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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number: 1-12675 (Kilroy Realty Corporation)
Commission File Number: 000-54005 (Kilroy Realty, L.P.)
KILROY REALTY CORPORATION
KILROY REALTY, L.P.
(Exact name of registrant as specified in its charter)
 
 
 
 
Kilroy Realty Corporation
Maryland
95-4598246
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
 
Kilroy Realty, L.P.
Delaware
95-4612685
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

12200 W. Olympic Boulevard, Suite 200, Los Angeles, California, 90064
(Address of principal executive offices) (Zip Code)

(310) 481-8400
(Registrant's telephone number, including area code)
 
 
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Registrant
Title of each class
Name of each exchange on which registered
Ticker Symbol
Kilroy Realty Corporation
Common Stock, $.01 par value
New York Stock Exchange
KRC
Securities registered pursuant to Section 12(g) of the Act:
Registrant
Title of each class
Kilroy Realty, L.P.
Common Units Representing Limited Partnership Interests
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Kilroy Realty Corporation    Yes      No  
Kilroy Realty, L.P.         Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    
Kilroy Realty Corporation     Yes      No  
Kilroy Realty, L.P.         Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Kilroy Realty Corporation
Large accelerated filer ☑    Accelerated filer 
Non-accelerated filer ☐    Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Kilroy Realty, L.P.
Large accelerated filer ☐    Accelerated filer 
Non-accelerated filer ☑    Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Kilroy Realty Corporation Yes       No  
Kilroy Realty, L.P. Yes       No  
As of July 19, 2019, 100,972,035 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.
 



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2019 of Kilroy Realty Corporation and Kilroy Realty, L.P. Unless stated otherwise or the context otherwise requires, references to “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” mean Kilroy Realty Corporation, a Maryland corporation, and its controlled and consolidated subsidiaries, and references to “Kilroy Realty, L.P.” or the “Operating Partnership” mean Kilroy Realty, L.P., a Delaware limited partnership and its controlled and consolidated subsidiaries.
The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of June 30, 2019, the Company owned an approximate 98.0% common general partnership interest in the Operating Partnership. The remaining approximate 2.0% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of the Company. As the sole general partner of the Operating Partnership, the Company exercises exclusive and complete discretion over the Operating Partnership’s day-to-day management and control and can cause it to enter into certain major transactions, including acquisitions, dispositions, and refinancings and cause changes in its line of business, capital structure and distribution policies.
There are a few differences between the Company and the Operating Partnership that are reflected in the disclosures in this Form 10-Q. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the Company and the Operating Partnership operate as an interrelated, consolidated company. The Company is a REIT, the only material asset of which is the partnership interests it holds in the Operating Partnership. As a result, the Company generally does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing certain debt of the Operating Partnership. The Company itself is not directly obligated under any indebtedness, but generally guarantees all of the debt of the Operating Partnership. The Operating Partnership owns substantially all of the assets of the Company either directly or through its subsidiaries, conducts the operations of the Company’s business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Company, which the Company generally contributes to the Operating Partnership in exchange for units of partnership interest, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness or through the issuance of units of partnership interest.
Noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The common limited partnership interests in the Operating Partnership are accounted for as partners’ capital in the Operating Partnership’s financial statements and, to the extent not held by the Company, as noncontrolling interests in the Company’s financial statements. The Operating Partnership’s financial statements reflect the noncontrolling interest in Kilroy Realty Finance Partnership, L.P., a Delaware limited partnership (the “Finance Partnership”). This noncontrolling interest represents the Company’s 1% indirect general partnership interest in the Finance Partnership, which is directly held by Kilroy Realty Finance, Inc., a wholly owned subsidiary of the Company. The differences between stockholders’ equity, partners’ capital and noncontrolling interest result from the differences in the equity issued by the Company and the Operating Partnership, and in the Operating Partnership’s noncontrolling interest in the Finance Partnership.
We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:
Combined reports better reflect how management and the analyst community view the business as a single operating unit;
Combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
Combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and
Combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
consolidated financial statements;
the following notes to the consolidated financial statements:
Note 5, Stockholders’ Equity of the Company;
Note 7, Partners’ Capital of the Operating Partnership;

i


Note 12, Net Income Available to Common Stockholders Per Share of the Company;
Note 13, Net Income Available to Common Unitholders Per Unit of the Operating Partnership;
Note 14, Supplemental Cash Flow Information of the Company; and
Note 15, Supplemental Cash Flow Information of the Operating Partnership;
“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
—Liquidity and Capital Resources of the Company;” and
—Liquidity and Capital Resources of the Operating Partnership.”
This report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for the Company and the Operating Partnership to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.


ii


KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019
TABLE OF CONTENTS
 
 
 
 
Page
 
 
PART I – FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
  
 
  
 
  
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
  
Item 3.
 
