BALANCE AS OF DECEMBER 31, 2018
$
—
100,746,988
$
1,007
$
3,976,953
$
(48,053 )
$
See accompanying notes to consolidated financial statements.
F - 5
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of real estate assets and leasing costs
Depreciation of non-real estate furniture, fixtures and equipment
Increase in provision for bad debts (Note 20)
Non-cash amortization of share-based compensation awards (Note 15)
Non-cash amortization of deferred financing costs and net debt discounts
Non-cash amortization of net below market rents (Note 5)
Loss on early extinguishment of debt (Note 9)
(Gain) loss on sale of land (Note 4)
Gains on sales of depreciable operating properties (Note 4)
Non-cash amortization of deferred revenue related to tenant-funded tenant improvements (Note 10)
Straight-line rents
Net change in other operating assets
Net change in other operating liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development properties and undeveloped land
Expenditures for acquisitions of development properties and undeveloped land (Note 3)
Expenditures for acquisitions of operating properties (Note 3)
Expenditures for operating properties and other capital assets
Net proceeds received from dispositions (Note 4)
Decrease (increase) in acquisition-related deposits
Proceeds received from repayment of note receivable (Note 7)
Issuance of notes receivable
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock (Note 13)
Redemption of Series G and H Preferred stock (Note 13)
Net proceeds from the issuance of unsecured debt (Note 9)
Repayments of unsecured debt (Note 9)
Borrowings on unsecured revolving credit facility
Repayments on unsecured revolving credit facility
Borrowings on unsecured debt (Note 9)
Principal payments and repayments of secured debt (Note 9)
Proceeds from the issuance of secured debt (Note 9)
Financing costs
Repurchase of common stock and restricted stock units (Note 15)
Proceeds from exercise of stock options
Contributions from noncontrolling interests in consolidated property partnerships (Note 11)
Distributions to noncontrolling interests in consolidated property partnerships
Dividends and distributions paid to common stockholders and common unitholders
Dividends and distributions paid to preferred stockholders and preferred unitholders
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash, beginning of year
Cash and cash equivalents and restricted cash, end of year
Year Ended December 31,
2018
2017
2016
$
277,926
$
180,615
$
303,798
249,882
4,400
5,685
27,932
1,084
(9,748 )
12,623
(11,825 )
(142,926 )
(18,429 )
(26,976 )
(7,930 )
48,345
410,043
(489,236 )
(311,299 )
(257,340 )
(166,440 )
364,300
36,000
15,100
—
241,862
4,024
3,269
19,046
3,247
(8,528 )
5,312
(449 )
(39,507 )
(16,767 )
(33,275 )
(17,732 )
5,895
347,012
(397,440 )
(19,829 )
—
(88,425 )
182,492
(35,900 )
—
—
(808,915 )
(359,102 )
130,693
—
648,537
(261,823 )
765,000
(690,000 )
120,000
(3,584 )
—
(6,262 )
(16,553 )
41
8,273
(11,803 )
(179,411 )
—
503,108
104,236
66,798
171,034
$
326,058
(200,000 )
674,447
(519,024 )
270,000
(270,000 )
—
(130,371 )
—
(11,500 )
(12,986 )
12,179
54,604
(16,542 )
(340,697 )
(7,409 )
(171,241 )
(183,331 )
250,129
66,798
$
$
213,156
4,078
—
21,064
2,720
(7,166 )
—
295
(164,302 )
(13,244 )
(29,629 )
(5,214 )
19,498
345,054
(351,012 )
(33,513 )
(393,767 )
(111,961 )
325,031
1,902
—
(16,100 )
(579,420 )
31,117
—
—
—
305,000
(305,000 )
—
(74,140 )
170,000
(2,159 )
(8,875 )
12,208
453,449
(3,615 )
(137,444 )
(13,250 )
427,291
192,925
57,204
250,129
See accompanying notes to consolidated financial statements.
F - 6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Kilroy Realty, L.P.
Los Angeles, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kilroy Realty, L.P. (the “Operating Partnership”) as of December 31, 2018 and 2017, the related
consolidated statements of operations, capital, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes and the
schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Operating Partnership as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Operating Partnership’s
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2019, expressed an unqualified opinion on the Operating
Partnership’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on the Operating
Partnership’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to
the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks
of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 14, 2019
We have served as the Operating Partnership’s auditor since 2010.
F - 7
KILROY REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
December 31, 2018
December 31, 2017
ASSETS
REAL ESTATE ASSETS (Notes 2, 3 and 4):
Land and improvements
Buildings and improvements
Undeveloped land and construction in progress
Total real estate assets held for investment
Accumulated depreciation and amortization
Total real estate assets held for investment, net
CASH AND CASH EQUIVALENTS (Note 24)
RESTRICTED CASH (Notes 4 and 24)
MARKETABLE SECURITIES (Notes 16 and 19)
CURRENT RECEIVABLES, NET (Note 6)
DEFERRED RENT RECEIVABLES, NET (Note 6)
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 3 and 5)
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 7)
TOTAL ASSETS
LIABILITIES AND CAPITAL
LIABILITIES:
Secured debt, net (Notes 9 and 19)
Unsecured debt, net (Notes 9 and 19)
Unsecured line of credit (Notes 9 and 19)
Accounts payable, accrued expenses and other liabilities (Note 18)
Accrued distributions (Notes 14 and 28)
Deferred revenue and acquisition-related intangible liabilities, net (Notes 3, 5 and 10)
Rents received in advance and tenant security deposits
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 18)
CAPITAL (Notes 12 and 14):
Common units, 100,746,988 and 98,620,333 held by the general partner and 2,025,287 and 2,077,193 held by
common limited partners issued and outstanding, respectively
Total partners’ capital
Noncontrolling interests in consolidated property partnerships and subsidiaries (Notes 2 and 12)
Total capital
TOTAL LIABILITIES AND CAPITAL
$
$
$
$
$
1,160,138
5,207,984
2,058,510
8,426,632
(1,391,368)
7,035,264
51,604
119,430
21,779
20,176
267,007
197,574
52,873
7,765,707
335,531
2,552,070
45,000
374,415
47,559
149,646
60,225
3,564,446
$
$
4,003,700
4,003,700
197,561
4,201,261
7,765,707
$
1,076,172
4,908,797
1,432,808
7,417,777
(1,264,162)
6,153,615
57,649
9,149
20,674
16,926
246,391
183,728
114,706
6,802,838
340,800
2,006,263
—
249,637
43,448
145,890
56,484
2,842,522
3,773,941
3,773,941
186,375
3,960,316
6,802,838
See accompanying notes to consolidated financial statements.
F - 8
KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit and per unit data)
Year Ended December 31,
2018
2017
2016
REVENUES:
Rental income
Tenant reimbursements
Other property income (Note 18)
Total revenues
EXPENSES:
Property expenses
Real estate taxes
Provision for bad debts (Note 20)
Ground leases (Notes 5 and 18)
General and administrative expenses (Note 15)
Acquisition-related expenses (Note 2)
Depreciation and amortization (Notes 2 and 5)
Total expenses
OTHER (EXPENSES) INCOME:
Interest income and other net investment (loss) gain (Note 19)
Interest expense (Note 9)
Loss on early extinguishment of debt (Note 9)
Net gain (loss) on sales of land (Note 4)
Gains on sales of depreciable operating properties (Note 4)
Total other income (expenses)
NET INCOME
Net income attributable to noncontrolling interests in consolidated property partnerships and subsidiaries (Notes 2 and
12)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.
Preferred distributions (Note 14)
Original issuance costs of redeemed preferred units (Note 14)
Total preferred distributions
NET INCOME AVAILABLE TO COMMON UNITHOLDERS
Net income available to common unitholders per unit – basic (Note 22)
Net income available to common unitholders per unit – diluted (Note 22)
Weighted average common units outstanding – basic (Note 22)
Weighted average common units outstanding – diluted (Note 22)
$
$
$
$
$
656,631
80,982
9,685
747,298
133,787
70,820
5,685
6,176
90,471
—
254,281
561,220
(559)
(49,721)
(12,623)
11,825
142,926
91,848
277,926
(14,716)
263,210
—
—
—
263,210
$
633,896
76,559
8,546
719,001
129,971
66,449
3,269
6,337
60,581
—
245,886
512,493
5,503
(66,040)
(5,312)
449
39,507
(25,893)
180,615
(13,175)
167,440
(5,774)
(7,589)
(13,363)
574,413
61,079
7,080
642,572
113,932
55,206
—
3,439
57,029
1,902
217,234
448,742
1,764
(55,803)
—
(295)
164,302
109,968
303,798
(3,735)
300,063
(13,250)
—
(13,250)
286,813
2.99
2.96
$
154,077
2.56
$
2.55
$
1.52
1.51
$
$
$
102,025,276
102,535,282
100,246,567
100,860,337
94,771,688
95,452,239
See accompanying notes to consolidated financial statements.
F - 9
KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(in thousands, except unit and per unit data)
Partners’ Capital
Preferred
Units
Number of Common
Units
Common Units
Total Partners’
Capital
Noncontrolling Interests
in Consolidated Property
Partnerships and
Subsidiaries
Total Capital
BALANCE AS OF DECEMBER 31, 2015
$
192,411
94,023,465
$
Net income
Issuance of common units
Issuance of common units in connection with acquisition
Issuance of share-based compensation awards
Non-cash amortization of share-based compensation
Exercise of stock options
Repurchase of common units and restricted stock units
Settlement of restricted stock units
Initial contributions from noncontrolling interest in consolidated property
partnership, net of transaction costs
Distributions to noncontrolling interests in consolidated property partnerships
Preferred distributions
Distributions declared per common unit ($3.375per unit)
BALANCE AS OF DECEMBER 31, 2016
Net income
Redemption of Series G & H Preferred stock
Issuance of common units
Issuance of share-based compensation awards
Non-cash amortization of share-based compensation
Exercise of stock options
Settlement of restricted stock units
Repurchase of common units and restricted stock units
Contributions from noncontrolling interest in consolidated property partnership
Distributions to noncontrolling interests in consolidated property partnerships
Preferred distributions
Distributions declared per common unit ($1.65 per unit)
BALANCE AS OF DECEMBER 31, 2017
Net income
Issuance of common units (Note 14)
Issuance of share-based compensation awards (Note 15)
Non-cash amortization of share-based compensation
(Note 15)
Exercise of stock options
Settlement of restricted stock units (Note 15)
Repurchase of common units and restricted stock units (Note 15)
Contributions from noncontrolling interest in consolidated property partnership
Distributions to noncontrolling interests in consolidated property partnerships
Distributions declared per common unit ($1.79 per unit) (Notes 14 and 28)
451,398
867,701
286,500
(137,126 )
109,044
192,411
95,600,982
(192,411 )
4,662,577
285,000
317,848
(168,881 )
—
100,697,526
1,817,195
1,000
488,354
(231,800 )
BALANCE AS OF DECEMBER 31, 2018
$
—
102,772,275
$
$
3,031,609
300,063
31,117
48,033
1,827
26,624
12,208
(8,875 )
$
3,224,020
300,063
31,117
48,033
1,827
26,624
12,208
(8,875 )
—
—
328,997
328,997
(13,250 )
(326,585 )
3,431,768
167,440
(7,589 )
326,058
5,890
26,319
12,179
—
(12,986 )
(13,250 )
(326,585 )
3,624,179
167,440
(200,000 )
326,058
5,890
26,319
12,179
—
(12,986 )
—
(5,774 )
(169,364 )
(5,774 )
(169,364 )
3,773,941
263,210
130,693
3,926
35,890
41
—
(16,553 )
—
3,773,941
263,210
130,693
3,926
35,890
41
—
(16,553 )
—
(187,448 )
4,003,700
$
(187,448 )
4,003,700
$
See accompanying notes to consolidated financial statements.
F - 10
$
10,566
3,735
124,452
(3,615 )
135,138
13,175
54,604
(16,542 )
186,375
14,716
8,273
(11,803 )
197,561
$
3,234,586
303,798
31,117
48,033
1,827
26,624
12,208
(8,875 )
—
453,449
(3,615 )
(13,250 )
(326,585 )
3,759,317
180,615
(200,000 )
326,058
5,890
26,319
12,179
—
(12,986 )
54,604
(16,542 )
(5,774 )
(169,364 )
3,960,316
277,926
130,693
3,926
35,890
41
—
(16,553 )
8,273
(11,803 )
(187,448 )
4,201,261
KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of real estate assets and leasing costs
Depreciation of non-real estate furniture, fixtures and equipment
Increase in provision for bad debts (Note 20)
Non-cash amortization of share-based compensation awards (Note 15)
Non-cash amortization of deferred financing costs and net debt discounts
Non-cash amortization of net below market rents (Note 5)
Loss on early extinguishment of debt (Note 9)
(Gain) loss on sale of land (Note 4)
Gains on sales of depreciable operating properties (Note 4)
Non-cash amortization of deferred revenue related to tenant-funded tenant improvements (Note 10)
Straight-line rents
Net change in other operating assets
Net change in other operating liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development properties and undeveloped land
Expenditures for acquisitions of development properties and undeveloped land (Note 3)
Expenditures for acquisitions of operating properties (Note 3)
Expenditures for operating properties and other capital assets
Net proceeds received from dispositions (Note 4)
Decrease (increase) in acquisition-related deposits
Proceeds received from repayment of note receivable (Note 7)
Issuance of notes receivable
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common units (Note 14)
Redemption of Series G and H Preferred units (Note 14)
Net proceeds from the issuance of unsecured debt (Note 9)
Repayments of unsecured debt (Note 9)
Borrowings on unsecured revolving credit facility
Repayments on unsecured revolving credit facility
Borrowings on unsecured debt (Note 9)
Principal payments and repayments of secured debt (Note 9)
Proceeds from the issuance of secured debt (Note 9)
Financing costs
Repurchase of common units and restricted stock units (Note 15)
Proceeds from exercise of stock options
Contributions from noncontrolling interests in consolidated property partnerships (Note 12)
Distributions to noncontrolling interests in consolidated property partnerships
Distributions paid to common unitholders
Distributions paid to preferred unitholders
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash, beginning of year
Cash and cash equivalents and restricted cash, end of year
Year Ended December 31,
2018
2017
2016
$
277,926
$
180,615
$
303,798
249,882
4,400
5,685
27,932
1,084
(9,748)
12,623
(11,825)
(142,926)
(18,429)
(26,976)
(7,930)
48,345
410,043
(489,236)
(311,299)
(257,340)
(166,440)
364,300
36,000
15,100
—
241,862
4,024
3,269
19,046
3,247
(8,528)
5,312
(449)
(39,507)
(16,767)
(33,275)
(17,732)
5,895
347,012
(397,440)
(19,829)
—
(88,425)
182,492
(35,900)
—
—
(808,915)
(359,102)
130,693
—
648,537
(261,823)
765,000
(690,000)
120,000
(3,584)
—
(6,262)
(16,553)
41
8,273
(11,803)
(179,411)
326,058
(200,000)
674,447
(519,024)
270,000
(270,000)
—
(130,371)
—
(11,500)
(12,986)
12,179
54,604
(16,542)
(340,697)
(7,409)
(171,241)
(183,331)
—
503,108
104,236
66,798
171,034
$
250,129
66,798
$
$
213,156
4,078
—
21,064
2,720
(7,166)
—
295
(164,302)
(13,244)
(29,629)
(5,214)
19,498
345,054
(351,012)
(33,513)
(393,767)
(111,961)
325,031
1,902
—
(16,100)
(579,420)
31,117
—
—
—
305,000
(305,000)
—
(74,140)
170,000
(2,159)
(8,875)
12,208
453,449
(3,615)
(137,444)
(13,250)
427,291
192,925
57,204
250,129
See accompanying notes to consolidated financial statements.
F - 11
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization and Ownership
Kilroy Realty Corporation (the “Company”) is a self-administered real estate investment trust (“REIT”) active in premier office and mixed-use submarkets along
the West Coast. We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties in the coastal regions of Greater Los Angeles,
Orange County, San Diego County, the San Francisco Bay Area and Greater Seattle, which we believe have strategic advantages and strong barriers to entry. Class A
real estate encompasses attractive and efficient buildings of high quality that are attractive to tenants, are well-designed and constructed with above-average material,
workmanship and finishes and are well-maintained and managed. We qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). The
Company’s common stock is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “KRC.”
We own our interests in all of our real estate assets through Kilroy Realty, L.P. (the “Operating Partnership”) and Kilroy Realty Finance Partnership, L.P. (the
“Finance Partnership”). We generally conduct substantially all of our operations through the Operating Partnership. Unless stated otherwise or the context indicates
otherwise, the terms “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” refer to Kilroy Realty Corporation and its consolidated subsidiaries and the
term “Operating Partnership” refers to Kilroy Realty, L.P. and its consolidated subsidiaries. The descriptions of our business, employees, and properties apply to both
the Company and the Operating Partnership.
Our stabilized portfolio of operating properties was comprised of the following properties at December 31, 2018:
Stabilized Office Properties
94
13,232,580
482
94.4 %
96.6 %
Number of
Buildings
Rentable
Square Feet (unaudited)
Number of
Tenants
Percentage
Occupied
(unaudited)
Percentage Leased
(unaudited)
Stabilized Residential Property
Number of
Buildings
Number of Units
2018 Average Occupancy
(unaudited)
1
200
79.7 %
Our stabilized portfolio includes all of our properties with the exception of development and redevelopment properties currently committed for construction, under
construction or in the tenant improvement phase, undeveloped land and real estate assets held for sale. We define redevelopment properties as those properties for
which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which
is a higher economic return on the property. We define properties in the tenant improvement phase as properties that we are developing or redeveloping where the
project has reached cold shell condition and is ready for tenant improvements, which may require additional major base building construction before being placed in
service. Projects in the tenant improvement phase are added to our stabilized portfolio once the project reaches the earlier of 95% occupancy or one year from the date
of the cessation of major base building construction activities. Costs capitalized to construction in progress for development and redevelopment properties are
transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets at the historical cost of the
property as the projects are placed in service.
As of December 31, 2018, the following properties were excluded from our stabilized portfolio. We did not have any redevelopment properties or properties held
for sale at December 31, 2018.
In-process development projects - tenant improvement (2)
In-process development projects - under construction (3)
_______________
(1) Estimated rentable square feet upon completion.
F - 12
Number of
Properties/Projects
2
3
Estimated Rentable
Square Feet (1)
(unaudited)
1,150,000
1,290,000
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(2) Includes 88,000 square feet of Production, Distribution, and Repair (“ PDR”) space.
(3) In addition to the estimated office and PDR rentable square feet noted above, development projects under construction also include 96,000 square feet of retail space and 801 residential
units.
Our stabilized portfolio also excludes our future development pipeline, which as of December 31, 2018 was comprised of five potential development sites,
representing approximately 73 gross acres of undeveloped land.
As of December 31, 2018, all of our properties and development projects were owned and all of our business was conducted in the state of California with the
exception of eight office properties and one development project under construction located in the state of Washington. All of our properties and development
projects are 100% owned, excluding four office properties owned by three consolidated property partnerships and an office property held by a consolidated variable
interest entity for a transaction intended to qualify as a like-kind exchange pursuant to Section 1031 of the Code (“Section 1031 Exchange”) that closed in January
2019. Two of the three property partnerships, 100 First Street Member, LLC (“100 First LLC”) and 303 Second Street Member, LLC (“303 Second LLC”), each owned
one office property in San Francisco, California through subsidiary REITs. As of December 31, 2018, the Company owned a 56% common equity interest in both 100
First LLC and 303 Second LLC. The third property partnership, Redwood City Partners, LLC (“Redwood LLC”) owned two office properties in Redwood City,
California. As of December 31, 2018, the Company owned an approximate 93% common equity interest in Redwood LLC. The remaining interests in all three property
partnerships were owned by unrelated third parties.
As of December 31, 2018, the Company owned an approximate 98.0% common general partnership interest in the Operating Partnership. The remaining
approximate 2.0% common limited partnership interest in the Operating Partnership as of December 31, 2018 was owned by non-affiliated investors and certain of our
executive officers and directors. Both the general and limited common partnership interests in the Operating Partnership are denominated in common units. Generally,
the number of common units held by the Company is equivalent to the number of outstanding shares of the Company’s common stock, and the rights of all the
common units to quarterly distributions and payments in liquidation mirror those of the Company’s common stockholders. The common limited partners have certain
redemption rights as provided in the Operating Partnership’s Seventh Amended and Restated Agreement of Limited Partnership, as amended, the “Partnership
Agreement”.
Kilroy Realty Finance, Inc., which is a wholly-owned subsidiary of the Company, is the sole general partner of the Finance Partnership and owns a 1.0% common
general partnership interest in the Finance Partnership. The Operating Partnership owns the remaining 99.0% common limited partnership interest. With the exception
of the Operating Partnership and our consolidated property partnerships, all of our subsidiaries are wholly-owned.
2.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of the Company include the consolidated financial position and results of operations of the Company, the Operating
Partnership, the Finance Partnership, 303 Second LLC, 100 First LLC, Redwood LLC and all of our wholly-owned and controlled subsidiaries. The consolidated
financial statements of the Operating Partnership include the consolidated financial position and results of operations of the Operating Partnership, the Finance
Partnership, 303 Second LLC, 100 First LLC, Redwood LLC and all of our wholly-owned and controlled subsidiaries. All intercompany balances and transactions have
been eliminated in the consolidated financial statements.
Accounting Pronouncements Adopted January 1, 2018
Effective January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09 “Revenue From
Contracts with Customers (Topic 606)” (“ASU 2014-09”) and the related FASB ASU Nos. 2016-12 and 2016-20, which provide practical expedients, technical
corrections, and improvements for certain aspects of ASU 2014-09, on a modified retrospective basis. ASU 2014-09 establishes a single comprehensive model for
entities to use in accounting for revenue from contracts with customers and supersedes most of the existing revenue recognition guidance.
F - 13
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We evaluated each of the Company’s revenue streams to determine the sources of revenue that are impacted by ASU 2014-09 and concluded that two revenue
streams, sales of real estate and revenue from our multi-tenant parking arrangements, fall within the scope of Topic 606. We evaluated the impact of the adoption of
the guidance on the timing of gain recognition for our historical dispositions and concluded there was not a significant impact to our consolidated financial statements
given the straight forward nature of our historical disposition transactions. We also evaluated the impact of the guidance on the timing and pattern of revenue
recognition for our multi-tenant parking arrangements and determined there was no significant impact to our consolidated financial statements. We generally provide
parking for our multi-tenant properties based on the prevailing market rate per parking space, which adjusts based on prevailing market rates during the tenant’s
occupancy, and we recognize parking revenue as parking spaces are utilized by the tenant. Given the structure of these arrangements whereby the amount of parking
revenue we recognize corresponds directly to the tenant’s use, we were able to apply the practical expedient provided in Accounting Standards Codification (“ASC”)
606-10-50-14(b) (the “right to invoice” practical expedient). As a result of applying this practical expedient, we are not required to disclose the transaction price
allocated to future performance obligations for multi-tenant parking since we cannot predict or estimate the use of such parking spaces. During the years ended
December 31, 2018, 2017 and 2016, we recognized $26.7 million, $26.7 million and $23.3 million, respectively, of parking revenue for arrangements that are within the
scope of Topic 606, which is included in rental revenues on our consolidated statements of operations. We concluded that the adoption of Topic 606 did not have a
material impact on our consolidated financial statements or a material impact on the notes to our consolidated financial statements.
Effective January 1, 2018, we adopted FASB ASU No. 2017-09 “Compensation - Stock Compensation (Topic 718)” on a prospective basis. Under the guidance, an
entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions, and classification as an equity or liability
instrument remain the same immediately before and after the change. The adoption of this guidance did not have an impact on our consolidated financial statements or
notes to our consolidated financial statements.
Effective January 1, 2018, we adopted FASB ASU No. 2017-05 “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-
20)” (“ASU 2017-05”) on a retrospective basis. This standard clarifies the scope of the original guidance within Subtopic 610-20 “Gains and Losses from the
Derecognition of Nonfinancial Assets” that was issued in connection with ASU 2014-09 which provided guidance for recognizing gains and losses from the transfer
of nonfinancial assets in transactions with noncustomers. Additionally, ASU 2017-05 adds guidance pertaining to the partial sales of real estate and clarifies that
nonfinancial assets within the scope of ASC 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may
transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. We evaluated the impact of the new amendments on our
historical transactions and concluded that there was no impact. As such, the adoption of this guidance did not have an impact on our consolidated financial
statements or notes to our consolidated financial statements.
Effective January 1, 2018, we adopted FASB ASU No. 2016-15 (“ASU 2016-15”) which provides guidance where there is diversity in practice in how certain cash
receipts and cash payments are presented and classified in the statement of cash flows, on a retrospective basis. The adoption of this guidance did not have an impact
on our consolidated financial statements or notes to our consolidated financial statements.
Effective January 1, 2018, we adopted FASB ASU No. 2016-01 (“ASU 2016-01”) which amends the accounting guidance on the classification and measurement of
financial instruments and FASB ASU No. 2018-03 (“ASU 2018-03”) which provides technical corrections and improvements to ASU 2016-01, on a modified
retrospective basis. The amendments require that all investments in equity securities, including other ownership interests, are reported at fair value with changes in
fair value reported in net income. This requirement does not apply to investments that qualify for equity method accounting or to those that result in consolidation of
the investee or for which the entity has elected the predictability exception to fair value measurement. Additionally, the amendments require that the portion of the
total fair value change caused by a change in instrument-specific credit risk for financial liabilities for which the fair value option has been elected would be recognized
in other comprehensive income. Any accumulated amount remaining in other comprehensive income is reclassified to earnings when the liability is extinguished. The
adoption of this guidance did not have an impact on our consolidated financial statements or notes to our consolidated financial statements since our only financial
instruments within the scope of ASU 2016-01 and 2018-03 are the marketable securities related to our deferred compensation plan which are classified as trading
securities and marked to market at fair value through earnings each reporting period.
F - 14
Partially Owned Entities and Variable Interest Entities
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At December 31, 2018 the consolidated financial statements of the Company included three VIEs in addition to the Operating Partnership: 100 First LLC, 303
Second LLC and an entity established during the fourth quarter of 2018 to facilitate a Section 1031 Exchange. At December 31, 2018, the Company and the Operating
Partnership were determined to be the primary beneficiaries of these three VIEs since we had the ability to control the activities that most significantly impact each of
the VIEs’ economic performance. As of December 31, 2018, the three VIEs’ total assets, liabilities and noncontrolling interests included on our consolidated balance
sheet were approximately $615.4 million (of which $543.9 million related to real estate held for investment), approximately $45.1 million and approximately $186.4 million,
respectively. In January 2019, the Section 1031 Exchange was successfully completed and the related VIE was terminated. Revenues, income and net assets generated
by 100 First LLC and 303 Second LLC may only be used to settle their contractual obligations, which primarily consist of operating expenses, capital expenditures and
required distributions.
At December 31, 2017, the consolidated financial statements of the Company included two VIEs in addition to the Operating Partnership: 100 First LLC and 303
Second LLC. At December 31, 2017, the impact of consolidating the VIEs increased the Company’s total assets, liabilities and noncontrolling interests on our
consolidated balance sheet by approximately $426.5 million (of which $382.1 million related to real estate held for investment on our consolidated balance sheet),
approximately $27.3 million and approximately $175.4 million, respectively. The consolidated financial statements of the Operating Partnership included the same three
VIEs at December 31, 2017.
Our accounting policy is to consolidate entities in which we have a controlling financial interest and significant decision making control over the entity's
operations. In determining whether we have a controlling financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity,
we consider factors such as ownership interest, board representation, management representation, size of our investment (including loans), authority to control
decisions, and contractual and substantive participating rights of the members. In addition to evaluating control rights, we consolidate entities in which the other
members have no substantive kick-out rights to remove the Company as the managing member.
Entities in which the equity investors do not have sufficient equity at risk to finance their endeavors without additional financial support or the holders of the
equity investment at risk do not have a controlling financial interest are VIEs. We evaluate whether an entity is a VIE and whether we are the primary beneficiary. We
are deemed to be the primary beneficiary of a VIE when we have the power to direct the activities of the VIE that most significantly impact the VIEs’ economic
performance and the obligation to absorb losses or receive benefits that could potentially be significant to the VIE.
If the requirements for consolidation are not met, the Company would account for investments under the equity method of accounting if we have the ability to
exercise significant influence over the entity. Equity method investments would be initially recorded at cost and subsequently adjusted for our share of net income or
loss and cash contributions and distributions each period. The Company did not have any equity method investments at December 31, 2018 or 2017.
Significant Accounting Policies
Acquisitions
Subsequent to our adoption of FASB ASU No. 2017-01 (“ASU 2017-01”) on January 1, 2017, which was adopted on a prospective basis, acquisitions of operating
properties and development and redevelopment opportunities generally no longer meet the definition of a business and are accounted for as asset acquisitions. For
these asset acquisitions, we record the acquired tangible and intangible assets and assumed liabilities based on each asset’s and liability’s relative fair value at the
acquisition date of the total purchase price plus any capitalized acquisition costs. We record the acquired tangible and intangible assets and assumed liabilities of
acquisitions of operating properties and development and redevelopment opportunities that meet the accounting criteria to be accounted for as business
combinations at fair value at the acquisition date.
