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Section 1: DEF 14A (DEF 14A)

DEF 14A

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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Definitive Proxy Statement

 

  

 

Definitive Additional Materials

 

  

 

Soliciting Material under §240.14a-12

KILROY REALTY CORPORATION

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N/A

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LOGO


LOGO


 

 
         
 

ON THE          

COVER          

 

    

 

LOGO

 

100 Hooper is a micro community of progressive thinkers and skilled makers within the broader SOMA entrepreneurial spirit. Right next door, interior enthusiasts flock to the showrooms of the Design District. Tucked between these landmark neighborhoods, 100 Hooper takes cues from both. Whether pouring your ideas into the next tech venture or handcrafting a new line of locally made products, an ethos of limitless possibility awaits.

 

    
 
         

ABOUT          

KILROY          

 

    

Kilroy Realty is a place where innovation works. We have made it our mission to provide creative work environments that spark inspiration and productivity for the country’s very best thinkers and doers. Home to over 270 employees, we are building and managing 17 million square feet of innovative, sustainable properties across the Pacific Northwest, San Francisco Bay Area, Greater Los Angeles and Greater San Diego; spaces that redefine life for the better.

 

    
 
         
         


KILROY REALTY CORPORATION

12200 W. Olympic Boulevard, Suite 200

Los Angeles, California 90064

April 5, 2019

To Our Fellow Stockholders:

On behalf of the entire Board of Directors of Kilroy Realty Corporation (NYSE: KRC), we are pleased to present you with KRC’s 2019 Proxy Statement and invite you to attend KRC’s 2019 annual meeting of stockholders to be held on May 16, 2019.

KRC delivered excellent results in 2018, driven by strong leasing and successful development.

We executed a record-breaking 3.4 million square feet of leases across our stabilized and development portfolios, ending 2018 with our stabilized portfolio 96.6% leased.

We initiated construction on over $925 million of projects that include 640,000 square feet of office and retail space as well as 564 residential units. We secured lease commitments on 85% of the office space, including a 12-year lease with entertainment giant Netflix, Inc. for the entire 355,000 square feet of office space at our mixed-use development project in Hollywood.

We invested $565 million in new opportunities, including purchasing Kilroy Oyster Point, a 39-acre, fully-entitled development site in one of the nation’s strongest life-sciences markets. We also acquired two operating projects that not only enhance the value of our current stabilized portfolio but also provide strategic benefits for years to come.

Our solid execution translated to strong financial results, including a 5.4% increase in funds from operations, adjusted for one-time charges, and 3% growth in our cash same-store net operating income. We continued to strengthen our balance sheet while lowering our overall cost of capital, issuing $1.1 billion in new debt and equity and generating $373 million from our capital recycling program. We also increased our common dividend by 7.1% on an annualized basis, which aggregates to a 30% growth rate over three years. In 2018, we continued to outperform both the SNL US REIT Office and BBG REIT Office Property Indices for the third consecutive year.

Our commitment and leadership position in sustainability continues to be recognized by various industry groups across the world. We were recognized by GRESB as the North American Listed Office leader for the fifth year in a row. We further deepened our commitment to building a more sustainable enterprise with a pledge to establish carbon neutral operations by year-end 2020.

Since our 2018 annual meeting of stockholders, we actively engaged with stockholders owning collectively more than 80% of our outstanding common stock. Our Lead Independent Director and Chair of our Executive Compensation Committee, and the Chair of our Corporate Social Responsibility and Sustainability Committee, personally led meetings with stockholders owning collectively more than 57% of our outstanding common stock. Based on feedback from investors, the Company modified the structure of its annual cash bonus program. We appreciate the dialogue with our investors and are committed to maintaining open lines of communication.

The accompanying proxy materials contain detailed information about the matters on which you are being asked to vote at the 2019 annual meeting. We urge you to read the materials carefully and vote in accordance with the Board’s recommendations. Your vote is very important to us.

Sincerely,

 

LOGO

 

LOGO

 

John Kilroy

 

 

Edward Brennan, PhD

Chairman of the Board,

 

Lead Independent Director

President and Chief Executive Officer

 

 


CONTENTS

 

NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
     1  
PROXY SUMMARY      2  
VOTING INFORMATION      7  
PROPOSAL 1 — ELECTION OF DIRECTORS      8  
PROPOSAL 2 — ADVISORY APPROVAL OF OUR
EXECUTIVE COMPENSATION
     17  
PROPOSAL 3 — RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITOR
     19  
CORPORATE GOVERNANCE      20  

Board Composition and Governance

     21  

Board Committees

     25  

Director Selection, Evaluation and Communications

     27  
AUDIT AND NON-AUDIT FEES      29  

Principal Accountant Fees and Services

     29  
AUDIT COMMITTEE REPORT      30  
OUR EXECUTIVE OFFICERS      31  
COMPENSATION DISCUSSION AND ANALYSIS      32  

Introduction

     32  

Stockholder Engagement

     33  

2018 Company Performance

     33  

Compensation Philosophy and Objectives

     36  

What We Pay and Why: Executive Compensation Elements

     37  

 

 


CONTENTS

 

Design Features of the 2018 Executive Compensation
Program

     38  

2018 Named Executive Officer Compensation

     39  

How We Make Compensation Decisions

     55  

Compensation Governance Practices

     58  
COMPENSATION COMMITTEE MATTERS      61  

Compensation Committee Report

     61  

Compensation Committee Interlocks and Insider
Participation

     61  
NAMED EXECUTIVE OFFICER COMPENSATION TABLES      62  

Summary Compensation Table — 2016, 2017 and 2018

     63  

Grants of Plan-Based Awards — 2018

     68  

Description of Plan-Based Awards

     69  

Outstanding Equity Awards at Fiscal Year End — 2018

     72  

Option Exercises and Stock Vested — 2018

     75  

Nonqualified Deferred Compensation — 2018

     76  

Potential Payments Upon Termination or Change in
Control

     78  

Estimated Severance and Change in Control Benefits

     83  
CEO PAY-RATIO DISCLOSURE      86  
EQUITY COMPENSATION PLAN INFORMATION      87  
DIRECTOR COMPENSATION      88  

Director Compensation Table — 2018

     89  

 

 


CONTENTS

 

BENEFICIAL OWNERSHIP OF CERTAIN STOCKHOLDERS      90  
OTHER MATTERS      93  

Certain Relationships and Related Transactions

     93  

Section 16(a) Beneficial Ownership Reporting Compliance

     94  

Proposals and Nominations for 2020 Annual Meeting of Stockholders

     94  
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING
AND VOTING PROCEDURES
     96  
GENERAL INFORMATION      100  

Proxy Solicitation Expenses

     100  

Available Information

     100  

Other Matters

     101  
APPENDIX A — DEFINITIONS AND RECONCILIATIONS OF NON-GAAP
FINANCIAL MEASURES
     A-1  

Funds From Operations (“FFO”), FFO Per Share,
Adjusted FFO and Adjusted FFO Per Share

     A-1  

Net Operating Income and Same Store Net Operating
Income (on a GAAP and Cash Basis)

     A-3  

Funds Available for Distribution (“FAD”), FAD Per
Share, and FAD Payout Ratio

     A-5  

Adjusted Net Income Available to Common
Stockholders and EBITDA, as Adjusted

     A-7  

 

 


 

This Proxy Statement 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. Forward-looking statements are based on our current expectations, beliefs and assumptions, and are not guarantees of future performance. Forward-looking statements are generally identified through the inclusion of words such as “believe,” “expect,” “goals” and “target” or similar statements or variations of such terms and other similar expressions. 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 enactment or implementations of, tax laws or other applicable laws, regulations or legislation, as well as business and consumer reactions to such changes; risks associated with joint venture investments, including our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers; environmental uncertainties and risks related to natural disasters; and our ability to maintain our status as a REIT; and the other factors discussed in the risk factors section of Kilroy Realty Corporation’s most recent annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. All forward-looking statements are based on currently available information, and speak only as of the dates on which they are made. We assume no obligation to update any forward-looking statement that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws.

 

 

 


NOTICE OF ANNUAL MEETING

OF STOCKHOLDERS

 

Date and Time:  

Thursday, May 16, 2019 at 8:30 a.m. local (Pacific) time

Place:  

Our principal executive offices at 12200 West Olympic Boulevard, Suite 200, Los Angeles,

   

California 90064.

Items of

Business:

 

1.

 

Elect as directors the six nominees named in the attached Proxy Statement.

   
   

2.

 

Approve, on an advisory basis, the compensation of our named executive officers.

   

3.

 

Ratify the appointment of Deloitte & Touche LLP as our independent auditor for the year

       

ending December 31, 2019.

Record Date:  

The Board of Directors has fixed the close of business on March 8, 2019 as the record date for determining the stockholders entitled to receive notice of and to vote at the 2019 annual meeting of stockholders (the “Annual Meeting”), or any adjournment(s) or postponement(s) thereof.

Proxy Voting:  

Your vote is very important to us. Whether or not you plan to attend the Annual Meeting, we urge you to submit your proxy or voting instructions as soon as possible to ensure your shares are represented at the Annual Meeting. If you attend the Annual Meeting and vote in person, your proxy or voting instructions will not be used.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF   By Order of the Board of Directors,
PROXY MATERIALS  

 

The Notice of Annual Meeting, Proxy Statement and our 2018 Annual Report on Form 10-K are available at www.proxyvote.com. You are encouraged to access and review all of the important information contained in our proxy materials before voting.

 

LOGO

 

 

Tyler Rose

  Executive Vice President,
  Chief Financial Officer and Secretary
  April 5, 2019 :: Los Angeles, California

 

KILROY REALTY    PROXY STATEMENT    1


PROXY SUMMARY

This section highlights information about Kilroy Realty Corporation (“we,” “our,” “us” or the “Company”) and our Board of Directors (the “Board”) that is contained elsewhere in this Proxy Statement. This section does not contain all of the information that you should consider and you should read the entire Proxy Statement before voting.

BUSINESS HIGHLIGHTS

We had another successful year in 2018 dominated by strong leasing activity in both our stabilized and development portfolios. We executed a record-breaking 3.4 million square feet of leases across our stabilized and development portfolios, ending 2018 with our stabilized portfolio 96.6% leased and our 2019 lease expirations 65% leased. Our highly experienced leadership team, led by John Kilroy (who brings nearly 50 years of experience to the organization), continued to invest in both existing and new value-creating opportunities and delivered solid financial results while maintaining a strong balance sheet. In addition to our already strong leadership team, most of whom have been with the Company for over 15 years, we added key personnel in 2016 and 2017. These additions deepened our expertise in the pursuit and execution of large, multi-use projects, including those in the life science sector, and positions us well for the future.

 

YEAR-END % LEASED

AND OCCUPANCY

  

TOTAL LEASES

EXECUTED

  

DIVIDEND

GROWTH

  

YEAR-END

DEBT / EBITDA(1)

96.6% &

94.4%

   3.4MM SF    7.1%    5.9x

 

Year-End % Leased

Above 95% for Sixth

Consecutive Year

   Highest in Company History
Includes 355,000 SF Lease
with Netflix, Inc., Largest Lease
Signed in Hollywood in a
Decade, and 375,000 SF Lease
with GM Cruise, LLC, for its
Headquarters in San Francisco
   30% Increase over
Three-Year Period
   1.5x Reduction Since 2014

In addition, our total stockholder return (“TSR”)(2) for the five-year period ended December 31, 2018 of 44.1% outperformed the SNL US REIT Office Index, the BBG REIT Office Property Index and the five-year TSR performance of the median peer(3) in our peer group as shown below.

 

     

TSR for the One-
Year Period Ended
December 31, 2018

 

  

TSR for the Three-
Year Period Ended
December 31, 2018

 

 

TSR for the Five-    

Year Period Ended    

December 31, 2018    

 

Kilroy Realty Corporation

 

   -13.6%    9.5%   44.1%

 

Median Peer(3)

 

   -10.9%    -5.0%   31.6%

 

SNL US REIT Office Index

 

   -17.8%    -5.7%   19.9%

 

BBG REIT Office Property Index

 

   -14.9%    -3.8%   19.4%

 

MSCI US REIT Index

 

   -4.6%    8.9%   45.6%

More information on the Company’s 2018 performance is detailed on pages 33-36.

 

 

(1)

The debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio is calculated as the Company’s consolidated debt balance for the applicable period, adjusted for the undrawn $360 million equity forward offering executed in August 2018, divided by the Company’s EBITDA, as adjusted, for such period. See Appendix A for a definition of EBITDA, as adjusted, and a reconciliation of net income available to common stockholders computed in accordance with generally accepted accounting principles (“GAAP”) to EBITDA, as adjusted.

 

(2)

For purposes of this Proxy Statement, TSR is calculated assuming dividend reinvestment.

 

(3)

The median peer was identified based on the median company included in the peer group identified on page 57 (based on compound annual growth rate for the five-year period ended December 31, 2018).

 

2    PROXY STATEMENT    KILROY REALTY


COMPENSATION HIGHLIGHTS

Our Executive Compensation Committee (the “Compensation Committee”) approved the 2018 compensation arrangements for our named executive officers identified on page 32 (our “NEOs”). Below are highlights of our 2018 compensation arrangements for our NEOs from the Compensation Discussion and Analysis (the “CD&A”) section of this Proxy Statement:

Enhanced Operating and Financial Goals

 

   

Key operating and financial goals used to determine 2018 short-term incentives for our NEOs were generally set at levels above the performance goals used for 2017. See the discussion on pages 40-41.

 

   

The FFO target used in the 2018 long-term incentive award for our NEOs was set above the FFO target used for 2017.

 

   

Vesting of a portion of the 2018 long-term incentive awards is also contingent on our TSR compared to other office-focused REITs over a three-year period and our average ratio of debt to EBITDA over that period.

New Employment Agreement for CEO and Related Incentive Awards

 

   

The Board believes that it is in the best interests of the Company and our stockholders for John Kilroy to continue to serve as the Company’s Chief Executive Officer (“CEO”).

 

   

The Company entered into an amended and restated employment agreement with Mr. Kilroy to replace his employment agreement that would have expired on December 31, 2018. The employment agreement was the result of negotiations between Mr. Kilroy and the Compensation Committee. See the discussion on pages 49-51.

 

   

Under his prior employment agreement, Mr. Kilroy was eligible to retire from the Company in December 2018. To incentivize him to delay his retirement and to provide an additional performance incentive during the term of his new employment agreement, Mr. Kilroy was granted additional restricted stock units (“RSUs”) in December 2018. The Company also granted our other NEOs RSU awards in December 2018 in recognition of their contributions to the Company and to provide additional long-term, performance-based incentives. To further align the interests of our executive team with the long-term interests of stockholders, in December 2018, more than half of the RSUs granted to Mr. Kilroy, and half of the RSUs granted to our other NEOs include performance-based vesting requirements with a long-term performance measure based on our relative TSR. See the discussion of the awards on pages 51-52.

Applicable rules of the Securities and Exchange Commission (“SEC”) require that the Summary Compensation Table on page 63 include the entire grant date fair value of these December 2018 RSU awards as 2018 compensation for our NEOs (even though the awards are subject to long-term vesting requirements). Accordingly, the 2018 total compensation for our NEOs, and for our CEO in particular, will appear significantly higher than their 2017 compensation when presented in this fashion. The compensation actually “realized” by Mr. Kilroy in 2018 (calculated as discussed under “CEO Realized Compensation” on page 52) was significantly less than his 2018 total compensation required to be reported in the Summary Compensation Table. See the discussion under “CEO Realized Compensation” on page 52.

Continued Emphasis on Long-Term Incentive Awards and Performance-Based Compensation

 

   

Long-term equity compensation, tied to three-to-four year vesting periods, is the largest component of each NEO’s total compensation opportunity.

 

   

Three-quarters of the 2018 annual equity award for our CEO is subject to performance-based vesting requirements and includes a performance measure indexed to our relative TSR.

 

   

Approximately two-thirds of the 2018 annual equity awards for our other NEOs are subject to performance-based vesting requirements and include a performance measure indexed to our relative TSR.

 

   

Approximately 88% of our CEO’s target TDC(4) for 2018 was not guaranteed but rather was tied to performance and/or our stock price.

 

   

Approximately 81% of our other NEOs’ target TDC for 2018 was not guaranteed but rather was tied to performance and/or our stock price.

 

 

(4)

As used in this Proxy Statement, “target TDC” means the executive’s base salary, target annual cash incentive and grant date fair value (based on the value approved by the Compensation Committee and used to determine the number of shares subject to the award) of annual long-term incentive awards granted to the executive in 2018. The equity awards granted in December 2018 are excluded from TDC. If included in TDC, the December 2018 equity awards would have had the impact of shifting a greater percentage of each executive’s overall TDC to at-risk, performance-based, long-term compensation.

 

KILROY REALTY    PROXY STATEMENT    3


2018 Target

Total Direct Compensation

 

 

LOGO

 

4    PROXY STATEMENT    KILROY REALTY


CORPORATE GOVERNANCE HIGHLIGHTS

The Company is committed to good corporate governance, which promotes the long-term interests of stockholders, strengthens accountability of the Board and helps build public trust in the Company. Highlights include the following:

 

Independent Board Leadership and Practices

 

   

Lead Independent Director with a well-defined role and robust responsibilities

 

   

Majority of directors are independent (5 out of 6 current directors)

 

   

Established a Corporate Social Responsibility and Sustainability Committee (the “CSR&S Committee”) in April 2018 responsible for advising the Board and consulting with, and generally advising management on matters related to, among other things, sustainability, diversity and inclusion, philanthropy and community involvement, good corporate citizenship, health and wellness, and other non-financial issues that are of significance to the Company and its stockholders

 

   

Commitment to include women and individuals from minority groups in the qualified pool from which new director candidates are selected

 

   

Commitment to Board refreshment with three new independent directors in the last five years

 

   

Average independent director tenure of 7.4 years

 

   

Comprehensive risk oversight practices, including cybersecurity and insurance

 

   

Strategic update from the CEO is a standing Board agenda item

 

   

Regular executive sessions of independent directors

 

   

Regular Board and committee self-evaluations

 

   

Succession Planning Committee oversees regular succession planning efforts

 

   

CEO may only serve on the board of directors of one other public company

 

   

All principal Board committees are composed solely of independent directors

Robust Stockholder Rights

 

   

Stockholder proxy access amended in 2017 to align with best practices and respond to stockholder feedback

 

   

Majority voting for directors in uncontested elections

 

   

Annual director elections (declassified Board)

 

   

Annual Say-on-Pay voting

 

   

Stockholder right to call a special meeting

 

   

Stockholder right to amend Bylaws by a majority vote

 

   

No stockholder rights plan

Best Practices Compensation and Governance Practices

 

   

Robust stock ownership guidelines for executives and non-employee directors

 

   

Stock holding requirements

 

   

Anti-hedging policy

 

   

Anti-pledging policy

 

   

Clawback policy

 

   

Related party transactions policy

 

   

No single trigger change in control provisions

 

   

No excise tax gross-ups

 

   

No repricing of underwater stock options without stockholder approval

 

   

Regular engagement with investors, including discussions since our 2018 annual meeting with stockholders who together own more than 80% of our outstanding common stock

 

 

KILROY REALTY    PROXY STATEMENT    5


CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY HIGHLIGHTS

The Company and its Board maintain a focus on corporate social responsibility and sustainability. We continuously look for new and better ways to foster a diverse and inclusive work environment, improve employee health and safety, engage our surrounding communities and minimize our environmental impact, all while creating value for our stockholders. As a result, in April 2018, we formed the CSR&S Committee. Below are some recent highlights of our diversity and sustainability initiatives. For additional information, see “Corporate Governance — Board Composition and Governance — Corporate Social Responsibility and Sustainability” beginning on page 23.

Diversity at the Company

 

   

We have several women in key leadership roles, including the EVP, Life Science, the EVP, Chief Administrative Officer, the Chief Accounting Officer and Controller, and the Treasurer, among others. As of December 31, 2018, 47% of supervisors at the Company were women.

 

   

We strive to have a workforce that reflects the diversity of qualified talent that is available in the markets that we serve.

LOGO

 

 

 

Diversity on the Board

 

   

We recently updated our Corporate Governance Guidelines and Board Membership Criteria to include diversity, in its broadest sense, reflecting, but not limited to, profession, geography, gender, ethnicity, skills and experience as criteria considered by the Nominating/Corporate Governance Committee (the “Governance Committee”) and the Board in considering Board nominations.

 

   

Our Governance Committee and Board will endeavor to include women and individuals from minority groups in the qualified pool from which new director candidates are selected the next time that the Board undergoes Board refreshment.

 

   

One of six directors (or 17%) is female and serves as the Chair of the Company’s CSR&S Committee.

Sustainability

 

   

We remain a committed leader in the effort to building and operating environmentally sound properties, which has resulted in wide recognition amongst our peers.

 

LOGO

 

ENERGY STAR

 

LOGO

 

GRESB

 

LOGO

 

NAREIT

 

LOGO

 

DOW JONES

 

Partner of the Year
2014 - 2019;
Sustained Excellence

2016 - 2019

 

 

Green Star 2013 - 2018;

North America Sector Leader
Listed Office 2014 - 2018

 

 

Leader in the Light Award,

Office Sector 2014 - 2018;
Most Innovative, 2018

 

SUSTAINABILITY

WORLD INDEX

 

Member 2017 - 2018, One Of
Only Two North American
Real Estate Companies Listed

 

6    PROXY STATEMENT    KILROY REALTY


VOTING INFORMATION

VOTING MATTERS AND BOARD RECOMMENDATIONS

Our Board is soliciting your proxy to vote on the following matters at our Annual Meeting to be held at 8:30 a.m. local (Pacific) time on Thursday, May 16, 2019 at our principal executive offices located at 12200 West Olympic Boulevard, Suite 200, Los Angeles, California 90064, and any adjournments or postponements of the Annual Meeting:

 

        Vote Required    Vote Required     

Board
Recommendation

 

     Page          

 

 

    Proposal No. 1

    

 

 

Election of Six Director Nominees

  

 

 

Majority of Votes Cast

 

    

 

 

For

    

 

 

8

 

 

    Proposal No. 2

    

 

 

Advisory Approval of Compensation

of NEOs

  

 

 

Majority of Votes Cast

 

    

 

 

For

    

 

 

17

 

 

    Proposal No. 3

    

 

 

Ratification of Appointment

of Deloitte & Touche LLP as

Independent Auditor for 2019

  

 

 

Majority of Votes Cast

    

 

 

For

    

 

 

19

HOW TO CAST YOUR VOTE

 

INTERNET   PHONE    MAIL      IN PERSON

Follow the instructions provided
in the  notice or  separate proxy
card or  voting  instruction  form
you received.

 

Follow the instructions provided
in  the  separate  proxy  card  or
voting    instruction    form   you
received.

  

Send    your   completed   and
signed   proxy   card  or voting
instruction form to the address
on  your  proxy  card  or voting
instruction form.

    

Ballots  will be provided
to anyone  who  attends
and wants to vote at the
Annual Meeting.

 

 

 

 

 

On April 5, 2019, the proxy materials for our Annual Meeting, including this Proxy Statement and our 2018 Annual Report on Form 10-K (the “2018 Annual Report”), were first sent or made available to our stockholders entitled to vote at the Annual Meeting.

 

 

 

  

 

 

KILROY REALTY    PROXY STATEMENT    7


PROPOSAL 1 –
ELECTION OF DIRECTORS

The Board presently consists of six directors. Each director is serving a term that continues until the Annual Meeting and until his or her successor is duly elected and qualified. As further described below, our Board has selected all six of our incumbent directors for re-election at the Annual Meeting.

NOMINEES FOR DIRECTOR

Upon the recommendation of the Governance Committee, the Board nominated John Kilroy, Edward Brennan, PhD, Jolie Hunt, Scott Ingraham, Gary Stevenson and Peter Stoneberg for election to the Board for a term continuing until the annual meeting of stockholders to be held in 2020 and until their respective successors are duly elected and qualified. All of our director nominees are currently directors of the Company and were previously elected to serve on the Board by our stockholders. In this Proxy Statement, references to “John Kilroy” or our CEO are to John B. Kilroy, Jr.

Except as otherwise instructed, proxies solicited by this Proxy Statement will be voted “FOR” the election of each of the nominees to the Board. The nominees have consented to be named in this Proxy Statement and to serve as directors if elected. If any nominee of the Board is unable to serve, or for good cause will not serve, as a director at the time of the Annual Meeting, the persons who are designated as proxies intend to vote, in their discretion, for any other persons that may be designated by the Board. As of the date of this Proxy Statement, the Board has no reason to believe that any of the director nominees named above will be unable or unwilling to stand as a nominee or to serve as a director if elected.