Item 4.
 
 
 
PART II – OTHER INFORMATION
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 




PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY CORPORATION

KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share data)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements
$
1,284,582

 
$
1,160,138

Buildings and improvements
5,712,448

 
5,207,984

Undeveloped land and construction in progress
1,827,528

 
2,058,510

Total real estate assets held for investment
8,824,558

 
8,426,632

Accumulated depreciation and amortization
(1,480,766
)
 
(1,391,368
)
Total real estate assets held for investment, net
7,343,792

 
7,035,264

CASH AND CASH EQUIVALENTS
52,415

 
51,604

RESTRICTED CASH
6,300

 
119,430

MARKETABLE SECURITIES (Note 11)
25,203

 
21,779

CURRENT RECEIVABLES, NET (Note 1)
27,563

 
20,176

DEFERRED RENT RECEIVABLES, NET (Note 1)
297,358

 
267,007

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 1)
203,451

 
197,574

RIGHT OF USE GROUND LEASE ASSETS (Notes 1 and 10)
82,647

 

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 3)
55,992

 
52,873

TOTAL ASSETS
$
8,094,721

 
$
7,765,707

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured debt, net (Notes 4 and 11)
$
259,455

 
$
335,531

Unsecured debt, net (Notes 4 and 11)
2,553,651

 
2,552,070

Unsecured line of credit (Notes 4, 11 and 16)
375,000

 
45,000

Accounts payable, accrued expenses and other liabilities
385,567

 
374,415

Ground lease liabilities (Notes 1 and 10)
87,082

 

Accrued dividends and distributions (Note 16)
50,800

 
47,559

Deferred revenue and acquisition-related intangible liabilities, net
136,266

 
149,646

Rents received in advance and tenant security deposits
59,997

 
60,225

Total liabilities
3,907,818

 
3,564,446

COMMITMENTS AND CONTINGENCIES (Note 10)

 

EQUITY:
 
 
 
Stockholders’ Equity (Note 5):
 
 
 
Common stock, $.01 par value, 150,000,000 shares authorized, 100,972,035 and 100,746,988 shares issued and outstanding, respectively
1,010

 
1,007

Additional paid-in capital
3,984,867

 
3,976,953

Distributions in excess of earnings (Note 1)
(70,345
)
 
(48,053
)
Total stockholders’ equity
3,915,532

 
3,929,907

Noncontrolling Interests (Notes 1 and 6):
 
 
 
Common units of the Operating Partnership
78,463

 
78,991

Noncontrolling interests in consolidated property partnerships
192,908

 
192,363

Total noncontrolling interests
271,371

 
271,354

Total equity
4,186,903

 
4,201,261

TOTAL LIABILITIES AND EQUITY
$
8,094,721

 
$
7,765,707




See accompanying notes to consolidated financial statements.

1


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
REVENUES (Note 1)
 
 
 
 
 
 
 
Rental income
$
197,629

 
$
164,515

 
$
397,011

 
$
327,386

Tenant reimbursements

 
19,567

 

 
38,717

Other property income
2,863

 
2,990

 
4,683

 
3,791

Total revenues
200,492

 
187,072

 
401,694

 
369,894

EXPENSES
 
 
 
 
 
 
 
Property expenses (Note 1)
38,536

 
32,567

 
76,685

 
64,238

Real estate taxes
17,926

 
17,813

 
36,565

 
34,959

Provision for bad debts (Note 1)

 
5,641

 

 
5,376

Ground leases (Notes 1 and 10)
2,114

 
1,586

 
4,086

 
3,147

General and administrative expenses
19,857

 
21,763

 
43,198

 
37,322

Leasing costs (Note 1)
2,650

 

 
4,407

 

Depreciation and amortization
68,252

 
64,006

 
134,387

 
126,721

Total expenses
149,335

 
143,376

 
299,328

 
271,763

OTHER (EXPENSES) INCOME
 
 
 
 
 
 
 
Interest income and other net investment gain (Note 11)
616

 
771

 
2,444

 
805

Interest expense (Note 4)
(11,727
)
 
(12,712
)
 
(22,970
)
 
