e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
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o |
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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)
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Kilroy Realty
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Maryland
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95-4598246 |
Corporation
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(State or other jurisdiction of
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(I.R.S. Employer |
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incorporation or organization)
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Identification No.) |
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Kilroy Realty,
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Delaware
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95-4612685 |
L.P.
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(State or other jurisdiction of
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(I.R.S. Employer |
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incorporation or organization)
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Identification No.) |
12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064
(Address of principal executive offices) (Zip Code)
(310) 481-8400
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
Kilroy Realty, L. P. Yes o No þ
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 þ No o
Kilroy Realty, L.P. Yes o No o
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. (Check one):
Kilroy Realty Corporation
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Kilroy Realty, L.P.
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer þ |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Kilroy Realty Corporation Yes o No þ
Kilroy Realty, L.P. Yes o No þ
As of October 22, 2010, 52,349,670 shares of Kilroy Realty Corporation common stock, par value
$.01 per share, were outstanding.
EXPLANATORY NOTE
This report combines the quarterly report on Form 10-Q for the period ended September 30, 2010
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 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 terms the
Company, we, our, and us refer to the Company or the Company and the Operating Partnership
together, as the text requires.
The Company is a real estate investment trust, or REIT, and the general partner of the
Operating Partnership. As of September 30, 2010, the Company owned an approximate 96.8% common
general partnership interest in the Operating Partnership. The remaining approximate 3.2% 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 Partnerships 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 which are
reflected in the disclosures in this Form 10-Q. 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 real
estate investment trust, whose only material asset is its ownership of partnership interests of the
Operating Partnership. As a result, the Company does not conduct business itself, other than acting
as the sole general partner of the Operating Partnership, issuing public equity from time to time
and guaranteeing certain debt of the Operating Partnership. The Company itself is not directly
obligated under any indebtedness, but guarantees some of the debt of the Operating Partnership. The
Operating Partnership owns substantially all the assets of the Company either directly or through
its subsidiaries, conducts the operations of the business and is structured as a limited
partnership with no publicly traded equity. Except for net proceeds from public equity issuances by
the Company, which are contributed to the Operating Partnership in exchange for partnership units,
the Operating Partnership generates the capital required by the Companys business through the
Operating Partnerships operations, by the Operating Partnerships direct or indirect incurrence of
indebtedness or through the issuance of partnership units.
Noncontrolling interests and 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 Partnerships financial statements and as noncontrolling
interests in the Companys financial statements. The Operating Partnerships financial statements
reflect the noncontrolling interest in Kilroy Realty Finance Partnership, L.P. This noncontrolling
interest represents the Companys 1% indirect general partnership interest in Kilroy Realty Finance
Partnership, L.P. 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 at the Company and the Operating
Partnership levels and in the Companys noncontrolling interest in Kilroy Realty Finance
Partnership, L.P.
We believe combining the quarterly reports on Form 10-Q of the Company and the Operating
Partnership into this single report results in the following benefits:
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Combined reports better reflect how management and the
analyst community view the business as a single operating unit; |
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Combined reports enhance investor 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; |
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Combined reports are more efficient for the Company and the
Operating Partnership and result in savings in time, effort and expense; and |
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Combined reports are more efficient for investors by
reducing duplicative disclosure and providing a single document for their
review. |
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:
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consolidated financial statements; |
2
the following notes to the consolidated financial statements:
Secured and Unsecured Debt of the Company and Secured and Unsecured Debt of the
Operating Partnership;
Stockholders Equity of the Company and Partners Capital of the Operating Partnership;
Net (Loss) Income Available to Common Stockholders per Share and Net (Loss) Income
Available to Unitholders;
Pro Forma Results of the Company and Pro Forma Results of the Operating Partnership; and
Liquidity and Capital Resources in Item 2: Managements Discussion and Analysis of
Financial Condition and Results of Operations.
This report also includes separate Item 4. Controls and Procedures sections and separate
Exhibit 31 and 32 certifications for each of the Company and the Operating Partnership in order 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 and 18 U.S.C. §1350.
3
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
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PART I-FINANCIAL INFORMATION
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Item 1. |
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FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION |
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5 |
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Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009 |
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5 |
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Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2010 and 2009 (unaudited) |
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6 |
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Consolidated Statements of Equity for the Nine Months ended September 30, 2010 and 2009 (unaudited) |
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7 |
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Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2010 and 2009 (unaudited) |
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8 |
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FINANCIAL STATEMENTS OF KILROY REALTY, L.P. |
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10 |
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Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009 |
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10 |
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Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2010 and 2009 (unaudited) |
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11 |
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Consolidated Statements of Capital for the Nine Months ended September 30, 2010 and 2009 (unaudited) |
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12 |
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Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2010 and 2009 (unaudited) |
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13 |
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Notes to Consolidated Financial Statements for Kilroy Realty Corporation and Kilroy Realty, L.P. |
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15 |
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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34 |
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Item 3. |
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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60 |
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Item 4. |
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CONTROLS AND PROCEDURES (KILROY REALTY CORPORATION AND KILROY REALTY, L.P. |
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60 |
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PART II-OTHER INFORMATION
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Item 1. |
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LEGAL PROCEEDINGS |
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62 |
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Item 1A. |
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RISK FACTORS |
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62 |
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Item 2. |
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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62 |
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Item 3. |
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DEFAULTS UPON SENIOR SECURITIES |
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62 |
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Item 4. |
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(REMOVED AND RESERVED) |
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62 |
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Item 5. |
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OTHER INFORMATION |
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62 |
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Item 6. |
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EXHIBITS |
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63 |
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SIGNATURES |
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64 |
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4
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION
KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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September 30, |
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December 31, |
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2010 |
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2009 |
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(unaudited) |
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ASSETS |
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REAL ESTATE ASSETS: |
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Land and improvements (Note 2) |
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$ |
432,289 |
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$ |
335,932 |
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Buildings and improvements (Note 2) |
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2,245,618 |
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1,920,543 |
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Undeveloped land and construction in progress |
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286,522 |
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263,608 |
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Total real estate held for investment |
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2,964,429 |
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2,520,083 |
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Accumulated depreciation and amortization |
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(652,675 |
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(605,976 |
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Total real estate assets, net |
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2,311,754 |
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1,914,107 |
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CASH AND CASH EQUIVALENTS |
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8,313 |
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9,883 |
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RESTRICTED
CASH (Note 2) |
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3,265 |
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2,059 |
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MARKETABLE SECURITIES (Note 11) |
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4,481 |
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3,452 |
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CURRENT RECEIVABLES, NET (Note 4) |
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4,055 |
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3,236 |
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DEFERRED RENT RECEIVABLES, NET (Note 4) |
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83,563 |
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74,392 |
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NOTE RECEIVABLE (Notes 4 and 11) |
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10,679 |
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DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 3) |
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96,691 |
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51,832 |
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DEFERRED FINANCING COSTS, NET (Note 6) |
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14,574 |
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8,334 |
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PREPAID EXPENSES AND OTHER ASSETS, NET |
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8,988 |
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6,307 |
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TOTAL ASSETS |
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$ |
2,535,684 |
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$ |
2,084,281 |
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LIABILITIES, NONCONTROLLING INTEREST AND EQUITY |
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LIABILITIES: |
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Secured debt, net (Notes 5, 6, and 11) |
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$ |
315,150 |
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$ |
294,574 |
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Exchangeable senior notes, net (Notes 5, 6, and 11) |
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298,295 |
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436,442 |
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Unsecured senior notes, net (Notes 5, 6, and 11) |
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330,941 |
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144,000 |
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Unsecured line of credit (Notes 5, 6, and 11) |
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205,000 |
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97,000 |
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Accounts payable, accrued expenses and other liabilities |
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66,814 |
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52,533 |
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Accrued distributions (Note 17) |
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20,383 |
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17,136 |
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Deferred revenue and acquisition-related intangible liabilities, net (Note 3) |
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68,251 |
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66,890 |
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Rents received in advance and tenant security deposits |
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23,776 |
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18,230 |
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Total liabilities |
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1,328,610 |
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1,126,805 |
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COMMITMENTS AND CONTINGENCIES (Note 13) |
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NONCONTROLLING INTEREST (Note 7): |
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7.45% Series A Cumulative Redeemable Preferred units of the Operating Partnership |
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73,638 |
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73,638 |
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EQUITY: |
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Stockholders Equity (Note 8): |
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Preferred stock, $.01 par value, 30,000,000 shares authorized: |
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7.45% Series A Cumulative Redeemable Preferred stock, $.01 par value,
1,500,000 shares authorized, none issued and
outstanding |
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7.80% Series E Cumulative Redeemable Preferred stock, $.01 par value,
1,610,000 shares authorized, issued and outstanding
($40,250 liquidation preference) |
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38,425 |
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38,425 |
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7.50% Series F Cumulative Redeemable Preferred stock, $.01 par value,
3,450,000 shares authorized, issued and outstanding
($86,250 liquidation preference) |
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83,157 |
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83,157 |
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Common stock, $.01 par value, 150,000,000 shares authorized,
52,349,670
and 43,148,762 shares issued and outstanding, respectively |
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523 |
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431 |
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Additional paid-in capital |
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1,209,673 |
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913,657 |
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Distributions in excess of earnings |
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(230,215 |
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(180,722 |
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Total stockholders equity |
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1,101,563 |
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854,948 |
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Noncontrolling interest (Note 7): |
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Common units of the Operating Partnership |
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31,873 |
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28,890 |
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Total equity |
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1,133,436 |
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883,838 |
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TOTAL LIABILITIES, NONCONTROLLING INTEREST AND EQUITY |
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$ |
2,535,684 |
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$ |
2,084,281 |
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See accompanying notes to consolidated financial statements.
5
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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REVENUES: |
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Rental income |
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$ |
72,608 |
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$ |
61,297 |
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$ |
198,302 |
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$ |
186,959 |
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Tenant reimbursements |
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6,211 |
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6,843 |
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18,412 |
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21,898 |
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Other property income |
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985 |
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354 |
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2,325 |
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3,198 |
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Total revenues |
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79,804 |
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68,494 |
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219,039 |
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212,055 |
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EXPENSES: |
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Property expenses |
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15,845 |
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12,699 |
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42,408 |
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37,611 |
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Real estate taxes |
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7,614 |
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5,988 |
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20,132 |
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18,260 |
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Provision for bad debts (Note 13) |
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(857 |
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243 |
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(843 |
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395 |
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Ground leases |
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336 |
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398 |
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648 |
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1,227 |
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General and administrative expenses |
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7,273 |
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7,662 |
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21,096 |
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22,023 |
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Acquisition-related expenses |
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354 |
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1,624 |
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Depreciation and amortization |
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30,054 |
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21,968 |
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74,714 |
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66,608 |
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Total expenses |
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60,619 |
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48,958 |
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159,779 |
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146,124 |
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OTHER
(EXPENSES) INCOME: |
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Interest income and other net investment gains |
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337 |
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501 |
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703 |
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1,074 |
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Interest expense (Note 6) |
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(15,853 |
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(10,926 |
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(40,897 |
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(35,041 |
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Gain (loss) on early extinguishment of debt (Note 6) |
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3,119 |
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(4,564 |
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3,119 |
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Total other
(expenses) income |
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(15,516 |
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(7,306 |
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(44,758 |
) |
|
|
(30,848 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
3,669 |
|
|
|
12,230 |
|
|
|
14,502 |
|
|
|
35,083 |
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(224 |
) |
Net gain on discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
3,669 |
|
|
|
12,230 |
|
|
|
14,502 |
|
|
|
37,344 |
|
Net loss (income) attributable to noncontrolling
common units of the Operating Partnership |
|
|
4 |
|
|
|
(320 |
) |
|
|
(128 |
) |
|
|
(1,144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION |
|
|
3,673 |
|
|
|
11,910 |
|
|
|
14,374 |
|
|
|
36,200 |
|
PREFERRED DISTRIBUTIONS AND DIVIDENDS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to noncontrolling cumulative redeemable preferred units of the
Operating Partnership |
|
|
(1,397 |
) |
|
|
(1,397 |
) |
|
|
(4,191 |
) |
|
|
(4,191 |
) |
Preferred dividends |
|
|
(2,402 |
) |
|
|
(2,402 |
) |
|
|
(7,206 |
) |
|
|
(7,206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total preferred distributions and dividends |
|
|
(3,799 |
) |
|
|
(3,799 |
) |
|
|
(11,397 |
) |
|
|
(11,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS |
|
$ |
(126 |
) |
|
$ |
8,111 |
|
|
$ |
2,977 |
|
|
$ |
24,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations available to common stockholders per common
share-basic (Note 15) |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations available to common stockholders per common
share-diluted (Note 15) |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders per share-basic (Note 15) |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders per share-diluted (Note 15) |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-basic (Note 15) |
|
|
52,274,316 |
|
|
|
42,934,796 |
|
|
|
48,561,614 |
|
|
|
37,279,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding-diluted (Note 15) |
|
|
52,274,316 |
|
|
|
42,935,475 |
|
|
|
48,565,028 |
|
|
|
37,296,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.35 |
|
|
$ |
0.35 |
|
|
$ |
1.05 |
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrol- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ling Interests |
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Total |
|
|
- Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Distributions |
|
|
Stock- |
|
|
Units of the |
|
|
|
|
|
|
Preferred |
|
|
Number of |
|
|
Common |
|
|
Paid-in |
|
|
in Excess of |
|
|
holders |
|
|
Operating |
|
|
Total |
|
|
|
Stock |
|
|
Shares |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Equity |
|
|
Partnership |
|
|
Equity |
|
BALANCE AS OF DECEMBER 31, 2008 |
|
$ |
121,582 |
|
|
|
33,086,148 |
|
|
$ |
331 |
|
|
$ |
700,122 |
|
|
$ |
(137,052 |
) |
|
$ |
684,983 |
|
|
$ |
29,903 |
|
|
$ |
714,886 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,200 |
|
|
|
36,200 |
|
|
|
1,144 |
|
|
|
37,344 |
|
Issuance of common stock |
|
|
|
|
|
|
10,062,500 |
|
|
|
100 |
|
|
|
191,566 |
|
|
|
|
|
|
|
191,666 |
|
|
|
|
|
|
|
191,666 |
|
Repurchase of common stock and
restricted stock units |
|
|
|
|
|
|
(86,482 |
) |
|
|
|
|
|
|
(2,725 |
) |
|
|
|
|
|
|
(2,725 |
) |
|
|
|
|
|
|
(2,725 |
) |
Issuance of share-based compensation
awards |
|
|
|
|
|
|
55,998 |
|
|
|
|
|
|
|
7,535 |
|
|
|
|
|
|
|
7,535 |
|
|
|
|
|
|
|
7,535 |
|
Noncash amortization of share-based
compensation awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,768 |
|
|
|
|
|
|
|
8,768 |
|
|
|
|
|
|
|
8,768 |
|
Allocation to the equity component of
cash paid upon repurchase of 3.25%
Exchangeable Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(814 |
) |
|
|
|
|
|
|
(814 |
) |
|
|
|
|
|
|
(814 |
) |
Exchange of common units of the
Operating Partnership |
|
|
|
|
|
|
30,598 |
|
|
|
|
|
|
|
516 |
|
|
|
|
|
|
|
516 |
|
|
|
(516 |
) |
|
|
|
|
Adjustment for noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(925 |
) |
|
|
|
|
|
|
(925 |
) |
|
|
925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred distributions and dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,397 |
) |
|
|
(11,397 |
) |
|
|
|
|
|
|
(11,397 |
) |
Dividends declared per common share
and common unit ($1.28 per
share/unit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,142 |
) |
|
|
(50,142 |
) |
|
|
(2,223 |
) |
|
|
(52,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AS OF SEPTEMBER 30, 2009 |
|
$ |
121,582 |
|
|
|
43,148,762 |
|
|
$ |
431 |
|
|
$ |
904,043 |
|
|
$ |
(162,391 |
) |
|
$ |
863,665 |
|
|
$ |
29,233 |
|
|
$ |
892,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrol- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ling Interests |
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Total |
|
|
- Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Distributions |
|
|
Stock- |
|
|
Units of the |
|
|
|
|
|
|
Preferred |
|
|
Number of |
|
|
Common |
|
|
Paid-in |
|
|
in Excess of |
|
|
holders |
|
|
Operating |
|
|
Total |
|
|
|
Stock |
|
|
Shares |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Equity |
|
|
Partnership |
|
|
Equity |
|
BALANCE AS OF DECEMBER 31, 2009 |
|
$ |
121,582 |
|
|
|
43,148,762 |
|
|
$ |
431 |
|
|
$ |
913,657 |
|
|
$ |
(180,722 |
) |
|
$ |
854,948 |
|
|
$ |
28,890 |
|
|
$ |
883,838 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,374 |
|
|
|
14,374 |
|
|
|
128 |
|
|
|
14,502 |
|
Issuance of common stock (Note 8) |
|
|
|
|
|
|
9,200,000 |
|
|
|
92 |
|
|
|
299,755 |
|
|
|
|
|
|
|
299,847 |
|
|
|
|
|
|
|
299,847 |
|
Settlement of restricted stock units
for shares of common stock (Note 10) |
|
|
|
|
|
|
53,451 |
|
|
|
|
|
|
|
(1,296 |
) |
|
|
|
|
|
|
(1,296 |
) |
|
|
|
|
|
|
(1,296 |
) |
Repurchase of common stock and
restricted stock units |
|
|
|
|
|
|
(59,782 |
) |
|
|
|
|
|
|
(2,121 |
) |
|
|
|
|
|
|
(2,121 |
) |
|
|
|
|
|
|
(2,121 |
) |
Issuance of share-based compensation
awards (Note 10) |
|
|
|
|
|
|
3,239 |
|
|
|
|
|
|
|
1,904 |
|
|
|
|
|
|
|
1,904 |
|
|
|
|
|
|
|
1,904 |
|
Noncash amortization of share-based
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,050 |
|
|
|
|
|
|
|
5,050 |
|
|
|
|
|
|
|
5,050 |
|
Exercise of stock options |
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
83 |
|
Allocation to the equity component of
cash paid upon repurchase of 3.25%
Exchangeable Notes (Note 6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,694 |
) |
|
|
|
|
|
|
(2,694 |
) |
|
|
|
|
|
|
(2,694 |
) |
Adjustment for noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,665 |
) |
|
|
|
|
|
|
(4,665 |
) |
|
|
4,665 |
|
|
|
|
|
Preferred distributions and dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,397 |
) |
|
|
(11,397 |
) |
|
|
|
|
|
|
(11,397 |
) |
Dividends declared per common share
and common unit ($1.05 per
share/unit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,470 |
) |
|
|
(52,470 |
) |
|
|
(1,810 |
) |
|
|
(54,280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AS OF SEPTEMBER 30, 2010 |
|
$ |
121,582 |
|
|
|
52,349,670 |
|
|
$ |
523 |
|
|
$ |
1,209,673 |
|
|
$ |
(230,215 |
) |
|
$ |
1,101,563 |
|
|
$ |
31,873 |
|
|
$ |
1,133,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,502 |
|
|
$ |
37,344 |
|
Adjustments to reconcile net income to net cash provided by
operating activities (including discontinued operations): |
|
|
|
|
|
|
|
|
Depreciation and amortization of building and improvements and leasing costs |
|
|
74,049 |
|
|
|
66,018 |
|
(Decrease) increase in provision for bad debts |
|
|
(843 |
) |
|
|
395 |
|
Depreciation of furniture, fixtures and equipment |
|
|
665 |
|
|
|
615 |
|
Noncash amortization of share-based compensation awards |
|
|
5,328 |
|
|
|
7,914 |
|
Noncash amortization of deferred financing costs and exchangeable debt discounts |
|
|
9,098 |
|
|
|
7,543 |
|
Noncash amortization of above/(below) market rents |
|
|
696 |
|
|
|
(349 |
) |
Net gain on dispositions of discontinued operations |
|
|
|
|
|
|
(2,485 |
) |
Loss (gain) on early extinguishment of debt (Note 6) |
|
|
4,564 |
|
|
|
(3,119 |
) |
Noncash amortization of deferred revenue related to tenant-funded tenant improvements |
|
|
(7,108 |
) |
|
|
(7,431 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Marketable securities |
|
|
(1,029 |
) |
|
|
(1,341 |
) |
Current receivables |
|
|
(706 |
) |
|
|
2,213 |
|
Deferred rent receivables |
|
|
(8,441 |
) |
|
|
(5,473 |
) |
Other deferred leasing costs |
|
|
(2,516 |
) |
|
|
(450 |
) |
Prepaid expenses and other assets |
|
|
(2,765 |
) |
|
|
(1,924 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
3,049 |
|
|
|
135 |
|
Deferred revenue |
|
|
5,546 |
|
|
|
(646 |
) |
Rents received in advance and tenant security deposits |
|
|
839 |
|
|
|
(959 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
94,928 |
|
|
|
98,000 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Expenditures for acquisition of operating properties (Note 2) |
|
|
(373,574 |
) |
|
|
|
|
Expenditures for operating properties |
|
|
(56,393 |
) |
|
|
(25,047 |
) |
Expenditures for development and redevelopment properties |
|
|
(14,681 |
) |
|
|
(15,129 |
) |
Net proceeds received from dispositions of operating properties |
|
|
|
|
|
|
4,933 |
|
Increase in escrow deposits |
|
|
(2,002 |
) |
|
|
|
|
Decrease (increase) in restricted cash (Note 2) |
|
|
1,316 |
|
|
|
(2,264 |
) |
Receipt of principal payments on note receivable (Note 4) |
|
|
10,679 |
|
|
|
108 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(434,655 |
) |
|
|
(37,399 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock (Note 8) |
|
|
299,847 |
|
|
|
191,666 |
|
Borrowings on unsecured line of credit (Note 6) |
|
|
553,000 |
|
|
|
102,000 |
|
Repayments on unsecured line of credit (Note 6) |
|
|
(445,000 |
) |
|
|
(228,000 |
) |
Principal payments on secured debt |
|
|
(101,653 |
) |
|
|
(19,552 |
) |
Repurchase of exchangeable senior notes (Note 6) |
|
|
(151,097 |
) |
|
|
(35,333 |
) |
Proceeds from issuance of secured debt (Note 6) |
|
|
71,000 |
|
|
|
|
|
Proceeds from issuance of unsecured debt (Note 6) |
|
|
247,870 |
|
|
|
|
|
Repayments of unsecured debt (Note 6) |
|
|
(61,000 |
) |
|
|
|
|
Financing costs |
|
|
(11,200 |
) |
|
|
(1,447 |
) |
Decrease in loan deposit |
|
|
1,420 |
|
|
|
|
|
Repurchase of common stock |
|
|
(3,417 |
) |
|
|
(2,725 |
) |
Proceeds from exercise of stock options |
|
|
83 |
|
|
|
|
|
Dividends and distributions paid to common stockholders and common unitholders |
|
|
(50,299 |
) |
|
|
(56,101 |
) |
Dividends and distributions paid to preferred stockholders and preferred unitholders |
|
|
(11,397 |
) |
|
|
(11,397 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
338,157 |
|
|
|
(60,889 |
) |
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents |
|
|
(1,570 |
) |
|
|
(288 |
) |
Cash and cash equivalents, beginning of period |
|
|
9,883 |
|
|
|
9,553 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
8,313 |
|
|
$ |
9,265 |
|
|
|
|
|
|
|
|
8
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-(Continued)
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
SUPPLEMENTAL CASH FLOWS INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest of $6,140 and $5,362 as of September 30, 2010 and 2009, respectively |
|
$ |
26,182 |
|
|
$ |
27,051 |
|
|
|
|
|
|
|
|
NONCASH INVESTING TRANSACTIONS: |
|
|
|
|
|
|
|
|
Accrual for expenditures for operating properties and development and redevelopment properties |
|
$ |
13,614 |
|
|
$ |
6,089 |
|
|
|
|
|
|
|
|
Tenant improvements funded directly by tenants to third parties |
|
$ |
2,520 |
|
|
$ |
1,477 |
|
|
|
|
|
|
|
|
Assumption of secured debt with property acquisition (Notes 2 and 6) |
|
$ |
51,079 |
|
|
|
|
|
|
|
|
|
|
|
|
Assumption of other liabilities with property acquisitions (Note 2) |
|
$ |
6,369 |
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH FINANCING TRANSACTIONS: |
|
|
|
|
|
|
|
|
Accrual of dividends and distributions payable to common stockholders and common unitholders |
|
$ |
18,925 |
|
|
$ |
15,705 |
|
|
|
|
|
|
|
|
Accrual of dividends and distributions payable to preferred stockholders and preferred unitholders |
|
$ |
1,909 |
|
|
$ |
1,909 |
|
|
|
|
|
|
|
|
Issuance of share-based compensation awards (Note 10) |
|
$ |
5,418 |
|
|
$ |
17,783 |
|
|
|
|
|
|
|
|
Exchange of common units of the Operating Partnership into shares of the Companys common stock |
|
|
|
|
|
$ |
516 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
9
ITEM 1: FINANCIAL STATEMENTS OF KILROY REALTY, L.P.