BOARD COMPOSITION

Board Snapshot

The following provides a snapshot of our six director nominees:

 

 

LOGO

 

8    PROXY STATEMENT    KILROY REALTY


Director Nominee Skills, Experience and Background

We believe each of the six director nominees possess the professional and personal qualifications necessary for effective service as a director. In addition to each nominee’s specific experience, qualifications and skills, we believe that each nominee has a reputation for integrity, honesty and adherence to high ethical standards and has demonstrated business acumen and an ability to exercise sound business judgment. We believe all nominees have a commitment to the Company and to building long-term stockholder value. The following chart shows a summary of the director nominees’ skills and core competencies:

 

  Skill/Qualification

 

 

Kilroy

 

 

Brennan

 

 

Hunt

 

 

Ingraham

 

 

Stevenson

 

 

Stoneberg  

 

 

Target Tenant Industry Experience

 

Knowledge and experience with the top five industries that make up the majority of our tenant base (Technology; Life Science & Healthcare; Media; and F.I.R.E. — Finance, Insurance and Real Estate)

 

           

 

Executive Leadership

 

Leadership role as company CEO or President

 

           

 

Public Company Board Service

 

Experience as a board member of another publicly traded company

 

                 

 

Investment Experience

 

Relevant investment, strategic and deal structuring experience

 

             

 

Financial Literacy/Accounting Experience

 

Financial or accounting experience and an understanding of financial reporting, internal controls and compliance

 

               

 

Finance/Capital Markets Experience

 

Experience navigating our capital-raising needs

 

             

 

Risk Management Experience

 

Experience overseeing and managing company risk

 

           

 

Advanced Degree/Professional Accreditation

 

Possesses an advanced degree or other professional accreditation that brings additional perspective to our business and strategy

 

               

 

KILROY REALTY    PROXY STATEMENT    9


DIRECTOR NOMINEE

 

LOGO

 

John Kilroy

 

President, Chief Executive Officer
and Chairman of the

Board

 

Age: 70

 

Director Since 1996

 

Committees: CSR&S

 

John Kilroy was elected to serve as our Chairman of the Board (“Chairman”) in February 2013 and has been our President, CEO and a director since our incorporation in September 1996. Having led its private predecessor, Kilroy Industries, in a similar capacity, he became its President in 1981 and was elected CEO in 1991. Mr. Kilroy has been involved in all aspects of commercial real estate acquisition, entitlement, development, construction, leasing, financing and dispositions for the Company and its predecessor since 1967. With Mr. Kilroy’s expertise and guidance, the Company entered the San Francisco and Seattle markets in 2009 and 2010, respectively, very early in the cycle. Mr. Kilroy has actively led the Company to become one of the premier landlords on the West Coast with one of the largest LEED-certified portfolios, spanning some of the strongest markets in the country, from Seattle to San Diego.

 

Mr. Kilroy currently serves on the board of directors of MGM Resorts International (NYSE: MGM), the Policy Advisory Board for the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley and the Advisory Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) and is a member of The Real Estate Roundtable. Mr. Kilroy previously served on the board of New Majority California and as Chairman of New Majority Los Angeles. He is a past trustee of the El Segundo Employers Association, Viewpoint School, Jefferson Center for Character Education and the National Fitness Foundation. He was also a member of the San Francisco America’s Cup Organizing Committee. Mr. Kilroy attended the University of Southern California.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Mr. Kilroy was nominated to serve on our Board because of his more than 50 years of experience with our Company and its predecessor, including 22 years as our President and CEO and approximately 17 and seven years as our predecessor’s President and CEO, respectively, as well as his experience in acquiring, owning, developing and managing real estate, and his service on the board of governors of a national real estate trade organization.

 

10    PROXY STATEMENT    KILROY REALTY


DIRECTOR NOMINEE

 

LOGO

 

Edward Brennan,

PhD

 

Lead Independent Director

 

Age: 67

 

Director Since 2003

 

Committees: Audit,
Compensation (C),

Governance

 

Edward Brennan, PhD has been a member of our Board since July 2003 and our Lead Independent Director since March 2014. He is currently the acting CEO and a director of Abram Scientific, a privately held medical diagnostics company and a Venture Partner with Strategic Healthcare Investment Partners, a venture capital partnership focused on medical devices and imbedded IT technologies. Until March 2014, Dr. Brennan was CEO of Nexus Dx, Inc. (“Nexus”), a medical diagnostics company located in San Diego, California. In November 2011, Nexus was acquired by Samsung Electronics Co., Ltd. from ITC Nexus Holding Company, where Dr. Brennan had been Chief Integration Officer following the merger of Nexus and International Technidyne Corporation. Previously, he was President and Chief Operating Officer of CryoCor, Inc. until June 2008, when the company was sold to Boston Scientific Corporation. From January 2004, he served as chairman of HemoSense Inc. until its sale to Inverness Medical Innovations in November 2007. While a director of HemoSense since 2000, he was also a Managing Partner of Perennial Ventures, a Seattle-based venture capital firm beginning in 2001. Prior to that time, he served as Vice President at Tredegar Investments. Dr. Brennan has participated in the development, management and financing of new medical technology ventures for over 30 years, including scientific and executive positions with Syntex, Inc., UroSystems, Inc., Medtronic Inc., DepoMed Systems, Inc. and CardioGenesis Corp. Dr. Brennan also works as a House Manager for the Center for the Performing Arts in the City of Mountain View, serves on the board of directors of several private companies and previously served on the Board of Trustees of Goucher College, Baltimore, Maryland. Dr. Brennan holds Bachelor’s Degrees in Chemistry and Biology and a PhD in Biology from the University of California, Santa Cruz.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Dr. Brennan was nominated to serve on our Board because of his executive management and board of directors experience with both public and private companies and specifically, his over 30 years of experience with companies in the health sciences and medical industries, which have historically been target tenants of the Company.

 

KILROY REALTY    PROXY STATEMENT    11


DIRECTOR NOMINEE

 

LOGO

 

Jolie Hunt

 

Independent Director

 

Age: 40

 

Director Since 2015

 

Committees:

Compensation,

Governance, CSR&S (C)

 

Jolie Hunt has been a member of our Board since May 2015. She is the CEO of Hunt & Gather, a marketing and communications agency that helps launch startup ventures, revive the strategic marketing and communications efforts of established brands and utilizes discreet influencer relations to pair like-minded people and places together where there is mutual benefit. Before founding Hunt & Gather in 2013, Ms. Hunt served as Chief Marketing & Communications Officer for AOL, Inc. from 2012 to 2013, and held the role of Senior Vice President, Global Head of Brand & Public Relations at Thomson Reuters from 2008 to 2012. Prior to that time, Ms. Hunt was the Global Director of Corporate & Business Affairs at IBM Corporation from 2006 to 2008 and served as Director of Public Relations for the Financial Times from 2002 to 2006. Ms. Hunt currently serves on the boards of The Lowline and the Civilian Public Affairs Council for West Point Military Academy. Ms. Hunt earned a Bachelor’s Degree in Mass Communication from Boston University and completed the Global Executive Program at Dartmouth University Tuck School of Business and Spain’s IE Business School in 2010.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Ms. Hunt was nominated to serve on our Board because of her significant marketing and communications experience, knowledge about trends in the media, entertainment and technology world and the use of technology to advance company brands, which she acquired through her experience working with multiple multinational corporations and as the founder and Principal of Hunt & Gather. The Board believes these positions and experience bring additional, unique skills, perspective and connections to our Board.

 

12    PROXY STATEMENT    KILROY REALTY


DIRECTOR NOMINEE

 

 

LOGO

 

Scott Ingraham

 

Independent Director

 

Age: 65

 

Director Since 2007

 

Committees: Audit (C),

Governance

 

Scott Ingraham has been a member of our Board since June 2007. He is the co-owner of Zuma Capital, a firm engaged in private equity and angel investing. He was the co-founder (1999), Chairman and CEO of Rent.com, an Internet-based multi-family real estate site, before it was sold to eBay in 2005. Mr. Ingraham was also a co-founder and previously served as the President and CEO of Oasis Residential (“Oasis”), a public apartment REIT founded in 1992 that merged with Camden Property Trust (“Camden”) in 1998. In addition to serving on the Company’s Board, Mr. Ingraham serves on the board of trust managers of Camden, NYSE: CPT (since 1998), the audit committee of Camden (for six years previously and beginning again in 2016) and the board of directors of RealPage, Inc., Nasdaq: RP (since 2012). He also served on the board of directors of LoopNet, Nasdaq: LOOP, for six years before it was acquired by Co-Star in 2012. Prior to co-founding Oasis, Mr. Ingraham’s career was devoted to real estate finance, mortgage and investment banking. He earned a Bachelor’s Degree in Business Administration from the University of Texas at Austin in 1976.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Mr. Ingraham was nominated to serve on our Board because he possesses extensive financial and real estate knowledge based on his experience as Chairman and CEO of Rent.com, President and CEO of Oasis, a member of the board of trustees and a member of the nominating and corporate governance committee, audit committee and compensation committee of Camden, a member of the board of directors and audit committee of LoopNet and a member of the board of directors and audit committee of RealPage, Inc.

 

KILROY REALTY    PROXY STATEMENT    13


DIRECTOR NOMINEE

 

LOGO

 

Gary Stevenson

 

Independent Director

 

Age: 62

 

Director Since 2014

 

Committees:

Compensation, Governance

 

Gary Stevenson has been a member of our Board since May 2014. Mr. Stevenson has been President and Managing Director of MLS Business Ventures of Major League Soccer since July 2013. Prior to such time, Mr. Stevenson served as President of PAC-12 Enterprises (“Pac-12”) from 2011 to 2013, where he managed a diversified and integrated company, including the Pac-12 Networks and Pac-12 Properties. Before joining Pac-12, Mr. Stevenson was Chairman and CEO of OnSport Strategies, a sports and entertainment consulting company that he founded in 1997 and later sold to Wasserman Media Group in 2007. From 2007 to 2010, Mr. Stevenson served as Principal for Wasserman Media Group to help handle the integration of OnSport Strategies. Mr. Stevenson previously also served as President of NBA Properties, Marketing and Media for the National Basketball Association from 1995 to 1997, as Chief Operating Officer and Executive Vice President of the Golf Channel from 1994 to 1995 and as Executive Vice President, Business Affairs for PGA Tour from 1987 to 1994. Mr. Stevenson received his Bachelor’s Degree from Duke University and his Master’s Degree in Business Administration from George Washington University.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Mr. Stevenson was nominated to serve on our Board because of his extensive business and operational experience, including his founding role at OnSport Strategies, and his roles as President of Pac-12 and currently as President and Managing Partner of MLS Business Ventures of Major League Soccer. The Board believes these positions and Mr. Stevenson’s entrepreneurship success bring a diverse set of skills, experiences and relationships to our Board.

 

14    PROXY STATEMENT    KILROY REALTY


DIRECTOR NOMINEE

 

LOGO

 

Peter Stoneberg

 

Independent Director

 

Age: 63

 

Director Since 2014

 

Committees: Audit,

Governance (C), CSR&S

 

Peter Stoneberg has been a member of our Board since May 2014. Mr. Stoneberg is currently Managing Partner of Velocity Ventures, LLC (“Velocity Ventures”), a merchant banking and M&A advisory firm that he founded in 2000. From 2000 to 2006, Mr. Stoneberg was with Bank of America Capital Investors (“BACI”), a private equity firm where he was an investment partner specializing in growth and buyout capital for public and private technology companies. Mr. Stoneberg also served as Senior Managing Director of Montgomery Securities, where he founded and led the Technology M&A group, beginning in 1994 until its acquisition by Bank of America in 1999. Previously, Mr. Stoneberg served in various other investment banking and management roles, including as Managing Director of Broadview Associates, Co-Founder and President of Data/Voice Solutions Corp and Product Marketing Manager for IBM and ROLM Corp. He was also an investor and on the board of directors of Cupertino Electric, Osprey Ventures, Historic Motorsports Productions, Saleslogix Corp. and Netcom Systems. Additionally, Mr. Stoneberg has served as a founder of the San Francisco America’s Cup Organizing Committee and Chair of the Investment Committee of the St. Francis Sailing Foundation. Mr. Stoneberg received his Bachelor’s Degree in Business from the University of Colorado and has completed the Stanford Law School Directors’ College.

 

Specific Qualifications, Attributes, Skills and Experience:

 

Mr. Stoneberg was nominated to serve on our Board because of his significant relationships, experience with and knowledge of large and small companies in the high-technology industry, particularly those within the San Francisco Bay Area, which have become target tenants of the Company. Mr. Stoneberg also possesses extensive knowledge in the areas of raising equity and debt capital, and mergers and acquisitions based on his experience at BACI, Montgomery Securities and Velocity Ventures. Mr. Stoneberg also has experience as an active board member at three companies, including as a member of the audit and compensation committees of Netcom Systems and Cupertino Electric.

 

KILROY REALTY    PROXY STATEMENT    15


VOTE REQUIRED

Each director nominee will be elected at the Annual Meeting if he or she receives a majority of the votes cast with respect to his or her election (that is, the number of votes cast “FOR” the nominee must exceed the number of votes cast “AGAINST” the nominee). The majority voting standard does not apply, however, in a contested election where the number of director nominees exceeds the number of directors to be elected at an annual meeting of stockholders. In such circumstances, directors will instead be elected by a plurality of all the votes cast in the election of directors at the annual meeting at which a quorum is present. The election of directors at the Annual Meeting is not contested.

Under Maryland law, if an incumbent director is not re-elected at a meeting of stockholders at which he or she stands for re-election, then the incumbent director continues to serve in office as a holdover director until his or her successor is elected. To address this “holdover” issue, our Bylaws provide that if an incumbent director is not re-elected due to his or her failure to receive a majority of the votes cast in an uncontested election, the director will promptly tender his or her resignation as a director, subject to acceptance by the Board. The Governance Committee will then make a recommendation to our Board as to whether to accept or reject the tendered resignation, or whether other action should be taken. Our Board will act on the Governance Committee’s recommendation and publicly disclose its decision, along with its rationale, within 90 days after the date of the certification of the election results.

RECOMMENDATION

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” EACH OF THE DIRECTOR NOMINEES.

 

16    PROXY STATEMENT    KILROY REALTY


PROPOSAL 2 –

ADVISORY APPROVAL OF OUR EXECUTIVE COMPENSATION

We are asking our stockholders to approve the compensation of our NEOs (as identified in the CD&A) as disclosed pursuant to the SEC’s executive compensation disclosure rules and set forth in this Proxy Statement (including in the compensation tables, the narratives accompanying those tables and the CD&A). This is commonly referred to as a “Say-on-Pay” vote.

Our executive compensation philosophy is designed to achieve the following objectives:

 

   

To align executive compensation with the Company’s corporate strategies, business objectives and the creation of long- term value for our stockholders without encouraging unnecessary or excessive risk-taking;

 

   

To provide an incentive to achieve key strategic and financial performance measures by linking short-term incentive award opportunities to the achievement of corporate and operational performance objectives in these areas;

 

   

To set total compensation to be competitive with companies in our peer group identified on page 57, taking into account our active portfolio management strategy and the skill set required to implement that strategy;

 

   

To provide a majority of target TDC(5) for our NEOs in the form of long-term incentive equity awards; and

 

   

To help the Company attract, retain and incentivize talented and experienced individuals in the highly competitive West Coast employment and commercial real estate markets.

Below are highlights of the 2018 compensation arrangements for our NEOs as approved by the Compensation Committee.

 

   

CEO Employment Agreement and Related Incentive Awards. The Board believes that it is in the best interests of the Company and our stockholders for Mr. Kilroy to continue to serve as our CEO. Mr. Kilroy was eligible to retire in December 2018 in accordance with the terms of his employment agreement. We entered into an amended and restated employment agreement with Mr. Kilroy in December 2018. To incentivize him to delay his retirement and to provide an additional performance incentive during the term of his new employment agreement, Mr. Kilroy was granted additional RSUs in December 2018. The Company also granted our other NEOs RSU awards in December 2018 in recognition of their contributions to the Company and to provide additional long-term, performance-based incentives. To further align the interests of our executive team with the long-term interests of stockholders, more than half of the RSUs granted to our CEO, and half of the RSUs granted to our other NEOs, in December 2018 include performance-based vesting requirements with a long-term performance measure based on our relative TSR. See the discussion of the employment agreement and awards on pages 49-52.

Applicable SEC rules require that the Summary Compensation Table on page 63 include the entire grant date fair value of these December 2018 RSU awards as 2018 compensation for our NEOs (even though the awards are subject to long-term vesting requirements). Accordingly, the 2018 total compensation for our NEOs, and for our CEO in particular, will appear significantly higher than their 2017 compensation when presented in this fashion. The compensation actually “realized” by Mr. Kilroy in 2018 (calculated as discussed under “CEO Realized Compensation” on page 52) was significantly less than the 2018 total compensation required to be reported in the Summary Compensation Table. See the discussion under “CEO Realized Compensation” on page 52.

 

 

 

(5)

As used in this Proxy Statement, “target TDC” and “target total direct compensation” mean the executive’s base salary, target annual cash incentive and grant date fair value (based on the value approved by the Compensation Committee and used to determine the number of shares subject to the award) of annual long-term incentive awards granted to the executive in 2018. The equity awards granted in December 2018 are excluded from TDC. If included in TDC, the December 2018 equity awards would have had the impact of shifting a greater percentage of each executive’s overall TDC to at-risk, performance-based, long-term compensation.

 

KILROY REALTY    PROXY STATEMENT    17


   

Annual Short-Term Incentives Based on Performance Measurement Framework. The Compensation Committee determines annual short-term incentives based on a rigorous performance measurement framework that measures the Company’s actual performance against pre-established financial and operational goals and each NEO’s contribution to that performance. Based on the Company’s performance (as reflected on pages 42-43), the Compensation Committee determined that the final 2018 short-term incentive amounts for our NEOs would be between 100% and 129% of their target payout levels, and in all cases below the maximum payout opportunities. See “Short-Term Incentives — Decisions for 2018; 2018 Key Operating and Financial Goal Setting and Performance” on pages 40-43 for more information about how the goals are set and the Company’s performance.

 

   

Majority of Target TDC is “At Risk”. Approximately 88% of our CEO’s and approximately 81% of our other NEOs’ target TDC for 2018 was not guaranteed but rather was tied directly to the performance of the Company, the Company’s stock price and/or individual performance, as shown in the pay mix charts on page 38.

 

   

Majority of Target TDC is in the Form of Annual Long-Term Incentives. The most significant component of each NEO’s total compensation opportunity is in the form of RSUs that vest over a three-year period. In 2018, approximately 59% of our CEO’s (and approximately 52% of our other NEOs’) target TDC was in the form of RSUs. We believe equity compensation helps to align the interests of our NEOs with those of our stockholders.

 

   

Majority of Annual Long-Term Incentives are Performance-Based. Three-quarters of our CEO’s annual long-term incentive award for 2018 (and approximately two-thirds of the annual award grant to each of our other NEOs) was subject to performance-based vesting requirements. Vesting levels were contingent on achievement of a threshold level of FFO per share for 2018. If that goal was achieved, vesting will be determined based on our TSR compared to other office-focused REITs over a three-year period and our average ratio of debt to EBITDA over that period. The balance of each NEO’s total annual long-term incentive award vests in annual installments over a three-year period, subject to continued service through the applicable vesting date.

We also maintain a range of executive compensation and governance-related policies, listed beginning on page 58, that we believe reflect current best practices.

In accordance with the requirements of Section 14A of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the related rules of the SEC, our Board requests your advisory Say-on-Pay vote to approve the following resolution at our Annual Meeting:

RESOLVED, that the compensation paid to the Company’s NEOs, as disclosed in this Proxy Statement pursuant to the Securities and Exchange Commission’s executive compensation disclosure rules (which disclosure includes the “Compensation Discussion and Analysis” section, the compensation tables and the narrative discussion that accompanies the compensation tables), is hereby approved.

This vote is an advisory vote only and will not be binding on the Company, the Board or the Compensation Committee, and will not be construed as overruling a decision by, or creating or implying any additional fiduciary duty for, the Company, the Board or the Compensation Committee. However, the Compensation Committee will consider the outcome of this vote when making future compensation decisions for our NEOs.

The Company’s current policy is to provide our stockholders with an advisory Say-on-Pay vote to approve the compensation of our NEOs each year at the annual meeting of stockholders. It is expected that the next advisory Say-on-Pay vote will be held at the 2020 annual meeting of stockholders.

VOTE REQUIRED

The compensation of our NEOs will be approved, on an advisory basis, if a majority of the votes cast at the Annual Meeting are cast in favor of the proposal.

RECOMMENDATION

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE RESOLUTION APPROVING, ON AN ADVISORY BASIS, THE COMPENSATION OF THE COMPANY’S NEOs.

 

18    PROXY STATEMENT    KILROY REALTY


PROPOSAL 3 –

RATIFICATION OF APPOINTMENT

OF INDEPENDENT AUDITOR

We are seeking stockholder ratification of our appointment of Deloitte & Touche LLP (“Deloitte”), an independent registered public accounting firm, as our independent auditor for the fiscal year ending December 31, 2019. Deloitte has served as our independent auditor since 1995 when the Company was privately held and has continued to serve as such since the Company’s initial public offering in January 1997 and, prior to the Annual Meeting, the Audit Committee is expected to re-appoint Deloitte as our independent auditor for the year ending December 31, 2019.

Additional information about Deloitte, including the fees we paid to Deloitte in fiscal years 2018 and 2017, can be found in this Proxy Statement under the caption “Audit and Non-Audit Fees.” The report of the Audit Committee included in this Proxy Statement under the caption “Audit Committee Report” also contains information about the role of Deloitte with respect to the audit of the Company’s annual financial statements.

A representative of Deloitte is expected to be present at our Annual Meeting, be available to respond to appropriate questions and will have the opportunity to make a statement, if desired.

Stockholder ratification of the appointment of Deloitte as our independent auditor is not required by our Bylaws or otherwise. However, the Board is submitting the appointment of Deloitte to the stockholders for ratification as a matter of good corporate governance. If the stockholders fail to ratify the appointment, the Audit Committee may reconsider whether or not to retain Deloitte. Even if the appointment is ratified, the Audit Committee, in its discretion, may appoint a different independent auditor at any time during the year if the Audit Committee determines that such a change would be in the best interests of the Company and our stockholders

VOTE REQUIRED

Ratification of the appointment of Deloitte as our independent auditor will be approved if a majority of the votes cast at the Annual Meeting are cast in favor of the proposal.

RECOMMENDATION

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF DELOITTE AS OUR INDEPENDENT AUDITOR FOR FISCAL 2019.

 

KILROY REALTY    PROXY STATEMENT    19


CORPORATE GOVERNANCE

The Company is committed to good corporate governance, which promotes the long-term interests of stockholders, strengthens accountability of the Board and helps build public trust in the Company. Highlights include the following:

 

Independent Board Leadership and Practices

 

   

Lead Independent Director with a well-defined role and robust responsibilities

 

   

Majority of directors are independent (5 out of 6 current directors)

 

   

Established the CSR&S Committee in April 2018 responsible for advising the Board and consulting with, and generally advising management on matters related to, among other things, sustainability, diversity and inclusion, philanthropy and community involvement, good corporate citizenship, health and wellness, and other non-financial issues that are of significance to the Company and its stockholders

 

   

Commitment to include women and individuals from minority groups in the qualified pool from which new director candidates are selected

 

   

Commitment to Board refreshment with three new independent directors in the last five years

 

   

Average independent director tenure of 7.4 years

 

   

Comprehensive risk oversight practices, including cybersecurity and insurance

 

   

Strategic update from CEO is a standing Board agenda item

 

   

Regular executive sessions of independent directors

 

   

Regular Board and committee self-evaluations

 

   

Succession Planning Committee oversees regular succession planning efforts

 

   

CEO may only serve on the board of directors of one other public company

 

   

All principal Board committees are composed solely of independent directors

Robust Stockholder Rights

 

   

Stockholder proxy access amended in 2017 to align with best practices and respond to stockholder feedback

 

   

Majority voting for directors in uncontested elections

 

   

Annual director elections (declassified Board)

 

   

Annual Say-on-Pay voting

 

   

Stockholder right to call a special meeting

 

   

Stockholder right to amend Bylaws by a majority vote

 

   

No stockholder rights plan

 

 

20    PROXY STATEMENT    KILROY REALTY


BOARD COMPOSITION AND GOVERNANCE

Director Attendance

During 2018 the Board held four meetings. All directors who served on the Board during 2018 attended at least 75% of the total number of meetings of the Board and meetings of the Board committees on which each director served that were held during the period of the director’s service during the year. Directors are encouraged to attend in person the annual meeting of stockholders of the Company. All directors attended the 2018 annual meeting of stockholders.

Independent Directors

Under the corporate governance rules of the New York Stock Exchange (the “NYSE”), a majority of the members of the Board must satisfy the NYSE criteria for “independence.” No director qualifies as independent unless the Board affirmatively determines that the director has no material relationship with the Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company). The Board has determined that each of Dr. Brennan, Ms. Hunt and Messrs. Ingraham, Stevenson and Stoneberg is independent under the current listing standards of the NYSE. In addition, pursuant to our Bylaws, each of Dr. Brennan, Ms. Hunt and Messrs. Ingraham, Stevenson and Stoneberg, comprising at least a majority of the members of the Board, is not an employee, officer or affiliate of the Company or any of its subsidiaries or divisions, or a relative of a principal executive officer, and is not an individual member of an organization acting as an advisor, consultant or legal counsel receiving compensation from the Company in addition to director’s fees. In this Proxy Statement, we refer to each of Dr. Brennan, Ms. Hunt and Messrs. Ingraham, Stevenson and Stoneberg as our “Independent Directors.”

Independent Director Meetings

The Independent Directors meet regularly in executive session without the presence of management. These meetings are generally held on the date of each regularly scheduled Board meeting and on an as-needed basis. Dr. Brennan, our Lead Independent Director, presides over these meetings.

Board Leadership Structure and Lead Independent Director

Our Corporate Governance Guidelines and our Bylaws permit the roles of Chairman and CEO to be filled by the same or different individuals. Our Board believes it is important to select our Chairman and our CEO in the manner it considers in the best interests of the Company and our stockholders at any given point in time. The Independent Directors on our Board assess the role of Chairman and CEO annually to ensure that the Company’s leadership structure best fits the Company’s specific circumstances and short and long-term challenges.

At this time, our Board believes that the Company and our stockholders are best served by having Mr. Kilroy serve as our Chairman and CEO. Mr. Kilroy’s combined role as Chairman and CEO demonstrates clearer accountability and provides a single leader who speaks with one voice to our stockholders, tenants, partners, employees, other stakeholders and the public. The combined Chairman and CEO role also enhances transparency between management and our Board by serving as an efficient and effective bridge for communication between the Board and management on significant business developments and time-sensitive matters, and provides unified leadership for carrying out our strategic initiatives and business plans. The combined Chairman and CEO role is balanced by the number of independent directors serving on our Board, our independent committee Chairs and our Lead Independent Director.