(26,210
)
Gains on sales of depreciable operating properties (Note 2)
7,169

 

 
7,169

 

      Total other (expenses) income
(3,942
)
 
(11,941
)
 
(13,357
)
 
(25,405
)
NET INCOME
47,215

 
31,755

 
89,009

 
72,726

Net income attributable to noncontrolling common units of the Operating Partnership
(871
)
 
(566
)
 
(1,571
)
 
(1,317
)
Net income attributable to noncontrolling interests in consolidated property partnerships
(4,150
)
 
(3,640
)
 
(8,341
)
 
(7,614
)
Total income attributable to noncontrolling interests
(5,021
)
 
(4,206
)
 
(9,912
)
 
(8,931
)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
42,194

 
$
27,549

 
$
79,097

 
$
63,795

Net income available to common stockholders per share – basic (Note 12)
$
0.41

 
$
0.27

 
$
0.77

 
$
0.63

Net income available to common stockholders per share – diluted (Note 12)
$
0.41

 
$
0.27

 
$
0.77

 
$
0.63

Weighted average common shares outstanding – basic (Note 12)
100,972,355

 
99,691,700

 
100,937,069

 
99,220,577

Weighted average common shares outstanding – diluted (Note 12)
101,809,541

 
100,150,856

 
101,618,953

 
99,687,682






















See accompanying notes to consolidated financial statements.

2


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited; in thousands, except share and per share/unit data)

 
Common Stock
 
Total
Stock-
holders’
Equity
 
Noncontrolling Interests
 
Total
Equity
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
BALANCE AS OF DECEMBER 31, 2018
100,746,988

 
$
1,007

 
$
3,976,953

 
$
(48,053
)
 
$
3,929,907

 
$
271,354

 
$
4,201,261

Net income
 
 
 
 
 
 
36,903

 
36,903

 
4,891

 
41,794

Opening adjustment to Distributions in Excess of Earnings upon adoption of ASC 842 (Note 1)
 
 
 
 
 
 
(3,146
)
 
(3,146
)
 
 
 
(3,146
)
Issuance of share-based compensation awards
 
 
 
 
2,210

 
 
 
2,210

 
 
 
2,210

Non-cash amortization of share-based compensation (Note 8)
 
 
 
 
8,817

 
 
 
8,817

 
 
 
8,817

Settlement of restricted stock units for shares of common stock
393,240

 
4

 
(4
)
 
 
 

 
 
 

Repurchase of common stock, stock options and restricted stock units
(175,204
)
 
(1
)
 
(12,129
)
 
 
 
(12,130
)
 
 
 
(12,130
)
Exchange of common units of the Operating Partnership
2,000

 

 
78

 
 
 
78

 
(78
)
 

Distributions to noncontrolling interests in consolidated property partnerships
 
 
 
 
 
 
 
 

 
(6,309
)
 
(6,309
)
Adjustment for noncontrolling interest
 
 
 
 
279

 
 
 
279

 
(279
)
 

Dividends declared per common share and common unit ($0.455 per share/unit)
 
 
 
 
 
 
(48,394
)
 
(48,394
)
 
(921
)
 
(49,315
)
BALANCE AS OF MARCH 31, 2019
100,967,024

 
1,010

 
3,976,204

 
(62,690
)
 
3,914,524

 
268,658

 
4,183,182

Net income
 
 
 
 
 
 
42,194

 
42,194

 
5,021

 
47,215

Issuance of share-based compensation awards

 
 
 
820

 
 
 
820

 
 
 
820

Non-cash amortization of share-based compensation (Note 8)
 
 
 
 
8,732

 
 
 
8,732

 
 
 
8,732

Exercise of stock options
1,500

 

 
64

 
 
 
64

 
 
 
64

Settlement of restricted stock units for shares of common stock
16,270

 

 

 
 
 

 
 
 

Repurchase and cancellation of common stock, stock options, and restricted stock units
(12,759
)
 

 
(793
)
 
 
 
(793
)
 
 
 
(793
)
Distributions to noncontrolling interests in consolidated property partnerships
 
 
 
 
 
 
 
 

 
(1,487
)
 
(1,487
)
Adjustment for noncontrolling interest
 
 
 
 
(160
)
 
 
 
(160
)
 
160

 

Dividends declared per common share and common unit ($0.485 per share/unit)
 
 
 
 
 
 
(49,849
)
 
(49,849
)
 
(981
)
 
(50,830
)
BALANCE AS OF JUNE 30, 2019
100,972,035

 
$
1,010

 
$
3,984,867

 
$
(70,345
)
 
$
3,915,532

 
$
271,371

 
$4,186,903



















See accompanying notes to consolidated financial statements.

