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Section 1: 8-K (8-K)

Document


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):
July 25, 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 July 25, 2018, Kilroy Realty Corporation issued a press release announcing its earnings for the quarter ended June 30, 2018 and distributed certain supplemental financial information. On July 25, 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 ended June 30, 2018 and distributed certain supplemental information. On July 25, 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: July 25, 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

394367170_q218supplementalcoverpagea01.jpg


Kilroy Realty Corporation
Second Quarter 2018 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, 2017, 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
Second Quarter 2018 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 June 30, 2018, the Company’s stabilized portfolio totaled approximately 13.9 million square feet of office space that was 94.0% 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
 
 
 
 
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
 
Daniel Ismail
(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
Evercore ISI
 
 
Stifel, Nicolaus & Company
 
Steve Sakwa
(212) 446-9462
 
John W. Guinee III
(443) 224-1307
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
Second Quarter 2018 Supplemental Financial Report


Executive Summary
 
 
 
Quarterly Financial Highlights
 
Quarterly Operating Highlights
 
 
 
• Net income available to common stockholders per share of $0.27
 
• Stabilized portfolio was 94.0% occupied and 96.8% leased at quarter-end
 
 
 
• FFO per share of $0.86, including a $0.05 per share charge for provision for bad
 
• 850,241 square feet of leases commenced in the stabilized portfolio
debts, primarily related to a $0.07 per share charge for one tenant that the company
 
 
is in ongoing discussions with, partially offset by a $0.02 per share reversal of
 
• 1,315,067 square feet of leases executed in the stabilized portfolio
provision due to the assignment of a lease to a credit tenant
 
 
 
 
• GAAP rents increased approximately 30.2% from prior levels
• Revenues of $187.1 million
 
 
 
 
• Cash rents increased approximately 9.8% from prior levels
• Same Store GAAP NOI increased 1.7% compared to the prior year
 
 
 
 
• Executed a 12-year lease with GM Cruise, LLC for 375,000 square feet at 301, 333
• Same Store Cash NOI increased 5.1% compared to the prior year
 
and 345 Brannan Street in San Francisco. 301 and 333 Brannan Street are included
 
 
in our stabilized office portfolio and we expect to close on the acquisition of 345
 
 
Brannan Street later this year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Markets Highlights
 
Strategic Highlights
 
 
 
• In May, completed a private placement of $50.0 million of eight-year, 4.30%
 
• In June, completed the acquisition of Kilroy Oyster Point, an approximately 39-acre
unsecured senior notes (“Series A Notes”) and $200.0 million of eight-year 4.35%
 
development site in South San Francisco, fully entitled for 2.5 million square feet of
unsecured senior notes (“Series B Notes”), both with delayed draw options. In July,
 
life science and office space, for a cash purchase price of approximately $308.2
drew the full amount of the Series A Notes. The Series B Notes are required to be
 
million
drawn by October 22, 2018
 
 
 
 
• In June, transferred 100 Hooper, a $270.0 million, 400,000 square foot development
• In May, issued all common stock remaining under the company’s 2014 $300.0
 
project located in San Francisco’s SOMA district from under construction to the
   million at-the-market (“ATM”) offering program at a weighted average price of
 
tenant improvement phase. The property’s 314,000 square feet of office space is
$73.01 per share before selling commissions, generating net proceeds of $98.7
 
fully leased to Adobe and the lease is expected to commence in the third quarter of
million
 
    2018. The remaining 86,000 square feet of production, distribution and repair
 
 
    (“PDR”) space is 39% leased
• In June, established a new $500.0 million ATM offering program and issued
 
 
common stock under the program at a weighted average price of $76.23 per
 
• In June, transferred The Exchange on 16th, a $570.0 million, 750,000 square foot
share before selling commissions, generating net proceeds of $26.3 million
 
development project located in San Francisco’s Mission Bay from under
 
 
construction to the tenant improvement phase. The office portion is fully leased to
• As of the date of this report, $290.0 million was outstanding on our unsecured
 
Dropbox, and the lease will commence in phases
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
Second Quarter 2018 Supplemental Financial Report


Financial Highlights
(unaudited, $ in thousands, except per share amounts)
 
