NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Organization
Kilroy Realty Corporation (the “Company”) is a self-administered real estate investment trust (“REIT”) active in premier office and mixed-use submarkets along the West Coast. We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties in the coastal regions of Los Angeles, Orange County, San Diego County, the San Francisco Bay Area and Greater Seattle, which we believe have strategic advantages and strong barriers to entry. Class A real estate encompasses attractive and efficient buildings of high quality that are attractive to tenants, are well-designed and constructed with above-average material, workmanship and finishes and are well-maintained and managed. We qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s common stock is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “KRC.”
We own our interests in all of our real estate assets through Kilroy Realty, L.P. (the “Operating Partnership”) and Kilroy Realty Finance Partnership, L.P. (the “Finance Partnership”). We generally conduct substantially all of our operations through the Operating Partnership. Unless stated otherwise or the context indicates otherwise, the terms “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” refer to Kilroy Realty Corporation and its consolidated subsidiaries and the term “Operating Partnership” refers to Kilroy Realty, L.P. and its consolidated subsidiaries. The descriptions of our business, employees and properties apply to both the Company and the Operating Partnership.
Our stabilized portfolio of operating properties was comprised of the following properties at
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Buildings
|
|
Rentable
Square Feet
(unaudited)
|
|
Number of
Tenants
|
|
Percentage
Occupied (unaudited)
|
|
Percentage Leased (unaudited)
|
Stabilized Office Properties
|
111
|
|
|
14,394,534
|
|
|
543
|
|
|
93.9
|
%
|
|
96.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Buildings
|
|
Number of Units
|
|
Percentage
Occupied
(unaudited)
|
|
Percentage Leased
(unaudited)
|
Stabilized Residential Property
|
1
|
|
|
200
|
|
|
77.0
|
%
|
|
82.0
|
%
|
Our stabilized portfolio includes all of our properties with the exception of development and redevelopment properties currently under construction or committed for construction, “lease-up” properties, real estate assets held for sale and undeveloped land. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We define “lease-up” properties as office properties we recently developed or redeveloped that have not yet reached
95%
occupancy and are within one year following cessation of major construction activities. There were no operating properties in “lease-up” or held for sale as of
June 30, 2017
.
During the
six
months ended
June 30, 2017
, we added
one
development project to our stabilized office portfolio consisting of
365,359
rentable square feet in Hollywood, California. As of
June 30, 2017
, the following properties were excluded from our stabilized portfolio. We did not have any redevelopment properties at
June 30, 2017
.
|
|
|
|
|
|
|
Number of
Properties/Projects
|
|
Estimated Rentable
Square Feet
(1)
|
Development projects under construction
(2)
|
4
|
|
1,800,000
|
|
________________________
|
|
(1)
|
Estimated rentable square feet upon completion.
|
|
|
(2)
|
Development projects under construction also include
96,000
square feet of retail space and
237
residential units in addition to the estimated office rentable square feet noted above.
|
Our stabilized portfolio also excludes our near-term and future development pipeline, which as of
June 30, 2017
was comprised of
six
development sites, representing approximately
52
gross acres of undeveloped land.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of
June 30, 2017
, all of our properties and development projects were owned and all of our business was conducted in the state of California with the exception of
twelve
office properties and one development project under construction located in the state of Washington. All of our properties and development projects are
100%
owned, excluding
four
office properties owned by
three
consolidated property partnerships.
Two
of the
three
property partnerships, 100 First Street Member, LLC (“100 First LLC”) and 303 Second Street Member, LLC (“303 Second LLC”), each owned
one
office property in San Francisco, California through subsidiary REITs. As of
June 30, 2017
, the Company owned a
56%
common equity interest in both 100 First LLC and 303 Second LLC. The third property partnership, Redwood City Partners, LLC (“Redwood LLC”) owned
two
office properties in Redwood City, California. As of
June 30, 2017
, the Company owned an approximate
93%
common equity interest in Redwood LLC. The remaining interests in all
three
property partnerships were owned by unrelated third parties.
Ownership and Basis of Presentation
The consolidated financial statements of the Company include the consolidated financial position and results of operations of the Company, the Operating Partnership, the Finance Partnership, Kilroy Services, LLC (“KSLLC”), 100 First LLC, 303 Second LLC, Redwood LLC and all of our wholly-owned and controlled subsidiaries. The consolidated financial statements of the Operating Partnership include the consolidated financial position and results of operations of the Operating Partnership, the Finance Partnership, KSLLC, 100 First LLC, 303 Second LLC, Redwood LLC and all wholly-owned and controlled subsidiaries of the Operating Partnership. All intercompany balances and transactions have been eliminated in the consolidated financial statements.
As of
June 30, 2017
, the Company owned an approximate
97.9%
common general partnership interest in the Operating Partnership. The remaining approximate
2.1%
common limited partnership interest in the Operating Partnership as of
June 30, 2017
was owned by non-affiliated investors and certain of our executive officers and directors (see Note 6). Both the general and limited common partnership interests in the Operating Partnership are denominated in common units. Generally, the number of common units held by the Company is equivalent to the number of outstanding shares of the Company’s common stock, and the rights of all the common units to quarterly distributions and payments in liquidation mirror those of the Company’s common stockholders. The common limited partners have certain redemption rights as provided in the Operating Partnership’s Seventh Amended and Restated Agreement of Limited Partnership, as amended, the “Partnership Agreement”.
Kilroy Realty Finance, Inc., which is a wholly-owned subsidiary of the Company, is the sole general partner of the Finance Partnership and owns a
1.0%
common general partnership interest in the Finance Partnership. The Operating Partnership owns the remaining
99.0%
common limited partnership interest. We conduct substantially all of our development activities through KSLLC, which is a wholly owned subsidiary of the Operating Partnership. With the exception of the Operating Partnership and our consolidated property partnerships, all of our subsidiaries are wholly-owned.
The accompanying interim financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying interim financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. However, the results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31,
2017
. The interim financial statements for the Company and the Operating Partnership should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended
December 31, 2016
.
