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Section 1: 8-K (8-K)

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false0001025996 0001025996 2019-10-23 2019-10-23


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 23, 2019
 
KILROY REALTY CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
 
 
Maryland
001-12675
95-4598246
(State or other jurisdiction of
incorporation or organization)
(Commission File No.)
(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
 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2.):
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
 
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2).
Emerging growth company

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.













Item 2.02    Results of Operations and Financial Condition.

On October 23, 2019, Kilroy Realty Corporation issued a press release announcing its earnings for the quarter ended September 30, 2019 and distributed certain supplemental financial information. On October 23, 2019, Kilroy Realty Corporation also posted the supplemental information on its website located at www.kilroyrealty.com. The text of the supplemental information and the related press release are furnished herewith as Exhibits 99.1 and 99.2, respectively, and are incorporated by reference herein.

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

Item 7.01    Regulation FD Disclosure.

As discussed in Item 2.02 above, Kilroy Realty Corporation issued a press release announcing its earnings for the quarter ended September 30, 2019 and distributed certain supplemental information. On October 23, 2019, Kilroy Realty Corporation also posted the supplemental information on its website located at www.kilroyrealty.com.

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

Item 9.01    Financial Statements and Exhibits.

(a)
 
Financial statements of businesses acquired: None.

 
 
 
(b)
 
Pro forma financial information: None.

 
 
 
(c)
 
Shell company transactions: None.

 
 
 
(d)
 
Exhibits:


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






SIGNATURES

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



 
 
 
Kilroy Realty Corporation
 
 
Date: October 23, 2019
 
 
 
 
 
 
 
 
 
 
 
By:
 
/s/ Merryl E. Werber
 
 
 
 
 
 
Merryl E. Werber
Senior Vice President,
Chief Accounting Officer and Controller
 
 
 
 
 
 
 
 





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Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit
Exhibit 99.1

400601633_q32019supplementalcoverpage.jpg


Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


Table of Contents
 
Page
Corporate Data and Financial Highlights
 
1
2
3
4
5
6
7
8-9
10
Portfolio Data
 
11
12-16
17
18
19-21
22
23
24
Development
 
25
26
27
Debt and Capitalization Data
 
28
29-30
31-33
34-37
This Supplemental Financial Report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include, among other things, information concerning lease expirations, debt maturities, potential investments, development and redevelopment activity, projected construction costs, dispositions and other forward-looking financial data. In some instances, forward-looking statements can be identified by the use of forward-looking terminology such as “expect,” “future,” “will,” “would,” “pursue,” or “project” and variations of such words and similar expressions that do not relate to historical matters. Forward-looking statements are based on Kilroy Realty Corporation’s current expectations, beliefs and assumptions, and are not guarantees of future performance. Forward-looking statements are inherently subject to uncertainties, risks, changes in circumstances, trends and factors that are difficult to predict, many of which are outside of Kilroy Realty Corporation’s control. Accordingly, actual performance, results and events may vary materially from those indicated or implied in the forward-looking statements, and you should not rely on the forward-looking statements as predictions of future performance, results or events. Numerous factors could cause actual future performance, results and events to differ materially from those indicated in the forward-looking statements, including, among others: global market and general economic conditions and their effect on our liquidity and financial conditions and those of our tenants; adverse economic or real estate conditions generally, and specifically, in the States of California and Washington; risks associated with our investment in real estate assets, which are illiquid, and with trends in the real estate industry; defaults on or non-renewal of leases by tenants; any significant downturn in tenants’ businesses; our ability to re-lease property at or above current market rates; costs to comply with government regulations, including environmental remediation; the availability of cash for distribution and debt service and exposure to risk of default under debt obligations; increases in interest rates and our ability to manage interest rate exposure; the availability of financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue development, redevelopment and acquisition opportunities and refinance existing debt; a decline in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing, and which may result in write-offs or impairment charges; significant competition, which may decrease the occupancy and rental rates of properties; potential losses that may not be covered by insurance; the ability to successfully complete acquisitions and dispositions on announced terms; the ability to successfully operate acquired, developed and redeveloped properties; the ability to successfully complete development and redevelopment projects on schedule and within budgeted amounts; delays or refusals in obtaining all necessary zoning, land use and other required entitlements, governmental permits and authorizations for our development and redevelopment properties; increases in anticipated capital expenditures, tenant improvement and/or leasing costs; defaults on leases for land on which some of our properties are located; adverse changes to, or 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. These factors are not exhaustive and additional factors could adversely affect our business and financial performance. For a discussion of additional factors that could materially adversely affect Kilroy Realty Corporation’s business and financial performance, see the factors included under the caption “Risk Factors” in Kilroy Realty Corporation’s annual report on Form 10-K for the year ended December 31, 2018, and its other filings with the Securities and Exchange Commission. All forward-looking statements are based on currently available information and speak only as of the dates on which they are made. Kilroy Realty Corporation assumes no obligation to update any forward-looking statement made in this Supplemental Financial Report that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws.


Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


Company Background

Kilroy Realty Corporation (NYSE: KRC), a publicly traded real estate investment trust and member of the S&P MidCap 400 Index, is one of the West Coast’s premier landlords. The Company has over 70 years of experience developing, acquiring and managing office and mixed-use real estate assets. At September 30, 2019, the Company’s stabilized portfolio totaled approximately 13.3 million square feet of office space that was 92.1% occupied, located in the coastal regions of Los Angeles, San Diego, the San Francisco Bay Area and Greater Seattle and 200 residential units located in the Hollywood submarket of Los Angeles. 
Board of Directors
 
Executive Management Team
 
Investor Relations
John Kilroy
Chairman
 
John Kilroy
President and CEO
 
12200 W. Olympic Blvd., Suite 200
Los Angeles, CA 90064
(310) 481-8400
Web: www.kilroyrealty.com
Edward F. Brennan, PhD
Lead Independent
 
Jeffrey C. Hawken
Executive VP and COO
 
Jolie Hunt
 
 
Robert Paratte
Executive VP, Leasing and Business Development
 
Scott S. Ingraham
 
 
Tyler H. Rose
Executive VP and CFO
 
Gary R. Stevenson
 
 
Heidi R. Roth
Executive VP and Chief Administrative Officer
 
Peter B. Stoneberg
 
 
Justin W. Smart
Executive VP, Development and Construction Services
 
Equity Research Coverage
 
 
 
 
 
Bank of America Merrill Lynch
 
 
J.P. Morgan
 
James Feldman
(646) 855-5808
 
Anthony Paolone
(212) 622-6682
BMO Capital Markets Corp.
 
 
KeyBanc Capital Markets
 
John P. Kim
(212) 885-4115
 
Craig Mailman
(917) 368-2316
BTIG
 
 
RBC Capital Markets
 
Thomas Catherwood
(212) 738-6140
 
Mike Carroll
(440) 715-2649
Citigroup Investment Research
 
 
Robert W. Baird & Co.
 
Michael Bilerman
(212) 816-1383
 
David B. Rodgers
(216) 737-7341
Deutsche Bank Securities, Inc.
 
 
Scotiabank
 
Derek Johnston
(210) 250-5683
 
Nicholas Yulico
(212) 225-6904
Evercore ISI
 
 
Stifel, Nicolaus & Company
 
Steve Sakwa
(212) 446-9462
 
John W. Guinee III
(443) 224-1307
Green Street Advisors
 
 
Wells Fargo
 
Daniel Ismail
(949) 640-8780
 
Blaine Heck
(443) 263-6529
 
Kilroy Realty Corporation is followed by the analysts listed above. Please note that any opinions, estimates or forecasts regarding Kilroy Realty Corporation’s performance made by these analysts are theirs alone and do not represent opinions, forecasts or predictions of Kilroy Realty Corporation or its management. Kilroy Realty Corporation does not by its reference above or distribution imply its endorsement of or concurrence with such information, conclusions or recommendations.

1

Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


Executive Summary
 
 
 
Quarterly Financial Highlights
 
Quarterly Operating Highlights
 
 
 
• Net income available to common stockholders per share of $0.41
 
• Stabilized portfolio was 92.1% occupied and 97.3% leased at quarter-end
 
 
 
• FFO per share of $1.01
 
• 444,308 square feet of leases commenced in the stabilized portfolio
 
 
 
• Revenues of $215.5 million
 
• 484,330 square feet of leases executed in the stabilized portfolio
 
 
 
• Same Store GAAP NOI increased 8.3% compared to the prior year
 
- GAAP rents increased approximately 38.8% from prior levels
 
 
 
• Same Store Cash NOI increased 3.6% compared to the prior year
 
- Cash rents increased approximately 17.6% from prior levels
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Markets Highlights
 
Strategic Highlights
 
 
 
• In September, completed a public offering of $500.0 million of 10-year senior
 
• In August, completed the acquisition of a 2.3-acre land site in the East Village
   unsecured notes at 3.050% due February 2030
 
   submarket of San Diego for a cash purchase price of $40.0 million. The site is fully
 
 
   entitled for the development of a mixed-use project. Currently, there are three
• As of the date of this report, no outstanding borrowings on our unsecured revolving
 
   existing buildings that are leased by the prior owner through the first half of 2021
   credit facility and approximately $85.0 million of unrestricted and restricted
 
 
   cash on hand
 
• In September, completed construction on 237 residential units, the first of three
 
 
   phases of the residential development at our One Paseo mixed-use project in the
 
 
   Del Mar submarket of San Diego. Phase I is currently 33% leased
 
 
 
 
 
• In September, commenced construction on 2100 Kettner, a 200,000 square foot
 
 
   office project in the Little Italy submarket of downtown San Diego. The project
 
 
   has a total estimated investment of $140.0 million
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
________________________
Note: Definitions for commonly used terms in this Supplemental Financial Report are on pages 34-35 “Definitions Included in Supplemental.”