Our Corporate Governance Guidelines provide that if the Chairman is also our CEO, or if the Chairman is not otherwise an Independent Director, the Independent Directors will appoint annually from amongst themselves a Lead Independent Director. Dr. Brennan is currently our Lead Independent Director and brings to this role considerable skills and experience, as described above in “Proposal 1 — Election of Directors.” The role of our Lead Independent Director is designed to further promote the independence of our Board and appropriate oversight of management and to facilitate free and open discussion and communication among the Independent Directors.

 

KILROY REALTY    PROXY STATEMENT    21


The responsibilities of our Lead Independent Director are clearly delineated in our Corporate Governance Guidelines and include:

 

   

Presiding at all meetings of our Board at which the Chairman is not present, including executive sessions of the Independent Directors;

 

   

Serving as liaison between the Chairman and the Independent Directors;

 

   

Approving information sent to our Board;

 

   

Approving agendas for meetings of our Board;

 

   

Approving meeting schedules of our Board to ensure that there is sufficient time for discussion of all agenda items;

 

   

Developing agendas for and calling meetings of the Independent Directors when necessary or appropriate; and

 

   

Being available for consultation and direct communication if requested by major stockholders.

We believe this current leadership structure with the combined Chairman and CEO leadership role and a Lead Independent Director enhances our Board’s ability to provide insight and direction on important strategic initiatives and, at the same time, promotes effective and independent oversight of management and our business.

Board Oversight of Risk

Our Board is actively involved in risk oversight and the Board as a whole directly oversees strategic, operating, financial and liquidity risks. Operational, financial and strategic presentations by management to the Board include consideration of the challenges and risks to our business, and the Board and management actively engage in discussion on these topics. In addition, our Board has delegated oversight for specific areas of risk exposure to committees of our Board as follows:

 

   

Audit Committee. Reviews specific critical accounting issues with management and the overall impact that those issues may have on our financial position and risk profile. Discusses legal and compliance matters and assesses the adequacy of our risk-related internal controls, which includes an annual review of our fraud risk assessment as part of its general oversight responsibility for the quality and integrity of our financial statements and accounting internal controls. The Audit Committee also oversees the Company’s cybersecurity and insurance risks and preparedness.

 

   

Compensation Committee. Structures our executive compensation programs so as to appropriately reward executives for operating performance and growth without undue risk-taking and oversees, among other things, the assessment and management of risks related to the Company’s compensation plans and policies. The Compensation Committee has evaluated our compensation policies and programs and believes that our compensation policies and practices provide appropriate incentives and controls and are not reasonably likely to have a material adverse effect on the Company.

 

   

Governance Committee. Oversees Board processes and corporate governance-related risks and reviews all Related Party Transactions and Principal Party Transactions, each as defined below under “Other Matters — Certain Relationships and Related Transactions,” including the risks relating to those transactions impacting the Company.

 

   

Corporate Social Responsibility and Sustainability Committee. Oversees and considers reputational and related business risks corresponding to our corporate social responsibility initiatives, including sustainability, diversity and inclusion, philanthropy and community involvement, good corporate citizenship, health and wellness, and other non-financial issues that are of significance to the Company and its stockholders.

 

   

Succession Planning Committee. Reviews and evaluates risks associated with leadership development and CEO and other key executive succession.

At each regular meeting of our Board, the Chair of each committee reports to the full Board regarding the matters reported and discussed at any committee meetings, including any matters relating to risk assessment or risk management. Our CEO, Chief Financial Officer, Chief Operating Officer, Chief Accounting Officer and Controller, and Corporate Counsel regularly attend meetings of these committees when they are not in executive session and often report on matters that may not be otherwise addressed at these meetings. In addition, our directors are encouraged to communicate directly with members of management regarding matters of interest, including matters related to risk, at times when meetings are not being held.

 

22    PROXY STATEMENT    KILROY REALTY


Our Board believes that the process it has established to administer the Board’s risk oversight function would be effective under a variety of leadership frameworks and, therefore, does not have a material effect on our choice of the Board’s leadership structure described above under “Board Leadership Structure and Lead Independent Director.”

Code of Business Conduct and Ethics

Our Board has adopted a Code of Business Conduct and Ethics that applies to our directors, officers (including our CEO, Chief Financial Officer, Chief Accounting Officer and Controller, and other members of senior financial management), employees, agents and consultants. This Code of Business Conduct and Ethics satisfies the requirements of a “code of business conduct and ethics” under the NYSE listing standards and a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and applicable SEC rules. This Code of Business Conduct and Ethics is available in the Investors — Overview — Corporate Governance section of the Company’s website at http://www.kilroyrealty.com. Amendments to, or waivers from, a provision of this Code of Business Conduct and Ethics that apply to the Company’s directors or executive officers, including our CEO, Chief Financial Officer, Chief Accounting Officer and Controller, and other members of senior financial management, may be made only by the Board or a Board committee and will be promptly posted on our website to the extent required by applicable SEC rules and NYSE listing standards.

Corporate Governance Guidelines

Our Board has adopted Corporate Governance Guidelines, which provide the framework for the governance of our Company and represent the Board’s current views with respect to selected corporate governance issues considered to be of significance to our stockholders. The Corporate Governance Guidelines direct our Board’s actions with respect to, among other things, Board composition and director qualifications, selection of the Chairman of the Board and the Lead Independent Director, establishment of the Board’s standing committees, director stock ownership guidelines, succession planning and the Board’s annual performance evaluation. A current copy of the Corporate Governance Guidelines is available in the Investors —Overview — Corporate Governance section of our website at http://www.kilroyrealty.com.

Succession Planning

Pursuant to our Corporate Governance Guidelines, our Board and our CEO review succession planning, management performance and management development on a regular basis. To facilitate this succession planning oversight by the Board, the Board has established an ad hoc Succession Planning Committee of the Board that is responsible for reviewing the Company’s succession planning and management performance and development. The members of the Succession Planning Committee are Messrs. Kilroy and Stevenson and Dr. Brennan, with Mr. Stevenson serving as its Chair. The Succession Planning Committee reviews potential internal candidates with our CEO, including the qualifications, experience and development priorities for these individuals, and provides recommendations to our Board regarding potential CEO successors and reviews their development plans. Directors also engage with potential CEO and key management personnel successors at Board and committee meetings and in less formal settings to allow directors to personally assess potential successor candidates.

Our Board also maintains an emergency CEO succession plan. The plan will become effective in the event our CEO becomes unable to perform his or her duties in order to minimize potential disruption or loss of continuity to the Company’s business and operations. The Succession Planning Committee reviews the emergency succession plan periodically and makes recommendations to the Board regarding any changes or updates to the emergency succession plan.

Corporate Social Responsibility and Sustainability

Operating in a responsible and sustainable manner plays an important role in our business. Management and our Board, through the CSR&S Committee established in April 2018, take seriously their responsibility to oversee and advance the Company’s corporate social responsibility and sustainability initiatives and recognize that community engagement and sustainable operations benefit all of our constituencies and are key to preserving our Company’s value and credibility. We believe that our governance foundation, coupled with our strong environmental and socially focused initiatives and accomplishments, stand out in our industry and create long-term value for our stockholders.

 

KILROY REALTY    PROXY STATEMENT    23


Commitment to Diversity at the Company and on the Board

We are focused on creating a diverse and inclusive workforce. Our priority is to attract, develop and retain the best talent, foster an inclusive culture and embrace diversity. Our employees are the foundation of our success and we strive to have a workforce that reflects the diversity of qualified talent that is available in the markets that we serve. As of December 31, 2018, women comprised 57% and minorities comprised 40% of the Company’s total workforce, and women comprised 47% of employees in supervisory roles at the Company. Additionally, the Company has several women in key leadership roles, including the EVP, Life Science, the EVP, Chief Administrative Officer, the Chief Accounting Officer and Controller, and the Treasurer, among others.

We are also committed to diversity at the Board level. Our Board will consider diversity, including gender and ethnicity, when considering nominations to the Board and will endeavor to include women and individuals from minority groups in the qualified pool from which new director candidates are selected the next time that the Board undergoes Board refreshment. The Board’s objective is to have a Board comprised of individuals who by occupation, background and experience are in a position to make a strong, positive contribution to the Company and its stockholders.

Commitment to Sustainability

We continue to be recognized for our industry leading sustainability practices.

 

   

Committed to achieving carbon neutral operations by year-end 2020

 

   

Ranked 1st in sustainability performance among 14 North American office listed real estate companies by GRESB, our fifth year in a row achieving a number one ranking in this category

 

   

Earned the highly competitive GRESB “Green Star” designation in each of the last six years for ranking in the top 25% of companies worldwide in sustainability performance

 

   

Selected from approximately 6,000 ENERGY STAR Partners to receive the U.S. EPA’s ENERGY STAR Partner of the Year Sustained Excellence Award, the U.S. EPA’s highest honor, for each of the last four years

 

   

A winner of NAREIT’s 2018 Leader in the Light Award in the Listed Office category for the fifth year in a row, and a winner of the NAREIT Leader in the Light Most Innovative award in 2018

 

   

Increased our LEED certified square footage by more than 750,000 additional square feet in 2018, resulting in 63% of the stabilized portfolio being LEED certified at year-end 2018

 

   

Increased percentage of stabilized portfolio that has earned ENERGY STAR certifications from 73% in 2017 to 77% in 2018

 

   

Achieved Fitwel certification, a measure of how well workplaces support the health of occupants, for 38% of our stabilized portfolio

 

   

Pursuing LEED platinum or gold certification for all development projects

To learn more about the Company’s sustainability efforts, please view our 2018 sustainability report on the Company’s website, by visiting http://kilroyrealty.com/sites/default/files/kilroy-realty-corporation-sustainability-report-2018.pdf.

 

24    PROXY STATEMENT    KILROY REALTY


BOARD COMMITTEES

Our Board has four (4) standing committees: (i) the Audit Committee, (ii) the Compensation Committee, (iii) the Governance Committee and (iv) the CSR&S Committee. All members of the Audit Committee, Compensation Committee and Governance Committee are Independent Directors. Our Audit Committee, Compensation Committee, Governance Committee and CSR&S Committee each operate under a written charter adopted by our Board, which is available in the Investors — Overview — Corporate Governance section of the Company’s website at http://www.kilroyrealty.com.

 

Director Name

 

  

Independent

 

  

Audit

 

  

Compensation

 

  

Governance

 

 

CSR&S  

 

    

 

Edward Brennan, PhD L

 

   X    M    C    M        

 

Jolie Hunt

 

   X         M    M   C    

 

Scott Ingraham

 

   X    C         M        

 

John Kilroy

 

                      M    

 

Gary Stevenson

 

   X         M    M        

 

Peter Stoneberg

 

   X    M       C   M  

L Lead Independent Director                M Committee Member                 F Financial Expert                 C Committee Chair

Audit Committee

The Audit Committee’s purpose is to assist the Board in fulfilling its oversight responsibilities regarding (i) the quality and integrity of the Company’s financial statements; (ii) the Company’s compliance with legal and regulatory requirements; (iii) the independent auditor’s qualifications and independence; (iv) the Company’s accounting and system of internal controls; and (v) the performance of the Company’s internal audit function and independent auditor. Our Board has determined that each member of the Audit Committee satisfies the enhanced independence standards applicable to audit committees pursuant to Rule 10A-3(b)(1)(i) under the Exchange Act and the NYSE listing standards. In addition, each of Messrs. Ingraham and Stoneberg and Dr. Brennan is financially literate and each of Messrs. Ingraham and Stoneberg and Dr. Brennan is an “audit committee financial expert” as determined by the Board in accordance with applicable rules of the NYSE and the SEC. The Board based its determination on the qualifications and business experience of each of Messrs. Ingraham and Stoneberg and Dr. Brennan described above under “Proposal 1 — Election of Directors.”

The Audit Committee held six meetings during 2018. Additional information regarding the specific functions performed by the Audit Committee is set forth in the “Audit Committee Report” below.

Executive Compensation Committee

The purpose of the Compensation Committee is to formulate, evaluate and approve the compensation of our officers, as defined in the rules under Section 16 of the Exchange Act, and to discharge our Board’s duties and responsibilities relating to our compensation programs and practices, including its incentive and equity-based compensation plans and programs. The Compensation Committee is responsible for, among other things: (i) reviewing and making changes to our compensation philosophy; (ii) reviewing and approving corporate goals and objectives relevant to the compensation of our CEO, evaluating the performance of our CEO in light of those goals and objectives, and determining and approving our CEO’s compensation level based on such evaluation; (iii) reviewing and approving the compensation for our other executive officers and all executive officers’ employment agreements, severance arrangements or any other compensation-related agreements; (iv) reviewing and making recommendations to the Board regarding compensation for non-employee members of our Board; (v) reviewing and making recommendations to the Board regarding the adoption, amendment or any discontinuation of any compensation plans under which Company securities may be issued or which otherwise requires stockholder approval, and approving award grants under any such plan and the terms of any such awards; and (vi) preparing the Compensation Committee Report included in this Proxy Statement. The Compensation Committee held four meetings in 2018.

 

KILROY REALTY    PROXY STATEMENT    25


Our Board has determined that each member of the Compensation Committee satisfies the additional independence requirements specific to compensation committee membership under the NYSE listing standards. In making this determination, the Board considered whether the director has a relationship with the Company that is material to the director’s ability to be independent from management in connection with the duties of a member of the Compensation Committee.

In fulfilling its responsibilities, the Compensation Committee may delegate any or all of its responsibilities to a separate committee of the Board or a subcommittee of the Compensation Committee. The Compensation Committee has not delegated any of its authority to set compensation levels of our executive officers or to grant equity awards, but has delegated certain limited administrative authority to management (i) with respect to the 2007 Deferred Compensation Plan, as amended; (ii) to address the settlement of fractional share interests arising under certain equity awards under our 2006 Incentive Award Plan (“2006 Plan”); and (iii) to determine whether certain equity awards would be settled in cash or stock under such plan.

In accordance with the Compensation Committee’s charter, the Compensation Committee may retain independent compensation advisors and other management consultants. In 2018, the Compensation Committee retained Mercer (US) Inc. (“Mercer”) to assist it in reviewing our compensation programs and the evaluation of specific compensation-related matters. As discussed under “Compensation Discussion and Analysis — How We Make Compensation Decisions — Role of Independent Compensation Consultant” below, the Compensation Committee has assessed the independence of Mercer and has concluded that its engagement of Mercer does not raise any conflict of interest with the Company. The services provided by Mercer in 2018 are also discussed in that section.

At the request of the Compensation Committee, certain of our executive officers aid the Compensation Committee in reviewing and analyzing our executive compensation program. These services are discussed under “Compensation Discussion and Analysis — How We Make Compensation Decisions — Role of Management in Executive Compensation Planning” below.

Nominating/Corporate Governance Committee

The purpose of the Governance Committee is to (i) identify individuals qualified to become Board members consistent with criteria approved by the Board; (ii) recommend director nominees for the next annual meeting of stockholders for approval by the Board; (iii) develop and annually review the Corporate Governance Guidelines and recommend any proposed changes to the Board; (iv) oversee the evaluation of the Board; and (v) generally advise the Board on corporate governance and related matters. The Governance Committee also serves as the Independent Committee of our Board pursuant to Article III, Section 7 of our Bylaws and approves all transactions between the Company and John B. Kilroy, Sr. (or his estate) or John B. Kilroy, Jr. and their respective affiliates. The Governance Committee held two meetings in 2018.

Additionally, the Governance Committee has the authority to engage any independent counsel or other outside expert or advisors it deems desirable or appropriate.

Corporate Social Responsibility and Sustainability Committee

The purpose of the CSR&S Committee, which was formed in April 2018, is to (i) generally advise the Board and management of the Company on matters related to the Company’s corporate social responsibility objectives, including but not limited to, sustainability, diversity and inclusion, philanthropy and community involvement, good corporate citizenship, health and wellness and other non-financial issues that are of significance to the Company and its stockholders and (ii) develop and oversee Company goals, policies and procedures, and initiatives to ensure alignment with, and promote the achievement of, such objectives. The CSR&S Committee held one meeting in 2018.

 

26    PROXY STATEMENT    KILROY REALTY


DIRECTOR SELECTION, EVALUATION AND COMMUNICATIONS

Qualifications of Director Nominees

The Board is committed to having a membership comprised of individuals who by occupation, background and experience are in a position to make a strong, positive contribution to the Company and its stockholders, and will endeavor to include women and individuals from minority groups in the qualified pool from which director candidates are selected. In considering candidates for nomination or appointment to the Board, the Governance Committee and the Board seek director candidates who, both individually and collectively, have such knowledge, experience and education based on criteria determined by the Governance Committee to be appropriate in the context of the perceived objectives of the Company at a given point in time and to provide balance to the Board’s knowledge, perspective, experience and expertise. The Governance Committee has established board membership criteria (the “Membership Criteria”), which it uses as a guideline in considering nominations to the Company’s Board. The criteria include, but are not limited to, (i) commitment to promoting the long-term interests of the Company’s stockholders, (ii) reputation and character, (iii) knowledge, experience and education, (iv) mature business judgment, (v) sufficient time, energy and attention to dedicate to the Company’s affairs, (vi) diversity, in its broadest sense, reflecting, but not limited to, profession, geography, gender, ethnicity, skills and experience, (vii) compliance with the Company’s stock ownership guidelines as set forth in the Corporate Governance Guidelines, (viii) independence and (ix) Board balance. In addition, the Company’s Bylaws and listing standards of the NYSE require the Board to be composed of a majority of directors who qualify as “independent directors” as defined therein. In considering director candidates, the Governance Committee and Board do not discriminate based on race, ethnicity, national origin, gender, religion or disability.

The Membership Criteria established by the Governance Committee are not exhaustive and the Governance Committee and the Board may consider other qualifications and attributes that they believe are appropriate in evaluating the ability of an individual to serve as a member of the Board. The Governance Committee reviews and assesses the Membership Criteria annually.

Process for Identifying Nominees for Director

At any appropriate time prior to each annual meeting of stockholders at which directors are to be elected, and whenever there is otherwise a vacancy on the Board, the Governance Committee will assess the qualifications and effectiveness of the current Board members and, to the extent there is a need, will seek other individuals qualified and available to serve as potential Board members. The Governance Committee will review each potential candidate’s qualifications in light of the Membership Criteria described above. In reviewing each potential candidate, the Governance Committee also considers the results of the annual Board and individual director evaluations for purposes of assessing the suitability of each Board member for continued service on the Board. See “Annual Board Evaluations” below for additional information regarding the annual Board evaluation process. The Governance Committee will select the candidate or candidates it believes are the most qualified to recommend to the Board for selection as a director nominee.

Stockholder-Recommended Director Candidates

The Governance Committee will consider director candidates recommended by stockholders of the Company. Candidates recommended by a stockholder are evaluated in the same manner as candidates identified by the Governance Committee. All recommendations must be directed to the Governance Committee c/o Secretary at 12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064. Recommendations for director nominees to be considered at the 2020 annual meeting of stockholders must be received in writing not later than November 30, 2019.

 

   

Each stockholder recommending a person as a director candidate must provide the Company with the following information for the Governance Committee to determine whether the recommended director candidate is independent from the stockholder, or each member of the stockholder group, that has recommended the director candidate;

 

   

If the recommending stockholder or any member of the recommending stockholder group is a natural person, whether the recommended director candidate is the recommending stockholder, a member of the recommending stockholder group, or a member of the immediate family of the recommending stockholder or any member of the recommending stockholder group;

 

KILROY REALTY    PROXY STATEMENT    27


   

If the recommending stockholder or any member of the recommending stockholder group is an entity, whether the recommended director candidate or any immediate family member of the recommended director candidate is an employee of the recommending stockholder or any member of the recommending stockholder group or has been at any time during the current or preceding calendar year;

 

   

Whether the recommended director candidate or any immediate family member of the recommended director candidate has accepted directly or indirectly any consulting, advisory or other compensatory fees from the recommending stockholder or any member of the group of recommending stockholders, or any of their respective affiliates during the current or preceding calendar year;

 

   

Whether the recommended director candidate is an executive officer or director (or person fulfilling similar functions) of the recommending stockholder or any member of the recommending stockholder group, or any of their respective affiliates; and

 

   

Whether the recommended director candidate controls the recommending stockholder or any member of the recommending stockholder group.

The recommending stockholder must also provide supplemental information that the Governance Committee may request to determine whether the recommended director candidate (i) meets the standards of independence established by the NYSE; (ii) satisfies the Membership Criteria described above; and (iii) is qualified to serve on the Audit Committee. In addition, the recommending stockholder must include the consent of the recommended director candidate and the recommended director candidate must make himself or herself reasonably available to be interviewed by the Governance Committee. The Governance Committee will consider all recommended director candidates submitted to it in accordance with these established procedures, although it will only recommend to the Board as potential nominees those candidates it believes are most qualified. However, the Governance Committee will not consider any director candidate if his or her candidacy or, if elected, Board membership, would violate controlling state or federal law.

Annual Board Evaluations

Pursuant to our Corporate Governance Guidelines and the charter of the Governance Committee, the Governance Committee oversees an annual evaluation of the performance of the Board. Each standing committee also conducts a separate evaluation of its own performance and of the adequacy of its charter and reports to the Board on the results of this evaluation. The evaluation process is designed to assess the overall effectiveness of the Board and its committees and to identify opportunities for improving Board and Board committee operations and procedures. The Governance Committee also reviews the qualifications and effectiveness of individual directors each year when the directors stand for re-nomination. The review of individual directors includes an assessment of each director’s skills and experience in relationship to the Membership Criteria and that director’s commitment to the Board as evidenced by preparation for, understanding of, and attendance at Board meetings. The results of the individual director evaluations and the Governance Committee’s recommendations regarding director nominations are reported to the Board. The annual evaluations are generally conducted in the fourth quarter of each year or in the first quarter of the following year.

Communications with the Board

Stockholders or other interested parties who wish to contact the Board, the Lead Independent Director, any Board committee, or our Independent Directors as a group may send written correspondence c/o Board of Directors at 12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064. The name of any specific intended Board recipients should be clearly noted in the communication. All communications will be received, processed and then forwarded to the appropriate member(s) of our Board, except that, certain items unrelated to the Board’s duties and responsibilities, such as spam, junk mail, mass mailings, solicitations, resumes and employment inquiries and similar items will not be forwarded. Board members receiving communications will respond as such directors deem appropriate, including the possibility of referring the matter to management of our Company, to the full Board or to an appropriate committee of the Board.

 

28    PROXY STATEMENT    KILROY REALTY


AUDIT AND NON-AUDIT FEES

Deloitte has served as the Company’s independent auditor since 1995 when the Company was privately held and has continued to serve as such since the Company’s initial public offering in January 1997. Deloitte is expected to be reappointed by the Audit Committee for the current fiscal year at its meeting to be held during the second quarter, which will precede the Annual Meeting.

The Audit Committee of the Board has determined that Deloitte is independent with regard to the Company within the meaning of the Exchange Act and the applicable published rules and regulations thereunder and by the Public Company Accounting Oversight Board (the “PCAOB”). The Audit Committee annually reviews and pre-approves certain audit and non-audit services that may be provided by Deloitte and establishes a pre-approved aggregate fee level for these services. Any proposed services not included within the list of pre-approved services or any proposed services that will cause the Company to exceed the pre-approved aggregate amount requires specific pre-approval by the Audit Committee. Additionally, the Audit Committee may delegate to one or more designated members of the Audit Committee the authority to grant pre-approvals, provided such pre-approvals are presented to the Audit Committee at a subsequent meeting. The Audit Committee has delegated this pre-approval authority to Mr. Ingraham, the Chair of the Audit Committee, although such delegation does not limit the authority of the Audit Committee to pre-approve in its discretion any specific services to be provided by Deloitte.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The aggregate fees billed to the Company by Deloitte for professional services rendered in fiscal years 2018 and 2017 are as follows:

 

Fees(1)

 

    

 

2018

 

 

 

    

 

2017

 

 

 

 

Audit Fees(2)

 

     $1,878,852        $1,670,420                    

 

Audit-Related Fees

 

            —                      

 

Tax Fees(3)

 

            27,205               74,020                      

 

All Other Fees

 

            —                      

 

Total Fees

 

     $1,906,057        $1,744,440                      

 

  (1)

All services rendered for these fees were pre-approved by the Audit Committee in accordance with the Audit Committee’s pre-approval policies and procedures described above. The Audit Committee has concluded that the provision of the non-audit services rendered for the listed fees is compatible with maintaining Deloitte’s independence.

 

  (2)

Includes the aggregate fees billed for the audits of the Company’s and the Operating Partnership’s annual financial statements and internal control over financial reporting, review of financial statements included in their quarterly reports on Form 10-Q, consultations with management on technical accounting and regulatory issues, consultation and review of filings associated with the Company’s and the Operating Partnership’s 2018 and 2017 equity and bond offerings, and services provided for assistance with and review of other regulatory filings.

 

  (3)

Tax fees rendered in 2018 and 2017 include the aggregate fees billed relating to tax consulting projects.

 

KILROY REALTY    PROXY STATEMENT    29


AUDIT COMMITTEE REPORT

The Audit Committee of the Company’s Board is composed of Independent Directors who satisfy the requirements of Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1)(i) thereunder, and the current listing standards of the NYSE. The Audit Committee operates pursuant to a written charter.