Variable Interest Entities
The Operating Partnership is a variable interest entity (“VIE”) of the Company as the Operating Partnership is a limited partnership in which the common limited partners do not have substantive kick-out or participating rights. At
June 30, 2017
, the consolidated financial statements of the Company included
two
VIEs in addition to the Operating Partnership: 100 First LLC and 303 Second LLC. At
June 30, 2017
, the Company and the Operating Partnership were determined to be the primary beneficiary of these two VIEs since we had the ability to control the activities that most significantly impact each of the VIE’s economic performance. As of
June 30, 2017
, these two VIEs’ total assets, liabilities and noncontrolling interests included on our consolidated balance sheet were approximately
$431.3 million
(of which
$386.7 million
related to real estate held for investment), approximately
$152.6 million
and approximately
$122.4 million
, respectively. Revenues, income and net assets generated by 100 First LLC and
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
303 Second LLC may only be used to settle its contractual obligations, which primarily consist of operating expenses, capital expenditures and required distributions.
At
December 31, 2016
, the consolidated financial statements of the Company and the Operating Partnership included
three
VIEs in which we were deemed to be the primary beneficiary: 100 First LLC, 303 Second LLC and an entity established during the fourth quarter of 2016 to facilitate a transaction intended to qualify as a like-kind exchange pursuant to Section 1031 of the Code (“Section 1031 Exchange”). In January 2017, the Section 1031 Exchange was successfully completed and the entity established for the 1031 Exchange was no longer a VIE. At
December 31, 2016
, the impact of consolidating the VIEs increased the Company’s total assets, liabilities and noncontrolling interests on our consolidated balance sheet by approximately
$654.3 million
(of which
$588.6 million
related to real estate held for investment), approximately
$166.1 million
and approximately
$124.3 million
, respectively.
Adoption of New Accounting Pronouncements
Effective January 1, 2017, the Company adopted FASB ASU No. 2017-01 (“ASU 2017-01”) which clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework provides a screen for determining whether an integrated set of assets is a business combination or an asset acquisition and clarifies that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar assets, the set of assets and activities is deemed not to meet the definition of a business. As a result of our adoption of the guidance, which we adopted on a prospective basis, the Company expects that most of our future acquisitions of operating properties and development properties that were previously accounted for as business combinations will instead be accounted for as asset acquisitions under the new guidance. In addition, we expect that most of the transaction costs associated with these future acquisitions will be capitalized as part of the purchase price of the acquisition instead of being expensed as incurred to acquisition-related expenses. The Company did not have any acquisitions of operating properties during the
six
months ended
June 30, 2017
.
Also effective January 1, 2017, the Company adopted ASU No. 2016-18 (“ASU 2016-18”) which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 on a retrospective basis. Therefore, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Company’s consolidated statements of cash flows for the
six
months ended
June 30, 2017
and
2016
. As a result of the adoption of ASU 2016-18, the change in restricted cash is no longer presented as a separate line item within cash flows from investing activities on the Company’s consolidated statements of cash flows since such balances are now included in total cash at both the beginning and end of the reporting period. As a result, for the
six
months ended
June 30, 2016
, the Company had net cash used in investing activities of
$39.1 million
instead of net cash used in investing activities of
$304.5 million
as previously reported since the Company had
$258.1 million
of restricted cash at
June 30, 2016
that was held at qualified intermediaries to facilitate potential future Section1031 Exchanges.
In addition, effective January 1, 2017, the Company adopted ASU No. 2016-09 (“ASU 2016-09”) which simplified several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The adoption of this guidance did not have an impact on our consolidated financial statements or notes to our consolidated financial statements.
Recently Issued Accounting Pronouncements
ASU No. 2016-02 “Leases (Topic 842)”
On February 25, 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) to amend the accounting guidance for leases. The accounting applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted.
We are currently conducting our evaluation of the impact of the guidance on our consolidated financial statements and have an active project team working on the evaluation and implementation of the guidance. We currently believe that the adoption of the standard will not significantly change the accounting for operating leases on our consolidated balance sheets where we are the lessor, and that such leases will be accounted for in a similar method to existing standards with the underlying leased asset being
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
reported and recognized as a real estate asset. We currently expect that certain non-lease components will need to be accounted for separately from the lease components, with the lease components continuing to be recognized on a straight-line basis over the term of the lease and certain non-lease components (such as common area maintenance and provision of utilities) being accounted for under the new revenue recognition guidance in ASU 2014-09 discussed below, even when revenue for such non-lease components is not separately stipulated in the lease. In addition, under ASU 2016-02, lessors will only be permitted to capitalize and amortize incremental direct leasing costs. As a result, we expect that upon the adoption of the standard, we will no longer be able to capitalize and amortize certain leasing related costs and instead will expense these costs as incurred. We currently expect this could have a material impact to the Company’s results of operations upon adoption of the standard.
For leases where we are the lessee, specifically for our ground leases, we currently believe that the adoption of the standard will significantly change the accounting on our consolidated balance sheets since both existing ground leases and any future ground leases will be required to be recorded on the Company’s consolidated balance sheets as an obligation of the Company. We currently believe that existing ground leases executed before the January 1, 2019 adoption date will continue to be accounted for as operating leases and will not have a material impact on our recognition of ground lease expense or our results of operations. However, we believe that we will be required to recognize a right of use asset and a lease liability on our consolidated balance sheets equal to the present value of the minimum lease payments required in accordance with each ground lease. As of
June 30, 2017
, our future undiscounted minimum rental payments under these leases totaled
$253.9 million
, with several of the leases containing provisions for rental payments to fluctuate based on fair market value and operating income measurements with expirations through 2093. In addition, we currently believe that for new ground leases entered into after the adoption date of the new standard, such leases could be required to be accounted for as a financing type lease, resulting in ground lease expense recorded using the effective interest method instead of on a straight-line basis over the term of the lease. This could have a significant impact on our results of operations if we enter into material new ground leases after the date of adoption since ground lease expense calculated using the effective interest method results in an increased amount of ground lease expense in the earlier years of a ground lease as compared to the current straight-line method.
We will adopt the guidance on a modified retrospective basis as required by ASU 2016-02. We are in the process of evaluating whether we will elect to apply the practical expedients identified in the standard but currently believe that we may do so.