2

Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


Financial Highlights
(unaudited, $ in thousands, except per share amounts)
 
 
Three Months Ended
 
 
 
9/30/2019 (1)
 
6/30/2019 (1) (2)
 
3/31/2019 (1)
 
12/31/2018 (2)
 
9/30/2018
 
INCOME ITEMS:
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
215,525

 
$
200,492

 
$
201,202

 
$
190,842

 
$
186,562

 
 
Lease Termination Fees, net

 
1,824

 
1,888

 
1,293

 
431

 
 
Net Operating Income (3)
152,170

 
141,916

 
142,442

 
137,636

 
131,020

 
 
Capitalized Interest and Debt Costs
20,585

 
20,880

 
19,437

 
19,519

 
19,156

 
 
Net Income Available to Common Stockholders
43,846

 
42,194

 
36,903

 
160,220

 
34,400

 
 
EBITDA, as adjusted (3) (4)
129,163

 
120,025

 
119,172

 
113,883

 
112,085

 
 
Funds From Operations (4) (5) (6) (7)
109,243

 
99,905

 
99,812

 
81,330

 
94,247

 
 
Net Income Available to Common Stockholders per common share – diluted (6)
$
0.41

 
$
0.41

 
$
0.36

 
$
1.58

 
$
0.33

 
 
Funds From Operations per common share – diluted (4) (6) (7)
$
1.01

 
$
0.95

 
$
0.95

 
$
0.78

 
$
0.90

 
LIQUIDITY ITEMS:
 
 
 
 
 
 
 
 
 
 
 
Funds Available for Distribution (5) (6) (8)
$
65,078

 
$
52,369

 
$
65,934

 
$
51,792

 
$
68,758

 
 
Dividends per common share (6)
$
0.485

 
$
0.485

 
$
0.455

 
$
0.455

 
$
0.455

 
RATIOS:
 
 
 
 
 
 
 
 
 
 
 
Net Operating Income Margins
70.6
%
 
70.8
%
 
70.8
%
 
72.1
%
 
70.2
%
 
 
Fixed Charge Coverage Ratio
4.2x

 
3.9x

 
4.0x

 
3.7x

 
3.8x

 
 
FFO Payout Ratio (4) (7)
48.0
%
 
50.0
%
 
46.9
%
 
57.5
%
 
49.6
%
 
 
FAD Payout Ratio (8)
80.5
%
 
95.4
%
 
71.1
%
 
90.3
%
 
68.0
%
 
ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Real Estate Held for Investment before Depreciation
$
8,977,843

 
$
8,824,558

 
$
8,616,167

 
$
8,426,632

 
$
8,329,580

 
 
Total Assets
8,623,815

 
8,094,721

 
7,883,987

 
7,765,707

 
7,562,236

 
CAPITALIZATION: (9)
 
 
 
 
 
 
 
 
 
 
 
Total Debt
$
3,334,967

 
$
3,210,427

 
$
3,020,882

 
$
2,955,811

 
$
2,891,725

 
 
Total Common Equity and Noncontrolling Interests in the Operating Partnership
8,414,862

 
7,602,085

 
7,823,144

 
6,462,321

 
7,367,745

 
 
Total Market Capitalization
11,749,829

 
10,812,512

 
10,844,026

 
9,418,132

 
10,259,470

 
 
Total Debt / Total Market Capitalization
28.4
%
 
29.7
%
 
27.9
%
 
31.4
%
 
28.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
______________________________________________________
Note: Definitions for commonly used terms in this Supplemental Financial Report are on pages 34-35 “Definitions Included in Supplemental.”
(1)
The Company adopted ASC 842 “Leases” effective January 1, 2019. Please refer to page 10 for a description of the impact of the adoption on our consolidated statements of operations.
(2)
Net Income Available to Common Stockholders includes $7.2 million of gains on sale of depreciable operating properties for the three months ended June 30, 2019 and $142.9 million of gains on sales of depreciable operating properties, an $11.8 million gain on sale of land and a $12.6 million loss on early extinguishment of debt for the three months ended December 31, 2018.
(3)
Please refer to page 10 for the calculation of Net Operating Income and pages 36-37 for reconciliations of GAAP Net Income Available to Common Stockholders to Net Operating Income and EBITDA, as adjusted.
(4)
EBITDA, as adjusted, and Funds From Operations include a $11.8 million gain on sale of land for the three months ended December 31, 2018. The Company’s calculation of EBITDA, as adjusted, is the same as EBITDAre, as defined by NAREIT, as the Company does not have any unconsolidated joint ventures.
(5)
Please refer to page 8 for reconciliations of GAAP Net Income Available to Common Stockholders to Funds From Operations available to common stockholders and unitholders and Funds Available for Distribution to common stockholders and unitholders and page 9 for a reconciliation of GAAP Net Cash Provided by Operating Activities to Funds Available for Distribution to common stockholders and unitholders.
(6)
Reported amounts are attributable to common stockholders, common unitholders and restricted stock unit holders.
(7)
Funds From Operations for the three months ended December 31, 2018 includes a $12.6 million loss on early extinguishment of debt.
(8)
Funds Available for Distribution for the three months ended December 31, 2018 includes a $11.8 million cash loss on early extinguishment of debt.
(9)
Please refer to page 28 for additional information regarding our capital structure.