KILROY REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
REAL ESTATE ASSETS: |
|
|
|
|
|
|
|
|
Land and improvements (Note 2) |
|
$ |
432,289 |
|
|
$ |
335,932 |
|
Buildings and improvements (Note 2) |
|
|
2,245,618 |
|
|
|
1,920,543 |
|
Undeveloped land and construction in progress |
|
|
286,522 |
|
|
|
263,608 |
|
|
|
|
|
|
|
|
Total real estate held for investment |
|
|
2,964,429 |
|
|
|
2,520,083 |
|
Accumulated depreciation and amortization |
|
|
(652,675 |
) |
|
|
(605,976 |
) |
|
|
|
|
|
|
|
Total real estate assets, net |
|
|
2,311,754 |
|
|
|
1,914,107 |
|
CASH AND CASH EQUIVALENTS |
|
|
8,313 |
|
|
|
9,883 |
|
RESTRICTED CASH (Note 2) |
|
|
3,265 |
|
|
|
2,059 |
|
MARKETABLE SECURITIES (Note 11) |
|
|
4,481 |
|
|
|
3,452 |
|
CURRENT RECEIVABLES, NET (Note 4) |
|
|
4,055 |
|
|
|
3,236 |
|
DEFERRED RENT RECEIVABLES, NET (Note 4) |
|
|
83,563 |
|
|
|
74,392 |
|
NOTE RECEIVABLE (Notes 4 and 11) |
|
|
|
|
|
|
10,679 |
|
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 3) |
|
|
96,691 |
|
|
|
51,832 |
|
DEFERRED FINANCING COSTS, NET (Note 6) |
|
|
14,574 |
|
|
|
8,334 |
|
PREPAID EXPENSES AND OTHER ASSETS, NET |
|
|
8,988 |
|
|
|
6,307 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
2,535,684 |
|
|
$ |
2,084,281 |
|
|
|
|
|
|
|
|
LIABILITIES AND CAPITAL |
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
Secured debt, net (Notes 5, 6, and 11) |
|
$ |
315,150 |
|
|
$ |
294,574 |
|
Exchangeable senior notes, net (Notes 5, 6, and 11) |
|
|
298,295 |
|
|
|
436,442 |
|
Unsecured
senior notes, net (Notes 5, 6, and 11) |
|
|
330,941 |
|
|
|
144,000 |
|
Unsecured line of credit (Notes 5, 6, and 11) |
|
|
205,000 |
|
|
|
97,000 |
|
Accounts payable, accrued expenses and other liabilities |
|
|
66,814 |
|
|
|
52,533 |
|
Accrued distributions (Note 17) |
|
|
20,383 |
|
|
|
17,136 |
|
Deferred revenue and acquisition-related intangible liabilities, net (Note 3) |
|
|
68,251 |
|
|
|
66,890 |
|
Rents received in advance and tenant security deposits |
|
|
23,776 |
|
|
|
18,230 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,328,610 |
|
|
|
1,126,805 |
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 13) |
|
|
|
|
|
|
|
|
7.45% SERIES A CUMULATIVE REDEEMABLE PREFERRED UNITS |
|
|
73,638 |
|
|
|
73,638 |
|
CAPITAL: |
|
|
|
|
|
|
|
|
Partners Capital (Note 9): |
|
|
|
|
|
|
|
|
7.80% Series E Cumulative Redeemable Preferred units,
1,610,000 units issued and outstanding
($40,250 liquidation preference) |
|
|
38,425 |
|
|
|
38,425 |
|
7.50% Series F Cumulative Redeemable Preferred units,
3,450,000 units issued and outstanding ($86,250
liquidation preference) |
|
|
83,157 |
|
|
|
83,157 |
|
Common units, 52,349,670 and 43,148,762 held by the general partner and
1,723,131 and 1,723,131 held by common limited partners issued and
outstanding, respectively |
|
|
1,010,242 |
|
|
|
760,756 |
|
Noncontrolling interests in consolidated subsidiaries |
|
|
1,612 |
|
|
|
1,500 |
|
|
|
|
|
|
|
|
Total capital |
|
|
1,133,436 |
|
|
|
883,838 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND CAPITAL |
|
$ |
2,535,684 |
|
|
$ |
2,084,281 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
10
KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
72,608 |
|
|
$ |
61,297 |
|
|
$ |
198,302 |
|
|
$ |
186,959 |
|
Tenant reimbursements |
|
|
6,211 |
|
|
|
6,843 |
|
|
|
18,412 |
|
|
|
21,898 |
|
Other property income |
|
|
985 |
|
|
|
354 |
|
|
|
2,325 |
|
|
|
3,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
79,804 |
|
|
|
68,494 |
|
|
|
219,039 |
|
|
|
212,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses |
|
|
15,845 |
|
|
|
12,699 |
|
|
|
42,408 |
|
|
|
37,611 |
|
Real estate taxes |
|
|
7,614 |
|
|
|
5,988 |
|
|
|
20,132 |
|
|
|
18,260 |
|
Provision for bad debts (Note 13) |
|
|
(857 |
) |
|
|
243 |
|
|
|
(843 |
) |
|
|
395 |
|
Ground leases |
|
|
336 |
|
|
|
398 |
|
|
|
648 |
|
|
|
1,227 |
|
General and administrative expenses |
|
|
7,273 |
|
|
|
7,662 |
|
|
|
21,096 |
|
|
|
22,023 |
|
Acquisition-related expenses |
|
|
354 |
|
|
|
|
|
|
|
1,624 |
|
|
|
|
|
Depreciation and amortization |
|
|
30,054 |
|
|
|
21,968 |
|
|
|
74,714 |
|
|
|
66,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
60,619 |
|
|
|
48,958 |
|
|
|
159,779 |
|
|
|
146,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSES) INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income and other net investment gains |
|
|
337 |
|
|
|
501 |
|
|
|
703 |
|
|
|
1,074 |
|
Interest expense (Note 6) |
|
|
(15,853 |
) |
|
|
(10,926 |
) |
|
|
(40,897 |
) |
|
|
(35,041 |
) |
Gain (loss) on early extinguishment of debt (Note 6) |
|
|
|
|
|
|
3,119 |
|
|
|
(4,564 |
) |
|
|
3,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expenses) income |
|
|
(15,516 |
) |
|
|
(7,306 |
) |
|
|
(44,758 |
) |
|
|
(30,848 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
3,669 |
|
|
|
12,230 |
|
|
|
14,502 |
|
|
|
35,083 |
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(224 |
) |
Net gain on dispositions of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
3,669 |
|
|
|
12,230 |
|
|
|
14,502 |
|
|
|
37,344 |
|
Net income attributable to noncontrolling interests in consolidated subsidiaries |
|
|
(41 |
) |
|
|
(61 |
) |
|
|
(138 |
) |
|
|
(195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P. |
|
|
3,628 |
|
|
|
12,169 |
|
|
|
14,364 |
|
|
|
37,149 |
|
PREFERRED DISTRIBUTIONS |
|
|
(3,799 |
) |
|
|
(3,799 |
) |
|
|
(11,397 |
) |
|
|
(11,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME AVAILABLE TO COMMON UNITHOLDERS |
|
$ |
(171 |
) |
|
$ |
8,370 |
|
|
$ |
2,967 |
|
|
$ |
25,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations available to common unitholders per
unit-basic (Note 16) |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations available to common unitholders per
unit-diluted (Note 16) |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common unitholders per unit-basic (Note 16) |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common unitholders per unit-diluted (Note 16) |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding-basic (Note 16) |
|
|
53,997,447 |
|
|
|
44,657,927 |
|
|
|
50,284,745 |
|
|
|
39,013,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding-diluted (Note 16) |
|
|
53,997,447 |
|
|
|
44,658,606 |
|
|
|
50,288,159 |
|
|
|
39,030,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions declared per common unit |
|
$ |
0.35 |
|
|
$ |
0.35 |
|
|
$ |
1.05 |
|
|
$ |
1.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
11
KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(unaudited, in thousands, except unit and per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners |
|
|
|
|
|
|
Noncontrol- |
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
ling Interests |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Total |
|
|
in |
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
Common |
|
|
Partners |
|
|
Consolidated |
|
|
Total |
|
|
|
Units |
|
|
Units |
|
|
Units |
|
|
Capital |
|
|
Subsidiaries |
|
|
Capital |
|
BALANCE AS OF DECEMBER 31, 2008 |
|
$ |
121,582 |
|
|
|
34,839,877 |
|
|
$ |
591,394 |
|
|
$ |
712,976 |
|
|
$ |
1,910 |
|
|
$ |
714,886 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
37,149 |
|
|
|
37,149 |
|
|
|
195 |
|
|
|
37,344 |
|
Issuance of common units |
|
|
|
|
|
|
10,062,500 |
|
|
|
191,666 |
|
|
|
191,666 |
|
|
|
|
|
|
|
191,666 |
|
Repurchase of common units and restricted stock units |
|
|
|
|
|
|
(86,482 |
) |
|
|
(2,725 |
) |
|
|
(2,725 |
) |
|
|
|
|
|
|
(2,725 |
) |
Issuance of share-based compensation awards |
|
|
|
|
|
|
55,998 |
|
|
|
7,535 |
|
|
|
7,535 |
|
|
|
|
|
|
|
7,535 |
|
Noncash amortization of share-based compensation |
|
|
|
|
|
|
|
|
|
|
8,768 |
|
|
|
8,768 |
|
|
|
|
|
|
|
8,768 |
|
Allocation to the equity component of cash paid upon
repurchase of 3.25% Exchangeable Notes |
|
|
|
|
|
|
|
|
|
|
(814 |
) |
|
|
(814 |
) |
|
|
|
|
|
|
(814 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
169 |
|
|
|
169 |
|
|
|
(169 |
) |
|
|
|
|
Preferred distributions |
|
|
|
|
|
|
|
|
|
|
(11,397 |
) |
|
|
(11,397 |
) |
|
|
|
|
|
|
(11,397 |
) |
Distributions declared per common unit ($1.28 per unit) |
|
|
|
|
|
|
|
|
|
|
(52,365 |
) |
|
|
(52,365 |
) |
|
|
|
|
|
|
(52,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AS OF SEPTEMBER 30, 2009 |
|
$ |
121,582 |
|
|
|
44,871,893 |
|
|
$ |
769,380 |
|
|
$ |
890,962 |
|
|
$ |
1,936 |
|
|
$ |
892,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners |
|
|
|
|
|
|
Noncontrol- |
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
ling Interests |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Total |
|
|
in |
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
Common |
|
|
Partners |
|
|
Consolidated |
|
|
Total |
|
|
|
Units |
|
|
Units |
|
|
Units |
|
|
Capital |
|
|
Subsidiaries |
|
|
Capital |
|
BALANCE AS OF DECEMBER 31, 2009 |
|
$ |
121,582 |
|
|
|
44,871,893 |
|
|
$ |
760,756 |
|
|
$ |
882,338 |
|
|
$ |
1,500 |
|
|
$ |
883,838 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
14,364 |
|
|
|
14,364 |
|
|
|
138 |
|
|
|
14,502 |
|
Issuance of common units (Note 9) |
|
|
|
|
|
|
9,200,000 |
|
|
|
299,847 |
|
|
|
299,847 |
|
|
|
|
|
|
|
299,847 |
|
Settlement of restricted stock units for shares of
common stock (Note 10) |
|
|
|
|
|
|
53,451 |
|
|
|
(1,296 |
) |
|
|
(1,296 |
) |
|
|
|
|
|
|
(1,296 |
) |
Repurchase of common units and restricted stock units |
|
|
|
|
|
|
(59,782 |
) |
|
|
(2,121 |
) |
|
|
(2,121 |
) |
|
|
|
|
|
|
(2,121 |
) |
Issuance of share-based compensation awards (Note 10) |
|
|
|
|
|
|
3,239 |
|
|
|
1,904 |
|
|
|
1,904 |
|
|
|
|
|
|
|
1,904 |
|
Noncash amortization of share-based compensation |
|
|
|
|
|
|
|
|
|
|
5,050 |
|
|
|
5,050 |
|
|
|
|
|
|
|
5,050 |
|
Exercise of stock options |
|
|
|
|
|
|
4,000 |
|
|
|
83 |
|
|
|
83 |
|
|
|
|
|
|
|
83 |
|
Allocation to the equity component of cash paid upon
repurchase of 3.25% Exchangeable Notes (Note 6) |
|
|
|
|
|
|
|
|
|
|
(2,694 |
) |
|
|
(2,694 |
) |
|
|
|
|
|
|
(2,694 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
26 |
|
|
|
(26 |
) |
|
|
|
|
Preferred distributions |
|
|
|
|
|
|
|
|
|
|
(11,397 |
) |
|
|
(11,397 |
) |
|
|
|
|
|
|
(11,397 |
) |
Distributions declared per common unit ($1.05 per unit) |
|
|
|
|
|
|
|
|
|
|
(54,280 |
) |
|
$ |
(54,280 |
) |
|
|
|
|
|
|
(54,280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AS OF SEPTEMBER 30, 2010 |
|
$ |
121,582 |
|
|
|
54,072,801 |
|
|
$ |
1,010,242 |
|
|
$ |
1,131,824 |
|
|
$ |
1,612 |
|
|
|
1,133,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
12
KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,502 |
|
|
$ |
37,344 |
|
Adjustments to reconcile net income to net cash provided by
operating activities (including discontinued operations): |
|
|
|
|
|
|
|
|
Depreciation and amortization of building and improvements and leasing costs |
|
|
74,049 |
|
|
|
66,018 |
|
(Decrease) increase in provision for bad debts |
|
|
(843 |
) |
|
|
395 |
|
Depreciation of furniture, fixtures and equipment |
|
|
665 |
|
|
|
615 |
|
Noncash amortization of share-based compensation awards |
|
|
5,328 |
|
|
|
7,914 |
|
Noncash amortization of deferred financing costs and exchangeable debt discounts |
|
|
9,098 |
|
|
|
7,543 |
|
Noncash amortization of above/(below) market rents |
|
|
696 |
|
|
|
(349 |
) |
Net gain on dispositions of discontinued operations |
|
|
|
|
|
|
(2,485 |
) |
Loss (gain) on early extinguishment of debt (Note 6) |
|
|
4,564 |
|
|
|
(3,119 |
) |
Noncash amortization of deferred revenue related to tenant-funded tenant improvements |
|
|
(7,108 |
) |
|
|
(7,431 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Marketable securities |
|
|
(1,029 |
) |
|
|
(1,341 |
) |
Current receivables |
|
|
(706 |
) |
|
|
2,213 |
|
Deferred rent receivables |
|
|
(8,441 |
) |
|
|
(5,473 |
) |
Other deferred leasing costs |
|
|
(2,516 |
) |
|
|
(450 |
) |
Prepaid expenses and other assets |
|
|
(2,765 |
) |
|
|
(1,924 |
) |
Accounts payable, accrued expenses and other liabilities |
|
|
3,049 |
|
|
|
135 |
|
Deferred revenue |
|
|
5,546 |
|
|
|
(646 |
) |
Rents received in advance and tenant security deposits |
|
|
839 |
|
|
|
(959 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
94,928 |
|
|
|
98,000 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Expenditures for acquisition of operating properties (Note 2) |
|
|
(373,574 |
) |
|
|
|
|
Expenditures for operating properties |
|
|
(56,393 |
) |
|
|
(25,047 |
) |
Expenditures for development and redevelopment properties |
|
|
(14,681 |
) |
|
|
(15,129 |
) |
Net proceeds received from dispositions of operating properties |
|
|
|
|
|
|
4,933 |
|
Decrease (increase) in restricted cash (Note 2) |
|
|
1,316 |
|
|
|
(2,264 |
) |
Increase in escrow deposits |
|
|
(2,002 |
) |
|
|
|
|
Receipt of principal payments on note receivable (Note 4) |
|
|
10,679 |
|
|
|
108 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(434,655 |
) |
|
|
(37,399 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net proceeds from issuance of common units (Note 9) |
|
|
299,847 |
|
|
|
191,666 |
|
Borrowings on unsecured line of credit |
|
|
553,000 |
|
|
|
102,000 |
|
Repayments on unsecured line of credit |
|
|
(445,000 |
) |
|
|
(228,000 |
) |
Principal payments on secured debt |
|
|
(101,653 |
) |
|
|
(19,552 |
) |
Repurchase of exchangeable senior notes (Note 6) |
|
|
(151,097 |
) |
|
|
(35,333 |
) |
Proceeds from issuance of secured debt (Note 6) |
|
|
71,000 |
|
|
|
|
|
Proceeds from issuance of unsecured debt, net (Note 6) |
|
|
247,870 |
|
|
|
|
|
Repayments of unsecured debt (Note 6) |
|
|
(61,000 |
) |
|
|
|
|
Financing costs |
|
|
(11,200 |
) |
|
|
(1,447 |
) |
Decrease in loan deposit |
|
|
1,420 |
|
|
|
|
|
Repurchase of common units |
|
|
(3,417 |
) |
|
|
(2,725 |
) |
Proceeds from exercise of stock options |
|
|
83 |
|
|
|
|
|
Distributions paid to common unitholders |
|
|
(50,299 |
) |
|
|
(56,101 |
) |
Distributions paid to preferred unitholders |
|
|
(11,397 |
) |
|
|
(11,397 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
338,157 |
|
|
|
(60,889 |
) |
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents |
|
|
(1,570 |
) |
|
|
(288 |
) |
Cash and cash equivalents, beginning of period |
|
|
9,883 |
|
|
|
9,553 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
8,313 |
|
|
$ |
9,265 |
|
|
|
|
|
|
|
|
13
KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
SUPPLEMENTAL CASH FLOWS INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest of $6,140 and $5,362 as of September 30, 2010 and 2009, respectively |
|
$ |
26,182 |
|
|
$ |
27,051 |
|
|
|
|
|
|
|
|
NONCASH INVESTING TRANSACTIONS: |
|
|
|
|
|
|
|
|
Accrual for expenditures for operating properties and development and redevelopment properties |
|
$ |
13,614 |
|
|
$ |
6,089 |
|
|
|
|
|
|
|
|
Tenant improvements funded directly by tenants to third parties |
|
$ |
2,520 |
|
|
$ |
1,477 |
|
|
|
|
|
|
|
|
Assumption of secured debt with property acquisition (Notes 2 and 6) |
|
$ |
51,079 |
|
|
|
|
|
|
|
|
|
|
|
|
Assumption of other liabilities with property acquisition (Note 2) |
|
$ |
6,369 |
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH FINANCING TRANSACTIONS: |
|
|
|
|
|
|
|
|
Accrual of distributions payable to common unitholders |
|
$ |
18,925 |
|
|
$ |
15,705 |
|
|
|
|
|
|
|
|
Accrual of distributions payable to preferred unitholders |
|
$ |
1,909 |
|
|
$ |
1,909 |
|
|
|
|
|
|
|
|
Issuance of share-based compensation awards (Note 10) |
|
$ |
5,418 |
|
|
$ |
17,783 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
14
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
1. Organization and Basis of Presentation
Organization
Kilroy Realty Corporation owns, operates, develops, and acquires office and industrial real
estate located in California. We qualify and operate as a self-administered real estate
investment trust (REIT) under the Internal Revenue Code of 1986, as amended. As of September 30,
2010, all but one of our properties are located in Southern California.
The following table of office buildings (the Office Properties) and industrial buildings
(the Industrial Properties) summarizes our stabilized portfolio of operating properties as of
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Rentable |
|
Number of |
|
|
|
|
Buildings |
|
Square Feet |
|
Tenants |
|
Percentage Occupied |
Office Properties (1) |
|
|
99 |
|
|
|
9,809,506 |
|
|
|
347 |
|
|
|
84.8 |
% |
Industrial Properties |
|
|
41 |
|
|
|
3,654,463 |
|
|
|
60 |
|
|
|
90.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stabilized Portfolio |
|
|
140 |
|
|
|
13,463,969 |
|
|
|
407 |
|
|
|
86.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes one office property acquired in March 2010, one office property acquired in May
2010, and five office properties acquired in June 2010 (see Note 2 for additional
information). |
Our stabilized portfolio excludes undeveloped land, development and redevelopment
properties currently under construction, lease-up properties, and one industrial property that we
are in the process of repositioning for residential use. We define lease-up
properties as properties we recently developed or redeveloped that have not yet reached 95%
occupancy and are within one year following cessation of major construction activities. As of
September 30, 2010, we had no properties that were in the lease-up phase. During the quarter ended
September 30, 2010, we received notification that the zoning to allow high density residential
improvements on the land underlying the industrial property that we are in the process of
repositioning was adopted by the City of Irvine. We are currently evaluating strategic alternatives
for this property. During the quarter ended September 30, 2010, we commenced redevelopment on one
of our properties that was previously occupied by a single tenant for over 25 years. The property
encompasses approximately 300,000 rentable square feet of office space and is located in the El
Segundo submarket of Los Angeles county.
We own our interests in all of our Office Properties and Industrial Properties through Kilroy
Realty, L.P. (the Operating Partnership) and Kilroy Realty Finance Partnership, L.P. (the
Finance Partnership). We conduct substantially all of our operations through the Operating
Partnership. Accordingly, the descriptions of our business, employees, and properties are also
descriptions of the business, employees, and properties of the Operating Partnership. Unless the
context indicates otherwise, the term Company refers to Kilroy Realty Corporation and its
consolidated subsidiaries and the term Operating Partnership refers to Kilroy Realty, L.P. and
its consolidated subsidiaries. The terms we, our and us refer to the Company or the Company
and the Operating Partnership together, as the text requires.
As of September 30, 2010, the Company owned a 96.8% general partnership interest in the
Operating Partnership. The remaining 3.2% common limited partnership interest in the Operating
Partnership as of September 30, 2010 was owned by certain of our non-affiliated investors and
certain directors and officers of the Company (see Note 7). 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% general partnership interest. The Operating Partnership owns the remaining 99.0%
limited partnership interest. We conduct substantially all of our development activities through
Kilroy Services, LLC (KSLLC), which is a wholly-owned subsidiary of the Operating Partnership.
Unless otherwise indicated, all references to the Company include the Operating Partnership, the
Finance Partnership, KSLLC and all wholly-owned subsidiaries of the Company and the
Operating Partnership and all references to the Operating
Partnership include the Operating Partnership, the Finance Partnership, KSLLC and all wholly-owned
subsidiaries of the Operating Partnership.
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,
KSLLC, and all wholly-owned subsidiaries of the
Company and the Operating Partnership. The consolidated financial statements of the Operating
Partnership include the consolidated financial position and results of operations of the
Operating Partnership, the Finance Partnership, KSLLC, and all
wholly-owned subsidiaries of the Company and the
Operating Partnership. All
intercompany
15
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
balances and transactions have been eliminated in the consolidated financial statements. We also
consolidate all variable interest entities (VIE) when we are deemed to be the primary
beneficiary. During the period ended June 30, 2010, we were required to establish a VIE, Kilroy
Realty Northside Drive, LLC, to hold the $52.6 million of assets and liabilities purchased and
$51.1 million of secured debt, net, assumed in connection with the acquisition of three office
buildings in San Diego, California (see Notes 2 and 6). Kilroy Realty Northside Drive, LLC is a
bankruptcy-remote VIE, and the assets held by this entity are not available to satisfy the debts
and other obligations of the Company or the Operating Partnership.
The accompanying interim financial statements have been prepared by management in accordance
with accounting principles generally accepted in the United States of America (GAAP) and in
conjunction with the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures required for annual financial statements have been
condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial
statements do not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, the accompanying interim financial statements
reflect all adjustments of a normal and recurring nature that are considered necessary for a fair
presentation of the results for the interim periods presented. However, the results of operations
for the interim periods are not necessarily indicative of the results that may be expected for the
year ending December 31, 2010. The interim financial statements for the Company should be read in
conjunction with the audited consolidated financial statements and notes thereto included in the
Companys annual report on Form 10-K for the year ended December 31, 2009. The interim financial
statements for the Operating Partnership should be read in conjunction with the audited
consolidated financial statements and notes there to included in the Operating Partnerships
General Form for Registration of Securities on Form 10 filed with the SEC on August 18, 2010.
Change in Statements of Operations Presentation for the Company
Certain prior period amounts in the Companys consolidated statement of operations have been
reclassified to conform to the current period presentation. We reclassified interest expense to be
presented under Other (Expenses) Income in the Companys consolidated statements of operations for
all periods presented. Interest expense had previously been presented under Expenses.
Significant Accounting Policies
Acquisitions
We record the acquired tangible and intangible assets and assumed liabilities of operating
property acquisitions at fair value at the acquisition date. The acquired assets and assumed
liabilities for an operating property acquisition generally include but are not limited to: land,
buildings and improvements, 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 leases, acquired in-place lease values, and tenant relationships, if
any.
The fair value of land is derived from comparable sales of land within the same submarket
and/or region. The fair value of buildings and improvements, tenant improvements, and leasing costs
are based upon current market replacement costs and other relevant market rate information.
The fair value of the above-market or below-market component of an acquired in-place 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 term and (ii)
managements estimate of the rents that would be paid using fair market rental rates and rent
escalations at the date of acquisition over the remaining term of the lease. The amounts recorded
for above-market leases are included in deferred leasing costs and acquisition-related intangibles,
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 leases are
included in deferred revenue and acquisition-related 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.