ASU No. 2014-09
“
Revenue From Contracts with Customers (Topic 606)”
In May 2014, the FASB issued ASU 2014-09 “Revenue From Contracts with Customers (Topic 606)” (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue from contracts with customers and will supersede most of the existing revenue recognition guidance. On May 9, 2016 and December 21, 2016, the FASB issued ASU No. 2016-12 and ASU No. 2016-20, which provides practical expedients, technical corrections, and improvements for certain aspects of ASU No. 2014-09. Public business entities may elect to adopt the amendments as of the original effective date; however, adoption is required for annual reporting periods beginning after December 15, 2017.
We are currently conducting our evaluation of the impact of the guidance on our consolidated financial statements and we have an active project team working on evaluation and implementation of the guidance. We have been compiling an inventory of the sources of revenue that the Company expects will be impacted by ASU 2014-09. Specifically, we have evaluated the impact on the timing of gain recognition for dispositions but currently do not believe there will be a material impact to our consolidated financial statements for dispositions given the simplicity of the Company’s historical disposition transactions. In addition, we currently believe that certain non-lease components of revenue from leases (upon the adoption of ASU 2016-02 on January 1, 2019) and parking revenue may be impacted by the adoption of ASU 2014-09. We are in the process of evaluating the impact of the standard but currently believe the impact would be limited to the timing and income statement presentation of revenue and not the total amount of revenue recognized over time.
Other Recently Issued Pronouncements
On May 10, 2017, the FASB issued ASU No. 2017-09 “Compensation - Stock Compensation (Topic 718)” to clarify the scope of modification accounting. Under the guidance, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions, and classification as an equity or liability instrument remain the same immediately before and after the change. The guidance is effective for annual periods beginning after December 15, 2017 and early adoption is permitted. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
On February 22, 2017, the FASB issued ASU No. 2017-05 “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)” (“ASU 2017-05”) to provide guidance and clarify the scope of the original guidance within Subtopic 610-20 “Gains and Losses from the Derecognition of Nonfinancial Assets” that was issued in connection with ASU
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2014-09, which provided guidance for recognizing gains and losses from the transfer of nonfinancial assets in transactions with noncustomers. ASU 2017-05 additionally adds guidance pertaining to the partial sales of real estate and clarifies that nonfinancial assets within the scope of Accounting Standards Codification Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017, with early application permitted for fiscal years beginning after December 15, 2016. We are currently evaluating the impact of ASU 2017-05 on our consolidated financial statements and currently do not anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
On August 26, 2016, the FASB issued ASU No. 2016-15 (“ASU 2016-15”) to provide guidance for areas where there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
On June 16, 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”) to amend the accounting for credit losses for certain financial instruments. Under the new guidance, an entity recognizes its estimate of expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
On January 5, 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”) to amend the accounting guidance on the classification and measurement of financial instruments. The standard requires that all investments in equity securities, including other ownership interests, are carried at fair value through net income. This requirement does not apply to investments that qualify for equity method accounting or to those that result in consolidation of the investee or for which the entity has elected the predictability exception to fair value measurement. Additionally, the standard requires that the portion of the total fair value change caused by a change in instrument-specific credit risk for financial liabilities for which the fair value option has been elected would be recognized in other comprehensive income. Any accumulated amount remaining in other comprehensive income is reclassified to earnings when the liability is extinguished. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
2. Dispositions
Operating Property Disposition
The following table summarizes the operating property sold during the
six
months ended
June 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Property Type
|
|
Month of Disposition
|
|
Number of Buildings
|
|
Rentable Square Feet
|
|
Sales Price
(1)
(in millions)
|
5717 Pacific Center Boulevard, San Diego, CA
(2)
|
|
Office
|
|
January
|
|
1
|
|
67,995
|
|
|
$
|
12.1
|
|
Total Dispositions
|
|
|
|
|
|
1
|
|
67,995
|
|
|
$
|
12.1
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________
|
|
(1)
|
Represents gross sales price before the impact of broker commissions and closing costs.
|
|
|
(2)
|
This property was classified as held for sale at
December 31, 2016
.
|
The gain on the operating property sold during the
six
months ended
June 30, 2017
was
$2.3 million
.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
3. Receivables
Current Receivables, net
Current receivables, net is primarily comprised of contractual rents and other lease-related obligations due from tenants. The balance consisted of the following as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Current receivables
|
$
|
15,161
|
|
|
$
|
15,172
|
|
Allowance for uncollectible tenant receivables
|
(1,458
|
)
|
|
(1,712
|
)
|
Current receivables, net
|
$
|
13,703
|
|
|
$
|
13,460
|
|
Deferred Rent Receivables, net
Deferred rent receivables, net consisted of the following as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Deferred rent receivables
|
$
|
236,038
|
|
|
$
|
220,501
|
|
Allowance for deferred rent receivables
|
(2,611
|
)
|
|
(1,524
|
)
|
Deferred rent receivables, net
|
$
|
233,427
|
|
|
$
|
218,977
|
|
4. Prepaid Expenses and Other Assets, Net
Prepaid expenses and other assets, net consisted of the following at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Furniture, fixtures and other long-lived assets, net
|
$
|
39,693
|
|
|
$
|
40,395
|
|
Notes receivable
(1)
|
19,788
|
|
|
19,439
|
|
Prepaid expenses & deposits
|
39,413
|
|
|
10,774
|
|
Total prepaid expenses and other assets, net
|
$
|
98,894
|
|
|
$
|
70,608
|
|
_______________
|
|
(1)
|
Approximately
$15.1 million
of our notes receivable are secured by real estate.
|
5. Secured and Unsecured Debt of the Operating Partnership
Unsecured Senior Notes - Private Placement
On February 17, 2017, the Operating Partnership issued the
$175.0 million
principal amount of its
3.35%
Senior Notes, Series A, due February 17, 2027 (the “Series A Notes”), and the
$75.0 million
principal amount of its
3.45%
Senior Notes, Series B, due February 17, 2029 (the “Series B Notes” and, together with the Series A Notes, the “Series A and B Notes”). The Series A and B Notes were issued pursuant to a delayed draw option under a Note Purchase Agreement entered into in connection with a private placement in September 2016. As of
June 30, 2017
, there was
$175.0 million
and
$75.0 million
issued and outstanding aggregate principal amount of Series A and B Notes, respectively. The Series A Notes mature on February 17, 2027, and the Series B Notes mature on February 17, 2029, unless earlier redeemed or prepaid pursuant to the terms of the Note Purchase Agreement. Interest on the Series A and B Notes is payable semi-annually in arrears on February 17 and August 17 of each year beginning August 17, 2017.