 
Three Months Ended
 
 
 
6/30/2018 (1)
 
3/31/2018
 
12/31/2017 (1)
 
9/30/2017 (1)
 
6/30/2017
 
INCOME ITEMS:
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
187,072

 
$
182,822

 
$
177,561

 
$
181,534

 
$
180,598

 
 
Lease Termination Fees, net
1,093

 
60

 
198

 
760

 
367

 
 
Net Operating Income (2)
129,465

 
132,709

 
127,522

 
129,495

 
128,795

 
 
Capitalized Interest and Debt Costs
15,811

 
13,582

 
13,436

 
12,180

 
10,758

 
 
Net Income Available to Common Stockholders
27,549

 
36,246

 
28,529

 
66,558

 
29,833

 
 
EBITDA, as adjusted (2) (3)
108,473

 
117,184

 
112,565

 
116,956

 
115,530

 
 
Funds From Operations (3) (4) (5) (6)
88,629

 
96,285

 
86,539

 
89,547

 
88,767

 
 
Net Income Available to Common Stockholders per common share – diluted (5)
$
0.27

 
$
0.36

 
$
0.28

 
$
0.67

 
$
0.30

 
 
Funds From Operations per common share – diluted (3) (5) (6)
$
0.86

 
$
0.94

 
$
0.85

 
$
0.88

 
$
0.87

 
LIQUIDITY ITEMS:
 
 
 
 
 
 
 
 
 
 
 
Funds Available for Distribution (4) (5) (7)
$
51,953

 
$
75,537

 
$
51,177

 
$
60,508

 
$
63,654

 
 
Dividends per common share (5)
$
0.455

 
$
0.425

 
$
0.425

 
$
0.425

 
$
0.425

 
RATIOS:
 
 
 
 
 
 
 
 
 
 
 
Net Operating Income Margins
69.2
%
 
72.6
%
 
71.8
%
 
71.3
%
 
71.3
%
 
 
Interest Coverage Ratio
3.9x

 
4.5x

 
4.2x

 
4.3x

 
4.2x

 
 
Fixed Charge Coverage Ratio
3.9x

 
4.5x

 
4.2x

 
4.2x

 
3.9x

 
 
FFO Payout Ratio (3) (6)
52.7
%
 
44.5
%
 
49.5
%
 
47.7
%
 
48.1
%
 
 
FAD Payout Ratio (7)
89.9
%
 
56.8
%
 
83.6
%
 
70.6
%
 
67.1
%
 
ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Real Estate Held for Investment before Depreciation
$
8,138,413

 
$
7,645,666

 
$
7,417,777

 
$
7,239,856

 
$
7,276,227

 
 
Total Assets
7,384,784

 
6,965,932

 
6,802,838

 
6,838,299

 
6,995,367

 
CAPITALIZATION: (8)
 
 
 
 
 
 
 
 
 
 
 
Total Debt
$
2,807,627

 
$
2,563,517

 
$
2,364,395

 
$
2,449,025

 
$
2,579,552

 
 
Total Preferred Equity and Noncontrolling Interests in the Operating Partnership

 

 

 

 
100,000

 
 
Total Common Equity and Noncontrolling Interests in the Operating Partnership
7,762,978

 
7,160,602

 
7,517,070

 
7,144,676

 
7,547,195

 
 
Total Market Capitalization
10,570,605

 
9,724,119

 
9,881,465

 
9,593,701

 
10,226,747

 
 
Total Debt / Total Market Capitalization
26.6
%
 
26.4
%
 
23.9
%
 
25.5
%
 
25.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
______________________________________________________
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 $5.6 million of provision for bad debts for the three months ended June 30, 2018, $37.3 million of gains on sales of depreciable operating properties and 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 include $5.6 million of provision for bad debts and a $0.4 million gain on sale of land for the three months ended June 30, 2018 and September 30, 2017, respectively. The Company’s calculation of EBITDA, as adjusted, is the same as EBITDAre, as defined by NAREIT, as the Company does not have any unconsolidated joint ventures.
(4)
Please refer to page 8 for reconciliations of GAAP 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 9 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.
(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
Second Quarter 2018 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 updated guidance range of NAREIT-defined FFO per diluted share for its fiscal year 2018 of $3.47 to $3.57 per share with a midpoint of $3.52 per share.
 
