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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-12675
KILROY REALTY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Maryland 95-4598246
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
2250 East Imperial Highway, Suite 1200, El Segundo, California 90245
(Address of principal executive offices)
(310) 563-5500
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of August 11, 2000, 26,455,400 shares of common stock, par value $.01
per share, were outstanding.
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<PAGE>
KILROY REALTY CORPORATION
QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I--FINANCIAL INFORMATION
<C> <S> <C>
Item 1. FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets as of June 30, 2000 and December
31, 1999....................................................... 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999............................ 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999......................................... 5
Notes to Consolidated Financial Statements..................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 27
PART II--OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.............................................. 30
Item 2. CHANGES IN SECURITIES.......................................... 30
Item 3. DEFAULTS UPON SENIOR SECURITIES................................ 30
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 30
Item 5. OTHER INFORMATION.............................................. 30
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 30
SIGNATURES..................................................... 31
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
------
INVESTMENT IN REAL ESTATE (Note 2):
Land and improvements................................ $ 274,541 $ 274,463
Buildings and improvements........................... 1,016,166 946,130
Undeveloped land and construction in progress, net... 176,858 189,645
---------- ----------
Total investment in real estate.................... 1,467,565 1,410,238
Accumulated depreciation and amortization............ (189,410) (174,427)
---------- ----------
Investment in real estate, net..................... 1,278,155 1,235,811
CASH AND CASH EQUIVALENTS............................. 16,518 26,116
RESTRICTED CASH....................................... 6,322 6,636
TENANT RECEIVABLES, NET............................... 25,621 22,078
NOTES RECEIVABLE FROM RELATED PARTY (Note 3).......... 45,278
DEFERRED FINANCING AND LEASING COSTS, NET............. 32,997 27,840
PREPAID EXPENSES AND OTHER ASSETS (Note 2)............ 18,172 2,020
---------- ----------
TOTAL ASSETS....................................... $1,423,063 $1,320,501
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Mortgage debt (Notes 2 & 4).......................... $ 386,034 $ 325,516
Unsecured line of credit (Note 4).................... 305,000 228,000
Accounts payable and accrued expenses................ 32,165 26,260
Accrued distributions (Note 9)....................... 13,591 13,456
Rents received in advance and tenant security
deposits............................................ 20,664 20,287
---------- ----------
Total liabilities.................................. 757,454 613,519
---------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS (Note 5):
8.075% Series A Cumulative Redeemable Preferred
unitholders......................................... 73,716 73,716
9.375% Series C Cumulative Redeemable Preferred
unitholders......................................... 34,464 34,464
9.250% Series D Cumulative Redeemable Preferred
unitholders......................................... 44,321 44,022
Common unitholders of the Operating Partnership...... 62,315 71,920
Minority interests in Development LLCs............... 10,969 9,931
---------- ----------
Total minority interests........................... 225,785 234,053
---------- ----------
STOCKHOLDERS' EQUITY (Note 6):
Preferred stock, $.01 par value, 26,200,000 shares
authorized, none issued and outstanding.............
8.075% Series A Cumulative Redeemable Preferred
stock, $.01 par value,
1,700,000 shares authorized, none issued and
outstanding........................................
Series B Junior Participating Preferred stock, $.01
par value,
400,000 shares authorized, none issued and
outstanding........................................
9.375% Series C Cumulative Redeemable Preferred
stock, $.01 par value,
700,000 shares authorized, none issued and
outstanding........................................
9.250% Series D Cumulative Redeemable Preferred
stock, $.01 par value,
1,000,000 shares authorized, none issued and
outstanding........................................
Common stock, $.01 par value, 150,000,000 shares
authorized, 265 278
26,455,400 and 27,808,410 shares issued and
outstanding, respectively..........................