3

Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


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

The Company is providing an updated guidance range of NAREIT-defined FFO per diluted share for its fiscal year 2019 of $3.82 to $3.88 per share with a midpoint of $3.85 per share.
 
 
 
Full Year 2019 Range
 
 
 
 
Low End
 
High End
 
 
Net income available to common stockholders per share - diluted
 
$
1.59

 
$
1.65

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - diluted (1)
 
105,500

 
105,500

 
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
168,000

 
$
174,000

 
 
Adjustments:
 
 
 
 
 
 
Net income attributable to noncontrolling common units of the Operating Partnership
 
3,300

 
3,500

 
 
Net income attributable to noncontrolling interests in consolidated property partnerships
 
16,500

 
19,500

 
 
Depreciation and amortization of real estate assets
 
256,000

 
256,000

 
 
Gains on sales of depreciable real estate
 
(7,169
)
 
(7,169
)
 
 
Funds From Operations attributable to noncontrolling interests in consolidated property partnerships
 
(26,000
)
 
(29,000
)
 
 
Funds From Operations (2)
 
$
410,631

 
$
416,831

 
 
 
 
 
 
 
 
 
Weighted average common shares and units outstanding - diluted (3)
 
107,500

 
107,500

 
 
 
 
 
 
 
 
 
FFO per common share/unit - diluted (3)
 
$
3.82

 
$
3.88

 
 
 
 
 
 
 
 

Key 2019 assumptions include:
Flat same store cash net operating income (2) 
Year-end occupancy of 94.0% to 95.0%
Total remaining development spending of approximately $125.0 million to $150.0 million
________________________
(1)
Calculated based on estimated weighted average shares outstanding including non-participating share-based awards.
(2)
See pages 32-33 for Management Statements on Funds From Operations and Same Store Cash Net Operating Income.
(3)
Calculated based on weighted average shares outstanding including participating and non-participating share-based awards, dilutive impact of stock options, contingently issuable shares, and shares issuable under forward equity sale agreements and assuming the exchange of all common limited partnership units outstanding. Reported amounts are attributable to common stockholders, common unitholders and restricted stock unitholders.

The Company’s guidance estimates for the full year 2019, and the reconciliation of net income available to common stockholders per share - diluted and FFO per share and unit - diluted included within this report, reflect management’s views on current and future market conditions, including assumptions with respect to rental rates, occupancy levels, and the earnings impact of the events referenced in this report. Although these guidance estimates reflect the impact on the Company’s operating results of an assumed range of future disposition activity, these guidance estimates do not include any estimates of possible future gains or losses from possible future dispositions because the magnitude of gains or losses on sales of depreciable operating properties, if any, will depend on the sales price and depreciated cost basis of the disposed assets at the time of disposition, information that is not known at the time the Company provides guidance, and the timing of any gain recognition will depend on the closing of the dispositions, information that is also not known at the time the Company provides guidance and may occur after the relevant guidance period. We caution you not to place undue reliance on our assumed range of future disposition activity because any potential future disposition transactions will ultimately depend on the market conditions and other factors, including but not limited to the Company’s capital needs, the particular assets being sold and the Company’s ability to defer some or all of the taxable gain on the sales. These guidance estimates also do not include the impact on operating results from potential future acquisitions, possible capital markets activity, possible future impairment charges or any events outside of the Company’s control. There can be no assurance that the Company’s actual results will not differ materially from these estimates.

4

Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


Common Stock Data (NYSE: KRC)
 
 
 
Three Months Ended
 
 
 
9/30/2019
 
6/30/2019
 
3/31/2019
 
12/31/2018
 
9/30/2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High Price
$
80.06

 
$
78.36

 
$
76.50

 
$
72.34

 
$
76.67

 
 
Low Price
$
74.25

 
$
72.87

 
$
61.44

 
$
59.46

 
$
69.67

 
 
Closing Price
$
77.89

 
$
73.81

 
$
75.96

 
$
62.88

 
$
71.69

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends per share – annualized
$
1.94

 
$
1.94

 
$
1.82

 
$
1.82

 
$
1.82

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closing common shares (in 000’s) (1) (2)
106,012

 
100,972

 
100,967

 
100,747

 
100,747

 
 
Closing common partnership units (in 000’s) (1)
2,023

 
2,023

 
2,023

 
2,025

 
2,025

 
 
 
108,035

 
102,995

 
102,990

 
102,772

 
102,772

 
 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
As of the end of the period.
(2)
In July 2019, the Company fully and physically settled 5,000,000 shares of common stock in connection with the August 2018 forward transaction for net proceeds of approximately $354.3 million.






