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Section 1: 8-K (8-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 OR 15 (d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):
January 31, 2018

KILROY REALTY CORPORATION
(Exact name of registrant as specified in its charter)

 
Maryland
 
1-12675
 
95-4598246
 
 
(State or other jurisdiction
of incorporation)
 
(Commission File Number)
 
(IRS Employer
Identification No.)
 
 
 
 
 
 
 
 
12200 W. Olympic Boulevard, Suite 200,
 Los Angeles, California
 
 
 
90064
 
 
(Address of principal executive offices)
 
 
 
(Zip Code)
 

Registrant’s telephone number, including area code:
(310) 481-8400

N/A
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
 
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
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







Item 2.02    Results of Operations and Financial Condition.

On January 31, 2018, Kilroy Realty Corporation issued a press release announcing its earnings for the quarter and full year ended December 31, 2017 and distributed certain supplemental financial information. On January 31, 2018, Kilroy Realty Corporation also posted the supplemental information on its website located at www.kilroyrealty.com. The text of the supplemental information and the related press release are furnished herewith as Exhibits 99.1 and 99.2, respectively, and are incorporated by reference herein.

Exhibits 99.1 and 99.2 are being furnished pursuant to Item 2.02 and shall not be deemed “filed” for any purpose, including for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section. The information in this Current Report on Form 8-K shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act regardless of any general incorporation language in such filing.

Item 7.01    Regulation FD Disclosure.

As discussed in Item 2.02 above, Kilroy Realty Corporation issued a press release announcing its earnings for the quarter and full year ended December 31, 2017 and distributed certain supplemental information. On January 31, 2018, Kilroy Realty Corporation also posted the supplemental information on its website located at www.kilroyrealty.com.

The information being furnished pursuant to Item 7.01 shall not be deemed “filed” for any purpose, including for the purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section. The information in this Current Report on Form 8-K shall not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act regardless of any general incorporation language in such filing.

Item 9.01    Financial Statements and Exhibits.

(a)
 
Financial statements of businesses acquired: None.

 
 
 
(b)
 
Pro forma financial information: None.

 
 
 
(c)
 
Shell company transactions: None.

 
 
 
(d)
 
Exhibits:


The following exhibits are furnished with this Current Report on Form 8-K:
Exhibit No.
 
Description
99.1**
 
 
 
 
99.2**
 
_______________
**    Furnished herewith.






SIGNATURES

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



 
 
 
Kilroy Realty Corporation
 
 
Date: January 31, 2018
 
 
 
 
 
 
 
 
 
 
 
By:
 
/s/ Heidi R. Roth
 
 
 
 
 
 
Heidi R. Roth
Executive Vice President
and Chief Accounting Officer
 
 
 
 
 
 
 
 





(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit
Exhibit 99.1

392000592_supplementalcoverpageq42017.jpg


Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Table of Contents
 
Page
Corporate Data and Financial Highlights
 
1
2
3
4
5
6
7
8-9
Portfolio Data
 
10
11-15
16
17
18-20
21
22
23
Development
 
24
25
Debt and Capitalization Data
 
26
27-28
29-31
32-35

This Supplemental Financial Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include, among other things, information concerning lease expirations, debt maturities, potential investments, development and redevelopment activity, projected construction costs, dispositions and other forward-looking financial data. In some instances, forward-looking statements can be identified by the use of forward-looking terminology such as “expect,” “future,” “will,” “would,” “pursue,” or “project” and variations of such words and similar expressions that do not relate to historical matters. Forward-looking statements are based on Kilroy Realty Corporation’s current expectations, beliefs and assumptions, and are not guarantees of future performance. Forward-looking statements are inherently subject to uncertainties, risks, changes in circumstances, trends and factors that are difficult to predict, many of which are outside of Kilroy Realty Corporation’s control. Accordingly, actual performance, results and events may vary materially from those indicated in the forward-looking statements, and you should not rely on the forward-looking statements as predictions of future performance, results or events. Numerous factors could cause actual future performance, results and events to differ materially from those indicated in the forward-looking statements, including, among others: global market and general economic conditions and their effect on our liquidity and financial conditions and those of our tenants; adverse economic or real estate conditions generally, and specifically, in the States of California and Washington; risks associated with our investment in real estate assets, which are illiquid, and with trends in the real estate industry; defaults on or non-renewal of leases by tenants; any significant downturn in tenants’ businesses; our ability to re-lease property at or above current market rates; costs to comply with government regulations, including environmental remediation; the availability of cash for distribution and debt service and exposure to risk of default under debt obligations; increases in interest rates and our ability to manage interest rate exposure; the availability of financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue development, redevelopment and acquisition opportunities and refinance existing debt; a decline in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing, and which may result in write-offs or impairment charges; significant competition, which may decrease the occupancy and rental rates of properties; potential losses that may not be covered by insurance; the ability to successfully complete acquisitions and dispositions on announced terms; the ability to successfully operate acquired, developed and redeveloped properties; the ability to successfully complete development and redevelopment projects on schedule and within budgeted amounts; delays or refusals in obtaining all necessary zoning, land use and other required entitlements, governmental permits and authorizations for our development and redevelopment properties; increases in anticipated capital expenditures, tenant improvement and/or leasing costs; defaults on leases for land on which some of our properties are located; adverse changes to, or implementations of, applicable laws, regulations or legislation, as well as business and consumer reactions to such changes; risks associated with joint venture investments, including our lack of sole decision-making authority, our reliance on co-venturers' financial condition and disputes between us and our co-venturers; environmental uncertainties and risks related to natural disasters; and our ability to maintain our status as a REIT. These factors are not exhaustive and additional factors could adversely affect our business and financial performance. For a discussion of additional factors that could materially adversely affect Kilroy Realty Corporation’s business and financial performance, see the factors included under the caption “Risk Factors” in Kilroy Realty Corporation’s annual report on Form 10-K for the year ended December 31, 2016, and its other filings with the Securities and Exchange Commission. All forward-looking statements are based on currently available information and speak only as of the date on which they are made. Kilroy Realty Corporation assumes no obligation to update any forward-looking statement made in this Supplemental Financial Report that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws.


Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Company Background

Kilroy Realty Corporation (NYSE: KRC), a publicly traded real estate investment trust and member of the S&P MidCap 400 Index, is one of the West Coast’s premier landlords. The Company has over 70 years of experience developing, acquiring and managing office and mixed-use real estate assets. At December 31, 2017, the Company’s stabilized portfolio totaled approximately 13.7 million square feet of office space that was 95.2% occupied, located in the coastal regions of Los Angeles, Orange County, San Diego, the San Francisco Bay Area and Greater Seattle and 200 residential units located in the Hollywood submarket of Los Angeles. 
Board of Directors
 
Executive Management Team
 
Investor Relations
John Kilroy
Chairman
 
John Kilroy
President and CEO
 
12200 W. Olympic Blvd., Suite 200
Los Angeles, CA 90064
(310) 481-8400
Web: www.kilroyrealty.com
E-mail: investorrelations@kilroyrealty.com
Edward F. Brennan, PhD
Lead Independent
 
John T. Fucci
Executive VP, Asset Management
 
Jolie Hunt
 
 
Jeffrey C. Hawken
Executive VP and COO
 
Scott S. Ingraham
 
 
Tracy Murphy
Executive VP, Life Science
 
Gary R. Stevenson
 
 
Robert Paratte
Executive VP, Leasing and Business Development
 
Peter B. Stoneberg
 
 
Tyler H. Rose
Executive VP and CFO
 
 
 
 
Steve Rosetta
Executive VP and CIO
 
 
 
 
Heidi R. Roth
Executive VP and CAO
 
 
 
 
David Simon
Executive VP, Southern California
 
 
 
 
 
Justin W. Smart
Executive VP, Development and Construction Services
 
 
Equity Research Coverage
 
 
 
 
 
Bank of America Merrill Lynch
 
 
Green Street Advisors
 
James Feldman
(646) 855-5808
 
Jed Reagan
(949) 640-8780
BMO Capital Markets Corp.
 
 
J.P. Morgan
 
John P. Kim
(212) 885-4115
 
Anthony Paolone
(212) 622-6682
BTIG
 
 
KeyBanc Capital Markets
 
Thomas Catherwood
(212) 738-6140
 
Craig Mailman
(917) 368-2316
Citigroup Investment Research
 
 
RBC Capital Markets
 
Michael Bilerman
(212) 816-1383
 
Mike Carroll
(440) 715-2649
D. A. Davidson
 
 
Robert W. Baird & Co.
 
Barry Oxford
(212) 240-9871
 
David B. Rodgers
(216) 737-7341
Deutsche Bank Securities, Inc.
 
 
Stifel, Nicolaus & Company
 
Vincent Chao
(212) 250-6799
 
John W. Guinee III
(443) 224-1307
Evercore ISI
 
 
UBS Investment Research
 
Steve Sakwa
(212) 446-9462
 
Nicholas Yulico
(212) 713-3402
Goldman Sachs & Co.
 
 
Wells Fargo
 
Andrew Rosivach
(212) 902-2796
 
Blaine Heck
(443) 263-6529
 
Kilroy Realty Corporation is followed by the analysts listed above. Please note that any opinions, estimates or forecasts regarding Kilroy Realty Corporation’s performance made by these analysts are theirs alone and do not represent opinions, forecasts or predictions of Kilroy Realty Corporation or its management. Kilroy Realty Corporation does not by its reference above or distribution imply its endorsement of or concurrence with such information, conclusions or recommendations.

1

Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Executive Summary
 
 
 
Quarterly Financial Highlights
 
Quarterly Operating Highlights
 
 
 
• Net income available to common stockholders per share of $0.28
 
• Stabilized portfolio was 95.2% occupied and 96.9% leased at quarter-end
 
 
 
• FFO per share of $0.85
 
• 719,171 square feet of leases commenced in the stabilized portfolio
 
 
 
• Net income available to common stockholders per share and FFO per share
 
• 677,935 square feet of leases executed in the stabilized portfolio
both include a $0.05 charge from the early extinguishment of debt and $0.01 of
 
 
additional interest expense, both related to the redemption the 4.800%
 
• GAAP rents increased approximately 15.0% from prior levels
unsecured senior notes due July 2018
 
 
 
 
• Cash rents increased approximately 5.5% from prior levels. Excluding a short-
• Revenues of $177.6 million
 
term extension for approximately 135,000 square feet, cash rents increased
 
 
18.3%
• Same Store GAAP and Cash NOI was flat compared to the same period in the
 
 
prior year
 
 
 
 
 
