Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
OR |
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o | 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 Corporation | Maryland | 95-4598246 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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Kilroy Realty, L.P. | Delaware | 95-4612685 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064 |
(Address of principal executive offices) (Zip Code) |
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(310) 481-8400 |
(Registrant's telephone number, including area code) |
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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 þ No o
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Kilroy Realty Corporation | | | |
Large accelerated filer þ | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Emerging growth company o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o |
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Kilroy Realty, L.P. | | | |
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Emerging growth company o If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Kilroy Realty Corporation Yes o No þ
Kilroy Realty, L.P. Yes o No þ
As of October 20, 2017, 98,382,256 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2017 of Kilroy Realty Corporation and Kilroy Realty, L.P. Unless stated otherwise or the context otherwise requires, references to “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” mean Kilroy Realty Corporation, a Maryland corporation, and its controlled and consolidated subsidiaries, and references to “Kilroy Realty, L.P.” or the “Operating Partnership” mean Kilroy Realty, L.P., a Delaware limited partnership and its controlled and consolidated subsidiaries.
The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of September 30, 2017, the Company owned an approximate 97.9% common general partnership interest in the Operating Partnership. The remaining approximate 2.1% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of the Company. As the sole general partner of the Operating Partnership, the Company exercises exclusive and complete discretion over the Operating Partnership’s day-to-day management and control and can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings, and cause changes in its line of business, capital structure and distribution policies.
There are a few differences between the Company and the Operating Partnership that are reflected in the disclosures in this Form 10-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 REIT, the only material asset of which is the partnership interests it holds in the Operating Partnership. As a result, the Company generally does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing certain debt of the Operating Partnership. The Company itself is not directly obligated under any indebtedness, but guarantees some of the debt of the Operating Partnership. The Operating Partnership owns substantially all of the assets of the Company either directly or through its subsidiaries, conducts the operations of the Company’s business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Company, which the Company generally contributes to the Operating Partnership in exchange for units of partnership interest, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness or through the issuance of units of partnership interest.
Noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The common limited partnership interests in the Operating Partnership are accounted for as partners’ capital in the Operating Partnership’s financial statements and, to the extent not held by the Company, as noncontrolling interests in the Company’s financial statements. The Operating Partnership’s financial statements reflect the noncontrolling interest in Kilroy Realty Finance Partnership, L.P., a Delaware limited partnership (the “Finance Partnership”). This noncontrolling interest represents the Company’s 1% indirect general partnership interest in the Finance Partnership, which is directly held by Kilroy Realty Finance, Inc., a wholly owned subsidiary of the Company. The differences between noncontrolling interests, stockholders’ equity and partners’ capital result from the differences in the equity issued by the Company and the Operating Partnership, and in the Operating Partnership’s noncontrolling interest in the Finance Partnership.
We believe combining the 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 investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management; |
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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; |
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• | the following notes to the consolidated financial statements: |
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◦ | Note 7, Stockholders’ Equity of the Company; |
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◦ | Note 8, Partners’ Capital of the Operating Partnership; |
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◦ | Note 12, Net Income Available to Common Stockholders Per Share of the Company; |
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◦ | Note 13, Net Income Available to Common Unitholders Per Unit of the Operating Partnership; |
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◦ | Note 14, Supplemental Cash Flow Information of the Company; and |
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◦ | Note 15, Supplemental Cash Flow Information of the Operating Partnership; |
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• | “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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◦ | —Liquidity and Capital Resources of the Company;” and |
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◦ | —Liquidity and Capital Resources of the Operating Partnership.” |
This report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for the Company and the Operating Partnership to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017
TABLE OF CONTENTS
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| | PART I – FINANCIAL INFORMATION | |
Item 1. | | | |
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Item 1. | | | |
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Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
| | PART II – OTHER INFORMATION | |
Item 1. | | | |
Item 1A. | | | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
Item 5. | | | |
Item 6. | | | |
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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY CORPORATION
KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
ASSETS | (unaudited) | | |
REAL ESTATE ASSETS: | | | |
Land and improvements | $ | 1,076,172 |
| | $ | 1,108,971 |
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Buildings and improvements | 4,871,667 |
| | 4,938,250 |
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Undeveloped land and construction in progress | 1,292,017 |
| | 1,013,533 |
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Total real estate assets held for investment | 7,239,856 |
| | 7,060,754 |
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Accumulated depreciation and amortization | (1,216,358 | ) | | (1,139,853 | ) |
Total real estate assets held for investment, net | 6,023,498 |
| | 5,920,901 |
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REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET | — |
| | 9,417 |
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CASH AND CASH EQUIVALENTS | 64,954 |
| | 193,418 |
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RESTRICTED CASH (Note 2) | 179,276 |
| | 56,711 |
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MARKETABLE SECURITIES (Note 11) | 18,851 |
| | 14,773 |
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CURRENT RECEIVABLES, NET (Note 3) | 18,626 |
| | 13,460 |
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DEFERRED RENT RECEIVABLES, NET (Note 3) | 238,959 |
| | 218,977 |
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DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET | 185,420 |
| | 208,368 |
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PREPAID EXPENSES AND OTHER ASSETS, NET (Note 4) | 108,715 |
| | 70,608 |
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TOTAL ASSETS | $ | 6,838,299 |
| | $ | 6,706,633 |
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LIABILITIES AND EQUITY | | | |
LIABILITIES: | | | |
Secured debt, net (Notes 5 and 11) | $ | 465,828 |
| | $ | 472,772 |
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Unsecured debt, net (Notes 5 and 11) | 1,909,381 |
| | 1,847,351 |
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Unsecured line of credit (Notes 5 and 11) | 60,000 |
| | — |
|
Accounts payable, accrued expenses and other liabilities | 271,405 |
| | 202,391 |
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Accrued dividends and distributions (Note 16) | 43,324 |
| | 222,306 |
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Deferred revenue and acquisition-related intangible liabilities, net | 145,556 |
| | 150,360 |
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Rents received in advance and tenant security deposits | 46,925 |
| | 52,080 |
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Liabilities of real estate assets held for sale | — |
| | 56 |
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Total liabilities | 2,942,419 |
| | 2,947,316 |
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COMMITMENTS AND CONTINGENCIES (Note 10) |
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EQUITY: | | | |
Stockholders’ Equity (Note 7): | | | |
Preferred stock, $.01 par value, 30,000,000 shares authorized: | | | |
6.875% Series G Cumulative Redeemable Preferred stock, $.01 par value, no shares issued and outstanding at 9/30/2017, and 4,000,000 shares authorized, issued and outstanding ($100,000 liquidation preference) at 12/31/2016 | — |
| | 96,155 |
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6.375% Series H Cumulative Redeemable Preferred stock, $.01 par value, no shares issued and outstanding at 9/30/2017, and 4,000,000 shares authorized, issued and outstanding ($100,000 liquidation preference) at 12/31/2016 | — |
| | 96,256 |
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Common stock, $.01 par value, 150,000,000 shares authorized, 98,382,256 and 93,219,439 shares issued and outstanding, respectively | 984 |
| | 932 |
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Additional paid-in capital | 3,797,546 |
| | 3,457,649 |
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Distributions in excess of earnings | (108,667 | ) | | (107,997 | ) |
Total stockholders’ equity | 3,689,863 |
| | 3,542,995 |
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Noncontrolling Interests: | | | |
Common units of the Operating Partnership (Note 6) | 77,911 |
| | 85,590 |
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Noncontrolling interests in consolidated property partnerships (Note 1) | 128,106 |
| | 130,732 |
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Total noncontrolling interests | 206,017 |
| | 216,322 |
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Total equity | 3,895,880 |
| | 3,759,317 |
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TOTAL LIABILITIES AND EQUITY | $ | 6,838,299 |
| | $ | 6,706,633 |
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See accompanying notes to consolidated financial statements.