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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The acquired assets and assumed liabilities for an acquisition generally include but are not limited to (i) land and improvements, buildings and improvements,
undeveloped land and construction in progress and (ii) identified tangible and intangible assets and liabilities associated with in-place leases, including tenant
improvements, leasing costs, value of above-market and below-market operating leases and ground leases, acquired in-place lease values and tenant relationships, if
any. Any debt assumed and equity (including common units of the Operating Partnership) issued in connection with a property acquisition is recorded at fair value on
the date of acquisition.
The fair value of land and improvements is derived from comparable sales of land and improvements within the same submarket and/or region. The fair value of
buildings and improvements, tenant improvements and leasing costs considers the value of the property as if it was vacant as well as current replacement costs and
other relevant market rate information.
The fair value of the above-market or below-market component of an acquired in-place operating lease is based upon the present value (calculated using a market
discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) our estimate of
the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease
for above-market operating leases and the initial non-cancellable term plus the term of any below-market fixed rate renewal options, if applicable, for below-market
operating leases. Our below-market operating leases generally do not include fixed rate or below-market renewal options. The amounts recorded for above-market
operating leases are included in deferred leasing costs and acquisition-related intangible assets, net on the balance sheet and are amortized on a straight-line basis as
a reduction of rental income over the remaining term of the applicable leases. The amounts recorded for below-market operating leases are included in deferred revenue
and acquisition-related intangible liabilities, net on the balance sheet and are amortized on a straight-line basis as an increase to rental income over the remaining term
of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. The amortization of the below-market ground lease obligation is
recorded as an increase to ground lease expense in the consolidated statements of operations for the periods presented. The amortization of the above-market ground
lease obligation is recorded as a decrease to ground lease expense in the consolidated statements of operations for the periods presented.
The fair value of acquired in-place leases is derived based on our assessment of lost revenue and costs incurred for the period required to lease the “assumed
vacant” property to the occupancy level when purchased. The amount recorded for acquired in-place leases is included in deferred leasing costs and acquisition-
related intangible assets, net on the balance sheet and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable
leases. Fully amortized intangible assets are written off each quarter.
Subsequent to our adoption of ASU 2017-01 on January 1, 2017, transaction costs associated with our acquisitions are capitalized as part of the purchase price of
the acquisition. Prior to our adoption of ASU 2017-01, costs associated with all operating property acquisitions and those development and redevelopment
acquisitions that met the criteria to be accounted for as business combinations were expensed as incurred and costs associated with development acquisitions
accounted for as asset acquisitions were capitalized as part of the cost of the asset.
Operating Properties
Operating properties are generally carried at historical cost less accumulated depreciation. Properties held for sale are reported at the lower of the carrying value or
the fair value less estimated cost to sell. The cost of operating properties includes the purchase price or development costs of the properties. Costs incurred for the
renovation and betterment of the operating properties are capitalized to our investment in that property. Maintenance and repairs are charged to expense as incurred.
When evaluating properties to be held and used for potential impairment, we first evaluate whether there are any indicators of impairment for any of our
properties. If any impairment indicators are present for a specific property, we then evaluate the regional market conditions that could reasonably affect the property. If
there are negative changes and trends in that regional market, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the
property to the property’s estimated undiscounted future cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is less than
the net carrying amount of the property, we then perform an
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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
impairment loss calculation to determine if the fair value of the property is less than the net carrying value of the property. Our impairment loss calculation compares
the net carrying amount of the property to the property’s estimated fair value, which may be based on estimated discounted future cash flow calculations or third-
party valuations or appraisals. We would recognize an impairment loss if the asset’s net carrying amount exceeds the asset’s estimated fair value. If we were to
recognize an impairment loss, the estimated fair value of the asset (less costs to sell for assets held for sale) would become its new cost basis. For a depreciable long-
lived asset, the new cost basis would be depreciated (amortized) over the remaining useful life of that asset.
Cost Capitalization
All costs clearly associated with the development, redevelopment and construction of a property are capitalized as project costs, including internal compensation
costs. In addition, the following costs are capitalized as project costs during periods in which activities necessary to prepare development and redevelopment
properties for their intended use are in progress: pre-construction costs essential to the development of the property, interest, real estate taxes and insurance.
•
•
•
For office and retail development and redevelopment properties that are pre-leased, we cease capitalization when revenue recognition commences, which is
upon substantial completion of tenant improvements deemed to be the Company’s asset for accounting purposes.
For office and retail development and redevelopment properties that are not pre-leased, we may not immediately build out the tenant improvements.
Therefore, we cease capitalization when revenue recognition commences upon substantial completion of the tenant improvements deemed to be the
Company's asset for accounting purposes, but in any event, no later than one year after the cessation of major construction activities. We also cease
capitalization on a development or redevelopment property when activities necessary to prepare the property for its intended use have been suspended.
For office and retail development or redevelopment properties with multiple tenants and staged leasing, we cease capitalization and begin depreciation on the
portion of the development or redevelopment property for which revenue recognition has commenced.
•
For residential development properties, we cease capitalization when the property is substantially complete and available for occupancy.
Once major base building construction activities have ceased and the development or redevelopment property is placed in service, the costs capitalized to
construction in progress are transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets as the
historical cost of the property.
Depreciation and Amortization of Buildings and Improvements
The costs of buildings and improvements and tenant improvements are depreciated using the straight-line method of accounting over the estimated useful lives
set forth in the table below. Depreciation expense for buildings and improvements for the three years ended December 31, 2018, 2017, and 2016 was $198.6 million,
$190.5 million, and $172.0 million, respectively.
Asset Description
Buildings and improvements
Tenant improvements
________________________
(1) Tenant improvements are amortized over the shorter of the lease term or the estimated useful life.
Real Estate Assets Held for Sale, Dispositions and Discontinued Operations
Depreciable Lives
25 – 40 years
1 – 20 years (1)
A real estate asset is classified as held for sale when certain criteria are met, including but not limited to the availability of the asset for immediate sale, the
existence of an active program to locate a buyer and the probable sale or transfer of the asset within one year. If such criteria are met, we present the applicable assets
and liabilities related to the real estate asset held for sale, if material, separately on the balance sheet and we would cease to record depreciation
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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
and amortization expense. Real estate assets held for sale are reported at the lower of their carrying value or their estimated fair value less the estimated costs to sell.
As of December 31, 2018 and 2017, we did not have any properties classified as held for sale.
Property disposals representing a strategic shift that have (or will have) a major effect on the Company’s operations and financial results, such as a major line of
business, a major geographical area or a major equity investment, are required to be presented as discontinued operations. If we were to determine that a property
disposition represents a strategic shift, the revenues, expenses and net gain (loss) on dispositions of the property would be recorded in discontinued operations for
all periods presented through the date of the applicable disposition. The operations of the eleven, eleven and six properties sold during the years ended December 31,
2018, December 31, 2017 and December 31, 2016, respectively, are presented in continuing operations as they did not represent a strategic shift in the Company’s
operations and financial results.
The net gains (losses) on dispositions of non-depreciable real estate property, including land, are reported in the consolidated statements of operations as gains
(losses) on sale of land within continuing operations in the period the land is sold. The net gains (losses) on dispositions of depreciable real estate property are
reported in the consolidated statements of operations as gains on sales of depreciable operating properties within continuing operations in the period the land is sold.
Revenue Recognition
We recognize revenue from rent, tenant reimbursements, parking and other revenue once all of the following criteria are met: (i) the agreement has been fully
executed and delivered, (ii) services have been rendered, (iii) the amount is fixed or determinable and (iv) the collectability of the amount is reasonably assured.
Minimum annual rental revenues are recognized in rental revenues on a straight-line basis over the non-cancellable term of the related lease. Rental revenue
recognition commences when the tenant takes possession or controls the physical use of the leased space. In order for the tenant to take possession, the leased
space must be substantially complete and ready for its intended use. In order to determine whether the leased space is substantially ready for its intended use, we
begin by determining whether the Company or the tenant owns the tenant improvements. When we conclude that the Company is the owner of tenant improvements,
rental revenue recognition begins when the tenant takes possession of the finished space, which is generally when Company owned tenant improvements are
substantially complete. In certain instances, when we conclude that the Company is not the owner (the tenant is the owner) of tenant improvements, rental revenue
recognition begins when the tenant takes possession of or controls the space.
When we conclude that the Company is the owner of tenant improvements, we record the cost to construct the tenant improvements, including costs paid for or
reimbursed by the tenants, as a capital asset. For these tenant improvements, we record the amount funded by or reimbursed by the tenants as deferred revenue,
which is amortized on a straight-line basis as additional rental income over the term of the related lease.
When we conclude that the tenant is the owner of tenant improvements for accounting purposes, we record our contribution towards those improvements as a
lease incentive, which is included in deferred leasing costs and acquisition-related intangible assets, net on our consolidated balance sheets and amortized as a
reduction to rental income on a straight-line basis over the term of the lease.
For residential properties, we commence revenue recognition upon lease commencement. Residential rental revenue is recognized on a straight-line basis over the
term of the related lease, net of any concessions.
Tenant Reimbursements
Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, are recognized
as revenue in the period the recoverable costs are incurred. Tenant reimbursements are generally recognized and recorded on a gross basis, as we are generally the
primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier, and have credit risk.
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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other Property Income
Other property income primarily includes amounts recorded in connection with lease terminations, tenant bankruptcy settlement payments, broken deal income
and property damage settlement related payments. Lease termination fees are amortized over the remaining lease term, if applicable. If there is no remaining lease term,
they are recognized when received and realized. Other property income also includes miscellaneous income from tenants, such as fees related to the restoration of
leased premises to their original condition and fees for late rental payments.
Allowances for Uncollectible Tenant and Deferred Rent Receivables
We carry our current and deferred rent receivables net of allowances for uncollectible amounts. Our determination of the adequacy of these allowances is based
primarily upon evaluations of individual receivables, current economic conditions, and other relevant factors. The allowances are increased or decreased through the
provision for bad debts on our consolidated statements of operations. We also evaluate allowances for all other receivables which includes note receivables included
in prepaid expenses and other assets on our consolidated balances sheets.
Cash and Cash Equivalents
We consider all highly-liquid investments with original maturities of three months or less to be cash equivalents.
Restricted Cash
Restricted cash consists of cash proceeds from dispositions that are temporarily held at qualified intermediaries for purposes of facilitating potential Section 1031
Exchanges and cash held in escrow related to acquisition and disposition holdbacks. Restricted cash also includes cash held as collateral to provide credit
enhancement for the Operating Partnership’s mortgage debt, including cash reserves for capital expenditures, tenant improvements and property taxes. As of
December 31, 2018 we had $113.1 million of restricted cash held at qualified intermediaries for the purpose of facilitating Section 1031 Exchanges. In January 2019, the
Section 1031 Exchange was completed and the cash proceeds were released from the qualified intermediary. We did not have any restricted cash held at qualified
intermediaries for the purpose of facilitating Section 1031 Exchanges at December 31, 2017.
Marketable Securities / Deferred Compensation Plan
Marketable securities reported in our consolidated balance sheets represent the assets held in connection with the Kilroy Realty Corporation 2007 Deferred
Compensation Plan (the “Deferred Compensation Plan”) (see Note 16 “Employee Benefit Plans” for additional information). The Deferred Compensation Plan assets
are held in a limited rabbi trust and invested in various mutual and money market funds. As a result, the marketable securities are treated as trading securities for
financial reporting purposes and are adjusted to fair value at the end of each accounting period, with the corresponding gains and losses recorded in interest income
and other net investment gains (losses).
At the time eligible management employees (“Participants”) defer compensation or earn mandatory Company contributions, or if we were to make a discretionary
contribution, we record compensation cost and a corresponding deferred compensation plan liability, which is included in accounts payable, accrued expenses, and
other liabilities on our consolidated balance sheets. This liability is adjusted to fair value at the end of each accounting period based on the performance of the
benchmark funds selected by each Participant, and the impact of adjusting the liability to fair value is recorded as an increase or decrease to compensation cost. The
impact of adjusting the deferred compensation plan liability to fair value and the changes in the value of the marketable securities held in connection with the Deferred
Compensation Plan generally offset and therefore do not significantly impact net income.
Deferred Leasing Costs
Costs incurred in connection with successful property leasing are capitalized as deferred leasing costs and classified as investing activities in the statement of
cash flows. Deferred leasing costs consist primarily of leasing commissions and also include certain internal payroll costs and lease incentives, which are amortized
using the straight-line method of accounting over the lives of the leases which generally range from one to 20 years. We reevaluate the remaining useful lives of
leasing costs as the creditworthiness of our tenants and economic and market conditions change. If we
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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
determine that the estimated remaining life of a lease has changed, we adjust the amortization period accordingly. Fully amortized deferred leasing costs are written off
each quarter.
As discussed below under “Accounting Standards Issued But Not Yet Effective at December 31, 2018,” upon the adoption of FASB ASU No. 2016-02 “Leases
(Topic 842),” most deferred leasing costs (with the exception of leasing commissions paid to external third party brokers) will no longer meet the criteria for
capitalization. For leases commenced prior to December 31, 2018, these costs will continue to be amortized over the remaining life of the associated lease. For leases
executed prior to December 31, 2018 that have not yet commenced as of December 31, 2018, such costs will be charged to distributions in excess of earnings as of
January 1, 2019.
Deferred Financing Costs
Financing costs related to the origination or assumption of long-term debt are deferred and generally amortized using the straight-line method of accounting,
which approximates the effective interest method, over the contractual terms of the applicable financings. Fully amortized deferred financing costs are written off when
the corresponding financing is repaid.
Debt Discounts and Premiums
Original issuance debt discounts and discounts/premiums related to recording debt acquired in connection with operating property acquisitions at fair value are
generally amortized and accreted on a straight-line basis, which approximates the effective interest method. Discounts are recorded as additional interest expense from
date of issuance or acquisition through the contractual maturity date of the related debt. Premiums are recorded as a reduction to interest expense from the date of
issuance or acquisition through the contractual maturity date of the related debt.
Noncontrolling Interests - Common Units of the Operating Partnership in the Company's Consolidated Financial Statements
Common units of the Operating Partnership within noncontrolling interests in the Company’s consolidated financial statements represent the common limited
partnership interests in the Operating Partnership not held by the Company (“noncontrolling common units”). Noncontrolling common units are presented in the
equity section of the Company’s consolidated balance sheets and are reported at their proportionate share of the net assets of the Operating Partnership.
Noncontrolling interests with redemption provisions that permit the issuer to settle in either cash or shares of common stock must be further evaluated to determine
whether equity or temporary equity classification on the balance sheet is appropriate. Since the common units contain such a provision, we evaluated the accounting
guidance and determined that the common units qualify for equity presentation in the Company’s consolidated financial statements. Net income attributable to
noncontrolling common units is allocated based on their relative ownership percentage of the Operating Partnership during the reported period. The noncontrolling
interest ownership percentage is determined by dividing the number of noncontrolling common units by the total number of common units outstanding. The issuance
or redemption of additional shares of common stock or common units results in changes to the noncontrolling interest percentage as well as the total net assets of the
Company. As a result, all equity transactions result in an allocation between equity and the noncontrolling interest in the Company’s consolidated balance sheets and
statements of equity to account for the changes in the noncontrolling interest ownership percentage as well as the change in total net assets of the Company.
Noncontrolling Interests in Consolidated Property Partnerships
Noncontrolling interests in consolidated property partnerships represent the equity interests held by unrelated third parties in our three consolidated property
partnerships (see Note 11 “Noncontrolling Interests on the Company’s Consolidated Financial Statements” and see Note 12 “Noncontrolling Interests on the
Operating Partnership’s Consolidated Financial Statements”). Noncontrolling interests in consolidated property partnerships are not redeemable and are presented as
permanent equity in the Company's consolidated balance sheets. We account for the noncontrolling interests in consolidated property partnerships using the
hypothetical liquidation at book value (“HLBV”) method to attribute the earnings or losses of the consolidated property partnerships between the controlling and
noncontrolling interests. Under the HLBV method, the amounts reported as noncontrolling interests in consolidated property partnerships in the consolidated balance
sheets represent the amounts the noncontrolling interests would hypothetically
F - 20
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
receive at each balance sheet reporting date under the liquidation provisions of the governing agreements assuming the net assets of the consolidated property
partnerships were liquidated at recorded amounts and distributed between the controlling and noncontrolling interests in accordance with the governing documents.
The net income attributable to noncontrolling interests in consolidated property partnerships in the consolidated statements of operations is associated with the
increase or decrease in the noncontrolling interest holders’ contractual claims on the respective entities’ balance sheets assuming a hypothetical liquidation at the end
of that reporting period when compared with their claims on the respective entities’ balance sheets assuming a hypothetical liquidation at the beginning of that
reporting period, after removing any contributions or distributions.
Common Partnership Interests on the Operating Partnership’s Consolidated Balance Sheets
The common units held by the Company and the noncontrolling common units held by the common limited partners are both presented in the permanent equity
section of the Operating Partnership’s consolidated balance sheets in partners’ capital. The redemption rights of the noncontrolling common units permit us to settle
the redemption obligation in either cash or shares of the Company’s common stock at our option (see Note 11 “Noncontrolling Interests on the Company’s
Consolidated Financial Statements” for additional information).
Noncontrolling Interests on the Operating Partnership’s Consolidated Financial Statements
Noncontrolling interests in the Operating Partnership’s consolidated financial statements include the noncontrolling interest in property partnerships (see
Note 12 “Noncontrolling Interests on the Operating Partnership’s Consolidated Financial Statements”) and the Company’s 1.0% general partnership interest in the
Finance Partnership. The 1.0% general partnership interest in the Finance Partnership noncontrolling interest is presented in the permanent equity section of the
Operating Partnership’s consolidated balance sheets given that these interests are not convertible or redeemable into any other ownership interest of the Company or
the Operating Partnership.
Equity Offerings
Underwriting commissions and offering costs incurred in connection with common equity offerings and our at-the-market stock offering program (see Note 13
“Stockholders’ Equity of the Company”) are reflected as a reduction of additional paid-in capital. Issuance costs incurred in connection with preferred equity offerings
are reflected as a reduction of the carrying value of the preferred equity.
Sales of our common stock under forward equity sale agreements (such as those under the forward equity offering executed in August 2018 and discussed at
Note 13) meet the derivatives and hedging guidance scope exception to be accounted for as equity instruments based on the following assessment: (i) none of the
agreements’ exercise contingencies were based on observable markets or indices besides those related to the market for our own stock price and operations; and (ii)
none of the settlement provisions precluded the agreements from being indexed to our own stock.
The net proceeds from any equity offering of the Company are generally contributed to the Operating Partnership in exchange for a number of common units
equivalent to the number of shares of common stock issued and are reflected in the Operating Partnership’s consolidated financial statements as an increase in
partners’ capital.
Share-based Incentive Compensation Accounting
Compensation cost for all share-based awards, including options, requires measurement at estimated fair value on the grant date. Compensation cost is
recognized on a straight-line basis over the service vesting period, which represents the requisite service period. The grant date fair value of market measure-based
share-based compensation plans are calculated using a Monte Carlo simulation pricing model. The grant date fair value of stock option grants is calculated using the
Black-Scholes valuation model. Equity awards settled in cash are valued at the fair value of our common stock on the period end date through the settlement date.
Equity awards settled in cash are remeasured at each reporting period and are recognized as a liability in the consolidated balance sheet during the vesting period until
settlement. Forfeitures of all share-based awards are recognized when they occur.
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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
For share-based awards in which the performance period precedes the grant date, we recognize compensation cost over the requisite service period, which
includes both the performance and service vesting periods, using the accelerated attribution expense method. The requisite service period begins on the date the
Executive Compensation Committee authorizes the award and adopts any relevant performance measures.
For share-based awards with performance-based measures, the total estimated compensation cost is based on our most recent estimate of the probable
achievement of the pre-established specific corporate performance measures. These estimates are based on actual results and our latest internal forecasts for each
performance measure. For share-based awards with market measures, the total estimated compensation cost is based on the fair value of the award at the grant date.
For share-based awards with performance-based measures and market measures, the total estimated compensation cost is based on the fair value per share at the grant
date multiplied by our most recent estimate of the number of shares to be earned based on actual results and the probable achievement of the pre-established
corporate performance measures based on our latest internal forecasts.
In accordance with the provisions of our share-based incentive compensation plan, we accept the return of shares of Company common stock, at the current
quoted market price, from employees to satisfy minimum statutory tax-withholding requirements related to shares that vested during the period.
For share-based awards granted by the Company, the Operating Partnership issues a number of common units equal to the number of shares of common stock
ultimately granted by the Company in respect of such awards.
Basic and Diluted Net Income Available to Common Stockholders per Share
Basic net income available to common stockholders per share is computed by dividing net income available to common stockholders, after preferred distributions
and the allocation of income to participating securities, by the weighted-average number of shares of common stock outstanding for the period. Diluted net income
available to common stockholders per share is computed by dividing net income available for common stockholders, after preferred distributions and the allocation of
income to participating securities, by the sum of the weighted-average number of shares of common stock outstanding for the period plus the assumed exercise of all
dilutive securities. The impact of the outstanding common units is considered in the calculation of diluted net income available to common stockholders per share. The
common units are not reflected in the diluted net income available to common stockholders per share calculation because the exchange of common units into common
stock is on a one for one basis, and the common units are allocated net income on a per share basis equal to the common stock (see Note 21 “Net Income Available to
Common Stockholders Per Share of the Company”). Accordingly, any exchange would not have any effect on diluted net income (loss) available to common
stockholders per share.
Nonvested share-based payment awards (including nonvested restricted stock units (“RSUs”), vested market-measure RSUs and vested dividend equivalents
issued to holders of RSUs) containing nonforfeitable rights to dividends or dividend equivalents are accounted for as participating securities and included in the
computation of basic and diluted net income available to common stockholders per share pursuant to the two-class method. The dilutive effect of shares issuable
under executed forward equity sale agreements and stock options are reflected in the weighted average diluted outstanding shares calculation by application of the
treasury stock method. The dilutive effect of the outstanding nonvested shares of common stock (“nonvested shares”) and RSUs that have not yet been granted but
are contingently issuable under the share-based compensation programs is reflected in the weighted average diluted shares calculation by application of the treasury
stock method at the beginning of the quarterly period in which all necessary conditions have been satisfied.
Basic and Diluted Net Income Available to Common Unitholders per Unit
Basic net income available to common unitholders per unit is computed by dividing net income available to common unitholders, after preferred distributions and
the allocation of income to participating securities, by the weighted-average number of vested common units outstanding for the period. Diluted net income available
to common unitholders per unit is computed by dividing net income available to common unitholders, after preferred distributions and the allocation of income to
participating securities, by the sum of the weighted-average number of common units outstanding for the period plus the assumed exercise of all dilutive securities.
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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The dilutive effect of stock options, outstanding nonvested shares, RSUs, awards containing nonforfeitable rights to dividend equivalents and shares issuable
under executed forward equity sale agreements are reflected in diluted net income available to common unitholders per unit in the same manner as noted above for net
income available to common stockholders per share.
Fair Value Measurements
The fair values of our financial assets and liabilities are disclosed in Note 19, “Fair Value Measurements and Disclosures,” to our consolidated financial
statements. The only financial assets recorded at fair value on a recurring basis in our consolidated financial statements are our marketable securities. We elected not
to apply the fair value option for any of our eligible financial instruments or other items.
We determine the estimated fair value of financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value
measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect our market assumptions. This hierarchy requires the use of observable market data when available. The following is the fair value
hierarchy:
•
•
Level 1 – quoted prices for identical instruments in active markets;
Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model-
derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
We determine the fair value for the marketable securities using quoted prices in active markets for identical assets. Our other financial instruments, which are only
disclosed at fair value, are comprised of secured debt, unsecured senior notes, unsecured line of credit and unsecured term loan facility.
We generally determine the fair value of our secured debt, unsecured debt, and unsecured line of credit by performing discounted cash flow analyses using an
appropriate market discount rate. We calculate the market rate by obtaining period-end treasury rates for maturities that correspond to the maturities of our fixed-rate
debt and then adding an appropriate credit spread based on information obtained from third-party financial institutions. These credit spreads take into account
factors, including but not limited to, our credit profile, the tenure of the debt, amortization period, whether the debt is secured or unsecured, and the loan-to-value ratio
of the debt to the collateral. These calculations are significantly affected by the assumptions used, including the discount rate, credit spreads and estimates of future
cash flow. We calculate the market rate of our unsecured line of credit, unsecured term loan facility, and unsecured term loan by obtaining the period-end London
Interbank Offered Rate (“LIBOR”) and then adding an appropriate credit spread based on our credit ratings, and the amended terms of our unsecured line of credit,
unsecured term loan facility, and unsecured term loan agreement. We determine the fair value of each of our publicly traded unsecured senior notes based on their
quoted trading price at the end of the reporting period, if such prices are available.
Carrying amounts of our cash and cash equivalents, restricted cash and accounts payable approximate fair value due to their short-term maturities.
Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code. To qualify as a REIT, we must distribute annually at least 90% of our adjusted
taxable income, as defined in the Code, to our stockholders and satisfy certain other organizational and operating requirements. We generally will not be subject to
federal income taxes if we distribute 100% of our taxable income for each year to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject
to federal income taxes (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and we may not be able to qualify as a REIT
for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property
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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
and to federal income taxes and excise taxes on our undistributed taxable income. We believe that we have met all of the REIT distribution and technical requirements
for the years ended December 31, 2018, 2017 and 2016, and we were not subject to any federal income taxes (see Note 25 “Tax Treatment of Distributions” for
additional information). We intend to continue to adhere to these requirements and maintain the Company’s REIT status. Accordingly, no provision for income taxes
has been made in the accompanying financial statements.
In addition, any taxable income from our taxable REIT subsidiaries, which were formed in 2002 and 2018, are subject to federal, state, and local income taxes. For
the years ended December 31, 2018, 2017 and 2016 the taxable REIT subsidiaries had de minimis taxable income.
Uncertain Tax Positions
We include favorable tax positions in the calculation of tax liabilities if it is more likely than not that our adopted tax position will prevail if challenged by tax
authorities.
We evaluated the potential impact of identified uncertain tax positions for all tax years still subject to audit under state and federal income tax law and concluded
that we did not have any unrecognized tax benefits or any additional tax liabilities as of December 31, 2018 or 2017. As of December 31, 2018, the years still subject to
audit are 2014 through 2018 under the California state income tax law and 2015 through 2018 under the federal income tax law.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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
reported periods. Actual results could differ from those estimates.
Segments
We currently operate in one operating segment, our office properties segment.
Concentration of Credit Risk
All of our properties and development and redevelopment projects are owned and all of our business is currently conducted in the state of California with the
exception of the ownership and operation of eight office properties and one development project under construction located in the state of Washington. The ability of
tenants to honor the terms of their leases is dependent upon the economic, regulatory, and social factors affecting the communities in which our tenants operate.
As of December 31, 2018, our 15 largest tenants represented approximately 45.7% of total annualized base rental revenues, of which 5.9% was attributable to our
largest tenant.
We have deposited cash with financial institutions that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per institution. As of
December 31, 2018 and 2017, we had cash accounts in excess of FDIC insured limits.
Accounting Standards Issued But Not Yet Effective at December 31, 2018
Accounting Pronouncements Adopted January 1, 2019
ASU No. 2016-02 “Leases (Topic 842)”
On February 25, 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”) to amend the accounting guidance for leases. The accounting
applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified
as operating leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and
F - 24
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an
accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense
for such leases generally on a straight-line basis over the lease term. For leases with a term of 12 months or less where we are the lessee, we plan to make this policy
election. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018.
In July 2018, the FASB issued ASU No. 2018-11 which (1) simplifies transition requirements for both lessees and lessors by adding an option that permits an
organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial
statements and (2) provides a practical expedient for lessors that permits lessors to make an accounting policy election to not separate nonlease components from the
associated lease components, if the following two criteria are met: (1) the timing and pattern of transfer of the lease and nonlease components are the same and (2) the
lease component would be classified as an operating lease if accounted for separately. For leases where we are the lessor, we plan to elect the optional transition relief
and apply the practical expedients provided by ASU 2018-11. As a result, leases where we are the lessor will be accounted for in a similar method to existing standards
with the underlying leased asset being reported and recognized as a real estate asset.
In December 2018, the FASB issued ASU 2018-20 which clarifies lessor treatment of sales taxes and other similar taxes collected from lessees, lessor costs paid
directly by lessees and recognition of variable payments for contracts with lease and nonlease components. This will result in a gross-up of amounts recorded to
tenant reimbursements and property expenses in our consolidated statements of operations related to certain services that, under existing GAAP guidance, were
presented on a net basis and such change will not have an impact to net income.
ASU 2016-02 also specifies that upon adoption, lessors will no longer be able to capitalize and amortize certain leasing related costs and instead will only be
permitted to capitalize and amortize incremental direct leasing costs. As a result, we have concluded that upon the adoption of the standard, we will be required to
expense as incurred certain leasing costs we are currently able to capitalize and amortize as deferred leasing costs under existing guidance. This change had a material
impact on the Company’s consolidated financial statements upon adoption of the standard on January 1, 2019.