• YTD Same Store GAAP and Cash NOI increased 1.1% and 3.2%, respectively,
 
 
compared to the prior year
 
 
 
 
 
 
 
 
 
 
 
Capital Markets Highlights
 
Strategic Highlights
 
 
 
• In November, repaid a $123.5 million, 4.270% mortgage note due February
 
• In October, signed a 15-year lease with Dropbox, Inc. for 100% of the 736,000
2018, at par. The mortgage encumbered a property owned as part of a venture
 
square feet of office space at The Exchange on 16th project, currently under
in which the Company owns a 56% interest
 
construction in the Mission Bay neighborhood of San Francisco
 
 
 
• In December, raised net proceeds of $17.5 million through the issuance of
 
• In October, acquired a 1.2 acre development site in the Little Italy
common stock under the at-the-market offering program
 
neighborhood of downtown San Diego, CA for $19.4 million in cash
 
 
 
• In December, issued $425.0 million of seven-year senior unsecured notes at
 
• In January, acquired three, two-story lab buildings encompassing 146,000 square
3.450% due December 2024 through a public offering
 
feet for approximately $111.0 million in the Oyster Point submarket of South San
 
 
Francisco
• In December, completed the early redemption of all $325.0 million of 4.800%
 
 
unsecured senior notes due July 2018 for a cash price of approximately $330.0
 
 
million
 
 
 
 
 
• In January, borrowed $75.0 million under our $150.0 million unsecured term
 
 
loan facility
 
 
 
 
 
• As of the date of this report, $70.0 million was outstanding on our unsecured
 
 
revolving credit facility
 
 
 
 
 
________________________
Note: Definitions for commonly used terms in this Supplemental Financial Report are on pages 32-33 “Definitions Included in Supplemental.”

2

Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Financial Highlights
(unaudited, $ in thousands, except per share amounts)
 
 
 
Three Months Ended
 
 
 
 
12/31/2017  (1)
 
9/30/2017 (1)
 
6/30/2017
 
   3/31/2017 (1)
 
12/31/2016
 
INCOME ITEMS:
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
177,561

 
$
181,534

 
$
180,598

 
$
179,308

 
$
168,645

 
 
Lease Termination Fees, net
 
198

 
760

 
367

 
794

 
323

 
 
Net Operating Income (2)
 
127,522

 
129,495

 
128,795

 
127,163

 
123,188

 
 
Capitalized Interest and Debt Costs
 
13,436

 
12,180

 
10,758

 
10,163

 
11,622

 
 
Net Income Available to Common Stockholders
 
28,529

 
66,558

 
29,833

 
26,329

 
29,426

 
 
EBITDA, as adjusted (2) (3)
 
112,565

 
116,956

 
115,530

 
113,295

 
106,814

 
 
Funds From Operations (3) (4) (5) (6)
 
86,539

 
89,547

 
88,767

 
81,934

 
84,292

 
 
Net Income Available to Common Stockholders per common share – diluted (5)
 
$
0.28

 
$
0.67

 
$
0.30

 
$
0.26

 
$
0.29

 
 
Funds From Operations per common share – diluted (5) (6)
 
$
0.85

 
$
0.88

 
$
0.87

 
$
0.81

 
$
0.87

 
LIQUIDITY ITEMS:
 
 
 
 
 
 
 
 
 
 
 
 
Funds Available for Distribution (4) (5) (7)
 
$
51,177

 
$
60,508

 
$
63,654

 
$
60,146

 
$
57,237

 
 
Dividends per common share (5)
 
$
0.425

 
$
0.425

 
$
0.425


$
0.375

 
$
0.375

 
RATIOS:
 
 
 
 
 
 
 
 
 
 
 
 
Net Operating Income Margins
 
71.8
%
 
71.3
%
 
71.3
%
 
70.9
%
 
73.0
%
 
 
Interest Coverage Ratio
 
4.2x

 
4.3x

 
4.2x

 
4.3x

 
4.2x

 
 
Fixed Charge Coverage Ratio
 
4.2x

 
4.2x

 
3.9x

 
3.8x

 
3.7x

 
 
FFO Payout Ratio (6)
 
49.5
%
 
47.7
%
 
48.1
%
 
45.9
%
 
42.5
%
 
 
FAD Payout Ratio (7)
 
83.6
%
 
70.6
%
 
67.1
%
 
62.6
%
 
62.6
%
 
ASSETS:
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Held for Investment before Depreciation
 
$
7,417,777

 
$
7,239,856

 
$
7,276,227

 
$
7,159,381

 
$
7,060,754

 
 
Total Assets
 
6,802,838

 
6,838,299

 
6,995,367

 
6,993,665

 
6,706,633

 
CAPITALIZATION: (8)
 
 
 
 
 
 
 
 
 
 
 
 
Total Debt
 
$
2,364,395

 
$
2,449,025

 
$
2,579,552

 
$
2,581,061

 
$
2,333,766

 
 
Total Preferred Equity and Noncontrolling Interests in the Operating Partnership
 

 

 
100,000

 
100,000

 
200,000

 
 
Total Common Equity and Noncontrolling Interests in the Operating Partnership
 
7,517,070

 
7,144,676

 
7,547,195

 
7,233,389

 
6,999,904

 
 
Total Market Capitalization
 
9,881,465

 
9,593,701

 
10,226,747

 
9,914,450

 
9,533,670

 
 