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board. In fulfilling its oversight responsibilities, the Audit Committee appoints the Company’s independent auditors and reviews and discusses the audited financial statements included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K with management, including the reasonableness of significant judgments and the clarity of disclosures in the financial statements. Management has primary responsibility for the financial statements and the reporting process, including the Company’s internal control over financial reporting.

The Company’s independent auditors are responsible for performing an audit of the Company’s consolidated financial statements and expressing an opinion on the conformity of those audited consolidated financial statements with generally accepted accounting principles. The Audit Committee reviewed and discussed the audited consolidated financial statements of the Company as of and for the year ended December 31, 2018 with management and the Company’s independent auditors. The Audit Committee discussed with the Company’s independent auditors their judgments as to the Company’s accounting principles and such other matters as are required to be discussed with the Audit Committee under Auditing Standard 1301 (previously Auditing Standard No. 16), “Communications with Audit Committees,” as adopted by the PCAOB. In addition, the Audit Committee received the written disclosures and the letter from the independent auditors required by the PCAOB regarding the independent auditors’ communications with the Audit Committee concerning the accountant’s independence, and it discussed with the Company’s independent auditors their independence from the Company. The Audit Committee also considered the compatibility of the independent auditors’ provision of audit, tax and non-audit services with the auditors’ independence.

The Audit Committee discussed with the Company’s independent auditors the overall scope of their respective audits. The Audit Committee meets with the independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of the Company’s internal control over financial reporting, and the overall quality of the Company’s financial reporting. In the performance of their oversight function, the members of the Audit Committee relied upon the information, opinions, reports and statements presented to them by the Company’s management and by the Company’s independent auditors. The Audit Committee held six meetings during 2018.

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board (and the Board approved) that the audited financial statements as of and for the year ended December 31, 2018 be included in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 15, 2019.

Audit Committee

Scott Ingraham, Chair

Edward Brennan, PhD

Peter Stoneberg

The foregoing report of the Audit Committee is not soliciting material, is not deemed filed with the SEC and is not incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, whether made before or after the date of this Proxy Statement and irrespective of any general incorporation language in such filing.

 

30    PROXY STATEMENT    KILROY REALTY


OUR EXECUTIVE OFFICERS

 

John Kilroy

 

•   President, Chief Executive and
Officer and Chairman
of the Board

•   Age: 70

 

 

John Kilroy was appointed as Chairman in February 2013 and has served as our President and CEO since our incorporation in September 1996. Biographical information regarding Mr. Kilroy is set forth above under the caption “Proposal 1 — Election of Directors.”

   

 

Jeffrey Hawken

 

•   Executive Vice President and Chief Operating Officer

•   Age: 60

 

Jeffrey Hawken has served as our Chief Operating Officer since our inception as a public company in January 1997. Mr. Hawken is responsible for overseeing the Company’s overall operations, including asset and property management functions, and legal affairs. Prior to our initial public offering, Mr. Hawken served in the same capacity for Kilroy Industries and was responsible for the management and operations of Kilroy Industries’ real estate portfolio and served on its acquisitions and executive committees. In 1980, after graduating from college, Mr. Hawken joined Kilroy Industries as a Senior Financial Analyst and has been involved in property and asset management with the Company since May 1983. Mr. Hawken is a member of the Young Presidents’ Organization, Angeleno Gold Chapter and has held leadership roles in Young Presidents’ Organization, Gold Santa Monica Bay Chapter. Mr. Hawken was a past Chairman of BOMA Greater Los Angeles and currently serves on the National Advisory Committee. Mr. Hawken serves on the Executive Committee at the University of Southern California Lusk Center for Real Estate. He is an active member of the City of Hope Los Angeles Real Estate and Construction Industries Council. Mr. Hawken holds a Bachelor of Science degree in Business Administration from the University of Southern California and he is a licensed Real Estate Broker in the state of California.

 

   

 

Tyler Rose

 

•   Executive Vice
President, Chief
Financial Officer and Secretary

•   Age: 58

 

Tyler Rose was appointed Executive Vice President and Chief Financial Officer in December 2009 after serving as Senior Vice President and Treasurer since 1997. Prior to his tenure at the Company, Mr. Rose was Senior Vice President, Corporate Finance of Irvine Apartment Communities, Inc. from 1995 to 1997, and was appointed Treasurer in 1996. Prior to that, Mr. Rose was Vice President, Corporate Finance of The Irvine Company from 1994 to 1995. From 1986 to 1994, Mr. Rose was employed at J.P. Morgan & Co., serving in its Real Estate Corporate Finance Group until 1992 and as Vice President of its Australia Mergers and Acquisitions Group from 1992 to 1994. Mr. Rose also served for two years as a financial analyst for General Electric Company. He currently serves as a director of Rexford Industrial Realty, Inc. and on the Policy Advisory Board for the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley. Mr. Rose received a Master of Business Administration degree from The University of Chicago Booth School of Business and a Bachelor of Arts degree in Economics from the University of California, Berkeley.

 

   

 

Stephen Rosetta

 

•   Executive Vice
President, Chief
Investment Officer

•   Age: 46

 

Stephen Rosetta was appointed Executive Vice President and Chief Investment Officer in June 2017. Mr. Rosetta came to the Company after over 20 years with Cushman & Wakefield (“C&W”), most recently as the Vice Chairman of Brokerage Services. He opened C&W’s office in San Diego County and grew it into an enterprise with over $2 billion in annual transaction volume. Mr. Rosetta also previously served as a principal in an opportunistic real estate company where he partnered with institutional and private equity companies to develop and reposition office projects across the United States. Mr. Rosetta received a Master’s in Real Estate Development from the University of Southern California, and a Bachelor’s Degree in Business Administration from California State University, San Marcos.

 

   

 

Heidi Roth

 

•   Executive Vice President, Chief Administrative Officer and Assistant Secretary

•   Age: 47

 

Heidi Roth was appointed Executive Vice President, Chief Administrative Officer in February 2019. Ms. Roth has been with the Company since 1997 and most recently held the role of Executive Vice President and Chief Accounting Officer following her appointment as Senior Vice President and Controller in July 2005. Prior to such time, Ms. Roth held various other positions with the Company, including serving as the Company’s Vice President, Internal Reporting and Strategic Planning. Prior to joining the Company, Ms. Roth was a CPA with Ernst & Young in Los Angeles. She is a Certified Public Accountant and a member of the AICPA. Ms. Roth currently serves on the Board of Directors of Crystal Stairs, Inc., a nonprofit child development organization, and is an emeritus member of the National Association of Real Estate Investment Trust’s Best Financial Practices Council. Ms. Roth received her Bachelor of Science degree in Accounting from the University of Southern California.

 

   

 

Justin Smart

 

•   Executive Vice
President, Development
and Construction Services

•   Age: 59

 

Justin Smart was appointed Executive Vice President, Development and Construction Services in January 2013. He served as Senior Vice President of Development and Construction Services from August 2000 through December 2012. Mr. Smart has in excess of 25 years of real estate development experience covering a wide range of product types, including office, industrial, residential and resort properties throughout the United States. From June 1996 to August 2000, Mr. Smart was Vice President of Development with Intrawest Corporation, a leading developer of resorts and resort real estate. Prior to 1996, Mr. Smart served as Vice President of Construction with Kilroy Industries.

 

 

 

KILROY REALTY    PROXY STATEMENT    31


COMPENSATION DISCUSSION

AND ANALYSIS

INTRODUCTION

This CD&A describes the material elements of our executive compensation program, the compensation decisions made under the program and the factors considered in making those decisions for the NEOs listed below for 2018.

 

Name

 

 

Title

 

 

John Kilroy

 

  President, Chief Executive Officer and Chairman of the Board

 

Jeffrey Hawken

 

  Executive Vice President and Chief Operating Officer

 

Tyler Rose

 

  Executive Vice President, Chief Financial Officer and Secretary

 

Stephen Rosetta

 

  Executive Vice President and Chief Investment Officer

 

Justin Smart

 

  Executive Vice President, Development and Construction Services

Our Business

We are a self-administered REIT that is active in the premier submarkets along the West Coast of the United States. With a more than 70 year history, we have built deep experience in the region through multiple business cycles and operating environments. In 1997, we became a publicly traded REIT and in 2013, we were added to the S&P MidCap 400 Index. We believe the following aspects of our business make us one of the leading office REITs in the United States:

 

   

A fully integrated real estate enterprise. Our core management capabilities encompass all aspects of real estate, including the acquisition, financing, development, redevelopment, construction management, leasing, asset management and disposition of office and mixed-use projects.

 

   

Strong development experience. We maintain an active, multi-year development program that focuses on economically dynamic locations where anticipated long-term demand is strong, supply is limited and barriers to entry are high.

 

   

A leader in sustainability. We are an advocate of sustainability practices and are an industry leader in LEED-certified design, development and property operations.

 

   

An innovator in work spaces. We strive to be a leader in rethinking and reshaping the physical work environment, which we believe is necessary to meet the needs of the fast-paced and knowledge-driven businesses that choose to locate in the coastal economies of the western United States.

 

32    PROXY STATEMENT    KILROY REALTY


STOCKHOLDER ENGAGEMENT

 

LOGO

The Compensation Committee values input from the Company’s stockholders regarding the Company’s executive compensation program. At each annual meeting, we hold a non-binding advisory vote to approve the compensation of our NEOs, which is commonly referred to as a “Say-on-Pay” vote. At our 2018 annual meeting of stockholders, approximately 59.1% of the votes cast were in favor of our Say-on-Pay proposal. The Compensation Committee believes our 2018 Say-on-Pay vote demonstrates that most stockholders support our executive compensation programs, while others express some degree of reservation. Since our 2018 annual meeting of stockholders, we engaged with and solicited input from stockholders who together own more than 80% of our outstanding common stock on a variety of topics, including market conditions, corporate strategy and corporate governance practices. Our Lead Independent Director and Chair of the Compensation Committee, and the Chair of our CSR&S Committee personally led meetings with stockholders who together own more than 57% of our outstanding common stock. Based on stockholder feedback, we have taken certain actions to continue to align our executive compensation practices more closely with stockholder preferences. In particular, our investors told us that they would like to see more objectivity in our annual cash incentive program for NEOs. This feedback was received after our 2018 annual cash incentive program was already established. However, taking this feedback into account, the Compensation Committee designed our 2019 annual cash incentive program for NEOs to include an objective goal for each performance metric, assign a weighting to each measurement category and include a new performance category and a new general and administrative expense metric (see page 54 for additional details).

When making future compensation decisions for our NEOs, the Compensation Committee will continue to consider the views that stockholders express through annual Say-on-Pay votes and through direct communication with our Lead Independent Director, our Board and management.

2018 COMPANY PERFORMANCE

The Company achieved strong financial and operational results and further positioned the Company during 2018 for continued long-term growth, including adding to its highly experienced and market-proven leadership team. Below is a summary of our key achievements.

Outperforming TSR. Our relative TSR performance has been strong. Our TSR for the three-year period ended December 31, 2018 outperformed the median peer in our peer group identified on page 57, the SNL US REIT Office Index, the BBG REIT Office Property Index and the MSCI US REIT Index, and our TSR for the five-year period ended December 31, 2018 outperformed the median peer in our peer group, the SNL US REIT Office Index and the BBG REIT Office Property Index. The following chart shows the value of a $100 investment at market close on December 31, 2013 in the Company, the SNL US REIT Office Index, the MSCI US REIT Index and the median peer in our peer group over the five-year period ended December 31, 2018 (assuming dividend reinvestment):

 

 

LOGO

 

 

KILROY REALTY    PROXY STATEMENT    33


5.4%

 

Adjusted FFO

Per Share growth

YOY(6)

 

  

4%

 

Remaining 2019

expirations;

reflects 65% of 2019

expirations leased

  

14.8% Cash

36% GAAP

 

Change in Rents; based on

2.8MM SF of leases signed(9)

 

  

2.5MM SF

 

Acquisition of fully

entitled land at Kilroy

Oyster Point in South San Francisco,

the birthplace of biotechnology

  

100%

 

Commenced GAAP revenue on all

office component

at 100 Hooper in

San Francisco

 

Strong 2018 Financial Performance. During 2018, we generated strong year-over-year financial results, which included the following:(6)(7)

 

   

Increased revenues by 3.9%

 

   

Increased Same Store GAAP NOI by 3.1% and Same Store Cash NOI by 3.0%

 

   

Increased adjusted net income available to common stockholders by 12.5%(8)

 

   

Increased Adjusted FFO Per Share by 5.4%

Strong Leasing Activity. During 2018, we generated strong leasing results, which included the following:

 

   

Signed approximately 3.4 million square feet of leases, including approximately 2.8 million square feet of new or renewing leases in the stabilized portfolio and approximately 560,000 square feet of leases in the Company’s current development program. Highlights include:

 

   

A 355,000 square foot lease with Netflix, Inc. for a term of 12 years at the Hollywood mixed-use development in the Hollywood submarket of Los Angeles — the largest office lease in Hollywood during the past decade

 

   

A 375,000 square foot lease with GM Cruise, LLC for a term of 12 years at 301, 333 and 345 Brannan Street in the SOMA submarket of San Francisco, extending the existing lease terms by an average of approximately six years with improved economics

 

   

Backfilled approximately 80% of the four largest 2018 expirations, which totaled 723,000 square feet

 

   

Backfilled 929,000 square feet or 65% of 2019 expirations, reducing 2019 expirations to approximately 4% of total portfolio leases

 

   

Stabilized office portfolio was 96.6% leased at year-end, the sixth consecutive year above 95%

 

   

Increased average rents on leases executed during 2018 by 14.8% on a cash basis and 36.0% on a GAAP basis(9)

 

 

 

(6)

See Appendix A for the definition of “Adjusted FFO Per Share” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to Adjusted FFO.

 

(7)

See Appendix A for the definition of “net operating income” or “NOI” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to net operating income, for the definition of “Same Store NOI (on a GAAP and cash basis)” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to Same Store NOI (on a GAAP and cash basis), and for the definition of “adjusted net income available to stockholders” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to adjusted net income available to common stockholders. Increases are reported as 2018 performance above 2017 levels.

 

(8)

Excluding gains on sales of depreciable operating properties, loss on early extinguishment of debt and original issuance costs of redeemed preferred stock, and a non-cash charge related to accrued future executive retirement benefits, in applicable periods.

 

(9)

Change in GAAP/cash rents (leases executed) is calculated as the change between GAAP/cash rents for signed leases and the expiring GAAP/cash rents for the same space. This excludes leases for which the space was vacant longer than one year, or vacant when the property was acquired by the Company.

 

34    PROXY STATEMENT    KILROY REALTY


Efficiently Managed Development Projects and Positioned New Projects for Commencement. We continued to create significant value for our stockholders through our development program. Over the past six years, we delivered $2.5 billion of projects encompassing approximately 3.9 million square feet. These projects were 97% leased upon stabilization and generated a stabilized cash return on cost that averaged approximately 7.5% to 8.0%. This included two projects in 2018:

 

   

Commenced GAAP revenue recognition on all 312,000 square feet of office space 100% leased to Adobe, Inc. at 100 Hooper, our recently completed office and production, distribution and repair project in San Francisco’s SOMA district.

 

   

Commenced tenant improvements at The Exchange on 16th, a $585.0 million, 750,000 square foot development project located in San Francisco’s Mission Bay. The office portion is fully leased to Dropbox, Inc., and the lease will commence in phases starting later this year.

Additionally, in 2018, we continued to improve the status and scope of the projects in our $1.6 billion of total estimated investment development projects under construction as highlighted below.

 

   

Continued to make significant progress on construction of our $380 million, 650,000 square foot 333 Dexter project in the South Lake Union submarket of Seattle.

 

   

Made significant progress at our $675.0 million, 1.1 million square foot One Paseo mixed-used development in the Del Mar submarket of San Diego. The retail component was 91% leased at year-end. Marketing is underway for the 608 residential units that will start to deliver in the second half of 2019. Given the progress on both the retail and residential components, we commenced construction in the fourth quarter of 2018 on the $205.0 million, 285,000 square foot office component that was 42% pre-leased with negotiations for up to two-thirds of the total space.

 

   

Commenced construction on our $495.0 million, 570,000 square foot Hollywood mixed-use development, comprised of 355,000 square feet of creative office and 193-unit luxury residential tower in the Hollywood submarket of Los Angeles. Ten months after construction commencement, we leased 100% of the office space to Netflix, Inc. for a 12-year term. The lease represents the largest lease signed in Hollywood during this past decade.

Further, we expanded our development program with the acquisition of Kilroy Oyster Point in South San Francisco, a 39-acre land site fully entitled for 2.5 million square feet of office and lab space development, for approximately $308 million. South San Francisco is known as the birthplace of biotechnology and one of the nation’s premier life science centers with strong fundamentals.

We also continued to make significant progress entitling our near and medium-term development projects, including progress at The Flower Mart in San Francisco, 2100 Kettner in the Little Italy submarket of San Diego, and 9455 Towne Centre Drive in San Diego, where we secured life science entitlements to build 150,000 square feet.

Disciplined Approach to Property Acquisitions. We remained a disciplined buyer of office properties and continued to focus on strategic opportunities in West Coast markets. During 2018, we acquired two projects in the San Francisco Bay area totaling just over 255,000 square feet of office and lab space for approximately $257 million. Both projects are adjacent to existing KRC assets that provide strategic opportunities for us to enhance the overall value of our existing portfolio and developments.

Strong Execution of Capital Recycling Program. Capital recycling continues to play an important role in funding our activities and growth. Our general strategy has been to sell non-core assets and redeploy some or all of the capital into acquisitions, development and/or redevelopment where we can leverage our experience and add value to generate higher returns. In 2018, we sold 11 office buildings and one non-income producing land parcel across three markets. The total gross proceeds from these dispositions were approximately $373 million and the sales generated an aggregate gain of approximately $155 million, including approximately $12 million of gain from sale of the land parcel.

 

KILROY REALTY    PROXY STATEMENT    35


Prudent Balance Sheet Management. During 2018, we continued to build and maintain a strong and flexible balance sheet that enables us to fund our development program and respond quickly to attractive opportunities as they arise. Below is a list of key achievements:

 

   

Completed several opportunistic financing transactions that lowered our cost of capital and enhanced our liquidity, including:

 

   

Raised $650 million through the public offering and private placement of new debt at a weighted average interest rate of 4.592% and redeemed $250 million of bonds with an interest rate of 6.625%. The amount raised includes $250 million of private placement notes that had a six-month delay draw feature that enabled us to delay dilution as well as $400 million of publicly offered senior unsecured notes.

 

   

Established a new $500 million at-the-market (“ATM”) offering program and issued an aggregate of $134 million of gross equity proceeds at a weighted average price of $73.64 per share, under both our prior and new ATM offering programs.

 

   

Completed a public offering of 5,000,000 shares of common stock priced at $72.10 per share structured as a forward sale with a final settlement date of August 1, 2019 to help manage timing of funding needs and delay dilution.

 

   

Maintained our debt to EBITDA ratio and total debt as a percentage of total market capitalization during a period of extensive development spending of 5.9x and 27.7%, respectively, at year-end 2018 (adjusted for the aforementioned $360 million forward equity offering), among the lowest in our peer group.

Business Values Take into Account Non-Financial Objectives. We are committed to pursuing corporate social responsibility objectives, including sustainability, diversity and inclusion, philanthropy and community involvement, good corporate citizenship, health and wellness, and other non-financial issues that are of significance to the Company and its stockholders, as further described under “Corporate Governance — Board Composition and Governance — Corporate Social Responsibility and Sustainability” on page 23.

Maintained Leadership Position in Sustainability. We continue to be recognized for our industry leading sustainability practices. For a list of accomplishments, see “Corporate Governance — Board Composition and Governance — Corporate Social Responsibility and Sustainability — Commitment to Sustainability” on page 24.

Strong Company Leadership. The Company’s leadership team is comprised of individuals that have extensive real estate experience, and is led by the award-winning Chairman and CEO, John Kilroy. Most members of the Company’s executive leadership team have been with the Company for over 15 years.

COMPENSATION PHILOSOPHY AND OBJECTIVES

Our executive compensation philosophy is designed to achieve the following objectives:

 

   

To align executive compensation with the Company’s corporate strategies, business objectives and the creation of long-term value for our stockholders without encouraging unnecessary or excessive risk-taking;

 

   

To provide an incentive to achieve key strategic and financial performance measures by linking annual cash incentive award opportunities to the achievement of corporate and operational performance objectives;

 

   

To set total compensation to be competitive with companies in our peer group, taking into account our active portfolio management strategy and the skill set required to implement that strategy;

 

   

To provide a majority of target total direct compensation for the NEOs in the form of long-term incentive equity awards; and

 

   

To help the Company attract, retain and incentivize talented and experienced individuals in the highly competitive West Coast employment and commercial real estate markets.

 

36    PROXY STATEMENT    KILROY REALTY


WHAT WE PAY AND WHY: EXECUTIVE COMPENSATION ELEMENTS

The following table sets forth the key elements of our executive compensation program, along with the primary objective and key features associated with each element of compensation.

 

    Compensation Element    Primary Objective    Key Features   

Page

Reference

 

Base Salary

  

  

To provide a regular source of income so employees can focus on day-to-day responsibilities.

 

  

  

Competitive pay, taking into account job scope, position, knowledge, tenure, skills and experience.

 

   Page 40
    

  

To recognize ongoing performance of job responsibilities.

 

              

Short-Term Incentives

(Annual Cash Bonuses)

  

  

To motivate and reward for achievement of annual financial and operational goals and other strategic objectives measured over the year.

  

  

Final payouts are awarded to our NEOs based on specific performance metrics and qualitative goals that are established at the beginning of each year based on the Company’s business plan. Each NEO can earn between 0% and 150% of their target cash incentive based on the Company’s performance against the pre-established goals.

 

   Page 40

Long-Term Incentives

(Annual Equity Awards)

  

  

To emphasize long-term performance objectives.

 

  

  

For 2018, three-quarters of our CEO’s annual long-term incentive award (and approximately two-thirds for our other NEOs) was subject to performance-based vesting requirements over a three-year period. The award would be forfeited if a minimum FFO per share threshold for 2018 is not achieved (without the opportunity to vest in any future year) and, if the FFO goal is achieved, vesting of the award is subject to relative TSR and average ratio of debt to EBITDA performance over the entire three-year vesting period.

 

   Page 44
  

  

To encourage creation of stock value and further align the interests of our NEOs with stockholder interests.

 

  

  

To retain key executives through the performance and vesting periods.

 

                          

 

KILROY REALTY    PROXY STATEMENT    37


DESIGN FEATURES OF THE 2018 EXECUTIVE COMPENSATION PROGRAM

We believe that our executive compensation program strikes an appropriate balance between attracting and retaining executives with the expertise and talent required to execute on our active portfolio management strategy and linking compensation with the performance of the Company. Below is a summary of some of the key design features of our 2018 executive compensation program.

 

   

Majority of NEO Target TDC is “At Risk.” Approximately 88% of our CEO’s and approximately 81% of our other NEOs’ target TDC(10) for 2018 was not guaranteed but rather was tied directly to the performance of the Company, the Company’s stock price and/or individual performance, as shown below.

2018 Target

Total Direct Compensation

 

LOGO

Short-term incentives are “at risk” because the amount awarded could range from 0% to 150% of the NEO’s target short-term incentive depending on Company and individual performance.

Annual long-term equity awards are “at risk” because the final award value depends on our stock price and continued service over a three-year vesting period. Three-quarters of our CEO’s 2018 annual equity award (and approximately two-thirds of our other NEOs’ 2018 annual equity awards) is also subject to performance-based vesting.

 

   

Annual Short-Term Incentives Based on Performance Measurement Framework. The Compensation Committee determines annual short-term incentives based on a rigorous performance measurement framework, assessing the Company’s actual performance against pre-established financial and operational goals and each NEO’s contribution to that performance. Based on the Company’s performance (as reflected on pages 42-43), the Compensation Committee determined that the final 2018 short-term incentives for our NEOs would be between 100% and 129% of target payout levels, and in all cases less than the maximum payout opportunities. See “Short-Term Incentives — Decisions for 2018; 2018 Key Operating and Financial Goal Setting and Performance” on pages 40-43 for more information about how the goals are set and the Company’s performance.

 

   

Majority of Annual Long-Term Incentives are Performance-Based. Three-quarters of our CEO’s annual long-term incentive award for 2018 (and approximately two-thirds of the annual award grant to each of our other NEOs) was subject to performance-based vesting requirements. Vesting levels were contingent on achievement of a threshold level of FFO per share for 2018. If that goal was achieved, vesting will be determined based on our TSR compared to other office-focused REITs over a three-year period and our average ratio of debt to EBITDA over that period. The balance of each NEO’s total annual long-term incentive award vests in annual installments over a three-year period, subject to continued service through the applicable vesting date.

 

 

 

(10)

As used in this Proxy Statement, “target TDC” means the executive’s base salary, target annual cash incentive and grant date fair value (based on the value approved by the Compensation Committee and used to determine the number of shares subject to the award) of annual long-term incentive awards granted to the executive in 2018. The equity awards granted in December 2018 are excluded from TDC. If included in TDC, the December 2018 equity awards would have had the impact of shifting a greater percentage of each executive’s overall TDC to at-risk, performance-based, long-term compensation.

 

38    PROXY STATEMENT    KILROY REALTY


   

Majority of Target TDC is in the Form of Annual Long-Term Incentives. The most significant component of each NEO’s total compensation opportunity is in the form of RSUs that vest over a three-year period. In 2018, approximately 59% of our CEO’s (and approximately 52% of our other NEOs’) target TDC was in the form of RSUs. We believe equity compensation helps to align the interests of our NEOs with those of our stockholders.