The election of the package of practical expedients described above permits us to continue to account for our leases that commenced before January 1, 2019
under the existing lease accounting guidance for the remainder of their lease terms, and to apply the new lease accounting guidance to leases commencing or modified
after January 1, 2019. On January 1, 2019, we recognized a cumulative adjustment to distributions in excess of earnings, as required by ASU 2016-02, to write-off lease
origination costs that were capitalized in connection with leases that had not commenced before January 1, 2019. These costs were capitalized in accordance with the
lease accounting standards existing prior to January 1, 2019, and would not qualify for capitalization under the new lease accounting guidance. This adjustment did
not have a material impact to our consolidated financial statements.
For leases where we are the lessee, specifically for our four ground leases, the adoption of the standard will significantly change the accounting on our
consolidated balance sheets since both existing ground leases and any future ground leases will be required to be recorded on the Company’s consolidated balance
sheets as an obligation of the Company. Existing ground leases executed before the January 1, 2019 adoption date will continue to be accounted for as operating
leases and the new guidance will not have a material impact on our recognition of ground lease expense or our results of operations. However, we will be required to
recognize a right of use asset and a lease liability on our consolidated balance sheets equal to the present value of the minimum lease payments required in accordance
with each ground lease. The adoption of this ASU will result in the recognition of operating lease right of use assets and related liabilities of approximately $80 million
to $95 million in the aggregate as of January 1, 2019. We do not expect there will be a material impact to our consolidated statements of operations or consolidated
cash flows as a result of adoption of this new guidance. In addition, we currently believe that for new ground leases entered into after the adoption date of the new
standard, such leases could be required to be accounted for as financing-type leases, resulting in ground lease expense recorded using the effective interest method
instead of on a straight-line basis over the term of the lease. This could have a significant impact on our results of operations if we enter into material new ground
leases after the date of adoption since ground lease expense calculated using the effective interest method results in an increased amount of ground lease expense in
the earlier years of a ground lease as compared to the current straight-line method.
F - 25
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accounting Pronouncements Effective 2020 and Beyond
ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326)”
On June 16, 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”) to amend the accounting for credit losses for certain financial instruments. Under the new
guidance, an entity recognizes its estimate of expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. In
November 2018, the FASB released ASU No. 2018-19 “Codification Improvements to Topic 326, Financial Instruments - Credit Losses.” This ASU clarifies that
receivables arising from operating leases are not within the scope of Subtopic 326-20 “Financial Instruments – Credit Losses.” Instead, impairment of receivables
arising from operating leases should be accounted for under Subtopic 842-30 “Leases – Lessor.” ASU 2016-13 is effective for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. The Company does not anticipate that the guidance will have an impact on the consolidated financial statements or notes to the consolidated
financial statements.
ASU No. 2018-13 “Fair Value Measurement (Topic 820)”
On August 28, 2018, the FASB issued ASU No. 2018-13 (“ASU 2018-13”) to amend the disclosure requirements for fair value measurements. The amendments in
ASU 2018-13 include new, modified and eliminated disclosure requirements and are the result of a broader disclosure project called FASB Concepts Statement,
Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements, which the Board finalized on August 28, 2018. The Board used the
guidance in the Concepts Statement to improve the effectiveness of ASC 820’s disclosure requirements. ASU 2018-13 is effective for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures. The Company currently
anticipates that the guidance will not have a significant impact on the disclosures in the notes to the consolidated financial statements.
ASU No. 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)”
On August 29, 2018, the FASB issued ASU No. 2018-15 (“ASU 2018-15”) to amend a customer’s accounting for implementation costs incurred in a cloud
computing arrangement that is a service contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include
an internal-use software license). ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early
adoption is permitted, including adoption in any interim period. ASU 2018-15 can be applied either retrospectively or prospectively to all implementation costs incurred
after the date of adoption. The Company is currently evaluating the impact of ASU 2018-15 on the consolidated financial statements and notes to the consolidated
financial statements.
3.
Acquisitions
Operating Property Acquisitions
During the year ended December 31, 2018, we acquired the four operating properties listed below in two transactions from unrelated third parties. We did not
acquire any operating properties during the year ended December 31, 2017.
Property
Date of Acquisition
Number of
Buildings
Rentable Square
Feet (unaudited)
Occupancy as of December
31, 2018 (unaudited)
Purchase Price
(in millions) (1)
2018 Acquisitions
345, 347 & 349 Oyster Point Boulevard, South San Francisco, CA
345 Brannan Street, San Francisco, CA (2)
January 31, 2018
December 21, 2018
Total (3)
________________________
(1) Excludes acquisition-related costs.
F - 26
3
1
4
145,530
110,030
255,560
78.5 % $
99.7 %
$
111.0
146.0
257.0
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(2) At December 31, 2018, this property was temporarily being held in a separate VIE to facilitate potential Section 1031 Exchanges. During January 2019, the Company completed the
Section 1031 Exchange related to this VIE. See Note 2 “ Basis of Presentation and Significant Accounting Policies.”
(3) The results of operations for the properties acquired during 2018 contributed $8.0 million and $1.7 million to revenue and net income, respectively, for the year ended December 31,
2018.
The related assets, liabilities and results of operations of the acquired properties are included in the consolidated financial statements as of the date of
acquisition. The following table summarizes the estimated fair values of the assets and liabilities assumed at the respective acquisition dates for our 2018 operating
property acquisitions:
Total 2018 Operating Property
Acquisitions (1)
80,269
172,059
13,593
265,921
8,921
8,921
257,000
Assets
Land and improvements
Buildings and improvements (2)
Deferred leasing costs and acquisition-related intangible assets (3)
Total assets acquired
Liabilities
Acquisition-related intangible liabilities (4)
Total liabilities assumed
$
$
$
$
Net assets and liabilities acquired
________________________
(1) The purchase price of the two acquisitions completed during the year ended December 31, 2018 were individually less than 5% and in aggregate less than 10% of the Company’s total
assets as of December 31, 2017.
(2) Represents buildings, building improvements and tenant improvements.
(3) Represents in-place leases (approximately $11.8 million with a weighted average amortization period of 1.3 years years) and leasing commissions (approximately $1.8 million with a
weighted average amortization period of 6.6 years years).
(4) Represents below-market leases (approximately $8.9 million with a weighted average amortization period of 9.8 years years).
Development Project Acquisitions
On June 1, 2018, we acquired the following 39-acre development site, which is located adjacent to the three operating properties we acquired in January 2018, from
an unrelated third party. The acquisition was funded with proceeds from the Company’s unsecured revolving credit facility and the Company’s at-the-market stock
offering program.
Project
Date of Acquisition
City/Submarket
Type
Purchase Price
(in millions) (1)
Kilroy Oyster Point
________________________
(1) Excludes acquisition-related costs. In connection with this acquisition, we also recorded $40.6 million in accrued liabilities and environmental remediation liabilities at the date of
acquisition, which are not included in the purchase price above. As of December 31, 2018, the purchase price and our current estimate of assumed liabilities are included in undeveloped
land and construction in progress and the assumed liabilities are included in accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets.
South San Francisco
June 1, 2018
308.2
Land
$
On October 10, 2017, the Company completed the acquisition of a 1.2 acre development site located in the Little Italy neighborhood of downtown San Diego,
California in three separate transactions from separate unrelated third parties for a total purchase price of $19.4 million and the assumption of $1.4 million of accrued
liabilities.
Acquisition Costs
During the years ended December 31, 2018, 2017, and 2016, we capitalized $3.8 million, $4.6 million, and $0.5 million, respectively, of acquisition costs. During the
year ended December 31, 2016, we expensed $1.9 million of acquisition costs.
F - 27
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
4. Dispositions
Operating Property Dispositions
The following table summarizes the operating properties sold during the years ended December 31, 2018, 2017 and 2016:
Location
2018 Dispositions
1310-1327 Chesapeake Terrace, Sunnyvale, CA
Plaza Yarrow Bay Properties (2)
23925, 23975, & 24025 Park Sorrento, Calabasas, CA
Total 2018 Dispositions
2017 Dispositions
5717 Pacific Center Boulevard, San Diego, CA
Sorrento Mesa and Mission Valley Properties (3)
Total 2017 Dispositions
2016 Dispositions
Torrey Santa Fe Properties (4)
4930, 4939 & 4955 Directors Place, San Diego, CA (5)
Total 2016 Dispositions
Month of Disposition
Number of
Buildings
Rentable
Square Feet (unaudited)
Sales Price
(in millions) (1)
November
November
December
January
September
January
July
4
4
3
11
1
10
11
4
2
6
266,982
279,924
225,340
772,246
$
$
67,995
675,143
743,138
$
$
465,812
136,908
602,720
$
$
160.3
134.5
78.2
373.0
12.1
174.5
186.6
262.3
49.0
311.3
__________________
(1) Represents gross sales price before the impact of broker commissions and closing costs.
(2) The Plaza Yarrow Bay Properties include the following properties: 10210, 10220 and 10230 NE Points Drive & 3933 Lake Washington Boulevard NE in Kirkland, Washington.
(3) The Sorrento Mesa and Mission Valley Properties includes the following properties: 10390, 10394, 10398, 10421, 10445 and 10455 Pacific Center Court, 2355, 2365, 2375 and 2385
Northside Drive and Pacific Corporate Center - Lot 8, a 5.0 acre undeveloped land parcel.
(4) The Torrey Santa Fe Properties include the following properties: 7525, 7535, 7545 and 7555 Torrey Santa Fe.
(5) Includes two operating properties totaling 136,908 rentable square feet and a 7.0 acre undeveloped land parcel.
The total gains on the sales of the operating properties sold during the years ended December 31, 2018, 2017 and 2016 were $142.9 million, $39.5 million and
$164.3 million, respectively.
Land Dispositions
During the year ended December 31, 2018, in connection with the Plaza Yarrow Bay Properties disposition listed above, we recognized a gain on sale of land of
$11.8 million. During the year ended December 31, 2017, in connection with the Sorrento Mesa and Mission Valley Properties disposition listed above, we recognized a
gain on sale of land of $0.4 million. The following table summarizes the land dispositions completed during the year ended December 31, 2016:
Properties
2016 Land Dispositions
Carlsbad Oaks - Lot 7
Carlsbad Oaks - Lots 4 & 5
Carlsbad Oaks - Lot 8
Total 2016 Land Dispositions (2)(3)
__________________
(1) Represents gross sales price before the impact of commissions and closing costs.
(2) In connection with these land dispositions, $2.3 million of secured debt was assumed by the buyers.
(3) The 2016 land dispositions resulted in a net loss on sales of $0.3 million.
F - 28
Submarket
Month of Disposition
Gross Site Acreage
(unaudited)
Sales Price(1)
(in millions)
Carlsbad
Carlsbad
Carlsbad
January
June
June
7.6
11.2
13.2
32.0
$
$
4.5
6.0
8.9
19.4
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restricted Cash Related to Dispositions
As of December 31, 2018, approximately $113.1 million of net proceeds related to the operating property dispositions during the year ended December 31, 2018
were temporarily being held at a qualified intermediary at our direction, for the purpose of facilitating a Section 1031 Exchange. The cash proceeds were included in
restricted cash on our consolidated balance sheets at December 31, 2018. During January 2019, the Section 1031 Exchange related to this VIE was successfully
completed and the cash proceeds were released from the qualified intermediary. We did not have any restricted cash related to dispositions or Section 1031 Exchanges
as of December 31, 2017.
5.
Deferred Leasing Costs and Acquisition-related Intangible Assets and Liabilities, net
The following table summarizes our deferred leasing costs and acquisition-related intangible assets (acquired value of leasing costs, above-market operating
leases, in-place leases and below-market ground lease obligation) and intangible liabilities (acquired value of below-market operating leases and above-market ground
lease obligation) as of December 31, 2018 and 2017:
Deferred Leasing Costs and Acquisition-related Intangible Assets, net:
Deferred leasing costs
Accumulated amortization
Deferred leasing costs, net
Above-market operating leases
Accumulated amortization
Above-market operating leases, net
In-place leases
Accumulated amortization
In-place leases, net
Below-market ground lease obligation
Accumulated amortization
Below-market ground lease obligation, net
Total deferred leasing costs and acquisition-related intangible assets, net
Acquisition-related Intangible Liabilities, net: (1)
Below-market operating leases
Accumulated amortization
Below-market operating leases, net
Above-market ground lease obligation
Accumulated amortization
Above-market ground lease obligation, net
Total acquisition-related intangible liabilities, net
_______________
(1) Included in deferred revenue and acquisition-related intangible liabilities, net in the consolidated balance sheets.
F - 29
December 31, 2018
December 31, 2017
(in thousands)
$
$
$
$
$
266,905
(100,805)
166,100
2,836
(2,150)
686
66,526
(36,174)
30,352
490
(54)
436
197,574
$
$
53,523
(29,978)
23,545
6,320
(727)
5,593
29,138
$
248,598
(101,917)
146,681
4,199
(3,068)
1,131
82,097
(46,625)
35,472
490
(46)
444
183,728
65,440
(40,495)
24,945
6,320
(626)
5,694
30,639
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table sets forth amortization related to deferred leasing costs and acquisition-related intangibles for the years ended December 31, 2018, 2017 and
2016.
Deferred leasing costs (1)
Above-market operating leases (2)
In-place leases (1)
Below-market ground lease obligation (3)
Below-market operating leases (4)
Above-market ground lease obligation (5)
$
Year Ended December 31,
2018
2017
2016
(in thousands)
$
34,341
444
15,915
8
(10,192)
(101)
$
31,675
2,240
18,650
8
(10,768)
(101)
28,639
1,509
11,676
8
(8,674)
(101)
Total
_______________
(1) The amortization of deferred leasing costs and in-place leases is recorded to depreciation and amortization expense and the amortization of lease incentives is recorded as a reduction to
40,415
$
41,704
$
33,057
$
rental income in the consolidated statements of operations for the periods presented.
(2) The amortization of above-market operating leases is recorded as a decrease to rental income in the consolidated statements of operations for the periods presented.
(3) The amortization of the below-market ground lease obligation is recorded as an increase to ground lease expense in the consolidated statements of operations for the periods presented.
(4) The amortization of below-market operating leases is recorded as an increase to rental income in the consolidated statements of operations for the periods presented.
(5) The amortization of the above-market ground lease obligation is recorded as a decrease to ground lease expense in the consolidated statements of operations for the periods presented.
The following table sets forth the estimated annual amortization expense related to deferred leasing costs and acquisition-related intangibles as of December 31,
2018 for future periods:
Year
2019
2020
2021
2022
2023
Thereafter
Deferred Leasing Costs
Above-Market
Operating Leases (1)
In-Place Leases
Below-Market Ground
Lease Obligation (2)
Below-Market
Operating Leases (3)
Above-Market Ground
Lease Obligation (4)
(in thousands)
31,980
26,868
21,787
18,683
14,914
51,868
166,100
192
38
38
38
38
342
686
16,675
5,963
2,861
1,589
648
2,616
30,352
8
8
8
8
8
396
436
(7,779)
(4,621)
(1,938)
(1,486)
(988)
(6,733)
(23,545) $
(100)
(100)
(100)
(100)
(100)
(5,093)
(5,593)
Total
_______________
(1) Represents estimated annual amortization related to above-market operating leases. Amounts will be recorded as a decrease to rental income in the consolidated statements of operations.
(2) Represents estimated annual amortization related to below-market ground lease obligations. Amounts will be recorded as an increase to ground lease expense in the consolidated statements
$
$
$
$
$
of operations.
(3) Represents estimated annual amortization related to below-market operating leases. Amounts will be recorded as an increase to rental income in the consolidated statements of operations.
(4) Represents estimated annual amortization related to above-market ground lease obligations. Amounts will be recorded as a decrease to ground lease expense in the consolidated statements
of operations.
F - 30
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
6.
Receivables
Current Receivables, net
Current receivables, net is primarily comprised of contractual rents and other lease-related obligations due from tenants. The balance consisted of the following as
of December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
Current receivables
Allowance for uncollectible tenant receivables
Current receivables, net
Deferred Rent Receivables, net
Deferred rent receivables, net consisted of the following as of December 31, 2018 and 2017:
Deferred rent receivables
Allowance for deferred rent receivables
Deferred rent receivables, net
7.
Prepaid Expenses and Other Assets, Net
Prepaid expenses and other assets, net consisted of the following at December 31, 2018 and 2017:
$
$
$
$
(in thousands)
$
24,815
(4,639)
20,176
$
19,235
(2,309)
16,926
December 31, 2018
December 31, 2017
(in thousands)
$
270,346
(3,339)
267,007
$
249,629
(3,238)
246,391
December 31, 2018
December 31, 2017
Furniture, fixtures and other long-lived assets, net
Notes receivable (1)
Prepaid expenses & acquisition deposits
Total Prepaid Expenses and Other Assets, Net
$
$
(in thousands)
$
36,833
2,113
13,927
52,873
$
39,686
19,912
55,108
114,706
_______________
(1) During the year ended December 31, 2018, a note receivable with a balance of $15.1 million was repaid to the Company. Notes receivable are shown net of a valuation allowance of
approximately $2.9 million as of December 31, 2018.
F - 31
8. Secured and Unsecured Debt of the Company
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In this Note 8, the “Company” refers solely to Kilroy Realty Corporation and not to any of our subsidiaries. The Company itself does not hold any indebtedness.
All of our secured and unsecured debt is held directly by the Operating Partnership.
The Company generally guarantees all the Operating Partnership’s unsecured debt obligations including the unsecured revolving credit facility, the $150.0 million
unsecured term loan facility and all of the unsecured senior notes. At December 31, 2018 and 2017, the Operating Partnership had $2.6 billion and $2.0 billion,
respectively, outstanding in total, including unamortized discounts and deferred financing costs, under these unsecured debt obligations.
In addition, although the remaining $0.3 billion of the Operating Partnership’s debt as of December 31, 2018 and 2017, is secured and non-recourse to the
Company, the Company provides limited customary secured debt guarantees for items such as voluntary bankruptcy, fraud, misapplication of payments and
environmental liabilities.
Debt Covenants and Restrictions
One of the covenants contained within the unsecured revolving credit facility and the unsecured term loan facility as discussed further below in Note 9 prohibits
the Company from paying dividends during an event of default in excess of an amount which results in distributions to us in an amount sufficient to permit us to pay
dividends to our stockholders that we reasonably believe are necessary to (a) maintain our qualification as a REIT for federal and state income tax purposes and
(b) avoid the payment of federal or state income or excise tax.
9. Secured and Unsecured Debt of the Operating Partnership
Secured Debt
The following table sets forth the composition of our secured debt as of December 31, 2018 and 2017:
Type of Debt
Mortgage note payable
Mortgage note payable (3)
Mortgage note payable (3)(4)
Total secured debt
Unamortized Deferred Financing Costs
Total secured debt, net
Annual Stated Interest
Rate (1)
GAAP
Effective Rate (1)(2)
Maturity Date
2018
2017
December 31,
3.57%
4.48%
6.05%
3.57%
4.48%
3.50%
December 2026
$
July 2027
June 2019
$
$
(in thousands)
170,000
91,332
75,238
336,570
$
$
(1,039 )
335,531
$
170,000
93,081
78,894
341,975
(1,175 )
340,800
______________
(1) All interest rates presented are fixed-rate interest rates.
(2) Represents the effective interest rate including the amortization of initial issuance discounts/premiums excluding the amortization of deferred financing costs.
(3) The secured debt and the related properties that secure the debt are held in a special purpose entity and the properties are not available to satisfy the debts and other obligations of the
Company or the Operating Partnership.
(4) As of December 31, 2018 and 2017, the mortgage loan had unamortized debt premiums of $0.8 million and $2.6 million, respectively. In February 2019, the Company repaid this
mortgage note payable at par.
The Operating Partnership’s secured debt was collateralized by operating properties with a combined net book value of approximately $324.6 million as of
December 31, 2018.
Although our mortgage loans are secured and non-recourse to the Company and the Operating Partnership, the Company provides limited customary secured
debt guarantees for items such as voluntary bankruptcy, fraud, misapplication of payments and environmental liabilities.
As of December 31, 2018, all of the Operating Partnership’s secured loans contained restrictions that would require the payment of prepayment penalties for the
acceleration of outstanding debt. The mortgage notes payable are secured
F - 32
by deeds of trust on certain of our properties and the assignment of certain rents and leases associated with those properties.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Unsecured Senior Notes
The following table summarizes the balance and significant terms of the registered unsecured senior notes issued by the Operating Partnership and outstanding,
including unamortized discounts of $6.6 million and $6.3 million and unamortized deferred financing costs of $15.4 million and $12.5 million as of December 31, 2018 and
2017, respectively:
Issuance date
Maturity date
Stated
coupon rate
Effective
interest rate (1)
2018
2017
Net Carrying Amount
as of December 31,
4.750% Unsecured Senior Notes (2)
November 2018
December 2028
4.750%
4.800%
$
(in thousands)
$
400,000
(4,960)
Unamortized discount and deferred financing costs
Net carrying amount
4.350% Unsecured Senior Notes (3)
Unamortized discount and deferred financing costs
Net carrying amount
4.300% Unsecured Senior Notes (3)
Unamortized discount and deferred financing costs
Net carrying amount
3.450% Unsecured Senior Notes (4)
Unamortized discount and deferred financing costs
Net carrying amount
Unamortized discount and deferred financing costs
Net carrying amount
3.350% Unsecured Senior Notes (5)
Unamortized discount and deferred financing costs
Net carrying amount
4.375% Unsecured Senior Notes (6)
Unamortized discount and deferred financing costs
Net carrying amount
4.250% Unsecured Senior Notes (7)
Unamortized discount and deferred financing costs
Net carrying amount
3.800% Unsecured Senior Notes (8)
Unamortized discount and deferred financing costs
Net carrying amount
6.625% Unsecured Senior Notes (9)
Unamortized discount and deferred financing costs
Net carrying amount
Total Unsecured Senior Notes, Net
—
—
—
—
—
—
—
—
—
425,000
(4,047)
75,000
(475)
74,525
175,000
(1,056)
October 2018
October 2026
4.350%
4.350%
$
200,000
$
$
395,040
$
(1,375)
$
198,625
$
July 2018
July 2026
4.300%
4.300%
$
50,000
$
(342)
$
49,658
$
December 2017
December 2024
3.450%
3.470%
$
425,000
$
(3,493)
$
421,507
$
420,953
75,000
$
(432)
February 2017
February 2027
3.350%
3.350%
$
175,000
$
(941)
$
74,568
$
$
174,059
$
173,944
September 2015
October 2025
4.375%
4.444%
$
400,000
$
(3,738)
400,000
(4,292)
$
396,262
$
395,708
July 2014
August 2029
4.250%
4.350%
$
400,000
$
(5,632)
400,000
(6,164)
$
394,368
$
393,836
January 2013
January 2023
3.800%
3.800%
$
300,000
$
(1,108)
300,000
(1,382)
$
298,892
$
298,618
May 2010
June 2020
6.625%
6.744%
$
$
—
—
—
$
250,000
(1,321)
$
248,679
$
2,402,979
$
2,006,263
3.450% Unsecured Senior Notes (5)
February 2017
February 2029
3.450%
3.450%
$
________________________
(1) Represents the effective interest rate including the amortization of initial issuance discounts, excluding the amortization of deferred financing costs.
(2) Interest on these notes is payable semi-annually in arrears on June 15th and December 15th of each year, beginning on June 15, 2019.
(3) Interest on these notes is payable semi-annually in arrears on April 18th and October 18th of each year, beginning in April 18, 2019.
(4) Interest on these notes is payable semi-annually in arrears on June 15th and December 15th of each year.
(5) Interest on these notes is payable semi-annually in arrears on February 17th and August 17th of each year.
(6) Interest on these notes is payable semi-annually in arrears on April 1st and October 1st of each year.
(7) Interest on these notes is payable semi-annually in arrears on February 15th and August 15th of each year.
(8) Interest on these notes is payable semi-annually in arrears on January 15th and July 15th of each year.
(9) Interest on these notes is payable semi-annually in arrears on June 1st and December 1st of each year.
F - 33
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Unsecured Senior Notes - Registered Offerings
In November 2018, the Operating Partnership issued $400.0 million of aggregate principal amount of unsecured senior notes in a registered public offering, as
shown on the table above. The outstanding balance of the unsecured senior notes is included in unsecured debt, net of initial issuance discount of $1.5 million, on our
consolidated balance sheets. The unsecured senior notes, which are scheduled to mature on December 15, 2028, require semi-annual interest payments each June and
December based on a stated annual interest rate of 4.750%. The Operating Partnership may redeem the notes at any time prior to December 15, 2028, either in whole or
in part, subject to the payment of an early redemption premium subject to a par call option.
In December 2018, we used a portion of the net proceeds from the issuance of our $400.0 million, 4.750% unsecured senior notes to early redeem, at our option, the
$250.0 million aggregate principal amount of our outstanding 6.625% unsecured senior notes that were scheduled to mature on June 1, 2020. In connection with our
early redemption, we incurred a $12.6 million loss on early extinguishment of debt comprised of an $11.8 million premium paid to the note holders at the redemption
date and a $0.8 million write-off of the unamortized discount and unamortized deferred financing costs.
In December 2017, the Operating Partnership issued $425.0 million of aggregate principal amount of unsecured senior notes in a registered public offering, as
shown on the table above. The outstanding balance of the unsecured senior notes is included in unsecured debt, net of initial issuance discount of $0.6 million, on our
consolidated balance sheet. The unsecured senior notes, which are scheduled to mature on December 15, 2024, require semi-annual interest payments each June and
December based on a stated annual interest rate of 3.450%. The Operating Partnership may redeem the notes at any time prior to September 15, 2024, either in whole or
in part, subject to the payment of an early redemption premium.
In December 2017, we used a portion of the net proceeds from the issuance of our $425.0 million, 3.450% unsecured senior notes to early redeem, at our option, the
$325.0 million aggregate principal amount of our outstanding 4.800% unsecured senior notes that were scheduled to mature on July 15, 2018. In connection with our
early redemption, we incurred a $5.3 million loss on early extinguishment of debt comprised of $5.0 million premium paid to the note holders at the redemption date and
$0.3 million write-off of the unamortized discount and unamortized deferred financing costs.
Unsecured Senior Notes - Private Placement
In May 2018, the Operating Partnership entered into a note purchase agreement in a private placement (the “2018 Note Purchase Agreement”) in connection with
the issuance and sale of $50.0 million principal amount of the Operating Partnership’s 4.30% Senior Notes, Series A, due July 18, 2026 (the “Series A Notes due 2026”),
and $200.0 million principal amount of the Operating Partnership’s 4.35% Senior Notes, Series B, due October 18, 2026 (the “Series B Notes due 2026” and, together
with the Series A Notes, the “Series A and B Notes due 2026”), as shown in the table above. The Company drew the full amount of the Series A Notes due 2026 on
July 18, 2018. On October 22, 2018, the Company drew the full amount of the Series B Notes due 2026. The Series A and B Notes due 2026 mature on their respective
due dates, unless earlier redeemed or prepaid pursuant to the terms of the 2018 Note Purchase Agreement. Interest on the Series A and B Notes due 2026 is payable
semi-annually in arrears on April 18 and October 18 of each year beginning April 18, 2019. As of December 31, 2018, there was $50.0 million and $200.0 million issued
and outstanding aggregate principal amount of Series A and Series B Notes due 2026, respectively.
In September 2016, the Operating Partnership entered into a note purchase agreement in a private placement (the “2016 Note Purchase Agreement”), in connection
with the issuance and sale of $175.0 million principal amount of the Operating Partnership’s 3.35% Senior Notes, Series A, due February 17, 2027 (the “Series A Notes
due 2027”), and $75.0 million principal amount of the Operating Partnership’s 3.45% Senior Notes, Series B, due February 17, 2029 (the “Series B Notes due 2029” and,
together with the Series A Notes due 2027, the “Series A and B Notes due 2027 and 2029”), as shown on the table above. In February 2017, the Operating Partnership
issued the $175.0 million principal amount of its Series A Notes due 2027 and the $75.0 million principal amount of its Series B Notes due 2029. The Series A and B
Notes due 2027 and 2029 mature on their respective due dates unless earlier redeemed or prepaid pursuant to the terms of the 2016 Note Purchase Agreement. Interest
on the Series A and B Notes due 2027 and 2029 is payable semi-annually in arrears on February 17 and August 17 of each year. As of December 31, 2018, there was
F - 34
$175.0 million and $75.0 million issued and outstanding aggregate principal amount of Series A and B Notes, respectively.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Operating Partnership may, at its option and upon notice to the purchasers of the Series A and B Notes due 2026 and Series A and B Notes due 2027 and
2029, prepay at any time all, or from time to time any part of the principal amounts then outstanding (in an amount not less than 5% of the aggregate principal amount
of the Series A and B Notes due 2026 and Series A and B Notes due 2027 and 2029 then outstanding in the case of a partial prepayment), at 100% of the principal
amount so prepaid, plus the make-whole amount determined for the prepayment date with respect to such principal amount as set forth in the 2016 & 2018 Note
Purchase Agreements.
In connection with the issuance of the Series A and B Notes due 2026 and Series A and B Notes due 2027 and 2029, the Company entered into an agreement
whereby it will guarantee the payment by the Operating Partnership of all amounts due with respect to the Series A and B Notes due 2026 and Series A and B Notes
due 2027 and the performance by the Operating Partnership of its obligations under the 2016 & 2018 Note Purchase Agreements.