Total Debt / Total Market Capitalization
 
23.9
%
 
25.5
%
 
25.2
%
 
26.0
%
 
24.5
%
 
 
Total Debt and Preferred / Total Market Capitalization
 
N/A

 
N/A

 
26.2
%
 
27.0
%
 
26.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
______________________________________________________
Note: Definitions for commonly used terms in this Supplemental Financial Report are on pages 32-33 “Definitions Included in Supplemental.”
(1)
Net Income Available to Common Stockholders includes $37.3 million and $2.3 million of gains on sales of depreciable operating properties for the three months ended September 30, 2017 and March 31, 2017, respectively, a $0.4 million gain on sale of land for the three months ended September 30, 2017, and a $5.3 million loss on early extinguishment of debt for the three months ended December 31, 2017.
(2)
Please refer to pages 34-35 for reconciliations of GAAP Net Income Available to Common Stockholders to Net Operating Income and EBITDA, as adjusted.
(3)
EBITDA, as adjusted, and Funds From Operations for the three months ended September 30, 2017 include a $0.4 million gain on sale of land.
(4)
Please refer to page 8 for reconciliations of Net Income Available to Common Stockholders to Funds From Operations available to common stockholders and unitholders and Funds Available for Distribution to common stockholders and unitholders and page 8 for a reconciliation of GAAP Net Cash Provided by Operating Activities to Funds Available for Distribution to common stockholders and unitholders.
(5)
Reported amounts are attributable to common stockholders, common unitholders and restricted stock unit holders.
(6)
Funds From Operations for the three months ended December 31, 2017 includes a $5.3 million loss on early extinguishment of debt. Funds From Operations for the three months ended September 30, 2017 includes a $3.7 million or $0.04 per share non-cash charge related to the original issuance costs of Series H preferred stock that was redeemed on August 15, 2017. Funds From Operations for the three months ended March 31, 2017 includes a $3.8 million or $0.04 per share non-cash charge related to the original issuance costs of Series G preferred stock that was redeemed on March 30, 2017.
(7)
Funds Available for Distribution for the three months ended December 31, 2017 includes a $5.0 million cash loss on early extinguishment of debt.
(8)
Please refer to page 26 for additional information regarding our capital structure.

3

Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Net Income Available to Common Stockholders / FFO Guidance and Outlook
(unaudited, $ and shares/units in thousands, except per share amounts)

The Company is providing an initial guidance range of NAREIT-defined FFO per diluted share for its fiscal year 2018 of $3.45 to $3.65 per share with a midpoint of $3.55 per share.
 
 
 
Full Year 2018 Range at December 31, 2017
 
 
 
 
Low End
 
High End
 
 
Net income available to common stockholders per share - diluted
 
$
1.37

 
$
1.57

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - diluted (1)
 
99,300

 
99,300

 
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
136,000

 
$
156,000

 
 
Adjustments:
 
 
 
 
 
 
Net income attributable to noncontrolling common units of the Operating Partnership
 
3,200

 
3,400

 
 
Net income attributable to noncontrolling interests in consolidated property partnerships
 
14,500

 
15,500

 
 
Depreciation and amortization of real estate assets
 
224,000

 
224,000

 
 
Gains on sales of depreciable real estate
 

 

 
 
Funds From Operations attributable to noncontrolling interests in consolidated property partnerships
 
(23,500
)
 
(24,500
)
 
 
Funds From Operations (2)
 
$
354,200

 
$
374,400

 
 
 
 
 
 
 
 
 
Weighted average common shares and units outstanding - diluted (3)
 
102,600

 
102,600

 
 
 
 
 
 
 
 
 
FFO per common share/unit - diluted (3)
 
$
3.45

 
$
3.65

 
 
 
 
 
 
 
 

Key 2018 assumptions include:
Dispositions of $250.0 to $750.0 million with a midpoint of $500.0 million
Same Store Cash Net Operating Income growth of 0 to 1% (2) 
Year-end occupancy of 94.0% to 95.0%
Net Operating Income Margin of approximately 70.5% (2) 
Total development spending of approximately $500.0 million
________________________
(1)
Calculated based on estimated weighted average shares outstanding including participating share-based awards (i.e. nonvested stock and certain time based restricted stock units).
(2)
See pages 29-31 for Management Statements on Funds From Operation, Same Store Cash Net Operating Income and Net Operating Income and page 33 for the definition of Net Operating Income Margin.
(3)
Calculated based on estimated weighted average shares outstanding including participating share-based awards (i.e. nonvested stock and certain time based restricted stock units) and assuming the exchange of all estimated common limited partnership units outstanding. Reported amounts are attributable to common stockholders, common unitholders, and restricted stock unit holders.

The Company’s guidance estimates for the full year 2018, and the reconciliation of net income available to common stockholders per share - diluted and FFO per share and unit - diluted included within this report, reflect management’s views on current and future market conditions, including assumptions with respect to rental rates, occupancy levels, and the earnings impact of the events referenced in this report. Although these guidance estimates reflect the impact on the Company’s operating results of an assumed range of future disposition activity, these guidance estimates do not include any estimates of possible future gains or losses from possible future dispositions because the magnitude of gains or losses on sales of depreciable operating properties, if any, will depend on the sales price and depreciated cost basis of the disposed assets at the time of disposition, information that is not known at the time the Company provides guidance, and the timing of any gain recognition will depend on the closing of the dispositions, information that is also not known at the time the Company provides guidance and may occur after the relevant guidance period. We caution you not to place undue reliance on our assumed range of future disposition activity because any potential future disposition transactions will ultimately depend on the market conditions and other factors, including but not limited to the Company’s capital needs, the particular assets being sold and the Company’s ability to defer some or all of the taxable gain on the sales. These guidance estimates also do not include the impact on operating results from potential future acquisitions, possible capital markets activity, possible future impairment charges or any events outside of the Company’s control. There can be no assurance that the Company’s actual results will not differ materially from these estimates.