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share data)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
REVENUES | | | | | | | |
Rental income | $ | 159,954 |
| | $ | 146,539 |
| | $ | 475,527 |
| | $ | 423,947 |
|
Tenant reimbursements | 19,665 |
| | 16,406 |
| | 58,228 |
| | 43,948 |
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Other property income | 1,915 |
| | 5,403 |
| | 7,685 |
| | 6,032 |
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Total revenues | 181,534 |
| | 168,348 |
| | 541,440 |
| | 473,927 |
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EXPENSES | | | | | | | |
Property expenses | 33,070 |
| | 30,050 |
| | 97,615 |
| | 85,236 |
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Real estate taxes | 16,371 |
| | 14,501 |
| | 50,878 |
| | 39,378 |
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Provision for bad debts | 1,036 |
| | — |
| | 2,743 |
| | — |
|
Ground leases | 1,562 |
| | 909 |
| | 4,751 |
| | 2,506 |
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General and administrative expenses | 14,514 |
| | 13,533 |
| | 43,750 |
| | 40,949 |
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Acquisition-related expenses (Note 1) | — |
| | 188 |
| | — |
| | 964 |
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Depreciation and amortization | 62,567 |
| | 56,666 |
| | 185,737 |
| | 160,452 |
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Total expenses | 129,120 |
| | 115,847 |
| | 385,474 |
| | 329,485 |
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OTHER (EXPENSES) INCOME | | | | | | | |
Interest income and other net investment gains (Note 11) | 1,526 |
| | 538 |
| | 3,629 |
| | 1,120 |
|
Interest expense (Note 5) | (16,151 | ) | | (14,976 | ) | | (51,476 | ) | | (41,189 | ) |
Total other (expenses) income | (14,625 | ) | | (14,438 | ) | | (47,847 | ) | | (40,069 | ) |
INCOME FROM OPERATIONS BEFORE GAINS (LOSS) ON SALES OF REAL ESTATE | 37,789 |
| | 38,063 |
| | 108,119 |
| | 104,373 |
|
Net gain (loss) on sale of land (Note 2) | 449 |
| | — |
| | 449 |
| | (295 | ) |
Gains on sales of depreciable operating properties (Note 2) | 37,250 |
| | 18,312 |
| | 39,507 |
| | 164,302 |
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NET INCOME | 75,488 |
| | 56,375 |
| | 148,075 |
| | 268,380 |
|
Net income attributable to noncontrolling common units of the Operating Partnership (Note 6) | (1,394 | ) | | (1,453 | ) | | (2,633 | ) | | (5,892 | ) |
Net income attributable to noncontrolling interests in consolidated property partnerships | (2,984 | ) | | (1,027 | ) | | (9,359 | ) | | (1,438 | ) |
Total income attributable to noncontrolling interests | (4,378 | ) | | (2,480 | ) | | (11,992 | ) | | (7,330 | ) |
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION | 71,110 |
| | 53,895 |
| | 136,083 |
| | 261,050 |
|
Preferred dividends | (808 | ) | | (3,313 | ) | | (5,774 | ) | | (9,938 | ) |
Original issuance costs of redeemed preferred stock and preferred units (Note 7) | (3,744 | ) | | — |
| | (7,589 | ) | | — |
|
Total preferred dividends | (4,552 | ) | | (3,313 | ) | | (13,363 | ) | | (9,938 | ) |
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS | $ | 66,558 |
| | $ | 50,582 |
| | $ | 122,720 |
| | $ | 251,112 |
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Net income available to common stockholders per share – basic (Note 12) | $ | 0.67 |
| | $ | 0.54 |
| | $ | 1.24 |
| | $ | 2.71 |
|
Net income available to common stockholders per share – diluted (Note 12) | $ | 0.67 |
| | $ | 0.54 |
| | $ | 1.23 |
| | $ | 2.69 |
|
Weighted average common shares outstanding – basic (Note 12) | 98,352,139 |
| | 92,227,016 |
| | 98,008,780 |
| | 92,220,522 |
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Weighted average common shares outstanding – diluted (Note 12) | 98,911,612 |
| | 92,920,406 |
| | 98,591,048 |
| | 92,831,538 |
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Dividends declared per common share | $ | 0.425 |
| | $ | 0.375 |
| | $ | 1.225 |
| | $ | 1.100 |
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See accompanying notes to consolidated financial statements.
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited; in thousands, except share and per share/unit data)
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| | | Common Stock | | Total Stock- holders’ Equity | | Noncontrolling Interests | | Total Equity |
| Preferred Stock | | Number of Shares | | Common Stock | | Additional Paid-in Capital | | Retained Earnings / (Distributions in Excess of Earnings) | |
BALANCE AS OF DECEMBER 31, 2015 | $ | 192,411 |
| | 92,258,690 |
| | $ | 923 |
| | $ | 3,047,894 |
| | $ | (70,262 | ) | | $ | 3,170,966 |
| | $ | 63,620 |
| | $ | 3,234,586 |
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Net income | | | | | | | | | 261,050 |
| | 261,050 |
| | 7,330 |
| | 268,380 |
|
Issuance of share-based compensation awards | | | | | | | 1,339 |
| | | | 1,339 |
| | | | 1,339 |
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Non-cash amortization of share-based compensation | | | | | | | 19,303 |
| | | | 19,303 |
| | | | 19,303 |
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Exercise of stock options | | | 51,000 |
| | | | 2,173 |
| | | | 2,173 |
| | | | 2,173 |
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Repurchase of common stock, stock options and restricted stock units | | | (110,528 | ) | | (1 | ) | | (6,873 | ) | | | | (6,874 | ) | | | | (6,874 | ) |
Settlement of restricted stock units for shares of common stock | | | 72,130 |
| | 1 |
| | (1 | ) | | | | — |
| | | | — |
|
Issuance of common units in connection with acquisition | | | | | | | | | | | | | 48,033 |
| | 48,033 |
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Exchange of common units of the Operating Partnership | | | 1,200 |
| | | | 39 |
| | | | 39 |
| | (39 | ) | | — |
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Initial contribution from noncontrolling interest in consolidated property partnership, net of transaction costs | | | | | | | 113,022 |
| | | | 113,022 |
| | 78,654 |
| | 191,676 |
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Distributions to noncontrolling interests in consolidated property partnerships | | | | | | | | | | | | | (1,139 | ) | | (1,139 | ) |
Adjustment for noncontrolling interest | | | | | | | 14,822 |
| | | | 14,822 |
| | (14,822 | ) | | — |
|
Preferred dividends | | | | | | | | | (9,938 | ) | | (9,938 | ) | | | | (9,938 | ) |
Dividends declared per common share and common unit ($1.10 per share/unit) | | | | | | | | | (102,743 | ) | | (102,743 | ) | | (2,894 | ) | | (105,637 | ) |
BALANCE AS OF SEPTEMBER 30, 2016 | $ | 192,411 |
| | 92,272,492 |
| | $ | 923 |
| | $ | 3,191,718 |
| | $ | 78,107 |
| | $ | 3,463,159 |
| | $ | 178,743 |
| | $ | 3,641,902 |
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| | Common Stock | | Total Stock- holders’ Equity | | Noncontrolling Interests | | Total Equity |
| Preferred Stock | | Number of Shares | | Common Stock | | Additional Paid-in Capital | | Distributions in Excess of Earnings |
BALANCE AS OF DECEMBER 31, 2016 | $ | 192,411 |
| | 93,219,439 |
| | $ | 932 |
| | $ | 3,457,649 |
| | $ | (107,997 | ) | | $ | 3,542,995 |
| | $ | 216,322 |
| | $ | 3,759,317 |
|
Net income | | | | | | | | | 136,083 |
| | 136,083 |
| | 11,992 |
| | 148,075 |
|
Redemption of Series G and H Preferred stock (Note 7) | (192,411 | ) | | | | | | | | (7,589 | ) | | (200,000 | ) | | | | (200,000 | ) |
Issuance of common stock (Note 7) | | | 4,427,500 |
| | 44 |
| | 308,768 |
| | | | 308,812 |
| | | | 308,812 |
|
Issuance of share-based compensation awards | | |
| | | | 5,291 |
| | | | 5,291 |
| | | | 5,291 |
|
Non-cash amortization of share-based compensation | | | | | | | 19,013 |
| | | | 19,013 |
| | | | 19,013 |
|
Exercise of stock options (Note 9) | | | 282,000 |
| | 4 |
| | 12,047 |
| | | | 12,051 |
| | | | 12,051 |
|
Settlement of restricted stock units for shares of common stock | | | 317,848 |
| | 3 |
| | (3 | ) | | | | — |
| | | | — |
|
Repurchase of common stock, stock options and restricted stock units | | | (168,881 | ) | | (2 | ) | | (12,984 | ) | | | | (12,986 | ) | | | | (12,986 | ) |
Exchange of common units of the Operating Partnership | | | 304,350 |
| | 3 |
| | 10,936 |
| | | | 10,939 |
| | (10,939 | ) | | — |
|
Contributions from noncontrolling interests in consolidated property partnerships | | | | | | | | | | | — |
| | 250 |
| | 250 |
|
Distributions to noncontrolling interests in consolidated property partnerships | | | | | | | | | | | — |
| | (12,234 | ) | | (12,234 | ) |
Adjustment for noncontrolling interest | | | | | | | (3,171 | ) | | | | (3,171 | ) | | 3,171 |
| | — |
|
Preferred dividends | | | | | | | | | (5,774 | ) | | (5,774 | ) | | | | (5,774 | ) |
Dividends declared per common share and common unit ($1.225 per share/unit) | | | | | | | | | (123,390 | ) | | (123,390 | ) | | (2,545 | ) | | (125,935 | ) |
BALANCE AS OF SEPTEMBER 30, 2017 | $ | — |
| | 98,382,256 |
| | $ | 984 |
| | $ | 3,797,546 |
| | $ | (108,667 | ) | | $ | 3,689,863 |
| | $ | 206,017 |
| | $ | 3,895,880 |
|
See accompanying notes to consolidated financial statements.