The fair value of acquired in-place leases is derived based on managements 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 intangibles, net on the balance sheet and amortized
as an increase to depreciation and amortization expense over the remaining term of the applicable
leases.
We record undeveloped land acquisitions at the purchase price paid and capitalize the
associated acquisition costs.
16
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 perform an undiscounted cash flow analysis
and compare the net carrying amount of the property to the propertys 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 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 propertys
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 assets net
carrying amount exceeds the assets estimated fair value. If we were to recognize an impairment
loss, the estimated fair value of the asset 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. We did not record any impairment losses for the periods presented.
Development and Redevelopment Properties
All costs clearly associated with the acquisition, development, and construction of a
development or redevelopment property are capitalized as project costs. In addition, the following
costs are capitalized as project costs during periods in which activities necessary to get the
property ready for its intended use are in progress: pre-construction costs essential to the
development of the property, interest, real estate taxes, insurance, and internal compensation and
administrative costs that are clearly related to our development or redevelopment activities.
|
|
|
For development and redevelopment properties that are pre-leased, we cease
capitalization when revenue recognition commences, which is upon substantial completion
of tenant improvements. |
|
|
|
|
For 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,
but in any event not 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 get the property ready for its intended use have been suspended. |
|
|
|
|
For development or redevelopment properties with multiple tenants and staged
leasing, we cease capitalization and begins depreciation on the portion of the
development or redevelopment property for which revenue recognition has commenced. |
Once major construction activity has ceased and the development or redevelopment property is
in the lease-up phase, 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.
2. Acquisitions
During the nine months ended September 30, 2010, we acquired the operating properties listed
below from unrelated third parties. Unless otherwise noted, we funded these acquisitions
principally with the net proceeds from the issuance of the 6.625% unsecured senior notes due 2020
(see Note 6), the net proceeds from the Companys public offering of common stock (see Note 8), and
borrowings under the unsecured line of credit (see Note 6):
17
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentable |
|
|
Occupied |
|
|
Purchase |
|
|
|
Property |
|
|
Date of |
|
|
Number of |
|
|
Square |
|
|
as of |
|
|
Price |
|
Property |
|
Type |
|
|
Acquisition |
|
|
Buildings |
|
|
Feet |
|
|
September 2010 |
|
|
(in millions)(3) |
|
2385 Northside Drive
San Diego, CA (1) |
|
Office |
|
March 17, 2010 |
|
|
1 |
|
|
|
88,795 |
|
|
|
71.8 |
% |
|
$ |
18.0 |
|
303 Second Street
San Francisco, CA |
|
Office |
|
May 26, 2010 |
|
|
1 |
|
|
|
734,035 |
|
|
|
89.4 |
% |
|
|
233.3 |
|
999 Town & Country
Orange, CA |
|
Office |
|
June 18, 2010 |
|
|
1 |
|
|
|
98,551 |
|
|
|
100.0 |
% |
|
|
22.3 |
|
2211 Michelson Drive
Irvine, CA |
|
Office |
|
June 24, 2010 |
|
|
1 |
|
|
|
271,556 |
|
|
|
96.9 |
% |
|
|
103.2 |
|
2355, 2365, 2375 Northside Drive
San Diego, CA (2) |
|
Office |
|
June 30, 2010 |
|
|
3 |
|
|
|
190,634 |
|
|
|
82.8 |
% |
|
|
52.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
1,383,571 |
|
|
|
|
|
|
$ |
429.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This property is a part of Mission City Corporate Center. |
(2) |
|
These properties are part of Mission City Corporate Center. We assumed secured debt with
an outstanding principal balance of $52.0 million, net of an initial discount of $0.9 million,
in connection with this acquisition (see Notes 1 and 6). |
(3) |
|
Excludes acquisition-related costs. |
The related assets, liabilities, and results of operations of all 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 acquired and liabilities assumed at the
respective acquisition dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
303 Second Street, |
|
|
All Other |
|
|
|
|
|
|
San Francisco, CA(1) |
|
|
Acquisitions(1) |
|
|
Total |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
63,550 |
|
|
$ |
35,309 |
|
|
$ |
98,859 |
|
Buildings and improvements(2) |
|
|
154,203 |
|
|
|
138,955 |
|
|
|
293,158 |
|
Deferred leasing costs and acquisition-related intangible assets(3) |
|
|
19,828 |
|
|
|
22,151 |
|
|
|
41,979 |
|
Restricted
cash(5) |
|
|
2,522 |
|
|
|
|
|
|
|
2,522 |
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
240,103 |
|
|
|
196,415 |
|
|
|
436,518 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue and acquisition-related intangible liabilites(4) |
|
|
3,210 |
|
|
|
2,267 |
|
|
|
5,477 |
|
Secured debt, net |
|
|
|
|
|
|
51,100 |
|
|
|
51,100 |
|
Accounts payable, accrued expenses and other liabilites(5) |
|
|
3,565 |
|
|
|
2,804 |
|
|
|
6,369 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
6,775 |
|
|
|
56,171 |
|
|
|
62,946 |
|
|
|
|
|
|
|
|
|
|
|
Net assets and liabilities acquired(6) |
|
$ |
233,328 |
|
|
$ |
140,244 |
|
|
$ |
373,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The purchase price of 303 Second Street, San Francisco, CA
was greater than 10% of our total assets as of December 31, 2009. The purchase price of all other acquisitions
completed during the nine months ended September 30, 2010 were individually less than 5%, and
in aggregate less than 10%, of our total assets as of December 31, 2009. |
(2) |
|
Represents buildings and improvements and tenant improvements. |
(3) |
|
Represents in-place leases (approximately $16.4 million), above-market leases
(approximately $16.9 million), and unamortized leasing commissions (approximately $8.7
million). |
(4) |
|
Represents below-market leases. |
(5) |
|
Represents unfunded tenant improvements and leasing commission obligations for in-place
leases of which approximately $2.5 million was held in an escrow account as restricted cash. |
(6) |
|
Reflects the purchase price net of assumed secured debt and other lease related
obligations. |
18
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
3. Acquisition-related Intangibles, Net
The following table summarizes our identified acquisition-related intangible assets (acquired
value of leasing costs, above-market and in-place leases) and intangible liabilities (acquired
value of below-market leases) as of September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Acquisition-related Intangible Assets(1): |
|
|
|
|
|
|
|
|
Deferred leasing costs |
|
$ |
11,567 |
|
|
$ |
5,736 |
|
Accumulated amortization |
|
|
(2,339 |
) |
|
|
(4,501 |
) |
|
|
|
|
|
|
|
Deferred leasing costs, net |
|
|
9,228 |
|
|
|
1,235 |
|
|
|
|
|
|
|
|
|
|
Above-market leases |
|
|
16,850 |
|
|
|
|
|
Accumulated amortization |
|
|
(1,063 |
) |
|
|
|
|
|
|
|
|
|
|
|
Above-market leases, net |
|
|
15,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place leases |
|
|
22,014 |
|
|
|
5,832 |
|
Accumulated amortization |
|
|
(6,716 |
) |
|
|
(5,476 |
) |
|
|
|
|
|
|
|
In-place leases, net |
|
|
15,298 |
|
|
|
356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition-related intangible assets, net |
|
$ |
40,313 |
|
|
$ |
1,591 |
|
|
|
|
|
|
|
|
|
Acquisition-related Intangible Liabilities(2): |
|
|
|
|
|
|
|
|
Below-market leases |
|
$ |
10,626 |
|
|
$ |
5,132 |
|
Accumulated amortization |
|
|
(4,754 |
) |
|
|
(4,369 |
) |
|
|
|
|
|
|
|
Below-market leases, net |
|
$ |
5,872 |
|
|
$ |
763 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in deferred leasing costs and acquisition-related intangible assets, net in
the consolidated balance sheets. |
(2) |
|
Included in deferred revenue and acquisition-related intangible liabilities, net in the
consolidated balance sheets. |
The following table sets forth amortization for the period related to acquisition-related
intangibles for the three and nine months ended September 30, 2010 and September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Deferred Leasing Costs(1) |
|
$ |
503 |
|
|
$ |
111 |
|
|
$ |
698 |
|
|
$ |
451 |
|
Net Above (Below)-Market Leases(2) |
|
|
664 |
|
|
|
(49 |
) |
|
|
696 |
|
|
|
(349 |
) |
In Place Leases(1) |
|
|
1,220 |
|
|
|
48 |
|
|
|
1,505 |
|
|
|
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,387 |
|
|
$ |
110 |
|
|
$ |
2,899 |
|
|
$ |
519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Recorded to depreciation and amortization expense in the consolidated statements of
operations for the periods presented. |
(2) |
|
Net above-market leases are recorded as a decrease to rental income and net-below
market leases are recorded as an increase to rental income in the consolidated statements of
operations for the three and nine months ended September 30, 2010 and September 30, 2009,
respectively. |
19
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table sets forth the estimated annual amortization related to
acquisition-related intangibles as of September 30, 2010 for future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending |
|
Deferred Leasing Costs |
|
|
Net Above/(Below)-Market Leases(1) |
|
|
In Place Leases |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Remaining 2010 |
|
$ |
489 |
|
|
$ |
663 |
|
|
$ |
1,117 |
|
2011 |
|
|
1,842 |
|
|
|
2,385 |
|
|
|
3,738 |
|
2012 |
|
|
1,647 |
|
|
|
2,000 |
|
|
|
2,867 |
|
2013 |
|
|
1,429 |
|
|
|
1,695 |
|
|
|
2,233 |
|
2014 |
|
|
1,243 |
|
|
|
1,483 |
|
|
|
1,860 |
|
Thereafter |
|
|
2,578 |
|
|
|
1,689 |
|
|
|
3,483 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,228 |
|
|
$ |
9,915 |
|
|
$ |
15,298 |
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Amortization Period (in years) |
|
|
3.6 |
|
|
|
5.9, 7.7 |
(2) |
|
|
5.7 |
|
|
|
|
(1) |
|
Represents estimated annual net amortization related to above and below market leases.
Amounts shown represent net above market leases which will result in decreases to rental
income in the consolidated statement of operations for all future periods presented. |
(2) |
|
Represents the weighted average amortization period of the above and below market leases, respectively. |
4. 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 September 30, 2010 and
December 31, 2009 :
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Current receivables |
|
$ |
6,921 |
|
|
$ |
6,299 |
|
Allowance for uncollectible tenant receivables |
|
|
(2,866 |
) |
|
|
(3,063 |
) |
|
|
|
|
|
|
|
Current receivables, net |
|
$ |
4,055 |
|
|
$ |
3,236 |
|
|
|
|
|
|
|
|
Deferred Rent Receivables, net
Deferred rent receivables, net consisted of the following as of September 30, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Deferred rent receivables |
|
$ |
88,856 |
|
|
$ |
80,780 |
|
Allowance for deferred rent receivables |
|
|
(5,293 |
) |
|
|
(6,388 |
) |
|
|
|
|
|
|
|
Deferred rent receivables, net |
|
$ |
83,563 |
|
|
$ |
74,392 |
|
|
|
|
|
|
|
|
Note Receivable
In July 2010, we received $10.6 million in cash for the full repayment of the outstanding note
receivable.
20
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
5. Secured and Unsecured Debt of the Company
In this Note 5, 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 guarantees all the Operating Partnerships unsecured debt obligations
including the unsecured line of credit, the 6.625% unsecured senior notes due 2020, the 6.45%
unsecured senior notes due 2014, the 3.25% Exchangeable Notes due 2012 (the 3.25% Exchangeable
Notes) and 4.25% Exchangeable Notes due 2014 (the 4.25% Exchangeable Notes and, together with
the 3.25% Exchangeable Notes the Exchangeable Notes). As of September 30, 2010, the Operating
Partnership had $0.9 billion of unsecured debt obligations
outstanding, before the effect of discounts.
In addition, although the remaining $0.3 billion of the Operating Partnerships debt 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.
The Company and the Operating Partnership are both named parties to the capped call option
transactions discussed further in Note 6.
Debt Covenants and Restrictions
One of the
covenants contained within the $500 million unsecured revolving
credit facility (the New Credit Facility) prohibits the Company from paying dividends
in excess of 95% of funds from operations (FFO).
6. Secured and Unsecured Debt of the Operating Partnership
Secured Debt
In January 2010, the Operating Partnership borrowed $71.0 million under a mortgage loan that
is scheduled to mature on February 1, 2017. The mortgage loan is secured by five properties, bears
interest at an annual rate of 6.51%, and requires monthly principal and interest payments based on
a 30-year amortization period. We used a portion of the proceeds to pay off a mortgage loan with an
outstanding principal balance of $63.2 million that was scheduled to mature in April 2010. In
connection with the closing of this loan, we were refunded the $1.4 million earnest loan deposit we
paid to the lender in the fourth quarter of 2009.
In March 2010, the Operating Partnership used borrowings under the unsecured line of credit
(the Credit Facility) to pay off a secured line of credit with an outstanding principal balance
of $33.5 million that was scheduled to mature in April 2010.
In connection with the acquisition of three office buildings at Mission City Corporate Center
in June 2010, the Operating Partnership assumed secured debt with a principal balance of $52.0
million that is scheduled to mature on April 1, 2012. This secured debt was recorded at fair value
on the date of the acquisition and is shown net of the initial discount at assumption of $0.9
million on the consolidated balance sheets. This discount will be accreted on a straight-line
basis, which approximates the effective interest method, as additional interest expense from the
date of issuance through the maturity date of the secured debt. The secured debt and the three
properties that secure the debt are held in a bankruptcy remote special purpose entity and the
properties are not available to satisfy the debts and other obligations of the Company or the
Operating Partnership (see Notes 1 and 2). The debt bears contractual interest at a weighted
average annual rate of 5.1% and requires monthly interest only payments.
21
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Unsecured Senior Notes
In May 2010, the Operating Partnership issued unsecured senior notes in a private placement
transaction with an aggregate principal balance of $250.0 million that are scheduled to mature in
June 2020. On October 5, 2010, the Company commenced an exchange offer of the private unsecured
senior notes for registered unsecured senior notes. The terms of the registered unsecured senior
notes are substantially identical to the outstanding private unsecured senior notes, except for
transfer restrictions and registration rights relating to the outstanding private unsecured senior
notes. The exchange offer expires on November 3, 2010, unless extended. We will not receive any
additional proceeds as a result of the exchange offer.
The unsecured senior notes require semi-annual interest payments each June and December based
on a contractual annual interest rate of 6.625%. The unsecured senior notes are shown net of the
initial issuance discount of $2.1 million on the consolidated balance sheets. This discount is
accreted on a straight-line basis, which approximates the effective interest method, as additional
interest expense from the date of issuance through the maturity date of the unsecured senior notes.
We used a portion of the net proceeds to repurchase $150.0 million in aggregate principal balance
of the 3.25% Exchangeable Notes. A portion of the net proceeds was used to fund acquisitions during
the nine months ended September 30, 2010 (See Note 2).
In August 2010, the Operating Partnership used borrowings under the Credit Facility to repay a
portion of our unsecured senior notes, with a principal balance of $61.0 million that matured in
August.
Unsecured Line of Credit
In August 2010 the Operating Partnership entered into
the New Credit Facility and used borrowings under the New Credit Facility to
repay, and then terminate, the Credit Facility . The New Credit Facility has a term of three years
plus a one year extension at our option and bears interest at an annual rate of LIBOR plus 2.675%.
We may elect to borrow up to an additional $200.0 million under an accordion option subject to bank
approval.
We expect to use borrowings under the New Credit Facility for general corporate purposes,
to fund potential acquisitions, to finance development and redevelopment expenditures, and
potentially to repay long-term debt. The following table summarizes the balance and significant
terms of the New Credit Facility and Credit Facility as of September 30, 2010 and December 31,
2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Outstanding borrowings |
|
$ |
205,000 |
|
|
$ |
97,000 |
|
Remaining borrowing capacity |
|
|
295,000 |
|
|
|
453,000 |
|
|
|
|
|
|
|
|
Total borrowing capacity |
|
$ |
500,000 |
|
|
$ |
550,000 |
|
|
|
|
|
|
|
|
Maturity
date(1)(2) |
|
August 2013 |
|
April 2010 |
Interest
rate(3) |
|
|
2.98 |
% |
|
|
1.11 |
% |
Fees(4) |
|
|
0.575 |
% |
|
|
0.20 |
% |
|
|
|
(1) |
|
Under the terms of the New Credit Facility, we may exercise an option to extend the
maturity date by one year. |
(2) |
|
In April 2010, we exercised an option to extend the maturity date of the Credit Facility
by one year. |
(3) |
|
As of September 30, 2010, the New Credit Facility bore interest at an annual rate of LIBOR
plus 2.675%. As of December 31, 2009, the Credit Facility bore interest at an annual rate of
LIBOR plus 0.85% to 1.35% depending upon our leverage ratio at the time of borrowing. |
(4) |
|
As of September 30, 2010, the facility fee for the New Credit Facility was at an annual
rate of 0.575%. As of December 31, 2009, the fee for unused funds for the Credit Facility was
at an annual rate of 0.15% to 0.20%, depending on the balance of our daily average undrawn
balance. In addition, we also incurred debt origination and legal
costs of approximately $5 million, which will be amortized as
additional interest expense through the contractual maturity date. |
22
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Exchangeable Senior Notes
The following table summarizes the balance and significant terms of the Exchangeable Notes
outstanding as of September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25% Exchangeable Notes |
|
|
4.25% Exchangeable Notes |
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Principal amount |
|
$ |
148,000 |
|
|
$ |
298,000 |
|
|
$ |
172,500 |
|
|
$ |
172,500 |
|
Unamortized discount |
|
|
(4,751 |
) |
|
|
(13,937 |
) |
|
|
(17,454 |
) |
|
|
(20,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount of liability component |
|
$ |
143,249 |
|
|
$ |
284,063 |
|
|
$ |
155,046 |
|
|
$ |
152,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of equity component |
|
$ |
33,675 |
|
|
$ |
36,369 |
|
|
$ |
19,835 |
|
|
$ |
19,835 |
|
Maturity date |
|
April 2012
|
|
November 2014
|
Stated coupon rate |
|
3.25% (1)
|
|
4.25%(2)
|
Effective interest rate(3) |
|
5.45%
|
|
7.13%
|
Exchange rate per $1,000 principal value
of the Exchangeable Notes, as
adjusted(4) |
|
11.3636 |
|
27.8307 |
Exchange price, as adjusted(4) |
|
$88.00
|
|
$35.93
|
Number of shares on which the aggregate
consideration to be delivered on
conversion is determined(4) |
|
|
1,681,813 |
|
|
|
3,386,353 |
|
|
|
4,800,796 |
|
|
|
4,800,796 |
|
|
|
|
(1) |
|
Interest on the 3.25% Exchangeable Notes is payable semi-annually in arrears on April
15th and October 15th of each year. |
(2) |
|
Interest on the 4.25% Exchangeable Notes is payable semi-annually in arrears on May
15th and November 15th of each year. |
(3) |
|
The rate at which we record interest expense, which represents our conventional debt
borrowing rate at the date of issuance. |
(4) |
|
The exchange rate, exchange price, and the number of shares to be delivered upon exchange
are subject to adjustment under certain circumstances including increases in the Companys
common stock dividends. |
Tender Offer for the 3.25% Exchangeable Notes
In June 2010, the Operating Partnership repurchased 3.25% Exchangeable Notes with an aggregate
stated principal amount of $150.0 million for approximately $151.1 million in cash, including
transaction costs, pursuant to a tender offer. As a result of the transaction, we recorded a net
loss on early extinguishment of debt of approximately $4.6 million and charged approximately $2.7
million, representing the amount of the cash repurchase proceeds allocated to the equity component,
to additional paid-in capital.
Interest Expense for the Exchangeable Notes
The unamortized discount on the Exchangeable Notes is accreted as additional interest expense
from the date of issuance through the maturity date of the applicable Exchangeable Notes. The
following table summarizes the total interest expense attributable to the Exchangeable Notes based
on the effective interest rates set forth above, before the effect of capitalized interest, for the
three and nine months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Contractual interest payments |
|
$ |
3,035 |
|
|
$ |
3,616 |
|
|
$ |
11,530 |
|
|
$ |
11,091 |
|
Amortization of discount |
|
|
1,818 |
|
|
|
2,091 |
|
|
|
6,497 |
|
|
|
6,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense attributable to the Exchangeable Notes |
|
$ |
4,853 |
|
|
$ |
5,707 |
|
|
$ |
18,027 |
|
|
$ |
17,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The trading price of the Companys common stock on the New York Stock Exchange (NYSE) was
below the exchange price of the then-outstanding Exchangeable Notes as of both September 30, 2010
and December 31, 2009 and, therefore, the exchange option was out-of-the-money at these dates.
Capped Call Transactions
In connection with each of the Exchangeable Notes offerings, we entered into capped call
option transactions to mitigate the dilutive impact to us of the potential conversion of the
Exchangeable Notes. The following table summarizes our capped call option positions as of September
30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
3.25% Exchangeable Notes(1) |
|
4.25% Exchangeable Notes(2) |
Referenced shares of common stock |
|
|
1,121,201 |
(3) |
|
|
4,800,796 |
|
Exchange price including effect of capped calls |
|
$ |
102.72 |
|
|
$ |
42.81 |
|
|
|
|
(1) |
|
The capped calls mitigate the dilutive impact to us of the potential exchange of
two-thirds of the 3.25% Exchangeable Notes into shares of common stock. |
(2) |
|
The capped calls mitigate the dilutive impact to us of the potential exchange of all of
the 4.25% Exchangeable Notes into shares of common stock. |
(3) |
|
Subsequent to the repurchase of $150.0 million of aggregate stated principal of the 3.25%
Exchangeable Notes, we had the above referenced outstanding capped calls. |
23
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Debt Covenants and Restrictions
The New Credit Facility, the unsecured senior notes, and certain other secured debt
arrangements contain covenants and restrictions requiring the Company 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,
a minimum unencumbered asset pool, a debt service coverage ratio, and a minimum
unencumbered debt yield. (see Note 5). Noncompliance with one or more of the covenants and restrictions could
result in the full or partial principal balance of the associated debt becoming immediately due and
payable. We were in compliance with all of our debt covenants as of September 30, 2010.
Debt Maturities
The following table summarizes the stated debt maturities and scheduled amortization payments,
excluding debt discounts, as of September 30, 2010:
|
|
|
|
|
Year Ending |
|
(in thousands) |
|
Remaining 2010 |
|
$ |
1,590 |
|
2011 |
|
|
75,028 |
|
2012 |
|
|
304,302 |
|
2013 |
|
|
208,248 |
|
2014 |
|
|
258,979 |
|
Thereafter |
|
|
326,274 |
|
|
|
|
|
Total |
|
$ |
1,174,421 |
(1) |
|
|
|
|
|
|
|
(1) |
|
Includes the full principal balance of our debt instruments. On the consolidated balance
sheets as of September 30, 2010, the Exchangeable Notes, $250.0 million of unsecured senior
notes, and $52.0 million of secured debt are presented net of unamortized discounts of
approximately $22.2 million, $2.0 million, and $0.7 million, respectively |
Capitalized Interest and Loan Fees
The following table sets forth our gross interest expense, including debt discounts and loan
cost amortization, net of capitalized interest for the three and nine months ended September 30,
2010 and 2009. The capitalized amounts are a cost of development and redevelopment, and increase
the carrying value of undeveloped land and construction in progress.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Gross interest expense |
|
$ |
18,543 |
|
|
$ |
13,540 |
|
|
$ |
48,980 |
|
|
$ |
41,992 |
|
Capitalized interest |
|
|
(2,690 |
) |
|
|
(2,614 |
) |
|
|
(8,083 |
) |
|
|
(6,951 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
15,853 |
|
|
$ |
10,926 |
|
|
$ |
40,897 |
|
|
$ |
35,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Noncontrolling Interest of the Operating Partnership
Preferred Unitholders
As of both September 30, 2010 and December 31, 2009, the Operating Partnership had 1,500,000
Series A Preferred Units representing preferred limited partnership interests in the Operating
Partnership issued and outstanding with a redemption value of $50.00 per unit. There were no
changes to this noncontrolling interest during the three and nine months ended September 30, 2010
and 2009.
24
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Common Units of the Operating Partnership
The Company owned a 96.8%, and 96.2% common general partnership interest in the Operating
Partnership as of September 30, 2010 and both December 31, 2009 and September 30, 2009,
respectively. The remaining 3.2%, and 3.8% common limited partnership interest as of September 30,
2010, and both December 31, 2009 and September 30, 2009, respectively, was owned in the form of
common units by non-affiliate investors and certain of our executive officers and directors. There
were 1,723,131 common units outstanding as of both September 30, 2010 and December 31, 2009.