4

Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Common Stock Data (NYSE: KRC)
 
 
 
Three Months Ended
 
 
 
12/31/2017
 
9/30/2017
 
6/30/2017
 
3/31/2017
 
12/31/2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High Price
$
76.18

 
$
75.69

 
$
77.09

 
$
77.91

 
$
76.88

 
 
Low Price
$
70.17

 
$
67.47

 
$
70.06

 
$
70.84

 
$
66.73

 
 
Closing Price
$
74.65

 
$
71.12

 
$
75.15

 
$
72.08

 
$
73.22

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends per share – annualized
$
1.70

 
$
1.70

 
$
1.70

 
$
1.50

 
$
1.50

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closing common shares (in 000’s) (1) (2)
98,620

 
98,382

 
98,351

 
98,275

 
93,219

 
 
Closing common partnership units (in 000’s) (1)
2,077

 
2,077

 
2,077

 
2,077

 
2,382

 
 
 
100,697

 
100,459


100,428

 
100,352

 
95,601

 
 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
As of the end of the period.
(2)
In the fourth quarter of 2017, the Company issued 235,077 common shares under its at-the-market stock offering program at a weighted average price of $75.40 per share before selling commissions.







5

Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Consolidated Balance Sheets
(unaudited, $ in thousands)
 
 
12/31/2017
 
9/30/2017
 
6/30/2017
 
3/31/2017
 
12/31/2016
 
 
ASSETS:

 
 
 
 
 
 
 
 
 
 
Land and improvements
$
1,076,172

 
$
1,076,172

 
$
1,108,971

 
$
1,108,971

 
$
1,108,971

 
 
Buildings and improvements
4,908,797

 
4,871,667

 
4,983,638

 
4,962,732

 
4,938,250

 
 
Undeveloped land and construction in progress
1,432,808

 
1,292,017

 
1,183,618

 
1,087,678

 
1,013,533

 
 
Total real estate assets held for investment
7,417,777

 
7,239,856

 
7,276,227

 
7,159,381

 
7,060,754

 
 
Accumulated depreciation and amortization
(1,264,162
)
 
(1,216,358
)
 
(1,234,079
)
 
(1,186,246
)
 
(1,139,853
)
 
 
Total real estate assets held for investment, net
6,153,615

 
6,023,498

 
6,042,148

 
5,973,135

 
5,920,901

 
 
Real estate assets and other assets held for sale, net

 

 

 

 
9,417

 
 
Cash and cash equivalents
57,649

 
64,954

 
387,616

 
478,391

 
193,418

 
 
Restricted cash
9,149

 
179,276

 
8,249

 
7,199

 
56,711

 
 
Marketable securities
20,674

 
18,851

 
16,010

 
15,163

 
14,773

 
 
Current receivables, net
16,926

 
18,626

 
13,703

 
13,740

 
13,460

 
 
Deferred rent receivables, net
246,391

 
238,959

 
233,427

 
225,860

 
218,977

 
 
Deferred leasing costs and acquisition-related intangible assets, net
183,728

 
185,420

 
195,320

 
202,499

 
208,368

 
 
Prepaid expenses and other assets, net
114,706

 
108,715

 
98,894

 
77,678

 
70,608

 
 
TOTAL ASSETS
$
6,802,838

 
$
6,838,299

 
$
6,995,367

 
$
6,993,665

 
$
6,706,633

 
 
LIABILITIES AND EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Secured debt, net
$
340,800

 
$
465,828

 
$
467,758

 
$
469,670

 
$
472,772

 
 
Unsecured debt, net
2,006,263

 
1,909,381

 
2,097,083

 
2,096,356

 
1,847,351

 
 
Unsecured line of credit

 
60,000

 

 

 

 
 
Accounts payable, accrued expenses and other liabilities
249,637

 
271,405

 
219,483

 
215,469

 
202,391

 
 
Accrued dividends and distributions
43,448

 
43,324

 
44,105

 
38,983

 
222,306

 
 
Deferred revenue and acquisition-related intangible liabilities, net
145,890

 
145,556

 
148,729

 
153,369

 
150,360

 
 
Rents received in advance and tenant security deposits
56,484

 
46,925

 
55,738

 
53,677

 
52,080

 
 
Liabilities and deferred revenue of real estate assets held for sale

 

 

 

 
56

 
 
Total liabilities
2,842,522

 
2,942,419

 
3,032,896

 
3,027,524

 
2,947,316

 
 
Equity:
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
6.875% Series G Cumulative Redeemable Preferred stock

 

 

 

 
96,155

 
 
6.375% Series H Cumulative Redeemable Preferred stock

 

 
96,256

 
96,256

 
96,256

 
 
Common stock
986

 
984

 
984

 
983

 
932

 
 