 
 
Full Year 2018 Range at June 30, 2018
 
 
 
 
Low End
 
High End
 
 
Net income available to common stockholders per share - diluted
 
$
1.30

 
$
1.40

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - diluted (1)
 
101,000

 
101,000

 
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
131,000

 
$
141,000

 
 
Adjustments:
 
 
 
 
 
 
Net income attributable to noncontrolling common units of the Operating Partnership
 
2,600

 
3,000

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

 
15,500

 
 
Depreciation and amortization of real estate assets
 
237,000

 
237,000

 
 
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)
 
$
361,600

 
$
372,000

 
 
 
 
 
 
 
 
 
Weighted average common shares and units outstanding - diluted (3)
 
104,300

 
104,300

 
 
 
 
 
 
 
 
 
FFO per common share/unit - diluted (3)
 
$
3.47

 
$
3.57

 
 
 
 
 
 
 
 

Key 2018 assumptions include:
Dispositions of $250.0 to $750.0 million
Same store cash net operating income growth of 1 to 2% (2) 
Year-end occupancy of 94.0% to 95.0%
Net operating income margin of approximately 70.0% to 70.5% (2) 
Remaining development spending of approximately $250.0 to $300.0 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 Operations, 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
Second Quarter 2018 Supplemental Financial Report


Common Stock Data (NYSE: KRC)
 
 
 
Three Months Ended
 
 
 
6/30/2018
 
3/31/2018
 
12/31/2017
 
9/30/2017
 
6/30/2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High Price
$
77.34

 
$
74.27

 
$
76.18

 
$
75.69

 
$
77.09

 
 
Low Price
$
68.96

 
$
63.72

 
$
70.17

 
$
67.47

 
$
70.06

 
 
Closing Price
$
75.64

 
$
70.96

 
$
74.65

 
$
71.12

 
$
75.15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends per share – annualized (1)
$
1.82

 
$
1.70

 
$
1.70

 
$
1.70

 
$
1.70

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closing common shares (in 000’s) (2) (3)
100,560

 
98,840

 
98,620

 
98,382

 
98,351

 
 
Closing common partnership units (in 000’s) (2)
2,071

 
2,071

 
2,077

 
2,077

 
2,077

 
 
 
102,631

 
100,911

 
100,697


100,459

 
100,428

 
 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
In May 2018, the regular quarterly cash dividend was increased to an annualized rate of $1.82 per share, a 7.1% increase from the previous annualized dividend level of $1.70 per share.
(2)
As of the end of the period.
(3)
In the second quarter of 2018, the Company issued 1,719,195 common shares under its ATM offering programs at a weighted average price of $73.66 per share before selling commissions.







5

Kilroy Realty Corporation
Second Quarter 2018 Supplemental Financial Report


Consolidated Balance Sheets
(unaudited, $ in thousands)
 
 
6/30/2018
 
3/31/2018
 
12/31/2017
 
9/30/2017
 
6/30/2017
 
 
ASSETS:

 
 
 
 
 
 
 
 
 
 
Land and improvements
$
1,127,100

 
$
1,127,100

 
$
1,076,172

 
$
1,076,172

 
$
1,108,971

 
 
Buildings and improvements
5,017,999

 
4,987,617

 
4,908,797

 
4,871,667

 
4,983,638

 
 
Undeveloped land and construction in progress
1,993,314

 
1,530,949

 
1,432,808

 
1,292,017

 
1,183,618

 
 
Total real estate assets held for investment
8,138,413

 
7,645,666

 
7,417,777

 
7,239,856

 
7,276,227

 
 
Accumulated depreciation and amortization
(1,361,811
)
 
(1,312,612
)
 
(1,264,162
)
 
(1,216,358
)
 
(1,234,079
)
 
 
Total real estate assets held for investment, net
6,776,602

 
6,333,054

 
6,153,615

 
6,023,498

 
6,042,148

 
 
Cash and cash equivalents
50,817

 
53,069

 
57,649

 
64,954

 
387,616

 
 