Unsecured Revolving Credit Facility and Term Loan Facility
In July 2017, the Operating Partnership amended and restated the terms of its unsecured revolving credit facility and unsecured term loan facility (together, the
“Facility”). The amendment and restatement increased the size of the unsecured revolving credit facility from $600.0 million to $750.0 million, maintained the size of the
unsecured term loan facility of $150.0 million, reduced the borrowing costs and extended the maturity date of the Facility to July 2022.
The following table summarizes the balance and terms of our unsecured revolving credit facility as of December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
(in thousands)
$
45,000
705,000
750,000
—
750,000
750,000
Outstanding borrowings
$
Remaining borrowing capacity
Total borrowing capacity (1)
Interest rate (2)
Facility fee-annual rate (3)
Maturity date
_______________
(1) We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional $600.0 million under an accordion feature under
July 2022
3.48 %
0.200%
2.56 %
$
$
the terms of the unsecured revolving credit facility and unsecured term loan facility.
(2) Our unsecured revolving credit facility interest rate was calculated based on the contractual rate of LIBOR plus 1.000% as of December 31, 2018 and 2017.
(3) Our facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, we incurred debt origination and legal costs. As of
December 31, 2018 and 2017, $4.7 million and $6.0 million of unamortized deferred financing costs, respectively, which are included in prepaid expenses and other assets, net on our
consolidated balance sheets, remained to be amortized through the maturity date of our unsecured revolving credit facility.
The Company intends to borrow under the unsecured revolving credit facility from time to time for general corporate purposes, to finance development and
redevelopment expenditures, to fund potential acquisitions and to potentially repay long-term debt.
F - 35
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During the first quarter of 2018, we borrowed the full $150.0 million borrowing capacity of our unsecured term loan facility. In connection with the funding of the
outstanding borrowings, we transferred $30.0 million of outstanding borrowings under the unsecured revolving credit facility to the balance of our unsecured term
loan facility. As a result, only $120.0 million of cash proceeds were received from the funding of the unsecured term loan facility. The following table summarizes the
balance and terms of our unsecured term loan facility as of December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
Outstanding borrowings
Remaining borrowing capacity
Total borrowing capacity (1)
$
$
(in thousands)
$
150,000
—
150,000
$
—
150,000
150,000
Interest rate (2)
Undrawn facility fee-annual rate (3)
Maturity date
_______________
(1) As of December 31, 2018 and 2017, $0.9 million and $1.2 million of unamortized deferred financing costs, respectively, remained to be amortized through the maturity date of our
July 2022
3.49 %
0.200%
2.66 %
unsecured term loan facility.
(2) Our unsecured term loan facility interest rate was calculated based on the contractual rate of LIBOR plus 1.100% as of December 31, 2018 and 2017.
(3) Prior to borrowing the full capacity of our unsecured term loan facility, the undrawn facility fee was calculated based on any unused borrowing capacity and was paid on a quarterly basis.
Debt Covenants and Restrictions
The unsecured revolving credit facility, the unsecured term loan facility, the unsecured senior notes, the Series A and B Notes due 2026 and Series A and B Notes
due 2027 and 2029 and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting
requirements. Some of the more restrictive financial covenants include a maximum ratio of total debt to total asset value, a minimum fixed-charge coverage ratio, a
minimum unsecured debt ratio and a minimum unencumbered asset pool debt service coverage ratio. Noncompliance with one or more of the covenants and
restrictions could result in the full principal balance of the associated debt becoming immediately due and payable. We believe we were in compliance with all of our
debt covenants as of December 31, 2018 and 2017.
Debt Maturities
The following table summarizes the stated debt maturities and scheduled amortization payments as of December 31, 2018:
Year
2019
2020
2021
2022
2023
Thereafter
Total aggregate principal value (1)
$
$
(in thousands)
76,309
5,137
5,342
200,554
305,775
2,362,694
2,955,811
________________________
(1) Includes gross principal balance of outstanding debt before the effect of the following at December 31, 2018: $17.4 million of unamortized deferred financing costs for the unsecured term
loan facility, unsecured senior notes and secured debt, $6.6 million of unamortized discounts for the unsecured senior notes and $0.8 million of unamortized premiums for the secured debt.
F - 36
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Capitalized Interest and Loan Fees
The following table sets forth gross interest expense, including debt discount/premium and deferred financing cost amortization, net of capitalized interest, for the
years ended 2018, 2017 and 2016. The interest expense capitalized was recorded as a cost of development and increased the carrying value of undeveloped land and
construction in progress.
Year Ended December 31,
2018
2017
2016
(in thousands)
Gross interest expense
Capitalized interest and deferred financing costs
Interest expense
$
$
$
117,789
(68,068 )
49,721
$
$
112,577
(46,537 )
66,040
$
10.
Deferred Revenue and Acquisition-Related Intangible Liabilities, net
Deferred revenue and acquisition-related intangible liabilities, net consisted of the following at December 31, 2018 and 2017:
December 31,
2018
2017
Deferred revenue related to tenant-funded tenant improvements
Other deferred revenue
Acquisition-related intangible liabilities, net (1)
Total
$
$
(in thousands)
$
104,558
15,950
29,138
149,646
$
105,263
(49,460 )
55,803
104,260
10,991
30,639
145,890
________________________
(1) See Note 5 “ Deferred Leasing Costs and Acquisition-related Intangible Assets and Liabilities, net” for additional information regarding our acquisition-related intangible liabilities.
Deferred Revenue Related to Tenant-funded Tenant Improvements
During the years ended December 31, 2018, 2017, and 2016, $18.4 million, $16.8 million and $13.2 million, respectively, of deferred revenue related to tenant-funded
tenant improvements was amortized and recognized as rental income. The following is the estimated amortization of deferred revenue related to tenant-funded tenant
improvements as of December 31, 2018 for the next five years and thereafter:
Year Ending
2019
2020
2021
2022
2023
Thereafter
Total
$
$
(in thousands)
16,973
16,265
14,612
13,603
11,857
31,248
104,558
F - 37
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
11. Noncontrolling Interests on the Company’s Consolidated Financial Statements
Common Units of the Operating Partnership
The Company owned a 98.0% and 97.9% common general partnership interest in the Operating Partnership as of December 31, 2018 and 2017, respectively. The
remaining 2.0% and 2.1% common limited partnership interest as of December 31, 2018 and 2017, respectively, was owned by non-affiliated investors and certain of our
executive officers and directors in the form of noncontrolling common units. There were 2,025,287 and 2,077,193 common units outstanding held by these investors,
executive officers and directors as of December 31, 2018 and 2017, respectively. The decrease in the common units from December 31, 2017 to December 31, 2018 was
attributable to 51,906 common unit redemptions.
The noncontrolling common units may be redeemed by unitholders for cash. Except under certain circumstances, we, at our option, may satisfy the cash
redemption obligation with shares of the Company’s common stock on a one-for-one basis. If satisfied in cash, the value for each noncontrolling common unit upon
redemption is the amount equal to the average of the closing quoted price per share of the Company’s common stock, par value $.01 per share, as reported on the
NYSE for the ten trading days immediately preceding the applicable redemption date. The aggregate value upon redemption of the then-outstanding noncontrolling
common units was $126.4 million and $154.5 million as of December 31, 2018 and 2017, respectively. This redemption value does not necessarily represent the amount
that would be distributed with respect to each noncontrolling common unit in the event of our termination or liquidation. In the event of our termination or liquidation,
it is expected in most cases that each common unit would be entitled to a liquidating distribution equal to the liquidating distribution payable in respect of each share
of the Company’s common stock.
Noncontrolling Interest in Consolidated Property Partnerships
On August 30, 2016, the Operating Partnership entered into agreements with Norges Bank Real Estate Management (“NBREM”) whereby NBREM invested,
through two REIT subsidiaries, in two existing companies that owned the Company’s 100 First Street and 303 Second Street office properties located in San Francisco,
California. Based on a gross valuation of the properties of approximately $1.2 billion, NBREM contributed a total of $452.9 million, for a 44% common equity interest in
the companies, which was net of approximately $55.3 million of its proportionate share of the existing mortgage debt on 303 Second Street as of the transaction date. In
November 2017, NBREM contributed $54.4 million to fund their proportionate share of the Company’s repayment of this mortgage debt.
The transaction was structured with a staggered closing. On August 30, 2016, the first tranche of the transaction closed and NBREM contributed $191.4 million
plus a working capital contribution of $2.1 million for a 44% common ownership interest in 100 First LLC. On November 30, 2016, the second tranche of the transaction
closed and NBREM contributed $261.5 million, which was net of its proportionate share of the existing mortgage debt secured by the 303 Second Street property of
approximately $55.3 million, plus a working capital contribution of $2.9 million for a 44% common ownership interest in 303 Second LLC.
The transactions did not meet the criteria to qualify as sales of real estate because the Company continues to effectively control the properties and therefore
continued to account for the 100 First Street and 303 Second Street office properties on a consolidated basis in its financial statements. At formation, the Company
accounted for the transactions as equity transactions and recognized noncontrolling interests in its consolidated balance sheets. In connection with the transaction,
the Company provides customary property management, leasing and construction management services for both properties. 100 First Street is a 467,095 square foot
office tower, and 303 Second Street is a 740,047 square foot office property, both located in the South of Market submarket in San Francisco, California.
The noncontrolling interests in 100 First LLC and 303 Second LLC as of December 31, 2018 and 2017 were $186.4 million and $175.4 million, respectively, which is
recognized in noncontrolling interests in consolidated property partnerships on the Company’s consolidated balance sheets. The remaining amount of noncontrolling
interests in consolidated property partnerships represents the third party equity interest in Redwood LLC. This noncontrolling interest was $6.0 million and $6.2
million as of December 31, 2018 and 2017, respectively.
F - 38
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
12. Noncontrolling Interests on the Operating Partnership’s Consolidated Financial Statements
Consolidated Property Partnerships
On August 30, 2016, the Operating Partnership entered into agreements with NBREM whereby NBREM invested, through two REIT subsidiaries, in two existing
companies that owned the Company’s 100 First Street and 303 Second Street office properties located in San Francisco, California. Based on a gross valuation of the
two properties of approximately $1.2 billion, NBREM contributed a total of $452.9 million for a 44% common equity interest in the companies, which is net of
approximately $55.3 million of its proportionate share of the existing mortgage debt.
In November 2017, the Company repaid the mortgage debt secured by the 303 Second Street office property. Prior to the repayment, NBREM contributed $54.4
million to fund their proportionate share of the repayment. Refer to Note 11 for additional information regarding these transactions.
13.
Stockholders’ Equity of the Company
Preferred Stock
On August 15, 2017, the Company redeemed all 4,000,000 shares of its 6.375% Series H Cumulative Redeemable Preferred Stock (“Series H Preferred Stock”). The
shares of Series H Preferred Stock were redeemed at a redemption price equal to their stated liquidation preference of $25.00 per share, representing $100.0 million in
aggregate. The redemption payment did not include any additional accrued dividends because the redemption date was also the dividend payment date.
On March 30, 2017 (the “Series G Redemption Date”), the Company redeemed all 4,000,000 shares of its 6.875% Series G Cumulative Redeemable Preferred Stock
(“Series G Preferred Stock”). The shares of Series G Preferred Stock were redeemed at a redemption price equal to their stated liquidation preference of $25.00 per share,
representing $100.0 million in aggregate, plus all accrued and unpaid dividends to the Series G Redemption Date.
In connection with the redemption of the Series G and Series H Preferred Stock, during the year ended December 31, 2017 we recorded non-cash charges of $7.6
million as a reduction to net income available to common stockholders for the original issuance costs of the Series H and Series G Preferred Stock.
Common Stock
Forward Equity Offering
On August 8, 2018, the Company entered into forward equity sale agreements with certain financial institutions acting as forward purchasers in connection with
an offering of 5,000,000 shares of common stock at an initial gross offering price of $360.5 million, or $72.10 per share, before underwriting discounts, commissions and
offering expenses. The forward purchasers borrowed and sold an aggregate of 5,000,000 shares of common stock in the offering. The Company did not receive any
proceeds from the sale of its shares of common stock by the forward purchasers at the time of the offering. The Company currently expects to fully physically settle
the forward sale agreements and receive cash proceeds upon one or more settlement dates, at the Company’s discretion, prior to the final settlement date under the
forward sale agreements of August 1, 2019. The forward sale price that we expect to receive upon physical settlement of the agreements, which was initially $71.68 per
share, will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers’ stock borrowing costs
and (iii) scheduled dividends during the term of the forward equity sale agreements. The full amount of this offering remains available for future settlement as of the
date of this filing. Upon issuance of shares, the Company will contribute the net proceeds from these issuances to the Operating Partnership in exchange for an equal
number of units in the Operating Partnership.
Common Stock Issuances
In January 2017, the Company completed an underwritten public offering of 4,427,500 shares of its common stock. The net offering proceeds, after deducting
underwriting discounts and offering expenses, were approximately $308.8
F - 39
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
million. We used a portion of the proceeds to partially fund our $1.90 per share of special dividends declared by our Board of Directors in December 2016 and used the
remaining proceeds for general corporate uses, to fund development expenditures and to repay outstanding indebtedness.
At-The-Market Stock Offering Program
Under our at-the-market stock offering programs, which commenced in December 2014 and June 2018 we may offer and sell shares of our common stock from time
to time in “at-the-market” offerings. During the year ended December 31, 2018, the Company completed its existing at-the-market stock offering program (the “2014 At-
The-Market Program”) under which we sold an aggregate of $300.0 million in gross sales of shares, and in June 2018 commenced a new at-the-market stock offering
program (the “2018 At-The-Market Program”) under which we may offer and sell shares of our common stock with an aggregate gross sales price of up to $500.0
million.
In connection with the 2018 At-The-Market-Program, the Company may, at its discretion, enter into forward equity sale agreements. The use of a forward equity
sale agreements would allow the Company to lock in a share price on the sale of shares of our common stock at the time the agreement is executed, but defer receiving
the proceeds from the sale of shares until a later date, allowing the Company to better align such funding with its capital needs.
The following table sets forth information regarding sales of our common stock under our at-the-market offering programs for the years ended December 31, 2018,
2017 and 2016:
Shares of common stock sold during the period
Weighted average price per share of common stock
Aggregate gross proceeds
Aggregate net proceeds after selling commissions
Year Ended December 31,
2018
2017
2016
(in millions, except share data)
1,817,195
73.64
133.8
132.1
$
$
$
$
$
$
235,077
75.40
17.7
17.5
$
$
$
451,398
71.50
32.3
31.9
The proceeds from sales were used to fund acquisitions, development expenditures and general corporate purposes including repayment of borrowings under the
unsecured revolving credit facility. During the year ended December 31, 2018, under the 2014 At-The-Market Program, we sold 1,369,729 shares of common stock and
completed the program. Since commencement of the 2018 At-The-Market Program through December 31, 2018, we have sold 447,466 shares of common stock, none of
which were sold under forward equity sale agreements. Approximately $466.2 million remains available to be sold under this program. Actual future sales will depend
upon a variety of factors, including, but not limited to, market conditions, the trading price of the Company’s common stock and our capital needs. We have no
obligation to sell the remaining shares available for sale under the 2018 At-The-Market program.
Common Stock Repurchases
On February 23, 2016, the Company’s Board of Directors approved a 4,000,000 share increase to the Company’s existing share repurchase program bringing the
total current repurchase authorization to 4,988,025 shares. The Company did not repurchase shares of common stock under this program during the years ended
December 31, 2018 or December 31, 2017. In March 2016, the Company repurchased 52,199 shares of common stock at a weighted average price of $55.45 per share of
common stock for $2.9 million. As of December 31, 2018, 4,935,826 shares remain eligible for repurchase under the Company’s share repurchase program.
F - 40
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accrued Dividends and Distributions
The following tables summarize accrued dividends and distributions for the noted outstanding shares of common stock and noncontrolling units as of
December 31, 2018 and 2017:
Dividends and Distributions payable to:
Common stockholders
Noncontrolling common unitholders of the Operating Partnership
RSU holders (1)
Total accrued dividends and distribution to common stockholders and noncontrolling unitholders
December 31,
2018
2017
(in thousands)
$
$
45,840
922
797
47,559
$
$
41,914
883
651
43,448
______________________
(1) The amount includes the value of the dividend equivalents that will be paid with additional RSUs (see Note 15 “ Share-Based Compensation” for additional information).
Outstanding Shares and Units:
Common stock (1)
Noncontrolling common units
RSUs (2)
December 31,
2018
2017
100,746,988
2,025,287
1,711,628
98,620,333
2,077,193
1,488,724
______________________
(1) The amount includes nonvested shares.
(2) The amount includes nonvested RSUs. Does not include 1,018,337 and 665,110 market measure-based RSUs because not all the necessary performance conditions have been met as of
December 31, 2018 and 2017, respectively. Refer to Note 15 “ Share-Based Compensation” for additional information.
14.
Partners' Capital of the Operating Partnership
Preferred Units
On August 15, 2017, the Company redeemed all 4,000,000 shares of its 6.375% Series H Preferred Stock. For each share of Series H Preferred Stock that was
outstanding, the Company had an equivalent number of 6.375% Series H Preferred Units (“Series H Preferred Units”) outstanding with substantially similar terms as
the Series H Preferred Stock. In connection with the redemption of the Series H Preferred Stock, the Series H Preferred Units held by the Company were redeemed by
the Operating Partnership.
On March 30, 2017, the Company redeemed all 4,000,000 shares of its 6.875% Series G Preferred Stock. For each share of Series G Preferred Stock that was
outstanding, the Company had an equivalent number of 6.875% Series G Preferred Units (“Series G Preferred Units”) outstanding with substantially similar terms as
the Series G Preferred Stock. In connection with the redemption of the Series G Preferred Stock, the Series G Preferred Units held by the Company were redeemed by
the Operating Partnership.
In connection with the redemption of the Series G and Series H Preferred Stock, during the year ended December 31, 2017 we recorded non-cash charges of $7.6
million as a reduction to net income available to common unitholders for the original issuance costs of the Series H and Series G Preferred Stock.
Common Units
Issuance of Common Units
In January 2017, the Company completed an underwritten public offering of 4,427,500 shares of its common stock (see Note 13 “Stockholders’ Equity of the
Company”). The net offering proceeds of approximately $308.8 million were contributed by the Company to the Operating Partnership in exchange for 4,427,500
common units.
F - 41
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In March 2016, the Operating Partnership issued 867,701 common units in connection with a development acquisition. Each common unit was valued at $55.36,
which was based on a trailing ten-day average of the closing quoted price per share of the Company’s common stock, par value $.01 per share, as reported on the
NYSE, as calculated in accordance with the Partnership Agreement.
At-The-Market Stock Offering Program
During the years ended December 31, 2018, 2017 and 2016, the Company utilized its at-the-market stock offering programs to issue shares of common stock (see
Note 13 “Stockholders’ Equity of the Company” for additional information). The net offering proceeds and property acquired using net offering proceeds contributed
by the Company to the Operating Partnership in exchange for common units for the years ended December 31, 2018, 2017 and 2016 are as follows:
Shares of common stock contributed by the Company
Common units exchanged for shares of common stock by the Company
Aggregate gross proceeds
Aggregate net proceeds after selling commissions
Common Units Outstanding
Year Ended December 31,
2018
2017
2016
(in millions, except share and per share data)
1,817,195
1,817,195
133.8
132.1
$
$
$
$
235,077
235,077
17.7
17.5
$
$
451,398
451,398
32.3
31.9
The following table sets forth the number of common units held by the Company and the number of common units held by non-affiliated investors and certain of
our executive officers and directors in the form of noncontrolling common units as well as the ownership interest held on each respective date:
Company owned common units in the Operating Partnership
Company owned general partnership interest
Noncontrolling common units of the Operating Partnership
Ownership interest of noncontrolling interest
December 31, 2018
December 31, 2017
100,746,988
98.0%
2,025,287
2.0%
98,620,333
97.9%
2,077,193
2.1%
For a further discussion of the noncontrolling common units during the years ended December 31, 2018 and 2017, refer to Note 11 “Noncontrolling Interests on
the Company’s Consolidated Financial Statements.”
Accrued Distributions
The following tables summarize accrued distributions for the noted common units as of December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
(in thousands)
Distributions payable to:
General partner
Common limited partners
RSU holders (1)
$
Total accrued distributions to common unitholders
______________________
(1) The amount includes the value of the dividend equivalents that will be paid with additional RSUs (see Note 15 “ Share-Based Compensation” for additional information).
$
45,840
922
797
47,559
$
$
41,914
883
651
43,448
F - 42
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Outstanding Units:
Common units held by the general partner
Common units held by the limited partners
RSUs (1)
December 31, 2018
December 31, 2017
100,746,988
2,025,287
1,711,628
98,620,333
2,077,193
1,488,724
______________________
(1) Does not include 1,018,337 and 665,110 market measure-based RSUs because not all the necessary performance conditions have been met as of December 31, 2018 and 2017,
respectively. Refer to Note 15 “ Share-Based Compensation” for additional information.
15. Share-Based and Other Compensation
Stockholder Approved Share-Based Incentive Compensation Plan
As of December 31, 2018, we maintained one share-based incentive compensation plan, the Kilroy Realty 2006 Incentive Award Plan, as amended (the “2006
Plan”). The Company has a currently effective registration statement registering 9.2 million shares of our common stock for possible issuance under our 2006 Incentive
Award Plan. As of December 31, 2018, approximately 0.6 million shares were available for grant under the 2006 Plan. The calculation of shares available for grant is
presented after taking into account a reserve for a sufficient number of shares to cover the vesting and payment of 2006 Plan awards that were outstanding on that
date, including performance-based vesting awards at (i) levels actually achieved for the performance conditions (as defined below) for which the performance period
has been completed and (ii) at maximum levels for the other performance and market conditions (as defined below) for awards still in a performance period.
The Executive Compensation Committee (the “Compensation Committee”) of the Company's Board of Directors may grant the following share-based awards to
eligible individuals, as provided under the 2006 Plan: incentive stock options, nonqualified stock options, restricted stock (nonvested shares), stock appreciation
rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units (“RSUs”), profit interest units,
performance bonus awards, performance-based awards and other incentive awards. For each award granted under our share-based incentive compensation programs,
the Operating Partnership simultaneously issues to the Company a number of common units equal to the number of shares of common stock ultimately paid by the
Company in respect of such awards.
2018, 2017 and 2016 Share-Based Compensation Grants
In connection with entering into an amended employment agreement (the “Amended Employment Agreement”), on December 27, 2018, the Compensation
Committee of the Company’s Board of Directors awarded John Kilroy, the Chairman of the Board of Directors, Chief Executive Officer and President of the Company
and the Operating Partnership 483,871 RSUs, providing an additional retention incentive during the term of the agreement and enticing Mr. Kilroy to delay his
retirement. Of these RSUs awarded, 266,130 RSUs (at the target level of performance) are subject to market-based vesting requirements and 217,741 RSUs are subject
to time-based vesting requirements. In addition to Mr. Kilroy’s award, the Compensation Committee of the Company’s Board of Directors awarded 161,290 RSUs to
certain members of management. Of these RSUs awarded, 80,647 RSUs (at the target level of performance) are subject to market-based vesting requirements (together
totaling 346,777 target RSUs with Mr. Kilroy’s award, the “December 2018 Market-Based RSUs”) and 80,643 RSUs are subject to time-based vesting requirements
(together totaling 298,384 RSUs with Mr. Kilroy’s award, the “December 2018 Time-Based RSUs”).
In January and February 2018, the Executive Compensation Committee of the Company’s Board of Directors awarded 282,038 RSUs to certain officers of the
Company under the 2006 Plan, which included 158,205 RSUs (at the target level of performance) that are subject to market and/or performance-based vesting
requirements (the “2018 Performance-Based RSUs”) and 123,833 RSUs that are subject to time-based vesting requirements (the “2018 Time-Based RSUs”).
Additionally, during 2018, 14,999 RSUs were granted to the board of directors and certain members of management subject to time vesting requirements.
In February 2017, the Executive Compensation Committee of the Company’s Board of Directors awarded 229,976 RSUs to certain officers of the Company under
the 2006 Plan, which included 130,956 RSUs (at the target level of performance) that are subject to time-based, market-measure based and performance-based vesting
requirements (the
F - 43
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
“2017 Performance-Based RSUs”) and 99,020 RSUs that are subject to time-based vesting requirements (the “2017 Time-Based RSUs”). Additionally, during 2017,
43,081 RSUs were granted to the board of directors and certain members of management subject to time vesting requirements.
On January 28, 2016, the Executive Compensation Committee of the Company’s Board of Directors awarded 294,821 RSUs to certain officers of the Company
under the 2006 Plan, which included 168,077 RSUs (at the target level of performance) that are subject to time-based, market-measure based and performance-based
vesting requirements (the “2016 Performance-Based RSUs”) and 126,744 RSUs that are subject to time-based vesting requirements (“2016 Time-Based RSUs”).
Additionally, during 2016, 47,003 RSUs were granted to the board of directors and certain members of management subject to time vesting requirements.
December 2018 Market-Based RSU Grant
Between 0% and 200% of the total 346,777 target number of December 2018 Market-Based RSUs will be eligible to vest based on the Company’s relative total
shareholder return (“TSR”) versus a comparative group of companies that consist of companies in the SNL US REIT Office Index over the performance period. An
initial number of RSUs (the “Initial Number of RSUs”) will be determined at the end of 2021 based on a three-year performance period (2019 through 2021). Once the
Initial Number of RSUs is determined, 75% of the Initial Number of RSUs will be scheduled to vest on January 5, 2022. The remaining 25% of the Initial Number of
RSUs will be scheduled to vest on January 5, 2023, subject to adjustment based on the Company’s relative TSR for the entire four-year performance period (2019
through 2022). The December 2018 Market-Based RSUs are also subject to service vesting requirements through the scheduled vest dates.
Each December 2018 Market-Based RSU represents the right to receive one share of our common stock in the future, subject to, and as modified by, the
Company’s level of achievement of the applicable market conditions. The December 27, 2018 grant date fair value of the December 2018 Market-Based RSUs was $23.8
million. The fair value was calculated using a Monte Carlo simulation pricing model based on the assumptions in the table below. For the year ended December 31,
2018, we recorded compensation expense based upon the $68.66 grant date fair value per share. Compensation expense for the December 2018 Market-Based RSUs is
recognized using a graded vesting approach, where 75% of the fair value will be recognized on a straight-line basis over the three-year initial performance period
through the end of 2021, and the remaining 25% of the fair value will be recognized on a straight-line basis over the four-year final performance period through the end
of 2022. The following table summarizes the assumptions utilized in the Monte Carlo simulation pricing models:
Valuation date
Fair value per share on valuation date
Expected share price volatility
Risk-free interest rate
December 2018 Market-Based RSU Award Fair Value
Assumptions
December 27, 2018
$68.66
23.0%
2.4%
The computation of expected volatility was based on a blend of the historical volatility of our shares of common stock over a period of twice the performance
period and implied volatility data based on the observed pricing of six month publicly-traded options on shares of our common stock. The risk-free interest rate was
based on the yield curve on zero-coupon U.S. Treasury STRIP securities in effect at December 27, 2018.
2018, 2017 and 2016 Annual Performance-Based RSU Grants
The 2018 Performance-Based RSUs are scheduled to vest at the end of a three-year period (consisting of calendar years 2018-2020). A target number of 2018
Performance-Based RSUs were awarded, and the final number of 2018 Performance-Based RSUs that vest (which may be more or less than the target number) will be
based upon (1) the achievement of pre-set FFO per share goals for the year ending December 31, 2018 that applies to 100% of the Performance-Based RSUs awarded
(the “2018 FFO Performance Condition”) and (2) a performance measure that applies to 50% of the award based upon a measure of the Company’s average debt to
EBITDA ratio for the three-year performance period (the “2018 Debt to EBITDA Ratio Performance Condition” and together with the 2018 FFO Performance Condition,
the “2018 Performance Conditions”) and a market measure that applies to the other 50% of
F - 44
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the award based upon the relative ranking of the Company’s TSR for the three-year performance period compared to the TSR of an established comparison group of
companies over the same period (the “2018 Market Condition”). The 2018 Performance-Based RSUs are also subject to a three-year service vesting provision and are
scheduled to cliff vest on the date the final vesting percentage is determined following the end of the three-year performance period under the awards. The 2018 FFO
Performance Condition was achieved 175% of target for one participant and 150% of target for all other participants. The number of 2018 Performance-Based RSUs
ultimately earned could fluctuate from the current estimated number of 2018 Performance-Based RSUs granted based upon the levels of achievement for the 2018 Debt
to EBITDA Ratio Performance Condition, the 2018 Market Condition and the extent to which the service vesting condition is satisfied.
The 2017 Performance-Based RSUs are scheduled to cliff vest at the end of a three-year period (consisting of calendar years 2017-2019) based upon (1) the
achievement of pre-defined FFO per share goals for the year ended December 31, 2017 that applies to 100% of the 2017 Performance-Based RSUs awarded (the “2017
FFO Performance Condition”) and (2) also based upon either the average FAD per share growth that applies to 30% of the award or the Company’s average debt to
EBITDA ratio that applies to a separate 30% of the award (together, the “Other 2017 Performance Conditions” and together with the 2017 FFO Performance Condition,
the “2017 Performance Conditions”) or the relative TSR versus a comparative group of companies that consist of companies in the SNL US REIT Office Index that
applies to the remaining 40% of the award (the “2017 Market Condition”) for the three-year period ending December 31, 2019. The 2017 FFO Performance Condition
was achieved at a weighted average of approximately 131% of target for the 2017 Performance-Based RSUs. The number of 2017 Performance-Based RSUs ultimately
earned could fluctuate from the current estimated number of 2017 Performance-Based RSUs granted based upon the levels of achievement for the Other 2017
Performance Conditions, the 2017 Market Condition and the extent to which the service vesting condition is satisfied.