Additional paid-in capital
3,822,492

 
3,797,546

 
3,792,028

 
3,782,291

 
3,457,649

 
 
Distributions in excess of earnings
(122,685
)
 
(108,667
)
 
(132,799
)
 
(120,207
)
 
(107,997
)
 
 
Total stockholders’ equity
3,700,793

 
3,689,863

 
3,756,469

 
3,759,323

 
3,542,995

 
 
Noncontrolling Interests
 
 
 
 
 
 
 
 
 
 
 
Common units of the Operating Partnership
77,948

 
77,911

 
77,296

 
77,432

 
85,590

 
 
Noncontrolling interests in consolidated property partnerships
181,575

 
128,106

 
128,706

 
129,386

 
130,732

 
 
Total noncontrolling interests
259,523

 
206,017

 
206,002

 
206,818

 
216,322

 
 
Total equity
3,960,316

 
3,895,880

 
3,962,471

 
3,966,141

 
3,759,317

 
 
TOTAL LIABILITIES AND EQUITY
$
6,802,838

 
$
6,838,299

 
$
6,995,367

 
$
6,993,665

 
$
6,706,633

 
 
 
 
 
 
 
 
 
 
 
 
 

6

Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Consolidated Statements of Operations
(unaudited, $ and shares in thousands, except per share amounts)
 
 
 
Three Months Ended December 31,
 
Year Ended December 31,
 
 
 
 
2017
 
2016
 
2017
 
2016
 
 
REVENUES
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
158,369

 
$
150,466

 
$
633,896

 
$
574,413

 
 
Tenant reimbursements
 
18,331

 
17,131

 
76,559

 
61,079

 
 
Other property income
 
861

 
1,048

 
8,546

 
7,080

 
 
Total revenues
 
177,561

 
168,645

 
719,001

 
642,572

 
 
EXPENSES
 
 
 
 
 
 
 
 
 
 
Property expenses
 
32,356

 
28,696

 
129,971

 
113,932

 
 
Real estate taxes
 
15,571

 
15,828

 
66,449

 
55,206

 
 
Provision for bad debts
 
526

 

 
3,269

 

 
 
Ground leases
 
1,586

 
933

 
6,337

 
3,439

 
 
General and administrative expenses
 
16,831

 
16,080

 
60,581

 
57,029

 
 
Acquisition-related expenses (1)
 

 
938

 

 
1,902

 
 
Depreciation and amortization
 
60,149

 
56,782

 
245,886

 
217,234

 
 
Total expenses
 
127,019

 
119,257

 
512,493

 
448,742

 
 
OTHER (EXPENSES) INCOME
 
 
 
 
 
 
 
 
 
 
Interest income and other net investment gains
 
1,874

 
644

 
5,503

 
1,764

 
 
Interest expense
 
(14,564
)
 
(14,614
)
 
(66,040
)
 
(55,803
)
 
 
Loss on early extinguishment of debt
 
(5,312
)
 

 
(5,312
)
 

 
 
Total other (expenses) income
 
(18,002
)
 
(13,970
)
 
(65,849
)
 
(54,039
)
 
 
INCOME FROM OPERATIONS BEFORE GAINS (LOSSES) ON SALES OF REAL ESTATE
 
32,540

 
35,418

 
140,659

 
139,791

 
 
Net gain (loss) on sale of land
 

 

 
449

 
(295
)
 
 
Gains on sales of depreciable operating properties
 

 

 
39,507

 
164,302

 
 
NET INCOME
 
32,540

 
35,418

 
180,615

 
303,798

 
 
Net income attributable to noncontrolling common units of the Operating Partnership
 
(590
)
 
(743
)
 
(3,223
)
 
(6,635
)
 
 
Net income attributable to noncontrolling interests in consolidated property partnerships
 
(3,421
)
 
(1,937
)
 
(12,780
)
 
(3,375
)
 
 
Total income attributable to noncontrolling interests
 
(4,011
)
 
(2,680
)
 
(16,003
)
 
(10,010
)
 
 
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
 
28,529

 
32,738

 
164,612

 
293,788

 
 
Preferred dividends
 

 
(3,312
)
 
(5,774
)
 
(13,250
)
 
 
Original issuance costs of redeemed preferred stock
 

 

 
(7,589
)
 

 
 
Total preferred dividends
 

 
(3,312
)
 
(13,363
)
 
(13,250
)
 
 
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
 
$
28,529

 
$
29,426

 
$
151,249

 
$
280,538

 
 
Weighted average common shares outstanding – basic
 
98,424

 
92,706

 
98,114

 
92,342

 
 
Weighted average common shares outstanding – diluted
 
99,128

 
93,590

 
98,727

 
93,023

 
 
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS PER SHARE
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders per share – basic
 
$
0.28

 
$
0.29

 
$
1.52

 
$
3.00

 
 
Net income available to common stockholders per share – diluted
 
$
0.28

 
$
0.29

 
$
1.51

 
$
2.97

 
 
 
 
 
 
 
 
 
 
 
 
______________________
(1)
On January 1, 2017, the Company adopted new accounting guidance clarifying the definition of a business. As a result, operating property acquisitions occurring after January 1, 2017 will generally be accounted for as asset acquisitions rather than business combinations and acquisition-related expenses will no longer be expensed as incurred but instead will be capitalized as a cost of the assets acquired.