Restricted cash

 

 
9,149

 
179,276

 
8,249

 
 
Marketable securities
22,519

 
21,572

 
20,674

 
18,851

 
16,010

 
 
Current receivables, net
15,144

 
17,602

 
16,926

 
18,626

 
13,703

 
 
Deferred rent receivables, net
256,558

 
251,744

 
246,391

 
238,959

 
233,427

 
 
Deferred leasing costs and acquisition-related intangible assets, net
186,649

 
181,567

 
183,728

 
185,420

 
195,320

 
 
Prepaid expenses and other assets, net
76,495

 
107,324

 
114,706

 
108,715

 
98,894

 
 
TOTAL ASSETS
$
7,384,784

 
$
6,965,932

 
$
6,802,838

 
$
6,838,299

 
$
6,995,367

 
 
LIABILITIES AND EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Secured debt, net
$
338,189

 
$
339,501

 
$
340,800

 
$
465,828

 
$
467,758

 
 
Unsecured debt, net
2,156,521

 
2,155,794

 
2,006,263

 
1,909,381

 
2,097,083

 
 
Unsecured line of credit
295,000

 
50,000

 

 
60,000

 

 
 
Accounts payable, accrued expenses and other liabilities
278,508

 
223,973

 
249,637

 
271,405

 
219,483

 
 
Accrued dividends and distributions
47,348

 
43,512

 
43,448

 
43,324

 
44,105

 
 
Deferred revenue and acquisition-related intangible liabilities, net
146,741

 
149,563

 
145,890

 
145,556

 
148,729

 
 
Rents received in advance and tenant security deposits
58,604

 
56,117

 
56,484

 
46,925

 
55,738

 
 
Total liabilities
3,320,911

 
3,018,460

 
2,842,522

 
2,942,419

 
3,032,896

 
 
Equity:
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
6.375% Series H Cumulative Redeemable Preferred stock

 

 

 

 
96,256

 
 
Common stock
1,006

 
988

 
986

 
984

 
984

 
 
Additional paid-in capital
3,951,289

 
3,816,385

 
3,822,492

 
3,797,546

 
3,792,028

 
 
Distributions in excess of earnings
(149,368
)
 
(130,514
)
 
(122,685
)
 
(108,667
)
 
(132,799
)
 
 
Total stockholders’ equity
3,802,927

 
3,686,859

 
3,700,793

 
3,689,863

 
3,756,469

 
 
Noncontrolling Interests
 
 
 
 
 
 
 
 
 
 
 
Common units of the Operating Partnership
78,223

 
77,240

 
77,948

 
77,911

 
77,296

 
 
Noncontrolling interests in consolidated property partnerships
182,723

 
183,373

 
181,575

 
128,106

 
128,706

 
 
Total noncontrolling interests
260,946

 
260,613

 
259,523

 
206,017

 
206,002

 
 
Total equity
4,063,873

 
3,947,472

 
3,960,316

 
3,895,880

 
3,962,471

 
 
TOTAL LIABILITIES AND EQUITY
$
7,384,784

 
$
6,965,932

 
$
6,802,838

 
$
6,838,299

 
$
6,995,367

 
 
 
 
 
 
 
 
 
 
 
 
 

6

Kilroy Realty Corporation
Second Quarter 2018 Supplemental Financial Report


Consolidated Statements of Operations
(unaudited, $ and shares in thousands, except per share amounts)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
 
 
REVENUES
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
164,515

 
$
158,925

 
$
327,386

 
$
315,573

 
 
Tenant reimbursements
 
19,567

 
19,267

 
38,717

 
38,563

 
 
Other property income
 
2,990

 
2,406

 
3,791

 
5,770

 
 
Total revenues
 
187,072

 
180,598

 
369,894

 
359,906

 
 
EXPENSES
 
 
 
 
 
 
 
 
 
 
Property expenses
 
32,567

 
33,304

 
64,238

 
64,545

 
 
Real estate taxes
 
17,813

 
16,543

 
34,959

 
34,507

 
 
Provision for bad debts
 
5,641

 
409

 
5,376

 
1,707

 
 
Ground leases
 
1,586

 
1,547

 
3,147

 
3,189

 
 