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 148,075 |
| | $ | 268,380 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization of real estate assets and leasing costs | 181,875 |
| | 157,587 |
|
Depreciation of non-real estate furniture, fixtures and equipment | 3,862 |
| | 2,865 |
|
Increase in provision for bad debts | 2,743 |
| | — |
|
Non-cash amortization of share-based compensation awards | 13,617 |
| | 15,263 |
|
Non-cash amortization of deferred financing costs and debt discounts and premiums | 2,398 |
| | 2,020 |
|
Non-cash amortization of net below market rents | (6,026 | ) | | (5,128 | ) |
Gains on sales of depreciable operating properties (Note 2) | (39,507 | ) | | (164,302 | ) |
(Gain) loss on sale of land (Note 2) | (449 | ) | | 295 |
|
Non-cash amortization of deferred revenue related to tenant-funded tenant improvements | (12,394 | ) | | (9,700 | ) |
Straight-line rents | (25,537 | ) | | (22,856 | ) |
Net change in other operating assets | (16,970 | ) | | (7,263 | ) |
Net change in other operating liabilities | 24,855 |
| | 15,444 |
|
Net cash provided by operating activities | 276,542 |
| | 252,605 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Expenditures for development properties and undeveloped land | (270,839 | ) | | (222,719 | ) |
Expenditures for operating properties and other capital assets | (61,875 | ) | | (81,688 | ) |
Net proceeds received from dispositions (Note 2) | 182,492 |
| | 325,031 |
|
(Increase) decrease in acquisition-related deposits | (30,490 | ) | | 1,902 |
|
Expenditures for acquisition of operating properties | — |
| | (55,415 | ) |
Expenditures for acquisition of undeveloped land | — |
| | (33,513 | ) |
Increase in note receivable | — |
| | (1,000 | ) |
Net cash used in investing activities | (180,712 | ) | | (67,402 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Net proceeds from issuance of common stock (Note 7) | 308,812 |
| | — |
|
Redemption of Series G and H Preferred stock (Note 7) | (200,000 | ) | | — |
|
Proceeds from the issuance of unsecured debt (Note 5) | 250,000 |
| | — |
|
Repayments of unsecured debt (Note 5) | (189,000 | ) | | — |
|
Borrowings on unsecured revolving credit facility | 70,000 |
| | 305,000 |
|
Repayments on unsecured revolving credit facility | (10,000 | ) | | (305,000 | ) |
Principal payments on secured debt | (5,740 | ) | | (7,254 | ) |
Financing costs | (7,480 | ) | | (1,485 | ) |
Repurchase of common stock and restricted stock units | (12,986 | ) | | (6,874 | ) |
Proceeds from exercise of stock options | 12,051 |
| | 2,173 |
|
Contributions from noncontrolling interests in consolidated property partnerships | 250 |
| | 191,676 |
|
Distributions to noncontrolling interests in consolidated property partnerships | (12,234 | ) | | (1,139 | ) |
Dividends and distributions paid to common stockholders and common unitholders | (297,993 | ) | | (101,542 | ) |
Dividends and distributions paid to preferred stockholders and preferred unitholders (Note 7) | (7,409 | ) | | (9,938 | ) |
Net cash (used in) provided by financing activities | (101,729 | ) | | 65,617 |
|
Net (decrease) increase in cash and cash equivalents and restricted cash | (5,899 | ) | | 250,820 |
|
Cash and cash equivalents and restricted cash, beginning of period | 250,129 |
| | 57,204 |
|
Cash and cash equivalents and restricted cash, end of period | $ | 244,230 |
| | $ | 308,024 |
|
See accompanying notes to consolidated financial statements.
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY, L.P.
KILROY REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
ASSETS | (unaudited) | | |
REAL ESTATE ASSETS: | | | |
Land and improvements | $ | 1,076,172 |
| | $ | 1,108,971 |
|
Buildings and improvements | 4,871,667 |
| | 4,938,250 |
|
Undeveloped land and construction in progress | 1,292,017 |
| | 1,013,533 |
|
Total real estate assets held for investment | 7,239,856 |
| | 7,060,754 |
|
Accumulated depreciation and amortization | (1,216,358 | ) | | (1,139,853 | ) |
Total real estate assets held for investment, net | 6,023,498 |
| | 5,920,901 |
|
REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET | — |
| | 9,417 |
|
CASH AND CASH EQUIVALENTS | 64,954 |
| | 193,418 |
|
RESTRICTED CASH (Note 2) | 179,276 |
| | 56,711 |
|
MARKETABLE SECURITIES (Note 11) | 18,851 |
| | 14,773 |
|
CURRENT RECEIVABLES, NET (Note 3) | 18,626 |
| | 13,460 |
|
DEFERRED RENT RECEIVABLES, NET (Note 3) | 238,959 |
| | 218,977 |
|
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET | 185,420 |
| | 208,368 |
|
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 4) | 108,715 |
| | 70,608 |
|
TOTAL ASSETS | $ | 6,838,299 |
| | $ | 6,706,633 |
|
LIABILITIES AND CAPITAL | | | |
LIABILITIES: | | | |
Secured debt, net (Notes 5 and 11) | $ | 465,828 |
| | $ | 472,772 |
|
Unsecured debt, net (Notes 5 and 11) | 1,909,381 |
| | 1,847,351 |
|
Unsecured line of credit (Notes 5 and 11) | 60,000 |
| | — |
|
Accounts payable, accrued expenses and other liabilities | 271,405 |
| | 202,391 |
|
Accrued distributions (Note 16) | 43,324 |
| | 222,306 |
|
Deferred revenue and acquisition-related intangible liabilities, net | 145,556 |
| | 150,360 |
|
Rents received in advance and tenant security deposits | 46,925 |
| | 52,080 |
|
Liabilities of real estate assets held for sale | — |
| | 56 |
|
Total liabilities | 2,942,419 |
| | 2,947,316 |
|
COMMITMENTS AND CONTINGENCIES (Note 10) |
| |
|
CAPITAL: | | | |
Partners’ Capital (Note 8): | | | |
6.875% Series G Cumulative Redeemable Preferred units, no units issued and outstanding at 9/30/2017, 4,000,000 units issued and outstanding ($100,000 liquidation preference) at 12/31/2016 | — |
| | 96,155 |
|
6.375% Series H Cumulative Redeemable Preferred units, no units issued and outstanding at 9/30/2017, 4,000,000 units issued and outstanding ($100,000 liquidation preference) at 12/31/2016 | — |
| | 96,256 |
|
Common units, 98,382,256 and 93,219,439 held by the general partner and 2,077,193 and 2,381,543 held by common limited partners issued and outstanding, respectively | 3,763,078 |
|
| 3,431,768 |
|
Total partners’ capital | 3,763,078 |
| | 3,624,179 |
|
Noncontrolling interests in consolidated property partnerships and subsidiaries (Note 1) | 132,802 |
|
| 135,138 |
|
Total capital | 3,895,880 |
|
| 3,759,317 |
|
TOTAL LIABILITIES AND CAPITAL | $ | 6,838,299 |
|
| $ | 6,706,633 |
|
See accompanying notes to consolidated financial statements.
KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except unit and per unit data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
REVENUES | | | | | | | |
Rental income | $ | 159,954 |
| | $ | 146,539 |
| | $ | 475,527 |
| | $ | 423,947 |
|
Tenant reimbursements | 19,665 |
| | 16,406 |
| | 58,228 |
| | 43,948 |
|
Other property income | 1,915 |
| | 5,403 |
| | 7,685 |
| | 6,032 |
|
Total revenues | 181,534 |
| | 168,348 |
| | 541,440 |
| | 473,927 |
|
EXPENSES | | | | | | | |
Property expenses | 33,070 |
| | 30,050 |
| | 97,615 |
| | 85,236 |
|
Real estate taxes | 16,371 |
| | 14,501 |
| | 50,878 |
| | 39,378 |
|
Provision for bad debts | 1,036 |
| | — |
| | 2,743 |
| | — |
|
Ground leases | 1,562 |
| | 909 |
| | 4,751 |
| | 2,506 |
|
General and administrative expenses | 14,514 |
| | 13,533 |
| | 43,750 |
| | 40,949 |
|
Acquisition-related expenses (Note 1) | — |
| | 188 |
| | — |
| | 964 |
|
Depreciation and amortization | 62,567 |
| | 56,666 |
| | 185,737 |
| | 160,452 |
|
Total expenses | 129,120 |
| | 115,847 |
| | 385,474 |
| | 329,485 |
|
OTHER (EXPENSES) INCOME | | | | | | | |
Interest income and other net investment gains (Note 11) | 1,526 |
| | 538 |
| | 3,629 |
| | 1,120 |
|
Interest expense (Note 5) | (16,151 | ) | | (14,976 | ) | | (51,476 | ) | | (41,189 | ) |
Total other (expenses) income | (14,625 | ) | | (14,438 | ) | | (47,847 | ) | | (40,069 | ) |
INCOME FROM OPERATIONS BEFORE GAINS (LOSS) ON SALES OF REAL ESTATE | 37,789 |
| | 38,063 |
| | 108,119 |
| | 104,373 |
|
Net gain (loss) on sale of land (Note 2) | 449 |
| | — |
| | 449 |
| | (295 | ) |
Gains on sales of depreciable operating properties (Note 2) | 37,250 |
| | 18,312 |
| | 39,507 |
| | 164,302 |
|
NET INCOME | 75,488 |
| | 56,375 |
| | 148,075 |
| | 268,380 |
|
Net income attributable to noncontrolling interests in consolidated property partnerships and subsidiaries | (3,086 | ) | | (1,121 | ) | | (9,648 | ) | | (1,703 | ) |
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P. | 72,402 |
| | 55,254 |
| | 138,427 |
| | 266,677 |
|
Preferred distributions | (808 | ) | | (3,313 | ) | | (5,774 | ) | | (9,938 | ) |
Original issuance costs of redeemed preferred units (Note 8) | (3,744 | ) | | — |
| | (7,589 | ) | | — |
|
Total preferred distributions | (4,552 | ) | | (3,313 | ) | | (13,363 | ) | | (9,938 | ) |
NET INCOME AVAILABLE TO COMMON UNITHOLDERS | $ | 67,850 |
| | $ | 51,941 |
| | $ | 125,064 |
| | $ | 256,739 |
|
Net income available to common unitholders per unit – basic (Note 13) | $ | 0.67 |
| | $ | 0.54 |
| | $ | 1.23 |
| | $ | 2.70 |
|
Net income available to common unitholders per unit – diluted (Note 13) | $ | 0.67 |
| | $ | 0.54 |
| | $ | 1.23 |
| | $ | 2.68 |
|
Weighted average common units outstanding – basic (Note 13) | 100,429,332 |
| | 94,858,292 |
| | 100,160,595 |
| | 94,630,183 |
|
Weighted average common units outstanding – diluted (Note 13) | 100,988,805 |
| | 95,551,682 |
| | 100,742,863 |
| | 95,241,199 |
|
Dividends declared per common unit | $ | 0.425 |
| | $ | 0.375 |
| | $ | 1.225 |
| | $ | 1.100 |
|
See accompanying notes to consolidated financial statements.
KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(Unaudited; in thousands, except unit and per unit data)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Partners’ Capital | | Total Partners’ Capital | | Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries | | |
| Preferred Units | | Number of Common Units | | Common Units | | | | Total Capital |
BALANCE AS OF DECEMBER 31, 2015 | $ | 192,411 |
| | 94,023,465 |
| | $ | 3,031,609 |
| | $ | 3,224,020 |
| | $ | 10,566 |
| | $ | 3,234,586 |
|
Net income | | | | | 266,677 |
| | 266,677 |
| | 1,703 |
| | 268,380 |
|
Issuance of common units in connection with acquisition | | | 867,701 |
| | 48,033 |
| | 48,033 |
| | | | 48,033 |
|
Issuance of share-based compensation awards | | | | | 1,339 |
| | 1,339 |
| | | | 1,339 |
|
Non-cash amortization of share-based compensation | | | | | 19,303 |
| | 19,303 |
| | | | 19,303 |
|
Exercise of stock options | | | 51,000 |
| | 2,173 |
| | 2,173 |
| | | | 2,173 |
|
Repurchase of common units, stock options and restricted stock units | | | (110,528 | ) | | (6,874 | ) | | (6,874 | ) | | | | (6,874 | ) |
Settlement of restricted stock units | | | 72,130 |
| | — |
| | — |
| | | | — |
|
Initial contribution from noncontrolling interest in consolidated property partnership, net of transaction costs | | | | | 113,022 |
| | 113,022 |
| | 78,654 |
| | 191,676 |
|
Distributions to noncontrolling interests in consolidated property partnerships | | | | | | | | | (1,139 | ) | | (1,139 | ) |
Preferred distributions | | | | | (9,938 | ) | | (9,938 | ) | | | | (9,938 | ) |
Distributions declared per common unit ($1.10 per unit) | | | | | (105,637 | ) | | (105,637 | ) | | | | (105,637 | ) |
BALANCE AS OF SEPTEMBER 30, 2016 | $ | 192,411 |
| | 94,903,768 |
| | $ | 3,359,707 |
| | $ | 3,552,118 |
| | $ | 89,784 |
| | $ | 3,641,902 |
|
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Partners’ Capital | | Total Partners’ Capital | | Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries | | |
| Preferred Units | | Number of Common Units | | Common Units | | | Total Capital |
BALANCE AS OF DECEMBER 31, 2016 | $ | 192,411 |
| | 95,600,982 |
| | $ | 3,431,768 |
| | $ | 3,624,179 |
| | $ | 135,138 |
| | $ | 3,759,317 |
|
Net income | | | | | 138,427 |
| | 138,427 |
| | 9,648 |
| | 148,075 |
|
Redemption of Series G and H Preferred units (Note 8) | (192,411 | ) | | | | (7,589 | ) | | (200,000 | ) | | | | (200,000 | ) |
Issuance of common units (Note 8) | | | 4,427,500 |
| | 308,812 |
| | 308,812 |
| | | | 308,812 |
|
Issuance of share-based compensation awards | | | | | 5,291 |
| | 5,291 |
| | | | 5,291 |
|
Non-cash amortization of share-based compensation | | | | | 19,013 |
| | 19,013 |
| | | | 19,013 |
|
Exercise of stock options (Note 9) | | | 282,000 |
| | 12,051 |
| | 12,051 |
| | | | 12,051 |
|
Settlement of restricted stock units | | | 317,848 |
| | — |
| | — |
| | | | — |
|
Repurchase of common units, stock options and restricted stock units | | | (168,881 | ) | | (12,986 | ) | | (12,986 | ) | | | | (12,986 | ) |
Contributions from noncontrolling interests in consolidated property partnerships | | | | |
|
| |
|
| | 250 |
| | 250 |
|
Distributions to noncontrolling interests in consolidated property partnerships | | | | | | |
|
| | (12,234 | ) | | (12,234 | ) |
Preferred distributions | | | | | (5,774 | ) | | (5,774 | ) | | | | (5,774 | ) |
Distributions declared per common unit ($1.225 per unit) | | | | | (125,935 | ) | | (125,935 | ) | | | | (125,935 | ) |
BALANCE AS OF SEPTEMBER 30, 2017 | $ | — |
| | 100,459,449 |
| | $ | 3,763,078 |
| | $ | 3,763,078 |
| | $ | 132,802 |
| | $ | 3,895,880 |
|
See accompanying notes to consolidated financial statements.
KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 148,075 |
| | $ | 268,380 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization of real estate assets and leasing costs | 181,875 |
| | 157,587 |
|
Depreciation of non-real estate furniture, fixtures and equipment | 3,862 |
| | 2,865 |
|
Increase in provision for bad debts | 2,743 |
| | — |
|
Non-cash amortization of share-based compensation awards | 13,617 |
| | 15,263 |
|
Non-cash amortization of deferred financing costs and debt discounts and premiums | 2,398 |
| | 2,020 |
|
Non-cash amortization of net below market rents | (6,026 | ) | | (5,128 | ) |
Gains on sales of depreciable operating properties (Note 2) | (39,507 | ) | | (164,302 | ) |
(Gain) loss on sale of land (Note 2) | (449 | ) | | 295 |
|
Non-cash amortization of deferred revenue related to tenant-funded tenant improvements | (12,394 | ) | | (9,700 | ) |
Straight-line rents | (25,537 | ) | | (22,856 | ) |
Net change in other operating assets | (16,970 | ) | | (7,263 | ) |
Net change in other operating liabilities | 24,855 |
| | 15,444 |
|
Net cash provided by operating activities | 276,542 |
| | 252,605 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Expenditures for development properties and undeveloped land | (270,839 | ) | | (222,719 | ) |
Expenditures for operating properties and other capital assets | (61,875 | ) | | (81,688 | ) |
Net proceeds received from dispositions (Note 2) | 182,492 |
| | 325,031 |
|
(Increase) decrease in acquisition-related deposits | (30,490 | ) | | 1,902 |
|
Expenditures for acquisition of operating properties | — |
| | (55,415 | ) |
Expenditures for acquisition of undeveloped land | — |
| | (33,513 | ) |
Increase in note receivable | — |
| | (1,000 | ) |
Net cash used in investing activities | (180,712 | ) | | (67,402 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Net proceeds from issuance of common units (Note 8) | 308,812 |
| | — |
|
Redemption of Series G and H Preferred units (Note 8) | (200,000 | ) | | — |
|
Proceeds from the issuance of unsecured debt (Note 5) | 250,000 |
| | — |
|
Repayments of unsecured debt (Note 5) | (189,000 | ) | | — |
|
Borrowings on unsecured revolving credit facility | 70,000 |
| | 305,000 |
|
Repayments on unsecured revolving credit facility | (10,000 | ) | | (305,000 | ) |
Principal payments on secured debt | (5,740 | ) | | (7,254 | ) |
Financing costs | (7,480 | ) | | (1,485 | ) |
Repurchase of common units and restricted stock units | (12,986 | ) | | (6,874 | ) |
Proceeds from exercise of stock options | 12,051 |
| | 2,173 |
|
Contributions from noncontrolling interests in consolidated property partnerships | 250 |
| | 191,676 |
|
Distributions to noncontrolling interests in consolidated property partnerships | (12,234 | ) | | (1,139 | ) |
Distributions paid to common unitholders | (297,993 | ) | | (101,542 | ) |
Distributions paid to preferred unitholders (Note 8) | (7,409 | ) | | (9,938 | ) |
Net cash (used in) provided by financing activities | (101,729 | ) | | 65,617 |
|
Net (decrease) increase in cash and cash equivalents and restricted cash | (5,899 | ) | | 250,820 |
|
Cash and cash equivalents and restricted cash, beginning of period | 250,129 |
| | 57,204 |
|
Cash and cash equivalents and restricted cash, end of period | $ | 244,230 |
| | $ | 308,024 |
|
See accompanying notes to consolidated financial statements.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Organization
Kilroy Realty Corporation (the “Company”) is a self-administered real estate investment trust (“REIT”) active in premier office and mixed-use submarkets along the West Coast. We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties in the coastal regions of Los Angeles, Orange County, San Diego County, the San Francisco Bay Area and Greater Seattle, which we believe have strategic advantages and strong barriers to entry. Class A real estate encompasses attractive and efficient buildings of high quality that are attractive to tenants, are well-designed and constructed with above-average material, workmanship and finishes and are well-maintained and managed. We qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s common stock is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “KRC.”
We own our interests in all of our real estate assets through Kilroy Realty, L.P. (the “Operating Partnership”) and Kilroy Realty Finance Partnership, L.P. (the “Finance Partnership”). We generally conduct substantially all of our operations through the Operating Partnership. Unless stated otherwise or the context indicates otherwise, the terms “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” refer to Kilroy Realty Corporation and its consolidated subsidiaries and the term “Operating Partnership” refers to Kilroy Realty, L.P. and its consolidated subsidiaries. The descriptions of our business, employees and properties apply to both the Company and the Operating Partnership.
Our stabilized portfolio of operating properties was comprised of the following properties at September 30, 2017:
|
| | | | | | | | | | | | | | |
| Number of Buildings | | Rentable Square Feet (unaudited) | | Number of Tenants | | Percentage Occupied (unaudited) | | Percentage Leased (unaudited) |
Stabilized Office Properties | 101 |
| | 13,720,598 |
| | 515 |
| | 94.0 | % | | 96.2 | % |
|
| | | | | | | | | | | |
| Number of Buildings | | Number of Units | | Percentage Occupied (unaudited) | | Percentage Leased (unaudited) |
Stabilized Residential Property | 1 |
| | 200 |
| | 72.0 | % | | 74.5 | % |
Our stabilized portfolio includes all of our properties with the exception of development and redevelopment properties currently under construction or committed for construction, “lease-up” properties, real estate assets held for sale and undeveloped land. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We define “lease-up” properties as office properties we recently developed or redeveloped that have not yet reached 95% occupancy and are within one year following cessation of major construction activities. There were no operating properties in “lease-up” or held for sale as of September 30, 2017.
During the nine months ended September 30, 2017, we added one development project to our stabilized office portfolio consisting of 365,359 rentable square feet in Hollywood, California. As of September 30, 2017, the following properties were excluded from our stabilized portfolio. We did not have any redevelopment properties at September 30, 2017.
|
| | | | |
| Number of Properties/Projects | | Estimated Rentable Square Feet (1) |
Development projects under construction (2) | 4 | | 1,800,000 |
|
________________________
| |
(1) | Estimated rentable square feet upon completion. |
| |
(2) | Development projects under construction also include 96,000 square feet of retail space and 237 residential units in addition to the estimated office rentable square feet noted above. |
Our stabilized portfolio also excludes our near-term and future development pipeline, which as of September 30, 2017 was comprised of five development sites, representing approximately 47 gross acres of undeveloped land.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of September 30, 2017, all of our properties and development projects were owned and all of our business was conducted in the state of California with the exception of twelve office properties and one development project under construction located in the state of Washington. All of our properties and development projects are 100% owned, excluding four office properties owned by three consolidated property partnerships.
Two of the three property partnerships, 100 First Street Member, LLC (“100 First LLC”) and 303 Second Street Member, LLC (“303 Second LLC”), each owned one office property in San Francisco, California through subsidiary REITs. As of September 30, 2017, the Company owned a 56% common equity interest in both 100 First LLC and 303 Second LLC. The third property partnership, Redwood City Partners, LLC (“Redwood LLC”) owned two office properties in Redwood City, California. As of September 30, 2017, the Company owned an approximate 93% common equity interest in Redwood LLC. The remaining interests in all three property partnerships were owned by unrelated third parties.
Ownership and 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, Kilroy Services, LLC (“KSLLC”), 100 First LLC, 303 Second LLC, Redwood LLC and all of our wholly-owned and controlled subsidiaries. The consolidated financial statements of the Operating Partnership include the consolidated financial position and results of operations of the Operating Partnership, the Finance Partnership, KSLLC, 100 First LLC, 303 Second LLC, Redwood LLC and all wholly-owned and controlled subsidiaries of the Operating Partnership. All intercompany balances and transactions have been eliminated in the consolidated financial statements.
As of September 30, 2017, the Company owned an approximate 97.9% common general partnership interest in the Operating Partnership. The remaining approximate 2.1% common limited partnership interest in the Operating Partnership as of September 30, 2017 was owned by non-affiliated investors and certain of our executive officers and directors (see Note 6). Both the general and limited common partnership interests in the Operating Partnership are denominated in common units. Generally, the number of common units held by the Company is equivalent to the number of outstanding shares of the Company’s common stock, and the rights of all the common units to quarterly distributions and payments in liquidation mirror those of the Company’s common stockholders. The common limited partners have certain redemption rights as provided in the Operating Partnership’s Seventh Amended and Restated Agreement of Limited Partnership, as amended, the “Partnership Agreement.”
Kilroy Realty Finance, Inc., which is a wholly-owned subsidiary of the Company, is the sole general partner of the Finance Partnership and owns a 1.0% common general partnership interest in the Finance Partnership. The Operating Partnership owns the remaining 99.0% common limited partnership interest. We conduct substantially all of our development activities through KSLLC, which is a wholly owned subsidiary of the Operating Partnership. With the exception of the Operating Partnership and our consolidated property partnerships, all of our subsidiaries are wholly-owned.
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, 2017. The interim financial statements for the Company and the Operating Partnership should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2016.