Additional paid-in capital........................... 459,436 491,204
Distributions in excess of earnings.................. (19,877) (18,553)
---------- ----------
Total stockholders' equity......................... 439,824 472,929
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $1,423,063 $1,320,501
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES (Note 7):
Rental income........................................... $ 39,370 $ 34,164 $ 77,072 $ 66,982
Tenant reimbursements................................... 4,594 4,193 9,288 8,316
Interest income......................................... 1,016 221 1,302 621
Other income............................................ 380 723 1,461 932
---------- ---------- ---------- ----------
Total revenues........................................ 45,360 39,301 89,123 76,851
---------- ---------- ---------- ----------
EXPENSES:
Property expenses....................................... 6,074 5,329 11,532 10,463
Real estate taxes....................................... 3,049 2,852 6,436 5,861
General and administrative expenses..................... 2,555 2,201 5,187 4,515
Ground leases........................................... 399 334 788 671
Interest expense........................................ 9,948 6,160 17,776 11,919
Depreciation and amortization........................... 9,645 7,460 18,968 14,677
---------- ---------- ---------- ----------
Total expenses........................................ 31,670 24,336 60,687 48,106
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS BEFORE GAINS ON DISPOSITIONS OF
OPERATING PROPERTIES, EQUITY IN LOSS OF UNCONSOLIDATED
SUBSIDIARY AND MINORITY INTERESTS........................ 13,690 14,965 28,436 28,745
GAINS ON DISPOSITIONS OF OPERATING PROPERTIES............. 4,273 3,968
EQUITY IN LOSS OF UNCONSOLIDATED SUBSIDIARY............... (24) (14) (17) (14)
---------- ---------- ---------- ----------
INCOME BEFORE MINORITY INTERESTS.......................... 17,939 14,951 32,387 28,731
---------- ---------- ---------- ----------
MINORITY INTERESTS:
Distributions on Cumulative Redeemable Preferred units.. (3,375) (2,335) (6,750) (4,669)
Minority interest in earnings of Operating Partnership.. (1,843) (1,820) (3,215) (3,356)
Minority interest in earnings of Development LLCs....... 83 (41)
---------- ---------- ---------- ----------
Total minority interests.............................. (5,135) (4,155) (10,006) (8,025)
---------- ---------- ---------- ----------
NET INCOME................................................ $ 12,804 $ 10,796 $ 22,381 $ 20,706
========== ========== ========== ==========
Net income per common share--basic (Note 8)............... $ 0.49 $ 0.39 $ 0.84 $ 0.75
========== ========== ========== ==========
Net income per common share--diluted (Note 8)............. $ 0.49 $ 0.39 $ 0.84 $ 0.75
========== ========== ========== ==========
Weighted average shares outstanding--basic (Note 8)....... 26,258,821 27,629,210 26,743,659 27,630,867
========== ========== ========== ==========
Weighted average shares outstanding--diluted (Note 8)..... 26,348,049 27,713,291 26,788,468 27,673,500
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 22,381 $ 20,706
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................ 18,968 14,677
Provision for uncollectable tenant receivables and
unbilled deferred rent................................ 1,297 1,310
Minority interest in earnings of Operating Partnership
and Development LLCs.................................. 3,256 3,356
Amortization of restricted stock grants.................. 236 254
Gains on dispositions of operating properties and
undeveloped land...................................... (3,968) (539)
Other.................................................... (184) (216)
Changes in assets and liabilities:
Tenant receivables...................................... (5,693) (3,349)
Deferred leasing costs.................................. (1,413) (1,674)
Prepaid expenses and other assets....................... (3,853) (164)
Accounts payable and accrued expenses................... 6,219 (19)
Rents received in advance and tenant security
deposits.............................................. 377 1,479
Accrued distributions to Cumulative Redeemable
Preferred unitholders.................................. 299 58
--------- --------
Net cash provided by operating activities.............. 37,922 35,879
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for operating properties.................... (7,577) (23,977)
Expenditures for undeveloped land and construction in
progress................................................ (79,653) (72,483)
Cash paid to acquire note receivable..................... (45,278)
Proceeds received from dispositions of operating
properties.............................................. 26,294
Proceeds received from dispositions of undeveloped land.. 5,051
Net advances to unconsolidated subsidiary................ (314) (1,016)
--------- --------
Net cash used in investing activities.................. (106,528) (92,425)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock.............................. (41,255)
Net borrowings (repayments) on unsecured line of credit.. 77,000 (19,500)
Proceeds from issuance of mortgage debt.................. 54,388 125,000
Principal payments on mortgage debt...................... (2,370) (20,585)
Financing costs.......................................... (3,097) (780)
Decrease in restricted cash.............................. 314 1,474
Net contributions from minority interests in Development
LLCs.................................................... 996
Distributions paid to common stockholders and common
unitholders............................................. (26,968) (26,462)
--------- --------
Net cash provided by financing activities.............. 59,008 59,147
--------- --------
Net (decrease) increase in cash and cash equivalents...... (9,598) 2,601
Cash and cash equivalents, beginning of period............ 26,116 6,443
--------- --------
Cash and cash equivalents, end of period.................. $ 16,518 $ 9,044
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized interest...... $ 16,411 $ 11,133
========= ========
Distributions paid to Cumulative Redeemable Preferred
unitholders............................................. $ 6,452 $ 4,596
========= ========
NON-CASH TRANSACTIONS:
Accrual of distributions payable (Note 8)................ $ 13,591 $ 13,567
========= ========
Issuance of mortgage note payable in connection with
undeveloped land acquisition (Note 2)................... $ 8,500
=========
Issuance of common units of the Operating Partnership to
acquire operating properties and undeveloped land....... $ 9,915
========
Minority interest recorded in connection with Development
LLCs undeveloped land acquisitions...................... $ 9,733
========
Note receivable from related parties repaid in connection
with operating property acquisition..................... $ 2,267
========
Note receivable from related parties satisfied in
connection with Development LLC undeveloped land
acquisitions............................................ $ 6,531
========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 2000 and 1999
(Unaudited)
1. Organization and Basis of Presentation
Organization
Kilroy Realty Corporation (the "Company") develops, owns, and operates
office and industrial real estate, primarily in Southern California. The
Company operates as a self-administered real estate investment trust ("REIT").