 

   

Enhanced Operating and Financial Goals. Key operating and financial goals used to determine 2018 short-term incentives for our NEOs were generally set at levels above the performance goals used for 2017 (see the discussion on page 41). The FFO target goal used in the 2018 long-term incentive award for our NEOs was set above the performance target goal used for 2017.

 

   

Target TDC Set Taking into Account Market Pay Levels and that Payouts are Linked to Performance. The Compensation Committee did not set 2018 target TDC levels at any specific percentile against our peer group. Rather, the Compensation Committee considered final 2017 peer group compensation data to inform its decision-making process for 2018. In setting the 2018 compensation levels, the Compensation Committee also considered the following factors:

 

   

Active Portfolio Management Strategy in Highly Competitive Markets. Our business model requires an active portfolio management strategy (see “2018 Company Performance” beginning on page 33 for a summary of our 2018 activities). Implementing this strategy requires a broader skill set than those of executives who focus primarily on managing cash flows of a more static investment portfolio.

 

   

Target TDC Realized Only if Goals Achieved. In 2018, approximately 74% of our CEO’s (and approximately 64% of our other NEOs’) target TDC was performance-based. As a result, our NEOs will only receive their target TDC if the Company performs.

 

   

Majority of NEO Target TDC is Subject to Forfeiture and Linked to Performance. As noted above, the payout of our short-term incentives and vesting of performance-based equity awards depends on our actual performance and may be forfeited if threshold goals are not achieved.

 

   

Outperforming TSR. Our relative TSR performance has been strong. As indicated in the table on page two of the Proxy Summary, our TSR for the three-year period ended December 31, 2018 outperformed the median peer in our peer group, the SNL US REIT Office Index, the BBG REIT Office Property Index and the MSCI US REIT Index and our TSR for the five-year period ended December 31, 2018 outperformed the median peer in our peer group, the SNL US REIT Office Index and the BBG REIT Office Property Index.

2018 NAMED EXECUTIVE OFFICER COMPENSATION

The Compensation Committee reviews and authorizes each NEO’s compensation on an annual basis. Executive compensation is not established at any particular level against peer group data. Rather, the Compensation Committee generally considers the following factors:

 

   

The performance of the Company (e.g., TSR, operations, financial performance, acquisitions, dispositions, development and balance sheet management);

 

   

The performance of each NEO;

 

   

The contribution of each NEO to our overall results;

 

   

Input from our CEO (with respect to our other NEOs);

 

   

Additional roles or responsibilities assumed;

 

   

Experience, skill set and tenure;

 

   

Base salary, target short-term incentive and long-term incentive grant levels for comparable positions at companies in our peer group;

 

   

The NEO’s employment agreement (if any); and

 

   

The relative need to retain the NEO.

 

KILROY REALTY    PROXY STATEMENT    39


Base Salary

General Description

As noted above, we provide base salaries as a regular source of income so employees can focus on day-to-day responsibilities and to recognize ongoing performance of job responsibilities.

Decisions for 2018

The Compensation Committee determined that Messrs. Rose and Smart should each receive a 10% base salary increase for 2018 to better align their base salaries with those paid for similar positions in peer group companies. This was the first base salary increase for Mr. Rose since 2010 and for Mr. Smart since 2014. The Compensation Committee determined that the other NEOs’ respective 2018 base salary levels would remain at the same level as in effect for 2017. The 2018 annual base salary for each of our NEOs was as follows: $1,225,000 for Mr. Kilroy, $675,000 for Mr. Hawken, $600,000 for Mr. Rosetta, and $550,000 for each of Messrs. Rose and Smart.

Short-Term Incentives

General Description

Our short-term incentives (annual cash bonuses) are based on the annual performance of our Company and each individual’s contribution to the annual performance of our Company.

During the first quarter of the year, the Compensation Committee establishes a target short-term incentive amount for each NEO and approves a performance measurement framework for that year based on the Company’s business plan. The Compensation Committee selects the performance categories, metrics and goals that it believes will accurately assess the annual performance of the Company and strategic goals.

Following the performance year, the Compensation Committee compares the Company’s actual performance results to the pre-established goals. The Compensation Committee then rates the Company’s overall performance as “Extraordinary,” “Superior,” “On Target,” “Below Expectations” or “Well Below Expectations,” resulting in payouts approximating 150% of target, 125% of target, 100% of target, 50% of target or 0% of target, respectively. The Compensation Committee’s determination is based on a holistic assessment of results achieved, including consideration of the Company’s TSR. Individual awards, however, may vary based on the Compensation Committee’s assessment of each NEO’s contributions and achievements. Awards may also vary based on a greater emphasis on certain categories, including recognition of the executives who are principally responsible for those categories and those who are not. The Compensation Committee does not apply specific weighting to performance categories. The maximum amount that may be awarded to an NEO is 150% of the NEO’s target short-term incentive amount.

The Compensation Committee believes this approach reflects an appropriate balance between applying objective criteria to determine each NEO’s short-term incentive and keeping each NEO focused on strategic decisions that are in the long-term best interests of our stockholders. Since our business strategy requires us to actively manage our property portfolio, the Compensation Committee believes that a rigid short-term incentive formula could undermine opportunistic decisions that have a negative impact on short-term gains but create long-term stockholder value (e.g., midyear changes in our strategy or portfolio due to a shift in market conditions or unanticipated opportunities can significantly alter specific objective goals that are set early in the year).

Decisions for 2018; 2018 Key Operating and Financial Goal Setting and Performance

The Compensation Committee determined that, except as to our CEO, the NEOs’ 2018 target short-term incentive amounts would remain at the same level (as a percentage of base salary) as in effect for 2017. Our CEO’s 2018 target short-term incentive amount was set at $3,000,000 pursuant to his employment agreement. The 2018 target short-term incentive level for each of our other NEOs was as follows: $1,350,000 for Mr. Hawken, $1,200,000 for Mr. Rosetta, and $550,000 for each of Messrs. Rose and Smart.

In developing the performance measurement framework and goals for 2018, the Compensation Committee selected performance measures that it considers to be common measures of REIT performance and the Company prepared a bottoms up, property-by-property budget that incorporated property specific assumptions for the Company’s stabilized portfolio. The Company

 

40    PROXY STATEMENT    KILROY REALTY


then integrated those assumptions with the Company’s development and funding strategies against a backdrop of existing real estate conditions. As a result, the Company created financial and operational goals that were directly tied to the Company’s existing portfolio and business objectives for 2018. The Compensation Committee did not assign any weighting to the performance categories for 2018.

The Compensation Committee then reviewed and approved the Company’s proposed 2018 financial and operational goals for inclusion in the performance measurement framework, each as described below. Goals are generally set at levels that are higher than the performance levels achieved in the prior year. However, since the composition of the Company’s portfolio changes from year to year (for example, the Company sold approximately $373 million of assets in 2018 as compared to $187 million in 2017), the performance level in the prior year may not accurately reflect the difficulty of achieving specified level of performance in the current year (for example, because of occupancy levels, scheduled lease expirations, capital expenditure budgets, development activity, product mix or disposition timing). In these cases, the Compensation Committee may set performance goals at levels that are the same or lower than the performance results achieved in the prior year but at levels that, after taking into account the composition of the Company’s portfolio at the start of each year, the Compensation Committee believes are comparatively as, or more, rigorous. This was the case with the following 2018 metrics:

 

   

Net Operating Income. The Company projected a slightly lower result in 2018 than 2017 due to a higher level of planned dispositions of $250 million to $750 million with a $500 million midpoint.

 

   

Same Store Cash NOI Growth. The Company projected a lower result in 2018 than 2017 due to four major expirations, each totaling more than 100,000 square feet, representing more than 60% of total 2018 expirations. Two of four were in San Diego, which had above market rents.

 

   

Leasing Square Footage and Year-End Occupancy. Given that two of the known move-outs in 2018 totaling approximately 424,000 square feet were later in the year, and 2018 expirations totaled approximately 1.2 million square feet, there was less space to lease in the portfolio during 2018 from the historically high occupancy rate at the end of 2017. Thus, the targets were lower for 2018 than in 2017.

 

   

Debt to EBITDA Ratio. The Company projected a higher debt to EBITDA ratio in 2018 than 2017 due to continued funding of a larger development pipeline in which the Company issued $400 million of debt, net of debt redemption, and raised 5,000,000 shares of equity under a forward structure that delays the drawdown, thus delaying the deleverage event into 2019.

 

KILROY REALTY    PROXY STATEMENT    41


The design of the 2018 performance measurement framework is consistent with the design of the 2017 performance measurement framework. The following table shows the 2018 performance measurement framework and 2018 goals approved by the Compensation Committee in February 2018 and the Company’s actual 2018 performance.

2018 Performance Measurement Framework

 

 

Category

 

 

Metric

 

 

 

2018

Goals

 

 

 

2018

Performance

 

      

Why It Is Important

 

 

Operations

 

  Adjusted FFO ($MM)(1):   $366   $386(6)      

 

Our operations performance demonstrates our ability to manage our Class A portfolio profitably and includes key metrics utilized by the REIT industry. We depend primarily on cash flows generated by leasing activity in both the stabilized portfolio and development program. Effective expense management further enhances our financial performance and drives our bottom line results. The amount of leasing, revenue and NOI (including Same Store Cash NOI) and occupancy demonstrate our effectiveness in lease execution and expense management. FFO and FAD, and their respective share metrics, indicate our ability to generate strong net cash flows after funding capital expenditures, corporate overhead and other corporate expenses, including dividends.

 

 

Adjusted FFO Per Share(1):

 

  $3.55   $3.72(6)    
 

 

Adjusted FAD ($MM)(2):

 

  $249   $261(7)    
 

 

Adjusted FAD Payout Ratio(2):

 

  75%   70%(7)    
 

 

Adjusted FAD Per Share(2):

 

  $2.41   $2.51(7)    
 

 

Revenue ($MM):

 

  $725   $747    
 

 

NOI ($MM)(2):

 

  $512   $531    
 

 

Same Store Cash NOI

Growth(2):

 

  0% - 1%   3%    
 

 

Leasing SF:

 

  655,000   3.4M(8)    
 

 

Year-End Occupancy:

 

  94% - 95%   94.4%  

 

Balance Sheet Management(3)

 

 

Debt/EBITDA(4):

 

  6.6x   5.9x(9)      

 

Prudently managing our balance sheet allows us to fund our in-place operations and future growth opportunities. Balancing various forms of capital and keeping a keen eye on leverage is critical to our business so that we are positioned well throughout market cycles. Our success in doing so is measured by our Debt/EBITDA ratio, a key metric used by our investors and rating agencies to evaluate financial risks in our business.

 

 

Equity:

 

  $100   $494(10)    
 

 

Debt Financing:

 

  $300   $650  
       
       
       
       

 

Acquisitions

 

 

Total Acquisitions ($MM):

 

  $111(5)   $565(11)      

 

Effectively allocating capital is a major driver of growth and value in our business that can significantly impact the quality of our portfolio, as well as generate meaningful cash flow and value over the long term — it allows us to acquire, sell and develop assets to fund development and other opportunities.

 

•  Acquisitions help generate current income and may play a strategic role in future development or redevelopment opportunities.

 

•  Dispositions, including joint ventures, not only help fund development and other strategic initiatives but can also enhance the quality of our portfolio depending on what we sell.

 

•  At certain points in the market cycle, development provides us with significant growth and future value creation opportunities.

 

Dispositions

 

 

Total Dispositions ($MM):

 

  $500   $373    

 

Development

 

 

Under-construction development was comprised of three projects, and included just under 1.3 million square feet of office, 801 residential units and 96,000 square feet of retail space representing a total investment of approximately $1.55 billion at year-end. Most notably, we signed the largest lease in Hollywood during the past decade with Netflix, Inc., at our Hollywood mixed-use development for 355,000 square feet.

 

We commenced GAAP revenue on 100% of the office project at 100 Hooper, which is 100% leased to Adobe, Inc. We are working on the tenant improvements for The Exchange on 16th, which is 100% leased to Dropbox, Inc., and expect to commence GAAP revenues across three phases, with phase one commencing in the third quarter of 2019.

 

We continued to make important progress in entitling our future development program at The Flower Mart project in San Francisco, 2100 Kettner, which in early 2019 received unanimous approval by the Civic San Diego Board, and 9455 Towne Centre, which received full entitlements for a 150,000 square foot life science development in 2018.

 

 

42    PROXY STATEMENT    KILROY REALTY


(1)

See Appendix A for the definition of “Adjusted FFO” and “Adjusted FFO Per Share” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to FFO and FFO Per Share and Adjusted FFO and Adjusted FFO Per Share. FFO Per Share is also used as a performance metric under the performance-based component of our NEO equity awards. The Compensation Committee believes it is nevertheless appropriate to take FFO Per Share into account in our short-term incentive award performance measurement framework because it is a key metric for the Company, frequently used by investors to assess REIT performance and is only one of many measures (disclosed above) used to assess performance under the framework.

 

(2)

See Appendix A for the definition of “FAD (or Funds Available for Distribution)”, “FAD Per Share”, “FAD Payout Ratio”, “NOI”, “Same Store NOI (on a GAAP and cash basis)” and reconciliations of net income available to common stockholders computed in accordance with GAAP to NOI and Same Store NOI (on a GAAP and cash basis) and net income available to common stockholders computed in accordance with GAAP to FAD and FAD Per Share and GAAP net cash provided by operating activities to FAD.

 

(3)

As of December 31, 2018.

 

(4)

Pro-rata for the Company’s 56% ownership in the Norges strategic venture. The debt to EBITDA ratio is also used as a performance metric under the performance-based component of our NEO equity awards. The Compensation Committee believes it is nevertheless appropriate to take the debt to EBITDA ratio into account in our short-term incentive performance measurement framework because it is a key metric for the Company, frequently used by investors to assess REIT performance and is only one of many measures (disclosed above) used to assess performance under the framework. The debt to EBITDA ratio is calculated as the Company’s consolidated debt balance for the applicable period, divided by the Company’s EBITDA, as adjusted, for such period. See Appendix A for a definition of “EBITDA, as adjusted,” and a reconciliation of net income available to common stockholders computed in accordance with GAAP to EBITDA, as adjusted.

 

(5)

Reflects acquisition of Oyster Point Tech Center.

 

(6)

Excludes ($0.13) per share cost related to the early redemption of 6.625% senior notes due in 2020, including additional interest, and ($0.12) per share non-cash retirement accrual charge; includes $0.11 per share gain from land sale.

 

(7)

Excludes ($0.13) per share cost related to the early redemption of 6.625% senior notes due in 2020, including additional interest, and includes $0.11 per share gain from land sale.

 

(8)

Includes development leasing of approximately 559,000 square feet.

 

(9)

Excludes aforementioned early debt redemption costs and non-cash retirement accrual charge. Pro forma for $360 million equity forward transaction that was executed in August 2018.

 

(10)

Includes undrawn $360 million equity forward transaction executed in August 2018.

 

(11)

Includes acquisition of Oyster Point Tech Center, 345 Brannan and Kilroy Oyster Point development land site.

Based on the Compensation Committee’s review of the Company’s actual 2018 performance disclosed in the chart above, the Compensation Committee determined that the Company’s overall performance for 2018 was “Superior.” As a result, the 2018 short-term incentive amounts were between 100% and 129% of target payout levels, but in all cases below the maximum payout opportunities.

The Compensation Committee determined that each of the NEOs made significant contributions to the Company in 2018, although the level of impact each NEO had on the Company’s 2018 results varied somewhat. Differences among the NEOs actual 2018 short-term incentive amounts also reflect the Compensation Committee’s overall qualitative assessment of each NEO’s performance, and relative contribution to and responsibility for each of the performance categories and metrics.

The 2018 target and actual short-term incentive amount determined by the Compensation Committee for each NEO is set forth in the chart below.

 

Named Executive

  

2018 Target

Cash Incentive

Amount

 

  

2018 Actual

Cash Incentive

Amount

 

           

 

John Kilroy

 

   $3,000,000    $3,775,000          

 

Jeffrey Hawken

 

   $1,350,000    $1,575,000          

 

Tyler Rose

 

   $   550,000    $   675,000          

 

Stephen Rosetta

 

   $1,200,000    $1,200,000          

 

Justin Smart

 

   $   550,000    $   675,000      

 

KILROY REALTY    PROXY STATEMENT    43


Long-Term Incentives

General Description

We grant annual long-term incentives to our NEOs in the form of RSUs that vest over a three-year period. Each RSU is paid in one share of our common stock, subject to the satisfaction of applicable vesting conditions, which further aligns our NEOs’ interests with those of our stockholders. The NEOs do not have the right to vote or dispose of any RSUs prior to the time the shares are issued. Each RSU is granted in tandem with a corresponding dividend equivalent right that entitles the NEO to be credited with additional RSUs upon the Company’s payment of dividends to stockholders if the dividend equivalent right is or was outstanding on the record date. Any such additional RSUs credited in respect of dividend equivalent rights are subject to the same vesting terms as the underlying RSUs and vest (if at all) together with the underlying RSU to which they relate. In addition to annual equity awards, we occasionally make grants of equity awards at other times at the discretion of the Compensation Committee, such as in recognition of service to the Company, in connection with the negotiation of an employment agreement or the hiring or promoting of executive officers. The Compensation Committee determined that equity awards should be granted to our NEOs in December 2018 to provide additional incentives. These awards are described below under “CEO Employment Agreement and December 2018 RSU Awards” on pages 51-52.

Decisions for 2018

The 2018 annual equity awards to our NEOs consist of the following:

 

   

Approximately two-thirds of each NEO’s total annual equity award (and three-quarters for our CEO) are RSUs subject to performance-based vesting requirements (“performance-based RSUs”). The performance-based RSUs cliff vest, if and to the extent the performance goals are achieved, in one lump sum after the end of the three-year vesting period. The Compensation Committee set the 2018 operational goal (i.e., the FFO Per Share metric) for the performance-based RSUs above the goal used for the prior year.

 

   

Approximately one-third of each NEO’s annual equity award (and one-quarter for our CEO) are RSUs subject to a time-based vesting schedule (“time-based RSUs”). The time-based RSUs vest ratably in annual installments over a three-year vesting period and payouts are subject to continued service through the applicable vesting date.

The Compensation Committee also believed that a majority of each NEO’s total 2018 annual equity award should be subject to performance-based vesting requirements to accomplish the following objectives:

 

   

Align overall reward opportunity with actual performance delivered;

 

   

Require achievement of pre-defined operating goals using a performance measure that is reflective of management’s efforts (i.e., the FFO Per Share metric and the debt to EBITDA ratio metric);

 

   

Require sustained longer-term performance of the Company’s share price by including a relative TSR modifier that measures the Company’s performance against other office REIT competitors in the SNL US REIT Office Index over the entire three-year vesting period (i.e., the TSR Percentile Ranking metric); and

 

   

Create an additional retention incentive, as vesting is contingent on each NEO’s continued service through the end of the three- year vesting period.

 

44    PROXY STATEMENT    KILROY REALTY


2018 Annual Equity Award Values

In February 2018, the Compensation Committee granted each NEO a number of time-based RSUs and a “target” number of performance-based RSUs, each expressed as a dollar value that was then converted into a number of RSUs based on our stock price on the date of grant. These dollar values are set forth in the chart below and are the same values that were used to determine the number of shares subject to the NEO’s annual equity award in 2017, except for our CEO whose grant date value for his performance-based RSUs in 2018 increased to $4,500,000 as compared to $4,250,000 in 2017. The Compensation Committee determined that the aggregate dollar value for each NEO’s 2018 annual equity award was appropriate based on its consideration of the factors listed on page 39.

 

Named Executive

  

Time-Based

RSUs(1)

  

Target

Performance-

Based

RSUs(1)

 

  

Total

Equity

Award

       

 

John Kilroy

 

   $1,500,000    $4,500,000    $6,000,000         

 

Jeffrey Hawken

 

   $   617,000    $1,234,000    $1,851,000         

 

Tyler Rose

 

   $   550,000    $1,100,000    $1,650,000         

 

Stephen Rosetta

 

   $   400,000    $   800,000    $1,200,000         

 

Justin Smart

 

   $   500,000    $1,000,000    $1,500,000   

(1)   These amounts are the values approved by the Compensation Committee in February 2018 and converted into the corresponding number of RSUs (the number of RSUs at the “target” level of performance in the case of the performance-based RSUs) based on the closing price of the Company’s common stock on the date of grant of the awards and rounded up to the nearest whole share. For the accounting fair value of these awards as reflected in the Summary Compensation Table, please refer to footnote (1) to the Summary Compensation Table.

    

2018 Performance-Based RSUs

The 2018 performance-based RSUs vest when the Compensation Committee determines if, and to the extent, the performance vesting conditions have been achieved by the Company. Such determination will be made by the Compensation Committee during January or February 2021. The total number of 2018 performance-based RSUs that ultimately vest will be determined as follows:

 

  1.

The target number of performance-based RSUs granted to each NEO is first multiplied by an FFO Per Share modifier that ranges from 0% to 150% (and 0% to 175% in the case of our CEO). This modifier is determined by the Company’s FFO Per Share for 2018 as shown in the table below (the number of RSUs resulting from this calculation is referred to as the “Banked Shares” subject to the award).

 

FFO Per Share (for 2018)*

  

FFO Per Share Modifier*

(for NEOs except CEO)

 

  

FFO Per Share Modifier*

(for CEO)

 

 

$3.65 or greater

 

   150%    175%

 

$3.55

 

   100%    100%

 

$3.45

 

   50%    25%

 

Less than $3.45

 

   0% (complete forfeiture)    0% (complete forfeiture)
* Determined on a pro-rata basis between points

 

KILROY REALTY    PROXY STATEMENT    45


The Banked Shares subject to the award are then eligible to vest as follows:

 

  2.

50% of the Banked Shares are multiplied by a TSR Percentile Ranking modifier that ranges from 66.6667% to 133.3333% (and from 50% to 150% for our CEO). This modifier is determined as shown in the table below based on the percentile ranking of the Company’s TSR for the three-year performance period (2018-2020) among the TSRs for the companies in the SNL US REIT Office Index calculated in the manner described on page 70.

 

     TSR Percentile Ranking*

     (2018-2020) — 50% Weight

  

TSR Modifier*

(for NEOs except CEO)

 

  

TSR Modifier*

(for CEO)

 

     80th percentile or greater

 

   133.3333%    150%

 

     40th percentile or greater, but

     equal to or less than 60th

     percentile

 

   100%    100%

 

     20th percentile or lower

 

   66.6667%    50%
* Determined on a pro-rata basis between points

For example, if the TSR Percentile Ranking is at or above the 40th percentile, but equal to or less than the 60th percentile, then there is no modification up or down to the Banked Shares allocated to this metric. If the TSR Percentile Ranking is below the 40th percentile, then the Banked Shares allocated to this metric may be reduced by up to 50% for our CEO’s award and by up to 33% for our other NEOs’ awards. If the TSR Percentile Ranking is greater than the 60th percentile, then the Banked Shares allocated to this metric may be increased by up to 50% for our CEO’s award and by up to 33% for our other NEOs’ awards.

 

  3.

50% of the Banked Shares are multiplied by an Average Debt to EBITDA Ratio modifier that ranges from 66.6667% to 133.3333% (and from 50% to 150% for our CEO). This modifier is determined as shown in the table below based on the Company’s Average Debt to EBITDA Ratio for the three-year performance period (2018-2020) calculated in the manner described on page 70.

 

     Average Debt to EBITDA Ratio*

     (2018-2020) — 50% Weight

  

Average Debt to EBITDA Ratio
Modifier*

(for NEOs except CEO)

 

  

Average Debt to EBITDA Ratio
Modifier*

(for CEO)

 

     6.75x or less

 

   133.3333%    150%

 

     7.25x

 

   100%    100%

 

     7.75x or higher

 

   66.6667%    50%
* Determined on a pro-rata basis between points

The FFO Per Share measure applies to the year 2018 only. This measure was selected as a performance metric because it is a financial measure commonly used by analysts and investors to evaluate a REIT’s operating performance and overall management of its property portfolio. If the threshold level of FFO Per Share shown above is not achieved, the entire award is forfeited with no opportunity to vest in a future year.

The TSR Percentile Ranking modifier was included to further align executives’ interests and potential rewards with stock price performance on a relative basis over a longer-term performance period.

The Average Debt to EBITDA Ratio modifier was included to align the Company’s substantial growth plans with maintaining a conservative balance sheet. By including a key leverage metric, the Company is limited in its ability to incur significant additional debt to fund growth and grow earnings without negatively impacting this compensation metric.

The increased up-side and down-side leverage applied to the TSR modifier and the Average Debt to EBITDA Ratio modifier for the award to our CEO reflects his responsibility for the overall performance of the Company.

Please see the discussion under “Named Executive Officer Compensation Tables — Description of Plan-Based Awards — Performance-Based RSUs” beginning on page 69 below for more information on determining FFO Per Share, TSR Percentile Ranking, Average Debt to EBITDA Ratio and related modifiers for purposes of these awards.

 

46    PROXY STATEMENT    KILROY REALTY


The following chart illustrates the operation of the performance-based RSUs awarded in 2018 and discussed above:

Illustration of 2018 Performance-Based RSUs

 

LOGO

2018 FFO Performance Under 2018 Annual Equity Awards

In February 2019, the Compensation Committee determined that the Company’s 2018 FFO Per Share, when adjusted in accordance with the 2018 RSU award agreement, was $3.76. As a result, 150% of the target number of performance-based RSUs awarded in 2018 to each NEO (and 175% of the target number of performance-based RSUs awarded in 2018 to our CEO) were Banked Shares and became eligible to vest, subject to (1) further adjustment (up or down) as follows (a) 50% of the Banked Shares will be adjusted (up or down) based on the Company’s relative TSR performance against other office REIT competitors in the SNL US REIT Office Index over the entire three-year vesting period and (b) 50% of the Banked Shares will be adjusted (up or down) based on the Company’s Average Debt to EBITDA Ratio over the three-year performance period and (2) continued service through the remainder of the three-year performance period.