The 2016 Performance-Based RSUs are also scheduled to cliff vest at the end of a three-year service period based upon the achievement of pre-defined FFO per
share goals for the year ended December 31, 2016 (the “2016 Performance Condition”) and also upon the average annual relative total stockholder return versus a
comparative group of companies that consist of companies in the SNL US REIT Office Index (the “2016 Market Condition”) for the three-year period ending December
31, 2018. Based upon the combined results of the final 2016 Performance Condition and 2016 Market Condition, the 2016 Performance-Based RSUs achieved 144% of
their target level of performance.
As of December 31, 2018, the estimated number of RSUs earned for the 2018 and 2017 Performance-Based RSUs and the actual number of RSUs earned for the
2016 Performance-Based RSUs was as follows:
2018 Performance-Based RSUs
2017 Performance-Based RSUs
2016 Performance-Based RSUs
Service vesting period
Target RSUs granted
Estimated RSUs earned (1)
February 14, 2018 -
January, 2021
158,205
254,235
February 14, 2018
February 24, 2017 -
January, 2020
130,956
170,994
February 24, 2017
January 28, 2016 - January,
2019
168,077
241,438
January 28, 2016
Date of valuation
_______________
(1) Estimated RSUs earned for the 2018 Performance-Based RSUs are based on the actual achievement of the 2018 FFO Performance Condition and assumes target level achievement of the
2018 Debt to EBITDA Ratio Performance Condition and the 2018 Market Condition. Estimated RSUs earned for the 2017 Performance-Based RSUs are based on the actual achievement
of the 2017 FFO Performance Condition and assume target level achievement of the 2017 Market Condition and Other 2017 Performance Conditions. The 2016 Performance-Based
RSUs earned are based on actual performance of the 2016 Performance Condition and the 2016 Market Condition.
Each Performance-Based RSU represents the right to receive one share of our common stock in the future, subject to, and as modified by, the Company’s level of
achievement of the applicable performance and market conditions. The fair values of the 2018 Performance-Based RSUs, 2017 Performance-Based RSUs and 2016
Performance-Based RSUs were $10.8 million at February 14, 2018, $10.3 million at February 24, 2017 and $9.6 million at January 28, 2016, respectively. The fair values for
the awards with market conditions were calculated using a Monte Carlo simulation pricing model based on the assumptions in the table below. The determination of
the fair value of the 2018, 2017 and 2016 Performance-Based RSUs takes into consideration the likelihood of achievement of the 2018, 2017 and 2016 Performance
Conditions and the 2018, 2017 and 2016 Market Conditions, respectively, as discussed above. The following table summarizes the assumptions utilized in the Monte
Carlo simulation pricing models:
F - 45
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Valuation date
Fair value per share on valuation date
Expected share price volatility
Risk-free interest rate
2018 Award Fair Value
Assumptions
2017 Award Fair Value
Assumptions
2016 Award Fair Value
Assumptions
February 14, 2018
February 24, 2017
January 28, 2016
$70.08
20.00%
2.37%
$80.89
21.00%
1.39%
$57.08
26.00%
1.13%
The computation of expected volatility was based on a blend of the historical volatility of our shares of common stock over a period of twice the remaining
performance period as of the grant date and implied volatility data based on the observed pricing of six month publicly-traded options on shares of our common stock.
The risk-free interest rate was based on the yield curve on zero-coupon U.S. Treasury STRIP securities in effect at February 14, 2018, February 24, 2017 and January 28,
2016.
Compensation expense for the Performance-Based RSUs is recognized on a straight-line basis over the requisite service period for each participant, which is
generally the three-year service period. However, for one participant there was a shorter service period for their 2017 and 2018 Performance-Based RSUs. As of
December 31, 2018, the number of 2018 Performance-Based RSUs estimated to be earned based on the Company’s estimate of the performance conditions measured
against the applicable goals was 254,235, and the compensation cost recorded to date for this program was based on that estimate. For the portion of the 2018
Performance-Based RSUs subject to the 2018 Market Condition, for the year ended December 31, 2018, we recorded compensation expense based upon the $70.08 fair
value per share at February 14, 2018. Compensation expense will be variable for the portion of the 2018 Performance-Based RSUs subject to the 2018 Debt to EBITDA
Ratio Performance Condition, based upon the outcome of that condition. As of December 31, 2018, the number of 2017 Performance-Based RSUs estimated to be
earned based on the Company’s estimate of the performance conditions measured against the applicable goals was 170,994, and the compensation cost recorded to
date for this program was based on that estimate. For the portion of the 2017 Performance-Based RSUs subject to the 2017 Market Condition, for the years ended
December 31, 2018 and 2017, we recorded compensation expense based upon the $80.89 fair value per share at February 24, 2017. Compensation expense will be
variable for the portion of the 2017 Performance-Based RSUs subject to the Other 2017 Performance Conditions, based upon the outcome of those conditions. For the
years ended December 31, 2018, 2017 and 2016, we recorded compensation expense for the 2016 Performance-Based RSUs based upon $57.08 fair value per share at
January 28, 2016 multiplied by the 241,438 RSUs, which is net of forfeitures, estimated to be earned at December 31, 2016.
December 2018 and Annual 2018, 2017 and 2016 Time-Based RSU Grants
The annual 2018, 2017 and 2016 Time-Based RSUs are scheduled to vest in equal installments over the periods listed below. The December 2018 Time-Based RSUs
are scheduled to vest 50% on January 5, 2022 and 50% on January 5, 2023. Compensation expense for the December 2018 and annual 2018, 2017 and 2016 Time-Based
RSUs is recognized on a straight-line basis over the requisite service period, which is generally the explicit service period. However, for one participant there was a
shorter service period for their 2017 and 2018 Time-Based RSUs. Each Time-Based RSU represents the right to receive one share of our common stock in the future,
subject to continued employment through the applicable vesting date. The total fair value of the Time-Based RSUs is based on the Company's closing share price on
the NYSE on the respective fair valuation dates as detailed in the table below:
December 2018 Time-Based RSU
Grant
2018 Time-Based RSU Grant (1)
2017 Time-Based RSU Grant (2)
2016 Time-Based RSU Grant
Service vesting period
Fair value on valuation date (in millions)
Fair value per share
December 27, 2018 - January
5, 2023
18.5
62.00
December 27, 2018
$
$
January & February 2018 -
January 5, 2021
8.4
70.37
January & February 2018
$
$
February 2017 - January 5,
2020
7.5
73.30
February 2017
January 28, 2016 - January 5,
2019
7.1
56.23
January 28, 2016
$
$
$
$
Date of fair valuation
_______________
(1) The 2018 Time-Based RSUs consist of 56,015 RSUs granted on January 29, 2018 at a fair value per share of $70.37 and 67,818 RSUs granted on February 14, 2018 at a fair value per
share of $66.46.
(2) The 2017 Time-Based RSUs consist of 41,119 RSUs granted on February 3, 2017 at a fair value per share of $73.30 and 57,901 RSUs granted on February 24, 2017 at a fair value per
share of $77.16.
F - 46
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Summary of Performance and Market-Measure Based RSUs
A summary of our performance and market-measure based RSU activity from January 1, 2018 through December 31, 2018 is presented below:
Nonvested RSUs
Outstanding at January 1, 2018
Granted
Vested
Settled (2)
Issuance of dividend equivalents (3)
Forfeited
Weighted-Average
Fair Value
Per Share (1)
68.83
68.51
74.25
71.75
Vested RSUs
Total RSUs
55,672
1,067
261,875
(285,818)
2,976
(11)
720,782
602,079
—
(285,818)
17,066
(11)
Amount
$
665,110
601,012
(261,875)
14,090
—
1,018,337
Outstanding as of December 31, 2018 (4)
_______________
(1) Represents the grant-date fair value for all awards, excluding the 2014 Performance-Based RSU Grant, which was re-measured upon stockholder approval of the amended 2006 Plan on
67.29
$
1,054,098
35,761
May 22, 2014, as an insufficient number of shares were available to settle these RSUs upon initial grant on January 29, 2014.
(2) Represents vested RSUs that were settled in shares of the Company’s common stock. Total shares settled include 139,933 shares that were tendered in accordance with the terms of the
2006 Plan to satisfy minimum statutory tax withholding requirements related to the RSUs settled. We accept the return of RSUs at the current quoted closing share price of the
Company’s common stock to satisfy tax obligations.
(3) Represents the issuance of dividend equivalents earned on the underlying RSUs. The dividend equivalents vest based on terms specified under the related RSU award agreement.
(4) Outstanding RSUs as of December 31, 2018 represent the actual achievement of the FFO performance conditions and assumes target levels for the market and other performance
conditions. The number of restricted stock units ultimately earned is subject to change based upon actual performance over the three-year vesting period. Dividend equivalents earned will
vest along with the underlying award and are also subject to changes based on the number of RSUs ultimately earned for each underlying award.
A summary of our performance and market-measure based RSU activity for years ended December 31, 2018, 2017 and 2016 is presented below:
Years ended December 31,
2018
2017
RSUs Granted
RSUs Vested
Non-Vested
RSUs Granted (1)
Weighted-Average
Fair Value
Per Share (2)
Vested RSUs
Total Vest-Date Fair Value
(in thousands)
$
601,012
170,994
258,393
68.51
78.97
57.36
(265,918) $
(194,991)
(36,914)
18,906
14,270
2,788
2016
_______________
(1) Non-vested RSUs granted during the years ended December 31, 2018 and 2017 are based on the actual achievement of the FFO performance conditions and assumes target level
achievement for the market and other performance conditions. Non-vested RSUs granted during the year ended December 31, 2016 are based on the final performance of both the 2016
Performance and Market Conditions, and are non-vested as of December 31, 2018 as they were subject to the Compensation Committee’s confirmation of final performance.
(2) Represents the grant-date fair value for all awards, excluding the 2014 Performance-Based RSU Grant, which was re-measured upon stockholder approval of the amended 2006 Plan on
May 22, 2014, as an insufficient number of shares were available to settle these RSUs upon initial grant on January 29, 2014.
F - 47
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Summary of Time-Based RSUs
A summary of our time-based RSU activity from January 1, 2018 through December 31, 2018 is presented below:
Outstanding at January 1, 2018
Granted
Vested
Settled (2)
Issuance of dividend equivalents (3)
Forfeited
Canceled (4)
Nonvested RSUs
Amount
Weighted Average Fair Value
Per Share (1)
Vested RSUs
Total RSUs
$
331,546
437,216
(187,209 )
6,316
(1,090 )
66.83
64.21
63.85
71.75
70.62
1,080,928
—
187,209
(202,536 )
26,922
—
(3,435 )
1,412,474
437,216
—
(202,536 )
33,238
(1,090 )
(3,435 )
Outstanding as of December 31, 2018
_______________
(1) Represents the grant-date fair value for all awards, excluding the 2014 Performance-Based RSU Grant, which was re-measured upon stockholder approval of the amended 2006 Plan on
65.87
1,089,088
1,675,867
586,779
$
May 22, 2014, as an insufficient number of shares were available to settle these RSUs upon initial grant on January 29, 2014.
(2) Represents vested RSUs that were settled in shares of the Company’s common stock. Total shares settled include 85,598 shares that were tendered in accordance with the terms of the
2006 Plan to satisfy minimum statutory tax withholding requirements related to the RSUs settled. We accept the return of RSUs at the current quoted closing share price of the
Company’s common stock to satisfy tax obligations.
(3) Represents the issuance of dividend equivalents earned on the underlying RSUs. The dividend equivalents vest based on terms specified under the related RSU award agreement.
(4) For shares vested but not yet settled, we accept the return of RSUs at the current quoted closing share price of the Company’s common stock to satisfy minimum statutory tax-
withholding requirements related to either the settlement or vesting of RSUs in accordance with the terms of the 2006 Plan.
A summary of our time-based RSU activity for the years ended December 31, 2018, 2017 and 2016 is presented below:
Year ended December 31,
2018
2017
RSUs Granted
RSUs Vested
Non-Vested
RSUs Issued
Weighted-Average Grant
Date
Fair Value
Per Share
Vested RSUs
Total Vest-Date Fair Value (1)
(in thousands)
$
437,216
142,101
173,747
64.21
74.91
58.29
(214,131 ) $
(228,095 )
(130,784 )
14,768
16,735
8,438
2016
_______________
(1) Total fair value of RSUs vested was calculated based on the quoted closing share price of the Company’s common stock on the NYSE on the day of vesting. Excludes the issuance of
dividend equivalents earned on the underlying RSUs. The dividend equivalents vest based on terms specified under the related RSU award agreement.
F - 48
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Summary of Nonvested Restricted Stock
A summary of our nonvested restricted stock activity from January 1, 2018 through December 31, 2018 is presented below:
Outstanding at January 1, 2018
Transferred from time-based RSUs
Vested (1)
Nonvested
Restricted Stock
$
22,884
—
(22,884 )
Weighted-Average
Grant Date
Fair Value
Per Share
55.23
—
55.23
Outstanding as of December 31, 2018
_______________
(1) The total shares vested includes 9,637 shares that were tendered in accordance with the terms of the 2006 Plan to satisfy minimum statutory tax withholding requirements related to the
—
—
$
restricted shares that have vested. We accept the return of shares at the current quoted closing share price of the Company’s common stock to satisfy tax withholding obligations.
A summary of our nonvested and vested restricted stock activity for years ended December 31, 2018, 2017 and 2016 is presented below:
Years ended December 31,
2018
2017
Shares Granted
Shares Vested
Nonvested
Shares Issued
Weighted-Average Grant
Date
Fair Value
Per Share
Vested Shares
Total Fair Value at Vest Date
(1)
(in thousands)
$
—
—
—
—
—
—
(22,884 ) $
(24,261 )
(24,262 )
1,652
1,781
1,527
2016
_______________
(1) Total fair value of shares vested was calculated based on the quoted closing share price of the Company’s common stock on the NYSE on the date of vesting.
Share-Based Compensation Cost Recorded During the Period
The total compensation cost for all share-based compensation programs was $35.9 million, $26.3 million and $26.6 million for the years ended December 31, 2018,
2017 and 2016, respectively. Of the total share-based compensation costs, $8.0 million, $7.3 million and $5.6 million was capitalized as part of real estate assets and
deferred leasing costs for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, there was approximately $60.5 million of total
unrecognized compensation cost related to nonvested incentive awards granted under share-based compensation arrangements that is expected to be recognized over
a weighted-average period of 3.0 years. The remaining compensation cost related to these nonvested incentive awards had been recognized in periods prior to
December 31, 2018. The $60.5 million of unrecognized compensation costs does not reflect the future compensation cost related to share-based awards that were
granted subsequent to December 31, 2018.
Other Compensation
On December 27, 2018, the Executive Compensation Committee of the Company’s Board approved, and the Company and the Operating Partnership entered into
the Amended Employment Agreement with John Kilroy, which amends and supersedes the existing employment agreement dated January 1, 2012. Except as noted
below, the Amended Employment Agreement continues Mr. Kilroy’s employment on terms substantially similar to those of the existing employment agreement, with a
new term scheduled to continue through December 31, 2023. The Amended Employment Agreement includes a cash retirement benefit of $13.2 million, or $16.2 million
for a retirement at or after attaining age 73, with at least twelve months’ advance notice or at or after the end of the term of the agreement. For the year ended December
31, 2018, the Company recognized $12.1 million of compensation expense in general and administrative expenses on the consolidated statement of operations,
representing the present value of the potential cash retirement benefit amount that was earned based on prior service.
F - 49
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
16.
Employee Benefit Plans
401(k) Plan
We have a retirement savings plan designed to qualify under Section 401(k) of the Code (the “401(k) Plan”). Our employees are eligible to participate in the 401
(k) Plan on the first day of the month after three months of service. The 401(k) Plan allows eligible employees (“401(k) Participants”) to defer up to 60% of their eligible
compensation on a pre-tax basis, subject to certain maximum amounts allowed by the Code. The 401(k) Plan provides for a matching contribution by the Company in
an amount equal to 50 cents of each one dollar of participant contributions up to a maximum of 10% of the 401(k) Participant’s annual salary. 401(k) Participants vest
immediately in the amounts contributed by us. For each of the years ended December 31, 2018, 2017, and 2016, we contributed $1.5 million, $1.3 million and $1.2 million,
respectively, to the 401(k) Plan.
Deferred Compensation Plan
In 2007, we adopted the Deferred Compensation Plan, under which directors and certain management employees may defer receipt of their compensation,
including up to 70% of their salaries and up to 100% of their director fees and bonuses, as applicable. In addition, employee participants will receive mandatory
Company contributions to their Deferred Compensation Plan accounts equal to 10% of their gross monthly salaries, without regard to whether such employees elect to
defer salary or bonus compensation under the Deferred Compensation Plan. Our Board may, but has no obligation to, approve additional discretionary contributions
by the Company to Participant accounts. We hold the Deferred Compensation Plan assets in a limited rabbi trust, which is subject to the claims of our creditors in the
event of bankruptcy or insolvency.
See Note 19 “Fair Value Measurements and Disclosures” for further discussion of our Deferred Compensation Plan assets as of December 31, 2018 and 2017. Our
liability of $21.7 million and $20.6 million under the Deferred Compensation Plan was fully funded as of December 31, 2018 and 2017, respectively.
17.
Future Minimum Rent
We have operating leases with tenants that expire at various dates through 2043 and are either subject to scheduled fixed increases or adjustments in rent based
on the Consumer Price Index. Generally, the leases grant tenants renewal options. Leases also provide for additional rents based on certain operating expenses. Future
contractual minimum rent under operating leases as of December 31, 2018 for future periods is summarized as follows:
Year Ending
2019
2020
2021
2022
2023
Thereafter
Total (1)
______________
(1) Excludes residential leases and leases with a term of one year or less.
18.
Commitments and Contingencies
General
$
$
(in thousands)
566,783
632,875
631,835
620,684
586,371
3,240,143
6,278,691
As of December 31, 2018, we had commitments of approximately $960.1 million, excluding our ground lease commitments, for contracts and executed leases
directly related to our operating and development properties.
F - 50
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Ground Leases
The following table summarizes our properties that are held subject to long-term noncancellable ground lease obligations and the respective contractual expiration
dates:
Property
601 108th Ave NE, Bellevue, WA
701, 801 and 837 N. 34th Street, Seattle, WA (2)
1701 Page Mill Road and 3150 Porter Drive, Palo Alto, CA
Contractual Expiration Date (1)
November 2093
December 2041
December 2067
Kilroy Airport Center Phases I, II, and III, Long Beach, CA
____________________
(1) Reflects the contractual expiration date prior to the impact of any extension or purchase options held by the Company.
(2) The Company has three 10-year and one 45-year extension options for this ground lease, which if exercised would extend the expiration date to December 2116.
July 2084
The minimum commitment under our ground leases as of December 31, 2018 for five years and thereafter is as follows:
Year Ending
2019
2020
2021
2022
2023
Thereafter
Total (1)(2)(3)(4)(5)
$
$
(in thousands)
5,154
5,154
5,154
5,154
5,154
233,619
259,389
________________________
(1) Excludes contingent future rent payments based on gross income or adjusted gross income and reflects the minimum ground lease obligations before the impact of ground lease extension
options.
(2) One of our ground lease obligations is subject to a fair market value adjustment every five years; however, the lease includes ground rent subprotection and infrastructure rent credits which
currently limit our annual rental obligations to $1.0 million. The contractual obligations for that ground lease included above assumes the lesser of $1.0 million or annual lease rental
obligation in effect as of December 31, 2018.
(3) One of our ground lease obligations includes a component which is based on the percentage of gross income that exceeds the minimum ground rent. The minimum rent is subject to
increases every five years based on 50% of the average annual percentage rent for the previous five years. The contractual obligations for that lease included above assume the current
annual ground lease obligation in effect at December 31, 2018 for the remainder of the lease term since we cannot predict future adjustments.
(4) One of our ground lease obligations is subject to a fair market value adjustment every five years based on a combination of CPI adjustments and third-party appraisals limited to maximum
increases annually. The contractual obligations for that lease included above assume the current annual ground lease obligation in effect at December 31, 2018 for the remainder of the
lease term since we cannot predict future adjustments.
(5) One of our ground lease obligations includes a component which is based on the percentage of adjusted gross income that exceeds the minimum ground rent. The minimum rent is subject
to increases every 10 years by an amount equal to 60% of the average annual percentage rent for the previous three years. The contractual obligations for this lease included above
assume the current annual ground lease obligation in effect at December 31, 2018 for the remainder of the lease term since we cannot predict future adjustments.
Environmental Matters
We follow the policy of monitoring all of our properties, including acquisition, development, and existing stabilized portfolio properties, for the presence of
hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental
liability with respect to our stabilized portfolio properties that would have a material adverse effect on our financial condition, results of operations and cash flow, or
that we believe would require additional disclosure or the recording of a loss contingency.
As of December 31, 2018 and 2017, we had accrued environmental remediation liabilities of approximately $83.2 million and $28.3 million, respectively, recorded on
our consolidated balance sheets in connection with certain of our in-process and future development projects. The accrued environmental remediation liabilities
represent the remaining costs we estimate we will incur prior to and during the development process at various development acquisition sites. These estimates, which
we developed with the assistance of third party experts, consist primarily of the removal of contaminated soil, performing environmental closure activities,
constructing remedial systems, and other related costs
F - 51
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
since we are required to dispose of any existing contaminated soil, and sometimes perform other environmental closure or remedial activities, when we develop new
buildings at these sites.
We record estimated environmental remediation obligations for acquired properties at the acquisition date when we are aware of such costs and when such costs
are probable of being incurred and can be reasonably estimated. Estimated costs related to development environmental remediation liabilities are recorded as an
increase to the cost of the development project. Actual costs are recorded as a decrease to the liability when incurred. These accruals are adjusted as an increase or
decrease to the development project costs and as an increase or decrease to the accrued environmental remediation liability if we obtain further information or
circumstances change. The environmental remediation obligations recorded at December 31, 2018 and 2017 were not discounted to their present values since the
amount and timing of cash payments are not fixed. It is possible that we could incur additional environmental remediation costs in connection with these development
projects. However, potential additional environmental costs for these development projects cannot be reasonably estimated at this time and certain changes in
estimates could occur as the site conditions, final project timing, design elements, actual soil conditions and other aspects of the projects, which may depend upon
municipal and other approvals beyond the control of the Company, are determined.
Other than the accrued environmental liabilities discussed above, we are not aware of any unasserted claims and assessments with respect to an environmental
liability that we believe would require additional disclosure or the recording of an additional loss contingency.
Litigation
We and our properties are subject to litigation arising in the ordinary course of business. To our knowledge, neither we nor any of our properties are presently
subject to any litigation or threat of litigation which, if determined unfavorably to us, would have a material adverse effect on our cash flow, financial condition, or
results of operations.
Insurance
We maintain commercial general liability, auto liability, employers’ liability, umbrella/excess liability, special form property, difference in conditions including
earthquake and flood, environmental, rental loss, and terrorism insurance covering all of our properties. Management believes the policy specifications and insured
limits are reasonable given the relative risk of loss, the cost of the coverage, and industry practice. We do not carry insurance for generally uninsurable losses such as
loss from governmental action, nuclear hazard, and war and military action. Policies are subject to various terms, conditions, and exclusions and some policies may
involve large deductibles or co-payments.
Property Damage Settlement
During the year ended December 31, 2016, we settled an outstanding property damage matter and received cash proceeds totaling $5.0 million, which is included
in other property income on our consolidated statements of operations.
19. Fair Value Measurements and Disclosures
Assets and Liabilities Reported at Fair Value
The only assets we record at fair value on our consolidated financial statements are the marketable securities related to our Deferred Compensation Plan (see
Note 16 “Employee Benefit Plans” for additional information). The following table sets forth the fair value of our marketable securities as of December 31, 2018 and
2017:
Description
Marketable securities (2)
_______________
(1) Based on quoted prices in active markets for identical securities.
(2) The marketable securities are held in a limited rabbi trust.
Fair Value (Level 1) (1)
2018
2017
$
(in thousands)
$
21,779
20,674
We report the change in the fair value of the marketable securities at the end of each accounting period in interest income and other net investment (losses) gains
in the consolidated statements of operations. We also adjust the related Deferred Compensation Plan liability to fair value at the end of each accounting period based
on the performance of the benchmark funds selected by each participant, which results in a corresponding increase or decrease to compensation cost for the period.
The following table sets forth the net (loss) gain on marketable securities recorded during the years ended December 31, 2018, 2017 and 2016:
Description
Net (loss) gain on marketable securities
Financial Instruments Disclosed at Fair Value
December 31,
2018
2017
2016
(in thousands)
$
(1,851) $
3,023
$
1,130
The following table sets forth the carrying value and the fair value of our other financial instruments as of December 31, 2018 and 2017:
Liabilities
Secured debt, net
Unsecured debt, net
Unsecured line of credit (1)
December 31,
2018
2017
Carrying Value
Fair Value (1)
Carrying Value
Fair Value (1)
(in thousands)
$
$
335,531
2,552,070
45,000
$
335,885
2,546,386
45,058
$
340,800
2,006,263
—
346,858
2,077,199
—
_______________
(1) Fair value calculated using Level II inputs, which are based on model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
20. Other Significant Events
During the year ended December 31, 2018, we recognized $5.7 million of provision for bad debts. The provision for bad debts was primarily due to a $7.0 million
provision for one tenant recognized during the second quarter of 2018, partially offset by a $1.4 million decrease in the provision for bad debts for one lease due to the
assignment of the lease to a credit tenant during the second quarter of 2018.
F - 52
21.
Net Income Available to Common Stockholders Per Share of the Company
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table reconciles the numerator and denominator in computing the Company’s basic and diluted per-share computations for net income available to
common stockholders for the years ended December 31, 2018, 2017 and 2016:
Numerator:
Net income attributable to Kilroy Realty Corporation
Total preferred dividends
Allocation to participating securities (1)
Numerator for basic and diluted net income available to common stockholders
Denominator:
Basic weighted average vested shares outstanding
Effect of dilutive securities
Diluted weighted average vested shares and common stock equivalents outstanding
Basic earnings per share:
Net income available to common stockholders per share
Diluted earnings per share:
Net income available to common stockholders per share
Year Ended December 31,
2018
2017
2016
(in thousands, except unit and per unit amounts)
$
258,415
—
(2,004 )
256,411
$
$
164,612
(13,363 )
(1,975 )
149,274
$
293,788
(13,250 )
(3,839 )
276,699
99,972,359
510,006
100,482,365
98,113,561
613,770
98,727,331
92,342,483
680,551
93,023,034
2.56
$
1.52
$
2.55
$
1.51
$
3.00
2.97
$
$
$
$
________________________
(1) Participating securities include nonvested shares, certain time-based RSUs and vested market measure-based RSUs.
Share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating
securities. The impact of potentially dilutive common shares, including stock options, RSUs, shares issuable under executed forward equity sale agreements and other
securities are considered in our diluted earnings per share calculation for the years ended December 31, 2018, 2017, and 2016. Certain market measure-based RSUs are
not included in dilutive securities as of December 31, 2018, 2017, and 2016 as not all performance metrics had been met by the end of the applicable reporting periods.
See Note 15 “Share-Based Compensation” for additional information regarding the stock options and other share-based compensation.
F - 53
22.
Net Income Available to Common Unitholders Per Unit of the Operating Partnership
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table reconciles the numerator and denominator in computing the Operating Partnership’s basic and diluted per-unit computations for net income
available to common unitholders for the years ended 2018, 2017 and 2016:
Numerator:
Net income attributable to Kilroy Realty, L.P.
Total preferred distributions
Allocation to participating securities (1)
Numerator for basic and diluted net income available to common unitholders
Denominator:
Basic weighted average vested units outstanding
Effect of dilutive securities
Diluted weighted average vested units and common unit equivalents outstanding
Basic earnings per unit:
Net income available to common unitholders per unit
Diluted earnings per unit:
Net income available to common unitholders per unit
Year Ended December 31,
2018
2017
2016
(in thousands, except unit and per unit amounts)
$
263,210
—
(2,004)
261,206
$
$
167,440
(13,363)
(1,975)
152,102
$
300,063
(13,250)
(3,839)
282,974
102,025,276
510,006
102,535,282
100,246,567
613,770
100,860,337
94,771,688
680,551
95,452,239
2.56
$
1.52
$
2.55
$
1.51
$
2.99
2.96
$
$
$
$
________________________
(1) Participating securities include nonvested shares, certain time-based RSUs and vested market measure-based RSUs.
Share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating
securities. The impact of potentially dilutive common units, including stock options, RSUs, shares issuable under executed forward equity sale agreements and other
securities are considered in our diluted earnings per share calculation for the years ended December 31, 2018, 2017 and 2016. Certain market measure-based RSUs are
not included in dilutive securities as of December 31, 2018, 2017 and 2016 as not all performance metrics had been met by the end of the applicable reporting periods.