General and administrative expenses
 
21,763

 
14,303

 
37,322

 
29,236

 
 
Depreciation and amortization
 
64,006

 
62,251

 
126,721

 
123,170

 
 
Total expenses
 
143,376

 
128,357

 
271,763

 
256,354

 
 
OTHER (EXPENSES) INCOME
 
 
 
 
 
 
 
 
 
 
Interest income and other net investment gain/loss
 
771

 
1,038

 
805

 
2,103

 
 
Interest expense
 
(12,712
)
 
(17,973
)
 
(26,210
)
 
(35,325
)
 
 
Total other (expenses) income
 
(11,941
)
 
(16,935
)
 
(25,405
)
 
(33,222
)
 
 
INCOME FROM OPERATIONS BEFORE GAINS ON SALES OF REAL ESTATE
 
31,755

 
35,306

 
72,726

 
70,330

 
 
Gains on sales of depreciable operating properties
 

 

 

 
2,257

 
 
NET INCOME
 
31,755

 
35,306

 
72,726

 
72,587

 
 
Net income attributable to noncontrolling common units of the Operating Partnership
 
(566
)
 
(616
)
 
(1,317
)
 
(1,239
)
 
 
Net income attributable to noncontrolling interests in consolidated property partnerships
 
(3,640
)
 
(3,242
)
 
(7,614
)
 
(6,375
)
 
 
Total income attributable to noncontrolling interests
 
(4,206
)
 
(3,858
)
 
(8,931
)
 
(7,614
)
 
 
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
 
27,549

 
31,448

 
63,795

 
64,973

 
 
Preferred dividends
 

 
(1,615
)
 

 
(4,966
)
 
 
Original issuance costs of redeemed preferred stock
 

 

 

 
(3,845
)
 
 
Total preferred dividends
 

 
(1,615
)
 

 
(8,811
)
 
 
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
 
$
27,549

 
$
29,833

 
$
63,795

 
$
56,162

 
 
Weighted average common shares outstanding – basic
 
99,692

 
98,275

 
99,221

 
97,834

 
 
Weighted average common shares outstanding – diluted
 
100,151

 
98,827

 
99,688

 
98,427

 
 
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS PER SHARE
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders per share – basic
 
$
0.27

 
$
0.30

 
$
0.63

 
$
0.56

 
 
Net income available to common stockholders per share – diluted
 
$
0.27

 
$
0.30

 
$
0.63

 
$
0.56

 
 
 
 
 
 
 
 
 
 
 
 


7

Kilroy Realty Corporation
Second Quarter 2018 Supplemental Financial Report


Funds From Operations and Funds Available for Distribution
(unaudited, $ in thousands, except per share amounts)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
 
 
FUNDS FROM OPERATIONS: (1)
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
27,549

 
$
29,833

 
$
63,795

 
$
56,162

 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling common units of the Operating Partnership
 
566

 
616

 
1,317

 
1,239

 
 
Net income attributable to noncontrolling interests in consolidated property partnerships
 
3,640

 
3,242

 
7,614

 
6,375

 
 
Depreciation and amortization of real estate assets
 
62,956

 
61,000

 
124,633

 
120,734

 
 
Gains on sales of depreciable real estate
 

 

 

 
(2,257
)
 
 
Funds From Operations attributable to noncontrolling interests in consolidated property partnerships
 
(6,082
)
 
(5,924
)
 
(12,445
)
 
(11,552
)
 
 
Funds From Operations (1)(2)
 
$
88,629

 
$
88,767

 
$
184,914

 
$
170,701

 
 
Weighted average common shares/units outstanding – basic (3)
 
102,879

 
101,551

 
102,457

 
101,219

 
 
Weighted average common shares/units outstanding – diluted (4)
 
103,338

 
102,103

 
102,924

 
101,812

 
 
FFO per common share/unit – basic (1)
 
$
0.86

 
$
0.87

 
$
1.80

 
$
1.69

 
 
FFO per common share/unit – diluted (1)
 
$
0.86

 
$
0.87

 
$
1.80

 
$
1.68

 
 
FUNDS AVAILABLE FOR DISTRIBUTION: (1)
 