As of June 30, 2000, the Company's stabilized portfolio of operating
properties consisted of 82 office buildings (the "Office Properties") and 83
industrial buildings (the "Industrial Properties"), which encompassed
approximately 6.3 million and 6.2 million rentable square feet, respectively,
and was 97.3% occupied. The Company's stabilized portfolio consists of all of
the Company's Office and Industrial Properties excluding properties recently
developed by the Company that have not yet reached 95.0% occupancy ("lease-up"
properties) and projects currently under construction or in pre-development.
As of June 30, 2000, the Company had recently completed construction on two
office properties encompassing an aggregate of approximately 293,800 rentable
square feet which were in the lease-up phase. Lease-up properties are included
in land and improvements and building and improvements on the consolidated
balance sheets upon building shell completion. In addition, as of June 30,
2000, the Company had 10 office properties under construction which when
completed are expected to encompass an aggregate of approximately 906,500
rentable square feet.
The Company owns its interests in all of its properties through Kilroy
Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance
Partnership, L.P. and conducts substantially all of its operations through the
Operating Partnership. The Company owned an 87.6% general partnership interest
in the Operating Partnership as of June 30, 2000. The Operating Partnership
owns a 50% interest in two limited liability companies (the "Development
LLCs") which were formed to develop two multi-phased office projects in
San Diego, California. The Development LLCs are consolidated for financial
reporting purposes since the Company holds significant control over the
entities through a 50% managing partner ownership interest, combined with the
ability to control all significant development and operating decisions.
Basis of Presentation
The accompanying interim financial statements have been prepared by the
Company's management in accordance with generally accepted accounting
principles ("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 in the United States of America for complete financial
statements. In the opinion of management, the interim financial statements
presented herein reflect all adjustments of a normal and recurring nature
which are considered necessary for a fair presentation of the results for the
interim periods presented. The results of operations for the interim period
are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000. These financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
Certain prior year amounts have been reclassified to conform to the current
period's presentation.
New Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on applying GAAP to revenue recognition
issues in financial statements. The Company is required to adopt SAB 101 in
the fourth quarter of 2000. Management does not expect the adoption of SAB 101
to have a material effect on the Company's results of operations or financial
position.
6
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions, Dispositions and Completed Development Projects
Acquisitions
In March 2000, the Company acquired 17 acres of undeveloped land in San
Diego, California from an unaffiliated third party for $11.3 million,
consisting of a cash payment of $2.8 million and the issuance of an $8.5
million mortgage note payable due to the seller. The $8.5 million mortgage
note payable due to the seller is payable upon the earlier of the successful
completion of infrastructure improvements to the undeveloped land that the
seller is obligated to perform, or December 31, 2003, the note's stated
maturity. The note bears interest at 10.00% per annum until December 31, 2000,
the date upon which the seller is expected to complete the infrastructure
improvements. If the infrastructure improvements are not completed by December
31, 2000, the note will not accrue any additional interest and the principal
balance of the note will be reduced at the rate of $1,000 per day. The cash
portion of the purchase price was funded primarily with existing working
capital.
Dispositions
During the six months ended June 30, 2000, the Company sold, through four
separate transactions, five office and four industrial buildings containing an
aggregate of approximately 373,100 rentable square feet, to unaffiliated third
parties for an aggregate sales price of $40.2 million as follows:
<TABLE>
<CAPTION>
Month of Rentable Square Sales Price
Property Type Location Disposition # of Buildings Feet ($ in millions)
------------- ---------------- ----------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Industrial.............. Lake Forest, CA January 2 45,300 $ 3.3
Industrial.............. Garden Grove, CA April 1 110,200 6.3
Industrial.............. Carlsbad, CA June 1 82,900 12.6
Office.................. Aliso Viejo, CA June 5 134,700 18.0
--- ------- -----
Total.............................................. 9 373,100 $40.2
=== ======= =====
</TABLE>
In connection with the disposition of the industrial property in Carlsbad,
California which closed on June 30, 2000, the Company recorded a $12.5 million
escrow receivable relating to the net sales proceeds as of June 30, 2000. The
escrow receivable is included in prepaid expenses and other assets on the
consolidated balance sheet at June 30, 2000.
Completed Development Projects
During the six months ended June 30, 2000, the Company completed the
development of, and stabilized three office buildings containing an aggregate
of approximately 314,100 rentable square feet as shown on the table below.