The noncontrolling common units may be redeemed by unitholders for cash. We, at our option,
may satisfy the cash redemption obligation with shares of the Companys common stock on a
one-for-one basis. Whether satisfied in cash or shares of the Companys common stock, 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 Companys common stock, par value $.01 per share, as reported on the
NYSE for the ten trading days immediately preceding the applicable balance sheet date. The
aggregate value upon redemption of the then-outstanding noncontrolling common units was $57.2
million and $53.6 million as of September 30, 2010 and December 31, 2009, respectively. This
redemption value does not necessarily represent the amount that would be distributed with respect
to each 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 amount payable with respect to each share of the Companys
common stock.
8. Stockholders Equity of the Company
Issuance of Common Stock
In April 2010, the Company completed an underwritten public offering of 9,200,000 shares of
its common stock. The net offering proceeds, after deducting underwriting discounts and commissions
and offering expenses, were approximately $299.8 million, which
the Company contributed to the Operating Partnership in exchange for
9,200,000 common units. We used a portion of the net proceeds
from the offering to fund acquisitions, repay borrowings on the Credit Facility, and for general
corporate purposes.
9. Partners Capital of the Operating Partnership
Issuance of Common Units
In April 2010, the Company completed an underwritten public offering of 9,200,000 shares of
the Companys common stock. The net offering proceeds, after deducting underwriting discounts and
commissions and offering expenses, were approximately $299.8 million, which the Company contributed
to the Operating Partnership in exchange for 9,200,000 common units. We used a portion of the net
proceeds from the offering to fund acquisitions, repay borrowings on the Credit Facility, and for
general corporate purposes.
Common Units Outstanding
The Company owned a 96.8%, and 96.2% common general partnership interest in the Operating
Partnership as of September 30, 2010 and both December 31, 2009 and September 30, 2009,
respectively. The remaining 3.2%, and 3.8% common limited partnership interest as of September
30, 2010, and both December 31, 2009 and September 30, 2009, respectively, was owned in the form of
common limited partnership units by certain of our executive officers and directors and also by
non-affiliate investors. There were 1,723,131 common limited partnership units outstanding as of
both September 30, 2010 and December 31, 2009.
The common units owned by the common limited partners may be redeemed by common limited
partners for cash. We, at our option, may satisfy the cash redemption obligation with shares of the
Companys common stock on a one-for-one basis. Whether satisfied in cash or shares of the Companys
common stock, the value for each common limited partnership unit upon redemption is the amount
equal to the average of the closing quoted price per share of the Companys common stock, par value
$.01 per share, as reported on the NYSE for the ten trading days immediately preceding the
applicable balance sheet date. The aggregate value upon redemption of the then-outstanding
noncontrolling common units was $57.2 million and $53.6 million as of September 30, 2010 and
December 31, 2009, respectively. This redemption value does not necessarily represent the amount
that would be distributed with respect to each 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 amount payable with
respect to each share of the Companys common stock.
25
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
10. Share-Based Compensation
Stockholder Approved Equity Compensation Plans
At September 30, 2010, we had one share-based incentive compensation plan, the Kilroy Realty
2006 Incentive Award Plan as amended (the 2006 Plan). In May 2010, the Companys stockholders
approved the fourth amendment to the 2006 Plan. The amendment increased the number of shares of
common stock authorized under the 2006 Plan by 2,990,000 shares such that the total aggregate
number of shares available for issuance pursuant to the 2006 Plan is 6,120,000. It also made
certain changes regarding how awards are counted prospectively against the number of shares
available for issuance under the 2006 Plan. As of September 30, 2010, 4,397,197 shares were
available for grant under the 2006 Plan. The number of shares that remains available for grant is
calculated using the weighted share counting provisions set forth in the 2006 Plan, which are based
on the type of awards that are granted. The maximum number of shares available for grant subject to
full value awards (which generally include equity awards other than options and stock appreciation
rights) was 1,505,889 shares as of September 30, 2010.
Summary of Nonvested Shares
A summary of the status of the Companys nonvested shares as of January 1, 2010 and changes
during the nine months ended September 30, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
Nonvested Shares |
|
Shares |
|
Fair Value |
Nonvested at January 1, 2010 |
|
|
88,473 |
|
|
$ |
59.05 |
|
Granted |
|
|
3,239 |
|
|
|
30.88 |
|
Vested |
|
|
(16,358 |
) |
|
|
46.63 |
|
|
|
|
|
|
|
|
|
|
Nonvested as of September 30, 2010 |
|
|
75,354 |
|
|
$ |
60.54 |
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2010 and 2009, we issued 3,239 and 4,958 nonvested
shares, respectively. The weighted-average grant-date fair value per share for nonvested shares
granted during the nine months ended September 30, 2010 and 2009 was $30.88 and $20.17,
respectively. In addition, during the nine months ended September 30, 2009, we issued 51,040 shares
of common stock under a share-based compensation program that were fully vested upon issuance. The
grant date fair value per share of this award was $26.94.
The total fair value of shares that vested during the nine months ended September 30, 2010 and
2009 was $0.5 million and $0.3 million, respectively, which was calculated based on the quoted
closing share price of the Companys common stock on the NYSE on the applicable date of vesting.
26
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Summary of Restricted Stock Units
The summary of our restricted stock units (RSUs) activity from January 1, 2010 through
September 30, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested RSUs |
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
|
|
|
Amount |
|
Value |
|
Vested RSUs |
|
Total RSUs |
Outstanding at January 1, 2010 |
|
|
269,294 |
|
|
$ |
26.81 |
|
|
|
362,037 |
|
|
|
631,331 |
|
Granted |
|
|
159,606 |
|
|
|
30.24 |
|
|
|
|
|
|
|
159,606 |
|
Vested |
|
|
(23,564 |
) |
|
|
25.46 |
|
|
|
23,564 |
|
|
|
|
|
Settled(1) |
|
|
|
|
|
|
|
|
|
|
(53,451 |
) |
|
|
(53,451 |
) |
Issuance of dividend equivalents(2) |
|
|
|
|
|
|
|
|
|
|
23,149 |
|
|
|
23,149 |
|
Canceled(1)(3) |
|
|
|
|
|
|
|
|
|
|
(54,122 |
) |
|
|
(54,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2010 |
|
|
405,336 |
|
|
$ |
28.24 |
|
|
|
301,177 |
|
|
|
706,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On July 1, 2010, certain vested RSUs were settled in
shares of the Companys common stock given that this date was six months plus one day
subsequent to one individuals separation from service from the Company.
For
individuals without an elected distribution date greater than six months beyond separation
from service, RSUs are automatically settled in common shares six months plus one day
subsequent to separation from service.
Of the total 97,593
RSUs held by this individual, 53,451 were settled for shares of the Companys common stock and
44,142 RSUs were canceled to cover the statutory minimum tax withholding. |
(2) |
|
RSUs issued as dividend equivalents are vested upon issuance. |
(3) |
|
We accept the return of RSUs, at the current quoted market price of the Companys common
stock, to satisfy minimum statutory tax-withholding requirements related to either RSUs that
have vested or RSU dividend equivalents in accordance with the terms of the 2006 Plan. |
During the nine months ended September 30, 2010 and 2009, we issued 159,606 and 589,805
nonvested RSUs, respectively. The weighted-average grant-date fair value per share for nonvested
RSUs granted during the nine months ended September 30, 2010 and 2009 was $30.24 and $26.71,
respectively.
The total fair value of the RSUs that vested during the nine months ended September 30, 2010
and 2009, excluding the vested RSUs issued as dividend equivalents, was $0.7 million and $0.1
million, respectively, which was calculated based on the quoted closing share price of the
Companys common stock on the NYSE on the day of vesting.
Compensation Cost Recorded During the Period
The total compensation cost for all share-based compensation programs was $2.2 million and
$2.6 million for the three months ended September 30, 2010 and 2009, respectively, and $6.4 million
and $8.7 million for the nine months ended September 30, 2010 and 2009, respectively. Of the total
share-based compensation cost, $0.3 million was capitalized as part of real estate
assets for both the three months ended September 30, 2010 and 2009 and $1.1 million and
$0.8 million was capitalized as part of real estate assets for the nine months ended September 30,
2010 and 2009, respectively. As of September 30, 2010, there was approximately $6.5 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 1.4 years. The remaining compensation cost related to these nonvested incentive awards
had been recognized in periods prior to September 30, 2010.
The $6.5 million of unrecognized compensation cost does not reflect the potential future
compensation cost for the approved executive officer share-based compensation programs under which
share-based awards have not yet been granted as of September 30, 2010. These programs have a
performance period that precedes the grant date. The Company recorded approximately $1.4 million
related to these programs for the nine months ended September 30, 2010, which is included in the
total $6.4 million compensation cost discussed above.
11. Fair Value of Financial Instruments
Financial Instruments Reported at Fair Value
The only financial instruments recorded at fair value in our consolidated financial statements
are the marketable securities related to the Kilroy Realty Corporation 2007 Deferred Compensation
Plan. The following table sets forth the fair value of our marketable securities as of September
30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Fair Value (Level 1)(1) |
Description |
|
September 30, 2010 |
|
December 31, 2009 |
|
|
(in thousands) |
Marketable Securities |
|
$ |
4,481 |
|
|
$ |
3,452 |
|
|
|
|
(1) |
|
Based on quoted prices in active markets for identical securities. |
27
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Financial Instruments Disclosed at Fair Value
The following table sets forth the carrying value and the fair value of our remaining
financial assets and liabilities as of September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Value |
|
Value |
|
Value |
|
Value |
Description |
|
September 30, 2010 |
|
December 31, 2009 |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable(1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
10,679 |
|
|
$ |
10,849 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured debt |
|
|
315,150 |
|
|
|
336,635 |
|
|
|
294,574 |
|
|
|
297,189 |
|
Exchangeable notes |
|
|
298,295 |
|
|
|
313,140 |
|
|
|
436,442 |
|
|
|
435,351 |
|
Unsecured senior notes |
|
|
330,941 |
|
|
|
345,026 |
|
|
|
144,000 |
|
|
|
142,828 |
|
New Credit Facility |
|
|
205,000 |
|
|
|
204,819 |
|
|
|
|
|
|
|
|
|
Credit Facility(2) |
|
|
|
|
|
|
|
|
|
|
97,000 |
|
|
|
96,250 |
|
|
|
|
(1) |
|
This note receivable was re-paid in full during the quarter ended September 30, 2010 (see
Note 4). |
(2) |
|
In August 2010, we entered into a $500.0 million New Credit Facility and used the borrowing
under the New Credit Facility to repay, and then terminate, our
previous $550.0 million Credit Facility (see Note 6). |
12. Future Minimum Rent
We have operating leases with tenants that expire at various dates through 2027 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
September 30, 2010 for future periods is summarized as follows:
|
|
|
|
|
Year Ending |
|
(in thousands) |
|
Remaining 2010 |
|
$ |
63,052 |
|
2011 |
|
|
256,527 |
|
2012 |
|
|
242,862 |
|
2013 |
|
|
222,544 |
|
2014 |
|
|
201,753 |
|
Thereafter |
|
|
666,139 |
|
|
|
|
|
Total |
|
$ |
1,652,877 |
|
|
|
|
|
13. Commitments and Contingencies
In the third quarter of 2010, we settled outstanding litigation related to certain premises at
one of our properties that had been abandoned by its former occupants. In connection with this
legal settlement, we received a $3.6 million cash payment. As a result, during the quarter ended
September 30, 2010, we reversed $0.6 million of allowance for bad debts which was previously
recorded in prior periods for receivables related to the lease at this property.
28
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
14. Segment Disclosure
Our reportable segments consist of the two types of commercial real estate properties for
which our chief operating decision-makers internally evaluate operating performance and financial
results: Office Properties and Industrial Properties. We also have certain corporate level
activities including legal administration, accounting, finance, and management information systems,
which are not considered separate operating segments.
We evaluate the performance of our segments based upon net operating income. Net
Operating Income is defined as operating revenues (rental income, tenant reimbursements, and other
property income) less property and related expenses (property expenses, real estate taxes, ground
leases, and provisions for bad debts) and excludes other non-property related income and expenses
such as interest income and interest expense, depreciation and amortization, acquisition related
expenses and corporate general and administrative expenses. There is no intersegment activity.
The following tables reconcile the segment activity to consolidated net income for the three
and nine months ended September 30, 2010 and 2009, and the consolidated financial position as of
September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Office Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues(1) |
|
$ |
72,174 |
|
|
$ |
60,765 |
|
|
$ |
196,492 |
|
|
$ |
187,014 |
|
Property and related expenses |
|
|
21,168 |
|
|
|
17,328 |
|
|
|
56,928 |
|
|
|
52,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income |
|
|
51,006 |
|
|
|
43,437 |
|
|
|
139,564 |
|
|
|
135,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues(1) |
|
|
7,630 |
|
|
|
7,729 |
|
|
|
22,547 |
|
|
|
25,041 |
|
Property and related expenses |
|
|
1,770 |
|
|
|
2,000 |
|
|
|
5,417 |
|
|
|
5,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income |
|
|
5,860 |
|
|
|
5,729 |
|
|
|
17,130 |
|
|
|
19,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues(1) |
|
|
79,804 |
|
|
|
68,494 |
|
|
|
219,039 |
|
|
|
212,055 |
|
Property and related expenses |
|
|
22,938 |
|
|
|
19,328 |
|
|
|
62,345 |
|
|
|
57,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income |
|
$ |
56,866 |
|
|
$ |
49,166 |
|
|
$ |
156,694 |
|
|
$ |
154,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Consolidated Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Operating Income for reportable segments |
|
$ |
56,866 |
|
|
$ |
49,166 |
|
|
$ |
156,694 |
|
|
$ |
154,562 |
|
Unallocated (expenses) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
(7,273 |
) |
|
|
(7,662 |
) |
|
|
(21,096 |
) |
|
|
(22,023 |
) |
Acquisition-related expenses |
|
|
(354 |
) |
|
|
|
|
|
|
(1,624 |
) |
|
|
|
|
Depreciation and amortization |
|
|
(30,054 |
) |
|
|
(21,968 |
) |
|
|
(74,714 |
) |
|
|
(66,608 |
) |
Interest income and other net investment gains |
|
|
337 |
|
|
|
501 |
|
|
|
703 |
|
|
|
1,074 |
|
Interest expense |
|
|
(15,853 |
) |
|
|
(10,926 |
) |
|
|
(40,897 |
) |
|
|
(35,041 |
) |
Gain (loss) on early extinguishment of debt |
|
|
|
|
|
|
3,119 |
|
|
|
(4,564 |
) |
|
|
3,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
3,669 |
|
|
|
12,230 |
|
|
|
14,502 |
|
|
|
35,083 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,669 |
|
|
$ |
12,230 |
|
|
$ |
14,502 |
|
|
$ |
37,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All operating revenues are comprised of amounts received from third-party tenants. |
29
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
September 30,
2010 |
|
|
December 31,
2009 |
|
|
|
(in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
Office Properties: |
|
|
|
|
|
|
|
|
Land, buildings, and improvements, net |
|
$ |
1,877,634 |
|
|
$ |
1,498,427 |
|
Undeveloped land and construction in progress |
|
|
286,522 |
|
|
|
263,608 |
|
Total assets(1) |
|
|
2,334,692 |
|
|
|
1,878,004 |
|
Industrial Properties: |
|
|
|
|
|
|
|
|
Land, buildings, and improvements, net |
|
|
147,598 |
|
|
|
152,072 |
|
Total assets(1) |
|
|
161,371 |
|
|
|
165,563 |
|
Total Reportable Segments: |
|
|
|
|
|
|
|
|
Land, buildings, and improvements, net |
|
|
2,025,232 |
|
|
|
1,650,499 |
|
Undeveloped land and construction in progress |
|
|
286,522 |
|
|
|
263,608 |
|
Total assets(1) |
|
|
2,496,063 |
|
|
|
2,043,567 |
|
Reconciliation to Consolidated Assets: |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
|
2,496,063 |
|
|
|
2,043,567 |
|
Other unallocated assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
8,313 |
|
|
|
9,883 |
|
Restricted cash |
|
|
3,265 |
|
|
|
2,059 |
|
Marketable securities |
|
|
4,481 |
|
|
|
3,452 |
|
Note receivable |
|
|
|
|
|
|
10,679 |
|
Deferred financing costs, net |
|
|
14,574 |
|
|
|
8,334 |
|
Prepaid expenses and other assets, net |
|
|
8,988 |
|
|
|
6,307 |
|
|
|
|
|
|
|
|
Total consolidated assets(2) |
|
$ |
2,535,684 |
|
|
$ |
2,084,281 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes land, buildings, and improvements, undeveloped land and construction in
progress, current receivables, deferred rent receivable and deferred leasing costs, and
acquisition-related intangible assets, all shown on a net basis. |
(2) |
|
Total consolidated assets and total assets for reportable segments have increased by a
material amount due to acquisitions completed during the nine months ended September 30, 2010
(see Note 2). |
30
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. Net (Loss) Income Available to Common Stockholders Per Share of the Company
The following table reconciles the numerator and denominator in computing the Companys basic
and diluted per-share computations for net (loss) income available to common stockholders for the
three and nine months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in thousands, except share and |
|
|
|
|
|
|
|
|
|
|
|
per share amounts) |
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3,669 |
|
|
$ |
12,230 |
|
|
$ |
14,502 |
|
|
$ |
35,083 |
|
Loss (income) from continuing operations attributable to
noncontrolling common units of the Operating Partnership |
|
|
4 |
|
|
|
(320 |
) |
|
|
(128 |
) |
|
|
(1,043 |
) |
Preferred distributions and dividends |
|
|
(3,799 |
) |
|
|
(3,799 |
) |
|
|
(11,397 |
) |
|
|
(11,397 |
) |
Allocation to participating securities (nonvested shares
and RSUs) |
|
|
(273 |
) |
|
|
(693 |
) |
|
|
(877 |
) |
|
|
(1,041 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted (loss) income from
continuing operations available to common stockholders |
|
$ |
(399 |
) |
|
$ |
7,418 |
|
|
$ |
2,100 |
|
|
$ |
21,602 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,261 |
|
Discontinued operations attributable to noncontrolling
common units of the Operating Partnership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net (loss) income available
to common stockholders |
|
$ |
(399 |
) |
|
$ |
7,418 |
|
|
$ |
2,100 |
|
|
$ |
23,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average vested shares outstanding |
|
|
52,274,316 |
|
|
|
42,934,796 |
|
|
|
48,561,614 |
|
|
|
37,279,250 |
|
Effect of dilutive securities-stock options and
contingently issuable shares |
|
|
|
|
|
|
679 |
|
|
|
3,414 |
|
|
|
17,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average vested shares and common share
equivalents outstanding |
|
|
52,274,316 |
|
|
|
42,935,475 |
|
|
|
48,565,028 |
|
|
|
37,296,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations available to
common stockholders per share |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.58 |
|
Discontinued operations per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders per share |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations available to
common stockholders per share |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.58 |
|
Discontinued operations per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders per share |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 and September 30, 2009, the effect of the assumed exchange of
the Exchangeable Notes was not included in the net (loss) income available to common stockholders
per share calculation as it was antidilutive to income from continuing operations available to
common stockholders since the average quoted trading price of the Companys common stock on the
NYSE for the periods presented was below the Exchangeable Notes
exchange prices.
31
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
16. Net (Loss) Income Available to Common Unitholders per Unit of the Operating Partnership
The following table reconciles the numerator and denominator in computing the Operating
Partnerships basic and diluted per-unit computations for net (loss) income available to common
unitholders for the three and nine months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(in thousands, except
unit and |
|
|
|
|
|
|
|
|
|
|
|
per unit amounts) |
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3,669 |
|
|
$ |
12,230 |
|
|
$ |
14,502 |
|
|
|
35,083 |
|
Income from continuing operations
attributable to noncontrolling interests in consolidated subsidiaries |
|
|
(41 |
) |
|
|
(61 |
) |
|
|
(138 |
) |
|
|
(195 |
) |
Preferred distributions |
|
|
(3,799 |
) |
|
|
(3,799 |
) |
|
|
(11,397 |
) |
|
|
(11,397 |
) |
Allocation to participating securities
(nonvested units and RSUs) |
|
|
(273 |
) |
|
|
(693 |
) |
|
|
(877 |
) |
|
|
(1,041 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted (loss)
income from continuing operations
available to common unitholders |
|
$ |
(444 |
) |
|
$ |
7,677 |
|
|
$ |
2,090 |
|
|
$ |
22,450 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net
(loss) income available to common
unitholders |
|
$ |
(444 |
) |
|
$ |
7,677 |
|
|
$ |
2,090 |
|
|
$ |
24,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average vested
common units outstanding |
|
|
53,997,447 |
|
|
|
44,657,927 |
|
|
|
50,284,745 |
|
|
|
39,013,029 |
|
Effect of dilutive securities-stock
options and contingently issuable
units |
|
|
|
|
|
|
679 |
|
|
|
3,414 |
|
|
|
17,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average vested units
and common unit equivalents
outstanding |
|
|
53,997,447 |
|
|
|
44,658,606 |
|
|
|
50,288,159 |
|
|
|
39,030,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations available to common
unitholders per unit |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.57 |
|
Discontinued operations per common unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.06 |
|
|
|
|
Net (loss) income available to common
unitholders per unit |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations available to common
unitholders per unit |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.57 |
|
Discontinued operations per common unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.06 |
|
|
|
|
Net (loss) income available to common
unitholders per unit |
|
$ |
(0.01 |
) |
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 and September 30, 2009, the effect of the assumed exchange of
the Exchangeable Notes was not included in the net (loss) income available to common
unitholder per unit calculation as it was antidilutive to income from continuing operations
available to common unitholders since the average quoted trading price of the Companys common
stock on the NYSE for the periods presented was below the
Exchangeable Notes exchange prices.
32
KILROY
REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
17. Subsequent Events
On October 15, 2010, aggregate dividends, distributions, and dividend equivalents of $19.2
million were paid to common stockholders and common unitholders of record on September 30, 2010 and
RSU holders of record on October 15, 2010.
On October 13, 2010, we completed the sale of one industrial building to an unrelated third
party for approximately $5.0 million.
In
October 2010, we entered into two separate purchase and sale
agreements with two separate unrelated third parties to acquire two
office properties encompassing an aggregate of 588,000 square feet
of space for approximately $238 million. Both acquisitions are
currently anticipated to close in the fourth quarter of 2010, subject
to customary closing conditions.
18. Pro Forma Results of the Company
The following unaudited pro forma consolidated results of operations of the Company for the
three and nine months ended September 30, 2010 and 2009 assumes that the acquisition of 303 Second
Street, San Francisco, California, was completed as of January 1, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Revenues |
|
$ |
79,804 |
|
|
$ |
75,535 |
|
|
$ |
228,937 |
|
|
$ |
232,452 |
|
Net (loss) income available to common stockholders |
|
|
(37 |
) |
|
|
10,312 |
|
|
|
5,428 |
|
|
|
31,216 |
|
Net (loss) income available to common stockholders per sharebasic |
|
$ |
(0.01 |
) |
|
$ |
0.22 |
|
|
$ |
0.09 |
|
|
$ |
0.81 |
|
Net (loss) income available to common stockholders per sharediluted |
|
$ |
(0.01 |
) |
|
$ |
0.22 |
|
|
$ |
0.09 |
|
|
$ |
0.81 |
|
Pro forma data may not be indicative of the results that would have been reported had the
acquisition actually occurred as of January 1, 2010 and 2009, respectively, nor does it intend to
be a projection of future results.
The following table summarizes actual results for certain operating data for the property
at 303 Second Street, San Francisco, California, from May 26, 2010, the date of acquisition,
through September 30, 2010:
|
|
|
|
|
|
|
(in thousands) |
Revenues |
|
$ |
8,726 |
|
Net income from continuing operations(1) |
|
$ |
2,207 |
|
(1) |
|
Reflects the net operating income less depreciation for this property and amortization of lease related intangibles. |
19. Pro Forma Results of the Operating Partnership
The following unaudited pro forma consolidated results of operations of the Operating
Partnership for the three and nine months ended September 30, 2010 and 2009 assumes that the
acquisition of 303 Second Street, San Francisco, California, was completed as of January 1, 2010
and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Revenues |
|
$ |
79,804 |
|
|
$ |
75,535 |
|
|
$ |
228,937 |
|
|
$ |
232,452 |
|
Net (loss) income available to common unitholders |
|
|
(79 |
) |
|
|
10,657 |
|
|
|
5,503 |
|
|
|
32,418 |
|
Net (loss) income available to common unitholders per share basic |
|
$ |
(0.01 |
) |
|
$ |
0.22 |
|
|
$ |
0.09 |
|
|
$ |
0.80 |
|
Net (loss) income available to common unitholders per share
diluted |
|
$ |
(0.01 |
) |
|
$ |
0.22 |
|
|
$ |
0.09 |
|
|
$ |
0.80 |
|
Pro forma data may not be indicative of the results that would have been reported had the
acquisition actually occurred as of January 1, 2010 and 2009, respectively, nor does it intend to
be a projection of future results.