 

KILROY REALTY    PROXY STATEMENT    47


2018 Performance Year Under 2017 Annual Equity Awards

In January 2017, the Compensation Committee awarded the NEOs (other than Mr. Rosetta) RSUs that had a structure similar to the RSUs awarded to the NEOs in February 2018, except that an additional performance modifier (average FAD Per Share growth) was used. The 2017 RSUs are described more fully in the Company’s 2018 Proxy Statement. In January 2018, the Compensation Committee determined that the Company’s 2017 FFO Per Share, when adjusted in accordance with the 2017 RSU award agreement, was $3.55. As a result, 125.3% (and 137.9% in the case of our CEO) of the target number of performance-based RSUs awarded in 2017 to each NEO were Banked Shares and became eligible to vest, subject to (1) further adjustment (up or down) based on the Company’s TSR Percentile Ranking, average FAD Per Share growth and Average Debt to EBITDA Ratio over the three-year performance period and (2) continued service through the remainder of the three-year performance period. If the Company’s 2017 FFO Per Share performance is taken into account, between approximately 84% and 167% of the target number of performance-based RSUs awarded in 2017 to each NEO (and between approximately 69% and 207% of the target number of performance-based RSUs awarded in 2017 to our CEO) will vest at the end of the three-year performance period, assuming continued service through the remainder of that period.

2018 Performance Year Under 2016 Annual Equity Awards (TSR Modifier Resulted in No Upside Modification)

In January 2016, the Compensation Committee awarded the NEOs (other than Mr. Rosetta) RSUs that had a structure similar to the RSUs awarded to the NEOs in February 2018, except that only a single performance modifier (TSR Percentile Ranking) was used. The 2016 RSUs are described more fully in the Company’s 2017 Proxy Statement. In February 2019, the Compensation Committee made a final determination that 143.7% of the target number of 2016 performance-based RSUs awarded to each NEO vested. The Compensation Committee’s final determination was based on (a) 143.7% of the target number of 2016 performance-based RSUs awarded to each NEO being Banked Shares as a result of the Company’s 2016 FFO Per Share performance and (b) no further modification being applied to those banked shares as a result of the Company’s TSR Percentile Ranking being at the 56th percentile (i.e., the average of the Company’s 2016, 2017 and 2018 TSR Percentile ranks as determined pursuant to the terms of these awards).

Past TSR Performance Awards

The Company awarded performance-based RSUs to Messrs. Kilroy and Hawken in 2012 and 2013, respectively, that are eligible to vest in substantially equal annual installments over the term of the award (2012-2018 in the case of the award granted to Mr. Kilroy in 2012 and 2013-2018 in the case of the award granted to Mr. Hawken in 2013). These awards are referred to in this Proxy Statement as the “Past TSR Awards.” The vesting of each installment of the Past TSR Awards is subject to the achievement of one of the following performance goals, and further subject to the executive’s continued employment through the applicable vesting date: (1) achievement of an annual TSR equal to 7.5% for the applicable calendar year; (2) achievement of a TSR that exceeds the TSR for the SNL US REIT Office Index for the applicable calendar year; or (3) achievement of a cumulative stockholder return goal not later than December 31, 2018. The cumulative stockholder return goal is based on an annualized TSR over the applicable term of the award of 7.5%. In January 2019, the Compensation Committee determined that the 2018 and final installment of the Past TSR Award vested for both Messrs. Kilroy and Hawken as the Company achieved the relative TSR goal in 2018.

In January 2016, the Company awarded Mr. Hawken a RSU award that included a component subject to both time-based and performance-based vesting conditions (this award is also referred to in this Proxy Statement as a “Past TSR Award”). The performance-based RSUs subject to the award are eligible to vest in substantially equal annual installments over a four-year period (2016-2019) based on the achievement of one of the following performance goals, subject to Mr. Hawken’s continued employment through the end of the applicable year: (1) achievement of an annual TSR equal to 7.5% for the applicable calendar year; (2) achievement of a TSR that exceeds the TSR for the SNL US REIT Office Index for the applicable calendar year; or (3) achievement of a cumulative stockholder return goal not later than December 31, 2019. The cumulative stockholder return goal is based on an annualized TSR over the applicable period of 7.5%. In January 2019, the Compensation Committee determined that the 2018 installment of the performance-based RSUs vested for Mr. Hawken as the Company achieved the relative TSR goal in 2018.

 

48    PROXY STATEMENT    KILROY REALTY


CEO Employment Agreement and December 2018 RSU Awards

In December 2018, the Company entered into an amended and restated employment agreement with our CEO to replace his existing employment agreement that would have expired by its terms on December 31, 2018. Mr. Kilroy has been the Company’s CEO and President, and a director of the Company, since its incorporation in September 1996. Prior to that, Mr. Kilroy led the Company’s private predecessor, Kilroy Industries, becoming its President in 1981 and its Chief Executive Officer in 1991. Mr. Kilroy has been involved in all aspects of commercial real estate acquisition, entitlement, development, construction, leasing, financing and dispositions since 1967.

Under Mr. Kilroy’s leadership, the Company has grown into what we believe to be one of the leading office REITs in the United States.

 

LOGO

 

             * Based on closing price of the Company’s common stock on such date

KILROY REALTY CORPORATION JANUARY 1, 2010 $2.6 Billion Enterprise Value* 12.4 Million Square Feet of Stabilized Office and Industrial Properties SoCal-Centric REIT All Properties Located in Southern California KILROY REALTY CORPORATION DECEMBER 31, 2018 $9.4 Billion Enterprise Value* 13.2 Million Square Feet of Stabilized Office Properties West Coast REIT Properties Located in the Coastal Regions of Greater Los Angeles County, Orange County, San Diego County, the San Francisco Bay Area and the Greater Seattle Areas 200 Residential Units Located in the Hollywood Submarket of Los Angeles 3 Projects Under Construction Totaling Approximately 1.3 Million Square Feet of Office Space, 801 Residential Units and 96,000 Square Feet of Retail Space 2 Projects in the Tenant Improvement Phase Totaling Approximately 1.2 Million Square Feet of Office and Production, Distribution and Repair Space. * Based on closing price of the Company's common stock on such date

Under Mr. Kilroy’s leadership, the Company’s commitment and leadership position in sustainability has been recognized by various industry groups across the world. In September 2018, the Company was recognized by GRESB as the North American Listed Office leader for the sixth year in a row. Other sustainability accolades include NAREIT’s Leader in the Light award for each of the past five years, the EPA’s highest honor of Sustained Excellence and winner of ENERGY STAR Partner of the Year for each of the past four years. The Company is listed in the Dow Jones Sustainability World Index, one of only two North American companies listed.

The Company’s TSR (assuming dividend reinvestment) over this period of transition, from January 1, 2010 through December 31, 2018, was 171%, far exceeding the TSR (assuming dividend reinvestment) of 76% for the SNL US REIT Office Index for the same period of time. This implies that, over that period of time, an investment in the Company’s common stock would have seen an increase in value that is 125% greater than a similar investment in the SNL U.S. REIT Office Index. Over that period of time, the annualized return on an investment in the Company’s common stock was 10.5%, while the annualized return on the SNL US REIT Office Index was 5.8%. The Board’s perspective is that this exceptional stock price performance has been driven primarily by the vision and leadership of Mr. Kilroy, with strong support from the other members of the Company’s senior leadership team. The target reward opportunities and overall incentive approaches provided to Mr. Kilroy have been strong motivating factors in generating this outperformance, with the aggregate target compensation representing a small fraction of the exceptional return created for stockholders. Given these facts, the Board decided that it was in the best interests of the Company and our stockholders to incentivize Mr. Kilroy to continue as our CEO.

 

KILROY REALTY    PROXY STATEMENT    49


KILROY REALTY CORPORATION

JANUARY 1, 2010 — DECEMBER 31, 2018

171% TSR

(Assuming Dividend

Reinvestment)

vs. 76% TSR for SNL US

REIT Office Index

 

10.5%

Annualized Return on

Investment in Company

Common Stock

vs. 5.8% Annualized Return

on Investment in Company

Common Stock for SNL US

REIT Office Index

 

125%

Greater

Increase in Value

vs. Similar Investment

in SNL US REIT Office

Index

The following chart shows the value of a $100 investment at market close on December 31, 2009 in the Company and in the SNL US REIT Office Index over the approximate nine-year period ended December 31, 2018 (assuming dividend reinvestment), as well as the total realized compensation for Mr. Kilroy for each year over that period of time. Mr. Kilroy’s realized compensation for each year has been calculated on the same basis as reported in the Summary Compensation Table, except for the method used to value stock and option awards. SEC rules require that the grant date fair value of all stock and option awards be reported in the Summary Compensation Table for the year in which they were awarded. As a result, a significant portion of the total compensation amounts reported in the Summary Compensation Table relate to stock awards that have not vested, a substantial portion of which are subject to performance-based vesting requirements. Mr. Kilroy may not realize any value from these awards if his employment terminates before the award vests or if the performance goals are not achieved. Mr. Kilroy’s total realized compensation for each year in the chart below includes the value (based on the closing price of a share of the Company’s common stock on the applicable vesting date) of the stock and option awards held by Mr. Kilroy that vested during the applicable year (including those granted in prior years) rather than including the grant date fair value of the stock and option awards granted during the year.

12/31/2009 - 12/31/2018 Relative Value Realized

 

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50    PROXY STATEMENT    KILROY REALTY


Under the terms of his employment agreement and past equity awards granted by the Company, Mr. Kilroy was eligible to retire from the Company in December 2018. During 2018, the Board held negotiations with Mr. Kilroy to secure his continued service and commitment to future stockholder value creation. The terms of the amended and restated employment agreement with our CEO are summarized in “Named Executive Officer Compensation Tables — Employment Agreements — Salary and Short-Term Incentive (Annual Cash Bonus) Amounts” and “Named Executive Officer Compensation Tables — Potential Payments Upon Termination or Change In Control” sections below. To incentivize Mr. Kilroy to delay his retirement and enter into the agreement, as well as to provide additional incentives during the term of the agreement and to recognize the transformation of the Company under his leadership, in December 2018 the Compensation Committee granted Mr. Kilroy a total of 483,871 RSUs under the terms of two RSU award agreements. The terms of the amended and restated employment agreement with Mr. Kilroy, as well as the terms of the December 2018 RSUs awarded to him, were the result of negotiations between Mr. Kilroy and the Compensation Committee. Additionally, to recognize the transformation of the Company under our other NEOs’ leadership and to provide additional incentives over a four-year performance period, in December 2018 the Compensation Committee granted each of our other NEOs additional RSUs in the amounts listed in the table below. As shown in the table below, approximately 45% of Mr. Kilroy’s RSUs granted in December 2018 (and approximately 50% in the case of the December 2018 awards granted to our other NEOs) are subject to time-based vesting requirements (“December 2018 Time-Based RSUs”) with vesting scheduled to occur in two equal installments on each of January 5, 2022 and January 5, 2023, subject to the NEO’s continued service. To further align our NEOs’ interests with those of our stockholders and to incentivize continuation of the Company’s track record of exceeding the TSR of the broader office REIT market, approximately 55% of Mr. Kilroy’s RSUs granted in December 2018 (and approximately 50% in the case of the December 2018 awards granted to our other NEOs) are subject to both time-based and performance-based vesting conditions (“December 2018 PRSUs”), and are also subject to the NEO’s continued service.

 

Named Executive

 

  

December 2018

Time-Based RSUs

 

  

Target December 2018
PRSUs

 

  

Total December 2018
RSU Award

 

 

John Kilroy

 

   217,741    266,130    483,871

 

Jeffrey Hawken

 

     16,129      16,129      32,258

 

Tyler Rose

 

     16,129      16,129      32,258

 

Stephen Rosetta

 

       8,064        8,065      16,129

 

Justin Smart

 

     12,097      12,097      24,194

Between 0% and 200% of the target number of shares covered by the December 2018 PRSUs will be eligible to vest based on the Company’s relative TSR over the performance period. An initial number of PRSUs (the “Initial Number of PRSUs”) will be determined at the end of 2021 based on a three-year performance period (2019 through 2021). The Initial Number of PRSUs will equal the following percentage of the target number of shares based on the Company’s TSR for the three-year performance period:

 

If the Company’s TSR for the three-year

performance period, when compared to the

 

TSR of the Index for the same period, is:*

 

  

The applicable percentage, as a
percent of target shares, is:*

 

 

Less than -100 basis points

 

   0%

 

-100 basis points

 

   50%

 

0 basis points

 

   75%

 

+100 basis points

 

   100%

 

+300 basis points or greater

 

   200%

        * Determined on a pro-rata basis between points

As outlined above, a “target” payout on the TSR measure requires 100 basis points above Index performance, while performance that is in-line with the Index results in significantly reduced payouts. As such, we are expecting our executive team to deliver meaningful above-market results to earn a target payout on this metric, further strengthening the alignment of their incentives with those of our stockholders.

 

KILROY REALTY    PROXY STATEMENT    51


Once the Initial Number of PRSUs is determined, 75% of the Initial Number of PRSUs will be scheduled to vest on January 5, 2022. The remaining 25% of the Initial Number of PRSUs will be scheduled to vest on January 5, 2023, subject to adjustment based on the Company’s TSR for the entire four-year performance period (2019 through 2022) as follows (the “Final Number of PRSUs”):

 

If the Company’s TSR for the four-year

performance period, when compared to the

TSR of the Index for the same period, is:*

 

  

The Initial Number of PRSUs will be adjusted as
follows:*

 

 

-100 basis points or less

 

   Reduced by 25%

 

0 basis points

 

   Reduced by 12.5%

 

+100 basis points

 

  

Adjusted upward, if and to the extent

necessary, so that the Initial Number

of PRSUs is not less than the target number of PRSUs

 

+300 basis points or greater

 

  

Adjusted upward, if and to the extent

necessary, so that the Initial Number

of PRSUs is not less than 200% of the

target number of PRSUs

        * Determined on a pro-rata basis between points

The number of PRSUs eligible to vest on January 5, 2023 will equal the Final Number of PRSUs, less the PRSUs that vested on January 5, 2022.

CEO REALIZED COMPENSATION

In evaluating Mr. Kilroy’s compensation, particularly his December 2018 RSU awards, we believe it is important to understand not only the potential value of incentive awards at the time they are granted, but also the value actually realized by Mr. Kilroy. The 2018 Realized Compensation Table below supplements the 2018 Summary Compensation Table that appears on page 63 and shows the compensation actually realized in 2018 by Mr. Kilroy. The primary difference between the 2018 Realized Compensation Table below and the Summary Compensation Table is the method used to value stock and option awards. SEC rules require that the grant date fair value of all stock and option awards be reported in the Summary Compensation Table in the year in which they were awarded. As a result, a significant portion of the total compensation amounts reported in the Summary Compensation Table relate to stock awards that have not vested, a substantial portion of which are subject to performance-based vesting requirements. Mr. Kilroy may not realize any value from these awards if his employment terminates before the award vests or if the performance goals are not achieved. By contrast, the 2018 Realized Compensation Table below includes only stock awards held by Mr. Kilroy that vested during 2018 (including those granted in prior years) and shows the value of those awards as of the applicable vesting date. Mr. Kilroy did not receive any stock option awards from the Company in 2018 and no stock options granted by the Company to Mr. Kilroy in the past vested during 2018. As shown in the table below, Mr. Kilroy’s total realized compensation calculated in this manner was $18,215,429 for 2018, which was $25,409,345 less than the 2018 total compensation reported in the 2018 Summary Compensation Table.

2018 Realized Compensation Table

 

Name

 

 

 

Salary

 

 

 

Bonus

 

 

 

Stock
Awards(1)

 

 

 

Option
Awards

 

 

 

Non-Equity
Incentive Plan
Compensation

 

 

 

All Other
Compensation

 

 

 

Total Realized
Compensation

 

 

 

Difference between Total

Realized Compensation

and Total Compensation

as Reported in Summary

Compensation Table

 

 

John Kilroy

  $1,225,000     $12,514,762     $3,775,000   $700,667   $18,215,429   $(25,409,345)

 

(1)

The dollar amounts shown in this column above for stock awards are determined by multiplying the number of shares of the Company’s common stock subject to the awards granted to Mr. Kilroy (including grants from prior years) that vested during 2018 by the per-share closing price of the Company’s common stock on the vesting date.

This information is supplemental to, and should be read in connection with, the Summary Compensation Table that appears on page 63.

 

52    PROXY STATEMENT    KILROY REALTY


Additional Compensation Elements

Indirect Elements of Compensation

To assist us in attracting and retaining key executives, our NEOs are eligible to participate in the same health, welfare and insurance benefit plans in which our other salaried employees are generally able to participate. In addition, we provide our NEOs with certain other benefits such as an automobile allowance, a medical allowance, supplemental life insurance, and certain reimbursements for club dues, financial planning services and home office expenses.

Stock Award Deferral Program

We maintain a Stock Award Deferral Program under which our directors and certain of our management employees, including our NEOs, may elect to receive RSUs in lieu of restricted shares granted under the 2006 Plan in order to defer receipt of these shares (or may elect to defer payment of RSUs that would otherwise be made when the RSUs vest). Each RSU issued under the deferral program represents the right to receive one share of our common stock in the future, subject in each case to the vesting conditions provided in the restricted stock or RSU award. In addition, deferred RSUs carry with them the right to receive dividend equivalents that credit participants, upon our payment of dividends in respect of the shares underlying the participant’s RSUs, with additional RSUs equal to the value of the dividend paid in respect of such shares. Shares of stock underlying RSUs will be paid to the participant on the earliest to occur of a change in control, the participant’s “separation from service” with us, the participant’s death or disability, or a pre-determined date, if specified by the participant. By electing to receive deferred RSUs, participants are generally able to defer income taxes on these awards, which we believe helps us to attract, retain and incentivize top talent without significant additional cost to the Company. Since RSUs are paid in our common stock and the deferral of payment of RSUs under the program may result in participants holding RSUs for a longer period, we believe the Stock Award Deferral Program enhances the alignment between management and stockholder interests.

Defined Contribution Plans

We maintain a Section 401(k) Savings/Retirement Plan (the “401(k) Plan”) that covers our eligible employees, including our NEOs, and those of certain designated affiliates. The 401(k) Plan permits our eligible employees to defer receipt of (and taxation on) a portion of their annual compensation, subject to certain limitations imposed by the 401(k) Plan and under the Internal Revenue Code. The employees’ elective deferrals are immediately vested and nonforfeitable upon contribution to the 401(k) Plan. We currently make matching contributions to the 401(k) Plan in an amount equal to fifty cents for each dollar of participant contributions, up to a maximum of 10% of the participant’s base salary (thus, the maximum match is 5% of the participant’s base salary) and subject to certain other limits under the tax laws. Participants vest immediately in the amounts contributed by us to their plan accounts. Our employees are eligible to participate in the 401(k) Plan after three months of credited service with us. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by employees to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan. This tax-preferential savings option helps us to attract, retain and incentivize top talent.

Deferred Compensation Plan

We maintain a cash deferred compensation plan, the 2007 Deferred Compensation Plan, as amended (the “Deferred Compensation Plan”), under which our directors, partners and certain of our management employees, including our NEOs, may defer receipt of their compensation, including up to 100% of their director fees and cash bonuses and up to 70% of their salaries or other types of eligible compensation, each as applicable. In addition, partners and eligible management employees, including our NEOs, will generally receive semi-monthly contributions from us to their Deferred Compensation Plan accounts equal to 10% of their respective gross semi-monthly base salaries (or certain guaranteed payments, in the case of partners). The Deferred Compensation Plan provides that we may also make additional discretionary contributions to participant accounts. We did not make any discretionary contributions to the Deferred Compensation Plan for 2018 for the benefit of any of our NEOs. The Deferred Compensation Plan fits into our compensation philosophy by providing our NEOs with the ability to accrue compensation and generate savings in a tax-efficient manner in excess of limits imposed on our 401(k) Plan, thereby providing additional financial security that enables our executives to focus on their work-related obligations. For additional information, refer to the Nonqualified Deferred Compensation table below.

 

KILROY REALTY    PROXY STATEMENT    53


Severance and Change in Control Arrangements

We have entered into employment agreements with each of our NEOs (other than Mr. Rosetta) that include certain severance benefits. Our equity awards also provide for continued or accelerated vesting in connection with certain terminations of the award holder’s employment or a change in control. We believe that these provisions help to ensure the day-to-day stability and focus of our management team. The Compensation Committee evaluates the level of severance benefits to provide our NEOs on a case-by-case basis, and in general, we consider these severance protections an important part of an executive’s compensation and consistent with competitive practices as of the date they were entered into.

We do not provide our NEOs with any “single trigger” severance or equity award acceleration arrangements, meaning that severance benefits and accelerated vesting of equity awards are not triggered simply because a change in control transaction occurs. Instead, time-based RSU awards granted to our NEOs generally vest in connection with a change in control transaction only if the award is to be terminated (and will not be continued, substituted for or assumed) in connection with the transaction. In the case of the performance-based RSUs granted to our NEOs, the RSUs will vest based on the Company’s performance through the transaction. The time-based RSUs granted to our NEOs also generally vest, and any severance benefits for our NEOs are generally triggered, upon a termination of the NEO’s employment by the Company without “cause,” by the NEO for “good reason,” or, in certain cases, due to the retirement, death or disability of the NEO.

For a description of the material terms of these arrangements, see “Named Executive Officer Compensation Tables —Employment Agreements — Salary and Short-Term Incentive (Annual Cash Bonus) Amounts,” “Named Executive Officer Compensation Tables — Grants of Plan-Based Awards — 2018,” “Named Executive Officer Compensation Tables — Description of Plan-Based Awards” and “Named Executive Officer Compensation Tables — Potential Payments Upon Termination or Change in Control” below.

Decisions for 2019

In February 2019, the Compensation Committee approved our executive compensation program for 2019. None of our NEOs received an increase in base salary, target annual cash incentive amounts or in the grant date value of annual equity awards (as approved by the Compensation Committee and used to determine the number of shares subject to the awards) for 2019 compared to the corresponding levels approved by the Compensation Committee for our NEOs for 2018. Our Compensation Committee designed the 2019 annual cash incentive program to include an objective goal for each performance metric and to weight each metric relative to the others. A key difference in the 2019 annual cash incentive award structure relative to prior years is that the measurement categories will be specifically weighted, with the weighting also producing a maximum bonus opportunity corresponding to each category, thereby reducing the degree of qualitative judgment applied in determining final payouts. In addition, a new sustainability and governance category will be included and will consider the Company’s achievement of LEED certifications on new developments, and the Company’s continued focus on diversity within the Company, and a new general and administrative expense metric will be included in the operations category.

As with the annual long-term incentive awards granted to the NEOs in 2018, three-quarters of our CEO’s (and approximately two-thirds of each of our other NEOs’) annual long-term incentive award granted in 2019 is subject to performance-based vesting requirements that cliff-vest at the end of a three-year vesting period, subject to continued service through the end of such performance period. The balance of each NEO’s total annual long-term incentive award granted in 2019 vests ratably in annual installments over a three-year vesting period, subject to continued service through the applicable vesting date. Each annual long-term incentive award granted to our NEOs in 2019 is generally subject to the same terms and conditions as the Company’s annual awards of RSUs granted to the NEOs in 2018.

 

54    PROXY STATEMENT    KILROY REALTY


HOW WE MAKE COMPENSATION DECISIONS

Role of Independent Compensation Consultant

The Compensation Committee has sole authority to hire, retain and terminate the services of independent compensation consultants to assist in its decision-making process. The Compensation Committee retained Mercer as its independent compensation consultant in 2018.

Mercer performed a comprehensive review of our 2018 executive compensation program before it was established, including the composition of our peer group, amounts and nature of compensation paid to executive officers, structure of our various compensation programs, design of our short-term incentive performance measurement framework, performance vesting requirements for our annual long-term incentive awards and appropriate target total direct compensation levels and potential payment and vesting ranges for our executive officers. During 2018, Mercer also provided data to the Compensation Committee on the compensation and relative performance of our peer group, advised and provided peer group data regarding the Company’s compensation arrangements for its non-employee directors, reviewed drafts of the CD&A and related compensation tables for inclusion in the Company’s Proxy Statement filed in 2018, provided advice in connection with the new employment agreement for our CEO and the December 2018 equity awards for our NEOs, provided advice as the Compensation Committee began its considerations of our executive compensation framework for 2019, and reviewed data in connection with the Compensation Committee’s determination of short-term incentive and performance-based incentive vesting levels for completed performance periods. A representative of Mercer regularly attends meetings of the Compensation Committee and regularly meets privately in executive session with the Compensation Committee to discuss its recommendations.

Mercer is a subsidiary of Marsh & McLennan Companies, Inc. (collectively, “MMC”), a diversified conglomerate of companies that provide insurance, strategy and human resources consulting services. During 2018, affiliates of MMC other than Mercer received $1,050,654 in fees for providing services to the Company, and Mercer received $165,500 for its services with respect to executive and director compensation described above. The decision to engage other MMC affiliates to provide services other than assisting the Compensation Committee with executive compensation matters was made by members of management. Although the Compensation Committee did not specifically approve these engagements, the Compensation Committee has reviewed the other services provided by other MMC affiliates and, after consideration of such services and other factors prescribed by the SEC for purposes of assessing the independence of compensation advisors, has determined that no conflicts of interest exist between the Company and Mercer (or any individuals working on the Company’s account on Mercer’s behalf). In reaching this determination, the Compensation Committee considered the following factors, all of which were confirmed by Mercer:

 

   

Other than the services identified above, MMC provided no services to the Company during 2018;

 

   

The aggregate amount of fees paid or payable by the Company to MMC for 2018 represented less than 1% of MMC’s total revenue for 2018;

 

   

Mercer has established Global Business Standards to manage potential conflicts of interest for executive rewards consulting services, which policies and procedures were provided to the Company;

 

   

There are no business or personal relationships between our Mercer executive remuneration advisors and any member of the Compensation Committee other than in respect of (1) the services provided to the Company by Mercer as described above, or (2) work performed by Mercer for any other company, board of directors or compensation committee for which such Compensation Committee member also serves as an independent director;

 

   

Our Mercer executive remuneration advisors do not own stock in the Company; and

 

   

There are no business or personal relationships between our Mercer executive remuneration advisors, Mercer or other MMC affiliates, and any executive officer of the Company other than in respect of the services provided to the Company as described above.