See Note 15 “Share-Based Compensation” for additional information regarding the stock options and other share-based compensation.
F - 54
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
23. Supplemental Cash Flow Information of the Company
Supplemental cash flow information follows (in thousands):
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest, net of capitalized interest of $65,627, $44,757, and $47,675 as of
December 31, 2018, 2017 and 2016, respectively
NON-CASH INVESTING TRANSACTIONS:
Accrual for expenditures for operating properties and development and redevelopment
properties
Tenant improvements funded directly by tenants
Assumption of other assets and liabilities in connection with operating and development
property acquisitions, net (Note 3)
Accrual for receivable related to development properties
NON-CASH FINANCING TRANSACTIONS:
Accrual of dividends and distributions payable to common stockholders and common
unitholders (Notes 13 and 28)
Exchange of common units of the Operating Partnership into shares of the Company’s
common stock
Accrual of dividends and distributions payable to preferred stockholders and preferred
unitholders (Note 13)
Issuance of common units of the Operating Partnership in connection with an acquisition
Secured debt assumed by buyers in connection with land disposition (Note 4)
Year Ended December 31,
2018
2017
2016
$
$
$
$
$
$
$
$
$
$
44,697
$
67,336
$
54,295
158,626
13,968
$
$
116,089
15,314
$
$
40,624
$
—
$
1,443
$
—
$
62,589
18,050
5,863
1,350
47,559
$
43,448
$
220,650
1,962
$
10,939
$
8,893
—
$
—
$
—
$
—
$
—
$
—
$
1,656
48,033
2,322
The following is a reconciliation of our cash and cash equivalents and restricted cash at the beginning and end of the years ended 2018, 2017 and 2016.
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents at beginning of period
Restricted cash at beginning of period
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents at end of period
Restricted cash at end of period
Cash and cash equivalents and restricted cash at end of period
F - 55
Year Ended December 31,
2018
2017
2016
$
$
$
$
57,649
9,149
66,798
51,604
119,430
171,034
$
$
$
$
193,418
56,711
250,129
57,649
9,149
66,798
$
$
$
$
56,508
696
57,204
193,418
56,711
250,129
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
24. Supplemental Cash Flow Information of the Operating Partnership:
Supplemental cash flow information follows (in thousands):
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest, net of capitalized interest of $65,627, $44,757, and $47,675 as of
December 31, 2018, 2017 and 2016, respectively
NON-CASH INVESTING TRANSACTIONS:
Accrual for expenditures for operating properties and development and redevelopment properties
Tenant improvements funded directly by tenants
Assumption of other assets and liabilities in connection with operating and development property acquisitions, net (Note
3)
Accrual for receivable related to development properties
NON-CASH FINANCING TRANSACTIONS:
Accrual of dividends and distributions payable to common stockholders and common
unitholders (Notes 14 and 28)
Accrual of dividends and distributions payable to preferred stockholders and preferred unitholders (Note 14)
Issuance of common units in connection with a development property acquisition
Secured debt assumed by buyers in connection with land disposition (Note 4)
Year Ended December 31,
2018
2017
2016
$
$
$
$
$
$
$
$
$
44,697
$
67,336
$
54,295
158,626
13,968
$
$
116,089
15,314
$
$
40,624
$
—
$
1,443
$
—
$
62,589
18,050
5,863
1,350
47,559
$
43,448
$
220,650
—
$
—
$
—
$
—
$
—
$
—
$
1,656
48,033
2,322
The following is a reconciliation of our cash and cash equivalents and restricted cash at the beginning and end of the years ended 2018, 2017 and 2016.
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents at beginning of period
Restricted cash at beginning of period
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents at end of period
Restricted cash at end of period
Cash and cash equivalents and restricted cash at end of period
F - 56
Year Ended December 31,
2018
2017
2016
$
$
$
$
57,649
9,149
66,798
51,604
119,430
171,034
$
$
$
$
193,418
56,711
250,129
57,649
9,149
66,798
$
$
$
$
56,508
696
57,204
193,418
56,711
250,129
25. Tax Treatment of Distributions
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table reconciles the dividends declared per share of common stock to the dividends paid per share of common stock during the years ended
December 31, 2018, 2017 and 2016 as follows:
Dividends
Dividends declared per share of common stock
Less: Dividends declared in the current year and paid in the following year
Add: Dividends declared in the prior year and paid in the current year (1)
Dividends paid per share of common stock
$
$
Year Ended December 31,
2018
2017
2016
$
1.790
(0.455)
0.425
1.760
$
$
1.650
(0.425)
2.275
3.500
$
3.375
(2.275)
0.350
1.450
_________________
(1) The fourth quarter 2016 dividend of $2.275 per share of common stock consists of a special cash dividend of $1.90 per share of common stock and a regular quarterly cash dividend of
$0.375 per share of common stock. The $1.90 per share special distribution is treated as paid in two tax years for income tax purposes: $1.587 is treated as paid on December 31, 2016
and $0.313 is treated as paid on January 13, 2017. The $0.375 per share regular quarterly distribution is considered a 2017 dividend distribution for income tax purposes.
The unaudited income tax treatment for the dividends to common stockholders reportable for the years ended December 31, 2018, 2017 and 2016 as identified in
the table above was as follows:
Shares of Common Stock
Ordinary income (1)
Qualified dividend
Return of capital
Capital gains (2)
Unrecaptured section 1250 gains
2018
2017
2016
Year Ended December 31,
$
$
1.474
0.003
0.275
0.008
—
1.760
83.73% $
0.19
15.64
0.44
—
100.00% $
1.356
0.002
0.344
—
0.211
1.913
70.87% $
0.11
18.00
—
11.02
100.00% $
1.500
0.002
—
1.212
0.323
3.037
49.40%
0.06
—
39.89
10.65
100.00%
_________________
(1) The Tax Cuts and Jobs Act enacted on December 22, 2017 generally allows a deduction for noncorporate taxpayers equal to 20% of ordinary dividends distributed by a REIT (excluding
capital gain dividends and qualified dividend income). The amount of dividend eligible for this deduction is referred to as the Section 199A Dividend. For the year ended December 31,
2018, the Section 199A Dividend is equal to the total ordinary income dividend.
(2) Capital gains are comprised entirely of 20% rate gains.
The 6.875% Series G Cumulative Redeemable Preferred Stock was issued in March 2012 and redeemed in March 2017. The unaudited income tax treatment for the
dividends to Series G preferred stockholders reportable for the years ended December 31, 2017 and 2016 was as follows:
Preferred Shares
Ordinary income
Qualified dividend
Capital gains (1)
Unrecaptured section 1250 gains
__________________
(1) Capital gains are comprised entirely of 20% rate gains.
Year Ended December 31,
2017
2016
$
$
0.371
0.001
—
0.058
0.430
86.43% $
0.14
—
13.43
100.00% $
0.848
0.001
0.687
0.183
1.719
49.31%
0.06
39.97
10.66
100.00%
F - 57
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The 6.375% Series H Cumulative Redeemable Preferred Stock was issued in August 2012 and redeemed in August 2017. The unaudited income tax treatment for the
dividends to Series H preferred stockholders reportable for the years ended December 31, 2017 and 2016 was as follows:
Preferred Shares
Ordinary income
Qualified dividend
Capital gains (1)
Unrecaptured section 1250 gains
Year Ended December 31,
2017
2016
$
$
1.033
0.002
—
0.160
1.195
86.43% $
0.14
—
13.43
100.00% $
0.786
0.001
0.637
0.170
1.594
49.31%
0.06
39.97
10.66
100.00%
__________________
(1) Capital gains are comprised entirely of 20% rate gains.
26.
Quarterly Financial Information of the Company (Unaudited)
Summarized quarterly financial data for the years ended December 31, 2018 and 2017 was as follows:
March 31,
June 30,
September 30,
December 31,
2018 Quarter Ended (1)
Revenues
Net income
Net income attributable to Kilroy Realty Corporation
Net income available to common stockholders
Net income available to common stockholders per share – basic
Net income available to common stockholders per share – diluted
Revenues
Net income
Net income attributable to Kilroy Realty Corporation
Preferred dividends and distributions
Net income available to common stockholders
Net income available to common stockholders per share – basic
$
$
(in thousands, except per share amounts)
$
$
182,822
40,971
36,246
36,246
0.36
0.36
187,072
31,755
27,549
27,549
0.27
0.27
186,562
38,310
34,400
34,400
0.34
0.33
$
190,842
166,890
160,220
160,220
1.59
1.58
March 31,
June 30,
September 30,
December 31,
2017 Quarter Ended (1)
(in thousands, except per share amounts)
$
$
179,308
37,281
33,525
(7,196)
26,329
0.27
0.26
180,598
35,306
31,448
(1,615)
29,833
0.30
0.30
$
181,534
75,488
71,110
(4,552)
66,558
0.67
0.67
177,561
32,540
28,529
—
28,529
0.28
0.28
Net income available to common stockholders per share – diluted
____________________
(1) The summation of the quarterly financial data may not equal the annual number reported on the consolidated statements of operations due to rounding. For the year ended December 31,
2018, the summation of the quarterly net income available to common stockholders per share does not equal the annual number reported on the consolidated statements of operations
due to the Company’s at-the-market stock offering programs that occurred during the year.
F - 58
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
27.
Quarterly Financial Information of the Operating Partnership (Unaudited)
Summarized quarterly financial data for the years ended December 31, 2018 and 2017 was as follows:
March 31,
June 30,
September 30,
December 31,
2018 Quarter Ended (1)
Revenues
Net income
Net income attributable to the Operating Partnership
Net income available to common unitholders
Net income available to common unitholders per unit – basic
Net income available to common unitholders per unit – diluted
Revenues
Net income
Net income attributable to the Operating Partnership
Preferred distributions
Net income available to common unitholders
Net income available to common unitholders per unit – basic
$
$
(in thousands, except per unit amounts)
$
$
182,822
40,971
36,893
36,893
0.36
0.36
187,072
31,755
28,015
28,015
0.27
0.27
186,562
38,310
34,993
34,993
0.34
0.33
$
190,842
166,890
163,309
163,309
1.58
1.57
March 31,
June 30,
September 30,
December 31,
2017 Quarter Ended (1)
(in thousands, except per unit amounts)
$
$
179,308
37,281
34,054
(7,196 )
26,858
0.26
0.26
180,598
35,306
31,971
(1,615 )
30,356
0.30
0.30
$
181,534
75,488
72,402
(4,552 )
67,850
0.67
0.67
177,561
32,540
29,013
—
29,013
0.28
0.28
Net income available to common unitholders per unit – diluted
___________________
(1) The summation of the quarterly financial data may not equal the annual number reported on the consolidated statements of operations due to rounding. For the year ended December 31,
2018, the summation of the quarterly net income available to common stockholders per share does not equal the annual number reported on the consolidated statements of operations
due to the Company’s at-the-market stock offering programs that occurred during the year.
28.
Subsequent Events
On January 15, 2019, $47.5 million of dividends were paid out to common stockholders, common unitholders and RSU holders of record on December 31, 2018.
In February 2019, the Executive Compensation Committee granted 144,982 Time-Based RSUs and 143,396 Performance-Based RSUs to key employees under the
2006 Plan. The compensation cost related to the RSUs is expected to be recognized over a period of three years.
On February 11, 2019, the Company repaid at par a secured mortgage note payable due in June 2019 for $74.3 million.
F - 59
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2018, 2017 and 2016
(in thousands)
Allowance for Uncollectible Tenant Receivables for the year ended
December 31,
2018 – Allowance for uncollectible tenant receivables
2017 – Allowance for uncollectible tenant receivables
2016 – Allowance for uncollectible tenant receivables
Allowance for Deferred Rent Receivables for the year ended
December 31,
2018 – Allowance for deferred rent
2017 – Allowance for deferred rent
2016 – Allowance for deferred rent
Balance at
Beginning
of Period
Charged to
Costs and
Expenses (1)
Recoveries
(Deductions)
Balance
at End
of Period
$
$
$
$
2,309
1,712
2,080
3,238
1,524
1,882
$
2,604
1,517
—
$
165
1,752
—
(274 ) $
(920 )
(368 )
(64 ) $
(38 )
(358 )
4,639
2,309
1,712
3,339
3,238
1,524
__________________
(1) In addition, for the year ended December 31, 2018, $2.9 million was charged to costs and expenses for a valuation allowance for a note receivable.
F - 60
KILROY REALTY CORPORATION AND KILROY REALTY, L.P
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2018
Initial Cost
Gross Amounts at Which
Carried at Close of Period
Encumb-
rances
Land and
improve-
ments
Buildings
and
Improve-
ments
Costs
Capitalized
Subsequent
to
Acquisition/
Improvement
Land and
improve-
ments
Buildings
and
Improve-
ments
($ in thousands)
Accumulated
Depreciation
Depreci-
ation
Life (1)
Total
Date of
Acquisition
(A)/
Construction
(C) (2)
Rentable
Square
Feet (3)
(unaudited)
$ 5,248
$ 8,001
$
8,267
$ 5,248
$ 16,268
$ 21,516
$ 11,862
1,044
11,763
29,509
1,048
41,268
42,316
25,671
2,579
29,062
36,148
2,547
65,242
67,789
52,858
2,518
28,370
36,672
2,547
65,013
67,560
14,064
(4)
(4)
3,577
34,042
48,056
3,577
82,098
85,675
38,602
1,407
34,326
16,497
1,407
50,823
52,230
23,178
1,313
3
16,458
2,455
15,319
17,774
11,120
4,256
43,952
8,703
50,625
59,328
1,318
3
9,642
1,318
9,645
10,963
22,153
51
119,406
22,153
119,457
141,610
9,235
21
58,582
9,235
58,603
67,838
16,970
39
135,583
16,970
135,622
152,592
1,483
5,631
870
8,149
4,026
9,911
18,111
60,320
44,535
18,111
104,855
122,966
29,278
—
1,941
11,153
—
13,094
13,094
10,395
—
17,467
13,714
—
31,181
31,181
25,635
—
22,319
23,008
—
45,327
45,327
37,365
—
19,408
20,838
—
40,246
40,246
23,575
—
13,586
10,364
—
23,950
23,950
15,417
—
9,704
11,277
—
20,981
20,981
3,820
—
12,615
11,983
—
24,598
24,598
17,147
—
—
4,997
—
4,997
4,997
9,720
50,956
600
9,720
51,556
61,276
31,693
27,974
925
31,693
28,899
60,592
10,013
3,695
135
10,013
3,830
13,843
39,954
27,884
1,092
39,954
28,976
68,930
4,997
4,209
2,085
264
2,267
170,000
(8)
352
45,611
18,518
9,633
54,848
64,481
27,316
(8)
4,329
35,488
23,707
3,977
59,547
63,524
37,257
22,100
53,170
3,986
22,100
57,156
79,256
11,832
(8)
3,325
2,080
12,202
6,672
11,341
3,139
3,399
2,040
23,469
9,851
26,868
11,891
12,017
6,908
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
1997
( A ) 84,098
1983
( C ) 122,870
1983
( C ) 298,728
1983
( C ) 298,728
2005
( C ) 244,136
2003
( C ) 128,588
2015
( C ) 26,105
2015
( C ) 91,173
2016
( C )
9,610
2016
( C ) 251,245
2016
( C ) 104,504
2016
( C )
—
2012
( A ) 323,920
1989
( C ) 10,457
1989
( C ) 165,278
1989
( C ) 219,777
2000
( C ) 192,476
1999
( C ) 136,026
1997
( A ) 96,035
1997
( A ) 129,893
—
—
—
2016
( A ) 71,875
2016
( A ) 43,603
2016
( A )
7,126
2016
( A ) 56,095
2003
( C ) 152,048
2000
( C ) 150,832
2012
( A ) 151,029
1997
1997
( A ) 76,644
( A ) 43,857
Property Location
Office Properties:
2829 Townsgate Rd., Thousand
Oaks, CA
2240 E. Imperial Highway, El
Segundo, CA
2250 E. Imperial Highway, El
Segundo, CA
2260 E. Imperial Highway, El
Segundo, CA
909 N. Pacific Coast Highway, El
Segundo, CA
999 N. Pacific Coast Highway, El
Segundo, CA
6115 W. Sunset Blvd., Los Angeles,
CA (5)
6121 W. Sunset Blvd., Los Angeles,
CA (5)
1525 N. Gower Street, Los Angeles,
CA (5)
1575 N. Gower Street, Los Angeles,
CA (5)
1500 N. El Centro Ave., Los
Angeles, CA (5)
1550 N. El Centro Ave., Los
Angeles, CA (5) (6)
6255 W. Sunset Blvd., Los Angeles,
CA
3750 Kilroy Airport Way, Long
Beach, CA
3760 Kilroy Airport Way, Long
Beach, CA
3780 Kilroy Airport Way, Long
Beach, CA
3800 Kilroy Airport Way, Long
Beach, CA
3840 Kilroy Airport Way, Long
Beach, CA
3880 Kilroy Airport Way, Long
Beach, CA
3900 Kilroy Airport Way, Long
Beach, CA
Kilroy Airport Center, Phase IV,
Long Beach, CA (7)
8560 W. Sunset Blvd, West
Hollywood, CA
8570 W. Sunset Blvd, West
Hollywood, CA
8580 W. Sunset Blvd, West
Hollywood, CA
8590 W. Sunset Blvd, West
Hollywood, CA
12100 W. Olympic Blvd.,
Los Angeles, CA
12200 W. Olympic Blvd.,
Los Angeles, CA
12233 W. Olympic Blvd.,
Los Angeles, CA
12312 W. Olympic Blvd.,
Los Angeles, CA
1633 26th St., Santa Monica, CA
2100/2110 Colorado Ave., Santa
Monica, CA
91,332
(9)
5,474
26,087
14,620
5,476
40,705
46,181
24,031
3130 Wilshire Blvd., Santa Monica,
CA
501 Santa Monica Blvd., Santa
Monica, CA
2211 Michelson, Irvine, CA
12225 El Camino Real, Del Mar, CA
8,921
6,579
15,992
9,188
22,304
31,492
14,674
(4)
(9)
4,547
9,319
1,700
12,044
82,836
9,633
14,129
6,629
3,493
4,551
9,319
1,673
26,169
89,465
13,153
30,720
98,784
14,826
15,614
27,097
8,905
35
35
35
35
35
1997
( A ) 102,864
1997
( A ) 90,074
1998
2010
1998
( A ) 76,803
( A ) 271,556
( A ) 58,401
F - 61
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION – (Continued)
December 31, 2018
Initial Cost
Gross Amounts at Which
Carried at Close of Period
Property Location
Encumb-
rances
Land and
improve-
ments
Buildings
and
Improve-
ments
Costs
Capitalized
Subsequent
to
Acquisition/
Improvement
Land and
improve-
ments
Buildings
and
Improve-
ments
($ in thousands)
Accumulated
Depreciation
Depreci-
ation
Life (1)
Total
Date of
Acquisition
(A)/
Construction
(C) (2)
Rentable
Square
Feet (3)
(unaudited)
12235 El Camino Real, Del Mar, CA
12340 El Camino Real, Del Mar, CA
12390 El Camino Real, Del Mar, CA
12348 High Bluff Dr., Del Mar, CA
12400 High Bluff Dr., Del Mar, CA
(4)
1,507
4,201
3,453
1,629
15,167
8,543
13,896
11,981
3,096
40,497
8,965
9,858
3,896
6,141
14,337
1,540
4,201
3,453
1,629
15,167
17,475
23,754
15,877
9,237
54,834
19,015
27,955
19,330
10,866
70,001
9,681
11,257
8,995
6,206
27,243
3579 Valley Centre Dr., Del Mar,
CA
3611 Valley Centre Dr., Del Mar,
CA
3661 Valley Centre Dr., Del Mar,
CA
3721 Valley Centre Dr., Del Mar,
CA
3811 Valley Centre Dr., Del Mar,
CA
12770 El Camino Real, Del Mar, CA
12780 El Camino Real, Del Mar, CA
12790 El Camino Real, Del Mar, CA
13280 Evening Creek Dr. South, I-
15 Corridor, CA
13290 Evening Creek Dr. South, I-
15 Corridor, CA
13480 Evening Creek Dr. North, I-
15 Corridor, CA
13500 Evening Creek Dr. North, I-
15 Corridor, CA
13520 Evening Creek Dr. North, I-
15 Corridor, CA
2305 Historic Decatur Rd., Point
Loma, CA
4690 Executive Dr., University
Towne Centre, CA
4100 Bohannon Dr., Menlo Park,
CA
4200 Bohannon Dr., Menlo Park,
CA
4300 Bohannon Dr., Menlo Park,
CA
4400 Bohannon Dr., Menlo Park,
CA
4500 Bohannon Dr., Menlo Park,
CA
4600 Bohannon Dr., Menlo Park,
CA
4700 Bohannon Dr., Menlo Park,
CA
1290 - 1300 Terra Bella Ave.,
Mountain View, CA
331 Fairchild Dr., Mountain View,
CA
680 E. Middlefield Rd., Mountain
View, CA
690 E. Middlefield Rd., Mountain
View, CA
1701 Page Mill Rd, Palo Alto, CA
3150 Porter Drive, Palo Alto, CA
900 Jefferson Ave., Redwood City,
CA (10)
900 Middlefield Rd., Redwood City,
2,167
6,897
7,449
2,858
13,655
16,513
9,512
4,184
19,352
18,881
5,259
37,158
42,417
24,251
4,038
21,144
16,178
4,725
36,635
41,360
20,619
4,297
18,967
14,569
4,254
33,579
37,833
15,893
3,452
9,360
18,398
10,252
16,152
—
54,954
21,236
20,105
33,628
14,775
1,426
4,457
9,360
18,398
10,252
35,252
33,628
69,729
22,662
39,709
42,988
88,127
32,914
3,701
8,398
4,730
3,701
13,128
16,829
5,229
11,871
5,919
5,229
17,790
23,019
21,545
1,950
11,995
4,794
5,167
5,950
7,997
—
52,143
7,997
52,143
60,140
18,660
7,581
35,903
15,331
7,580
51,235
58,815
20,471
7,581
35,903
15,427
7,580
51,331
58,911
22,819
5,240
22,220
7,309
5,240
29,529
34,769
1,623
7,926
3,668
1,623
11,594
13,217
4,835
15,526
525
4,860
16,026
20,886
4,798
15,406
3,222
4,662
18,764
23,426
6,527
20,958
2,955
6,470
23,970
30,440
4,798
15,406
2,943
4,939
18,208
23,147
6,527
20,957
2,025
6,470
23,039
29,509
4,798
15,406
3,326
4,939
18,591
23,530
6,527
20,958
1,422
6,470
22,437
28,907
(4)
(4)
(4)
(4)
(4)
(4)
(4)
28,730
27,555
29
28,730
27,584
56,314
(4)
18,396
17,712
7,955
18,396
25,667
44,063
34,605
—
56,464
34,605
56,464
91,069
34,755
—
—
—
99,522
21,715
56,707
25
4
34,755
—
—
56,707
99,547
21,719
91,462
99,547
21,719
9,248
7,324
3,954
4,915
6,996
5,066
5,665
4,924
5,492
3,589
4,674
7,908
7,942
6,000
1,591
16,668
—
109,313
18,063
107,918
125,981
11,977
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
2000 ( C )
1998 ( A ) 53,751
89,272
2002 ( C )
70,140
38,806
2004 ( C ) 209,220
1999 ( C )
1999 ( C )
52,418
2000 ( C ) 129,656
2001 ( C ) 128,364
2003 ( C ) 115,193
2000 ( C ) 112,067
73,032
2015 ( C )
2013 ( A ) 140,591
2013 ( A ) 78,836
2008 ( C )
41,196
2008 ( C )
61,180
2008 ( C ) 154,157
2004 ( A ) 137,658
2004 ( A ) 146,701
2010 ( A ) 107,456
1999 ( A ) 47,846
2012 ( A ) 47,379
2012 ( A ) 45,451
2012 ( A ) 63,079
2012 ( A ) 48,146
2012 ( A ) 63,078
2012 ( A ) 48,147
2012 ( A ) 63,078
2016 ( A ) 114,175
2013 ( C )
87,147
2014 ( C ) 170,090
2014 ( C ) 170,823
2016 ( A ) 128,688
2016 ( A ) 36,897
2015 ( C ) 228,505
CA (10)
303 Second St., San Francisco, CA (11)
7,959
63,550
—
154,153
49,862
70,133
8,626
63,550
49,195
224,286
57,821
287,836
5,204
71,553
35
35
2015 ( C ) 118,764
2010 ( A ) 740,047
F - 62
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION – (Continued)
December 31, 2018
Initial Cost
Land and
improve-
ments
Buildings
and
Improve-
ments
Costs
Capitalized
Subsequent
to
Acquisition/
Improvement
Property Location
Encumb-
rances
Gross Amounts at Which
Carried at Close of Period
Land and
improve-
ments
Buildings
and
Improve-
ments
Total
Accumulated
Depreciation
($ in thousands)
Date of
Acquisition
(A)/
Construction
(C) (2)
Rentable
Square
Feet (3)
(unaudited)
Depreci-
ation
Life (1)
100 First St., San
Francisco, CA (12)
250 Brannan St., San
Francisco, CA
201 Third St., San
Francisco, CA
301 Brannan St., San
Francisco, CA
360 Third St., San
Francisco, CA
333 Brannan St., San
Francisco, CA
350 Mission Street, San
Francisco, CA
100 Hooper Street, San
Francisco, CA (15)
345 Brannan St., San
Francisco, CA
345 Oyster Point Blvd.,
South San Francisco, CA
347 Oyster Point Blvd,
South San Francisco, CA
349 Oyster Point Blvd.,
South San Francisco, CA
49,150
131,238
63,503
49,150
194,741
243,891
53,081
7,630
22,770
4,466
7,630
27,236
34,866
9,786
19,260
84,018
66,543
19,260
150,561
169,821
46,541
5,910
22,450
5,109
5,910
27,559
33,469
8,375
—
88,235
112,885
28,504
172,616
201,120
39,931
78,426
18,645
78,426
97,071
6,451
213,459
52,815
213,459
266,274
17,818
35
35
35
35
35
35
35
2010 ( A )
467,095
2011 ( A )
100,850
2011 ( A )
346,538
2011 ( A )
82,834
2011 ( A )
429,796
2016 ( C )
185,602
2016 ( C )
455,340
179,739
78,564
179,739
258,303
1,043 1,043
35 0.035
2018 ( C )
—
29,405
113,179
142,584
—
—
35 0.035
2018 ( A )
110,030
18,645
52,815
78,564
—
—
—
29,405
113,179
13,745
18,575
14,071
18,289
—
2
8
13,745
18,577
32,322
14,071
18,297
32,368
611
602
919
23,112
22,601
771
23,112
23,372
46,484
505 Mathilda Ave.,
Sunnyvale, CA
555 Mathilda Ave.,
Sunnyvale, CA
605 Mathilda Ave.,
Sunnyvale, CA
599 Mathilda Ave.,
Sunnyvale, CA
601 108th Ave.,
Bellevue, WA
10900 NE 4th St.,
Bellevue, WA
837 N. 34th St., Lake
Union, WA
701 N. 34th St., Lake
Union, WA
801 N. 34th St., Lake
Union, WA
320 Westlake Avenue
North, WA
321 Terry Avenue
North, Lake Union,
WA
401 Terry Avenue
North, Lake Union,
WA
TOTAL OPERATING
PROPERTIES
37,843
1,163
50,450
37,943
51,513
89,456
6,388
37,843
1,163
50,447
37,943
51,510
89,453
6,387
29,014
891
77,281
29,090
78,096
107,186
14,036
13,538
12,559
58
13,538
12,617
26,155
3,568
—
214,095
33,860
—
247,955
247,955
70,018
25,080
150,877
36,619
25,080
187,496
212,576
46,105
—
37,404
3,817
—
41,221
41,221
9,697
—
48,027
7,989
—
56,016
56,016
13,785
—
58,537
1,657
—
60,194
60,194
14,159
74,479 (13)
14,710
82,018
5,063
14,710
87,081
101,791
16,693
(13)
10,430
60,003
9,987
10,430
69,990
80,420
13,046
22,500
77,046
—
22,500
77,046
99,546
12,888
335,811
1,117,915 2,777,476 2,472,731
1,160,138 5,207,984 6,368,122 1,391,368
Undeveloped land and
construction in progress
—
940,092
— 1,118,418
940,092 1,118,418 2,058,510
—
TOTAL ALL
PROPERTIES
$335,811 (14) $2,058,007 $2,777,476 $ 3,591,149
$2,100,230 $6,326,402 $8,426,632 $ 1,391,368
F - 63
35
35
35
35
35
35
35
35
35
35
35
35
35
35
35
2018 ( A )
40,410
2018 ( A )
39,780
2018 ( A )
65,340
2014 ( C )
212,322
2014 ( C )
212,322
2014 ( C )
162,785
2012 ( A )
76,031
2011 ( A )
488,470
2012 ( A )
428,557
2012 ( A )
111,580
2012 ( A )
138,994
2012 ( A )
169,412
2013 ( A )
184,644
2013 ( A )
135,755
2014 ( A )
140,605
13,232,580
—
13,232,580
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION – (Continued)
December 31, 2018
__________________
(1) The initial costs of buildings and improvements are depreciated over 35 years using a straight-line method of accounting; improvements capitalized subsequent to acquisition are
depreciated over the shorter of the lease term or useful life, generally ranging from one to 20 years.