5

Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


Consolidated Balance Sheets
(unaudited, $ in thousands)
 
 
9/30/2019
 
6/30/2019
 
3/31/2019
 
12/31/2018
 
9/30/2018
 
 
ASSETS:

 
 
 
 
 
 
 
 
 
 
Land and improvements
$
1,315,448

 
$
1,284,582

 
$
1,184,496

 
$
1,160,138

 
$
1,127,100

 
 
Buildings and improvements
5,770,226

 
5,712,448

 
5,300,313

 
5,207,984

 
5,056,050

 
 
Undeveloped land and construction in progress
1,892,169

 
1,827,528

 
2,131,358

 
2,058,510

 
2,146,430

 
 
Total real estate assets held for investment
8,977,843

 
8,824,558

 
8,616,167

 
8,426,632

 
8,329,580

 
 
Accumulated depreciation and amortization
(1,505,785
)
 
(1,480,766
)
 
(1,441,506
)
 
(1,391,368
)
 
(1,411,529
)
 
 
Total real estate assets held for investment, net
7,472,058

 
7,343,792

 
7,174,661

 
7,035,264

 
6,918,051

 
 
Real estate assets and other assets held for sale, net
77,751

 

 

 

 

 
 
Cash and cash equivalents
297,620

 
52,415

 
49,693

 
51,604

 
86,517

 
 
Restricted cash
6,300

 
6,300

 
6,300

 
119,430

 

 
 
Marketable securities
26,188

 
25,203

 
24,098

 
21,779

 
23,353

 
 
Current receivables, net
34,116

 
27,563

 
28,016

 
20,176

 
17,519

 
 
Deferred rent receivables, net
314,812

 
297,358

 
280,756

 
267,007

 
261,003

 
 
Deferred leasing costs and acquisition-related intangible assets, net
202,063

 
203,451

 
187,309

 
197,574

 
183,118

 
 
Right of use ground lease assets
83,200

 
82,647

 
82,794

 

 

 
 
Prepaid expenses and other assets, net
109,707

 
55,992

 
50,360

 
52,873

 
72,675

 
 
TOTAL ASSETS
$
8,623,815

 
$
8,094,721

 
$
7,883,987

 
$
7,765,707

 
$
7,562,236

 
 
LIABILITIES AND EQUITY:
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Secured debt, net
$
259,027

 
$
259,455

 
$
259,878

 
$
335,531

 
$
336,866

 
 
Unsecured debt, net
3,048,209

 
2,553,651

 
2,552,883

 
2,552,070

 
2,207,049

 
 
Unsecured line of credit

 
375,000

 
185,000

 
45,000

 
330,000

 
 
Accounts payable, accrued expenses and other liabilities
439,081

 
385,567

 
373,691

 
374,415

 
360,674

 
 
Ground lease liabilities
87,617

 
87,082

 
87,247

 

 

 
 
Accrued dividends and distributions
53,205

 
50,800

 
47,676

 
47,559

 
47,411

 
 
Deferred revenue and acquisition-related intangible liabilities, net
134,828

 
136,266

 
138,973

 
149,646

 
149,059

 
 
Rents received in advance and tenant security deposits
57,428

 
59,997

 
55,457

 
60,225

 
56,258

 
 
Liabilities and deferred revenue of real estate assets held for sale
4,911

 

 

 

 

 
 
Total liabilities
4,084,306

 
3,907,818

 
3,700,805


3,564,446


3,487,317

 
 
Equity:
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Common stock
1,060

 
1,010

 
1,010

 
1,007

 
1,007

 
 
Additional paid-in capital
4,342,296

 
3,984,867

 
3,976,204

 
3,976,953

 
3,965,405

 
 
Distributions in excess of earnings
(78,707
)
 
(70,345
)
 
(62,690
)
 
(48,053
)
 
(161,654
)
 
 
Total stockholders’ equity
4,264,649

 
3,915,532

 
3,914,524

 
3,929,907

 
3,804,758

 
 
Noncontrolling Interests
 
 
 
 
 
 
 
 
 
 
 
Common units of the Operating Partnership
81,393

 
78,463

 
78,413

 
78,991

 
76,486

 
 
Noncontrolling interests in consolidated property partnerships
193,467

 
192,908

 
190,245

 
192,363

 
193,675

 
 
Total noncontrolling interests
274,860

 
271,371

 
268,658

 
271,354

 
270,161

 
 
Total equity
4,539,509

 
4,186,903

 
4,183,182

 
4,201,261

 
4,074,919

 
 
TOTAL LIABILITIES AND EQUITY
$
8,623,815

 
$
8,094,721

 
$
7,883,987

 
$
7,765,707

 
$
7,562,236

 
 
 
 
 
 
 
 
 
 
 
 
 


6

Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


Consolidated Statements of Operations
(unaudited, $ and shares in thousands, except per share amounts)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2019
 
2018
 
2019
 
2018
 
 
REVENUES
 
 
 
 
 
 
 
 
 
 
Rental income (1)
 
$
212,321

 
$
162,288

 
$
609,332

 
$
489,674

 
 
Tenant reimbursements (1)
 

 
21,754

 

 
60,471

 
 
Other property income (1)
 
3,204

 
2,520

 
7,887

 
6,311

 
 
Total revenues
 
215,525

 
186,562

 
617,219

 
556,456

 
 