 

KILROY REALTY    PROXY STATEMENT    55


Role of Management in Executive Compensation Planning

Our CEO provides recommendations to the Compensation Committee regarding the compensation of our executive officers (other than for himself). Our CEO further participates in the executive compensation decision-making process as follows:

 

   

Presents overall results of the Company’s performance and achievement of historical and go-forward business objectives and goals from management’s perspective;

 

   

Provides evaluations for all other executive officers (including our NEOs); and

 

   

Reviews peer group information and compensation recommendations and provides feedback regarding the potential impact of proposed compensation decisions.

Our Chief Financial Officer evaluates the financial implications and affordability of the Company’s compensation program. Other executive officers (including other NEOs) may periodically participate in the compensation process and in Compensation Committee meetings at the invitation of the Compensation Committee to advise on performance and/or activity in areas with respect to which these executive officers have particular knowledge or expertise. None of our NEOs are members of the Compensation Committee or otherwise had any role in determining the compensation of the other NEOs.

Market Review and Compensation Peer Group

Our Compensation Committee reviews peer group data to assess the competitiveness of our executive compensation program and to help inform its decision-making process. The 2018 peer group consisted of the 15 publicly-traded REITs shown in the table below (referred to as our “peer group” in this Proxy Statement) and was the same as our 2017 peer group, except that Macerich Real Estate Company and HCP, Inc. were added to the peer group because the Compensation Committee believed that those companies were appropriate peer companies based on the factors noted below and Tanger Factory Outlet Centers was removed from the peer group because the Compensation Committee believed, at the time the 2018 peer group was established, that it had a different market focus than the Company and no longer had a comparable market capitalization. The companies included in the 2018 peer group had equity market capitalization ranging from approximately $22.0 billion to approximately $1.8 billion as of December 31, 2018, and, as a group, had a median equity market capitalization of approximately $5.8 billion as of December 31, 2018. Our equity market capitalization by comparison was approximately $6.3 billion as of December 31, 2018.

 

56    PROXY STATEMENT    KILROY REALTY


Kilroy Realty Corporation

Peer Group: KRC Alignment Characteristics

 

               

Comparable Categories

 

 

Company

 

 

Equity
Market
Cap
(1)

 

 

Total
Revenue
(2)

 

 

Total
Assets
(3)

 

 

Office
REITS
(4)

 

 

Equity
Market
Cap
(5)

 

 

 

Total
Revenue
(6)

 

 

Total
Assets
(7)

 

 

W. Coast       
Concen-
tration
(8)

 

Digital Realty Trust

 

  $21,979   $3,079   $23,767          

 

Boston Properties

 

  $17,382   $2,701   $20,256          

 

Realty Income Corp

 

  $18,604   $1,296   $15,095          

 

HCP, Inc.

 

  $13,399   $1,848   $13,084          

 

Alexandria Real Estate Equities

 

  $12,391   $1,335   $14,465          

 

SL Green Realty Corp

 

  $  6,743   $1,235   $12,751          

 

Macerich Company

 

  $  6,111   $1,030   $  9,027          

 

Douglas Emmett

 

  $  5,800   $   870   $  8,348          

 

Hudson Pacific Properties

 

  $  4,522   $   719   $  6,745          

 

Highwood Properties

 

  $  4,004   $   722   $  4,675          

 

Paramount Group

 

  $  2,980   $   751   $  8,941          

 

Brandywine Realty Trust

 

  $  2,299   $   527   $  4,099          

 

Corporate Office Properties Trust

 

  $  2,289   $   581   $  3,656          

 

Piedmont Office Realty Trust

 

  $  2,187   $   526   $  3,592          

 

Mack-Cali Realty Corp

 

  $  1,768   $   541   $  5,046          

 

75th Percentile

 

  $12,895   $1,315   $13,774          

 

50th Percentile

 

  $  5,800   $   870   $  8,941          

 

25th Percentile

 

  $  2,639   $   650   $  4,861          

 

Kilroy Realty Corporation

 

  $  6,331   $   747   $  7,766          

 

(1)

As of December 31, 2018, based on publicly-available information from the S&P Capital IQ database’s definition of Market Capitalization.

 

(2)

Per S&P Capital IQ database’s definition of Total Revenue, based on the trailing 12 months of publicly reported data as of February 12, 2019.

 

(3)

Per S&P Capital IQ database’s definition of Total Assets, based on the most recently reported fiscal quarter as of February 12, 2019.

 

(4)

Office REITS as defined by the GICS Office REIT Sub-Industry.

 

(5)

Comparable firms based on equity market capitalization defined as those that fall within 0.5x — 2.0x of the Company’s market capitalization as of December 31, 2018.

 

(6)

Comparable firms based on total revenue defined as those that fall within 0.5x — 2.0x of the Company’s revenue level based on the information summarized in the chart.

 

(7)

Comparable firms based on asset size defined as those that fall within 0.5x — 2.0x of the Company’s asset level based on the information summarized in the chart.

 

(8)

Defined as possessing a significant portfolio of properties on the West Coast and/or being a significant West Coast talent competitor.

The Compensation Committee uses peer group compensation analyses, together with other reports and information prepared by Mercer for the Compensation Committee, to evaluate our executive compensation program generally and to inform its decision-making process. Differences in compensation levels for our NEOs are driven by the Compensation Committee’s assessment, in its judgment, of each of our executive’s responsibilities, experience and compensation levels for similar positions at companies in the peer group. Our pay positioning versus the peer group also incorporates the degree of expertise and experience needed to oversee and direct our active portfolio management strategy. For example, our strategy requires different skill sets than executives who focus primarily on managing cash flows from a more static investment portfolio. Further, our compensation levels reflect the need to attract, retain and incentivize talented and experienced individuals in the highly competitive West Coast employment and commercial real estate markets.

 

KILROY REALTY    PROXY STATEMENT    57


For 2018, the Compensation Committee did not set compensation levels at any specific level or percentile against the peer group data. Except as otherwise noted in this CD&A, the Compensation Committee’s executive compensation determinations are subjective and the result of the Compensation Committee’s business judgment, which is informed by the experiences of the members of the Compensation Committee, the analysis and input from, and peer group data provided by, the Compensation Committee’s independent executive compensation consultant, as well as the Compensation Committee’s assessment of overall compensation trends and trends specific to the REIT market.

COMPENSATION GOVERNANCE PRACTICES

We maintain a number of compensation and governance-related policies described below that we believe represent current best practices.

Compensation Governance Practices

 

   

Clawback policy

 

   

Anti-hedging policy

 

   

Anti-pledging policy

 

   

Robust stock ownership guidelines for executives and non-employee directors

 

   

Stock holding requirements

 

   

No single trigger change in control provisions

   

No excise tax gross-ups

 

   

Related party transactions policy

 

   

No repricing of underwater stock options without stockholder approval

 

   

Independent compensation consultant

 

   

Regular stockholder engagement

 

 

Compensation Clawback Policy

Under our clawback policy, subject to the discretion and approval of our Board, we may require reimbursement and/or cancellation of any bonus or other incentive compensation, including equity-based compensation, awarded to an executive officer, in any case where all of the following factors are present: (i) the award was predicated upon the achievement of certain financial results during the three fiscal years preceding the date of the Company’s most recent audited balance sheet (or any interim or other portion of such period of three fiscal years, or any more recent period) that were subsequently the subject of an accounting restatement due to material noncompliance by us with any financial reporting requirements under securities laws; (ii) the Board determines that the executive officer engaged in misconduct that was a substantial contributing cause to the need for the restatement; and (iii) a lower award would have been made to the executive officer based upon the restated financial results. In each instance, we may recover the individual executive officer’s entire annual bonus or any gain received from the award within the relevant period, plus a reasonable rate of interest. These clawback provisions are in addition to the provisions of the Non-Competition, Non-Solicitation and Non-Disclosure Agreements we have entered into with our NEOs, described below under “Named Executive Officer Compensation Tables — Potential Payments Upon Termination or Change in Control” that provide for the executive to forfeit certain equity awards if he fails to comply with certain restrictive covenants in our favor.

Anti-Hedging Policy

We maintain a policy that restricts our directors, officers, certain other employees and their family members from engaging in any transaction that might allow them to gain from declines in the price of Company securities. Specifically, we prohibit transactions by these individuals using derivative securities, or otherwise participating in hedging, “stop loss” or other speculative transactions involving Company securities, including short-selling Company securities, trading in any puts, calls, covered calls or other derivative products involving Company securities, or writing purchase or call options, short sales and other similar transactions.

 

58    PROXY STATEMENT    KILROY REALTY


Anti-Pledging Policy

We have a policy prohibiting our NEOs and other Section 16 officers from pledging, or using as collateral, Company securities in order to secure personal loans, lines of credit or other obligations, which includes holding Company securities in an account that has been margined. Exceptions to this policy are granted where the securities pledged (i) are not needed to satisfy the minimum ownership level required by the Company’s stock ownership guidelines, as discussed below, (ii) do not total more than 10% of the individual’s total beneficial ownership of Company securities and (iii) are not utilized as part of any hedging strategy that would potentially immunize the individual against economic exposure to such securities. In addition, our Board may grant other exceptions to this policy in such circumstances as it may consider appropriate; however, no such other exceptions have been made.

Minimum Stock Ownership Guidelines

As part of our compensation philosophy, we believe that our NEOs should hold a significant amount of the Company’s stock to help align their long-term interests with those of our stockholders. Accordingly, we maintain minimum stock ownership guidelines applicable to all of our NEOs as reflected in the table below. Under the guidelines, each NEO has six years from the point of first being subject to the guidelines to satisfy the minimum guideline level of ownership. As of December 31, 2018, all of our NEOs had met the minimum required level of ownership.

 

Named Executive

  

Ownership

Requirement

as a % of

Base Salary

  

Ownership

Requirement

Met as of

December 31,

2018

 

     

 

John Kilroy

 

   600%    Yes     

 

Jeffrey Hawken

 

   300%    Yes     

 

Tyler Rose

 

   300%    Yes     

 

Stephen Rosetta

 

   300%    Yes     

 

Justin Smart

 

   300%    Yes   

Stock Holding Requirements

Our stock ownership guidelines also provide that, if an executive falls short of the applicable level of stock ownership, the executive is expected to hold (and not sell) at least 50% of the net shares acquired upon exercise, vesting or payment, as the case may be, of any equity award granted by us to the executive. “Net shares” for this purpose means the total number of shares acquired by the executive pursuant to the award, after reduction for shares having a fair market value equal to the exercise price of the award (in the case of a stock option) and shares having a fair market value equal to the executive’s expected tax liability resulting from the award.

No Single Trigger Change in Control Severance Provisions

None of our executives have the benefit of any “single trigger” severance or equity award acceleration arrangements, meaning that severance benefits and accelerated vesting of equity awards are not triggered simply because a change in control transaction occurs.

No Excise Tax Gross-Ups

None of our executives’ agreements with the Company provide for tax “gross-up” payments.

 

KILROY REALTY    PROXY STATEMENT    59


Tax Considerations

Section 162(m) of the Internal Revenue Code generally prohibits a publicly-held company from deducting compensation paid to a current or former named executive officer that exceeds $1 million during the tax year. Certain awards granted before November 2, 2017 that were based upon attaining pre-established performance measures that were set by the Compensation Committee under a plan approved by our stockholders, as well as amounts payable to former executives pursuant to a written binding contract that was in effect on November 2, 2017, may qualify for an exception to the $1 million deductibility limit.

The Compensation Committee notes this deductibility limitation as one of the factors in its consideration of compensation matters. However, the Compensation Committee generally has the flexibility to take any compensation-related actions that it determines are in the Company’s and its stockholders’ best interest, including designing and awarding compensation for our executive officers that is not fully deductible for tax purposes. In addition, we believe that we qualify as a REIT under the Internal Revenue Code and are not subject to federal income taxes, meaning that the payment of compensation that is not deductible under Section 162(m) should not have a material adverse consequence to us, provided we continue to remain qualified as a REIT under the Internal Revenue Code.

 

60    PROXY STATEMENT    KILROY REALTY


COMPENSATION COMMITTEE

MATTERS

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed our Compensation Discussion and Analysis section with management and, based on the review and discussions, recommended to the Board that the Compensation Discussion and Analysis section be included in this Proxy Statement on Schedule 14A.

Executive Compensation Committee

Edward Brennan, PhD, Chair

Jolie Hunt

Gary Stevenson

The foregoing report of the Compensation Committee is not soliciting material, is not deemed filed with the SEC and is not incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act, whether made before or after the date of this Proxy Statement and irrespective of any general incorporation language in such filing.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Dr. Brennan, Mr. Stevenson and Ms. Hunt were members of the Compensation Committee during all of 2018. No one who served on the Compensation Committee at any time during 2018 is or has been an executive officer of the Company or had any relationships requiring disclosure by the Company under the rules of the SEC requiring disclosure of certain relationships and related party transactions. None of our executive officers who served as a director of the Company or as a member of the Compensation Committee during the year ended December 31, 2018 served as a director or a member of a compensation committee (or other committee serving an equivalent function) for any other entity.

 

KILROY REALTY    PROXY STATEMENT    61


NAMED EXECUTIVE OFFICER

COMPENSATION TABLES

The Summary Compensation Table quantifies the value of the different forms of compensation earned by or awarded to our NEOs for 2016, 2017 and 2018. The primary elements of each NEO’s total compensation reported in the table are base salary, a short-term incentive (annual cash bonus) and long-term incentive equity awards. Our NEOs also received the other benefits listed in column (i) of the Summary Compensation Table, as further described in the footnotes to the table.

The Summary Compensation Table should be read in conjunction with the tables and narrative descriptions that follow. A description of the material terms of each NEO’s employment agreement regarding base salary and short-term incentive amounts is provided immediately following the Summary Compensation Table. The Grants of Plan-Based Awards table, and the accompanying disclosure following that table, provide information regarding the cash and equity awards granted to our NEOs in 2018. The Outstanding Equity Awards at Fiscal Year End and Option Exercises and Stock Vested tables provide further information on the NEOs’ potential realizable value and actual value realized with respect to their equity awards. Additional information regarding the compensation realized by our CEO in 2018 can be found in the “CEO Realized Compensation” section of the CD&A on page 52.

 

62    PROXY STATEMENT    KILROY REALTY


SUMMARY COMPENSATION TABLE — 2016, 2017 AND 2018

The following table sets forth summary information regarding compensation of our NEOs for all services rendered to us in all capacities in 2016, 2017 and 2018.

 

Name & Principal

Position(s)

  Year   Salary ($)     Bonus
($)
    Stock
Awards
(1)
($)
    Option
Awards
($)
   

Non-Equi-
ty Incen-
tive Plan
Compen-
sation
(2)
($)

 

    Change in
Pension Value &
Non-qualified De-
ferred Compensa-
tion Earnings ($)
    All Other
Compen-
sation
(3) ($)
    Total(4) ($)

 

(a)

 

 

(b)

 

 

(c)

 

   

(d)

 

   

(e)

 

   

(f)

 

   

(g)

 

   

(h)

 

   

(i)

 

   

(j)

 

      

 

John Kilroy

 

  2018   

 

  $ 1,225,000           $ 37,924,107           $ 3,775,000             $700,667     $ 43,624,774      

President and Chief

Executive Officer

 

 

2017

 

  $ 1,225,000           $ 5,872,397           $ 3,800,000             $531,253     $ 11,428,650      
 

 

2016

 

  $ 1,225,000           $ 5,841,535           $ 3,800,000             $520,494     $ 11,387,029    

 

Jeffrey Hawken

 

  2018   $ 675,000           $ 3,986,125           $ 1,575,000             $167,120     $ 6,403,245      

Executive Vice

President and Chief

Operating Officer

 

 

2017

 

  $ 675,000           $ 1,874,898           $ 1,600,000             $149,051     $ 4,298,949      
 

 

2016

 

  $ 675,000           $ 3,912,258           $ 1,600,000             $160,846     $ 6,348,104    

 

Tyler Rose

 

  2018   $ 550,000           $ 3,782,147           $ 675,000             $124,441     $ 5,131,588      

Executive Vice

President, Chief

Financial Officer and

Secretary

 

 

 

2017

 

  $ 500,000           $ 1,671,387           $ 700,000             $113,448     $ 2,984,835      
 

 

2016

 

  $ 500,000           $ 1,666,698           $ 700,000             $111,520     $ 2,978,218    
                   

 

Stephen Rosetta

 

  2018   $ 600,000     $ 539,435 (5)     $ 2,271,716           $ 1,200,000             $100,615     $ 4,711,766      

Executive Vice

President and Chief

Investment Officer

 

 

 

2017

 

  $ 323,077 (6)           $ 2,000,009           $ 650,000         $  52,430     $ 3,025,516    
                   
                   

 

Justin Smart

 

  2018   $ 550,000           $ 3,103,083           $ 675,000             $116,872     $ 4,444,955      

Executive Vice

President,

Development

and Construction

Services

 

 

2017

 

  $ 500,000           $ 1,519,457           $ 700,000             $110,962     $ 2,830,419      
 

 

2016

 

  $ 500,000           $ 1,515,221           $ 700,000             $112,581     $ 2,827,802    
                   
                   

 

  (1)

The amounts reported in column (e) of the table above for each year reflect the aggregate accounting fair value of stock awards granted in the applicable year as computed in accordance with FASB Accounting Standard Codification (“ASC”) Topic 718, Compensation — Stock Compensation (determined as of the grant date of the awards, as the grant date of the awards is determined for accounting purposes). For information on the assumptions used in the accounting fair value computations, refer to Note 15 “— Share-Based and Other Compensation” in the Notes to Consolidated Financial Statements in the Company’s 2018 Form 10-K filed with the SEC. The amounts included in the Summary Compensation Table above, and in the tables below in this footnote, may not be indicative of the realized value of the awards if they vest.

As discussed in the CD&A, in 2016, 2017 and 2018 the Company granted annual long-term incentive award RSUs to the NEOs, the vesting of which is subject, in part, to the Company’s performance. As required by applicable SEC rules, the accounting fair value of the performance-based RSUs awarded in these years was determined based on the probable outcome (determined as of the grant date of the awards, as the grant date of the awards is determined for accounting purposes) of the performance-based conditions applicable to the awards. For these purposes, as of the grant date of the awards (as determined for accounting purposes) we determined that, other than as to the Company TSR Percentile Ranking performance condition applicable to the awards, the “target” level of performance was the probable outcome of the applicable performance-based conditions. Accordingly, for such portion of these awards, the accounting fair value is included for the NEOs as Stock Award compensation for the year in which the grant was made based on the “target” number of shares subject to the awards. For the portion of the performance-based awards that vest based on the Company’s TSR Percentile Ranking, the accounting fair value was included for the NEOs as Stock Award compensation for the year in which the grant was made based on a Monte Carlo simulation pricing model (which probability weights multiple potential outcomes) as of such grant date of the awards. For more information on the assumptions made in the Monte Carlo simulation pricing model, refer to Note 15 “— Share-Based and Other Compensation” in the Notes to Consolidated Financial Statements in the Company’s Form 10-K for the year in which the awards were granted. Under the terms of the performance-based awards at grant, between 0% and 200% (between 0% and 262.5% in the case of the awards granted to our CEO in 2017 and 2018 and between 0% and 225% in the case of the award granted to our CEO in 2016) of the target number of shares subject to the awards can vest, based on performance and the other vesting conditions applicable to the awards. The following tables present the accounting fair value (determined as described above as of the grant date of the awards) of the annual long-term incentive performance-based RSUs awarded to the NEOs in 2016, 2017 and 2018 under two sets of assumptions: (a) assuming that the target level of performance would be achieved as to the performance-based conditions other than the Company’s TSR Percentile Ranking, which we originally judged to be the probable outcome, and using the Monte Carlo simulation pricing model to value the portion of the awards that vest based on the Company’s TSR Percentile Ranking, and (b) assuming that the highest level of performance would be achieved (200% of the target level for awards other than the CEO’s; 262.5% in the case of the awards granted to our CEO in 2017 and 2018 and 225% in the case of the award granted to our CEO in 2016).

 

KILROY REALTY    PROXY STATEMENT    63


 

2016 Annual Performance-Based RSUs

 

                            

 

Named Officer

  

 

Grant Date Fair
Value (Based on
Probable Outcome)

    

 

Grant Date Fair
Value (Based on
Maximum
Performance)

 

           

 

John Kilroy

 

     $4,341,488        $9,562,572             

 

Jeffrey Hawken

 

     $1,252,678        $2,468,047             

 

Tyler Rose

 

     $1,116,656        $2,200,055             

 

Stephen Rosetta

 

     $              0        $              0             

 

Justin Smart

 

     $1,015,168        $2,000,101       

 

2017 Annual Performance-Based RSUs

 

                            

 

Named Officer

  

 

Grant Date Fair
Value (Based on
Probable Outcome)

    

 

Grant Date Fair
Value (Based on
Maximum
Performance)

 

           

 

John Kilroy

 

     $4,372,330        $11,156,381             

 

Jeffrey Hawken

 

     $1,257,849        $  2,468,040             

 

Tyler Rose

 

     $1,121,313        $  2,200,140             

 

Stephen Rosetta

 

     $              0        $                0             

 

Justin Smart

 

     $1,019,383        $  2,000,142       

 

2018 Annual Performance-Based RSUs

 

                            

 

Named Officer

  

 

Grant Date Fair
Value (Based on
Probable Outcome)

    

 

Grant Date Fair
Value (Based on
Maximum
Performance)

 

           

 

John Kilroy

 

     $4,651,677        $11,812,517             

 

Jeffrey Hawken

 

     $1,261,696        $  2,468,058             

 

Tyler Rose

 

     $1,124,708        $  2,200,091             

 

Stephen Rosetta

 

     $   817,982        $  1,600,091             

 

Justin Smart

 

     $1,022,444        $  2,000,047       

 

64    PROXY STATEMENT    KILROY REALTY


As discussed in the CD&A, the Company awarded additional RSUs to the NEOs in December 2018, the vesting of which is subject, in part, to the Company’s performance. For these purposes, the accounting fair value of the RSUs awarded in December 2018 that are subject to performance-based vesting conditions was included for the NEOs as Stock Award compensation for 2018 based on a Monte Carlo simulation pricing model (which probability weights multiple potential outcomes) as of the grant date of the awards. For more information on the assumptions made in this Monte Carlo simulation pricing model, refer to Note 15 “— Share-Based and Other Compensation” in the Notes to Consolidated Financial Statements in the Company’s 2018 Form 10-K filed with the SEC. Under the terms of these awards at grant, between 0% and 200% of the target number of shares subject to the awards can vest, based on performance and the other vesting conditions applicable to the awards. The following table presents the accounting fair value (determined as described above as of the grant date of the awards) of the December 2018 PRSUs awarded to the NEOs under two sets of assumptions: (a) using the Monte Carlo simulation pricing model, and (b) assuming that the highest level of performance would be achieved (200% of the target level).

 

December 2018 PRSUs

 

                            

 

Named Officer

  

 

Grant Date Fair
Value (Based on
Probable Outcome)

    

 

Grant Date Fair
Value (Based on
Maximum
Performance)

 

           

 

John Kilroy

 

     $18,272,486        $33,000,120             

 

Jeffrey Hawken

 

     $  1,107,417        $  1,999,996             

 

Tyler Rose

 

     $  1,107,417        $  1,999,996             

 

Stephen Rosetta

 

     $     553,743        $  1,000,060             

 

Justin Smart

 

     $     830,580        $  1,500,028       

 

  (2)

As described in the CD&A, each of the NEOs received a short-term incentive under the Company’s 2018 annual incentive program in the amount reported in column (g) of the table.

 

  (3)

The following table identifies the items reported in the “All Other Compensation” column of the table for each NEO in 2018:

 

Executive

Officers

   Employee
Health-
care Pre-
miums
   Medical
Allow-
ance
     Life &
Disability
Insurance
Premiums
    

Company
Contribu-
tions to
Deferred
Compen-
sation
Plan

 

   Company
Contribu-
tions to
401(k)
    

Travel
and
Automo-
bile-Re-
lated
Expens-

es

    

Home
Office

/ Other
Expens-
es

     Finan-
cial
Planning
Services
     Club
Dues
     Total
Benefits
 

 

John Kilroy

 

   $6,368      $25,000        $425,332      $122,500      $12,250        $86,821        $5,750               $16,646        $700,667  

 

Jeffrey Hawken

 

   $6,368      $25,000             $  67,500      $12,250        $33,832        $3,562        $5,263        $13,345        $167,120  

 

Tyler Rose

 

   $6,368      $25,000             $  55,000      $12,250        $20,334        $2,431        $3,058               $124,441  

 

Stephen Rosetta

 

   $6,368                  $  60,000      $  9,250        $22,289        $2,708                      $100,615  

 

Justin Smart

 

   $6,368      $25,000             $  55,000      $12,250        $18,206        $     48                      $116,872  

As discussed under “Certain Relationships and Related Transactions,” during 2018 the Company was a party to a time-sharing agreement with each of the NEOs for the lease of an aircraft that is owned by the Company. Our senior executives are actively involved in managing and overseeing the Company’s activities over a broad geographic area. The Company owns the aircraft to help maximize the business time and effectiveness of our executive team and avoid the time and scheduling constraints associated with commercial air travel. Such NEOs may, pursuant to the time-sharing agreement, use the aircraft for personal travel when the aircraft is not being used for business purposes. In addition, if there is open space available on a flight that has been arranged for business purposes, a non-business guest of a NEO may on occasion travel on that flight. Except for $4,287 and $433 of costs included in the travel column above for Messrs. Kilroy and Hawken, respectively, the aggregate incremental costs, as discussed under “Certain Relationships and Related Transactions,” of any personal use of the aircraft by an NEO during 2018 were paid for by the NEO pursuant to the NEO’s time-sharing agreement.