(2) Represents our date of construction or acquisition, or of our predecessor, the Kilroy Group.
(3) Includes square footage from our stabilized portfolio.
(4) These properties secure intercompany promissory notes between KRLP and consolidated property partnerships.
(5) These properties include the costs of a shared parking structure for a complex comprised of five office buildings and one residential tower. The costs of the parking structure are allocated
amongst the six buildings.
(6) This property represents the 200-unit Columbia Square - Residential tower that stabilized in 2016.
(7) These costs represent infrastructure costs incurred in 1989. During the third quarter of 2009, we exercised our option to terminate the ground lease at Kilroy Airport Center, Phase IV in
Long Beach, California. We had previously leased this land, which is adjacent to our Office Properties at Kilroy Airport Center, Long Beach, for potential future development
opportunities.
(8) These properties secure a $170.0 million mortgage note.
(9) These properties secure a $91.3 million mortgage note
(10) These properties are owned by Redwood City Partners LLC, a consolidated property partnership.
(11) This property is owned by 303 Second Street Member LLC, a consolidated property partnership.
(12) This property is owned by 100 First Street Member LLC, a consolidated property partnership.
(13) These properties secure a $74.5 million mortgage note, which was repaid at par in February 2019.
(14) Represents gross aggregate principal amount before the effect of the unamortized premium of approximately $0.8 million and deferred financing costs of $1.0 million as of December 31,
2018.
(15) This property is currently in the tenant improvement phase of our in-process development projects and not yet in the stabilized portfolio. The estimated rentable square feet for this
property is 400,000 rentable square feet.
F - 64
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION – (Continued)
December 31, 2018
As of December 31, 2018, the aggregate gross cost of property included above for federal income tax purposes approximated $7.0 billion. This amount excludes
approximately$0.1 billion of gross costs attributable to a property held in a VIE at December 31, 2018 to facilitate a potential Section 1031 Exchange.
The following table reconciles the historical cost of total real estate held for investment from January 1, 2016 to December 31, 2018:
Total real estate held for investment, beginning of year
Additions during period:
Acquisitions
Improvements, etc.
Total additions during period
Deductions during period:
Cost of real estate sold
Properties held for sale
Other
Total deductions during period
Year Ended December 31,
2018
2017
(in thousands)
2016
$
7,417,777
$
7,060,754
$
6,328,146
581,671
991,008
1,572,679
(286,623)
—
(277,201)
(563,824)
19,829
533,939
553,768
(191,610)
—
(5,135)
(196,745)
460,957
386,836
847,793
(68,200)
(13,193)
(33,792)
(115,185)
Total real estate held for investment, end of year
$
8,426,632
$
7,417,777
$
7,060,754
The following table reconciles the accumulated depreciation from January 1, 2016 to December 31, 2018:
Accumulated depreciation, beginning of year
Additions during period:
Depreciation of real estate
Total additions during period
Deductions during period:
Write-offs due to sale
Properties held for sale
Other
Total deductions during period
Accumulated depreciation, end of year
Year Ended December 31,
2018
2017
2016
(in thousands)
$
1,264,162
$
1,139,853
$
994,241
198,578
198,578
(71,372)
—
—
(71,372)
190,515
190,515
(66,206)
—
—
(66,206)
171,983
171,983
(22,471)
(3,900)
—
(26,371)
$
1,391,368
$
1,264,162
$
1,139,853
F - 65
Exhibit
Number
3.(i)1
3.(i)2
3.(i)3
3.(i)4
3.(i)5
3.(ii)1
3.(ii)2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
EXHIBIT INDEX
Description
Kilroy Realty Corporation Articles of Restatement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter
ended June 30, 2012)
Certificate of Limited Partnership of Kilroy Realty, L.P. (previously filed by Kilroy Realty, L.P., as an exhibit to the General Form for
Registration of Securities on Form 10 as filed with the Securities and Exchange Commission on August 18, 2010)
Amendment to the Certificate of Limited Partnership of Kilroy Realty, L.P. (previously filed by Kilroy Realty, L.P., as an exhibit to the General
Form for Registration of Securities on Form 10 as filed with the Securities and Exchange Commission on August 18, 2010)
Articles Supplementary reclassifying shares of the Series G Preferred Stock of the Company (previously filed by Kilroy Realty Corporation as
an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 23, 2017)
Articles Supplementary reclassifying shares of the Series H Preferred Stock of the Company (previously filed by Kilroy Realty Corporation
as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 23, 2017)
Fifth Amended and Restated Bylaws of Kilroy Realty Corporation (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K
as filed with the Securities and Exchange Commission on February 1, 2017)
Seventh Amended and Restated Agreement of Limited Partnership of Kilroy Realty, L.P. dated August 15, 2012, as amended (previously filed
by Kilroy Realty Corporation on Form 10-Q for the quarter ended June 30, 2014)
Kilroy Realty Corporation Form of Certificate for Common Stock (previously filed by Kilroy Realty Corporation as an exhibit to the
Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
Registration Rights Agreement, dated January 31, 1997 (previously filed by Kilroy Realty Corporation as an exhibit to the Registration
Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
Form of Certificate for Partnership Units of Kilroy Realty, L.P. (previously filed by Kilroy Realty, L.P., as an exhibit to the General Form for
Registration of Securities on Form 10 as filed with the Securities and Exchange Commission on August 18, 2010)
Registration Rights Agreement, dated July 31, 2012 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter
ended June 30, 2012)
Officers’ Certificate pursuant to Sections 101, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy Realty, L.P., as issuer,
Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “3.800%
Notes due 2023,” including the form of 3.800% Notes due 2023 and the form of related guarantee (previously filed by Kilroy Realty
Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on January 14, 2013)
Indenture, dated March 1, 2011, by and among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National
Association, as trustee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit to the Registration Statement on
Form S-3 as filed with the Securities and Exchange Commission on October 2, 2013)
Supplemental Indenture, dated July 5, 2011, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank
National Association, as trustee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit to the Registration
Statement on Form S-3 as filed with the Securities and Exchange Commission on October 2, 2013)
Officers’ Certificate pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy Realty, L.P., as issuer,
Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “4.25%
Senior Notes due 2029,” including the form of 4.25% Senior Notes due 2029 and the form of related guarantee (previously filed by Kilroy
Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 6,
2014)
Exhibit
Number
4.9
4.10
4.11
4.12
10.1
10.2†
10.3
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
Description
Officers’ Certificate, dated September 16, 2015, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among
Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of
securities entitled “4.375% Senior Notes due 2025,” including the form of 4.375% Senior Notes due 2025 and the form of related guarantee
(previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange
Commission on September 16, 2015)
Officers’ Certificate, dated December 11, 2017, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy
Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of
securities entitled “3.450% Senior Notes due 2024,” including the form of 3.450% Senior Notes due 2024 and the form of related guarantee
(previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange
Commission on December 11, 2017)
Officers’ Certificate, dated November 29, 2018, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, as amended
and supplemented, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as
trustee, establishing a series of securities entitled “4.750% Senior Notes due 2028,” including the form of 4.750% Senior Note due 2028 and
the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with
the Securities and Exchange Commission on November 29, 2018)
The Company is party to agreements in connection with long-term debt obligations, none of which individually exceeds ten percent of the
total assets of the Company on a consolidated basis. Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Company agrees to furnish
copies of these agreements to the Commission upon request
Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries (previously filed by Kilroy
Realty Corporation as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
1997 Stock Option and Incentive Plan of the Registrant and Kilroy Realty, L.P. (previously filed by Kilroy Realty Corporation as an exhibit to
the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
License Agreement by and among the Registrant and the other persons named therein (previously filed by Kilroy Realty Corporation as an
exhibit to the Registration Statement on Amendment No. 4 to Form S-11 (No. 333-15553))
Form of Restricted Stock Award Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the
Securities and Exchange Commission on February 8, 2007)
Kilroy Realty Corporation Stock Award Deferral Program (previously filed by Kilroy Realty Corporation as an exhibit to Form 8-K as filed
with the Securities and Exchange Commission on January 2, 2008)
Form of Indemnification Agreement of Kilroy Realty Corporation with certain officers and directors (previously filed by Kilroy Realty
Corporation as an exhibit on Form 10-K for the year ended December 31, 2009)
Kilroy Realty Corporation Form of Stock Option Grant Notice and Stock Option Agreement (previously filed by Kilroy Realty Corporation as
an exhibit on Form 8-K as filed with the Securities and Exchange Commission on February 24, 2012)
Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended
June 30, 2013)
Form of Stock Award Deferral Program Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form
10-Q for the quarter ended June 30, 2013)
Form of Performance-Vest Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the
quarter ended March 31, 2014)
Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended
March 31, 2014)
Exhibit
Number
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20†
10.21†
10.22†
10.23†
10.24†*
10.25
10.26
10.27
10.28
Description
Form of Restricted Stock Unit Agreement for Non-Employee Members of the Board of Directors (previously filed by Kilroy Realty
Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2014)
Form of Performance-Vest Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the
quarter ended March 31, 2015)
Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended
March 31, 2015)
Form of Restricted Stock Unit Agreement for Non-Employee Members of the Board of Directors (previously filed by Kilroy Realty
Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2015)
Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty,
L.P. and Jeffrey C. Hawken effective as of December 31, 2015 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-K for
the year ended December 31, 2015)
Kilroy Realty Corporation 2006 Incentive Award Plan Restricted Stock Unit Agreement by and between Kilroy Realty Corporation and
Jeffrey C. Hawken, dated January 9, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended
March 31, 2016)
Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty,
L.P. and Tyler H. Rose effective as of January 28, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the
quarter ended March 31, 2016)
Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty,
L.P. and Justin W. Smart effective as of January 28, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the
quarter ended March 31, 2016)
Kilroy Realty Corporation Director Compensation Policy effective as of April 1, 2018 (previously filed by Kilroy Realty Corporation as an
exhibit on Form 10-Q for the quarter ended March 31, 2018.
Employment Agreement, as amended and restated December 27, 2018, by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and
John B. Kilroy, Jr. (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities
and Exchange Commission on December 31, 2018)
Kilroy Realty Corporation 2006 Incentive Award Plan Restricted Stock Unit Agreement by and between Kilroy Realty Corporation and John
B. Kilroy, Jr., dated December 27, 2018 (with retirement as to Time-Based RSUs) (previously filed by Kilroy Realty Corporation and Kilroy
Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 31, 2018)
Kilroy Realty Corporation 2006 Incentive Award Plan Restricted Stock Unit Agreement by and between Kilroy Realty Corporation and John
B. Kilroy, Jr., dated December 27, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as
filed with the Securities and Exchange Commission on December 31, 2018)
Form of Restricted Stock Unit Agreement for 2006 Incentive Award Plan
Note Purchase Agreement dated September 14, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with
the Securities and Exchange Commission on September 14, 2016)
Amendment to Note Purchase Agreement dated May 11, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an
exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 14, 2018)
Form of Time Sharing Agreement of Kilroy Realty, L.P. (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the
quarter ended September 30, 2016)
Promissory Note, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K
for the year ended December 31, 2017)
Exhibit
Number
10.29
10.30
10.31
10.32
10.33
10.34†
10.35
10.36†
10.37
10.38
10.39
10.40
10.41
10.42
21.1*
21.2*
23.1*
23.2*
24.1*
31.1*
Description
Loan Agreement, dated November 29, 2016, by and between KR WMC, LLC and Massachusetts Mutual Life Insurance Company
(previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated November 29, 2016 (previously filed by Kilroy
Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
Assignment of Leases and Rents, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an
exhibit on Form 10-K for the year ended December 31, 2017)
Recourse Guaranty Agreement, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit
on Form 10-K for the year ended December 31, 2017)
Environmental Indemnification Agreement, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P.,
as an exhibit on Form 10-K for the year ended December 31, 2017)
Kilroy Realty Corporation 2007 Deferred Compensation Plan, as amended and restated effective January 1, 2017 (previously filed by Kilroy
Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2016)
General Partner Guaranty Agreement, dated February 17, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an
exhibit on Form 10-Q for the quarter ended March 31, 2017)
Kilroy Realty 2006 Incentive Award Plan (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities
and Exchange Commission on May 23, 2017)
Second Amended and Restated Credit Agreement dated as of July 24, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty,
L.P., as an exhibit on Form 10-Q for the quarter ended June 30, 2017)
Second Amended and Restated Guaranty dated as of July 24, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as
an exhibit on Form 10-Q for the quarter ended on June 30, 2017)
Note Purchase Agreement dated May 11, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-
K as filed with the Securities and Exchange Commission on May 14, 2018)
Sales Agreement, dated June 5, 2018, between and among Kilroy Realty Corporation, Kilroy Realty, L.P. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Citigroup Global Markets Inc., Jefferies LLC, J.P. Morgan Securities LLC, Raymond James & Associates, Inc., RBC
Capital Markets, LLC, Scotia Capital (USA) Inc. and SMBC Nikko Securities America, Inc. as Agents, and the Forward Purchasers
(previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange
Commission on June 5, 2018)
Forward Sale Agreement dated August 8, 2018, among Kilroy Realty Corporation and Barclays Bank PLC, as Forward Purchaser (previously
filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on
August 13, 2018)
Forward Sale Agreement dated August 8, 2018, among Kilroy Realty Corporation and Citibank, N.A., as Forward Purchaser (previously filed
by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on
August 13, 2018)
List of Subsidiaries of Kilroy Realty Corporation
List of Subsidiaries of Kilroy Realty, L.P.
Consent of Deloitte & Touche LLP for Kilroy Realty Corporation
Consent of Deloitte & Touche LLP for Kilroy Realty, L.P.
Power of Attorney (included on the signature page of this Form 10-K)
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty Corporation
Exhibit
Number
31.2*
31.3*
31.4*
32.1*
32.2*
32.3*
32.4*
101.1
Description
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty Corporation
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty, L.P.
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty, L.P.
Section 1350 Certification of Chief Executive Officer of Kilroy Realty Corporation
Section 1350 Certification of Chief Financial Officer of Kilroy Realty Corporation
Section 1350 Certification of Chief Executive Officer of Kilroy Realty, L.P.
Section 1350 Certification of Chief Financial Officer of Kilroy Realty, L.P.
The following Kilroy Realty Corporation and Kilroy Realty, L.P. financial information for the year ended December 31, 2018, formatted in
XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated
Statements of Changes in Equity, (iv) Consolidated Statements of Capital, (v) Consolidated Statements of Cash Flows and (vi) Notes to the
Consolidated Financial Statements.(1)
*
†
(1)
Filed herewith
Management contract or compensatory plan or arrangement.
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the
Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.
(Back To Top)
Section 2: EX-10.24 (EXHIBIT 10.24)
KILROY REALTY CORPORATION
2006 INCENTIVE AWARD PLAN
RESTRICTED STOCK UNIT AGREEMENT
GRANT NOTICE
Exhibit 10.24
Kilroy Realty Corporation (the “Company”) has granted to the Participant named below an award of Restricted Stock Units (“RSUs”). The terms and
conditions of the award are set forth in this Grant Notice (the “Grant Notice”) and Appendices A and B attached hereto and incorporated herein by this reference
(collectively, this “Agreement”).
Participant:
Grant Date:
[___________________] (the “Participant”)
December 27, 2018 (the “Grant Date”)
Total Number of RSUs:
[_____]
Of the total number of RSUs, [__________] are “Time-Vest RSUs” and [__________] are a target number of
“Performance-Vest RSUs,” such target number “Target Performance-Vest RSUs.”
Vesting Dates:
The Time-Vest RSUs shall vest in two (2) substantially equal installments (rounded down to the nearest whole
RSU until the last installment) on each of January 5, 2022 and January 5, 2023.
The Performance-Vest RSUs are subject to performance- and time-based vesting requirements as set forth in the
attached Appendix B.
The RSUs are subject to accelerated vesting in connection with certain changes in control of the Company or
certain terminations of the Participant’s employment as and to the extent provided herein.
The award is granted under and is further subject to the terms and conditions of the Company’s 2006 Incentive Award Plan (as amended from time to time, the
“Plan”), incorporated herein by this reference. The Participant acknowledges having received and read, and understands, the Plan and this Agreement. The
Participant agrees to the terms and conditions of the award as set forth in this Agreement.
KILROY REALTY CORPORATION,
a Maryland corporation
________________________________
Name: __________________________
Title: ___________________________
KILROY REALTY CORPORATION,
a Maryland corporation
________________________________
Name: __________________________
Title: ___________________________
PARTICIPANT:
____________________________________
Printed Name: ________________________
2
APPENDIX A
TERMS AND CONDITIONS OF
RESTRICTED STOCK UNITS AND DIVIDEND EQUIVALENT RIGHTS
1. Grant. The effective date of the award is the Grant Date. The total number of RSUs subject to the award is the total number of RSUs set forth in the Grant
Notice. Except as otherwise expressly provided herein, all capitalized terms used in this Agreement and not otherwise defined shall have the meanings provided in the
Plan or in Appendix B.
2. RSUs. Each RSU that vests in accordance with this Agreement shall represent the right to receive, as determined by the Committee in accordance with
Section 6 below, either (i) a payment of one share of Stock or (ii) a payment in cash equal to the Fair Market Value of one share of Stock on the applicable Distribution
Date (as defined below). Prior to actual payment in respect of any vested RSU, such RSU will represent an unsecured obligation of the Company, payable (if at all)
only from the general assets of the Company.
3. Dividend Equivalent Rights.
(a) Each RSU granted hereunder is hereby granted in tandem with a corresponding Dividend Equivalent right. Such Dividend Equivalent right shall entitle
the Participant to have a hypothetical bookkeeping account (established and maintained for purposes of tracking the RSUs and any additional RSUs credited to such
account in respect of Dividend Equivalent rights in accordance with this Section 3 (the “Account”)) that is credited upon the Company’s payment of dividends to
stockholders of outstanding shares of Stock if the Dividend Equivalent right is or was outstanding on the applicable Stock record date. Subject to Section 3(c) below,
when such dividends are so declared, the following shall occur:
(i) on the date that the Company pays a cash dividend in respect of outstanding shares of Stock, the Company shall credit the Participant’s
Account with a number of full and fractional RSUs equal to the quotient of (A) the total number of RSUs credited to the Account but not yet distributed (including
any RSUs granted hereunder and any additional RSUs credited with respect to Dividend Equivalent rights), multiplied by the per share dollar amount of such
dividend, divided by (B) the Fair Market Value of a share of Stock on the date such dividend is paid;
(ii) on the date that the Company pays a Stock dividend in respect of outstanding shares of Stock, the Company shall credit the Participant’s
Account with a number of full and fractional RSUs equal to the product of (A) the total number of RSUs credited to the Account but not yet distributed (including any
RSUs granted hereunder and any additional RSUs credited with respect to Dividend Equivalent rights), multiplied by (B) the number of shares of Stock distributed
with respect to such dividend per share of Stock; or
(iii) on the date that the Company pays any other type of distribution in respect of outstanding shares of Stock, the Company shall credit the
Participant’s Account in an equitable manner based on the total number of RSUs held in the Account, as determined in the sole discretion of the Committee.
(b) To the extent that any additional RSUs are credited to the Participant’s Account in respect of the Participant’s Dividend Equivalent rights, such
additional RSUs shall be subject to the same vesting terms as the original RSUs to which they relate (e.g., additional RSUs credited in respect of Time-Vest RSUs will
be subject to the same time-based vesting requirements as the underlying Time-Vest RSUs, while
additional RSUs credited in respect of Performance-Vest RSUs will be subject to the same performance- and time-based vesting requirements as the underlying
Performance-Vest RSUs) and shall also carry corresponding Dividend Equivalent rights.
(c) Dividend Equivalent rights shall remain outstanding from the Grant Date (or later date of grant of such Dividend Equivalent right in connection with the
Company’s payment of a dividend) through the earlier to occur
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of (i) the termination or forfeiture for any reason of the RSU to which such Dividend Equivalent right corresponds or (ii) the delivery to the Participant of payment for
the RSU (in accordance with Section 6 below) to which such Dividend Equivalent right corresponds. For the avoidance of doubt, if a Dividend Equivalent right
terminates after the applicable Stock record date for a Company dividend (other than due to the termination or forfeiture of the RSU to which such Dividend Equivalent
right corresponds) and prior to the corresponding payment date thereof, the Participant shall still be entitled to payment of the Dividend Equivalent right amount
determined in accordance with this Section 3, if and when the Company pays the underlying dividend; provided, however, that, unless otherwise provided by the
Committee, such Dividend Equivalent right amount shall be made in cash (rather than RSUs to be paid in Stock).
(d) Dividend Equivalent rights and any amounts that may become distributable in respect thereof shall be treated separately from the RSUs and the rights
arising in connection therewith for purposes of the designation of time and form of payments required by Code Section 409A.
4. Vesting. The Time-Vest RSUs shall vest in accordance with the vesting schedule provided in the Grant Notice. To the extent the performance-based
vesting requirements set forth in the attached Appendix B attached hereto are satisfied, the applicable number of Performance-Vest RSUs shall vest as provided in
Appendix B. The applicable date on which any RSUs are scheduled to vest pursuant to the Grant Notice or Appendix B, as applicable, is referred to herein as the
“Vesting Date” of such RSUs.
5. Termination of Employment or Service.
(a) General. Except as described below in connection with certain terminations of the Participant’s employment or services, the Participant must continue to
provide services as an Employee through the applicable Vesting Date in order to vest in the applicable installment of Time-Vest RSUs and Performance-Vest RSUs.
Upon the Participant’s termination as an Employee, all RSUs that have not vested as of such termination (taking into consideration any vesting that may occur in
connection with such termination as provided in this Section 5 and Appendix B) shall automatically be forfeited and canceled without payment of consideration
therefor.
(b) Qualifying Termination. The rules set forth below in this Section 5(b) shall apply in the event of a Qualifying Termination. A “Qualifying Termination”
means that (1) the Participant’s employment by the Company is terminated by the Company without Cause (as such term is defined in the Participant’s employment
agreement with the Company (the “Employment Agreement”)) or by the Participant with Good Reason (as defined in the Employment Agreement), or (2) while
employed by the Company, the Participant dies or becomes “disabled” (within the meaning of Code Section 409A).
Subject to the release requirement set forth below, in the event of the Participant’s Qualifying Termination, the unvested Time-Vest RSUs that are
outstanding immediately prior to such Qualifying Termination shall fully vest and become nonforfeitable immediately prior to such Qualifying Termination, and the
unvested Performance-Vest RSUs that are outstanding immediately prior to such Qualifying Termination shall vest as provided in Appendix B. The benefits provided
by this paragraph are subject to the condition that the Participant (or, in the event of the Participant’s death or disability, the Participant’s estate or personal
representative, as the case may be) provide the Company with, and the Participant (or the Participant’s estate or personal representative, as the case may be) does not
revoke, a general release in substantially the form attached to the Participant’s Employment Agreement (or, if the Participant is not a party to an Employment
Agreement or no such form is attached to the Participant’s Employment Agreement, in a form prescribed by the Company). Such general release shall be provided to
the Participant (or the Participant’s estate or personal representative, as the case may be) within five (5) days of the Qualifying Termination date and the Participant (or
the Participant’s estate or personal representative, as the case may be) shall execute and deliver to the Company the general release within thirty (30) days after the
Company provides the release to the Participant (or forty-five (45) days if such longer period of time is required to make the release maximally enforceable under
applicable law). In the event this paragraph applies and the general release (and the expiration of any revocation rights provided therein or pursuant to applicable law)
could become effective in one of two taxable years depending on when the Participant (or the Participant’s estate or personal representative, as the case may be)
executes and delivers the release, any payment conditioned on the release shall not be made earlier than the first business day of the later of such two tax years. For
purposes of this Agreement, “business day” means a calendar day other than a Saturday, Sunday or Federal holiday.
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(c) Employment Agreement. The RSUs shall be subject to the termination of employment rules set forth in Section 5(b) and Appendix B herein and not any
severance, accelerated vesting, or similar provisions of any Employment Agreement. As to the RSUs, any provision of an Employment Agreement giving the
Participant “better of” (or similar) treatment (e.g., the better of the severance protections afforded in the Employment Agreement or the applicable award agreement)
shall not apply. To the extent the Participant’s Employment Agreement includes, as a component of any severance that may be payable to the Participant pursuant to
the Employment Agreement, a measure based on “Annual Incentives” or similar measure that includes the value of equity awards granted, the RSUs (including,
without limitation, any grant, vesting or payment thereof) shall be excluded and not taken into account for purposes of any determination of such Annual Incentives
(or similar). The provisions of this paragraph control in the event of any inconsistency with an Employment Agreement and notwithstanding anything in an
Employment Agreement to the contrary. Each Employment Agreement is deemed amended to the extent (if any) necessary to give effect to this paragraph. The
Participant specifically agrees with this paragraph.
6. Distribution.
(a) Distribution Date. Subject to Sections 6(d) and 10 below, payment with respect to RSUs issued under this Agreement (including any RSUs issued in
respect of Dividend Equivalent rights) shall, to the extent vested, be paid to the Participant on or within sixty (60) days following the earliest to occur of (i) the date of
the Participant’s “separation from service” within the meaning of Code Section 409A (a “Separation from Service”); (ii) the date of the occurrence of a 409A Change
in Control Event (as defined in Appendix B); (iii) the date of the Participant’s death or “disability” (within the meaning of Code Section 409A); and (iv) the date such
RSUs vest in accordance with the vesting schedule provided in the Grant Notice or Appendix B (any such date, a “Distribution Date”).
(b) Distribution Payments. All distributions upon payment of the RSUs shall be made by the Company in the form of whole shares of Stock, and to the
extent that any fractional RSUs become payable on a Distribution Date, such fractional RSUs shall be paid in cash (unless otherwise determined under Section 15.10 of
the Plan). To the extent that any outstanding RSUs remain unvested as of an applicable Distribution Date (after taking into consideration any vesting which may occur
in connection with the occurrence of such Distribution Date), then such RSUs shall, to the extent not forfeited in connection with such distribution, be paid as
Restricted Stock, and the vesting schedule that applied to such RSUs immediately prior to such
distribution shall continue to apply to such Restricted Stock; provided, however, that to the extent any such distributions are payable in cash in accordance with this
Section 6(b), such cash amounts (determined as of the Distribution Date) shall instead be paid to the Participant on or within sixty (60) days after the date(s) on which
the shares of Restricted Stock to which such cash payments relate would have vested in accordance with this Section 6(b) (and such cash payments shall be
forfeitable on the same terms that would otherwise apply to such Restricted Stock).
(c) [Reserved]
(d) Distributions Following Separation from Service. Notwithstanding anything herein to the contrary, no distribution hereunder shall be made to the
Participant during the six (6)-month period following the Participant’s Separation from Service (i) if the Participant is a “specified employee” within the meaning of
Treasury Regulation Section 1.409A-1(i) as of the date of the Participant’s Separation from Service (generally, the Company’s Senior Vice Presidents and more senior
officers are specified employees, but in all cases the Company will make the final determination of specified employee in accordance with such Treasury Regulation),
(ii) if the RSUs constitute deferred compensation under Code Section 409A, and (iii) to the extent that paying such amounts at the time otherwise set forth in this
Section 6 would be a prohibited distribution under Code Section 409A(a)(2)(B)(i). If the payment of any such amounts is delayed as a result of the previous sentence,
then on or within sixty (60) days after the first day following the end of such six (6)-month period (or such earlier date upon which such amount can be paid under
Code Section 409A without resulting in a prohibited distribution, including as a result of the Participant’s death), the Company shall pay the Participant the cumulative
amounts that would have otherwise been payable to the Participant during such period.
(e) Distribution Timing. The time of distribution of the RSUs under this Agreement may not be changed except as may be permitted by the Committee in
accordance with the Plan and Code Section 409A and the applicable
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Treasury Regulations promulgated thereunder. For purposes of clarity, no provision of the Plan (including, without limitation, Section 11.2 thereof) shall alter the time
of distribution of the RSUs under this Agreement, except as the Committee may provide consistent with the preceding sentence.
7. Tax Withholding. The Company shall have the authority and the right to deduct, withhold or require the Participant or beneficiary to remit to the
Company an amount sufficient to satisfy federal, state, local and foreign taxes (including without limitation any income and employment tax obligations) required by
law to be withheld with respect to any taxable event arising in connection with the RSUs and/or the Dividend Equivalent rights. The Company may, in its sole
discretion and in satisfaction of the foregoing requirement, withhold or require the Participant to deliver shares of Stock otherwise issuable under this Agreement (or
allow the return of shares of Stock) having a Fair Market Value as of the date of withholding (as the Company may determine) equal to the sums required to be
withheld.
8. Rights as Stockholder. Neither the Participant nor any person claiming under or through the Participant will have any of the rights or privileges of a
stockholder of the Company in respect of any shares of Stock deliverable hereunder unless and until certificates representing such shares of Stock will have been
issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant or any person claiming under or through the
Participant.