Variable Interest Entities
The Operating Partnership is a variable interest entity (“VIE”) of the Company as the Operating Partnership is a limited partnership in which the common limited partners do not have substantive kick-out or participating rights. At September 30, 2017, the consolidated financial statements of the Company included two VIEs in addition to the Operating Partnership: 100 First LLC and 303 Second LLC. At September 30, 2017, the Company and the Operating Partnership were determined to be the primary beneficiaries of these two VIEs since we had the ability to control the activities that most significantly impact each of the VIE’s economic performance. As of September 30, 2017, these two VIEs’ total assets, liabilities and noncontrolling interests included on our consolidated balance sheet were approximately $429.4 million (of which $383.7 million related to real estate held for investment), approximately $151.4 million and approximately $121.8 million, respectively. Revenues, income and net assets
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
generated by 100 First LLC and 303 Second LLC may only be used to settle its contractual obligations, which primarily consist of operating expenses, capital expenditures and required distributions.
At December 31, 2016, the consolidated financial statements of the Company and the Operating Partnership included three VIEs in which we were deemed to be the primary beneficiary: 100 First LLC, 303 Second LLC and an entity established during the fourth quarter of 2016 to facilitate a transaction intended to qualify as a like-kind exchange pursuant to Section 1031 of the Code (“Section 1031 Exchange”). In January 2017, the Section 1031 Exchange was successfully completed and the entity established for the 1031 Exchange was no longer a VIE. At December 31, 2016, the impact of consolidating the VIEs increased the Company’s total assets, liabilities and noncontrolling interests on our consolidated balance sheet by approximately $654.3 million (of which $588.6 million related to real estate held for investment), approximately $166.1 million and approximately $124.3 million, respectively.
Adoption of New Accounting Pronouncements
Effective January 1, 2017, the Company adopted FASB ASU No. 2017-01 (“ASU 2017-01”) which clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework provides a screen for determining whether an integrated set of assets is a business combination or an asset acquisition and clarifies that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar assets, the set of assets and activities is deemed not to meet the definition of a business. As a result of our adoption of the guidance, which we adopted on a prospective basis, the Company expects that most of our future acquisitions of operating properties and development properties that were previously accounted for as business combinations will instead be accounted for as asset acquisitions under the new guidance. In addition, we expect that most of the transaction costs associated with these future acquisitions will be capitalized as part of the purchase price of the acquisition instead of being expensed as incurred to acquisition-related expenses. The Company did not have any acquisitions of operating properties during the nine months ended September 30, 2017.
Also effective January 1, 2017, the Company adopted ASU No. 2016-18 (“ASU 2016-18”) which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 on a retrospective basis. Therefore, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Company’s consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016. As a result of the adoption of ASU 2016-18, the change in restricted cash is no longer presented as a separate line item within cash flows from investing activities on the Company’s consolidated statements of cash flows since such balances are now included in total cash at both the beginning and end of the reporting period. As a result, for the nine months ended September 30, 2016, the Company had net cash used in investing activities of $67.4 million instead of net cash used in investing activities of $124.2 million as previously reported since the Company had an increase in restricted cash of $56.8 million during the nine months ended September 30, 2016 primarily due to $48.4 million of restricted cash that was held at qualified intermediaries to facilitate potential future Section1031 Exchanges.
In addition, effective January 1, 2017, the Company adopted ASU No. 2016-09 (“ASU 2016-09”) which simplified several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The adoption of this guidance did not have an impact on our consolidated financial statements or notes to our consolidated financial statements.
Recently Issued Accounting Pronouncements
ASU No. 2016-02 “Leases (Topic 842)”
On February 25, 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) to amend the accounting guidance for leases. The accounting applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted.
We are currently conducting our evaluation of the impact of the guidance on our consolidated financial statements and have an active project team working on the evaluation and implementation of the guidance. We currently believe that the adoption of
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the standard will not significantly change the accounting for operating leases on our consolidated balance sheets where we are the lessor, and that such leases will be accounted for in a similar method to existing standards with the underlying leased asset being reported and recognized as a real estate asset. We currently expect that certain non-lease components will need to be accounted for separately from the lease components, with the lease components continuing to be recognized on a straight-line basis over the term of the lease and certain non-lease components (such as common area maintenance) being accounted for under the new revenue recognition guidance in ASU 2014-09 discussed below, even when revenue for such non-lease components is not separately stipulated in the lease. In addition, under ASU 2016-02, lessors will only be permitted to capitalize and amortize incremental direct leasing costs. As a result, we expect that upon the adoption of the standard, we will no longer be able to capitalize and amortize certain leasing related costs and instead will expense these costs as incurred. We currently expect this could have a material impact to the Company’s results of operations upon adoption of the standard.
For leases where we are the lessee, specifically for our ground leases, we currently believe that the adoption of the standard will significantly change the accounting on our consolidated balance sheets since both existing ground leases and any future ground leases will be required to be recorded on the Company’s consolidated balance sheets as an obligation of the Company. We currently believe that existing ground leases executed before the January 1, 2019 adoption date will continue to be accounted for as operating leases and will not have a material impact on our recognition of ground lease expense or our results of operations. However, we believe that we will be required to recognize a right of use asset and a lease liability on our consolidated balance sheets equal to the present value of the minimum lease payments required in accordance with each ground lease. As of September 30, 2017, our future undiscounted minimum rental payments under these leases totaled $252.8 million, with several of the leases containing provisions for rental payments to fluctuate based on fair market value and operating income measurements with expirations through 2093. In addition, we currently believe that for new ground leases entered into after the adoption date of the new standard, such leases could be required to be accounted for as a financing type lease, resulting in ground lease expense recorded using the effective interest method instead of on a straight-line basis over the term of the lease. This could have a significant impact on our results of operations if we enter into material new ground leases after the date of adoption since ground lease expense calculated using the effective interest method results in an increased amount of ground lease expense in the earlier years of a ground lease as compared to the current straight-line method.
We will adopt the guidance on a modified retrospective basis as required by ASU 2016-02. We are in the process of evaluating whether we will elect to apply the practical expedients identified in the standard but currently believe that we may do so.
ASU No. 2014-09 “Revenue From Contracts with Customers (Topic 606)”
In May 2014, the FASB issued ASU 2014-09 “Revenue From Contracts with Customers (Topic 606)” (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue from contracts with customers and will supersede most of the existing revenue recognition guidance. On May 9, 2016 and December 21, 2016, the FASB issued ASU No. 2016-12 and ASU No. 2016-20, which provides practical expedients, technical corrections, and improvements for certain aspects of ASU No. 2014-09. Public business entities may elect to adopt the amendments as of the original effective date; however, adoption is required for annual reporting periods beginning after December 15, 2017.
We have compiled an inventory of the sources of revenue that will be impacted by ASU 2014-09. Specifically, we have evaluated the impact of the guidance on timing of gain recognition for dispositions and currently do not believe there will be a material impact to our consolidated financial statements given the simplicity of the Company’s historical disposition transactions. In addition, we currently believe that certain non-lease components of revenue from leases such as common area maintenance and certain types of parking revenue may be impacted by ASU 2014-09 when we adopt ASU 2016-02 on January 1, 2019. We are in the process of evaluating the impact on these non-lease revenue components and currently believe the impact will be limited to the income statement presentation of revenue and not the total amount of revenue recognized.