 

  (4)

The amounts reported in column (j) of the table above include amounts that have been deferred under our Deferred Compensation Plan. For further information regarding our Deferred Compensation Plan, see above under “Compensation Discussion and Analysis — Deferred Compensation Plan.” For an additional description of the amounts deferred, see the Nonqualified Deferred Compensation table on page 76.

 

  (5)

Mr. Rosetta was granted a $2,000,000 cash-settled new hire award in 2017. The award was credited under the Deferred Compensation Plan and vests, subject to continued service, over four years. The amount included in this column represents the portion of the award that vested in 2018, including the earnings credited under the Deferred Compensation Plan on such portion of the award through the vesting date.

 

  (6)

Mr. Rosetta’s annualized rate of base salary for 2017 was $600,000. The actual salary paid to Mr. Rosetta for 2017 was $323,077 as he joined the Company mid-year.

 

KILROY REALTY    PROXY STATEMENT    65


Employment Agreements — Salary and Short-Term Incentive (Annual Cash Bonus) Amounts

We have entered into employment agreements with each of Messrs. Kilroy, Hawken, Rose and Smart. During 2018, we did not have an employment agreement with Mr. Rosetta.

John Kilroy

As discussed in the CD&A, Mr. Kilroy entered into a new amended and restated employment agreement with the Company effective December 27, 2018. The term of Mr. Kilroy’s amended and restated employment agreement is scheduled to end on December 31, 2023, subject to earlier termination in connection with a termination of Mr. Kilroy’s employment, and is not subject to automatic extensions of the term. The agreement provides for an initial annual base salary of $1,225,000 and that the Compensation Committee will review Mr. Kilroy’s base salary each year during the term of the agreement and has discretion to increase (but not decrease) his base salary level. The agreement also provides for Mr. Kilroy’s target short-term incentive award (annual cash bonus) to be set at $3,000,000 and his annual equity incentive award to be set at $6,000,000, with the Compensation Committee to determine Mr. Kilroy’s actual cash and equity incentive award amounts each year. The agreement also provides for Mr. Kilroy to participate in the Company’s long-term incentive plan applicable to senior executives, pursuant to which the Compensation Committee has the discretion to grant certain equity awards, as well as participation in the Company’s executive and employee compensation and benefit plans and programs, reimbursement of business expenses, an auto allowance, an annual physical examination, an annual payment equal to $130,768 for Mr. Kilroy’s supplemental life insurance premiums and an annual payment up to $250,000 for Mr. Kilroy’s disability insurance premiums. The agreement does not provide for tax gross-up payments from us for any elements of compensation, including for excise taxes imposed pursuant to Sections 280G and 4999 of the Internal Revenue Code. Provisions of Mr. Kilroy’s agreement relating to outstanding equity incentive awards and post-termination of employment benefits are discussed under the applicable sections of this Proxy Statement.

Jeffrey Hawken

Mr. Hawken entered into an amended and restated employment agreement with the Company effective December 31, 2015. The term of Mr. Hawken’s amended and restated employment agreement was scheduled to end on March 1, 2019, but was extended through March 1, 2020 by the agreement of Mr. Hawken and the Company, subject to earlier termination in connection with a termination of Mr. Hawken’s employment, and is not subject to automatic extensions of the term. The agreement provides for an initial annual base salary of $675,000 and that the Compensation Committee will review Mr. Hawken’s base salary each year during the term of the agreement and has discretion to increase (but not decrease) his base salary level. The agreement also provides for Mr. Hawken’s target short-term incentive award to be set at 200% of his annual base salary and his annual equity incentive award to have a target grant date fair value of not less than 200% of his annual base salary. The agreement also provides for Mr. Hawken to participate in any outperformance incentive award plan applicable to senior executives that may be adopted by the Board, as well as participation in the Company’s executive and employee compensation and benefit plans and programs, including an auto allowance, an annual physical examination and an annual payment up to $25,000 for tax and financial planning services. The agreement does not provide for tax gross-up payments from us for any elements of compensation, including for excise taxes imposed pursuant to Sections 280G and 4999 of the Internal Revenue Code. Provisions of Mr. Hawken’s agreement relating to outstanding equity incentive awards and post-termination of employment benefits are discussed under the applicable sections of this Proxy Statement.

 

66    PROXY STATEMENT    KILROY REALTY


Tyler Rose

Mr. Rose entered into an employment agreement with the Company effective January 28, 2016. The term of the employment agreement is scheduled to end on March 1, 2020, subject to earlier termination in connection with a termination of Mr. Rose’s employment and to automatic one-year extensions each year unless either party provides notice that the agreement will not be extended. The employment agreement provides for an initial annual base salary of $500,000 and provides that the Compensation Committee will review Mr. Rose’s base salary each year during the term of the agreement and has discretion to increase (but not decrease) his base salary level. The agreement also provides for Mr. Rose’s target short-term incentive award to be set at not less than 100% of his annual base salary and his annual equity incentive award to have a target grant date value of not less than 100% of his annual base salary. The agreement also provides for Mr. Rose to participate in any outperformance incentive award plan applicable to senior executives that may be adopted by the Board, as well as participation in the Company’s executive and employee compensation and benefit plans and programs and reimbursement of business expenses. The agreement does not provide for tax gross-up payments from us for any elements of compensation, including for excise taxes imposed pursuant to Sections 280G and 4999 of the Internal Revenue Code. Provisions of Mr. Rose’s agreement relating to outstanding equity incentive awards and post-termination of employment benefits are discussed under the applicable sections of this Proxy Statement.

Justin Smart

Mr. Smart entered into an employment letter agreement with the Company dated January 28, 2016. The term of the employment letter agreement is scheduled to end on March 1, 2020, subject to earlier termination in connection with a termination of Mr. Smart’s employment and to automatic one-year extensions each year unless either party provides notice that the letter agreement will not be extended. The agreement provides for an initial base salary of $500,000 and provides that the Compensation Committee will review Mr. Smart’s base salary each year during the term of the agreement and has discretion to increase (not decrease) his base salary level. The agreement also provides for Smart’s target short-term incentive award to be set at not less than 100% of his annual base salary and his annual equity incentive award to have a target grant date value of not less than 100% of his annual base salary. The agreement also provides for Mr. Smart to participate in the Company’s executive and employee benefit plans and programs. The agreement does not provide for tax gross-up payments from us for any elements of compensation, including for excise taxes imposed pursuant to Sections 280G and 4999 of the Internal Revenue Code. Provisions of Mr. Smart’s agreement relating to outstanding equity incentive awards and post-termination of employment benefits are discussed under the applicable sections of this Proxy Statement.

 

KILROY REALTY    PROXY STATEMENT    67


GRANTS OF PLAN-BASED AWARDS — 2018

The following table sets forth summary information regarding the incentive awards granted to our NEOs during 2018.

 

     

Estimated Future

Payouts

Under Non-Equity Incentive

Plan Awards

 

 

 

 

   

 

Estimated Future

Payouts

Under Equity

Incentive Plan Awards

 

 

 

 

 

 

       

 

Name

 

 

Grant Date(1)     

 

 

Threshold
($)

   

 

Target

($)

   

 

Maximum
($)

   

 

Threshold
(#)(2)

   

 

Target
(#)

   

 

Maxi-
mum (#)

   

 

All
Other
Stock
Awards:
Number
of

Shares
of Stock
or Units
(#)

   

 

All
Other
Options
Awards;
Number
of Se-
curities
Under-
lying
Options
(#)

 

   

 

Exercise

of Base
Price of

Option

Awards

($/Sh)

   

 

Grant Date
Fair Value
of Stock
and Option
Awards

($)(3)

 

 

(a)

 

  (b)

 

   

 

(c)

 

 

 

   

 

(d)

 

 

 

   

 

(e)

 

 

 

   

 

(f)

 

 

 

   

 

(g)

 

 

 

   

 

(h)

 

 

 

   

 

(i)

 

 

 

   

 

(j)

 

 

 

   

 

(k)

 

 

 

   

 

(l)

 

 

 

 

John

Kilroy

 

 

02/14/2018

 

                                          22,570                 $ 1,500,002  
 

 

02/14/2018

 

                      16,928         67,710       177,738                       $ 4,651,677  
 

 

02/14/2018

 

        $ 3,000,000     $ 4,500,000                                            
 

 

12/27/2018

 

                      99,799       266,130       532,260                       $ 18,272,486  
 

 

12/27/2018

 

                                        217,741                 $ 13,499,942  

 

Jeffrey

Hawken

 

 

02/14/2018

 

                                            9,284                 $ 617,015  
 

 

02/14/2018

 

                        9,284         18,568         37,135                       $ 1,261,696  
 

 

02/14/2018

 

        $ 1,350,000     $ 2,025,000                                            
 

 

12/27/2018

 

                        6,048         16,129         32,258                       $ 1,107,417  
 

 

12/27/2018

 

                                          16,129                 $ 999,998  

 

Tyler

Rose

 

 

02/14/2018

 

                                            8,276                 $ 550,023  
 

 

02/14/2018

 

                        8,276         16,552         33,103                       $ 1,124,708  
 

 

02/14/2018

 

        $ 550,000     $ 825,000                                            
 

 

12/27/2018

 

                        6,048         16,129         32,258                       $ 1,107,417  
 

 

12/27/2018

 

                                          16,129                 $ 999,998  

 

Stephen

Rosetta

 

 

02/14/2018

 

                                            6,019                 $ 400,023  
 

 

02/14/2018

 

                        6,019         12,038         24,075                       $ 817,982  
 

 

02/14/2018

 

        $ 1,200,000     $ 1,800,000                                            
 

 

12/27/2018

 

                        3,024           8,065         16,130                       $ 553,743  
 

 

12/27/2018

 

                                            8,064                 $ 499,968  

 

Justin

Smart

 

 

02/14/2018

 

                                            7,524                 $ 500,045  
 

 

02/14/2018

 

                        7,524         15,047         24,075                       $ 1,022,444  
 

 

02/14/2018

 

        $ 550,000     $ 825,000                                            
 

 

12/27/2018

 

                        4,536         12,097         24,194                       $ 830,580  
 

 

12/27/2018

 

                                          12,097                 $ 750,014  

 

  (1)

The table includes the target and maximum 2018 short-term incentives for the NEOs, as well as the time-based RSUs and performance-based RSUs that were granted to each of the NEOs in 2018.

 

  (2)

The threshold level of the performance-based RSUs granted in February 2018 is presented based on achieving the threshold level of FFO Per Share for 2018 and without giving effect to any adjustment for the Company’s TSR Percentile Ranking or Average Debt to EBITDA Ratio over the three-year performance period. The threshold level of the December 2018 PRSUs is presented based on achieving the threshold level of TSR performance for the initial three-year performance period and not achieving the threshold level of TSR performance for the entire four-year performance period.

 

  (3)

These amounts present the aggregate accounting fair value of the equity awards computed in accordance with FASB ASC Topic 718, Compensation — Stock Compensation determined as of the grant date of the awards. For information on the assumptions used in the accounting fair value computations, refer to Note 15 “— Share-Based Compensation” in the Notes to Consolidated Financial Statements in the Company’s 2018 Form 10-K filed with the SEC. Also see footnote (1) to the Summary Compensation Table above.

 

 

68    PROXY STATEMENT    KILROY REALTY


DESCRIPTION OF PLAN-BASED AWARDS

Columns (d) and (e) of the Grants of Plan-Based Awards table above report the target and maximum, respectively, short-term incentive award levels for our NEOs for 2018. The 2018 short-term incentive awards actually paid to our NEOs are presented in the Summary Compensation Table under the heading “Non-Equity Incentive Plan Compensation.” See the “Short-Term Incentives” section of the CD&A for a discussion of our performance measurement framework and the 2018 short-term incentive awards for our NEOs.

Each of the equity incentive awards reported in the above table was granted under, and is subject to, the terms of the 2006 Plan. The Compensation Committee administers the 2006 Plan. The Compensation Committee has authority to interpret the plan provisions and to make all required determinations under the plan. Awards granted under the plan are generally only transferable by the NEO by will or the laws of descent and distribution.

Each NEO may be entitled to accelerated vesting of his outstanding equity incentive awards upon certain terminations of employment with the Company or if the awards are to be terminated in connection with a change in control of the Company. The terms of this accelerated vesting are described in this section and below under “— Potential Payments Upon Termination or Change in Control.”

Each RSU subject to the awards described below represents a contractual right to receive one share of our common stock. Payment will generally be made as the RSUs become vested, although the NEO may generally elect to have the RSUs paid on a deferred basis. Subject to the NEO’s employment agreement or the award agreement evidencing the RSUs, if an NEO’s employment terminates for any reason during the vesting period, any RSUs that have not previously vested will terminate.

The NEOs do not have the right to vote or dispose of the RSUs subject to these awards, but do have the right to receive dividend equivalents (in cash or stock) based on the amount of dividends (if any) paid by the Company during the term of the award on a number of shares equal to the number of outstanding and unpaid RSUs then subject to the award. Any such dividend equivalents are credited in the form of additional RSUs that are subject to the same vesting requirements as the RSUs to which they relate.

Time-Based RSUs

Column (i) of the Grants of Plan-Based Awards table above reports awards of RSUs granted to our NEOs in February 2018 and December 2018 that vest based solely on the executive’s continued employment or service with the Company. Each of the annual long-term incentive awards granted in February 2018 is subject to a three-year vesting schedule, with one-third of the award vesting on January 5th in each of the three years following the year of the grant date. Each of the December 2018 Time-Based RSU awards will vest in two equal installments on January 5, 2022 and January 5, 2023.

Performance-Based RSUs

Columns (f) through (h) of the Grants of Plan-Based Awards table above report awards of performance-based RSUs granted to our NEOs in February 2018 and December 2018.

February 2018 Awards. As described more fully above under “Compensation Discussion and Analysis — 2018 Named Executive Officer Compensation,” the percentage of performance-based RSUs granted in February 2018 that become eligible to vest range from 0% to 200% of the RSUs subject to the award (0% to 262.5% in the case of the award granted to our CEO) depending on the Company’s FFO Per Share for 2018 and its TSR Percentile Ranking relative to the Company’s peer group and Average Debt to EBITDA Ratio for the 2018-2020 performance period.

For 2018, the FFO Per Share performance condition was determined to have been satisfied at 150% of the target level (and 175% of target level for the award to our CEO). Accordingly, between approximately 100% and 200% of the target number of RSUs subject to each award (87.5% to 262.5% in the case of the award granted to our CEO) is eligible to vest based on the Company’s TSR Percentile Ranking and Average Debt to EBITDA Ratio for 2018-2020 and on the NEO’s continued employment through the date the Compensation Committee determines the level of achievement of the performance goals.

 

KILROY REALTY    PROXY STATEMENT    69


In general, for purposes of these performance awards, “FFO Per Share” means the Company’s funds from operations during 2018, determined in accordance with the White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts, adjusted to exclude the impact of acquisition-related expenses, non-cash charges, non-budgeted compensation costs, any expense associated with variable accounting for certain equity-based awards, the impact of mergers, dispositions of property (to the extent that such dispositions exceed the midpoint of the range estimated in the Company’s business plan for the applicable year) and similar corporate transactions, and the impact of other extraordinary items not contemplated by the Compensation Committee on the grant date, and including revenue that would have been included in earnings but is not recognized due to tenant delays and the impact of any lost revenue from a certain tenant default, divided by the weighted average common shares of the Company outstanding for 2018, calculated on a diluted basis, including participating share-based awards (i.e., nonvested stock and time-based RSUs), the dilutive impact of stock options and contingently issuable shares and assuming the exchange of all common limited partnership units outstanding. If the Company’s FFO Per Share for 2018 was less than $3.45, the award would be forfeited in full. If the Company’s FFO Per Share for 2018 was $3.45, the percentage of the target number of shares subject to the award that will become “Banked Shares” would be 50% (25% in the case of the award granted to our CEO). If the Company’s FFO Per Share for 2018 was $3.55 (target), the percentage of the target number of shares subject to the award that will become Banked Shares would be 100%. If the Company’s FFO Per Share for 2018 was $3.65 or greater, the percentage of the target number of shares subject to the award that will become Banked Shares would be 150% (175% in the case of the award granted to our CEO). For an FFO Per Share amount between these levels, the number of Banked Shares would be determined on a pro-rata basis.

In general, for purposes of these awards, the “TSR Percentile Ranking” for the performance period (2018-2020) will be determined as follows: the percentile ranking of the Company’s TSR for the performance period will be determined against the TSRs for the performance period for the companies included in the SNL US REIT Office Index on the first date of the performance period that remain included in such Index through the end of the performance period. These calculations will be based on average closing stock prices during the twenty-trading day period immediately prior to the start of the performance period and the twenty-trading day period at the end of the performance period, assuming dividend reinvestment and adjusted to mitigate the impact of stock splits, stock dividends and reverse stock splits. If the TSR Percentile Ranking is the 80th percentile or greater, the TSR modifier as to 50% of the Banked Shares will be 133.3333% (150% in the case of the award granted to our CEO). If the TSR Percentile Ranking is the 40th percentile or greater, but equal to or less than the 60th percentile, the TSR modifier as to 50% of the Banked Shares will be 100%. If the TSR Percentile Ranking is the 20th percentile or lower, the TSR modifier as to 50% of the Banked Shares will be 66.6667% (50% in the case of the award granted to our CEO). For a TSR Percentile Ranking between these levels, the TSR modifier will be determined on a pro-rata basis.

In general, for purposes of these awards, the “Average Debt to EBITDA Ratio” for the performance period (2018-2020) will be determined as the average of the Company’s Annual Debt to EBITDA Ratio (as defined below) for each of 2018, 2019 and 2020. The Company’s “Annual Debt to EBITDA Ratio” will be determined as the average of the Company’s consolidated debt balances at the end of each quarter of the applicable year, divided by the Company’s EBITDA for the applicable year. The Company’s EBITDA will be determined as the Company’s consolidated earnings before interest expense, depreciation and amortization, gain/loss on early extinguishment of debt, gains and losses on depreciable real estate, net income attributable to noncontrolling interests, preferred dividends and distributions, original issuance costs of redeemed preferred stock and preferred units, and impairment losses. EBITDA will be adjusted to exclude the impact of acquisition-related expenses, non-cash charges, non-budgeted compensation costs, any expense associated with variable accounting for certain equity-based awards, the impact of mergers, dispositions of property (to the extent that such dispositions exceed the midpoint of the range estimated in the Company’s business plan for the applicable year) and similar corporate transactions, and the impact of other extraordinary items not contemplated by the Compensation Committee on the grant date, and including revenue that would have been included in earnings but is not recognized due to tenant delays. If the Average Debt to EBITDA Ratio is 6.75x or less, the debt to EBITDA modifier as to 50% of the Banked Shares will be 133.3333% (150% in the case of the award granted to our CEO). If the Average Debt to EBITDA Ratio is 7.25x, the debt to EBITDA modifier as to 50% of the Banked Shares will be 100%. If the Average Debt to EBITDA Ratio is 7.75x or higher, the debt to EBITDA modifier as to 50% of the Banked Shares will be 66.6667% (50% in the case of the award granted to our CEO). For an Average Debt to EBITDA Ratio between these levels, the debt to EBITDA modifier will be determined on a pro-rata basis.

 

70    PROXY STATEMENT    KILROY REALTY


December 2018 Awards. As described more fully above under “Compensation Discussion and Analysis — 2018 Named Executive Officer Compensation,” the percentage of the December 2018 PRSUs that become eligible to vest range from 0% to 200% of the PRSUs subject to the award depending on the Company’s Relative TSR performance for the 2019-2022 performance period.

In general, for purposes of these December 2018 PRSU awards, the “Relative TSR” for the applicable performance period will be determined as the Company’s TSR for the applicable performance period less the compound annual growth rate of an investment in the SNL US REIT Office Index for the applicable performance period (the “Index TSR”). These calculations will be based on average closing stock prices during the twenty-trading day period immediately prior to the start of the performance period and the twenty-trading day period at the end of the performance period, assuming dividend reinvestment and adjusted to mitigate the impact of stock splits, stock dividends and reverse stock splits.

The Relative TSR will first be measured for the performance period from 2019 to 2021 (the “Initial Performance Period”) to determine the “Initial Number of PRSUs” eligible to vest. If the Relative TSR for the Initial Performance Period is less than -100 basis points, 0% of the target number of PRSUs subject to the award will be deemed to be the Initial Number of PRSUs. If the Relative TSR for the Initial Performance Period is -100 basis points, 50% of the target number of PRSUs subject to the award will be deemed to be the Initial Number of PRSUs. If the Relative TSR for the Initial Performance Period is 0 basis points, 75% of the target number of PRSUs subject to the award will be deemed to be the Initial Number of PRSUs. If the Relative TSR for the Initial Performance Period is 100 basis points, 100% of the target number of PRSUs subject to the award will be deemed to be the Initial Number of PRSUs. If the Relative TSR for the Initial Performance Period is 300 basis points or greater, 200% of the target number of PRSUs subject to the award will be deemed to be the Initial Number of PRSUs. For a Relative TSR between these levels, the Initial Number of PRSUs will be determined on a pro-rata basis. 75% of the Initial Number of PRSUs will vest on January 5, 2022, assuming continued employment through that date.

The Relative TSR will again be measured for the final performance period from 2019 to 2022 (the “Final Performance Period”) to determine the “Final Number of PRSUs” eligible to vest. If the Relative TSR for the Final Performance Period is -100 basis points or less, the Final Number of PRSUs will equal the Initial Number of PRSUs reduced by 25% (i.e. no additional RSUs will be eligible to vest). If the Relative TSR for the Final Performance Period is 0 basis points, the Final Number of PRSUs will equal the Initial Number of PRSUs reduced by 12.5%. If the Relative TSR for the Final Performance Period is 100 basis points, the Final Number of PRSUs will equal 100% of the target number of PRSUs subject to the award (or the Initial Number of PRSUs if greater). If the Relative TSR for the Final Performance Period is 300 basis points or greater, the Final Number of PRSUs will equal 200% of the target number of PRSUs subject to the award (or the Initial Number of PRSUs if greater). For Relative TSR between these levels, the Final Number of PRSUs will be determined on a pro-rata basis. The number of PRSUs that vest on January 5, 2023, assuming continued employment through that date, will equal the difference between the Final Number of PRSUs and the number of Initial Number of PRSUs that previously vested.

 

KILROY REALTY    PROXY STATEMENT    71


OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END — 2018

The following table sets forth summary information regarding the outstanding equity awards held by each of our NEOs as of December 31, 2018, including the vesting dates for the portions of these awards that had not vested as of that date.

 

          Option Awards

 

  Stock Awards

 

 

Name

 

 

Grant Date

   

 

Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable

 

 

Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable

 

 

Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options

(#)

 

 

Option
Exercise
Price

($)

 

 

Option
Expiration
Date

 

 

Number of
Shares or
Units of
Stock
That Have
Not
Vested

(#)(1)

 

 

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested

($)(2)

 

 

Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested

(#)(1)

 

 

Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested

($)(2)

 

(a)

 

   

 

(b)

 

 

 

  (c)

 

  (d)

 

  (e)

 

  (f)

 

  (g)

 

  (h)

 

  (i)

 

  (j)

 

  (k)

 

John

Kilroy

 

 

 

 

 

03/30/2012

 

 

 

 

                  14,751(3)   $     927,543
 

 

 

 

 

01/28/2016

 

 

 

 

                9,713(4)   $     610,753    
 

 

 

 

 

01/28/2016

 

 

 

 

                118,587(5)   $  7,456,751
 

 

 

 

 

02/24/2017

 

 

 

 

              13,505(6)   $     849,194    
 

 

 

 

 

02/24/2017

 

 

 

 

                  79,139(7)   $  4,976,260
 

 

 

 

 

02/14/2018

 

 

 

 

              22,992(8)   $  1,445,737    
 

 

 

 

 

02/14/2018

 

 

 

 

                120,706(9)   $  7,589,993
 

 

 

 

 

12/27/2018

 

 

 

 

            217,741(10)   $13,691,554    
 

 

 

 

 

12/27/2018

 

 

 

 

                266,130(11)   $16,734,254

 

Jeffrey

Hawken

 

 

 

 

 

04/04/2013

 

 

 

 

                    1,591(12)   $     100,042
 

 

 

 

 

01/09/2016

 

 

 

 

                    8,479(13)   $     533,160
 

 

 

 

 

01/09/2016

 

 

 

 

                4,241(14)   $     266,674    
 

 

 

 

 

01/28/2016

 

 

 

 

                3,996(4)   $     251,268    
 

 

 

 

 

01/28/2016

 

 

 

 

                  34,432(5)   $  2,165,084
 

 

 

 

 

02/24/2017

 

 

 

 

                5,556(6)   $     349,361    
 

 

 

 

 

02/24/2017

 

 

 

 

                  20,874(7)   $  1,312,557
 

 

 

 

 

02/14/2018