The Operating Partnership may, at its option and upon notice to the purchasers of the Series A and B Notes, prepay at any time all, or from time to time, any part of the Series A and B Notes then outstanding (in an amount not less than
5%
of the aggregate principal amount of the Series A and B Notes then outstanding in the case of a partial prepayment), at
100%
of the principal amount so prepaid, plus the make-whole amount determined for the prepayment date with respect to such principal amount as set forth in the Note Purchase Agreement.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In connection with the issuance of the Series A and B Notes, the Company entered into an agreement whereby it guarantees the payment by the Operating Partnership of all amounts due with respect to the Series A and B Notes and the performance by the Operating Partnership of its obligations under the Note Purchase Agreement.
Unsecured Revolving Credit Facility and Term Loan Facility
The following table summarizes the balance and terms of our unsecured revolving credit facility as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Outstanding borrowings
|
$
|
—
|
|
|
$
|
—
|
|
Remaining borrowing capacity
|
600,000
|
|
|
600,000
|
|
Total borrowing capacity
(1)
|
$
|
600,000
|
|
|
$
|
600,000
|
|
Interest rate
(2)
|
2.27
|
%
|
|
1.82
|
%
|
Facility fee-annual rate
(3)
|
0.200%
|
Maturity date
|
July 2019
|
________________________
|
|
(1)
|
We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional
$311.0 million
under an accordion feature under the terms of the unsecured revolving credit facility and unsecured term loan facility.
|
|
|
(2)
|
The interest rate on our unsecured revolving credit facility is based on an annual rate of LIBOR plus
1.050%
.
|
|
|
(3)
|
Our facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, we incurred debt origination and legal costs. As of
June 30, 2017
and
December 31, 2016
,
$2.6 million
and
$3.3 million
of unamortized deferred financing costs, respectively, remained to be amortized through the maturity date of our unsecured revolving credit facility, which are included in prepaid expenses and other assets, net on our consolidated balance sheets.
|
The Company intends to borrow under the unsecured revolving credit facility from time to time for general corporate purposes, to finance development and redevelopment expenditures, to fund potential acquisitions and to potentially repay long-term debt. No borrowings under the unsecured revolving credit facility occurred during the
six
months ended
June 30, 2017
.
The following table summarizes the balance and terms of our unsecured term loan facility as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Outstanding borrowings
(1)
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Interest rate
(2)
|
2.36
|
%
|
|
1.85
|
%
|
Maturity date
|
July 2019
|
________________________
|
|
(1)
|
As of
June 30, 2017
and
December 31, 2016
,
$0.5 million
and
$0.7 million
of unamortized deferred financing costs, respectively, remained to be amortized through the maturity date of our unsecured term loan facility.
|
|
|
(2)
|
Our unsecured term loan facility interest rate was calculated based on an annual rate of LIBOR plus
1.150%
.
|
Additionally, the Company had a
$39.0 million
unsecured term loan outstanding with an annual interest rate of LIBOR plus
1.150%
as of
June 30, 2017
and
December 31, 2016
, that was to mature in July 2019. As of
June 30, 2017
and
December 31, 2016
,
$0.1 million
and
$0.2 million
of unamortized deferred financing costs, respectively, remained to be amortized through the maturity date of our unsecured term loan.
In July 2017, the Operating Partnership amended and restated the terms of its unsecured revolving credit facility and unsecured term loan facility (together, the “Facility”). The amendment and restatement increased the size of the unsecured revolving credit facility from
$600.0 million
to
$750.0 million
, maintained the size of the unsecured term loan facility of
$150.0 million
, reduced the borrowing costs and extended the maturity date of the Facility to July 2022. The unsecured term loan facility features two six-month delayed draw options and the Facility was undrawn at closing, including the
$150.0 million
term loan, which was repaid in full at closing with available cash. Concurrently with the closing of the Facility, the Operating Partnership repaid its
$39.0 million
unsecured term loan with available cash.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Debt Covenants and Restrictions
The unsecured revolving credit facility, the unsecured term loan facility, the unsecured term loan, the unsecured senior notes, the Series A and B Notes and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Some of the more restrictive financial covenants include a maximum ratio of total debt to total asset value, a minimum fixed-charge coverage ratio, a minimum unsecured debt ratio and a minimum unencumbered asset pool debt service coverage ratio. Noncompliance with one or more of the covenants and restrictions could result in the full principal balance of the associated debt becoming immediately due and payable. We believe we were in compliance with all of our debt covenants as of
June 30, 2017
.
Debt Maturities
The following table summarizes the stated debt maturities and scheduled amortization payments of our issued and outstanding debt, excluding unamortized debt discounts, premiums and deferred financing costs, as of
June 30, 2017
:
|
|
|
|
|
Year
|
(in thousands)
|
Remaining 2017
|
$
|
3,072
|
|
2018
|
451,669
|
|
2019
|
265,309
|
|
2020
|
255,137
|
|
2021
|
5,342
|
|
Thereafter
|
1,599,023
|
|
Total
(1)
|
$
|
2,579,552
|
|
________________________
|
|
(1)
|
Includes gross principal balance of outstanding debt before the effect of the following at
June 30, 2017
:
$12.0 million
of unamortized deferred financing costs,
$6.2 million
of unamortized discounts for the unsecured senior notes and
$3.5 million
of unamortized premiums for the secured debt.