Other Recently Issued Pronouncements
On May 10, 2017, the FASB issued ASU No. 2017-09 “Compensation - Stock Compensation (Topic 718)” to clarify the scope of modification accounting. Under the guidance, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions, and classification as an equity or liability instrument remain the same immediately before and after the change. The guidance is effective for annual periods beginning after December 15, 2017 and early adoption is permitted. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
On February 22, 2017, the FASB issued ASU No. 2017-05 “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)” (“ASU 2017-05”) to provide guidance and clarify the scope of the original guidance within Subtopic 610-20 “Gains and Losses from the Derecognition of Nonfinancial Assets” that was issued in connection with ASU
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2014-09, which provided guidance for recognizing gains and losses from the transfer of nonfinancial assets in transactions with noncustomers. ASU 2017-05 additionally adds guidance pertaining to the partial sales of real estate and clarifies that nonfinancial assets within the scope of Accounting Standards Codification Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017, with early application permitted for fiscal years beginning after December 15, 2016. We are currently evaluating the impact of ASU 2017-05 on our consolidated financial statements and currently do not anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
On August 26, 2016, the FASB issued ASU No. 2016-15 (“ASU 2016-15”) to provide guidance for areas where there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
On June 16, 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”) to amend the accounting for credit losses for certain financial instruments. Under the new guidance, an entity recognizes its estimate of expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
On January 5, 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”) to amend the accounting guidance on the classification and measurement of financial instruments. The standard requires that all investments in equity securities, including other ownership interests, are carried at fair value through net income. This requirement does not apply to investments that qualify for equity method accounting or to those that result in consolidation of the investee or for which the entity has elected the predictability exception to fair value measurement. Additionally, the standard requires that the portion of the total fair value change caused by a change in instrument-specific credit risk for financial liabilities for which the fair value option has been elected would be recognized in other comprehensive income. Any accumulated amount remaining in other comprehensive income is reclassified to earnings when the liability is extinguished. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
2. Dispositions
The following table summarizes the properties sold during the nine months ended September 30, 2017.
|
| | | | | | | | | | | | | |
Location | | Property Type | | Month of Disposition | | Number of Buildings | | Rentable Square Feet | | Sales Price (1) (in millions) |
5717 Pacific Center Boulevard, San Diego, CA (2) | | Office | | January | | 1 | | 67,995 |
| | $ | 12.1 |
|
Sorrento Mesa and Mission Valley Properties (3) | | Office | | September | | 10 | | 675,143 |
| | 174.5 |
|
Total Dispositions | | | | | | 11 | | 743,138 |
| | $ | 186.6 |
|
| | | | | | | | | | |
________________________
| |
(1) | Represents gross sales price before the impact of broker commissions and closing costs. |
| |
(2) | This property was classified as held for sale at December 31, 2016. |
| |
(3) | The Sorrento Mesa and Mission Valley Properties includes the following properties: 10390, 10394, 10398, 10421, 10445 and 10455 Pacific Center Court, 2355, 2365, 2375 and 2385 Northside Drive and Pacific Corporate Center - Lot 8, a 5.0 acre undeveloped land parcel. |
The total gain on the operating properties and land sold during the nine months ended September 30, 2017 was $39.5 million and $0.4 million, respectively. As of September 30, 2017, approximately $170.6 million of net proceeds related to the Sorrento Mesa and Mission Valley Properties disposition were temporarily being held at qualified intermediaries, at our direction, for the purpose of facilitating potential future Section 1031 Exchanges. The cash proceeds are included in restricted cash on our consolidated balance sheets as of September 30, 2017.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
3. 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, 2017 and December 31, 2016:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (in thousands) |
Current receivables | $ | 20,746 |
| | $ | 15,172 |
|
Allowance for uncollectible tenant receivables | (2,120 | ) | | (1,712 | ) |
Current receivables, net | $ | 18,626 |
| | $ | 13,460 |
|
Deferred Rent Receivables, net
Deferred rent receivables, net consisted of the following as of September 30, 2017 and December 31, 2016:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (in thousands) |
Deferred rent receivables | $ | 241,929 |
| | $ | 220,501 |
|
Allowance for deferred rent receivables | (2,970 | ) | | (1,524 | ) |
Deferred rent receivables, net | $ | 238,959 |
| | $ | 218,977 |
|
4. Prepaid Expenses and Other Assets, Net
Prepaid expenses and other assets, net consisted of the following at September 30, 2017 and December 31, 2016:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (in thousands) |
Furniture, fixtures and other long-lived assets, net | $ | 39,889 |
| | $ | 40,395 |
|
Notes receivable (1) | 19,838 |
| | 19,439 |
|
Prepaid expenses & acquisition deposits | 48,988 |
| | 10,774 |
|
Total prepaid expenses and other assets, net | $ | 108,715 |
| | $ | 70,608 |
|
_______________
| |
(1) | Approximately $15.1 million of our notes receivable are secured by real estate. |
5. Secured and Unsecured Debt of the Operating Partnership
Unsecured Senior Notes - Private Placement
On February 17, 2017, the Operating Partnership issued the $175.0 million principal amount of its 3.35% Senior Notes, Series A, due February 17, 2027 (the “Series A Notes”), and the $75.0 million principal amount of its 3.45% Senior Notes, Series B, due February 17, 2029 (the “Series B Notes” and, together with the Series A Notes, the “Series A and B Notes”). The Series A and B Notes were issued pursuant to a delayed draw option under a Note Purchase Agreement entered into in connection with a private placement in September 2016. As of September 30, 2017, there was $175.0 million and $75.0 million issued and outstanding aggregate principal amount of Series A and B Notes, respectively. The Series A Notes mature on February 17, 2027, and the Series B Notes mature on February 17, 2029, unless earlier redeemed or prepaid pursuant to the terms of the Note Purchase Agreement. Interest on the Series A and B Notes is payable semi-annually in arrears on February 17 and August 17 of each year.
The Operating Partnership may, at its option and upon notice to the purchasers of the Series A and B Notes, prepay at any time all, or from time to time, any part of the Series A and B Notes then outstanding (in an amount not less than 5% of the aggregate principal amount of the Series A and B Notes then outstanding in the case of a partial prepayment), at 100% of the principal amount so prepaid, plus the make-whole amount determined for the prepayment date with respect to such principal amount as set forth in the Note Purchase Agreement.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In connection with the issuance of the Series A and B Notes, the Company entered into an agreement whereby it guarantees the payment by the Operating Partnership of all amounts due with respect to the Series A and B Notes and the performance by the Operating Partnership of its obligations under the Note Purchase Agreement.
Unsecured Revolving Credit Facility and Term Loan Facility
In July 2017, the Operating Partnership amended and restated the terms of its unsecured revolving credit facility and unsecured term loan facility (together, the “Facility”). The amendment and restatement increased the size of the unsecured revolving credit facility from $600.0 million to $750.0 million, maintained the size of the unsecured term loan facility of $150.0 million, reduced the borrowing costs and extended the maturity date of the Facility to July 2022. The unsecured term loan facility features two six-month delayed draw options.
The following table summarizes the balance and terms of our unsecured revolving credit facility as of September 30, 2017 and December 31, 2016:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (in thousands) |
Outstanding borrowings | $ | 60,000 |
| | $ | — |
|
Remaining borrowing capacity | 690,000 |
| | 600,000 |
|
Total borrowing capacity (1) | $ | 750,000 |
| | $ | 600,000 |
|
Interest rate (2) | 2.24 | % | | 1.82 | % |
Facility fee-annual rate (3) | 0.200% |
Maturity date | July 2022 | | July 2019 |
________________________
| |
(1) | We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional $600.0 million under an accordion feature under the terms of the unsecured revolving credit facility and unsecured term loan facility. |
| |
(2) | Our unsecured revolving credit facility interest rate was calculated based on an annual rate of LIBOR plus 1.000% and LIBOR plus 1.050% as of September 30, 2017 and December 31, 2016, respectively. |
| |
(3) | Our facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, we incurred debt origination and legal costs. As of September 30, 2017 and December 31, 2016, $6.3 million and $3.3 million of unamortized deferred financing costs, respectively, remained to be amortized through the maturity date of our unsecured revolving credit facility, which are included in prepaid expenses and other assets, net on our consolidated balance sheets. |
The Company intends to borrow under the unsecured revolving credit facility from time to time for general corporate purposes, to finance development and redevelopment expenditures, to fund potential acquisitions and to potentially repay long-term debt.
The following table summarizes the balance and terms of our unsecured term loan facility as of September 30, 2017 and December 31, 2016:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| (in thousands) |
Outstanding borrowings (1) | $ | — |
| | $ | 150,000 |
|
Remaining borrowing capacity | 150,000 |
| | — |
|
Total borrowing capacity (2) | $ | 150,000 |
| | $ | 150,000 |
|
Interest rate (3) | 2.33 | % | | 1.85 | % |
Undrawn facility fee-annual rate (4) | 0.200 | % | | — | % |
Maturity date | July 2022 | | July 2019 |
________________________ | |
(1) | In July 2017, the unsecured term loan facility was paid down and the Facility was amended to include two, six-month delayed draw options on the unsecured term loan facility. The Company may draw on the unsecured term loan facility through July 2018, at which time the outstanding balance will become the balance of the unsecured term loan facility and no additional draws may be made. However, if the Company does not draw at least $75.0 million by the end of first option term in January 2018, the total borrowing capacity under the Facility will be reduced by 50% of the unutilized borrowing capacity at that time. The Company intends to draw $75.0 million prior to the end of the first option term in January 2018. |
| |
(2) | As of September 30, 2017 and December 31, 2016, $1.2 million and $0.7 million of unamortized deferred financing costs, respectively, remained to be amortized through the maturity date of our unsecured term loan facility. |
| |
(3) | Our unsecured term loan facility interest rate was calculated based on an annual rate of LIBOR plus 1.100% and LIBOR plus 1.150% as of September 30, 2017 and December 31, 2016, respectively. |
| |
(4) | In July 2017, the Facility was amended to include a facility fee on the remaining borrowing capacity of the unsecured term loan facility, which is paid on a monthly basis. |
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Additionally, as of December 31, 2016 the Operating Partnership had a $39.0 million unsecured term loan outstanding with an annual interest rate of LIBOR plus 1.150% that was to mature in July 2019. As of December 31, 2016, $0.2 million of unamortized deferred financing costs remained to be amortized through the maturity date of our unsecured term loan. Concurrently with the amendment of the Facility, the Operating Partnership repaid its $39.0 million unsecured term loan.