The following table summarizes actual results for certain operating data for the property
at 303 Second Street, San Francisco, California, from May 26, 2010, the date of acquisition,
through September 30, 2010:
|
|
|
|
|
|
|
(in thousands) |
Revenues |
|
$ |
8,726 |
|
Net income from continuing operations(1) |
|
$ |
2,207 |
|
(1) |
|
Reflects the net operating income less depreciation for this property and amortization of lease related intangibles. |
33
ITEM 2. MANAGEMENTS 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 Kilroy Realty Corporation and Kilroy Realty,
L.P. because the results are essentially identical for both reporting entities.
Statements contained in this Managements Discussion and Analysis of Financial Condition and
Results of Operations that are not historical facts may be forward-looking statements. Such
statements are subject to certain risks and uncertainties, which could cause actual results to
differ materially from those projected. Some of the information presented is forward-looking in
nature, including information concerning projected future occupancy rates, rental rate increases,
property development timing and costs, and investment amounts. Although the information is based on
our current expectations, actual results could vary from expectations stated in this report.
Numerous factors could affect our actual results, some of which are beyond our control. These
include the breadth and duration of the current slowness in economic growth and its impact on our
tenants, the strength of commercial and industrial real estate markets, market conditions affecting
tenants, our ability to complete and successfully integrate pending and recent acquisitions,
competitive market conditions, interest rate levels, volatility in our stock price, and capital
market conditions. You are cautioned not to place undue reliance on this information, which speaks
only as of the date this report was filed. We assume no obligation to update publicly any
forward-looking information, whether as a result of new information, future events, or otherwise,
except to the extent we are required to do so in connection with our ongoing requirements under
federal securities laws to disclose material information. For a discussion of important risks
related to our business, and related to investing in our securities, including risks that could
cause actual results and events to differ materially from results and events referred to in the
forward-looking information, see Item 1A: Risk Factors in the Companys annual report on Form 10-K
for the fiscal year ended December 31, 2009, Item 1A: Risk Factors in the Operating Partnerships
General Form for Registration for Securities on Form 10 filed with the SEC on August 18, 2010, and
the discussion under the captions -Factors That May Influence Future Results of Operations and
-Liquidity and Capital Resources for the Company and -Liquidity and Capital Resources for the
Operating Partnership below. In light of these risks, uncertainties, and assumptions, the
forward-looking events discussed in this report might not occur.
Overview and Background
We own, operate, develop, redevelop, and acquire office and industrial real estate located in
California. We qualify and operate as a self-administered REIT. We own our interests in all of our
properties through the Operating Partnership and the Finance Partnership, and conduct substantially
all of our operations through the Operating Partnership. We owned a 96.8%, and 96.2% general
partnership interest in the Operating Partnership as of September 30, 2010 and both December 31,
2009 and September 30, 2009, respectively. All our properties are held in fee except for the seven
office buildings located at Kilroy Airport Center in Long Beach, California, which are held subject
to leases for the land that expire in 2084.
Factors That May Influence Future Results of Operations
Acquisitions. As a key component of our growth strategy, we continually evaluate selected
property acquisition opportunities. We consider potential acquisitions on an ongoing basis and may
have one or more potential acquisitions under consideration at any point in time, which may be at
varying stages of the negotiation and due diligence review process. We generally finance our
acquisitions through debt and equity offerings and borrowings on our unsecured line of credit (the
New Credit Facility).
During the nine months ended September 30, 2010, we completed five acquisitions of seven
buildings for approximately $429.4 million (see Note 2 to our consolidated financial statements
included in this report for additional information). In addition, subsequent to September 30, 2010
we entered into separate agreements to acquire two office properties located in San Francisco,
California and the Bellevue area of greater Seattle, Washington encompassing an aggregate 588,000 square feet of space.
|
|
|
In San Francisco, we are currently a party to a purchase and sale agreement with an
unrelated third party to acquire an approximate 466,000 square-foot office property
located in San Franciscos South Financial District for approximately $191.5 million. |
|
|
|
|
In the greater Seattle area, we are currently a party to a purchase and sale agreement with an
unrelated third party to acquire an approximate 122,000 square-foot office property
for approximately $46.0 million. |
Both acquisitions are expected close in the fourth quarter, subject to customary closing
conditions. We cannot provide assurance that any of the pending acquisitions described above will
be consummated at the prices, on the terms or by the dates currently contemplated, or at all, or
that any potential acquisitions will be completed. Costs associated with acquisitions are expensed
as incurred and we may be unable to complete an acquisition after making a nonrefundable deposit or
incurring acquisition-related costs.
Real Estate Asset Valuation. General economic conditions and the resulting impact on market
conditions such as the downturn in tenants businesses, declining demand for office or industrial
properties, or decreases in market rental rates, or the market values of real estate assets
generally, may adversely affect the value of our assets, including the value of our properties and
related tenant improvements and the value of our undeveloped land. Although our strategy is to hold
our properties and our undeveloped land for long-term use, if our strategy and/or market conditions
change or we decide to dispose of an asset, we may be required to recognize an impairment loss to
reduce the property or undeveloped land to the lower of the carrying amount or fair value, and such
a loss could potentially be material and could adversely affect our results of operations.
Likewise, if as a result of an early lease termination we were required to remove and write off
material amounts of tenant improvements that were not reusable to another tenant, our results of
operations could be adversely affected.
34
We evaluate our real estate assets for potential impairment, on a property-by-property basis,
whenever events or changes in circumstances with respect to a specific market, submarket or
property indicate that the carrying amount of a given asset may not be recoverable.
In recent periods, circumstances occurred that indicated that an analysis for potential
impairment of certain of our properties was necessary. As a result, 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 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 the nine months ended
September 30, 2010 or 2009 or the years ended December 31, 2009, 2008, and 2007.
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, 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 leases that commenced during the three and
nine months ended September 30, 2010.
Leasing Commencement Information by Segment
For Leases That Commenced During the Three Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st & 2nd Generation(1) |
|
2nd Generation(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Number of |
|
Rentable |
|
|
|
|
|
Changes |
|
|
|
|
|
Average |
|
|
Leases(2) |
|
Square Feet(2) |
|
Changes in |
|
in Cash |
|
Retention |
|
Lease Term |
|
|
New |
|
Renewal |
|
New |
|
Renewal |
|
Rents(3) |
|
Rents(4) |
|
Rates(5) |
|
(in months) |
Office Properties |
|
|
14 |
|
|
|
16 |
|
|
|
136,401 |
|
|
|
356,753 |
|
|
|
(19.5 |
)% |
|
|
(5.2 |
)% |
|
|
43.3 |
% |
|
|
49 |
|
Industrial Properties |
|
|
4 |
|
|
|
2 |
|
|
|
264,886 |
|
|
|
90,842 |
|
|
|
(22.3 |
)% |
|
|
(30.9 |
)% |
|
|
100.0 |
% |
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio |
|
|
18 |
|
|
|
18 |
|
|
|
401,287 |
|
|
|
447,595 |
|
|
|
(19.9 |
)% |
|
|
(9.4 |
)% |
|
|
48.9 |
% |
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Leasing Commencement Information by Segment
For Leases That Commenced During the Nine Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st & 2nd Generation(1) |
|
2nd Generation(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Number of |
|
Rentable |
|
|
|
|
|
Changes |
|
|
|
|
|
Average |
|
|
Leases(2) |
|
Square Feet(2) |
|
Changes in |
|
in Cash |
|
Retention |
|
Lease Term |
|
|
New |
|
Renewal |
|
New |
|
Renewal |
|
Rents(3) |
|
Rents(4) |
|
Rates(5) |
|
(in months) |
Office Properties |
|
|
41 |
|
|
|
37 |
|
|
|
625,866 |
|
|
|
578,554 |
|
|
|
(14.1 |
)% |
|
|
(11.3 |
)% |
|
|
52.2 |
% |
|
|
63 |
|
Industrial Properties |
|
|
9 |
|
|
|
5 |
|
|
|
299,886 |
|
|
|
217,998 |
|
|
|
(22.0 |
)% |
|
|
(28.3 |
)% |
|
|
58.2 |
% |
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio |
|
|
50 |
|
|
|
42 |
|
|
|
925,752 |
|
|
|
796,552 |
|
|
|
(15.1 |
)% |
|
|
(13.7 |
)% |
|
|
53.7 |
% |
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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. |
(2) |
|
Represents leasing activity for leases that commenced during the period shown, including
first and second generation space, net of month-to-month leases. Excludes leasing on new
construction. |
(3) |
|
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 we acquired the property. |
(4) |
|
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 we acquired the property. |
(5) |
|
Calculated as the percentage of space either renewed or expanded into by existing tenants
or subtenants at lease expiration. |
The
changes in rents and changes in cash rents reported above exclude
leases of approximately 208,700
and 542,200 rentable square feet for the three and nine months ended September 30, 2010,
respectively, for which the space was vacant longer than one year or we are leasing the space for
the first time. We exclude space vacant for more than one year in our change in rents calculations
in order to provide a meaningful market comparison.
In general, we have been experiencing decreases in rental rates in many of our submarkets over
the last several quarters due to continuing slow economic growth and other related factors. During
the third quarter of 2010, we executed 32 leases for an aggregate of 0.4 million rentable square
feet. The weighted average change in rents as compared to the expiring rents for the same space for
these new leases was a 9.5% decrease in cash rents and a 7.6% decrease in GAAP rents, excluding
leases for which the space was vacant longer than one year. As of September 30, 2010, we believe
that the weighted average cash rental rates for our overall portfolio, including recently acquired
properties, are approximately 10% above the current average market rental rates, although
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. As previously
discussed, our rental rates and occupancy are impacted by general economic conditions, including
the pace of regional economic growth and access to capital. Therefore, given the impact of the
current economy on our submarkets, 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.
Scheduled Lease Expirations. The following table sets forth certain information
regarding our lease expirations for the remainder of 2010 and the next five years, which is in
addition to the 1.8 million rentable square feet, or 13.6%, of vacant space in our stabilized
portfolio at September 30, 2010. Our ability to re-lease available space depends upon the market
conditions in the specific regions in which our properties are located as well as market conditions
generally.
36
Lease Expirations by Segment Type(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
|
|
|
|
Net Rentable |
|
|
Percentage of |
|
|
|
|
|
|
Annualized |
|
|
Average Annualized |
|
|
|
|
|
|
|
Area |
|
|
Leased |
|
|
Annualized Base |
|
|
Base Rental |
|
|
Base Rental |
|
|
|
|
|
|
|
Subject |
|
|
Square Feet |
|
|
Rental Revenue |
|
|
Revenue |
|
|
Revenue Per |
|
|
|
Number of |
|
|
to Expiring |
|
|
Represented by |
|
|
Under |
|
|
Represented |
|
|
Square Foot Under |
|
|
|
Expiring |
|
|
Leases |
|
|
Expiring |
|
|
Expiring Leases |
|
|
by Expiring |
|
|
Expiring Leases |
|
Year of Lease Expiration |
|
Leases |
|
|
(Sq. Ft.) |
|
|
Leases |
|
|
(000s)(2) |
|
|
Leases(2) |
|
|
(000s)(2) |
|
Office Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2010 |
|
|
15 |
|
|
|
185,942 |
|
|
|
2.3 |
% |
|
$ |
3,833 |
|
|
|
1.6 |
% |
|
$ |
20.61 |
|
2011 |
|
|
76 |
|
|
|
664,767 |
|
|
|
8.1 |
% |
|
|
15,528 |
|
|
|
6.3 |
% |
|
|
23.36 |
|
2012 |
|
|
68 |
|
|
|
780,878 |
|
|
|
9.5 |
% |
|
|
21,789 |
|
|
|
8.9 |
% |
|
|
27.90 |
|
2013 |
|
|
68 |
|
|
|
844,428 |
|
|
|
10.3 |
% |
|
|
22,844 |
|
|
|
9.3 |
% |
|
|
27.05 |
|
2014 |
|
|
54 |
|
|
|
1,078,147 |
|
|
|
13.1 |
% |
|
|
29,194 |
|
|
|
11.9 |
% |
|
|
27.08 |
|
2015 |
|
|
63 |
|
|
|
1,108,957 |
|
|
|
13.5 |
% |
|
|
34,000 |
|
|
|
13.8 |
% |
|
|
30.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Office |
|
|
344 |
|
|
|
4,663,119 |
|
|
|
56.8 |
% |
|
|
127,188 |
|
|
|
51.8 |
% |
|
|
27.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2010 |
|
|
3 |
|
|
|
88,484 |
|
|
|
2.7 |
% |
|
|
864 |
|
|
|
3.4 |
% |
|
|
9.76 |
|
2011 |
|
|
10 |
|
|
|
288,845 |
|
|
|
8.7 |
% |
|
|
2,528 |
|
|
|
9.8 |
% |
|
|
8.75 |
|
2012 |
|
|
12 |
|
|
|
490,473 |
|
|
|
14.8 |
% |
|
|
2,866 |
|
|
|
11.1 |
% |
|
|
5.84 |
|
2013 |
|
|
8 |
|
|
|
610,455 |
|
|
|
18.4 |
% |
|
|
4,463 |
|
|
|
17.3 |
% |
|
|
7.31 |
|
2014 |
|
|
12 |
|
|
|
486,578 |
|
|
|
14.7 |
% |
|
|
3,918 |
|
|
|
15.2 |
% |
|
|
8.05 |
|
2015 |
|
|
10 |
|
|
|
544,864 |
|
|
|
16.5 |
% |
|
|
3,839 |
|
|
|
14.9 |
% |
|
|
7.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Industrial |
|
|
55 |
|
|
|
2,509,699 |
|
|
|
75.8 |
% |
|
|
18,478 |
|
|
|
71.7 |
% |
|
|
7.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
399 |
|
|
|
7,172,818 |
|
|
|
62.2 |
% |
|
$ |
145,666 |
|
|
|
53.6 |
% |
|
$ |
20.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The information presented reflects leasing activity through September 30, 2010. For
leases that have been renewed early or space that has been re-leased to a new tenant, the
expiration date and annualized base rent information presented takes into consideration the
renewed or re-leased lease terms. Excludes space leased under month-to-month leases and vacant
space as of September 30, 2010. |
(2) |
|
Reflects annualized contractual base rental revenue calculated on a straight-line basis. |
Leases representing approximately 2.4% and 8.3% of the occupied square footage of our
stabilized portfolio are scheduled to expire during the remainder of 2010 and in 2011,
respectively. The leases scheduled to expire during the remainder of 2010 and in 2011 represent
approximately 0.9 million rentable square feet of office space, or 7.1% of our total annualized
base rental revenue, and 0.4 million rentable square feet of industrial space, or 1.2% of our total
annualized base rental revenue. As of September 30, 2010, we believe that the weighted average cash
rental rates for leases scheduled to expire during the remainder of 2010 are up to approximately
10% above the current average market rental rates, and leases scheduled to expire during 2011 are
approximately 15% to 20% above current average market rental rates, although 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.
Sublease Activity. Of our leased space as of September 30, 2010, approximately 255,100
rentable square feet, or 1.9% of the square footage in our stabilized portfolio, was available for
sublease compared to 297,100 rentable square feet, or 2.4% of the square footage in our stabilized
portfolio, as of December 31, 2009. Of the 1.9% of available sublease space in our stabilized
portfolio as of September 30, 2010, approximately 1.5% was vacant space, and the remaining 0.4% was
occupied. Approximately 70.8%, 24.4%, and 4.8% of the available sublease space as of September 30,
2010 is located in the San Diego, Los Angeles, and Orange County regions, respectively. Of the
approximately 255,100 rentable square feet available for sublease as of September 30, 2010,
approximately 12,300 rentable square feet representing one lease is scheduled to expire in 2010,
and approximately 43,300 rentable square feet representing two leases are scheduled to expire in
2011.
Development and Redevelopment Programs. We believe that a portion of our long-term future
potential growth will continue to come from our development pipeline and redevelopment
opportunities within our existing portfolio. Redevelopment opportunities are those projects in
which we spend significant development and construction costs on existing buildings pursuant to a
formal plan, the result of which is a higher economic return on the property. While we have
currently delayed the timing and reduced the scope of our development program as a result of the
present economic conditions in our submarkets, we continue to evaluate development opportunities
throughout California and specifically in our core markets. In addition, during the quarter ended
September 30, 2010 we commenced the redevelopment of one our buildings in the El Segundo submarket
of Los Angeles County which encompasses approximately 300,000 rentable square feet. We will be
upgrading and modernizing the building since it was previously occupied by the Boeing Company and
its predecessors for more than 25 years. The project has a total estimated investment of
approximately $50 million and is expected to be completed in the third quarter of 2012 (see
additional information under the caption -Liquidity and Capital Resources of the Operating
Partnership Liquidity Uses Redevelopment and Acquisition Opportunities).
Over the next two years, we plan to continue to evaluate redevelopment opportunities for other
certain properties, which have been occupied by long-term tenants and require significant capital
expenditures to upgrade and modernize the buildings. We also plan to continue to focus on enhancing
37
the entitlements for our existing development land pipeline, performing additional activities
to prepare for the time when development will again be economically attractive.
Incentive Compensation. Our Executive Compensation Committee determines compensation,
including equity and cash incentive programs, for our executive officers. The programs approved by
the Executive Compensation Committee have historically provided for equity and cash compensation to
be earned by our executive officers based on the attainment of certain performance measures,
including financial, operating, and development targets.
In the first quarter of 2010, our Executive Compensation Committee approved the 2010 Annual
Bonus Program for executive management that will allow executive management to receive bonus
compensation for achieving certain specified corporate performance measures for the year ending
December 31, 2010. As a result of the structure of this program and other performance-based and
market-based programs that the Executive Compensation Committee may adopt in the future, accrued
incentive compensation and compensation expense for such programs will be affected by our operating
and development performance, financial results, the performance of the trading price of our common
stock, and market conditions. Consequently, we cannot predict the amounts that will be recorded in
future periods related to these compensation programs.
Share-Based Compensation. As of September 30, 2010, there was $6.5 million of total
unrecognized compensation cost related to outstanding nonvested shares and nonvested restricted
stock units issued under share-based compensation arrangements. That cost is expected to be
recognized over a weighted-average period of 1.4 years. The $6.5 million of unrecognized
compensation cost does not reflect the potential future compensation cost for the 2010 Annual Bonus
Program or the leasing component of the 2007 Development Performance Plan (the DPP) since
share-based awards have not been granted under these programs as of
September 30, 2010. See Note 10
to our consolidated financial statements included with this report for additional information
regarding our share-based incentive compensation plan.
As of September 30, 2010, we were still in the performance period for the leasing component of
the DPP. The incentive award that may be earned under the leasing component of the DPP is based on
whether certain future leasing targets are achieved by the fourth quarter of 2010 for development
and redevelopment properties on which we commenced construction during 2007. If the performance
measures are not ultimately achieved, we will reverse the cumulative compensation expense recorded
to date for this program in the fourth quarter of 2010, which as of September 30, 2010 was $1.0
million.
Significant Tenants
The following table sets forth information about our fifteen largest tenants as of the date of
filing this quarterly report for properties owned at September 30, 2010 and based upon annualized
rental revenues as of September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Annualized Base |
|
|
Annualized Base |
|
|
|
|
|
Property |
|
Rental |
|
|
Rental |
|
|
Lease Expiration |
Tenant Name |
|
Segment |
|
Revenues(1) |
|
|
Revenues(1) |
|
|
Date |
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Intuit, Inc. |
|
Office |
|
$ |
15,126 |
|
|
|
5.6 |
% |
|
Various(2) |
Bridgepoint Education, Inc. |
|
Office |
|
|
14,886 |
|
|
|
5.5 |
% |
|
Various(3) |
Scripps Health |
|
Office |
|
|
12,562 |
|
|
|
4.6 |
% |
|
Various(4) |
CareFusion Corporation (10) |
|
Office |
|
|
10,087 |
|
|
|
3.7 |
% |
|
Various(5) |
DIRECTV, Inc. |
|
Office |
|
|
8,540 |
|
|
|
3.2 |
% |
|
July 2014 |
AMN Healthcare, Inc. |
|
Office |
|
|
8,341 |
|
|
|
3.1 |
% |
|
July 2018 |
Fish & Richardson P.C. |
|
Office |
|
|
6,071 |
|
|
|
2.2 |
% |
|
October 2018 |
Hewlett-Packard Company |
|
Office |
|
|
5,838 |
|
|
|
2.0 |
% |
|
Various(6) |
Wells Fargo (10) |
|
Office |
|
|
5,346 |
|
|
|
1.9 |
% |
|
Various(7) |
BP Biofuels North America LLC |
|
Office |
|
|
5,158 |
|
|
|
1.8 |
% |
|
Various(8) |
Epson America, Inc. |
|
Office |
|
|
4,915 |
|
|
|
1.4 |
% |
|
October 2019 |
Avnet, Inc. |
|
Office |
|
|
3,768 |
|
|
|
1.3 |
% |
|
February 2013 |
Scan Health Plan (10) |
|
Office |
|
|
3,637 |
|
|
|
1.0 |
% |
|
June 2015 |
Young & Rubicam, Inc. |
|
Office |
|
|
3,391 |
|
|
|
1.3 |
% |
|
April 2020 |
Northrop Grumman Systems Corporation |
|
Office |
|
|
3,268 |
|
|
|
1.2 |
% |
|
Various(9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
110,934 |
|
|
|
39.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
(1) |
|
Based upon annualized contractual base rental revenue, which is calculated on a
straight-line basis in accordance with GAAP, for leases for which rental revenue is being
recognized by us as of September 30, 2010. |
|
(2) |
|
The Intuit leases, which contribute $1.6 million and $13.5 million of annualized base
rental revenues, expire in August 2012 and August 2017, respectively. |
|
(3) |
|
The Bridgepoint Education leases, which contribute $0.8 million, $6.3 million, and $7.8
million of annualized base rental revenues, expire in February 2017, July 2018, and September
2018, respectively. |
|
(4) |
|
The Scripps Health leases, which contribute $5.2 million and $7.4 million of annualized
base rental revenues, expire in June 2021 and February 2027, respectively. |
|
(5) |
|
The CareFusion Corporation leases, which contribute $0.8 million and $9.3 million of
annualized base rental revenues, expire in February 2012 and August 2017, respectively. |
|
(6) |
|
The Hewlett-Packard Company leases, which contribute $4.3 million and $1.5 million of
annualized base rental revenues, expire in April 2012 and July 2015, respectively. |
|
(7) |
|
The Wells Fargo leases, which contribute $0.1 million, $1.4 million, $1.0 million, $0.7
million, $2.0 million, and $0.1 million of annualized rental revenues, expire in January 2011,
September 2013, November 2014, August 2015, September 2017, and February 2019, respectively. |
|
(8) |
|
During the third quarter of 2010, the leases associated with Verenium Corporation were
assigned to BP Biofuels North America LLC. These leases, which contribute $2.9 million and
$2.3 million of annualized base rental revenues, expire in November 2015 and March 2017,
respectively. |
|
(9) |
|
The Northrup Grumman Systems Corporation leases, which contribute $2.0 million and $1.3 million of
annualized base rental revenues, expire in February 2012 and April 2012, respectively. |
|
(10) |
|
We have entered into leases with various affiliates of the tenant name listed above. |
Stabilized Portfolio Information
The following table reconciles the changes in the rentable square feet in our stabilized
portfolio of operating properties from September 30, 2009 to September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Properties |
|
Industrial Properties |
|
Total |
|
|
Number of |
|
Rentable |
|
Number of |
|
Rentable |
|
Number of |
|
Rentable |
|
|
Buildings |
|
Square Feet |
|
Buildings |
|
Square Feet |
|
Buildings |
|
Square Feet |
Total as of September 30, 2009 |
|
|
92 |
|
|
|
8,657,659 |
|
|
|
41 |
|
|
|
3,654,463 |
|
|
|
133 |
|
|
|
12,312,122 |
|
Acquisitions |
|
|
7 |
|
|
|
1,383,571 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
1,383,571 |
|
Property added from the
development portfolio |
|
|
1 |
|
|
|
50,925 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
50,925 |
|
Property moved to the
redevelopment portfolio |
|
|
(1 |
) |
|
|
(286,151 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(286,151 |
) |
Remeasurement |
|
|
|
|
|
|
3,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as of September 30, 2010 |
|
|
99 |
|
|
|
9,809,506 |
|
|
|
41 |
|
|
|
3,654,463 |
|
|
|
140 |
|
|
|
13,463,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy Information
The following table sets forth certain information regarding our stabilized portfolio:
Stabilized Portfolio Occupancy by Segment Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Square Feet |
|
Occupancy at(1) |
Region |
|
Buildings |
|
Total |
|
9/30/2010 |
|
6/30/2010 |
|
12/31/2009 |
Office Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles and Ventura Counties |
|
|
29 |
|
|
|
3,065,626 |
|
|
|
89.6 |
% |
|
|
93.0 |
% |
|
|
88.8 |
% |
San Diego |
|
|
62 |
|
|
|
5,362,398 |
|
|
|
82.2 |
|
|
|
81.5 |
|
|
|
76.8 |
|
Orange County |
|
|
7 |
|
|
|
647,447 |
|
|
|
78.7 |
|
|
|
78.2 |
|
|
|
49.8 |
|
San Francisco |
|
|
1 |
|
|
|
734,035 |
|
|
|
89.4 |
|
|
|
89.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
9,809,506 |
|
|
|
84.8 |
|
|
|
85.7 |
|
|
|
80.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles County |
|
|
1 |
|
|
|
192,053 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Orange County |
|
|
40 |
|
|
|
3,462,410 |
|
|
|
90.0 |
|
|
|
82.4 |
|
|
|
87.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
3,654,463 |
|
|
|
90.6 |
|
|
|
83.3 |
|
|
|
88.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stabilized portfolio |
|
|
140 |
|
|
|
13,463,969 |
|
|
|
86.4 |
% |
|
|
85.1 |
% |
|
|
82.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Occupancy for Three Months Ended |
|
|
September 30, |
|
|
Stabilized Portfolio(1) |
|
Core Portfolio(2) |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Office Properties |
|
|
84.9 |
% |
|
|
82.9 |
% |
|
|
84.6 |
% |
|
|
82.5 |
% |
Industrial Properties |
|
|
86.8 |
% |
|
|
88.3 |
% |
|
|
86.8 |
% |
|
|
88.3 |
% |
Total portfolio |
|
|
85.4 |
% |
|
|
84.5 |
% |
|
|
85.3 |
% |
|
|
84.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Occupancy for Nine Months Ended |
|
|
September 30, |
|
|
Stabilized Portfolio(1) |
|
Core Portfolio(2) |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Office Properties |
|
|
83.5 |
% |
|
|
84.1 |
% |
|
|
83.6 |
% |
|
|
84.0 |
% |
Industrial Properties |
|
|
85.7 |
% |
|
|
90.4 |
% |
|
|
85.7 |
% |
|
|
91.3 |
% |
Total portfolio |
|
|
84.1 |
% |
|
|
86.0 |
% |
|
|
84.2 |
% |
|
|
86.2 |
% |
|
|
|
(1) |
|
Occupancy percentages reported are based on our stabilized portfolio for the period
presented. |
(2) |
|
Occupancy percentages reported are based on Office Properties and Industrial Properties
owned and stabilized as of January 1, 2009 and still owned and stabilized as of September 30,
2010. |
As of September 30, 2010, the Office Properties and Industrial Properties represented
approximately 90.5% and 9.5%, respectively, of our total annualized base rental revenue.