|
Capitalized Interest and Loan Fees
The following table sets forth gross interest expense, including debt discount/premium and deferred financing cost amortization, net of capitalized interest, for the
three
and
six
months ended
June 30, 2017
and
2016
. The interest expense capitalized was recorded as a cost of development and increased the carrying value of undeveloped land and construction in progress.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands)
|
Gross interest expense
|
$
|
28,731
|
|
|
$
|
26,668
|
|
|
$
|
56,246
|
|
|
$
|
52,843
|
|
Capitalized interest and deferred financing costs
|
(10,758
|
)
|
|
(12,284
|
)
|
|
(20,921
|
)
|
|
(26,630
|
)
|
Interest expense
|
$
|
17,973
|
|
|
$
|
14,384
|
|
|
$
|
35,325
|
|
|
$
|
26,213
|
|
6. Noncontrolling Interests on the Company’s Consolidated Financial Statements
Common Units of the Operating Partnership
The Company owned an approximate
97.9%
,
97.5%
and
97.2%
common general partnership interest in the Operating Partnership as of
June 30, 2017
,
December 31, 2016
and
June, 30, 2016
, respectively. The remaining approximate
2.1%
,
2.5%
and
2.8%
common limited partnership interest as of
June 30, 2017
,
December 31, 2016
and
June, 30, 2016
, respectively, was owned by non-affiliated investors and certain of our executive officers and directors in the form of noncontrolling common units. There were
2,077,193
,
2,381,543
and
2,631,276
common units outstanding held by these investors, executive officers and directors as of
June 30, 2017
,
December 31, 2016
and
June, 30, 2016
, respectively.
The noncontrolling common units may be redeemed by unitholders for cash. Except under certain circumstances, we, at our option, may satisfy the cash redemption obligation with shares of the Company’s common stock on a one-for-one basis. If satisfied in cash, the value for each noncontrolling common unit upon redemption is the amount equal to the average of the closing quoted price per share of the Company’s common stock, par value
$.01
per share, as reported on the NYSE for the ten trading days immediately preceding the applicable redemption date. The aggregate value upon redemption of the then-outstanding
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
noncontrolling common units was
$158.6 million
and
$174.9 million
as of
June 30, 2017
and
December 31, 2016
, respectively. This redemption value does not necessarily represent the amount that would be distributed with respect to each noncontrolling common unit in the event of our termination or liquidation. In the event of our termination or liquidation, it is expected in most cases that each common unit would be entitled to a liquidating distribution equal to the liquidating distribution payable in respect of each share of the Company’s common stock.
7. Stockholders’ Equity of the Company
Preferred Stock Redemption
On
March 30, 2017
(the “Redemption Date”), the Company redeemed all
4,000,000
shares of its
6.875%
Series G Cumulative Redeemable Preferred Stock (“Series G Preferred Stock”). The shares of Series G Preferred Stock were redeemed at a redemption price equal to their stated liquidation preference of
$25.00
per share, representing
$100.0 million
in aggregate, plus all accrued and unpaid dividends to the Redemption Date.
During the
six
months ended
June 30, 2017
, we recognized a non-recurring non-cash charge of
$3.8 million
as a reduction to net income available to common stockholders for the original issuance costs related to the Series G Preferred Stock.
Common Stock Issuance
In January 2017, the Company completed an underwritten public offering of
4,427,500
shares of its common stock. The net offering proceeds, after deducting underwriting discounts and offering expenses, were approximately
$308.8 million
. We used a portion of the proceeds to partially fund our 2016 special dividend and will use the remaining proceeds for general corporate uses, to fund development expenditures, for potential future acquisitions and to repay outstanding indebtedness.
At-The-Market Stock Offering Program
Under our current at-the-market stock offering program, which commenced in December 2014, we may offer and sell shares of our common stock having an aggregate gross sales price of up to
$300.0 million
from time to time in “at-the-market” offerings. No shares of common stock were sold under this program during the
six
months ended
June 30, 2017
. Since commencement of the program through
June 30, 2017
, we have sold
2,459,165
shares of common stock having an aggregate gross sales price of
$182.4 million
. As of
June 30, 2017
, shares of common stock having an aggregate gross sales price of up to
$117.6 million
remain available to be sold under this program. Actual future sales will depend upon a variety of factors, including but not limited to market conditions, the trading price of the Company’s common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under this program.
Payment of 2016 Special Cash Dividend
On
January 13, 2017
, the Company paid
$184.3 million
of special cash dividends, which was the equivalent of
$1.90
of special cash dividend per share of common stock to stockholders of record on
December 30, 2016
. This special dividend payment was in addition to the
$36.4 million
of regular dividends we also paid on
January 13, 2017
to common stockholders, unitholders and RSU holders of record on
December 30, 2016
.
8. Partners’ Capital of the Operating Partnership
Preferred Stock Redemption
On
March 30, 2017
, the Company redeemed all
4,000,000
units of its
6.875%
Series G Cumulative Redeemable Preferred Stock. For each share of Series G Preferred Stock that was outstanding, the Company had an equivalent number of
6.875%
Series G Preferred Units (“Series G Preferred Units”) outstanding with substantially similar terms as the Series G Preferred Stock. In connection with the redemption of the Series G Preferred Stock, the Series G Preferred Units held by the Company were redeemed by the Operating Partnership.
Issuance of Common Units
In January 2017, the Company completed an underwritten public offering of
4,427,500
shares of its common stock as discussed in Note 7. The net offering proceeds of approximately
$308.8 million
were contributed by the Company to the Operating Partnership in exchange for
4,427,500
common units.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Common Units Outstanding
The following table sets forth the number of common units held by the Company and the number of common units held by non-affiliated investors and certain of our executive officers and directors in the form of noncontrolling common units as well as the ownership interest held on each respective date:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2016
|
Company owned common units in the Operating Partnership
|
98,351,217
|
|
|
93,219,439
|
|
|
92,254,768
|
|
Company owned general partnership interest
|
97.9
|
%
|
|
97.5
|
%
|
|
97.2
|
%
|
Noncontrolling common units of the Operating Partnership
|
2,077,193
|
|
|
2,381,543
|
|
|
2,631,276
|
|
Ownership interest of noncontrolling interest
|
2.1
|
%
|
|
2.5
|
%
|
|
2.8
|
%
|
For further discussion of the noncontrolling common units as of
June 30, 2017
and
December 31, 2016
, refer to Note 6.