3


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited; in thousands, except share and per share/unit data)

 
Common Stock
 
Total
Stock-
holders’
Equity
 
Noncontrolling Interests
 
Total
Equity
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2017
98,620,333

 
$
986

 
3,822,492

 
$
(122,685
)
 
$
3,700,793

 
$
259,523

 
$
3,960,316

Net income
 
 
 
 
 
 
36,246

 
36,246

 
4,725

 
40,971

Issuance of share-based compensation awards
 
 
 
 
1,864

 
 
 
1,864

 
 
 
1,864

Non-cash amortization of share-based compensation
 
 
 
 
5,094

 
 
 
5,094

 
 
 
5,094

Settlement of restricted stock units for shares of common stock
405,067

 
4

 
(4
)
 
 
 

 
 
 

Repurchase of common stock, stock options and restricted stock units
(192,195
)
 
(2
)
 
(13,640
)
 
 
 
(13,642
)
 
 
 
(13,642
)
Exchange of common units of the Operating Partnership
6,503

 

 
244

 
 
 
244

 
(244
)
 

Distributions to noncontrolling interests in consolidated property partnerships
 
 
 
 
 
 
 
 

 
(2,177
)
 
(2,177
)
Adjustment for noncontrolling interest
 
 
 
 
335

 
 
 
335

 
(335
)
 

Dividends declared per common share and common unit ($0.425 per share/unit)
 
 
 
 
 
 
(44,075
)
 
(44,075
)
 
(879
)
 
(44,954
)
BALANCE AS OF MARCH 31, 2018
98,839,708

 
988

 
3,816,385

 
(130,514
)
 
3,686,859

 
260,613

 
3,947,472

Net income
 
 
 
 
 
 
27,549

 
27,549

 
4,206

 
31,755

Issuance of common stock
1,719,195

 
17

 
124,130

 
 
 
124,147

 
 
 
124,147

Issuance of share-based compensation awards
 
 
 
 
589

 
 
 
589

 
 
 
589

Non-cash amortization of share-based compensation
 
 
 
 
11,503

 
 
 
11,503

 
 
 
11,503

Exercise of stock options
1,000

 

 
41

 
 
 
41

 
 
 
41

Exchange of common units of the Operating Partnership

 
1

 

 
 
 
1

 
(1
)
 

Distributions to noncontrolling interests in consolidated property partnerships
 
 
 
 
 
 
 
 

 
(4,288
)
 
(4,288
)
Adjustment for noncontrolling interest
 
 
 
 
(1,359
)
 
 
 
(1,359
)
 
1,359

 

Dividends declared per common share and common unit ($0.455 per share/unit)
 
 
 
 
 
 
(46,403
)
 
(46,403
)
 
(943
)
 
(47,346
)
BALANCE AS OF JUNE 30, 2018
100,559,903

 
$
1,006

 
$
3,951,289

 
$
(149,368
)
 
$
3,802,927

 
$
260,946

 
$
4,063,873

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





















See accompanying notes to consolidated financial statements.

4


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
 
Six Months Ended June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
89,009

 
$
72,726

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of real estate assets and leasing costs
131,982

 
124,633

Depreciation of non-real estate furniture, fixtures and equipment
2,405

 
2,088

(Recoveries of) provision for bad debts and write-offs (Note 1)
(3,091
)
 
5,376

Non-cash amortization of share-based compensation awards
14,082

 
12,267

Non-cash amortization of deferred financing costs and debt discounts and premiums
717

 
582

Non-cash amortization of net below market rents
(4,415
)
 
(5,481
)
Gain on sale of depreciable operating properties (Note 2)
(7,169
)
 

Non-cash amortization of deferred revenue related to tenant-funded tenant improvements
(8,181
)
 
(8,869
)
Straight-line rents
(29,937
)
 
(10,566
)
Amortization of right of use ground lease assets
291

 

Net change in other operating assets
(15,540
)
 
(5,513
)
Net change in other operating liabilities
(4,493
)
 
1,600

Net cash provided by operating activities
165,660

 
188,843

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for development properties and undeveloped land
(372,750
)
 
(204,039
)
Expenditures for operating properties
(61,557
)
 
(74,079
)
Net proceeds received from dispositions (Note 2)
17,271

 