Current Regional Information
Real estate fundamentals may continue to be challenging in many of our regional submarkets.
However, since December 31, 2009, occupancy rates have increased across our portfolio, and we have
generally seen a modest decrease in vacancy rates across many of our regional submarkets as well as
a stabilization in rental rates and lease concession packages. See additional information
regarding rental rates under the captions -Leasing Activity and Rental Rates and -Scheduled
Lease Expirations.
Los Angeles and Ventura Counties. Our Los Angeles and Ventura Counties stabilized office
portfolio of 3.1 million rentable square feet was 89.6% occupied with approximately 319,500 vacant
rentable square feet as of September 30, 2010 compared to 88.8% occupied with approximately 376,400
vacant rentable square feet as of December 31, 2009.
As
of September 30, 2010, an aggregate of approximately 163,700 and
460,000 rentable square
feet are scheduled to expire in this region during the remainder of 2010 and 2011, respectively.
The aggregate rentable square feet scheduled to expire in this region during the remainder of 2010
and 2011 represents approximately 21.7% of the total occupied rentable square feet in this region
and 4.6% of our annualized base rental revenues for our total stabilized portfolio.
San Diego. Our San Diego stabilized office portfolio of 5.4 million rentable square feet
was 82.2% occupied with approximately 954,700 vacant rentable square feet as of September 30, 2010
compared to 76.8% occupied with approximately 1.2 million vacant rentable square feet as of
December 31, 2009. As of the date of this filing, we have leased
approximately 269,000 rentable
square feet in this region that was vacant at September 30, 2010. The new leases are scheduled to
commence at various dates during the remainder of 2010 and the first quarter of 2011. During the
nine months ended September 30, 2010, we acquired four San Diego office buildings encompassing
approximately 279,400 rentable square feet. These four buildings were 79.3% occupied as of
September 30, 2010 (see Note 2 to our consolidated financial statements included in this report for
additional information).
As
of September 30, 2010, leases representing an aggregate of
approximately 22,300 and 152,100
rentable square feet are scheduled to expire during the remainder of 2010 and 2011, respectively,
in this region. The aggregate rentable square feet scheduled to expire in this region during the
remainder of 2010 and 2011 represents approximately 4.0% of the total occupied rentable square feet
in this region and 1.9% of our annualized base rental revenues for our total stabilized portfolio.
Orange County. As of September 30, 2010, our Orange County stabilized industrial portfolio
of approximately 3.5 million rentable square feet
was 90.0% occupied with approximately 344,900 vacant rentable square feet compared to 87.6%
occupied with approximately 429,900 vacant rentable square feet as of December 31, 2009. The
increase in Orange County stabilized industrial portfolio occupancy is primarily attributable to a
lease encompassing approximately 153,300 rentable square feet that commenced, partially offset by a
lease encompassing approximately 74,300 rentable square feet that expired during the first quarter
of 2010. Approximately
40
144,000 rentable square feet of the 344,900 rentable square feet
that was vacant as of September 30, 2010 has been re-leased to a new tenant. The new lease is
expected to commence during the fourth quarter of 2010.
Our Orange County stabilized office portfolio of approximately 647,400 rentable square feet
was 78.7% occupied with approximately 137,700 vacant rentable square feet as of September 30, 2010
compared to 49.8% occupied with approximately 139,100 vacant rentable square feet as of December
31, 2009. During the second quarter of 2010, we acquired two Orange County office buildings
encompassing approximately 370,100 rentable square feet. These two buildings were 97.8% occupied as
of September 30, 2010 (see Note 2 to our consolidated financial statements included in this report
for additional information).
As
of September 30, 2010, leases representing an aggregate of
approximately 88,500 and 318,900
rentable square feet are scheduled to expire during the remainder of 2010 and 2011, respectively,
in this region. The aggregate rentable square feet scheduled to expire during the remainder of 2010
and 2011 represents approximately 11.2% of the total occupied rentable square feet in this region
and 1.6% of the annualized base rental revenues for our total
stabilized portfolio. Of the 407,400
rentable square feet scheduled to expire during the remainder of 2010 and 2011, approximately
377,300 rentable square feet is industrial space. Within the overall Orange County market, total
vacancy for industrial space is currently 10.0%. Over the last year, the Orange County industrial
market has experienced a significant decrease in rental rates. As of September 30, 2010, we believe
that the weighted average cash rental rates for our Orange County industrial portfolio are
approximately 15.0% above the current average market rental rates, although individual properties
may be leased either above, below, or at the current average market rental rates.
San Francisco. During the quarter ended June 30, 2010, we acquired one office building in
San Francisco encompassing approximately 734,000 rentable square feet. The building was 89.4%
occupied as of September 30, 2010 (see Note 2 to our consolidated financial statements included in
this report for additional information). As of September 30, 2010, no leases are scheduled to
expire during the remainder of 2010 and leases representing an
aggregate of approximately 22,600
rentable square feet are scheduled to expire during 2011 in this region. The aggregate rentable
square feet scheduled to expire in this region during the remainder of 2010 and 2011 represents
approximately 3.5% of the total occupied rentable square feet in this region and less than 0.3% of
our annualized base rental revenues for our total stabilized portfolio. Total vacancy in the San
Francisco South Financial District office market is currently 12.6%.
41
Results of Operations
Management internally evaluates the operating performance and financial results of our
portfolio based on Net Operating Income for the following segments of commercial real estate
property: Office Properties and Industrial Properties. We define Net Operating Income as
operating revenues (rental income, tenant reimbursements, and other property income) less operating
expenses (property expenses, real estate taxes, provision for bad debts, and ground leases). The
Net Operating Income segment information presented within this Managements Discussion and Analysis
of Financial Condition and Results of Operations consists of the same Net Operating Income segment
information disclosed in Note 14 to our consolidated financial statements.
Comparison of the Three Months Ended September 30, 2010 to the Three Months Ended September
30, 2009
The following table reconciles our Net Operating Income by segment to our net income for the
three months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Dollar |
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
($ in thousands) |
|
Net Operating Income, as defined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Properties |
|
$ |
51,006 |
|
|
$ |
43,437 |
|
|
$ |
7,569 |
|
|
|
17.4 |
% |
Industrial Properties |
|
|
5,860 |
|
|
|
5,729 |
|
|
|
131 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio |
|
$ |
56,866 |
|
|
$ |
49,166 |
|
|
$ |
7,700 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income, as defined for reportable segments |
|
$ |
56,866 |
|
|
$ |
49,166 |
|
|
$ |
7,700 |
|
|
|
15.7 |
|
Unallocated
(expenses) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
(7,273 |
) |
|
|
(7,662 |
) |
|
|
389 |
|
|
|
(5.1 |
) |
Acquisition-related expenses |
|
|
(354 |
) |
|
|
|
|
|
|
(354 |
) |
|
|
100.0 |
|
Depreciation and amortization |
|
|
(30,054 |
) |
|
|
(21,968 |
) |
|
|
(8,086 |
) |
|
|
36.8 |
|
Interest income and other net investment gains |
|
|
337 |
|
|
|
501 |
|
|
|
(164 |
) |
|
|
(32.7 |
) |
Interest expense |
|
|
(15,853 |
) |
|
|
(10,926 |
) |
|
|
(4,927 |
) |
|
|
45.1 |
|
Gain on early extinguishment of debt |
|
|
|
|
|
|
3,119 |
|
|
|
(3,119 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
3,669 |
|
|
|
12,230 |
|
|
|
(8,561 |
) |
|
|
(70.0 |
) |
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,669 |
|
|
$ |
12,230 |
|
|
$ |
(8,561 |
) |
|
|
(70.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental Operations
Office Properties
The following table compares the Net Operating Income for the Office Properties for the three
months ended September 30, 2010 and 2009.
42
Office Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Office Portfolio |
|
|
Core Office Portfolio(1) |
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
($ in thousands) |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
66,427 |
|
|
$ |
54,634 |
|
|
$ |
11,793 |
|
|
|
21.6 |
% |
|
$ |
54,829 |
|
|
$ |
53,278 |
|
|
$ |
1,551 |
|
|
|
2.9 |
% |
Tenant reimbursements |
|
|
5,369 |
|
|
|
5,926 |
|
|
|
(557 |
) |
|
|
(9.4 |
) |
|
|
4,969 |
|
|
|
5,353 |
|
|
|
(384 |
) |
|
|
(7.2 |
) |
Other property income |
|
|
378 |
|
|
|
205 |
|
|
|
173 |
|
|
|
84.4 |
|
|
|
192 |
|
|
|
205 |
|
|
|
(13 |
) |
|
|
(6.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
72,174 |
|
|
|
60,765 |
|
|
|
11,409 |
|
|
|
18.8 |
|
|
|
59,990 |
|
|
|
58,836 |
|
|
|
1,154 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and related
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses |
|
|
14,847 |
|
|
|
11,658 |
|
|
|
3,189 |
|
|
|
27.4 |
|
|
|
11,802 |
|
|
|
11,310 |
|
|
|
492 |
|
|
|
4.4 |
|
Real estate taxes |
|
|
6,830 |
|
|
|
5,197 |
|
|
|
1,633 |
|
|
|
31.4 |
|
|
|
5,311 |
|
|
|
4,933 |
|
|
|
378 |
|
|
|
7.7 |
|
Provision for bad debts |
|
|
(845 |
) |
|
|
75 |
|
|
|
(920 |
) |
|
|
(1,226.7 |
) |
|
|
(845 |
) |
|
|
75 |
|
|
|
(920 |
) |
|
|
(1,226.7 |
) |
Ground leases |
|
|
336 |
|
|
|
398 |
|
|
|
(62 |
) |
|
|
(15.6 |
) |
|
|
333 |
|
|
|
395 |
|
|
|
(62 |
) |
|
|
(15.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
21,168 |
|
|
|
17,328 |
|
|
|
3,840 |
|
|
|
22.2 |
|
|
|
16,601 |
|
|
|
16,713 |
|
|
|
(112 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income |
|
$ |
51,006 |
|
|
$ |
43,437 |
|
|
$ |
7,569 |
|
|
|
17.4 |
% |
|
$ |
43,389 |
|
|
$ |
42,123 |
|
|
$ |
1,266 |
|
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Office Properties owned and stabilized as of January 1, 2009 and still owned and
stabilized as of September 30, 2010. |
Rental Income
Rental Income from Office Properties increased $11.8 million, or 21.6%, for the three months
ended September 30, 2010 compared to the three months ended September 30, 2009 primarily due to:
|
|
|
An increase of $11.1 million generated by seven office buildings we acquired during 2010 (the
Office Acquisition Properties); |
|
|
|
|
An increase of $1.6 million primarily due to an increase in average occupancy for the Office
Properties owned and stabilized as of January 1, 2009 and still owned and stabilized as of
September 30, 2010 (the Core Office Portfolio). Average occupancy increased 2.1%, from 82.5% for
the three months ended September 30, 2009, to 84.6% for the three months ended September 30, 2010;
and |
|
|
|
|
An offsetting decrease of $0.9 million generated by one office building that was moved from the
stabilized portfolio to the redevelopment portfolio during the third quarter of 2010 (the Office
Redevelopment Property). |
Tenant Reimbursements
Tenant reimbursements from Office Properties decreased $0.6 million, or 9.4%, for the three
months ended September 30, 2010 compared to the three months ended September 30, 2009 primarily due
to:
|
|
|
A decrease of $0.4 million generated by the Core Office Portfolio primarily due
to the renewal of several leases, which resulted in the reset of the base year expense
level; |
|
|
|
|
A decrease of $0.4 million generated by the Office Redevelopment Property; and |
|
|
|
|
An offsetting increase of $0.2 million generated by Office Acquisition Properties. |
Property Expenses
Property expenses from Office Properties increased $3.2 million, or 27.4%, for the three
months ended September 30, 2010 compared to the three months ended September 30, 2009 primarily due
to:
|
|
|
An increase of $2.8 million generated by the Office Acquisition Properties; and |
|
|
|
|
An increase of $0.5 million generated by the Core Office Portfolio primarily due
to: |
|
|
|
An increase of $0.8 million attributable to an increase in certain
recurring operating costs such as utilities, property management expenses,
janitorial and other service-related costs partially due to increase in average
occupancy; |
|
|
|
|
An increase of $0.4 million attributable to an increase in
nonreimbursable legal fees and consulting costs; and |
|
|
|
|
An offsetting $0.6 million included in the 2009 results related to
nonrecurring repairs. |
43
Real Estate Taxes
Real estate taxes from Office Properties increased $1.6 million, or 31.4%, for the three
months ended September 30, 2010 compared to the three months ended September 30, 2009 primarily due
to an increase of $1.2 million in real estate taxes attributable to the Office Acquisition
Properties.
Provision for Bad Debts
The provision for bad debts from Office Properties for the three months ended September 30,
2010 included a reversal of $0.6 million of a previously recorded provision for bad debts. During
the third quarter of 2010, we settled outstanding litigation related to certain premises at one of
our properties that had been abandoned by its former occupants (see
Note 13 to our consolidated financial statements included in this
report for additional information).
Net Operating Income
Net Operating Income from Office Properties increased $7.6 million, or 17.4%, for the three
months ended September 30, 2010 compared to the three months ended September 30, 2009 primarily due
to:
|
|
|
An increase of $7.4 million attributable to Office Acquisition Properties; and |
|
|
|
|
An increase of $1.3 million attributable to the Core Office Portfolio primarily
due to: |
|
|
|
A reversal of a previously recorded provision for bad debts; |
|
|
|
|
An increase in average occupancy year over year; |
|
|
|
|
An offsetting increase in certain recurring operating costs; and |
|
|
|
An offsetting decrease of $1.0 million generated by the Office Redevelopment
Property. |
44
Industrial Properties
The following table compares the Net Operating Income for the Industrial Properties for the
three months ended September 30, 2010 and 2009.
Industrial Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Industrial Portfolio |
|
|
Core Industrial Portfolio(1) |
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
($ in thousands) |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
6,181 |
|
|
$ |
6,663 |
|
|
$ |
(482 |
) |
|
|
(7.2 |
)% |
|
$ |
6,136 |
|
|
$ |
6,618 |
|
|
$ |
(482 |
) |
|
|
(7.3 |
)% |
Tenant reimbursements |
|
|
842 |
|
|
|
917 |
|
|
|
(75 |
) |
|
|
(8.2 |
) |
|
|
842 |
|
|
|
917 |
|
|
|
(75 |
) |
|
|
(8.2 |
) |
Other property income |
|
|
607 |
|
|
|
149 |
|
|
|
458 |
|
|
|
307.4 |
|
|
|
607 |
|
|
|
149 |
|
|
|
458 |
|
|
|
307.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,630 |
|
|
|
7,729 |
|
|
|
(99 |
) |
|
|
(1.3 |
) |
|
|
7,585 |
|
|
|
7,684 |
|
|
|
(99 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and related
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses |
|
|
998 |
|
|
|
1,041 |
|
|
|
(43 |
) |
|
|
(4.1 |
) |
|
|
877 |
|
|
|
908 |
|
|
|
(31 |
) |
|
|
(3.4 |
) |
Real estate taxes |
|
|
784 |
|
|
|
791 |
|
|
|
(7 |
) |
|
|
(0.9 |
) |
|
|
673 |
|
|
|
681 |
|
|
|
(8 |
) |
|
|
(1.2 |
) |
Provision for bad debts |
|
|
(12 |
) |
|
|
168 |
|
|
|
(180 |
) |
|
|
(107.1 |
) |
|
|
(12 |
) |
|
|
168 |
|
|
|
(180 |
) |
|
|
(107.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,770 |
|
|
|
2,000 |
|
|
|
(230 |
) |
|
|
(11.5 |
) |
|
|
1,538 |
|
|
|
1,757 |
|
|
|
(219 |
) |
|
|
(12.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income |
|
$ |
5,860 |
|
|
$ |
5,729 |
|
|
$ |
131 |
|
|
|
2.3 |
% |
|
$ |
6,047 |
|
|
$ |
5,927 |
|
|
$ |
120 |
|
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Industrial Properties owned and stabilized as of January 1, 2009 which are still owned
and stabilized as of September 30, 2010. |
Rental Income
Rental income from Industrial Properties decreased $0.5 million, or 7.2%, for the three months
ended September 30, 2010 compared to the three months ended September 30, 2009 primarily due a
decrease in GAAP rents of approximately 20% for leases that commenced
at the Core Industrial Portfolio Properties in the three months ended
September 30, 2010 (see additional information under the caption -Factors That May
Influence Results of Operations).
Other Property Income
Other property income from Industrial Properties increased $0.5 million for the three months
ended September 30, 2010 compared to the three months ended September 30, 2009. During the third
quarter of 2010 we recognized $0.6 million of a $1.0 million surrender fee that is being amortized
over the remaining lease term for one tenant that will be vacating one of our Industrial Properties
in Orange County during the fourth quarter of 2010.
Net Operating Income
Net Operating Income from Industrial Properties increased $0.1 million, or 2.3%, for the three
months ended September 30, 2010 compared to the three months ended September 30, 2009 primarily due
to the amortization of a surrender fee from a tenant that will be vacating one of our Industrial
Properties in Orange County during the fourth quarter of 2010.
Other
Expenses and Income
General and Administrative Expense
General and administrative expenses decreased $0.4 million, or 5.1%, for the three months
ended September 30, 2010 compared to the three months ended September 30, 2009 primarily due to a
decrease in incentive compensation expense.
45
Acquisition-related Expenses
During the three months ended
September 30, 2010, we incurred third-party acquisition costs in connection
with acquisitions completed in 2010 and other potential acquisitions. See additional information
under the caption -Factors That May Influence Future Results of Operations-Acquisitions. In
accordance with accounting provisions, all acquisition costs related to operating properties are
expensed as incurred. We anticipate that we could incur additional third-party acquisition costs
throughout 2010 as we pursue other potential acquisition opportunities.
Depreciation and Amortization
Depreciation and amortization increased by $8.1 million, or 36.8% for the three months ended
September 30, 2010 compared to the three months ended September 30, 2009 primarily due to:
|
|
|
Approximately $3.0 million related to acquisitions; and |
|
|
|
|
Approximately $3.2 million related to the change in the estimated useful life
of an industrial property that we are in the process of repositioning (see Note 1 to our
consolidated financial statements included in this report for additional
information). |
Interest Expense
The following table sets forth our gross interest expense, including debt discounts and loan
cost amortization, net of capitalized interest for the three months ended September 30, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
($ in thousands) |
|
Gross interest expense |
|
$ |
18,543 |
|
|
$ |
13,540 |
|
|
$ |
5,003 |
|
|
|
36.9 |
% |
Capitalized interest |
|
|
(2,690 |
) |
|
|
(2,614 |
) |
|
|
(76 |
) |
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
15,853 |
|
|
$ |
10,926 |
|
|
$ |
4,927 |
|
|
|
45.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross interest expense, before the effect of capitalized interest, increased $5.0 million, or
36.9%, for the three months ended September 30, 2010 compared to the three months ended September
30, 2009 due to an increase in both our average debt balance and our weighted-average effective interest rate from approximately 5.5%
during the three months ended September 30, 2009 to approximately 6.4% during the three months
ended September 30, 2010.
Comparison of the Nine Months Ended September 30, 2010 to the Nine Months Ended September 30, 2009
The following table reconciles our Net Operating Income by segment to our net income for the
nine months ended September 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Dollar |
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
($ in thousands) |
|
Net Operating Income, as defined |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Properties |
|
$ |
139,564 |
|
|
$ |
135,014 |
|
|
$ |
4,550 |
|
|
|
3.4 |
% |
Industrial Properties |
|
|
17,130 |
|
|
|
19,548 |
|
|
|
(2,418 |
) |
|
|
(12.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio |
|
$ |
156,694 |
|
|
$ |
154,562 |
|
|
$ |
2,132 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income, as defined for reportable segments |
|
$ |
156,694 |
|
|
$ |
154,562 |
|
|
$ |
2,132 |
|
|
|
1.4 |
|
Unallocated
(expenses) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
(21,096 |
) |
|
|
(22,023 |
) |
|
|
927 |
|
|
|
(4.2 |
) |
Acquisition-related expenses |
|
|
(1,624 |
) |
|
|
|
|
|
|
(1,624 |
) |
|
|
100.0 |
|
Depreciation and amortization |
|
|
(74,714 |
) |
|
|
(66,608 |
) |
|
|
(8,106 |
) |
|
|
12.2 |
|
Interest income and other net investment gains |
|
|
703 |
|
|
|
1,074 |
|
|
|
(371 |
) |
|
|
(34.5 |
) |
Interest expense |
|
|
(40,897 |
) |
|
|
(35,041 |
) |
|
|
(5,856 |
) |
|
|
16.7 |
|
(Loss) gain on early extinguishment of debt |
|
|
(4,564 |
) |
|
|
3,119 |
|
|
|
(7,683 |
) |
|
|
(246.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
14,502 |
|
|
|
35,083 |
|
|
|
(20,581 |
) |
|
|
(58.7 |
) |
Income from discontinued operations |
|
|
|
|
|
|
2,261 |
|
|
|
(2,261 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,502 |
|
|
$ |
37,344 |
|
|
$ |
(22,842 |
) |
|
|
(61.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Rental Operations
Office Properties
The following table compares the Net Operating Income for the Office Properties for the nine
months ended September 30, 2010 and 2009.
Office Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Office Portfolio |
|
|
Core Office Portfolio(1) |
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
($ in thousands) |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
179,344 |
|
|
$ |
166,130 |
|
|
$ |
13,214 |
|
|
|
8.0 |
% |
|
$ |
161,700 |
|
|
$ |
162,065 |
|
|
$ |
(365 |
) |
|
|
(0.2 |
)% |
Tenant reimbursements |
|
|
15,845 |
|
|
|
18,938 |
|
|
|
(3,093 |
) |
|
|
(16.3 |
) |
|
|
14,498 |
|
|
|
17,117 |
|
|
|
(2,619 |
) |
|
|
(15.3 |
) |
Other property income |
|
|
1,303 |
|
|
|
1,946 |
|
|
|
(643 |
) |
|
|
(33.0 |
) |
|
|
916 |
|
|
|
1,946 |
|
|
|
(1,030 |
) |
|
|
(52.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
196,492 |
|
|
|
187,014 |
|
|
|
9,478 |
|
|
|
5.1 |
|
|
|
177,114 |
|
|
|
181,128 |
|
|
|
(4,014 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and related
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses |
|
|
39,308 |
|
|
|
34,857 |
|
|
|
4,451 |
|
|
|
12.8 |
|
|
|
34,637 |
|
|
|
33,747 |
|
|
|
890 |
|
|
|
2.6 |
|
Real estate taxes |
|
|
17,779 |
|
|
|
15,914 |
|
|
|
1,865 |
|
|
|
11.7 |
|
|
|
15,311 |
|
|
|
15,274 |
|
|
|
37 |
|
|
|
0.2 |
|
Provision for bad debts |
|
|
(807 |
) |
|
|
2 |
|
|
|
(809 |
) |
|
|
(40,450.0 |
) |
|
|
(807 |
) |
|
|
2 |
|
|
|
(809 |
) |
|
|
(40,450.0 |
) |
Ground leases |
|
|
648 |
|
|
|
1,227 |
|
|
|
(579 |
) |
|
|
(47.2 |
) |
|
|
638 |
|
|
|
1,217 |
|
|
|
(579 |
) |
|
|
(47.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
56,928 |
|
|
|
52,000 |
|
|
|
4,928 |
|
|
|
9.5 |
|
|
|
49,779 |
|
|
|
50,240 |
|
|
|
(461 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income |
|
$ |
139,564 |
|
|
$ |
135,014 |
|
|
$ |
4,550 |
|
|
|
3.4 |
% |
|
$ |
127,335 |
|
|
$ |
130,888 |
|
|
$ |
(3,553 |
) |
|
|
(2.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Office Properties owned and stabilized as of January 1, 2009 and still owned and
stabilized as of September 30, 2010. |
Rental Income
Rental income from Office Properties increased $13.2 million, or 8.0%, for the nine months
ended September 30, 2010 compared to the nine months ended
September 30, 2009 primarily due to:
|
|
|
An increase of $14.5 million generated by the Office Acquisition Properties; and |
|
|
|
|
An offsetting decrease of $0.9 million attributable to the Office Redevelopment
Property. |
Tenant Reimbursements
Tenant reimbursements from Office Properties decreased $3.1 million, or 16.3%, for the nine
months ended September 30, 2010 compared to the nine months ended September 30, 2009 primarily due
to a decrease of $2.6 million generated by the Core Office Portfolio. During the nine months ended
September 30, 2010, there was a decrease attributable to the renewal of several leases which
resulted in the reset of the base year expense level for these leases.