These properties were included in the Company's stabilized portfolio at June
30, 2000 since they exceeded 95% occupancy upon completion.
<TABLE>
<CAPTION>
Completion & Rentable Square Occupancy at
Property Type Location Stabilization Date # of Buildings Feet June 30, 2000
------------- ----------- ------------------ -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Office.................. Del Mar, CA Q1 2000 1 72,300 100%
Office.................. Del Mar, CA Q2 2000 1 129,700 100%
Office.................. Del Mar, CA Q2 2000 1 112,100 100%
--- -------
Total................................................ 3 314,100 100%
=== =======
</TABLE>
7
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At June 30, 2000, the Company had recently completed construction on two
office properties encompassing an aggregate of approximately 293,800 rentable
square feet, which were in the lease-up phase as follows:
<TABLE>
<CAPTION>
Rentable Square
Property Type Location Completion Date # of Buildings Feet
------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Office.................. Long Beach, CA Q2 2000 1 192,400
Office.................. Calabasas, CA Q2 2000 1 101,400
--- -------
Total................................................ 2 293,800
=== =======
</TABLE>
3. Notes Receivable from Related Party
On May 1, 2000, the Company initiated actions that have put it in a
position to potentially acquire the fee interest in a three building office
complex located in El Segundo, California. The complex, which encompasses
approximately 366,000 aggregate rentable square feet, is currently owned by
Kilroy Airport Imperial Co. ("KAICO"), a partnership owned by John B. Kilroy,
Sr., the Company's Chairman of the Board of Directors, John B. Kilroy, Jr. the
Company's President and Chief Executive Officer, and certain other Kilroy
family members. The complex is comprised of two office buildings and a parking
structure. One of the office buildings is occupied by Hughes Space &
Communications Company ("Hughes") and the other office building is vacant. The
lease with Hughes contains a 60-day right of first offer that gives Hughes,
under certain circumstances, the right to offer to purchase the complex. The
Company believes the 60-day right of first offer expired in July 2000.
In the first step of the transaction, on May 1, 2000, the Company purchased
a non-recourse note receivable with an outstanding principal balance of $60.8
million and accrued interest of $10.2 million from an institutional lender for
$45.3 million. The note is secured by a first trust deed on the complex and
has an annual interest rate of 9.63% and a maturity date of February 1, 2005.
At the time of the acquisition, KAICO was in payment default under the terms
of the note. The Company recorded its investment in the impaired note at the
$45.3 million purchase price and recorded no additional impairment allowance
since the Company believes that the purchase price of the note is less than
the fair market value of the complex securing it. The acquisition of the note
was funded with borrowings under the Company's revolving credit facility.
As a result of the acquisition of the note, the Company is receiving all of
the net operating income from the complex under a related agreement. In
addition, KAICO will pay the Company approximately $98,000 per month for six
months. The Company is recording these amounts as interest income on the
consolidated statement of operations on a cash basis. For the months of May
and June 2000, the Company recorded approximately $0.8 million of interest
income related to this note.
The Company and KAICO also entered into an agreement whereby the Company
agreed to pay KAICO approximately $3.7 million for the reimbursement of
expenditures incurred by KAICO on the complex since 1997 and for the
modification of an existing option that the Company holds to purchase the
complex. Of the $3.7 million, $2.3 million was paid to KAICO on May 1, 2000 at
the time of the note acquisition. The Company, in its capacity as manager of
the property, has been named as a codefendant in litigation currently pending
between KAICO and Hughes with respect to the lease on the complex. The Company
believes there would be no material adverse effect upon its financial
condition, results of operations and cash flows if the litigation were
determined adversely to KAICO or the Company.
4. Unsecured Line of Credit and Mortgage Debt
As of June 30, 2000, the Company had borrowings of $305 million outstanding
under its revolving unsecured line of credit (the "Credit Facility") and
availability of approximately $54.6 million. Availability
8
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
under the Credit Facility is based upon the value of the Company's
unencumbered assets. The Credit Facility bears interest at an annual rate
between LIBOR plus 1.13% and LIBOR plus 1.75% (8.18% at June 30, 2000),
depending upon the Company's leverage ratio at the time of borrowing. In April
2000, the Credit Facility agreement was amended to increase the funds
available on the unencumbered asset pool and to increase the unsecured
leverage ratio. The Company expects to use the Credit Facility to finance
development expenditures, to fund potential undeveloped land acquisitions and
for general corporate purposes.
In February 2000, the Company entered into an interest rate swap agreement
with a total notional amount of $150 million to effectively limit interest
expense on the Company's floating rate debt during periods of increasing
interest rates. The agreement, which expires in February 2002, requires the
Company to pay fixed rate interest payments based on an annual interest rate
of 6.95% and receive floating rate interest payments based on one-month LIBOR.