Expenditures for acquisition of operating properties

 
(111,029
)
Expenditures for acquisition of undeveloped land

 
(311,299
)
Net decrease in acquisition-related deposits

 
21,000

Proceeds received from repayment of note receivable

 
15,100

Net cash used in investing activities
(417,036
)
 
(664,346
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings on unsecured revolving credit facility (Note 4)
425,000

 
505,000

Repayments on unsecured revolving credit facility (Notes 4 and 16)
(95,000
)
 
(180,000
)
Borrowings on unsecured debt

 
120,000

Principal payments and repayments of secured debt (Note 4)
(75,384
)
 
(1,768
)
Financing costs
(1,335
)
 
(1,840
)
Net proceeds from issuance of common stock

 
124,147

Repurchase of common stock and restricted stock units
(12,618
)
 
(13,642
)
Proceeds from exercise of stock options
64

 
41

Distributions to noncontrolling interests in consolidated property partnerships
(7,812
)
 
(6,485
)
Dividends and distributions paid to common stockholders and common unitholders
(93,858
)
 
(85,931
)
Net cash provided by financing activities
139,057

 
459,522

Net decrease in cash and cash equivalents and restricted cash
(112,319
)
 
(15,981
)
Cash and cash equivalents and restricted cash, beginning of period
171,034

 
66,798

Cash and cash equivalents and restricted cash, end of period
$
58,715

 
$
50,817












See accompanying notes to consolidated financial statements.

5





ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY, L.P.

KILROY REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except unit data)
 
 
June 30, 2019
 
December 31, 2018
ASSETS 
 
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements
$
1,284,582

 
$
1,160,138

Buildings and improvements
5,712,448

 
5,207,984

Undeveloped land and construction in progress
1,827,528

 
2,058,510

Total real estate assets held for investment
8,824,558

 
8,426,632

Accumulated depreciation and amortization
(1,480,766
)
 
(1,391,368
)
Total real estate assets held for investment, net
7,343,792

 
7,035,264

CASH AND CASH EQUIVALENTS
52,415

 
51,604

RESTRICTED CASH
6,300

 
119,430

MARKETABLE SECURITIES (Note 11)
25,203

 
21,779

CURRENT RECEIVABLES, NET (Note 1)
27,563

 
20,176

DEFERRED RENT RECEIVABLES, NET (Note 1)
297,358

 
267,007

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 1)
203,451

 
197,574

RIGHT OF USE GROUND LEASE ASSETS (Notes 1 and 10)
82,647

 

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 3)
55,992

 
52,873

TOTAL ASSETS
$
8,094,721

 
$
7,765,707

LIABILITIES AND CAPITAL
 
 
 
LIABILITIES:
 
 
 
Secured debt, net (Notes 4 and 11)
$
259,455

 
$
335,531

Unsecured debt, net (Notes 4 and 11)
2,553,651

 
2,552,070

Unsecured line of credit (Notes 4, 11 and 16)
375,000

 
45,000

Accounts payable, accrued expenses and other liabilities
385,567

 
374,415

Ground lease liabilities (Notes 1 and 10)
87,082

 

Accrued distributions (Note 16)
50,800

 
47,559

Deferred revenue and acquisition-related intangible liabilities, net
136,266

 
149,646

Rents received in advance and tenant security deposits
59,997

 
60,225

Total liabilities
3,907,818

 
3,564,446

COMMITMENTS AND CONTINGENCIES (Note 10)

 

CAPITAL:
 
 
 
Common units, 100,972,035 and 100,746,988 held by the general partner and 2,023,287 and 2,025,287
held by common limited partners issued and outstanding, respectively (Note 6)
3,988,538


4,003,700

Noncontrolling interests in consolidated property partnerships and subsidiaries (Note 1)
198,365


197,561

Total capital
4,186,903


4,201,261

TOTAL LIABILITIES AND CAPITAL
$
8,094,721


$
7,765,707













See accompanying notes to consolidated financial statements.