Other Property Income
Other property income from Office Properties decreased $0.6 million for the nine months ended
September 30, 2010 compared to the nine months ended
September 30, 2009.
Included
in the results for 2009 is a $1.3 million
net lease termination fee related to a settlement with a former
tenant. Included in the results for 2010 is approximately $0.7
million in lease termination and restoration fees from three tenants
that have vacated three of our Office Properties in Los Angeles
County.
47
Property Expenses
Property expenses from Office Properties increased $4.5 million, or 12.8%, for the nine months
ended September 30, 2010 compared to the nine months ended September 30, 2009 primarily due to:
|
|
|
An increase of $3.7 million generated by the Office Acquisition Properties; and |
|
|
|
|
An increase of $0.9 million generated by the Core Office Portfolio primarily due
to: |
|
|
|
An increase of $1.0 million attributable to an increase in
certain recurring operating costs such as property management expenses, repairs
and maintenance, janitorial and other service-related costs; |
|
|
|
|
An increase of $1.3 million due to nonreimbursable legal
fees and consulting costs; and |
|
|
|
|
An offsetting decrease of $0.9 million related to
nonrecurring repairs in 2009. |
Real Estate Taxes
Real estate taxes from Office Properties increased $1.9 million, or 11.7%, for the nine months
ended September 30, 2010 compared to the nine months ended September 30, 2009 primarily due to the
Office Acquisition Properties.
Provision for Bad Debts
The provision for bad debts from Office Properties for the nine months ended September 30,
2010 included a reversal of $0.6 million of a previously recorded provision for bad debts. During
the third quarter of 2010, we settled outstanding litigation related to certain premises at one of
our properties that had been abandoned by its former occupants (see
Note 13 to our consolidated financial statements included in this
report for additional information).
Ground Leases
Ground lease expense from Office Properties decreased $0.6 million, or 47.2%, for the nine
months ended September 30, 2010 compared to the nine months ended September 30, 2009 primarily due
to a ground rent expense adjustment for our Kilroy Airport Center, Long Beach project. During the
first quarter of 2010, we were successful in negotiating a lower rental rate under the terms of the
ground lease retroactive to January 1, 2006.
Net Operating Income
Net Operating Income from Office Properties increased $4.6 million, or 3.4%, for the nine
months ended September 30, 2010 compared to the nine months ended September 30, 2009 primarily due
to:
|
|
|
An increase of $9.6 million attributable to the Office Acquisition Properties; |
|
|
|
|
An offsetting decrease of $3.6 million attributable to the Core Office Portfolio
primarily due to: |
|
|
|
A decrease of $2.6 million due to a decrease in tenant reimbursements
primarily attributable to the renewal of several leases which resulted in the
reset of the base year expense level for these leases; and |
|
|
|
|
A decrease of $1.3 million net lease termination fee included in the
results for 2009 related to a settlement with a former tenant; and |
|
|
|
An offsetting decrease of $1.1 million attributable to the Office Redevelopment
Property. |
48
Industrial Properties
The following table compares the Net Operating Income for the Industrial Properties for the
nine months ended September 30, 2010 and 2009.
Industrial Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Industrial Portfolio |
|
|
Core Industrial Portfolio(1) |
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
($ in thousands) |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
18,958 |
|
|
$ |
20,829 |
|
|
$ |
(1,871 |
) |
|
|
(9.0 |
)% |
|
$ |
18,823 |
|
|
$ |
20,656 |
|
|
$ |
(1,833 |
) |
|
|
(8.9 |
)% |
Tenant reimbursements |
|
|
2,567 |
|
|
|
2,960 |
|
|
|
(393 |
) |
|
|
(13.3 |
) |
|
|
2,567 |
|
|
|
2,960 |
|
|
|
(393 |
) |
|
|
(13.3 |
) |
Other property income |
|
|
1,022 |
|
|
|
1,252 |
|
|
|
(230 |
) |
|
|
(18.4 |
) |
|
|
1,022 |
|
|
|
1,252 |
|
|
|
(230 |
) |
|
|
(18.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
22,547 |
|
|
|
25,041 |
|
|
|
(2,494 |
) |
|
|
(10.0 |
) |
|
|
22,412 |
|
|
|
24,868 |
|
|
|
(2,456 |
) |
|
|
(9.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and related
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses |
|
|
3,100 |
|
|
|
2,754 |
|
|
|
346 |
|
|
|
12.6 |
|
|
|
2,756 |
|
|
|
2,377 |
|
|
|
379 |
|
|
|
15.9 |
|
Real estate taxes |
|
|
2,353 |
|
|
|
2,346 |
|
|
|
7 |
|
|
|
0.3 |
|
|
|
2,023 |
|
|
|
2,009 |
|
|
|
14 |
|
|
|
0.7 |
|
Provision for bad debts |
|
|
(36 |
) |
|
|
393 |
|
|
|
(429 |
) |
|
|
(109.2 |
) |
|
|
(36 |
) |
|
|
393 |
|
|
|
(429 |
) |
|
|
(109.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,417 |
|
|
|
5,493 |
|
|
|
(76 |
) |
|
|
(1.4 |
) |
|
|
4,743 |
|
|
|
4,779 |
|
|
|
(36 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income |
|
$ |
17,130 |
|
|
$ |
19,548 |
|
|
$ |
(2,418 |
) |
|
|
(12.4 |
)% |
|
$ |
17,669 |
|
|
$ |
20,089 |
|
|
$ |
(2,420 |
) |
|
|
(12.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Industrial Properties owned and stabilized as of January 1, 2009 which are still owned
and stabilized as of September 30, 2010. |
Rental Income
Rental income from Industrial Properties decreased $1.9 million, or 9.0%, for the nine months
ended September 30, 2010 compared to the nine months ended
September 30, 2009 primarily due to:
|
|
|
A 5.6% decrease in average occupancy for the Core Industrial Portfolio from
91.3% for the nine months ended September 30, 2009 to 85.7% for the nine months ended
September 30, 2010; and |
|
|
|
|
A decrease in GAAP rents of approximately 20% for leases that commenced
during the nine months ended September 30, 2010 (please see additional information
under the caption -Factors That May Influence Results of Operations). |
Tenant Reimbursements
Tenant reimbursements from Industrial Properties decreased $0.4 million, or 13.3%, for the
nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 due to a
decrease in the Core Industrial Portfolios average occupancy, as discussed above under the caption
-Rental Income.
Other Property Income
Other property income from Industrial Properties decreased $0.2 million, or 18.4%, for the
nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.
Included in the results for 2009 is a $1.1 million restoration fee from a tenant that vacated one
of our Industrial Properties in Orange County. Included in the results for 2010 is the recognition
of $0.8 million of a $1.0 million surrender fee that is being amortized over the remaining term of
a lease with a tenant that will be vacating one of our Industrial Properties in Orange County
during the fourth quarter of 2010.
49
Property Expenses
Property expenses from Industrial Properties increased $0.3 million, or 12.6%, for the nine
months ended September 30, 2010 compared to the nine months ended September 30, 2009 primarily due
to an increase in nonreimbursable legal fees mainly due to tenant defaults that occurred during
2009.
Provision for Bad Debts
Provision for bad debts from Industrial Properties decreased $0.4 million, or 109.2%, for the
nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 due to
changes in our estimates of collectability of receivables from certain watchlist tenants.
Net Operating Income
Net Operating Income from Industrial Properties decreased $2.4 million, or 12.4%, for the nine
months ended September 30, 2010 compared to the nine months ended September 30, 2009 primarily due
to a decrease in average occupancy year over year at the Core Industrial Portfolio and a decrease of approximately 20%
for leases that commenced during the nine months ended September 30, 2010.
Other Expenses and Income
General and Administrative Expense
General and administrative expenses decreased $0.9 million, or 4.2%, for the nine months ended
September 30, 2010 compared to the nine months ended September 30, 2009 primarily due to a decrease
in incentive compensation expense.
Acquisition-related Expenses
During
the nine months ended September 30, 2010, we incurred
third-party acquisition costs in connection
with acquisitions completed in 2010 and other potential acquisitions. See additional information
under the caption -Factors That May Influence Future Results of Operations-Acquisitions. We
anticipate that we could incur additional third-party acquisition costs throughout 2010 as we
pursue other potential acquisition opportunities.
Depreciation and Amortization
Depreciation and amortization increased by $8.1 million, or 12.2% for the nine months ended
September 30, 2010 compared to the nine months ended September 30, 2009 primarily due to:
|
|
|
Approximately $3.7 million related to acquisitions; and |
|
|
|
|
Approximately $4.3 million related to the change in the estimated useful
life of an industrial property that we are in the process of repositioning (see Note
1 to our consolidated financial statements included in this report for additional
information). |
Interest Expense
The following table sets forth our gross interest expense, including debt discounts and loan
cost amortization, net of capitalized interest for the nine months ended September 30, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percentage |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
Change |
|
|
|
($ in thousands) |
|
Gross interest expense |
|
$ |
48,980 |
|
|
$ |
41,992 |
|
|
$ |
6,988 |
|
|
|
16.6 |
% |
Capitalized interest |
|
|
(8,083 |
) |
|
|
(6,951 |
) |
|
|
(1,132 |
) |
|
|
16.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
40,897 |
|
|
$ |
35,041 |
|
|
$ |
5,856 |
|
|
|
16.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross interest expense, before the effect of capitalized interest, increased $7.0 million, or
16.6%, for the nine months ended September 30, 2010 compared to the nine months ended September 30,
2009 primarily due to a change in our debt composition which increased our weighted-average
effective interest rate from approximately 5.1% during the nine months ended
September 30, 2009 to approximately 6.2% during the nine months ended September
30, 2010.
50
Capitalized interest increased $1.1 million, or 16.3%, for the nine months ended September 30,
2010 compared to the nine months ended September 30, 2009 primarily due to an increase in our
weighted-average effective interest rate, which caused a corresponding increase in the
capitalization rate applied to our development and redevelopment asset balances qualifying for
interest capitalization. During both the nine months ended September 30, 2010 and 2009, we did not
capitalize interest on five of our seven development pipeline properties with an aggregate cost
basis of approximately $82 million as of September 30, 2010. In addition, in September 2010, we
ceased interest capitalization on another one of our development pipeline properties with an
aggregate cost basis of approximately $77.3 million as of September 30, 2010. We have suspended
substantially all development activities related to these projects as a result of economic
conditions in our submarkets and we determined these projects did not qualify for interest
capitalization under GAAP.
Interest Income and Other Net Investment Gains
Total interest income and other net investment gains income is lower by $0.4 million, or
34.5%, for the nine months ended September 30, 2010 compared to the nine months ended September 30,
2009 due to:
|
|
|
A decrease of $0.2 million in gains in the fair market value of marketable securities held in
connection with our deferred compensation plan during the nine months ended September
30, 2010 as compared to the nine months ended September 30, 2009: and |
|
|
|
|
A decrease of $0.2 million in interest income during the nine months ended September 30, 2010 as
compared to the nine months ended September 30, 2009 due to the repayment of the note
receivable in July 2010 (see Note 4 to our consolidated financial statements included
in this report for additional information). |
(Loss) Gain on Early Extinguishment of Debt
During the nine months ended September 30, 2010, we recorded a loss on early extinguishment of
debt of approximately $4.6 million due to the repurchase of 3.25% Exchangeable Notes with an
aggregate stated principal amount of $150.0 million (see Note 6 to our consolidated financial
statements included in this report for additional information). During the nine months ended
September 30, 2009, we recorded a gain on early extinguishment of debt of approximately $3.1
million due to the repurchase of 3.25% Exchangeable Notes with an aggregate stated principal amount
of $40.0 million.
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. For further discussion of the liquidity and capital
resources of the Company on a consolidated basis see the section entitled Liquidity and Capital
Resources of the Operating Partnership below.
The Companys business is operated primarily through the Operating Partnership. The Company
issues public equity from time to time, but does not otherwise generate any capital itself or
conduct any business itself, other than incurring certain expenses in operating as a public company
which are fully reimbursed by the Operating Partnership. The Company itself does not hold any
indebtedness, and its only material asset is its ownership of partnership interests of the
Operating Partnership. The Companys principal funding requirement is the payment of dividends on
its common and preferred shares. The Companys principal source of funding for its dividend
payments is distributions it receives from the Operating Partnership.
As of September 30, 2010, the Company owned a 96.8%, general partnership interest in the
Operating Partnership excluding preferred units. The remaining 3.2% common limited partnership
interest as of September 30, 2010 was owned by non-affiliate investors and certain of our executive
officers and directors. Through its ownership as the sole general partner of the Operating
Partnership, the Company has the full, exclusive and complete responsibility for the Operating
Partnerships day-to-day management and control. The Company causes the Operating Partnership to
distribute all, or such portion as the Company may in its discretion determine, of its available
cash in the manner provided in the Operating Partnerships partnership agreement. Distributions
from the Operating Partnership are the Companys primary source of capital.
51
The Company is a well-known seasoned issuer with an effective shelf registration statement
which was amended in September 2010 that allows the Company to register unspecified various classes
of equity securities and the Operating Partnership to register unspecified and various classes of
debt securities. As circumstances warrant, the Company may issue equity from time to time on an
opportunistic basis, dependent upon market conditions and available pricing. When the Company
receives proceeds from preferred or common equity issuances, it is required by the Operating
Partnerships partnership agreement to contribute the proceeds from its equity issuances to the
Operating Partnership in exchange for preferred or common partnership units of the Operating
Partnership. The Operating Partnership may use the proceeds to repay debt, including borrowings
under its line of credit, develop new or existing properties, to make acquisitions of properties,
portfolios of properties, or for general corporate purposes.
The liquidity of the Company is dependent on the Operating Partnerships ability to make
sufficient distributions to the Company. The Company also guarantees some of the Operating
Partnerships debt, as discussed further in Note 5 to the consolidated financial statements. If
the Operating Partnership fails to fulfill certain of its debt requirements, which trigger Company
guarantee obligations, then the Company will be required to fulfill its cash payment commitments
under such guarantees. However, the Companys only significant asset is its investment in the
Operating Partnership.
The Company believes the Operating Partnerships sources of working capital, specifically its
cash flow from operations, and borrowings available under its credit facility, 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 preferred and common shareholders. Cash flows from operating activities generated
by the Operating Partnership for the nine months ended September 30, 2010 were sufficient to cover
the Companys payment of cash dividends to its shareholders. However, there can be no assurance
that the Operating Partnerships sources of capital will continue to be available at all or in
amounts sufficient to meet its needs, including its ability to make distribution payments to the
Company. The unavailability of capital could adversely affect the Operating Partnerships ability
to pay its distributions to the Company, which would in turn, adversely affect the Companys
ability to pay cash dividends to its shareholders.
For the Company to maintain its qualification as a real estate investment trust, it must pay
dividends to its shareholders aggregating annually at least 90% of its REIT taxable income. While
historically the Company has satisfied this distribution requirement by making cash distributions
to its shareholders, it may choose to satisfy this requirement by making distributions of cash or
other property, including, in limited circumstances, the Companys own shares. As a result of this
distribution requirement, the Operating Partnership cannot rely on retained earnings to fund its
on-going operations to the same extent that other companies whose parent companies are not real
estate investment trusts can. The Company may need to continue to raise capital in the equity
markets to fund the Operating Partnerships working capital needs, as well as potential
developments at new or existing properties, acquisitions or investments in existing or newly
created joint ventures.
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. Because the Company consolidates the Operating Partnership for financial reporting
purposes, 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.
Dividends
On September 14, 2010, the Companys Board of Directors declared a $0.35 cash dividend per
common share payable on October 15, 2010 to each common shareholder of record on September 30,
2010, and caused a $0.35 per Operating Partnership unit cash
distribution to be paid to the the
common limited partnership interests not owned by the Company.
On September 14, 2010, the board of directors also declared a dividend of $0.4875 per share on
the Companys 7.80% Series E Cumulative Redeemable Preferred Stock and a dividend of $0.46875 per
share on the companys 7.50% Series F Cumulative Redeemable Preferred Stock for the period
commencing on and including August 15, 2010 and ending on and including November 14, 2010.
Debt Covenants
One of the covenants contained within
the New Credit Facility prohibits the Company from paying dividends in excess of 95% of funds from operations (FFO).
52
Capitalization
As of September 30, 2010, our total debt as a percentage of total market capitalization was
37.1% and our total debt and liquidation value of our preferred equity as a percentage of total
market capitalization was 43.5%, which was calculated based on the closing price per
share of the Companys common stock of $33.14 on September 30, 2010 as shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
Shares/Units |
|
|
Amount or |
|
|
% of Total |
|
|
|
at September 30, |
|
|
$ Value |
|
|
Market |
|
|
|
2010 |
|
|
Equivalent |
|
|
Capitalization |
|
|
|
($ in thousands) |
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
New Credit Facility |
|
|
|
|
|
$ |
205,000 |
|
|
|
6.5 |
% |
3.25% Exchangeable Notes(1) |
|
|
|
|
|
|
148,000 |
|
|
|
4.7 |
|
4.25% Exchangeable Notes(2) |
|
|
|
|
|
|
172,500 |
|
|
|
5.4 |
|
Unsecured Senior Notes due 2014 |
|
|
|
|
|
|
83,000 |
|
|
|
2.6 |
|
Unsecured Senior Notes due 2020(3) |
|
|
|
|
|
|
250,000 |
|
|
|
7.9 |
|
Secured debt(4) |
|
|
|
|
|
|
315,921 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
$ |
1,174,421 |
|
|
|
37.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity and Noncontrolling Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
7.450% Series A Cumulative Redeemable Preferred Units(5) |
|
|
1,500,000 |
|
|
$ |
75,000 |
|
|
|
2.4 |
|
7.800% Series E Cumulative Redeemable Preferred Stock(6) |
|
|
1,610,000 |
|
|
|
40,250 |
|
|
|
1.3 |
|
7.500% Series F Cumulative Redeemable Preferred Stock(6) |
|
|
3,450,000 |
|
|
|
86,250 |
|
|
|
2.7 |
|
Common Units Outstanding(7) |
|
|
1,723,131 |
|
|
|
57,105 |
|
|
|
1.8 |
|
Common Shares Outstanding(7) |
|
|
52,349,670 |
|
|
|
1,734,868 |
|
|
|
54.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Total equity and noncontrolling interests |
|
|
|
|
|
|
1,993,473 |
|
|
|
62.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Market Capitalization |
|
|
|
|
|
$ |
3,167,894 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents gross aggregate principal amount before the effect of the unamortized
discount of approximately $4.7 million as of September 30, 2010. |
(2) |
|
Represents gross aggregate principal amount before the effect of the unamortized discount
of approximately $17.5 million as of September 30, 2010. |
(3) |
|
Represents gross aggregate principal amount before the effect of the unamortized discount
of approximately $2.0 million as of September 30, 2010. |
(4) |
|
Includes the $52.0 million gross aggregate principal amount of the loan due in April 2012
before the effect of the unamortized discount of approximately $0.7 million as of September
30, 2010. |
(5) |
|
Value based on $50.00 per share liquidation preference. |
(6) |
|
Value based on $25.00 per share liquidation preference. |
(7) |
|
Value based on closing price per share of the Companys common stock of $33.14 as of September 30,
2010. |
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:
53
Liquidity Sources
|
|
|
Net cash flow from operations; |
|
|
|
|
Borrowings under the New Credit Facility; |
|
|
|
|
Proceeds from additional secured or unsecured debt financings; |
|
|
|
|
Proceeds from public or private issuance of debt or equity securities; and |
|
|
|
|
Proceeds from the disposition of nonstrategic assets. |
Liquidity Uses
|
|
|
Property or undeveloped land acquisitions; |
|
|
|
|
Operating and corporate expenses; |
|
|
|
|
Capital expenditures, tenant improvement and leasing costs; |
|
|
|
|
Development and redevelopment costs; |
|
|
|
|
Debt service and principal payments, including debt maturities; |
|
|
|
|
Distributions to common and preferred stockholders and unitholders; and |
|
|
|
|
Purchasing outstanding debt. |
General Strategy
Our general strategy is to maintain a conservative balance sheet with a top 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 potential liquidity
sources listed above. We believe our conservative leverage and staggered debt maturities provides
us with financial flexibility and enhances 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.
2010 Financing Activities
During the first nine months of 2010, we completed a variety of capital raising activities
which significantly extended our debt maturities and enabled us to fund five property acquisitions.