Also, in February 2000, the Company entered into an interest rate cap
agreement with a total notional amount of $150 million to effectively limit
interest expense on the Company's floating rate debt during periods of
increasing interest rates. The agreement begins in July 2000, has a LIBOR
based cap rate of 6.50%, and expires in January 2002. The Company's exposure
is limited to the $1.9 million cost of the agreement which the Company will
amortize over the life of the agreement and include as a component of interest
expense in the consolidated statements of operations.
In April 2000, one of the Development LLCs obtained a non-recourse
construction loan with a total commitment of $57.0 million. The construction
loan, which had an outstanding balance of approximately $32.4 million at June
30, 2000, bears interest at an annual interest rate of LIBOR plus 2.70% (9.37%
at June 30, 2000) and matures on April 17, 2002, with the option to extend for
up to two six-month periods. The proceeds from the construction loan are being
used to finance the development of one of the multi-phased office projects
that the Company is developing in San Diego, California, with The Allen Group,
a group of affiliated real estate development and investment companies based
in Visalia, California. The project is expected to encompass approximately
550,000 rentable square feet of office space upon completion of all phases.
The construction loan is secured by the land for the entire project, the three
phases of the project that the Company has completed as of June 30, 2000, and
all improvements to be constructed.
In May 2000, one of the Development LLCs entered into an interest rate cap
agreement with a LIBOR based cap rate of 8.50% to effectively limit interest
expense on the aforementioned floating rate construction loan during periods
of increasing interest rates. The agreement has an initial notional amount of
$21.1 million that increases to $57.0 million during the period from May 2000
through August 2001, and then remains at $57.0 million until expiration in
April 2002. The notional amount of this interest rate cap agreement was
approximately $31.2 million at June 30, 2000. The Development LLC's exposure
is limited to the $0.1 million cost of the agreement.
In June 2000, one of the Development LLCs borrowed $22.0 million under a
mortgage loan that requires monthly principal and interest payments based on a
floating annual interest rate of LIBOR plus 1.75% (8.40% at June 30, 2000)
amortizes over 25 years, and matures in June 2004. The mortgage loan is
secured by two buildings that the Company has developed with The Allen Group
and completed in the fourth quarter of 1999. The Development LLC used the
proceeds from the mortgage loan to fund development expenditures on the
remaining phases of the multi-phase office project to be constructed.
On July 3, 2000, in connection with the disposition of the industrial
property in Carlsbad, California (see Note 2), the Company made a $6.8 million
partial paydown on the principal balance of an existing $90.0 million
variable-mortgage note payable which has an annual interest rate of LIBOR plus
1.75% and matures in October 2003.
9
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total interest capitalized for the three months ended June 30, 2000 and
1999 was $4.0 million and $2.8 million, respectively. Total interest
capitalized for the six months ended June 30, 2000 and 1999 was $8.0 million
and $4.9 million, respectively.
5. Minority Interests
Minority interests represent the preferred limited partnership interests in
the Operating Partnership, the common limited partnership interests in the
Operating Partnership not owned by the Company, and interests held by The
Allen Group in the Development LLCs. The Company owned an 87.6% general
partnership interest in the Operating Partnership as of June 30, 2000.
During the six months ended June 30, 2000, 481,290 common units of the
Operating Partnership were exchanged into shares of the Company's common stock
on a one-for-one basis. Of these 481,290 common units, 364,200 common units
were owned by Kilroy Industries, an entity owned by John B. Kilroy, Sr., the
Chairman of the Company's Board of Directors, and John B. Kilroy, Jr., the
Company's President and Chief Executive Officer. In addition, of the 481,290
common units, 1,739 common units were owned by a Vice President of the
Company. Neither the Company nor the Operating Partnership received any
proceeds from the issuance of the common stock to the identified common
unitholders.
6. Stockholders Equity
During the first quarter of 2000, the Company repurchased 1,999,300 shares
of its common stock in open market transactions for an aggregate repurchase
price of $41.2 million or an average repurchase price of $20.58 per share.
Repurchases during the first quarter of 2000 were funded primarily through
working capital and borrowings on the Company's unsecured revolving credit
facility. The Company did not repurchase any shares of common stock in the
second quarter of 2000.
In April 2000, the Company filed a registration statement on Form S-3 with
the SEC which registered the potential issuance and resale of up to a total of
380,333 shares of the Company's common stock in exchange for 380,333 common
limited partnership units of the Operating Partnership previously issued in
connection with certain 1999 and 1998 property acquisitions. The common
limited partnership units may be exchanged at the Company's option into shares
of the Company's common stock on a one-for-one basis. Neither the Company nor
the Operating Partnership will receive any proceeds from the issuance of the
common stock to the identified common unitholders. The SEC declared the
registration statement effective on May 8, 2000.