6


KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except unit and per unit data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
REVENUES (Note 1)
 
 
 
 
 
 
 
Rental income
$
197,629

 
$
164,515

 
$
397,011

 
$
327,386

Tenant reimbursements

 
19,567

 

 
38,717

Other property income
2,863

 
2,990

 
4,683

 
3,791

Total revenues
200,492

 
187,072

 
401,694

 
369,894

EXPENSES
 
 
 
 
 
 
 
Property expenses (Note 1)
38,536

 
32,567

 
76,685

 
64,238

Real estate taxes
17,926

 
17,813

 
36,565

 
34,959

Provision for bad debts (Note 1)

 
5,641

 

 
5,376

Ground leases (Note 1 and 10)
2,114

 
1,586

 
4,086

 
3,147

General and administrative expenses
19,857

 
21,763

 
43,198

 
37,322

Leasing costs (Note 1)
2,650

 

 
4,407

 

Depreciation and amortization
68,252

 
64,006

 
134,387

 
126,721

Total expenses
149,335

 
143,376

 
299,328

 
271,763

OTHER (EXPENSES) INCOME
 
 
 
 
 
 
 
Interest income and other net investment gain (Note 11)
616

 
771

 
2,444

 
805

Interest expense (Note 4)
(11,727
)
 
(12,712
)
 
(22,970
)
 
(26,210
)
Gains on sales of depreciable operating properties (Note 2)
7,169

 

 
7,169

 

Total other (expenses) income
(3,942
)
 
(11,941
)
 
(13,357
)
 
(25,405
)
NET INCOME
47,215

 
31,755

 
89,009

 
72,726

Net income attributable to noncontrolling interests in consolidated property partnerships and subsidiaries
(4,314
)
 
(3,740
)
 
(8,600
)
 
(7,818
)
NET INCOME AVAILABLE TO COMMON UNITHOLDERS
$
42,901

 
$
28,015

 
$
80,409

 
$
64,908

Net income available to common unitholders per unit – basic (Note 13)
$
0.41

 
$
0.27

 
$
0.77

 
$
0.63

Net income available to common unitholders per unit – diluted (Note 13)
$
0.41

 
$
0.27

 
$
0.77

 
$
0.63

Weighted average common units outstanding – basic (Note 13)
102,995,642

 
101,762,390

 
102,960,599

 
101,291,549

Weighted average common units outstanding – diluted (Note 13)
103,832,828

 
102,221,546

 
103,642,483

 
101,758,654
























See accompanying notes to consolidated financial statements.

7


KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(Unaudited; in thousands, except unit and per unit data)
 
 
Partners’ Capital
 
Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries
 
 
 
Number of
Common
Units
 
Common
Units
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2018
102,772,275

 
$
4,003,700

 
$
197,561

 
$
4,201,261

Net income
 
 
37,508

 
4,286

 
41,794

Opening adjustment to Partners’ Capital upon adoption of ASC 842 (Note 1)
 
 
(3,146
)
 
 
 
(3,146
)
Issuance of share-based compensation awards
 
 
2,210

 
 
 
2,210

Non-cash amortization of share-based compensation (Note 8)
 
 
8,817

 
 
 
8,817

Settlement of restricted stock units
393,240

 

 
 
 

Repurchase of common units, stock options and restricted stock units
(175,204
)
 
(12,130
)
 
 
 
(12,130
)
Distributions to noncontrolling interests in consolidated property partnerships
 
 
 
 
(6,309
)
 
(6,309
)
Distributions declared per common unit ($0.455 per unit)
 
 
(49,315
)
 
 
 
(49,315
)
BALANCE AS OF MARCH 31, 2019
102,990,311

 
3,987,644


195,538


4,183,182

Net income
 
 
42,901

 
4,314

 
47,215

Issuance of share-based compensation awards
 
 
820

 
 
 
820

Non-cash amortization of share-based compensation (Note 8)
 
 
8,732

 
 
 
8,732

Exercise of stock options
1,500

 
64

 
 
 
64

Settlement of restricted stock units
16,270

 

 
 
 

Repurchase and cancellation of common units, stock options, and restricted stock units
(12,759
)
 
(793
)
 
 
 
(793
)
Distributions to noncontrolling interests in consolidated property partnerships
 
 
 
 
(1,487
)
 
(1,487
)
Distributions declared per common unit ($0.485 per unit)
 
 
(50,830
)
 
 
 
(50,830
)
BALANCE AS OF JUNE 30, 2019
102,995,322

 
$
3,988,538

 
$
198,365

 
$4,186,903

 
Partners’ Capital
 
Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries
 
 
 
Number of
Common
Units
 
Common
Units
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2017
100,697,526

 
$
3,773,941

 
$
186,375

 
$
3,960,316

Net income
 
 
36,893

 
4,078

 
40,971

Issuance of share-based compensation awards
 
 
1,864

 
 
 
1,864

Non-cash amortization of share-based compensation
 
 
5,094

 
 
 
5,094

Settlement of restricted stock units
405,067

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