This financing and acquisition activity increased our consolidated total assets by approximately
20% as compared to December 31, 2009, without increasing our total debt as a percentage of total
market capitalization. The following activities occurred during the period:
|
|
|
In September 2010, the Operating Partnership became a registered public entity
allowing us additional flexibility to access the public debt markets. |
|
|
|
|
In August 2010, the Operating Partnership entered into a $500.0 million New Credit
Facility with a term of three years plus a one year extension option. We used borrowings
under the New Credit Facility to repay, and then terminate, our existing $550.0 million
unsecured line of credit (the Credit Facility). |
|
|
|
|
In August 2010, the Operating Partnership used borrowings under our Credit Facility
to repay a portion of our unsecured senior notes, with a principal balance of $61.0
million that was maturing. |
|
|
|
|
In June 2010, the Operating Partnership completed a tender offer for the repurchase
of $150 million in aggregate stated principal value of the 3.25% Exchangeable Notes (see
Note 6 to our consolidated financial statements included in this report for additional
information). |
|
|
|
|
In June 2010, the Operating Partnership assumed secured debt with a principal
balance of $52.0 million in conjunction with the acquisition of Mission City Corporate
Center in San Diego, CA (see Notes 1, 2, and 6 to our consolidated financial statements
included in this report for additional information). |
|
|
|
|
In May 2010, the Operating Partnership issued $250.0 million
in aggregate stated principal amount of 6.625% unsecured senior
notes due 2020 (see
Note 6 to our consolidated financial statements included in this report for additional
information). |
|
|
|
|
In April 2010, the Company completed an underwritten public offering of 9,200,000
shares of our common stock. The net offering proceeds, after deducting underwriting
discounts and commissions and offering expenses, of approximately $299.8 million were
contributed to the Operating Partnership in exchange for common units issued
to the Company. (see Notes 8 and 9 to our consolidated financial statements included in
this report for additional information). |
54
|
|
|
In April 2010, the Operating Partnership was assigned initial investment grade
credit ratings by two major rating agencies, which we believe enhances our access to the
capital markets by allowing the Operating Partnership to raise long-term unsecured debt
financing in the bond market. |
|
|
|
|
In March 2010, the Operating Partnership used borrowings under our Credit Facility
to repay a secured line of credit with an outstanding principal balance of $33.5 million
that was scheduled to mature in April 2010. |
|
|
|
|
In January 2010, the Operating Partnership used the proceeds from the issuance of a
$71.0 million mortgage loan to repay an outstanding mortgage loan with a principal
balance of $63.2 million that was scheduled to mature in April 2010. The mortgage loan is
secured by five properties, bears interest at an annual rate of 6.51%, requires monthly
interest and principal payments based on a 30-year amortization period, and is scheduled
to mature on February 1, 2017. |
Liquidity Sources
Exchangeable
Notes, Unsecured Senior Notes, and Secured Debt
The aggregate
principal amount of exchangeable notes, unsecured senior notes,
and secured debt of the Operating
Partnership outstanding as of September 30, 2010 was as follows:
|
|
|
|
|
|
|
Aggregate
Principal
Amount |
|
|
|
($ in thousands) |
|
3.25% Exchangeable Notes(1) |
|
$ |
148,000 |
|
4.25% Exchangeable Notes(2) |
|
|
172,500 |
|
Unsecured Senior Notes due 2014 |
|
|
83,000 |
|
Unsecured Senior Notes due 2020(3) |
|
|
250,000 |
|
Secured Debt(4) |
|
|
315,921 |
|
|
|
|
|
Total
Exchangeable Notes, Unsecured Senior Notes, and Secured Debt |
|
$ |
969,421 |
|
|
|
|
|
|
|
|
(1) |
|
Represents gross aggregate principal amount before the effect of the unamortized
discount of approximately $4.7 million as of September 30, 2010. |
|
(2) |
|
Represents gross aggregate principal amount before the effect of the unamortized discount
of approximately $17.5 million as of September 30, 2010. |
|
(3) |
|
Represents gross aggregate principal amount before the effect of the unamortized discount
of approximately $2.0 million as of September 30, 2010. |
|
(4) |
|
Represents gross aggregate principal amount before the effect of the unamortized discount of approximately $0.7 million as of September 30, 2010. |
Debt Composition
The composition of the Operating Partnerships aggregate debt balances between secured and
unsecured and fixed-rate and variable-rate debt as of September 30, 2010 and December 31, 2009 were
as follows:
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Debt |
|
Weighted Average Interest Rate |
|
|
September 30, |
|
December 31, |
|
September 30, |
|
December 31, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Secured vs. unsecured: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured(1) |
|
|
73.1 |
% |
|
|
70.7 |
% |
|
|
4.7 |
% |
|
|
3.8 |
% |
Secured |
|
|
26.9 |
|
|
|
29.3 |
|
|
|
6.0 |
|
|
|
5.7 |
|
Variable-rate vs. fixed-rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-rate |
|
|
17.5 |
|
|
|
13.0 |
|
|
|
2.9 |
|
|
|
1.1 |
|
Fixed-rate(1) |
|
|
82.5 |
|
|
|
87.0 |
|
|
|
5.5 |
|
|
|
4.8 |
|
Total debt interest rate(1) |
|
|
|
|
|
|
|
|
|
|
5.0 |
|
|
|
4.3 |
|
Total debt interest rate including loan costs(1) |
|
|
|
|
|
|
|
|
|
|
5.6 |
|
|
|
4.8 |
|
GAAP effective interest rate(2) |
|
|
|
|
|
|
|
|
|
|
6.3 |
% |
|
|
5.9 |
% |
|
|
|
(1) |
|
Excludes the impact of the noncash debt discounts on our Exchangeable Notes (see Note 6
to our consolidated financial statements included in this report for additional information on
the debt discount). |
(2) |
|
Represents the GAAP effective interest rate for total debt, which includes the impact of
the amortization of the noncash debt discounts on our debt instruments. |
Credit Facility
The following table summarizes the balance and significant terms of the New Credit Facility
and the Credit Facility as of September 30, 2010 and December 31, 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Outstanding borrowings |
|
$ |
205,000 |
|
|
$ |
97,000 |
|
Remaining borrowing capacity |
|
|
295,000 |
|
|
|
453,000 |
|
|
|
|
|
|
|
|
Total borrowing capacity(1) |
|
$ |
500,000 |
|
|
$ |
550,000 |
|
|
|
|
|
|
|
|
Maturity date(2)(3) |
|
August 2013 |
|
|
April 2010 |
|
Interest rate(4) |
|
|
2.98 |
% |
|
|
1.11 |
% |
Fees(5) |
|
|
0.575 |
% |
|
|
0.20 |
% |
|
|
|
(1) |
|
We may elect to borrow, subject to bank approval, up to an additional $200 million under
an accordion feature under the terms of the New Credit Facility. |
(2) |
|
Under the terms of the New Credit Facility, we may exercise an option to extend the
maturity date by one year. |
(3) |
|
In April 2010, we exercised an option to extend the maturity date of the Credit Facility
by one year. |
(4) |
|
As of September 30, 2010, the New Credit Facility bore interest at an annual rate of LIBOR
plus 2.675%. As of December 31, 2009, the Credit Facility bore interest at an annual rate of
LIBOR plus 0.85% to 1.35% depending upon our leverage ratio at the time of borrowing. |
(5) |
|
As of September 30, 2010, the facility fee for the New Credit Facility was at an annual
rate of 0.575%. As of December 31, 2009, the fee for unused funds for the Credit Facility was
at an annual rate of 0.15% to 0.20%, depending on the balance of our daily average undrawn
balance. In addition, we also incurred debt origination and legal costs of approximately
$5 million, which will be amortized as additional interest expense through the contractual maturity date. |
As discussed above under the caption -2010 Financing Activities, the Operating
Partnership entered into the New Credit Facility in August 2010 and used borrowings under the New
Credit Facility to repay, and then terminate, the Credit Facility. The New Credit Facility includes
a $200.0 million accordion option and has a term of three years plus a one year extension option.
The New Credit Facility bears interest at an annual rate of LIBOR plus 2.675%.
Liquidity Uses
Contractual Obligations
The following table provides information with respect to the Operating Partnerships
contractual obligations as of September 30, 2010. The financing activities completed during the
nine months ended September 30, 2010, including the New Credit Facility, issuance of $250 million
of unsecured senior notes, and the repurchase of $150 million of aggregate principal value of the
3.25% Exchangeable Notes, significantly extended our debt maturities as compared to December 31,
2009. The table (i) indicates the maturities and scheduled principal repayments of our secured
debt, Exchangeable Notes, unsecured senior notes, and New Credit Facility; (ii) indicates the
scheduled interest payments of the Operating Partnerships fixed-rate and
56
variable-rate debt as of
September 30, 2010; (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 redevelopment commitments as of September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
|
|
|
(Remainder |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
|
|
|
of 2010) |
|
|
(2011-2012) |
|
|
(2013-2014) |
|
|
(After 2014) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Principal payments-secured debt(1) |
|
$ |
1,590 |
|
|
$ |
231,330 |
|
|
$ |
6,727 |
|
|
$ |
76,274 |
|
|
$ |
315,921 |
|
Principal payments-Exchangeable Notes(2) |
|
|
|
|
|
|
148,000 |
|
|
|
172,500 |
|
|
|
|
|
|
|
320,500 |
|
Principal payments-unsecured senior notes(3) |
|
|
|
|
|
|
|
|
|
|
83,000 |
|
|
|
250,000 |
|
|
|
333,000 |
|
Principal payments- New Credit Facility(4) |
|
|
|
|
|
|
|
|
|
|
205,000 |
|
|
|
|
|
|
|
205,000 |
|
Interest payments-fixed-rate debt(5) |
|
|
13,235 |
|
|
|
94,047 |
|
|
|
63,091 |
|
|
|
103,767 |
|
|
|
274,140 |
|
Interest payments-variable-rate debt(4)(6) |
|
|
1,794 |
|
|
|
14,350 |
|
|
|
4,783 |
|
|
|
|
|
|
|
20,927 |
|
Ground lease obligations(7) |
|
|
352 |
|
|
|
2,425 |
|
|
|
2,136 |
|
|
|
69,292 |
|
|
|
74,205 |
|
Lease and contractual commitments(8) |
|
|
26,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,142 |
|
Redevelopment Commitments(9) |
|
|
5,340 |
|
|
|
12,660 |
|
|
|
|
|
|
|
|
|
|
|
18,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
48,453 |
|
|
$ |
502,812 |
|
|
$ |
537,237 |
|
|
$ |
499,333 |
|
|
$ |
1,587,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the $52.0 million gross aggregate principal amount of the loan due in April
2012 before the effect of the unamortized discount of approximately $0.7 million as of
September 30, 2010. |
(2) |
|
Represents gross aggregate principal amount before the effect of the unamortized discount
of approximately $22.2 million as of September 30, 2010. |
(3) |
|
Represents unsecured senior notes net of a $2.0 million unamortized discount as of
September 30, 2010. |
(4) |
|
In August 2010, we entered into the New Credit Facility as noted above under the caption
-2010 Financing Activities. |
(5) |
|
As of September 30, 2010, 82.5% 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, interest payment dates, and scheduled maturity dates. |
(6) |
|
As of September 30, 2010, 17.5% of our debt bore interest at variable rates. The variable
interest rate payments are based on LIBOR plus a spread of 2.675% as of September 30, 2010.
The information in the table above reflects our projected interest rate obligations for these
variable-rate payments based on outstanding principal balances as of September 30, 2010, the
scheduled interest payment dates, and the contractual maturity dates. |
(7) |
|
We have noncancelable ground lease obligations for the Kilroy Airport Center in Long
Beach, California with a lease period for Phases I, II, and III expiring in July 2084. |
(8) |
|
Amounts represent commitments under signed leases and contracts for operating properties,
excluding tenant-funded tenant improvements. The timing of these expenditures may fluctuate. |
(9) |
|
Amounts represent contractual commitments for redevelopment
properties at September 30, 2010. Costs include the remaining total estimated investment,
excluding capitalized interest, and development overhead.
The timing of these expenditures may fluctuate based
on the ultimate progress of construction. |
Redevelopment and Acquisition Opportunities
During the first nine months of 2010, we spent approximately $373.6 million to acquire five
properties encompassing seven buildings. We funded these acquisitions principally with the net
proceeds from the issuance of the 6.625% unsecured senior notes due 2020, the net proceeds from the
Companys public offering of common stock, and borrowings under the unsecured line of credit (see
Notes 2, 6 and 8 to our consolidated financial statements for more information). We continue to
evaluate strategic opportunities to acquire additional properties that provide attractive yields,
significant potential for growth in cash flow from operations, present growth opportunities in
strategic markets, or demonstrate the potential for improved performance through strategic
management. We expect that we could finance any potential material acquisitions with borrowings
under our New Credit Facility or the public issuance of new debt or equity securities.
As of September 30, 2010, we had one redevelopment project under construction. This project
has a total estimated investment of approximately $50 million of which we have incurred
approximately $12 million as of September 30, 2010. Of the remaining $38 million yet to be
incurred, we are currently contractually obligated to pay
approximately $18 million over the next two years
as shown in the table above.
In addition, we expect we may incur up to approximately $20 million
in leasing related costs, depending on leasing activity.
Ultimate timing of these expenditures may fluctuate given the
ultimate progress and status of the redevelopment project. We also estimate that we could spend
up to to an additional $20 million on other future redevelopment and development pipeline projects
during 2010 and 2011, depending on market conditions.
57
Factors That May Influence Future Sources of Capital and Liquidity
We continue to evaluate sources of financing for our business activities, including borrowings
under the New Credit Facility, issuance of public and private unsecured debt, fixed-rate secured
mortgage financing, and offerings of the Companys common stock. However, the Operating
Partnerships ability to obtain new financing or refinance existing borrowings on favorable terms
could be impacted by various factors including continuing economic conditions, significant tenant
defaults, a further decline in the demand for office or industrial properties, a further decrease
in market rental rates or market values of real estate assets in our submarkets, and the amount of
future borrowings. These events could result in the following:
|
|
|
decreases in our cash flows from operations, which could create further
dependence on our New 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 Partnerships 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 Partnerships 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
Partnerships 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 New Credit Facility, unsecured senior notes, and certain other secured debt arrangements
contain covenants and restrictions requiring us to meet certain financial ratios and reporting
requirements. The more restrictive financial covenants and their covenant levels include:
|
|
|
|
|
|
|
|
|
|
|
Actual Performance at |
|
|
Covenant Level |
|
September 30, 2010 |
Unsecured Line of Credit (as defined per Credit Agreement): |
|
|
|
|
|
|
Total debt to total asset value |
|
less than 60% |
|
|
31 |
% |
Fixed charge coverage ratio |
|
greater than 1.5x |
|
|
2.7 |
x |
Unsecured debt ratio |
|
greater than 1.67x |
|
|
2.95 |
x |
Unencumbered asset pool debt service coverage |
|
greater than 2.0x |
|
|
5.2 |
x |
Unencumbered debt yield |
|
greater than 12% |
|
|
19 |
% |
|
|
|
|
|
|
|
Unsecured Senior Notes due 2020 (as defined per Indenture): |
|
|
|
|
|
|
Total debt/total asset value |
|
less than 60% |
|
|
38 |
% |
Interest coverage |
|
greater than 1.5x |
|
|
3.7 |
x |
Secured debt/total asset value |
|
less than 40% |
|
|
10 |
% |
Unencumbered asset pool value to unsecured debt |
|
greater than 150% |
|
|
302 |
% |
The Operating Partnership was in compliance with all our debt covenants as of September
30, 2010. Our current expectation is that the Operating Partnership will continue to meet
requirements of its debt covenants in both the short and long term. However, in the event of a
continued economic slow down and 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.
58
Historical Cash Flow Summary
Our historical cash flow activity for the nine months ended September 30, 2010 as compared to
the nine months ended September 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
Dollar |
|
Percentage |
|
|
2010 |
|
2009 |
|
Change |
|
Change |
|
|
($ in thousands) |
Net cash provided by operating activities |
|
$ |
94,928 |
|
|
$ |
98,000 |
|
|
$ |
(3,072 |
) |
|
|
(3.1 |
)% |
Net cash used in investing activities |
|
|
(434,655 |
) |
|
|
(37,399 |
) |
|
|
(397,256 |
) |
|
|
(1,062.2 |
)% |
Net cash provided by (used in) financing activities |
|
|
338,157 |
|
|
|
(60,889 |
) |
|
|
399,046 |
|
|
|
(655.4 |
)% |
Operating Activities
Our cash flows from operations is primarily dependent on the occupancy level of our portfolio,
the rental rates achieved on our leases, the collectability of rent and recoveries from our tenants
and the level of operating expenses, and other general and administrative costs. Our cash flows
from operations in the future will also be impacted by the operating results of any acquired and
potential acquisition properties. Our net cash provided by operating activities decreased by $3.1
million, or 3.1%, for the nine months ended September 30, 2010 compared to the nine months ended
September 30, 2009 primarily due to an increase in expenditures
for severance costs and acquisition related costs.
Investing Activities
Our net cash used in investing activities is generally used to fund property acquisitions,
recurring and nonrecurring capital expenditures for our operating properties, and development and
redevelopment projects. Our net cash used in investing activities increased $397.3 million for the
nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. This net
increase was primarily comprised of the following:
|
|
|
Approximately $373.6 million in cash paid to acquire five operating properties
during 2010 (see Note 2 to our consolidated financial statements included in this report
for additional information); |
|
|
|
|
An increase of $31.3 million in expenditures for our operating properties in 2010
primarily for tenant improvement projects and leasing commissions related to increased
leasing activity at the end of 2009 and in 2010 ; and |
|
|
|
|
An offsetting decrease of $10.7 million in cash received for the note receivable
balance paid in full in the third quarter of 2010 (see Note 4 to our consolidated financial statements
included in this report for additional information). |
Financing Activities
Our net cash provided by or used in
financing activities is generally impacted by our debt and equity capital
raising activities net of dividends and distributions paid to common and preferred stockholders and
unit holders. Net cash provided by financing activities
fluctuated by $399.0 million for the nine months ended September 30, 2010 compared to the nine
months ended September 30, 2009. The net change in cash provided by financing activities was primarily due to the
following:
|
|
|
An increase in capital raising activities, including the Operating Partnerships
issuance of secured and unsecured debt, and the Companys issuance of 9.2 million shares
of common stock, primarily to fund our 2010 property acquisitions (see Notes 2, 6, and 8 to our
consolidated financial statements included in this report for additional information); |
|
|
|
|
An offsetting decrease related to the repurchase of $150.0 million in aggregate
stated principal of 3.25% Exchangeable Notes during 2010 (see Note 6 to our consolidated financial
statements included in this report for additional information); and |
|
|
|
|
The impact of the 40% decrease in our cash dividend rate
enacted by our Board of Directors in the second quarter of 2009. This resulted in a net $5.8
million decrease in our dividends and distributions paid to common stockholders and
common unitholders during the nine months ended September 30, 2010 as compared to the
nine months ended September 30, 2009. |
59
Off-Balance Sheet Arrangements
As of September 30, 2010 and as of the date this report was filed, we did not have any
off-balance sheet transactions, arrangements, or obligations, including contingent obligations.
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, and gains and losses from sales of depreciable
operating property, 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.
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 since
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 of operations.
The following table presents our FFO for the three and nine months ended September 30,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
Net (loss) income available to common stockholders |
|
$ |
(126 |
) |
|
$ |
8,111 |
|
|
$ |
2,977 |
|
|
$ |
24,803 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to noncontrolling
common units of the Operating Partnership |
|
|
(4 |
) |
|
|
320 |
|
|
|
128 |
|
|
|
1,144 |
|
Depreciation and amortization of real estate assets |
|
|
29,820 |
|
|
|
21,759 |
|
|
|
74,049 |
|
|
|
66,018 |
|
Net gain on dispositions of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds From Operations(1) |
|
$ |
29,690 |
|
|
$ |
30,190 |
|
|
$ |
77,154 |
|
|
$ |
89,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reported amounts are attributable to our common stockholders and common unitholders of
the Operating Partnership. |
60
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk we face is interest rate risk. We 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 September 30, 2010
and December 31, 2009, we did not have any interest-rate sensitive derivative assets or
liabilities.
Information about our changes in interest rate risk exposures from December 31, 2009 to
September 30, 2010 is incorporated herein by reference from Item 2: Managements Discussion and
Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources.
Market Risk
As of September 30, 2010, approximately 17.5% of our total outstanding debt of $1.2 billion
was subject to variable interest rates. The remaining 82.5% 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.
With the exception of the Exchangeable Notes, we generally determine the fair value of our
fixed-rate debt by performing discounted cash flow analyses using an appropriate market 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 standing, the maturity of the debt,
whether the debt is secured or unsecured, and the loan-to-value ratio of the debt. We determine the
fair value of the liability component of our Exchangeable Notes by performing discounted cash flow
analysis using an appropriate market interest rate for similar nonconvertible conventional debt
instruments. See Note 11 to our consolidated financial statements included in this report for
additional information on the fair value of our financial instruments as of September 30, 2010 and
December 31, 2009.
As of September 30, 2010, the total outstanding balance of our variable-rate debt included
borrowings on our New Credit Facility of $205 million and was indexed to LIBOR plus a spread of
2.675% (weighted average interest rate was 2.98%). As of December 31, 2009, the total outstanding
balance of our variable-rate debt included borrowings of $97 million on our Credit Facility, which
was indexed to LIBOR plus a spread of 0.85%, and borrowings of $33.5 million on our secured line of
credit, which was indexed to LIBOR plus a spread of 0.75% (weighted average interest rate was
1.1%). Assuming no changes in the outstanding balance of our existing variable-rate debt as of
September 30, 2010, a 100 basis point increase in the LIBOR rate would increase our projected
annual interest expense, before the effect of capitalization, by approximately $2.1 million.
Comparatively, if interest rates were 100 basis points higher as of December 31, 2009, our
projected annual interest expense, before the effect of capitalization, would have been $1.3
million higher.
The total carrying value of our fixed-rate debt, including our Exchangeable Notes, was
approximately $944.4 million and $841.5 million as of September 30, 2010 and December 31, 2009,
respectively. The total estimated fair value of our fixed-rate debt
was approximately $994.8
million and $842.1 million as of September 30, 2010 and December 31, 2009, 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 $37.1 million, or 3.7%, as of September
30, 2010. 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 $20.2 million, or 2.4%, as of December
31, 2009.
The above sensitivity analyses do not consider interrelationships between different
market movements, which could result in additional changes in the fair value of our debt and
Exchangeable Notes beyond the amounts calculated.
ITEM 4. 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 Securities Exchange Act of 1934, as amended) that are designed to ensure that
information required to be disclosed in the
Companys reports under the Securities Exchange Act of 1934, as amended, is processed,
recorded, summarized, and reported
61
within the time periods specified in the SECs 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 September 30, 2010, the end of the period covered by this report.
Based on the foregoing, the Companys Chief Executive Officer and Chief Financial Officer
concluded, as of that time, that disclosure controls and procedures were effective at the
reasonable assurance level.
There have been no significant changes that occurred during the quarter covered by this report
in the Companys internal control over financial reporting identified in connection with the
evaluation referenced above that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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 Securities Exchange Act of 1934, as amended) that are
designed to ensure that information required to be disclosed in the Operating Partnerships reports
under the Securities Exchange Act of 1934, as amended, is processed, recorded, summarized, and
reported within the time periods specified in the SECs 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 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 the effectiveness of the design and operation of the disclosure
controls and procedures as of September 30, 2010, the end of the period covered by this report.
Based on the foregoing, the Operating Partnerships Chief Executive Officer and Chief Financial
Officer concluded, as of that time, that disclosure controls and procedures were effective at the
reasonable assurance level.
There have been no significant changes that occurred during the quarter covered by this report
in the Operating Partnerships internal control over financial reporting identified in connection
with the evaluation referenced above that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
62
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not defendants in, and our properties are not subject to, any legal proceedings that,
if determined adversely to us, would have a material adverse effect upon our financial condition,
results of operations, or cash flows.
ITEM 1A. RISK FACTORS-There have been no material changes to the risk factors included in the
Companys annual report on Form 10-K for the fiscal year ended December 31, 2009 or the Operating
Partnerships General Form for Registration of Securities on Form 10 filed with the SEC on August
18, 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS-None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES-None
ITEM 4. (REMOVED and RESERVED)
ITEM 5. OTHER INFORMATION-None
63
ITEM 6. EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
3.(i)1
|
|
Kilroy Realty Corporation Articles of Restatement(1) |
|
|
|
3.(i)2
|
|
Certificate of Limited Partnership of Kilroy Realty, L.P.(2) |
|
|
|
3.(i)3
|
|
Amendment to the Certificate of Limited Partnership of Kilroy Realty, L.P.(2) |
|
|
|
3.(ii)1
|
|
Second Amended and Restated Bylaws of Kilroy Realty Corporation(3) |
|
|
|
3.(ii)2
|
|
Amendment No. 1 to Second Amended and Restated Bylaws(4) |
|
|
|
4.1
|
|
Form of Indenture (Single Series)(5) |
|
|
|
4.2
|
|
Form of Indenture (Multiple Series)(5) |
|
|
|
10.1
|
|
Revolving Credit Agreement dated August 10, 2010 (6) |
|
|
|
10.2
|
|
Guaranty of Payment dated August 10, 2010(6) |
|
|
|
31.1*
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty Corporation |
|
|
|
31.2*
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty Corporation |
|
|
|
31.3*
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty, L.P. |
|
|
|
31.4*
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty, L.P. |
|
|
|
32.1*
|
|
Section 1350 Certification of Chief Executive Officer of Kilroy Realty Corporation |
|
|
|
32.2*
|
|
Section 1350 Certification of Chief Financial Officer of Kilroy Realty Corporation |
|
|
|
32.3*
|
|
Section 1350 Certification of Chief Executive Officer of Kilroy Realty, L.P. |
|
|
|
32.4*
|
|
Section 1350 Certification of Chief Financial Officer of Kilroy Realty, L.P. |
|
|
|
101
|
|
The following Kilroy Realty Corporation financial information for the quarter ended September
30, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated
Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii)
Consolidated Statements of Changes in Equity (unaudited) and (iv) Consolidated Statements of
Cash Flows (unaudited) and (v) Notes to the Consolidated Financial Statements (unaudited),
tagged as blocks of text.(7) |
|
|
|
* |
|
Filed herewith |
|
(1) |
|
Previously filed by Kilroy Realty Corporation as an exhibit on Form 10-K for the year
ended December 31, 2009. |
|
(2) |
|
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. |
|
(3) |
|
Previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with
the Securities and Exchange Commission on December 12, 2008. |
|
(4) |
|
Previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the
Securities and Exchange Commission on May 27, 2009. |
|
(5) |
|
Previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit to
Post-Effective Amendment No. 1 to the Registration Statement on Form S-3 as filed with the
Securities and Exchange Commission on September 15, 2010. |
|
(6) |
|
Previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the
Securities and Exchange Commission on August 11, 2010. |
|
(7) |
|
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. |
64
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on
October 26, 2010.
|
|
|
|
|
|
|
|
|
|
|
KILROY REALTY CORPORATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ John B. Kilroy, Jr. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John B. Kilroy, Jr. |
|
|
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Tyler H. Rose |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tyler H. Rose |
|
|
|
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
|
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Heidi R. Roth |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heidi R. Roth |
|
|
|
|
|
|
|
|
Senior Vice President and Controller |
|
|
|
|
|
|
|
|
(Principal Accounting Officer) |
|
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on
October 26, 2010.
|
|
|
|
|
|
|
|
|
|
|
KILROY REALTY, L.P. |
|
|
|
|
|
|
|
|
|
|
|
|
|
BY: |
|
KILROY REALTY CORPORATION |
|
|
|
|
|
|
Its general partner |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ John B. Kilroy, Jr. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John B. Kilroy, Jr. |
|
|
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Tyler H. Rose |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tyler H. Rose |
|
|
|
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
|
|
|
|
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Heidi R. Roth |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heidi R. Roth |
|
|
|
|
|
|
|
|
Senior Vice President and Controller |
|
|
|
|
|
|
|
|
(Principal Accounting Officer) |
|
|
65