On June 23, 2000, the Company's Compensation Committee, comprised of two
independent directors, granted 175,000 shares of restricted stock to certain
key employees, the grantees. All of the shares of restricted stock granted,
which were sold at a purchase price of $0.01 per share, contain cliff-vesting
provisions such that the shares vest 100% on March 1, 2003. Compensation
expense for the restricted shares is calculated based upon the Company's
closing share price of $24.94 on the June 23, 2000 grant date, and is
amortized on a straight-line basis over the vesting period and included in
general and administrative expenses in the consolidated statements of
operations. The restricted shares have the same dividend and voting rights as
common stock. The restricted shares are included in the Company's calculation
of weighted average outstanding shares at June 30, 2000.
10
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Segment Disclosure
The Company evaluates the performance of its segments based upon net
operating income. Net operating income is defined as operating revenues
(rental income, tenant reimbursements and other income) less property and
related expenses (property expenses, real estate taxes and ground leases) and
does not include interest income and expense, depreciation and amortization
and corporate general and administrative expenses. All operating revenues are
comprised of amounts received from third-party tenants.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2000 1999 2000 1999
--------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Revenues and Expenses:
Office Properties:
Operating revenues................. $ 31,084 $ 27,210 $ 60,958 $ 52,768
Property and related expenses...... 7,672 6,574 14,967 13,198
--------- --------- -------- --------
Net operating income, as defined... 23,412 20,636 45,991 39,570
--------- --------- -------- --------
Industrial Properties:
Operating revenues................. 13,260 11,870 26,863 23,462
Property and related expenses...... 1,850 1,941 3,789 3,797
--------- --------- -------- --------
Net operating income, as defined... 11,410 9,929 23,074 19,665
--------- --------- -------- --------
Total Reportable Segments:
Operating revenues................. 44,344 39,080 87,821 76,230
Property and related expenses...... 9,522 8,515 18,756 16,995
--------- --------- -------- --------
Net operating income, as defined... 34,822 30,565 69,065 59,235
--------- --------- -------- --------
Reconciliation to Consolidated Net
Income:
Total net operating income, as
defined, for reportable segments.. 34,822 30,565 69,065 59,235
Other unallocated revenues:
Interest income.................. 1,016 221 1,302 621
Other unallocated expenses:
General and administrative
expenses........................ 2,555 2,201 5,187 4,515
Interest expense................. 9,948 6,160 17,776 11,919
Depreciation and amortization.... 9,645 7,460 18,968 14,677
--------- --------- -------- --------
Net income from operations before
gains on dispositions of operating
properties, equity in loss of
unconsolidated subsidiary and
minority interests................ 13,690 14,965 28,436 28,745
Gains on dispositions of operating
properties........................ 4,273 3,968
Equity in loss of unconsolidated
subsidiary........................ (24) (14) (17) (14)
Minority interests................. (5,135) (4,155) (10,006) (8,025)
--------- --------- -------- --------
Net income......................... $ 12,804 $ 10,796 $ 22,381 $ 20,706
========= ========= ======== ========
</TABLE>
11
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding for the period plus the
number of common shares issuable assuming the exercise of all dilutive
securities. The Company does not consider common units of the Operating
Partnership to be dilutive since the exchange of common units into common
stock is on a one-for-one basis and would not have any effect on diluted
earnings per share. The following table reconciles the numerator and
denominator of the basic and diluted per-share computations for net income.
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 Three Months Ended June 30, 1999
----------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic................... $12,804 26,258,821 $0.49 $10,796 27,629,210 $0.39
Effect of dilutive
securities:
Stock options
granted.............. 89,228 84,081
------- ---------- ----- ------- ---------- -----
Diluted ................ $12,804 26,348,049 $0.49 $10,796 27,713,291 $0.39
======= ========== ===== ======= ========== =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 Six Months Ended June 30, 1999
----------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ---------- ------------- ---------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic................... $22,381 26,743,659 $0.84 $20,706 27,630,867 $0.75
Effect of dilutive
securities:
Stock options
granted.............. 44,809 42,633
------- ---------- ----- ------- ---------- -----
Diluted ................ $22,381 26,788,468 $0.84 $20,706 27,673,500 $0.75
======= ========== ===== ======= ========== =====
</TABLE>
At June 30, 2000, Company employees and directors held options to purchase
approximately 1,093,000 shares of the Company's common stock that, based on
the Company's average share price for the quarter ended June 30, 2000, were
antidilutive to the diluted earnings per share computation. These options
could become dilutive in future periods if the average market price of the
Company's common stock exceeds the exercise price of the outstanding options.
9. Subsequent Events
On July 3, 2000, in connection with disposition of the industrial property
in Carlsbad, California (see Note 2), the Company made a $6.8 million partial
paydown of the principal balance of an existing $90.0 million variable-rate
mortgage note payable due October 2003 (see Note 4).
On July 14, 2000, aggregate distributions of $13.6 million were paid to
common stockholders and common unitholders of record on June 30, 2000.