EXPENSES
 
 
 
 
 
 
 
 
 
 
Property expenses (1)
 
41,308

 
35,163

 
117,993

 
99,401

 
 
Real estate taxes (1)
 
19,998

 
17,462

 
56,563

 
52,421

 
 
Provision for bad debts (1)
 

 
1,338

 

 
6,714

 
 
Ground leases (1)
 
2,049

 
1,579

 
6,135

 
4,726

 
 
General and administrative expenses
 
22,576

 
19,277

 
65,774

 
56,599

 
 
Leasing costs (1)
 
1,192

 

 
5,599

 

 
 
Depreciation and amortization
 
69,230

 
62,700

 
203,617

 
189,421

 
 
Total expenses
 
156,353

 
137,519

 
455,681

 
409,282

 
 
OTHER (EXPENSES) INCOME
 
 
 
 
 
 
 
 
 
 
Interest income and other net investment gain
 
761

 
342

 
3,205

 
1,147

 
 
Interest expense
 
(11,635
)
 
(11,075
)
 
(34,605
)
 
(37,285
)
 
 
Gains on sales of depreciable operating properties
 

 

 
7,169

 

 
 
Total other (expenses) income
 
(10,874
)
 
(10,733
)
 
(24,231
)
 
(36,138
)
 
 
NET INCOME
 
48,298

 
38,310

 
137,307

 
111,036

 
 
Net income attributable to noncontrolling common units of the Operating Partnership
 
(852
)
 
(691
)
 
(2,423
)
 
(2,008
)
 
 
Net income attributable to noncontrolling interests in consolidated property partnerships
 
(3,600
)
 
(3,219
)
 
(11,941
)
 
(10,833
)
 
 
Total income attributable to noncontrolling interests
 
(4,452
)
 
(3,910
)
 
(14,364
)
 
(12,841
)
 
 
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
 
$
43,846

 
$
34,400

 
$
122,943

 
$
98,195

 
 
Weighted average common shares outstanding – basic
 
104,841

 
100,677

 
102,253

 
99,711

 
 
Weighted average common shares outstanding – diluted
 
105,360

 
101,228

 
102,872

 
100,209

 
 
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS PER SHARE
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders per share – basic
 
$
0.41

 
$
0.34

 
$
1.19

 
$
0.97

 
 
Net income available to common stockholders per share – diluted
 
$
0.41

 
$
0.33

 
$
1.18

 
$
0.97

 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
Effective January 1, 2019, the Company adopted ASC 842 “Leases.” Please refer to page 10 for a description of the changes made to our 2019 consolidated statement of operations upon adoption of ASC 842 “Leases.” In accordance with the adoption of the new standard under the modified retrospective method, previously reported periods are not restated for the impact of the standard.

7

Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


Funds From Operations and Funds Available for Distribution
(unaudited, $ in thousands, except per share amounts)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2019
 
2018
 
2019
 
2018
 
 
FUNDS FROM OPERATIONS: (1)
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
43,846

 
$
34,400

 
$
122,943

 
$
98,195

 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling common units of the Operating Partnership
 
852

 
691

 
2,423

 
2,008

 
 
Net income attributable to noncontrolling interests in consolidated property partnerships
 
3,600

 
3,219

 
11,941

 
10,833

 
 
Depreciation and amortization of real estate assets
 
67,985

 
61,609

 
199,967

 
186,242

 
 
Gains on sales of depreciable real estate
 

 

 
(7,169
)
 

 
 
Funds From Operations attributable to noncontrolling interests in consolidated property partnerships
 
(7,040
)
 
(5,672
)
 
(21,145
)
 
(18,117
)
 
 
Funds From Operations (1)(2)
 
$
109,243

 
$
94,247

 
$
308,960

 
$
279,161

 
 
Weighted average common shares/units outstanding – basic (3)
 
107,981

 
103,841

 
105,400

 
102,923

 
 
Weighted average common shares/units outstanding – diluted (4)
 
108,500

 
104,393

 
106,020

 
103,421

 
 
FFO per common share/unit – basic (1)
 
$
1.01

 
$
0.91

 
$
2.93

 
$
2.71

 
 
FFO per common share/unit – diluted (1)
 
$
1.01

 
$
0.90

 
$
2.91

 
$
2.70

 
 
FUNDS AVAILABLE FOR DISTRIBUTION: (1)
 
 
 
 
 
 
 
 
 
 
Funds From Operations (1)(2)
 
$
109,243

 
$
94,247

 
$
308,960

 
$
279,161

 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
Recurring tenant improvements, leasing commissions and capital expenditures
 
(31,438
)
 
(26,218
)
 
(86,454
)
 
(75,066
)
 
 
Amortization of deferred revenue related to tenant-funded tenant improvements (2)(5)
 
(6,766
)
 
(4,811
)
 
(14,947
)
 
(13,680
)
 
 
Net effect of straight-line rents
 
(18,743
)
 
(4,445
)
 
(52,201
)
 
(14,612
)
 
 
Amortization of net below market rents (6)
 
(1,826
)
 