 
 
 
 
 
 
 
 
 
Funds From Operations (1)(2)
 
$
88,629

 
$
88,767

 
$
184,914

 
$
170,701

 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
Recurring tenant improvements, leasing commissions and capital expenditures
 
(34,854
)
 
(17,967
)
 
(48,848
)
 
(35,856
)
 
 
Amortization of deferred revenue related to tenant-funded tenant improvements (2)(5)
 
(4,588
)
 
(4,548
)
 
(8,869
)
 
(8,243
)
 
 
Net effect of straight-line rents
 
(4,814
)
 
(7,568
)
 
(10,167
)
 
(14,451
)
 
 
Amortization of net below market rents (6)
 
(2,938
)
 
(1,191
)
 
(5,481
)
 
(3,603
)
 
 
Amortization of deferred financing costs and net debt discount/premium
 
267

 
406

 
582

 
823

 
 
Non-cash amortization of share-based compensation awards
 
8,669

 
4,832

 
12,267

 
8,966

 
 
Original issuance costs of redeemed preferred stock
 

 

 

 
3,845

 
 
Other lease related adjustments, net (7)
 
(733
)
 
(301
)
 
554

 
(393
)
 
 
Adjustments attributable to noncontrolling interests in consolidated property partnerships
 
2,315

 
1,224

 
2,538

 
2,011

 
 
Funds Available for Distribution (1)
 
$
51,953

 
$
63,654

 
$
127,490

 
$
123,800

 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
See page 31 for Management Statements on Funds From Operations and Funds Available for Distribution. 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 $4.6 million and $4.5 million for the three months ended June 30, 2018 and 2017, respectively, and $8.9 million and $8.2 million for the six months ended June 30, 2018 and 2017, 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

Kilroy Realty Corporation
Second Quarter 2018 Supplemental Financial Report


Reconciliation of GAAP Net Cash Provided by Operating Activities to Funds Available for Distribution
(unaudited, $ in thousands)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
 
 
GAAP Net Cash Provided by Operating Activities 
 
$
94,734

 
$
82,041

 
$
188,843

 
$
178,416

 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
Recurring tenant improvements, leasing commissions and capital expenditures
 
(34,854
)
 
(17,967
)
 
(48,848
)
 
(35,856
)
 
 
Preferred dividends
 

 
(1,615
)
 

 
(4,966
)
 
 
Depreciation of non-real estate furniture, fixtures and equipment
 
(1,050
)
 
(1,251
)
 
(2,088
)
 
(2,436
)
 
 
Provision for uncollectible tenant receivables
 
(5,248
)
 
(50
)
 
(4,977
)
 
(620
)
 
 
Net changes in operating assets and liabilities (1)
 
4,358

 
9,069

 
10,464

 
2,089

 
 
Noncontrolling interests in consolidated property partnerships share of FFO and FAD
 
(3,767
)
 
(4,700
)
 
(9,907
)
 
(9,541
)
 
 
Cash adjustments related to investing and financing activities
 
(2,220
)
 
(1,873
)
 
(5,997
)
 
(3,286
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds Available for Distribution(2)
 
$
51,953

 
$
63,654

 
$
127,490

 
$
123,800

 
 
 
 
 
 
 
 
 
 
 
 
_______________________
(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
Second Quarter 2018 Supplemental Financial Report


Same Store Analysis (1) 
(unaudited, $ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
 
Total Same Store Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of properties
 
98

 
98

 
 
 
98

 
98

 
 
 
 
Square Feet
 
13,370,620

 
13,370,620

 
 
 
13,370,620

 
13,370,620

 
 
 
 
Percent of Stabilized Portfolio
 
96.3
%
 
92.9
%
 
 
 
96.3
%
 
92.9
%
 
 
 
 
Average Occupancy
 
94.7
%
 
94.9
%
 
 
 