7

Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Funds From Operations and Funds Available for Distribution
(unaudited, $ in thousands, except per share amounts)
 
 
 
Three Months Ended December 31,
 
Year Ended December 31,
 
 
 
 
2017
 
2016
 
2017
 
2016
 
 
FUNDS FROM OPERATIONS: (1)
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
28,529

 
$
29,426

 
$
151,249

 
$
280,538

 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling common units of the Operating Partnership
 
590

 
743

 
3,223

 
6,635

 
 
Net income attributable to noncontrolling interests in consolidated property partnerships
 
3,421

 
1,937

 
12,780

 
3,375

 
 
Depreciation and amortization of real estate assets
 
59,987

 
55,569

 
241,862

 
213,156

 
 
Gains on sales of depreciable real estate
 

 

 
(39,507
)
 
(164,302
)
 
 
Funds From Operations attributable to noncontrolling interests in consolidated property partnerships
 
(5,988
)
 
(3,383
)
 
(22,820
)
 
(5,660
)
 
 
Funds From Operations (1)(2)
 
$
86,539

 
$
84,292

 
$
346,787

 
$
333,742

 
 
Weighted average common shares/units outstanding – basic (3)
 
101,707

 
96,363

 
101,443

 
95,911

 
 
Weighted average common shares/units outstanding – diluted (4)
 
102,411

 
97,247

 
102,056

 
96,592

 
 
FFO per common share/unit – basic (1)
 
$
0.85

 
$
0.87

 
$
3.42

 
$
3.48

 
 
FFO per common share/unit – diluted (1)
 
$
0.85

 
$
0.87

 
$
3.40

 
$
3.46

 
 
FUNDS AVAILABLE FOR DISTRIBUTION: (1)(9)
 
 
 
 
 
 
 
 
 
 
Funds From Operations (1)(2)
 
$
86,539

 
$
84,292

 
$
346,787

 
$
333,742

 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
Recurring tenant improvements, leasing commissions and capital expenditures
 
(32,742
)
 
(22,902
)
 
(91,287
)
 
(66,013
)
 
 
Amortization of deferred revenue related to tenant-funded tenant improvements (2)(5)
 
(4,373
)
 
(3,544
)
 
(16,767
)
 
(13,244
)
 
 
Net effect of straight-line rents
 
(7,432
)
 
(6,773
)
 
(31,523
)
 
(29,629
)
 
 
Amortization of net below market rents (6)
 
(2,502
)
 
(2,038
)
 
(8,528
)
 
(7,166
)
 
 
Amortization of deferred financing costs and net debt discount/premium
 
634

 
361

 
1,895

 
1,345

 
 
Non-cash amortization of share-based compensation awards
 
5,429

 
5,801

 
19,046

 
21,064

 
 
Original issuance costs of redeemed preferred stock
 

 

 
7,589

 

 
 
Other lease related adjustments, net (7)
 
2,376

 
885

 
1,778

 
4,168

 
 
Adjustments attributable to noncontrolling interests in consolidated property partnerships (8)
 
3,248

 
1,155

 
6,495

 
1,470

 
 
Funds Available for Distribution (1)(9)
 
$
51,177

 
$
57,237

 
$
235,485

 
$
245,737

 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
See page 31 for Funds From Operations and Funds Available for Distribution Management Statements. Reported per common share/unit amounts are attributable to common stockholders, common unitholders and restricted stock unit holders.
(2)
FFO available to common stockholders and unitholders includes amortization of deferred revenue related to tenant-funded tenant improvements of $4.4 million and $3.5 million for the three months ended December 31, 2017 and 2016, respectively, and $16.8 million and $13.2 million for the year ended December 31, 2017 and 2016, respectively. These amounts are adjusted out of FFO in our calculation of FAD.
(3)
Calculated based on weighted average shares outstanding including participating share-based awards and assuming the exchange of all common limited partnership units outstanding.
(4)
Calculated based on weighted average shares outstanding including participating and non-participating share-based awards (i.e. nonvested stock and time based restricted stock units), dilutive impact of stock options and contingently issuable shares and assuming the exchange of all common limited partnership units outstanding.
(5)
Represents revenue recognized during the period as a result of the amortization of deferred revenue recorded for tenant-funded tenant improvements.
(6)
Represents the non-cash adjustment related to the acquisition of buildings with above and/or below market rents.
(7)
Includes other non-cash adjustments attributable to lease-related GAAP revenue recognition timing differences.
(8)
Includes second generation capital expenditures for prior periods from noncontrolling interests.
(9)
For the three months and year ended December 31, 2017, Funds Available for Distribution includes a $5.0 million cash loss on early extinguishment of debt.