(2,166
)
 
(6,241
)
 
(7,647
)
 
 
Amortization of deferred financing costs and net debt discount/premium
 
194

 
234

 
911

 
816

 
 
Non-cash executive compensation expense (7)
 
6,495

 
6,634

 
21,323

 
18,901

 
 
Other lease related adjustments, net and leasing costs (8)
 
3,991

 
3,447

 
2,148

 
4,001

 
 
Adjustments attributable to noncontrolling interests in consolidated property partnerships
 
3,928

 
1,836

 
9,882

 
4,374

 
 
Funds Available for Distribution (1)
 
$
65,078

 
$
68,758

 
$
183,381

 
$
196,248

 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
See page 33 for Management Statements on Funds From Operations and Funds Available for Distribution. Reported per common share/unit amounts are attributable to common stockholders, common unitholders and restricted stock unit holders.
(2)
FFO available to common stockholders and unitholders includes amortization of deferred revenue related to tenant-funded tenant improvements of $6.8 million and $4.8 million for the three months ended September 30, 2019 and 2018, respectively, and $14.9 million and $13.7 million for the nine months ended September 30, 2019 and 2018, respectively. These amounts are adjusted out of FFO in our calculation of FAD.
(3)
Calculated based on weighted average shares outstanding including participating share-based awards and assuming the exchange of all common limited partnership units outstanding.
(4)
Calculated based on weighted average shares outstanding including participating and non-participating share-based awards, dilutive impact of stock options, contingently issuable shares, and shares issuable under forward equity sale agreements and assuming the exchange of all common limited partnership units outstanding.
(5)
Represents revenue recognized during the period as a result of the amortization of deferred revenue recorded for tenant-funded tenant improvements.
(6)
Represents the non-cash adjustment related to the acquisition of buildings with above and/or below market rents.
(7)
Includes non-cash amortization of share-based compensation and accrued potential future executive retirement benefits.
(8)
Includes other cash and non-cash adjustments attributable to lease-related matters including GAAP revenue recognition timing differences and leasing costs.


8

Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


Reconciliation of GAAP Net Cash Provided by Operating Activities to Funds Available for Distribution
(unaudited, $ in thousands)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2019
 
2018
 
2019
 
2018
 
 
GAAP Net Cash Provided by Operating Activities 
 
$
135,730

 
$
128,372

 
$
301,390

 
$
317,215

 
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
Recurring tenant improvements, leasing commissions and capital expenditures
 
(31,438
)
 
(26,218
)
 
(86,454
)
 
(75,066
)
 
 
Depreciation of non-real estate furniture, fixtures and equipment
 
(1,245
)
 
(1,091
)
 
(3,650
)
 
(3,179
)
 
 
Net changes in operating assets and liabilities (1)
 
(34,254
)
 
(25,576
)
 
(15,251
)
 
(20,089
)
 
 
Noncontrolling interests in consolidated property partnerships share of FFO and FAD
 
(3,112
)
 
(3,836
)
 
(11,263
)
 
(13,743
)
 
 
Cash adjustments related to investing and financing activities
 
(603
)
 
(2,893
)
 
(1,391
)
 
(8,890
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Funds Available for Distribution(2)
 
$
65,078

 
$
68,758

 
$
183,381

 
$
196,248

 
 
 
 
 
 
 
 
 
 
 
 
_______________________
(1)
Primarily includes changes in the following assets and liabilities: marketable securities; current receivables; prepaid expenses and other assets; accounts payable, accrued expenses and other liabilities; and rents received in advance and tenant security deposits. 
(2)
Please refer to page 33 for a Management Statement on Funds Available for Distribution.


9

Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


Net Operating Income (1) 
(unaudited, $ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2019 (2)
 
2018 As Reported
 
2018 As Adjusted (3)
 
% Change
2019 vs. 2018
As Adjusted
 
2019 (2)
 
2018 As Reported
 
2018 As Adjusted (3)
 
% Change
2019 vs. 2018
As Adjusted
 
 
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
181,959

 
$
162,288

 
$
161,098

 
12.9
%
 
$
526,906

 
$
489,674

 
$
482,024

 
9.3
%
 
 
Tenant reimbursements
 
30,362

 
21,754

 
26,107

 
16.3
%
 
82,426

 
60,471

 
72,144

 
14.3
%
 
 
Other property income
 
3,204

 
2,520

 
2,372

 
35.1
%
 
7,887

 
6,311

 
7,247

 
8.8
%
 
 
Total operating revenues
 
215,525

 
186,562

 
189,577

 
13.7
%
 
617,219

 
556,456

 
561,415

 
9.9
%
 
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Property expenses
 
41,308

 
35,163

 
39,516

 
4.5
%
 
117,993

 
99,401

 
111,074

 
6.2
%
 
 
Real estate taxes
 
19,998

 
17,462

 
16,992

 
17.7
%
 
56,563

 
52,421

 
51,028

 
10.8
%
 
 
Provision for bad debts
 

 
1,338

 

 
%
 

 
6,714

 