9. Share-Based Compensation
Stockholder Approved Equity Compensation Plans
As of
June 30, 2017
, we maintained
one
share-based incentive compensation plan, the Kilroy Realty 2006 Incentive Award Plan, as amended (the “2006 Plan”). As of
June 30, 2017
,
2,026,925
shares were available for grant under the 2006 Plan. The calculation of shares available for grant is presented after taking into account a reserve for a sufficient number of shares to cover
the vesting and payment of 2006 Plan awards that were outstanding on that date, including performance-based vesting awards at (i) levels actually achieved for the performance conditions (as defined below) for which the performance period has been completed and (ii) at target levels for the performance or market conditions (as defined below) for awards still in a performance period.
2017 Share-Based Compensation Grants
In
February 2017
, the Executive Compensation Committee of the Company’s Board of Directors awarded
229,976
restricted stock units (“RSUs”) to certain officers of the Company under the 2006 Plan, which included
130,956
RSUs (at the target level of performance), or
57%
, that are subject to market and/or performance-based vesting requirements (the “2017 Performance-Based RSUs”) and
99,020
RSUs, or
43%
, that are subject to time-based vesting requirements (the “2017 Time-Based RSUs”).
2017 Performance-Based RSU Grant
The 2017 Performance-Based RSUs are scheduled to vest at the end of a
three
-year period based upon the achievement of pre-set FFO per share goals for the year ending December 31, 2017 (the “FFO performance condition”) and also based upon either the average FAD per share growth or the Company’s average debt to EBITDA ratio (the “other performance conditions”) or the average annual relative total stockholder return ranking for the Company compared to an established comparison group of companies (the “market condition”) for the
three
-year period ending December 31, 2019. The 2017 Performance-Based RSUs are also subject to a
three
-year service vesting provision and are scheduled to cliff vest at the end of the
three
-year period. The number of 2017 Performance-Based RSUs ultimately earned could fluctuate from the target number of 2017 Performance-Based RSUs granted based upon the levels of achievement for the FFO performance condition, the other performance conditions and the market condition. The estimate of the number of 2017 Performance-Based RSUs earned is evaluated quarterly during the performance period based on our estimate for each of the performance conditions measured against the applicable goals. As of
June 30, 2017
, the number of 2017 Performance-Based RSUs estimated to be earned based on the Company’s estimate of the performance conditions measured against the applicable goals was
130,956
, and the compensation cost recorded to date for this program was based on that estimate. Compensation expense for the 2017 Performance-Based RSU grant will be recorded on a straight-line basis over the
three
-year period.
Each 2017 Performance-Based RSU represents the right, subject to the applicable vesting conditions, to receive
one
share of our common stock in the future. The total fair value of the 2017 Performance-Based RSU grant was
$10.3 million
at
February 24, 2017
. The determination of the fair value of the 2017 Performance-Based RSU grant with other performance conditions takes into consideration the likelihood of achievement of the FFO performance condition and the other performance conditions. The grant date fair value for the performance awards with a market condition was calculated using a Monte Carlo simulation pricing
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
model based on the assumptions in the table below. For the portion of the 2017 Performance-Based RSUs subject to the market condition, for the
six
months ended
June 30, 2017
, we recorded compensation expense based upon the
$80.89
fair value at
February 24, 2017
. The following table summarizes the assumptions utilized in the Monte Carlo simulation pricing model:
|
|
|
|
Fair Value Assumptions
|
Fair value per share at February 24, 2017
|
$80.89
|
Expected share price volatility
|
21.00%
|
Risk-free interest rate
|
1.39%
|
Remaining expected life
|
2.8 years
|
The computation of expected volatility is based on a blend of the historical volatility of our shares of common stock over approximately
5.6
years, as that is expected to be most consistent with future volatility and equates to a time period twice as long as the approximate
2.8
-year remaining performance period of the RSUs and implied volatility data based on the observed pricing of six month publicly-traded options on our shares of common stock. The risk-free interest rate is based on the yield curve on zero-coupon U.S. Treasury STRIP securities in effect at
February 24, 2017
. The expected life of the RSUs is equal to the remaining
2.8
year vesting period at
February 24, 2017
.
2017 Time-Based RSU Grant
The 2017 Time-Based RSUs are scheduled to vest in
three
equal installments beginning on January 5, 2018 through January 5, 2020. Compensation expense for the 2017 Time-Based RSUs will be recognized on a straight-line basis over the
three
-year service vesting period. Each 2017 Time-Based RSU represents the right to receive one share of our common stock in the future. The total fair value of the 2017 Time-Based RSU grant was
$7.5 million
, which was based on the
$73.30
and
$77.16
closing share prices of the Company’s common stock on the NYSE on the
February 3, 2017
and
February 24, 2017
grant dates, respectively.
Share-Based Award Activity
During the
six
months ended
June 30, 2017
,
272,000
non-qualified stock options were exercised and issued at an exercise price per share equal to
$42.61
. As of
June 30, 2017
, there were
39,500
stock options outstanding.
Share-Based Compensation Cost Recorded During the Period
The total compensation cost for all share-based compensation programs was
$6.5 million
and
$6.6 million
for the
three
months ended
June 30, 2017
and
2016
, respectively, and
$12.6 million
and
$12.5 million
for the
six
months ended
June 30, 2017
and
2016
, respectively. Of the total share-based compensation costs,
$1.6 million
and
$1.3 million
was capitalized as part of real estate assets and deferred leasing costs for the
three
months ended
June 30, 2017
and
2016
, respectively, and
$3.7 million
and
$2.5 million
for the
six
months ended
June 30, 2017
and
2016
, respectively. As of
June 30, 2017
, there was approximately
$35.1 million
of total unrecognized compensation cost related to nonvested incentive awards granted under share-based compensation arrangements that is expected to be recognized over a weighted-average period of
1.9
years. The remaining compensation cost related to these nonvested incentive awards had been recognized in periods prior to
June 30, 2017
.
10. Commitments and Contingencies
General
As of
June 30, 2017
, we had commitments of approximately
$736.8 million
, excluding our ground lease commitments, for contracts and executed leases directly related to our operating properties and development projects.
Environmental Matters
We follow the policy of monitoring all of our properties, both acquisition and existing stabilized portfolio properties, for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to our stabilized portfolio properties that would have a material adverse effect on our financial condition, results of operations and cash flow, or that we believe would require additional disclosure or the recording of a loss contingency.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of
June 30, 2017
, we had accrued environmental remediation liabilities of approximately
$21.3 million
recorded on our consolidated balance sheets in connection with certain development projects and recent development acquisitions. It is possible that we could incur additional environmental remediation costs in connection with these recent development acquisitions. However, given we are in the early stages of development on certain of these projects, potential additional environmental costs are not reasonably estimable at this time.