8

Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Reconciliation of GAAP Net Cash Provided by Operating Activities to Funds Available for Distribution
(unaudited, $ in thousands)
 
 
 
Three Months Ended December 31,
 
Year Ended December 31,
 
 
 
 
2017
 
2016
 
2017
 
2016
 
 
GAAP Net Cash Provided by Operating Activities 
 
$
70,470

 
$
92,449

 
$
347,012

 
$
345,054

 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
Recurring tenant improvements, leasing commissions and capital expenditures
 
(32,742
)
 
(22,902
)
 
(91,287
)
 
(66,013
)
 
 
Loss on early extinguishment of debt
 
(5,312
)
 

 
(5,312
)
 

 
 
Net gain (loss) on sale of land
 

 

 
449

 
(295
)
 
 
Preferred dividends
 

 
(3,312
)
 
(5,774
)
 
(13,250
)
 
 
Depreciation of non-real estate furniture, fixtures and equipment
 
(162
)
 
(1,213
)
 
(4,024
)
 
(4,078
)
 
 
Provision for uncollectible tenant receivables
 
(220
)
 

 
(1,517
)
 

 
 
Net changes in operating assets and liabilities (1)
 
23,566

 
(2,586
)
 
20,566

 
(6,175
)
 
 
Noncontrolling interests in property partnerships share of FAD
 
(2,740
)
 
(2,228
)
 
(16,325
)
 
(4,190
)
 
 
Cash adjustments related to investing and financing activities
 
(1,683
)
 
(2,971
)
 
(8,303
)
 
(5,316
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds Available for Distribution(2)
 
$
51,177

 
$
57,237

 
$
235,485

 
$
245,737

 
 
 
 
 
 
 
 
 
 
 
 
_______________________
(1)
Primarily includes changes in the following assets and liabilities: marketable securities; current receivables; prepaid expenses and other assets; accounts payable, accrued expenses and other liabilities; and rents received in advance and tenant security deposits. 
(2)
Please refer to page 31 for a Management Statement on Funds Available for Distribution.


9

Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Same Store Analysis (1) 
(unaudited, $ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31,
 
Year Ended December 31,
 
 
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
 
Total Same Store Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of properties
 
88

 
88

 
 
 
88

 
88

 
 
 
 
Square Feet
 
12,182,805

 
12,182,805

 
 
 
12,182,805

 
12,182,805

 
 
 
 
Percent of Stabilized Portfolio
 
88.8
%
 
86.9
%
 
 
 
88.8
%
 
86.9
%
 
 
 
 
Average Occupancy
 
94.1
%
 
96.7
%
 
 
 
94.7
%
 
96.5
%
 
 
 
 
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
131,591

 
$
129,943

 
1.3
 %
 
$
520,312

 
$
515,813

 
0.9
 %
 
 
Tenant reimbursements
 
13,819

 
12,649

 
9.2
 %
 
57,411

 
50,472

 
13.7
 %
 
 
Other property income
 
547

 
649

 
(15.7
)%
 
6,093

 
1,499

 
306.5
 %
 
 
Total operating revenues
 
145,957

 
143,241

 
1.9
 %
 
583,816

 
567,784

 
2.8
 %
 
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property expenses
 
25,779

 
23,478

 
9.8
 %
 
104,428

 
97,672

 
6.9
 %
 
 
Real estate taxes
 
12,598

 
11,843

 
6.4
 %
 
47,543

 
45,468

 
4.6
 %
 
 
Provision for bad debts
 
81

 
(163
)
 
(149.7
)%
 
1,755

 
(124
)
 
(1,515.3
)%
 
 
Ground leases
 
971

 
850

 
14.2
 %
 
3,927

 
3,356

 
17.0
 %
 
 
Total operating expenses
 
39,429

 
36,008

 
9.5
 %
 
157,653

 
146,372

 
7.7
 %
 
 
GAAP Net Operating Income
 
$
106,528

 
$
107,233

 
(0.7
)%
 
$
426,163

 
$
421,412

 
1.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same Store Analysis (Cash Basis) (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31,
 
Year Ended December 31,
 
 
 
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
 
Total operating revenues
 
$
140,721

 
$
136,975

 
2.7
 %
 
$
554,375

 
$
532,586

 
4.1
 %
 
 
Total operating expenses
 
39,369

 
36,190

 
8.8
 %
 
155,983

 
146,578

 
6.4
 %
 
 
Cash Net Operating Income
 
$
101,352

 
$
100,785

 
0.6
 %
 
$
398,392

 
$
386,008

 
3.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
Same Store is defined as all properties owned and included in our stabilized portfolio as of January 1, 2016 and still owned and included in the stabilized portfolio as of December 31, 2017 and includes 100% of consolidated property partnerships.
(2)
Please refer to page 34 for a reconciliation of Net Income Available to Common Stockholders to Same Store GAAP Net Operating Income and Same Store Cash Net Operating Income.


10

Kilroy Realty Corporation
Fourth Quarter 2017 Supplemental Financial Report


Stabilized Portfolio Occupancy Overview by Region

 
 
 
 
 
Portfolio Breakdown
 
 
 
Occupied at
 
Leased at
 
 
OFFICE PORTFOLIO
 
Buildings
 
YTD NOI %
 
SF %
 
Total SF
 
12/31/2017
 
9/30/2017
 
12/31/2017
 
 
Los Angeles and Ventura Counties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101 Corridor
 
4
 
1.1
%
 
2.3
%
 
309,438

 
89.3
%
 
90.1
%
 
91.2
%
 
 
El Segundo
 
5
 
6.0
%
 
8.0
%
 
1,093,050

 
97.5
%
 
98.0
%
 
98.2
%
 
 
Hollywood
 
6
 
4.9
%
 
5.9
%
 
806,557

 
94.3
%
 
91.6
%
 
97.9
%
 
 
Long Beach
 
7
 
3.4
%
 
6.9
%
 
949,910

 
92.4
%
 
91.7
%
 
92.8
%
 
 
West Hollywood
 
4
 
1.8
%
 
1.3
%
 
178,699