On July 24, 2000, the Company sold five industrial buildings encompassing
approximately 430,000 aggregate rentable square feet to an unaffiliated third
party. The buildings, which are located in San Jose, California, were sold for
an aggregate sales price of $62.4 million in cash at a gain of approximately
$7.0 million.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to the consolidated financial statements
of the Company and should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report. Statements contained in
this "Management's Discussion and Analysis of Financial Condition and Results
of Operations" that are not historical facts may be forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected.
You are cautioned not to place undue reliance on these forward-looking
statements.
Overview and Background
Kilroy Realty Corporation (the "Company") develops, owns, and operates
office and industrial real estate, primarily in Southern California. The
Company operates as a self-administered real estate investment trust ("REIT").
The Company owns its interests in all of its properties through Kilroy Realty,
L.P. (the "Operating Partnership") and Kilroy Realty Finance Partnership, L.P.
and conducts substantially all of its operations through the Operating
Partnership. The Company owned an 87.6% general partnership interest in the
Operating Partnership as of June 30, 2000.
Results of Operations
The Company continues to focus its efforts on its substantial development
pipeline which at June 30, 2000 consisted of an aggregate of approximately 1.3
million rentable square feet of in-process and committed office development
projects and an aggregate of approximately 1.5 million rentable square feet of
future office development projects that the Company expects to add to its
stabilized portfolio. During the six months ended June 30, 2000, the Company
completed and stabilized three office buildings encompassing an aggregate of
approximately 314,100 rentable square feet. During the third and fourth
quarters of 1999, the Company completed and stabilized six office and four
industrial buildings encompassing an aggregate of approximately 472,000 and
390,200 rentable square feet, respectively. The Company's stabilized portfolio
of operating properties consists of all of the Company's office and industrial
properties excluding properties recently developed by the Company that have
not yet reached 95.0% occupancy ("lease-up" properties) and projects currently
under construction or in pre-development. At June 30, 2000, the Company had
two office buildings encompassing an aggregate of approximately 293,800
rentable square feet in the lease-up phase and ten office projects under
construction which when completed are expected to encompass an aggregate of
approximately 906,500 rentable square feet.
During the six months ended June 30, 2000, the Company sold four industrial
and five office buildings encompassing an aggregate of approximately 238,400
and 134,700 rentable square feet respectively, for an aggregate sales price of
$40.2 million. During the third and fourth quarters of 1999, the Company
disposed of five office and five industrial buildings encompassing an
aggregate of 113,700 and 335,800 rentable square feet, respectively, for an
aggregate sales price of $22.6 million. The Company did not acquire any
operating properties during the six months ended June 30, 2000. During the
third and fourth quarters of 1999, the Company acquired one office building
encompassing an aggregate of 50,900 rentable square feet for an aggregate
acquisition cost of $9.5 million.
As a result of the properties acquired and the projects developed by the
Company subsequent to June 30, 1999, net of the effect of properties disposed
of subsequent to June 30, 1999, rentable square footage in the Company's
portfolio of stabilized properties increased by approximately 609,000 rentable
square feet, or 5.1% to 12.5 million rentable square feet at June 30, 2000
compared to 12.0 million rentable square feet at June 30, 1999. As of June 30,
2000, the Company's stabilized portfolio was comprised of 82 office properties
(the "Office Properties") encompassing 6.3 million rentable square feet and 83
industrial properties (the "Industrial Properties") encompassing approximately
6.2 million rentable square feet. The stabilized portfolio occupancy rate at
June 30, 2000 was 97.3%, with the Office and Industrial Properties 96.2% and
98.4% occupied, respectively.
13
<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------- Dollar Percentage
2000 1999 Change Change
------- ------- ------- ----------
(unaudited, dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Rental income............................ $39,370 $34,164 $ 5,206 15.2%
Tenant reimbursements.................... 4,594 4,193 401 9.6
Interest income.......................... 1,016 221 795 359.7
Other income............................. 380 723 (343) (47.4)
------- ------- -------
Total revenues......................... 45,360 39,301 6,059 15.4
------- ------- -------
Expenses:
Property expenses........................ 6,074 5,329 745 14.0
Real estate taxes........................ 3,049 2,852 197 6.9
General and administrative expenses...... 2,555 2,201 354 16.1
Ground leases............................ 399 334 65 19.5
Interest expense......................... 9,948 6,160 3,788 61.5
Depreciation and amortization............ 9,645 7,460 2,185 29.3
------- ------- -------
Total expenses......................... 31,670 24,336 7,334 30.1
------- ------- -------
Income from operations before gains on
dispositions of operating properties,
equity in loss of unconsolidated
subsidiary and minority interests......... $13,690 $14,965 $(1,275) (8.5%)
======= ======= =======
</TABLE>
Rental Operations
Management evaluates the operations of its portfolio based on operating
property type. The following tables compare the net operating income, defined
as operating revenues (rental income, tenant reimbursements and other income)
less property and related expenses (property expenses, real estate taxes and
ground leases) before depreciation, for the Office and Industrial Properties
for the three months ended June 30, 2000 and 1999.