94.8
%
 
95.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
156,507

 
$
149,891

 
4.4
%
 
$
311,862

 
$
297,796

 
4.7
 %
 
 
Tenant reimbursements
 
19,160

 
18,717

 
2.4
%
 
38,129

 
37,582

 
1.5
 %
 
 
Other property income
 
2,987

 
1,414

 
111.2
%
 
3,788

 
4,697

 
(19.4
)%
 
 
Total operating revenues
 
178,654

 
170,022

 
5.1
%
 
353,779

 
340,075

 
4.0
 %
 
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property expenses
 
31,262

 
31,193

 
0.2
%
 
61,612

 
60,855

 
1.2
 %
 
 
Real estate taxes
 
16,523

 
15,246

 
8.4
%
 
32,594

 
31,936

 
2.1
 %
 
 
Provision for bad debts
 
5,641

 
451

 
1,150.8
%
 
5,351

 
1,631

 
228.1
 %
 
 
Ground leases
 
1,586

 
1,547

 
2.5
%
 
3,147

 
3,189

 
(1.3
)%
 
 
Total operating expenses
 
55,012

 
48,437

 
13.6
%
 
102,704

 
97,611

 
5.2
 %
 
 
GAAP Net Operating Income
 
$
123,642

 
$
121,585

 
1.7
%
 
$
251,075

 
$
242,464

 
3.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same Store Analysis (Cash Basis) (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
 
Total operating revenues
 
$
167,074

 
$
159,897

 
4.5
%
 
$
332,895

 
$
320,284

 
3.9
 %
 
 
Total operating expenses
 
49,371

 
47,933

 
3.0
%
 
97,352

 
95,887

 
1.5
 %
 
 
Cash Net Operating Income
 
$
117,703

 
$
111,964

 
5.1
%
 
$
235,543

 
$
224,397

 
5.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
Same Store is defined as all properties owned and included in our stabilized portfolio as of January 1, 2017 and still owned and included in the stabilized portfolio as of June 30, 2018. Same Store includes 100% of consolidated property partnerships as well as the residential tower at Columbia Square.
(2)
Please refer to page 34 for a reconciliation of GAAP Net Income Available to Common Stockholders to Same Store GAAP Net Operating Income and Same Store Cash Net Operating Income.




10

Kilroy Realty Corporation
Second Quarter 2018 Supplemental Financial Report


Stabilized Portfolio Occupancy Overview by Region

 
 
 
 
 
Portfolio Breakdown
 
 
 
Occupied at
 
Leased at
 
 
STABILIZED OFFICE PORTFOLIO
 
Buildings
 
YTD NOI %
 
SF %
 
Total SF
 
6/30/2018
 
3/31/2018
 
6/30/2018
 
 
Greater Los Angeles
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101 Corridor
 
4
 
0.8
%
 
2.2
%
 
309,438

 
89.5
%
 
91.2
%
 
90.3
%
 
 
El Segundo
 
5
 
5.1
%
 
7.9
%
 
1,093,050

 
99.3
%
 
98.0
%
 
99.3
%
 
 
Hollywood
 
6
 
5.6
%
 
5.8
%
 
806,557

 
97.8
%
 
93.7
%
 
97.8
%
 
 
Long Beach
 
7
 
3.2
%
 
6.8
%
 
949,910

 
90.8
%
 
93.1
%
 
94.3
%
 
 
West Hollywood
 
4
 
1.8
%
 
1.3
%
 
178,699

 
91.3
%
 
98.0
%
 
91.3
%
 
 
West Los Angeles
 
10
 
7.0
%
 
6.1
%
 
844,079

 
90.9
%
 
89.8
%
 
90.9
%
 
 
Total Greater Los Angeles
 
36
 
23.5
%
 
30.1
%
 
4,181,733

 
94.3
%
 
93.9
%
 
95.2
%
 
 
Total Orange County
 
1
 
1.2
%
 
2.0
%
 
271,556

 
89.6
%
 
89.6
%
 
89.6
%
 
 
San Diego County
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Del Mar
 
14
 
9.2
%
 
9.8
%
 
1,351,044

 
99.6
%
 
98.6
%
 
100.0
%
 
 
I-15 Corridor
 
5
 
3.4
%
 
3.9
%
 
541,991

 
96.3
%
 
96.6
%
 
97.6
%
 
 
Point Loma
 
1
 
0.4
%
 
0.8
%
 
103,900

 
100.0
%
 
100.0
%
 
100.0
%