 
%
 
 
Ground leases
 
2,049

 
1,579

 
2,049

 
%
 
6,135

 
4,726

 
6,119

 
0.3
%
 
 
Total operating expenses
 
63,355

 
55,542

 
58,557

 
8.2
%
 
180,691

 
163,262

 
168,221

 
7.4
%
 
 
Net Operating Income
 
$
152,170

 
$
131,020

 
$
131,020

 
16.1
%
 
$
436,528

 
$
393,194

 
$
393,194

 
11.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
Please refer to page 31 for Management Statements on Net Operating Income and page 36 for a reconciliation of GAAP Net Income Available to Common Stockholders to Net Operating Income.
(2)
Effective January 1, 2019, the Company adopted ASC 842 “Leases,” which required the following changes for all periods beginning and subsequent to January 1, 2019. In accordance with the adoption of the new standard under the modified retrospective method, previously reported periods are not restated for the impact of the standard.
- All lease related revenue required to be reported as a single component within rental income. For the three months ended September 30, 2019, rental income includes $30.4 million of tenant reimbursements and $3.6 million of gross lease termination fees. For the nine months ended September 30, 2019, rental income includes $82.4 million of tenant reimbursements and $10.5 million of gross lease termination fees. For this analysis, tenant reimbursements have been broken out from rental income for comparison purposes.
- Rental income to be presented net of provision for bad debts. For the three and nine months ended September 30, 2019, rental income includes provision for bad debts of $0.1 million and a recovery of provision for bad debts of $3.2 million, respectively.
- All property expenses paid directly by the Company and reimbursed by the tenant to be presented on a gross basis. For the three and nine months ended September 30, 2019, rental income and property expenses both include $4.1 million and $10.1 million, respectively, of additional tenant reimbursements and the related property expenses, which were previously shown net in property expenses in prior periods. This change has no impact to net income, Net Operating Income or Funds From Operations.
- Non-tenant parking income to be presented in other property income instead of rental income since recognized under ASC 606 “Revenue from Contracts with Customers” and outside the scope of ASC 842 “Leases.”
- Real estate taxes for properties where the Company is a lessee under ground leases to be presented in ground leases instead of real estate taxes. For the three and nine months ended September 30, 2019, ground leases includes $0.5 million and $1.4 million, respectively, of property taxes for properties where the Company is a lessee.
(3)
The components of Net Operating Income for the three and nine months ended September 30, 2018 have been presented as if we adopted ASC 842 “Leases” effective January 1, 2018 for comparison purposes. For this analysis, tenant reimbursements have been broken out from rental income for comparison purposes. For the three and nine months ended September 30, 2018 as adjusted, rental income includes $1.9 million and $4.4 million, respectively, of lease termination fees.


10

Kilroy Realty Corporation
Third Quarter 2019 Supplemental Financial Report


Same Store Analysis (1) 
(unaudited, $ in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2019
 
2018
 
2018 As Adjusted (2)
 
% Change
2019 vs. 2018
As Adjusted
 
2019
 
2018
 
2018 As Adjusted (2)
 
% Change
2019 vs. 2018
As Adjusted
 
 
Total Same Store Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Office Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of properties
 
88

 
88

 
88

 
 
 
88

 
88

 
88

 
 
 
 
Square Feet
 
12,672,292

 
12,672,292

 
12,672,292

 
 
 
12,672,292

 
12,672,292

 
12,672,292

 
 
 
 
Percent of Stabilized Portfolio
 
95.1
%
 
91.2
%
 
91.2
%
 
 
 
95.1
%
 
91.2
%
 
91.2
%
 
 
 
 
Average Occupancy
 
94.0
%
 
93.0
%
 
93.0
%
 
 
 
93.7
%
 
94.3
%
 
94.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues: (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income 
 
$
160,055

 
$
151,352

 
$
150,049

 
6.7
%
 
$
473,884

 
$
458,013

 
$
450,526

 
5.2
 %
 
 
Tenant reimbursements
 
24,559

 
19,655

 
23,643

 
3.9
%
 
70,416

 
54,751

 
65,386

 
7.7
 %
 
 
Other property income
 
2,705

 
2,397

 
2,247

 
20.4
%
 
6,707

 
6,078

 
7,015

 
(4.4
)%
 
 
Total operating revenues
 
187,319

 
173,404

 
175,939

 
6.5
%
 
551,007

 
518,842

 
522,927

 
5.4
 %
 
 
Operating Expenses: (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property expenses
 
36,750

 
32,386

 
36,374

 
1.0
%
 
107,765

 
91,806

 
102,441

 
5.2
 %
 
 
Real estate taxes
 
16,309

 
15,874

 
15,403

 
5.9
%
 
48,950

 
47,745

 
46,352

 
5.6
 %
 
 
Provision for bad debts
 

 
1,452

 

 
%
 

 
6,550

 

 
 %
 
 
Ground leases
 
2,049

 
1,579

 
2,049

 
%
 
6,135

 
4,726

 
6,119

 
0.3
 %
 
 
Total operating expenses
 
55,108

 
51,291

 
53,826