11. Fair Value Measurements and Disclosures
Assets and Liabilities Reported at Fair Value
The only assets we record at fair value on our consolidated financial statements are the marketable securities related to our Deferred Compensation Plan. The following table sets forth the fair value of our marketable securities as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
Fair Value (Level 1)
(1)
|
|
June 30, 2017
|
|
December 31, 2016
|
Description
|
(in thousands)
|
Marketable securities
(2)
|
$
|
16,010
|
|
|
$
|
14,773
|
|
________________________
|
|
(1)
|
Based on quoted prices in active markets for identical securities.
|
|
|
(2)
|
The marketable securities are held in a limited rabbi trust.
|
We report the change in the fair value of the marketable securities at the end of each accounting period in interest income and other net investment gains in the consolidated statements of operations. We also adjust the related Deferred Compensation Plan liability to fair value at the end of each accounting period based on the performance of the benchmark funds selected by each participant, which results in a corresponding increase or decrease to compensation cost for the period.
The following table sets forth the net gain on marketable securities recorded during the
three
and
six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Description
|
(in thousands)
|
|
(in thousands)
|
Net gain on marketable securities
|
$
|
512
|
|
|
$
|
249
|
|
|
$
|
1,183
|
|
|
$
|
386
|
|
Financial Instruments Disclosed at Fair Value
The following table sets forth the carrying value and the fair value of our other financial instruments as of
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Carrying
Value
|
|
Fair
Value
(1)
|
|
Carrying
Value
|
|
Fair
Value
(1)
|
|
(in thousands)
|
Liabilities
|
|
|
|
|
|
|
|
Secured debt, net
|
$
|
467,758
|
|
|
$
|
467,782
|
|
|
$
|
472,772
|
|
|
$
|
469,234
|
|
Unsecured debt, net
|
2,097,083
|
|
|
2,172,095
|
|
|
1,847,351
|
|
|
1,900,487
|
|
________________________
|
|
(1)
|
Fair value calculated using Level II inputs, which are based on model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
|
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
12. Net Income Available to Common Stockholders Per Share of the Company
The following table reconciles the numerator and denominator in computing the Company’s basic and diluted per-share computations for net income available to common stockholders for the
three
and
six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands, except share and per share amounts)
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable to Kilroy Realty Corporation
|
$
|
31,448
|
|
|
$
|
32,847
|
|
|
$
|
64,973
|
|
|
$
|
207,155
|
|
Total preferred dividends
|
(1,615
|
)
|
|
(3,312
|
)
|
|
(8,811
|
)
|
|
(6,625
|
)
|
Allocation to participating securities
(1)
|
(511
|
)
|
|
(423
|
)
|
|
(959
|
)
|
|
(818
|
)
|
Numerator for basic and diluted net income available to common stockholders
|
$
|
29,322
|
|
|
$
|
29,112
|
|
|
$
|
55,203
|
|
|
$
|
199,712
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted average vested shares outstanding
|
98,275,471
|
|
|
92,209,955
|
|
|
97,834,255
|
|
|
92,217,238
|
|
Effect of dilutive securities
|
551,907
|
|
|
614,831
|
|
|
593,090
|
|
|
566,827
|
|
Diluted weighted average vested shares and common share equivalents outstanding
|
98,827,378
|
|
|
92,824,786
|
|
|
98,427,345
|
|
|
92,784,065
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Net income available to common stockholders per share
|
$
|
0.30
|
|
|
$
|
0.32
|
|
|
$
|
0.56
|
|
|
$
|
2.17
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net income available to common stockholders per share
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
$
|
0.56
|
|
|
$
|
2.15
|
|
________________________
|
|
(1)
|
Participating securities include nonvested shares, certain time-based RSUs and vested market measure-based RSUs.
|
Share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities. The impact of potentially dilutive common shares, including stock options, RSUs and other securities are considered in our diluted earnings per share calculation for the
three
and
six
months ended
June 30, 2017
and
2016
. Certain market measure-based RSUs are not included in dilutive securities for the
three
and
six
months ended
June 30, 2017
and
2016
, as not all performance metrics had been met by the end of the applicable reporting periods.
See Note 9 “Share-Based Compensation” for additional information regarding share-based compensation.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
13. Net Income Available to Common Unitholders Per Unit of the Operating Partnership
The following table reconciles the numerator and denominator in computing the Operating Partnership’s basic and diluted per-unit computations for net income available to common unitholders for the
three
and
six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in thousands, except unit and per unit amounts)
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable to Kilroy Realty, L.P.
|
$
|
31,971
|
|
|
$
|
33,590
|
|
|
$
|
66,025
|
|
|
$
|
211,423
|
|
Total preferred distributions
|
(1,615
|
)
|
|
(3,312
|
)
|
|
(8,811
|
)
|
|
(6,625
|
)
|
Allocation to participating securities
(1)
|
(511
|
)
|
|
(423
|
)
|
|
(959
|
)
|
|
(818
|
)
|
Numerator for basic and diluted net income available to common unitholders
|
$
|
29,845
|
|
|
$
|
29,855
|
|
|
$
|
56,255
|
|
|
$
|
203,980
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted average vested units outstanding
|
100,352,664
|
|
|
94,841,231
|
|
|
100,024,000
|
|
|
94,514,876
|
|
Effect of dilutive securities
|
551,907
|
|
|
614,831
|
|
|
593,090
|
|
|
566,827
|
|
Diluted weighted average vested units and common unit equivalents outstanding
|
100,904,571
|
|
|
95,456,062
|
|
|
100,617,090
|
|
|
95,081,703
|
|
Basic earnings per unit:
|
|
|
|
|
|
|
|
Net income available to common unitholders per unit
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
$
|
0.56
|
|
|
$
|
2.16
|
|
Diluted earnings per unit:
|
|
|
|
|
|
|
|
Net income available to common unitholders per unit
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
$
|
0.56
|
|
|
$
|
2.15
|
|
________________________
|
|
(1)
|
Participating securities include nonvested shares, certain time-based RSUs and vested market measure-based RSUs.
|
Share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities. The impact of potentially dilutive common units, including stock options, RSUs and other securities are considered in our diluted earnings per share calculation for the
three
and
six
months ended
June 30, 2017
and
2016
. Certain market measure-based RSUs are not included in dilutive securities for the
three
and
six
months ended
June 30, 2017
and
2016
, as not all performance metrics had been met by the end of the applicable reporting periods.