9. Non-Transferability. Neither the RSUs or Dividend Equivalent rights nor any interest or right therein or part thereof shall be transferred, assigned,
pledged or hypothecated by the Participant in any way in favor of any party other than the Company or a Subsidiary (whether by operation of law or otherwise) and
shall not be subjected to any lien, obligation or liability of the Participant to any party other than the
Company or a Subsidiary, other than by the laws of descent and distribution. Upon any attempt by the Participant to transfer, assign, pledge, hypothecate or
otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale by the Participant under any execution, attachment or similar
process, this grant and the rights and privileges conferred hereby shall immediately become null and void. Notwithstanding the foregoing, the Company may assign
any of its rights under this Agreement to single or multiple assignees and this Agreement shall inure to the benefit of the successors and assigns of the Company.
10. Distribution of Stock. In the event shares of Stock are paid to the Participant in accordance with this Agreement in settlement of RSUs (including RSUs
credited as Dividend Equivalents), the Company shall not be required to record any shares of Stock in the name of the Participant in the books and records of the
Company’s transfer agent, and the Company shall not be required to issue or deliver any certificate or certificates for any shares of Stock prior to the fulfillment of all
of the following conditions: (a) the admission of such shares to listing on all stock exchanges on which the Company’s Stock is then listed, (b) the completion of any
registration or other qualification of such shares under any state or federal law or under rulings or regulations of the Securities and Exchange Commission or other
governmental regulatory body, which the Company shall, in its sole and absolute discretion, deem necessary and advisable, (c) the obtaining of any approval or other
clearance from any state or federal governmental agency that the Company shall, in its absolute discretion, determine to be necessary or advisable, and (d) the lapse of
any such reasonable period of time following the Distribution Date as the Company may from time to time establish for reasons of administrative convenience. In the
event that the Company delays a distribution or payment in settlement of RSUs because it determines that the issuance of shares of Stock in settlement of such RSUs
will violate federal securities laws or other applicable law, such distribution or payment shall be made at the earliest date at which the Company reasonably determines
that the making of such distribution or payment will not cause such violation, as required by Treasury Regulation Section 1.409A-2(b)(7)(ii). No payment shall be
delayed under this Section 10 if such delay will result in a violation of Code Section 409A.
11. No Right to Continued Service. Nothing in the Plan or in this Agreement shall confer upon the Participant any right to continue as an Employee,
Consultant, member of the Board, or other service provider of the Company or any Subsidiary, or shall interfere with or restrict in any way the rights of the Company
or any Subsidiary, which are hereby expressly reserved, to discharge the Participant at any time for any reason whatsoever, with or without Cause, except to the extent
expressly provided otherwise in a written agreement between the Participant and the Company or any Subsidiary.
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12. Severability. In the event that any provision in this Agreement is held invalid or unenforceable, such provision will be severable from, and such
invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement, which shall remain in full force and effect.
13. Tax Consultation. The Participant understands that he or she may suffer adverse tax consequences in connection with the RSUs and Dividend
Equivalent rights granted pursuant to this Agreement. The Participant represents that the Participant has consulted with any tax consultants that he or she deems
advisable in connection with the RSUs and the Dividend Equivalent rights and that the Participant is not relying on the Company for tax advice.
14. Amendment. Subject to Section 18 below, this Agreement may only be amended, modified or terminated by a writing executed by the Participant and by
a duly authorized representative of the Company.
15. Relationship to other Benefits. Neither the RSUs, the Dividend Equivalent rights, nor payment in respect of the foregoing shall be taken into account in
determining any benefits pursuant to any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any
Subsidiary.
16. Code Section 409A. To the extent that the Company or the Participant determines that any RSUs and/or Dividend Equivalent rights may not be
compliant with or exempt from Code Section 409A, the Company and the Participant shall cooperate in good faith in connection with amending or modifying this
Agreement in a manner intended to comply with the requirements of Code Section 409A or an exemption therefrom (including amendments with retroactive effect), or
take any other actions as it deems necessary or appropriate to (a) comply with the requirements of Code Section 409A and/or (b) exempt the RSUs and/or the Dividend
Equivalent rights from Code Section 409A and/or preserve the intended tax treatment of the benefits provided with respect to the RSUs; provided, that, any such
amendment or modification shall attempt to preserve the intended economic benefits of the RSUs and/or Dividend Equivalent rights to the maximum extent practicable.
To the extent applicable, this Agreement shall be interpreted in accordance with, and so as to not cause any tax, penalty, or interest under, the provisions of Code
Section 409A.
17. Claw-back. The Participant agrees that all compensation paid or payable to the Participant pursuant to this Agreement shall be subject to (a) the
provisions of any claw-back policy implemented by the Company to comply with applicable law or regulation (including stock exchange rules), including, without
limitation, any claw-back policy adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or
regulations promulgated thereunder, (b) any other claw-back required by applicable law or included in any separation agreement entered into by and between the
Participant and the Company, and (c) the provisions of the Participant’s Non-Competition, Non-Solicitation and Non-Disclosure Agreement with the Company.
18. Conformity to Securities Laws. The Participant acknowledges that the Plan and this Agreement are intended to conform to the extent necessary with all
provisions of the Securities Act and the Exchange Act, and any and all regulations and rules promulgated by the Securities and Exchange Commission thereunder, as
well as all applicable state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the RSUs are granted,
only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be deemed
amended to the extent necessary to conform to such laws, rules and regulations.
19. Notices. Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of the Secretary of the
Company at the Company’s principal office, and any notice to be given to the Participant shall be addressed to the Participant at the Participant’s last address
(physical or electronic) reflected on the Company’s records. Any notice shall be deemed duly given when sent by reputable overnight courier or by certified mail
(return receipt requested) through the United States Postal Service.
20. Entire Agreement. The Plan and this Agreement (including all exhibits and appendices hereto) constitute the entire agreement of the parties and
supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof.
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21 Governing Law. The laws of the State of Maryland shall govern the interpretation, validity, administration, enforcement and performance of the terms of
this Agreement regardless of the law that might be applied under principles of conflicts of laws.
22. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.
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APPENDIX B
PERFORMANCE VESTING REQUIREMENTS
The percentage of the Target Performance-Vest RSUs (if any) that will be eligible to vest on the applicable Vesting Date(s) shall be determined based on the
Company’s performance for the applicable performance periods as set forth in this Appendix B. Such determination shall be made by the Committee during January or
February of the year following the end of the applicable performance periods (or such earlier time as provided in this Agreement in the case of the Participant’s
Qualifying Termination or a 409A Change in Control Event).
(1) An initial number of Performance-Vest RSUs (the “Initial Number of PRSUs”) will be eligible to be earned and vest based on the Company’s Relative
TSR for the performance period beginning on January 1, 2019 and ending on December 31, 2021 (the “Initial Performance Period”). The Initial Number of PRSUs will
be determined by multiplying the Target Performance-Vest RSUs by the applicable percentage determined in accordance with the following table:
If the Company’s Relative TSR for the Initial Performance Period is:
The applicable percentage is:
Less than -100 basis points
-100 basis points
0 basis points
100 basis points
300 basis points or greater
0%
50%
75%
100%
200%
For Relative TSR amounts between the levels indicated, the applicable percentage will be determined on a pro-rata basis between points.
Subject to Section 5 of this Agreement, 75% of the Initial Number of PRSUs shall vest on January 5, 2022.
(2) The Initial Number of PRSUs shall be adjusted based on the Company’s Relative TSR for the performance period beginning on January 1, 2019 and
ending on December 31, 2022 (the “Final Performance Period”), with such adjusted number being the “Final Number of PRSUs.” The Final Number of PRSUs will be
determined by adjusting the Initial Number of PRSUs as follows:
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If the Company’s Relative TSR for the Final Performance Period is:
The Initial Number of PRSUs will be:
-100 basis points or less
0 basis points
Reduced by 25%
Reduced by 12.5%
100 basis points
Adjusted to equal 100% of the Target Performance-Vest RSUs
300 basis points or greater
Adjusted to equal 200% of the Target Performance-Vest RSUs
For Relative TSR amounts between the levels indicated, the applicable percentage will be determined on a pro-rata basis between points. In addition and
notwithstanding the table above, if the Company’s Relative TSR for the Final Performance Period is 100 basis points or greater, the Initial Number of
PRSUs shall not be reduced if the number of Target Performance-Vest RSUs determined pursuant to the foregoing table based on performance for the
Final Performance Period would be less than the Initial Number of PRSUs (in which case the Final Number of PRSUs will equal the Initial Number of
PRSUs). However, if the Company’s Relative TSR for the Final Performance Period is less than 100 basis points, the Initial Number of PRSUs shall be
reduced by a percentage determined on a straight line basis between no reduction at 100 basis points and a 25% reduction at -100 basis points.
On January 5, 2023 the number of Performance-Vest RSUs (if any) that vest (subject to Section 5 of this Agreement) will equal (i) the Final Number of
PRSUs less (ii) the total number of the Initial Number of PRSUs that vested before that date pursuant to the preceding provisions of this Appendix. For
the avoidance of doubt, if the Company’s Relative TSR for the Final Performance Period is -100 or fewer basis points, no additional Performance-Vest
RSUs shall vest on January 5, 2023 as the 25% reduction provided for above would entirely offset the remaining unvested portion of the Initial Number
of PRSUs.
For example, if 100 Performance-Vest RSUs are the Target Performance-Vest RSUs subject to the award and the Company’s Relative TSR for the Initial
Performance Period is 200 basis points, the Initial Number of PRSUs will be equal to 150 (100 multiplied by the applicable percentage of 150% corresponding to that
Relative TSR for the Initial Performance Period). Accordingly, 112 RSUs would be scheduled to vest in January 2022 (75% of the Initial Number of PRSUs rounded
down to the nearest whole RSU). If the Company’s Relative TSR for the Final Performance Period is 125 basis points, the Initial Number of PRSUs will not be adjusted
and 38 RSUs will be scheduled to vest in January 2023 (which is the remaining 25% of the Initial Number of PRSUs). If, however, the Company’s Relative TSR for the
Final Performance Period is 50 basis points, the Final Number of PRSUs will equal 140 (the Initial Number of PRSUs reduced by 6.25%, rounded down to the nearest
whole RSU) and, therefore, 28 RSUs will be scheduled to vest in January 2023 (140 less the 112 Initial Number of PRSUs that have already vested). If, however, the
Company’s Relative TSR for the Final Performance Period is -125 basis points, no additional RSUs would vest in January 2023. If, however, the Company’s Relative
TSR for the Final Performance Period is 250 basis points, the Final Number of PRSUs will equal 175 (which is 175% of the Target Performance-Vest RSUs) and,
therefore, 63 RSUs will be scheduled to vest in January 2023 (175 less the 112 Initial Number of PRSUs that have already vested).
Change in Control. If a 409A Change in Control Event occurs before December 31, 2022, the performance period(s) applicable to the unvested Performance-
Vest RSUs shall end in connection with such 409A Change in Control Event and the provisions of this Appendix B shall be applied as modified by this paragraph. For
purposes of clarity, the Performance-Vest RSUs shall continue to be subject to the applicable time-based vesting requirement, and the severance protections afforded
the Participant in this Agreement shall continue to apply. If the 409A Change in Control Event occurs on or before December 31, 2021, the Initial Number of PRSUs will
be determined based on the Company’s Relative TSR for a shortened performance period ending on the last trading day preceding the date of the 409A Change
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in Control Event (with the amount of the Initial Number of PRSUs determined in accordance with clause (1) above as modified by this paragraph) and will be scheduled
to vest as to 75% of such Initial Number of PRSUs on January 5, 2022, and 25% of such Initial Number of PRSUs on January 5, 2023. In such event, there shall not be
any further adjustment of the Initial Number of PRSUs pursuant to a Final Performance Period or otherwise. If the 409A Change in Control Event occurs after
December 31, 2021 and before December 31, 2022, the Final Number of PRSUs shall be determined based on the Company’s Relative TSR for a shortened performance
period ending on the last trading day preceding the date of the 409A Change in Control Event (with the amount of the Final Number of PRSUs determined in
accordance with clause (2) above as modified by this paragraph). In such case, 75% of the Initial Number of PRSUs shall be scheduled to vest on January 5, 2022 and
an amount equal to (i) the Final Number of PRSUs (as determined in accordance with this paragraph) less (ii) the vested portion of the Initial Number of PRSUs, if a
positive number, shall be scheduled to vest on January 5, 2023.
Notwithstanding the foregoing, if the 409A Change in Control Event occurs on or before December 31, 2021 and due to a Board Change in Control, the Initial
Number of PRSUs shall equal 100% of the Target Performance-Vest RSUs and will be scheduled to vest as to 75% of such Initial Number of PRSUs on January 5, 2022
and 25% of such Initial Number of PRSUs on January 5, 2023. In such event, there shall not be any further adjustment of the Initial Number of PRSUs pursuant to a
Final Performance Period or otherwise. If the 409A Change in Control Event occurs after December 31, 2021 and before December 31, 2022 and is due to a Board
Change in Control, the Final Number of PRSUs shall equal 100% of the Target Performance-Vest RSUs or, if greater, the Initial Number of PRSUs. In such case, 75% of
the Initial Number of PRSUs, to the extent not already vested, shall be scheduled to vest on January 5, 2022, and an amount equal to (i) the Final Number of PRSUs (as
determined in accordance with this paragraph) less (ii) the vested portion of the Initial Number of PRSUs, if a positive number, shall be scheduled to vest on January 5,
2023.
Any determination of achievement of performance goals shall be subject to the Committee deeming a higher level of performance to have been achieved. If a
Qualifying Termination occurs (a) during the 6 month period immediately preceding a 409A Change in Control Event or (b) following the execution of a definitive
agreement which would result in a 409A Change in Control Event and such 409A Change in Control Event actually occurs, the applicable achievement of performance
goals shall be the greater of the applicable achievement based upon a Qualifying Termination or the 409A Change in Control Event, with any additional payments or
amounts due upon the 409A Change in Control Event paid upon such 409A Change in Control Event.
Qualifying Termination. If a Qualifying Termination occurs on or before December 31, 2022 and upon or following a 409A Change in Control Event, subject
to the release requirement set forth in Section 5(b) of this Agreement, the unvested Initial Number of PRSUs or the unvested Final Number of PRSUs, as applicable,
shall vest on the date of such Qualifying Termination. If a Qualifying Termination occurs on or before December 31, 2022, and before a 409A Change in Control Event,
the performance period(s) applicable to the unvested Performance-Vest RSUs shall end in connection with such Qualifying Termination and the provisions of this
Appendix B shall be applied as modified by this paragraph. If the Qualifying Termination occurs on or before December 31, 2021, the Initial Number of PRSUs will be
determined based on the Company’s Relative TSR for a shortened performance period ending on (i) if the Company is required to publicly disclose the Qualifying
Termination pursuant to Item 5.02(b) of Securities and Exchange Commission Form 8-K, the last day of the calendar month immediately prior to such public
announcement of the Qualifying Termination, or (ii) otherwise, the date of the Qualifying Termination (with the amount of the Initial Number of PRSUs determined in
accordance with clause (1) above of this Appendix B as modified by this paragraph) and, subject to the release requirement set forth in Section 5(b) of this Agreement,
the Initial Number of PRSUs will vest on the date of such Qualifying Termination. If a Qualifying Termination occurs after December 31, 2021 and before December 31,
2022, the Final Number of PRSUs will be determined based on the Company’s Relative TSR for a shortened performance period ending on (i) if the Company is
required to publicly disclose the Qualifying Termination pursuant to Item 5.02(b) of Securities and Exchange Commission Form 8-K, the last day of the calendar month
immediately prior to such public announcement of the Qualifying Termination, or (ii) otherwise, the date of the Qualifying Termination (with the amount of the Final
Number of PRSUs determined in accordance with clause (2) above of this Appendix B as modified by this paragraph) and, subject to the release requirement set forth
in Section 5(b) of this Agreement, an amount equal to (i) the Final Number of PRSUs (as determined in accordance with this
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paragraph) less (ii) the vested portion of the Initial Number of PRSUs, if a positive number, shall vest on the date of such Qualifying Termination.
Any determination of achievement of performance goals shall be subject to the Committee deeming a higher level of performance to have been achieved.
Defined Terms. For purposes of this Appendix B, the following definitions shall apply:
“Beginning Price” means the average of the closing market prices of a share of the Company’s Stock on the principal exchange on which such stock is
traded for the twenty (20) consecutive trading days ending with the last trading day immediately prior to the applicable performance period. If the Company’s Stock
begins to trade ex-dividend during such twenty (20)-trading day period as to a particular dividend declared by the Company, the closing market prices for the portion
of such period preceding the ex-dividend date shall be equitably and proportionately adjusted to exclude the amount of the related dividend.
“Board Change in Control” means that a majority of members of the Board is replaced during any twelve (12) month period within the meaning of, and in a
majority change that satisfies, Treas. Reg. 1.409A-3(i)(5)(vi)(A)(2).
“Company TSR” means the compound annual growth rate of an investment in the Company’s Stock for the applicable performance period, determined using
the Beginning Price to value the investment at the start of the performance period and the Ending Price to value the investment at the end of the applicable
performance period, and assuming the reinvestment (at the applicable closing price of the Stock on the date of distribution) of all dividends and other distributions
(other than a distribution for which an adjustment is made pursuant to the following sentence) on the Company’s Stock. For purposes of such determination, the
Ending Price shall be equitably and proportionately adjusted to the extent (if any) necessary to preserve the intended incentives of the award and mitigate the impact
of any stock split, stock dividend or reverse stock split occurring during the applicable performance period.
“Ending Price” means the average of the closing market prices of a share of the Company’s Stock on the principal exchange on which such stock is traded
for the twenty (20) consecutive trading days ending with the last trading day of the applicable performance period; provided, however, if the applicable Performance
Period ends on a shortened basis because of a 409A Change in Control, the Ending Price means the last closing market price of a share of the Company’s Stock on the
principal exchange on which such stock is traded on the last trading day occurring prior to the date on which the 409A Change in Control occurs. If the Company’s
Stock begins to trade ex-dividend during such twenty (20)-trading day period as to a particular dividend declared by the Company, the closing market prices as to
such stock for the portion of such period preceding the ex-dividend date shall be equitably and proportionately adjusted to exclude the amount of the related
dividend.
“Index” means the SNL US REIT Office Index.
“Index TSR” means the compound annual growth rate of an investment in the Index for the applicable performance period, as measured based on actual
published index returns for the applicable performance period. For the avoidance of doubt, all company additions or subtractions to or from the Index during the
applicable performance period will be as determined by the Index administrator and the resulting Index returns for the applicable performance period as adjusted for
such additions and deletions during such performance period will be as determined by the Index administrator.
“Relative TSR” means (i) the Company TSR for the applicable performance period, less (ii) the Index TSR for the applicable performance period.
“409A Change in Control Event” means a “change in the ownership or effective control” of the Company or a “change in the ownership of a substantial
portion of the assets” of the Company, in each case within the meaning of Code Section 409A.
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Section 3: EX-21.1 (EXHIBIT 21.1)
* * * * *
B-4
SUBSIDIARIES OF KILROY REALTY CORPORATION
NAME OF SUBSIDIARY
OR ORGANIZATION
Kilroy Realty, L.P.
Kilroy Realty Finance, Inc.
Kilroy Realty Finance Partnership, L.P.
Kilroy Services, LLC
Kilroy Realty TRS, Inc.
Kilroy Realty Management, L.P.
Kilroy Realty 303, LLC
KR Westlake Terry, LLC
KR 6255 Sunset, LLC
KR MML 12701, LLC
KR 690 Middlefield, LLC
KR Lakeview, LLC
KR Tribeca West, LLC
KR 331 Fairchild, LLC
KR Hollywood, LLC
KR 350 Mission, LLC
Exhibit 21.1
STATE OF INCORPORATION
OR FORMATION
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Fremont Lake Union Center, LLC
KR 555 Mathilda, LLC
KR Redwood City Member, LLC
Redwood City Partners, LLC
KR Academy, LLC
KR 401 Terry, LLC
KR Mission Bay, LLC
KR Flower Mart, LLC
KR SFFGA, LLC
KR CFM, Inc.
KR 333 Dexter, LLC
KR 330 Dexter, LLC
KR 400 Aurora, LLC
KR 401 Dexter, LLC
KR 100 Hooper, LLC
100 First Street Member, LLC
KR 100 First Street Owner, LLC
201 Third Street Member, LLC
KR 201 Third Street Owner, LLC
303 Second Street Member, LLC
KR 303 Second Street Owner, LLC
KR Terra Bella, LLC
KR Menlo Park, LLC
KR WMC, LLC
KR 501 Santa Monica, LLC
KR 12400 High Bluff, LLC
KR Chesapeake Commons, LLC
KR Sunset Weho, LLC
KR 1701 Page Mill, LLC
KR Oyster Point Developer, LLC
KR Rose Canyon, LLC
KR Kettner, LLC
Oyster Cove Marina Owner, LLC
Oyster Cove Marina Owner Member, LLC
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
California
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
KR OP Tech, LLC
KR North PCH, LLC
Kilroy Realty TRS 2, Inc.
KR Oyster Point I, LLC
KR Oyster Point II, LLC
KR Oyster Point III, LLC
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
(Back To Top)
Section 4: EX-21.2 (EXHIBIT 21.2)
SUBSIDIARIES OF KILROY REALTY, L.P.
NAME OF SUBSIDIARY
OR ORGANIZATION
Kilroy Realty Finance Partnership, L.P.
Kilroy Services, LLC
Kilroy Realty TRS, Inc.
Kilroy Realty Management, L.P.
Kilroy Realty 303, LLC
KR Westlake Terry, LLC
KR 6255 Sunset, LLC
KR MML 12701, LLC
KR 690 Middlefield, LLC
KR Lakeview, LLC
KR Tribeca West, LLC
KR 331 Fairchild, LLC
KR Hollywood, LLC
KR 350 Mission, LLC
Fremont Lake Union Center, LLC
KR 555 Mathilda, LLC
KR Redwood City Member, LLC
Redwood City Partners, LLC
KR Academy, LLC
KR 401 Terry, LLC
KR Mission Bay, LLC
KR Flower Mart, LLC
KR SFFGA, LLC
KR 333 Dexter, LLC
KR 330 Dexter, LLC
KR 400 Aurora, LLC
KR 401 Dexter, LLC
KR 100 Hooper, LLC
100 First Street Member, LLC
KR 100 First Street Owner, LLC
201 Third Street Member, LLC
KR 201 Third Street Owner, LLC
303 Second Street Member, LLC
KR 303 Second Street Owner, LLC
KR Terra Bella, LLC
KR Menlo Park, LLC
KR WMC, LLC
KR 501 Santa Monica, LLC
KR 12400 High Bluff, LLC
KR Chesapeake Commons, LLC
KR Sunset Weho, LLC
Exhibit 21.2
STATE OF INCORPORATION
OR FORMATION
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
KR 1701 Page Mill, LLC
KR Oyster Point Developer, LLC
KR Rose Canyon, LLC
KR Kettner, LLC
Oyster Cove Marina Owner, LLC
Oyster Cove Marina Owner Member, LLC
KR OP Tech, LLC
KR North PCH, LLC
Kilroy Realty TRS 2, Inc.
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
KR Oyster Point I, LLC
KR Oyster Point II, LLC
KR Oyster Point III, LLC
Delaware
Delaware
Delaware
(Back To Top)
Section 5: EX-23.1 (EXHIBIT 23.1)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-213864 on Form S-3 and Registration Statement Nos. 333-43227, 333-77739, 333-135385,
333-161954, 333-167452, 333-201990, 333-204853, and 333-218241 on Form S-8 of our reports dated February 14, 2019, relating to the consolidated financial statements
and financial statement schedules of Kilroy Realty Corporation and the effectiveness of Kilroy Realty Corporation's internal control over financial reporting, appearing
in this Annual Report on Form 10-K of Kilroy Realty Corporation and Kilroy Realty, L.P. for the year ended December 31, 2018.
Exhibit 23.1
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 14, 2019
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Section 6: EX-23.2 (EXHIBIT 23.2)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-213864-01 on Form S-3 of our reports dated February 14, 2019, relating to the
consolidated financial statements and financial statement schedules of Kilroy Realty, L.P. and the effectiveness of Kilroy Realty, L.P.'s internal control over financial
reporting, appearing in this Annual Report on Form 10-K of Kilroy Realty, L.P. and Kilroy Realty Corporation for the year ended December 31, 2018.
Exhibit 23.2
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 14, 2019
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Section 7: EX-31.1 (EXHIBIT 31.1)
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, John Kilroy, certify that:
1.
I have reviewed this annual report on Form 10-K of Kilroy Realty Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
/s/ John Kilroy
John Kilroy
President and Chief Executive Officer
Date: February 14, 2019
(Back To Top)
Section 8: EX-31.2 (EXHIBIT 31.2)
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Tyler H. Rose, certify that:
1.
I have reviewed this annual report on Form 10-K of Kilroy Realty Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
/s/ Tyler H. Rose
Tyler H. Rose
Executive Vice President and Chief Financial Officer
Date: February 14, 2019
(Back To Top)
Section 9: EX-31.3 (EXHIBIT 31.3)
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.3
I, John Kilroy, certify that:
1.
I have reviewed this annual report on Form 10-K of Kilroy Realty, L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
/s/ John Kilroy
John Kilroy
President and Chief Executive Officer
Kilroy Realty Corporation, sole general partner of
Kilroy Realty, L.P.
Date: February 14, 2019
(Back To Top)
Section 10: EX-31.4 (EXHIBIT 31.4)
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.4
I, Tyler H. Rose, certify that:
1.
I have reviewed this annual report on Form 10-K of Kilroy Realty, L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
/s/ Tyler H. Rose
Tyler H. Rose
Executive Vice President and Chief Financial Officer
Kilroy Realty Corporation, sole general partner of
Kilroy Realty, L.P.
Date: February 14, 2019
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Section 11: EX-32.1 (EXHIBIT 32.1)
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Kilroy Realty Corporation (the “Company”)
Certification of Chief Executive Officer
Exhibit 32.1
hereby certifies, to his knowledge, that:
(i)
the accompanying Annual Report on Form 10-K of the Company for the year ended December 31, 2018 (the “Report”) fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ John Kilroy
John Kilroy
President and Chief Executive Officer
Date: February 14, 2019
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350, is not being filed as part of the Report or as a separate disclosure document,
and is not being incorporated by reference into any filing of the Company or Kilroy Realty, L.P. under the Securities Act of 1933, as amended, or the Securities Act of
1934, as amended, (whether made before or after the date of the Report) irrespective of any general incorporation language contained in such filing. The signed
original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
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Section 12: EX-32.2 (EXHIBIT 32.2)
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Kilroy Realty Corporation (the “Company”)
hereby certifies, to his knowledge, that:
(i)
the accompanying Annual Report on Form 10-K of the Company for the year ended December 31, 2018 (the “Report”) fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Exhibit 32.2
/s/ Tyler H. Rose
Tyler H. Rose
Executive Vice President and Chief Financial Officer
Date: February 14, 2019
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350, is not being filed as part of the Report or as a separate disclosure document,
and is not being incorporated by reference into any filing of the Company or Kilroy Realty, L.P. under the Securities Act of 1933, as amended, or the Securities Act of
1934, as amended, (whether made before or after the date of the Report) irrespective of any general incorporation language contained in such filing. The signed
original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
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Section 13: EX-32.3 (EXHIBIT 32.3)
Certification of Chief Executive Officer
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Kilroy Realty Corporation, the sole general
partner of Kilroy Realty, L.P. (the “Operating Partnership”), hereby certifies, to his knowledge, that:
(i)
the accompanying Annual Report on Form 10-K of the Operating Partnership for the year ended December 31, 2018 (the “Report”) fully complies
with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating
Exhibit 32.3
Partnership.
/s/ John Kilroy
John Kilroy
President and Chief Executive Officer
Kilroy Realty Corporation, sole general partner of
Kilroy Realty, L.P.
Date: February 14, 2019
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350, is not being filed as part of the Report or as a separate disclosure document,
and is not being incorporated by reference into any filing of Kilroy Realty Corporation or the Operating Partnership under the Securities Act of 1933, as amended, or
the Securities Act of 1934, as amended, (whether made before or after the date of the Report) irrespective of any general incorporation language contained in such
filing. The signed original of this written statement required by Section 906 has been provided to the Operating Partnership and will be retained by the Operating
Partnership and furnished to the Securities and Exchange Commission or its staff upon request.
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Section 14: EX-32.4 (EXHIBIT 32.4)
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Kilroy Realty Corporation, the sole general
partner of Kilroy Realty, L.P. (the “Operating Partnership”), hereby certifies, to his knowledge, that:
(i)
the accompanying Annual Report on Form 10-K of the Operating Partnership for the year ended December 31, 2018 (the “Report”) fully complies
with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating
Partnership.
Exhibit 32.4
/s/ Tyler H. Rose
Tyler H. Rose
Executive Vice President and Chief Financial Officer
Kilroy Realty Corporation, sole general partner of
Kilroy Realty, L.P.
Date: February 14, 2019
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350, is not being filed as part of the Report or as a separate disclosure document,
and is not being incorporated by reference into any filing of Kilroy Realty Corporation or the Operating Partnership under the Securities Act of 1933, as amended, or
the Securities Act of 1934, as amended, (whether made before or after the date of the Report) irrespective of any general incorporation language contained in such
filing. The signed original of this written statement required by Section 906 has been provided to the Operating Partnership and will be retained by the Operating
Partnership and furnished to the Securities and Exchange Commission or its staff upon request.
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