Debt Covenants and Restrictions
The unsecured revolving credit facility, the unsecured term loan facility, the unsecured term loan, the unsecured senior notes, the Series A and B Notes and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Some of the more restrictive financial covenants include a maximum ratio of total debt to total asset value, a minimum fixed-charge coverage ratio, a minimum unsecured debt ratio and a minimum unencumbered asset pool debt service coverage ratio. Noncompliance with one or more of the covenants and restrictions could result in the full principal balance of the associated debt becoming immediately due and payable. We believe we were in compliance with all of our debt covenants as of September 30, 2017.
Debt Maturities
The following table summarizes the stated debt maturities and scheduled amortization payments of our issued and outstanding debt, excluding unamortized debt discounts, premiums and deferred financing costs, as of September 30, 2017:
|
| | | |
Year | (in thousands) |
Remaining 2017 | $ | 1,545 |
|
2018 | 451,669 |
|
2019 | 76,309 |
|
2020 | 255,137 |
|
2021 | 5,342 |
|
Thereafter | 1,659,023 |
|
Total (1) | $ | 2,449,025 |
|
________________________ | |
(1) | Includes gross principal balance of outstanding debt before the effect of the following at September 30, 2017: $10.9 million of unamortized deferred financing costs, $6.0 million of unamortized discounts for the unsecured senior notes and $3.0 million of unamortized premiums for the secured debt. |
Capitalized Interest and Loan Fees
The following table sets forth gross interest expense, including debt discount/premium and deferred financing cost amortization, net of capitalized interest, for the three and nine months ended September 30, 2017 and 2016. The interest expense capitalized was recorded as a cost of development and increased the carrying value of undeveloped land and construction in progress.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in thousands) |
Gross interest expense | $ | 28,331 |
| | $ | 26,184 |
| | $ | 84,577 |
| | $ | 79,027 |
|
Capitalized interest and deferred financing costs | (12,180 | ) | | (11,208 | ) | | (33,101 | ) | | (37,838 | ) |
Interest expense | $ | 16,151 |
| | $ | 14,976 |
| | $ | 51,476 |
| | $ | 41,189 |
|
6. Noncontrolling Interests on the Company’s Consolidated Financial Statements
Common Units of the Operating Partnership
The Company owned an approximate 97.9%, 97.5% and 97.2% common general partnership interest in the Operating Partnership as of September 30, 2017, December 31, 2016 and September 30, 2016, respectively. The remaining approximate 2.1%, 2.5% and 2.8% common limited partnership interest as of September 30, 2017, December 31, 2016 and September 30, 2016, respectively, was owned by non-affiliated investors and certain of our executive officers and directors in the form of noncontrolling common units. There were 2,077,193, 2,381,543 and 2,631,276 common units outstanding held by these investors, executive officers and directors as of September 30, 2017, December 31, 2016 and September 30, 2016, respectively.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The noncontrolling common units may be redeemed by unitholders for cash. Except under certain circumstances, we, at our option, may satisfy the cash redemption obligation with shares of the Company’s common stock on a one-for-one basis. If satisfied in cash, the value for each noncontrolling common unit upon redemption is the amount equal to the average of the closing quoted price per share of the Company’s common stock, par value $.01 per share, as reported on the NYSE for the ten trading days immediately preceding the applicable redemption date. The aggregate value upon redemption of the then-outstanding noncontrolling common units was $145.6 million and $174.9 million as of September 30, 2017 and December 31, 2016, respectively. This redemption value does not necessarily represent the amount that would be distributed with respect to each noncontrolling common unit in the event of our termination or liquidation. In the event of our termination or liquidation, it is expected in most cases that each common unit would be entitled to a liquidating distribution equal to the liquidating distribution payable in respect of each share of the Company’s common stock.
7. Stockholders’ Equity of the Company
Preferred Stock Redemption
On August 15, 2017, the Company redeemed all 4,000,000 shares of its 6.375% Series H Cumulative Redeemable Preferred Stock (“Series H Preferred Stock”). The shares of Series H Preferred Stock were redeemed at a redemption price equal to their stated liquidation preference of $25.00 per share, representing $100.0 million in aggregate. The redemption payment did not include any additional accrued dividends because the redemption date was also the dividend payment date.
On March 30, 2017 (the “Series G Redemption Date”), the Company redeemed all 4,000,000 shares of its 6.875% Series G Cumulative Redeemable Preferred Stock (“Series G Preferred Stock”). The shares of Series G Preferred Stock were redeemed at a redemption price equal to their stated liquidation preference of $25.00 per share, representing $100.0 million in aggregate, plus all accrued and unpaid dividends to the Series G Redemption Date.
During the three and nine months ended September 30, 2017, we recognized non-recurring non-cash charges of $3.7 million and $7.6 million, respectively, as a reduction to net income available to common stockholders for the original issuance costs related to the Series G and Series H Preferred Stock.
Common Stock Issuance
In January 2017, the Company completed an underwritten public offering of 4,427,500 shares of its common stock. The net offering proceeds, after deducting underwriting discounts and offering expenses, were approximately $308.8 million. We used a portion of the proceeds to partially fund our 2016 special dividend and used the remaining proceeds for general corporate uses, to fund development expenditures and to repay outstanding indebtedness.
At-The-Market Stock Offering Program
Under our current at-the-market stock offering program, which commenced in December 2014, we may offer and sell shares of our common stock having an aggregate gross sales price of up to $300.0 million from time to time in “at-the-market” offerings. No shares of common stock were sold under this program during the nine months ended September 30, 2017. Since commencement of the program through September 30, 2017, we have sold 2,459,165 shares of common stock having an aggregate gross sales price of $182.4 million. As of September 30, 2017, shares of common stock having an aggregate gross sales price of up to $117.6 million remain available to be sold under this program. Actual future sales will depend upon a variety of factors, including but not limited to market conditions, the trading price of the Company’s common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under this program.
Payment of 2016 Special Cash Dividend
On January 13, 2017, the Company paid $184.3 million of special cash dividends, which was the equivalent of $1.90 of special cash dividend per share of common stock to stockholders of record on December 30, 2016. This special dividend payment was in addition to the $36.4 million of regular dividends we also paid on January 13, 2017 to common stockholders, unitholders and RSU holders of record on December 30, 2016.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
8. Partners’ Capital of the Operating Partnership
Preferred Stock Redemption
On August 15, 2017, the Company redeemed all 4,000,000 shares of its 6.375% Series H Preferred Stock. For each share of Series H Preferred Stock that was outstanding, the Company had an equivalent number of 6.375% Series H Preferred Units (“Series H Preferred Units”) outstanding with substantially similar terms as the Series H Preferred Stock. In connection with the redemption of the Series H Preferred Stock, the Series H Preferred Units held by the Company were redeemed by the Operating Partnership.
On March 30, 2017, the Company redeemed all 4,000,000 shares of its 6.875% Series G Preferred Stock. For each share of Series G Preferred Stock that was outstanding, the Company had an equivalent number of 6.875% Series G Preferred Units (“Series G Preferred Units”) outstanding with substantially similar terms as the Series G Preferred Stock. In connection with the redemption of the Series G Preferred Stock, the Series G Preferred Units held by the Company were redeemed by the Operating Partnership.
Issuance of Common Units
In January 2017, the Company completed an underwritten public offering of 4,427,500 shares of its common stock as discussed in Note 7. The net offering proceeds of approximately $308.8 million were contributed by the Company to the Operating Partnership in exchange for 4,427,500 common units.
Common Units Outstanding
The following table sets forth the number of common units held by the Company and the number of common units held by non-affiliated investors and certain of our executive officers and directors in the form of noncontrolling common units as well as the ownership interest held on each respective date:
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| September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
Company owned common units in |