See Note 9 “Share-Based Compensation” for additional information regarding share-based compensation.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
14. Supplemental Cash Flow Information of the Company
Supplemental cash flow information is included as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
SUPPLEMENTAL CASH FLOWS INFORMATION:
|
|
|
|
Cash paid for interest, net of capitalized interest of $20,219 and $25,674 as of June 30, 2017 and 2016, respectively
|
$
|
30,977
|
|
|
$
|
25,787
|
|
NON-CASH INVESTING TRANSACTIONS:
|
|
|
|
Accrual for expenditures for operating properties and development properties
|
$
|
66,967
|
|
|
$
|
50,246
|
|
Tenant improvements funded directly by tenants
|
$
|
9,221
|
|
|
$
|
10,713
|
|
Assumption of accrued liabilities in connection with acquisitions
|
$
|
—
|
|
|
$
|
4,911
|
|
NON-CASH FINANCING TRANSACTIONS:
|
|
|
|
Accrual of dividends and distributions payable to common stockholders and common unitholders
|
$
|
43,305
|
|
|
$
|
36,093
|
|
Accrual of dividends and distributions payable to preferred stockholders and preferred unitholders
|
$
|
797
|
|
|
$
|
1,656
|
|
Exchange of common units of the Operating Partnership into shares of the Company’s common stock
|
$
|
10,939
|
|
|
$
|
39
|
|
Issuance of common units of the Operating Partnership in connection with an acquisition
|
$
|
—
|
|
|
$
|
48,033
|
|
Secured debt assumed by buyers in connection with land dispositions
|
$
|
—
|
|
|
$
|
2,322
|
|
The following is a reconciliation of our cash and cash equivalents and restricted cash at the beginning and end of the
six
months ended
June 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
|
|
|
|
Cash and cash equivalents at beginning of period
|
$
|
193,418
|
|
|
$
|
56,508
|
|
Restricted cash at beginning of period
|
56,711
|
|
|
696
|
|
Cash and cash equivalents and restricted cash at beginning of period
|
$
|
250,129
|
|
|
$
|
57,204
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
$
|
387,616
|
|
|
$
|
26,332
|
|
Restricted cash at end of period
|
8,249
|
|
|
266,158
|
|
Cash and cash equivalents and restricted cash at end of period
|
$
|
395,865
|
|
|
$
|
292,490
|
|
15. Supplemental Cash Flow Information of the Operating Partnership:
Supplemental cash flow information is included as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
SUPPLEMENTAL CASH FLOWS INFORMATION:
|
|
|
|
Cash paid for interest, net of capitalized interest of $20,219 and $25,674 as of June 30, 2017 and 2016, respectively
|
$
|
30,977
|
|
|
$
|
25,787
|
|
NON-CASH INVESTING TRANSACTIONS:
|
|
|
|
Accrual for expenditures for operating properties and development properties
|
$
|
66,967
|
|
|
$
|
50,246
|
|
Tenant improvements funded directly by tenants
|
$
|
9,221
|
|
|
$
|
10,713
|
|
Assumption of accrued liabilities in connection with acquisitions
|
$
|
—
|
|
|
$
|
4,911
|
|
NON-CASH FINANCING TRANSACTIONS:
|
|
|
|
Accrual of distributions payable to common unitholders
|
$
|
43,305
|
|
|
$
|
36,093
|
|
Accrual of distributions payable to preferred unitholders
|
$
|
797
|
|
|
$
|
1,656
|
|
Issuance of common units of the Operating Partnership in connection with an acquisition
|
$
|
—
|
|
|
$
|
48,033
|
|
Secured debt assumed by buyers in connection with land dispositions
|
$
|
—
|
|
|
$
|
2,322
|
|
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following is a reconciliation of our cash and cash equivalents and restricted cash at the beginning and end of the
six
months ended
June 30, 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
|
|
|
|
Cash and cash equivalents at beginning of period
|
$
|
193,418
|
|
|
$
|
56,508
|
|
Restricted cash at beginning of period
|
56,711
|
|
|
696
|
Cash and cash equivalents and restricted cash at beginning of period
|
$
|
250,129
|
|
|
$
|
57,204
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
$
|
387,616
|
|
|
$
|
26,332
|
|
Restricted cash at end of period
|
8,249
|
|
|
266,158
|
|
Cash and cash equivalents and restricted cash at end of period
|
$
|
395,865
|
|
|
$
|
292,490
|
|
16. Subsequent Events
On
July 12, 2017
, aggregate dividends, distributions and dividend equivalents of
$43.3 million
were paid to common stockholders, common unitholders and RSU holders of record on
June 30, 2017
.
On
July 12, 2017, the Company announced its intent to redeem all
4,000,000
shares of its
6.375%
Series H Cumulative Redeemable Preferred Stock (“Series H Preferred Stock”) on
August 15, 2017
by payment of
$25.00
per share in cash, totaling
$100.0 million
. Upon redemption of the outstanding Series H Preferred Stock on
August 15, 2017
, the Company will incur an associated non-cash charge of
$3.7 million
as a reduction to net income available to common stockholders for the related original issuance costs.
On July 24 2017, the Operating Partnership amended and restated the terms of its unsecured revolving credit facility and term loan facility (together, the “Facility”). The amendment and restatement increased the size of the revolving credit facility from
$600.0 million
to
$750.0 million
, maintained the size of the term loan facility of
$150.0 million
, reduced the borrowing costs and extended the maturity date of the Facility to July 2022. The term loan facility features two six-month delayed draw options and the Facility was undrawn at closing, including the
$150.0 million
term loan, which was repaid in full at closing with available cash. Concurrently with the closing of the Facility, the Operating Partnership repaid its
$39.0 million
unsecured term loan with available cash.