Office Properties
<TABLE>
<CAPTION>
Total Office Portfolio Core Office Portfolio
---------------------------------- ----------------------------------
Dollar Percentage Dollar Percentage
2000 1999 Change Change 2000 1999 Change Change
------- ------- ------ ---------- ------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Rental income......... $27,459 $23,561 $3,898 16.5% $22,435 $21,739 $ 696 3.2%
Tenant
reimbursements....... 3,287 2,966 321 10.8 2,971 2,843 128 4.5
Other income.......... 338 683 (345) (50.5) 104 270 (166) (61.5)
------- ------- ------ ------- ------- -----
Total............... 31,084 27,210 3,874 14.2 25,510 24,852 658 2.6
------- ------- ------ ------- ------- -----
Property and related
expenses:
Property expenses..... 5,210 4,614 596 12.9 4,744 4,369 375 8.6
Real estate taxes..... 2,063 1,626 437 26.9 1,668 1,502 166 11.1
Ground leases......... 399 334 65 19.5 360 320 40 12.5
------- ------- ------ ------- ------- -----
Total............... 7,672 6,574 1,098 16.7 6,772 6,191 581 9.4
------- ------- ------ ------- ------- -----
Net operating income, as
defined................ $23,412 $20,636 $2,776 13.5% $18,738 $18,661 $ 77 0.4%
======= ======= ====== ======= ======= =====
</TABLE>
14
<PAGE>
Total revenues from Office Properties increased $3.9 million, or 14.2% to
$31.1 million for the three months ended June 30, 2000 compared to $27.2
million for the three months ended June 30, 1999. Rental income from Office
Properties increased $3.9 million, or 16.5% to $27.5 million for the three
months ended June 30, 2000 compared to $23.6 million for the three months
ended June 30, 1999. Rental income generated by the stabilized office
properties owned at January 1, 1999 and still owned at June 30, 2000 (the
"Core Office Portfolio") increased $0.7 million, or 3.2% for the three months
ended June 30, 2000 as compared to the three months ended June 30, 1999. This
increase is primarily attributable to an increase in occupancy. Average
occupancy in the Core Office Portfolio increased 2.8% to 96.0% for the three
months ended June 30, 2000 compared to 93.2% for the three months ended June
30, 1999. The remaining increase of $3.2 million in rental income from office
properties was generated by the office properties developed by the Company in
2000 and 1999 (the "Office Development Properties").
Tenant reimbursements from Office Properties increased $0.3 million, or
10.8% to $3.3 million for the three months ended June 30, 2000 compared to
$3.0 million for the three months ended June 30, 1999. An increase of $0.1
million, or 4.5% in tenant reimbursements was generated by the Core Office
Portfolio which was primarily due to the increase in occupancy in this
portfolio. An increase of $0.1 million in tenant reimbursements was generated
by the Office Development Properties and the remaining increase of $0.1
million was generated by the Office Properties acquired in 1999, offset by the
effect of the Office Properties sold subsequent to June 30, 1999 (the "Net
Office Acquisitions and Dispositions"). Other income from Office Properties
decreased $0.4 million or 50.5% to $0.3 million for the three months ended
June 30, 2000 compared to $0.7 million for the three months ended June 30,
1999. Other income for the three months ended June 30, 1999 included a $0.4
million gain on the sale of five acres of undeveloped land in San Diego,
California. The remaining amounts in other income from Office Properties for
both periods consisted primarily of lease termination fees, management fees
and tenant late charges.
Total expenses from Office Properties increased $1.1 million, or 16.7% to
$7.7 million for the three months ended June 30, 2000 compared to $6.6 million
for the three months ended June 30, 1999. Property expenses increased $0.6
million, or 12.9% to $5.2 million for the three months ended June 30, 2000
compared to $4.6 million for the three months ended June 30, 1999. An increase
of $0.4 million in property expenses was attributable to the Core Office
Properties, one-third of which was due to occupancy gains. The remaining
increase of $0.2 million was attributable to the Office Development
Properties. Real estate taxes increased $0.4 million, or 26.9% to $2.0 million
for the three months ended June 30, 2000 as compared to $1.6 million for the
three months ended June 30, 1999. An increase of $0.2 million in real estate
taxes was attributable to the Core Office Properties of which $0.1 million was
due to the effect of refunds of prior year real estates taxes which were
successfully appealed by the Company and received during the three months
ended June 30, 1999. The remaining $0.2 million increase was from the Office
Development Properties. Ground lease expense from Office Properties increased
$0.1 million, or 19.5% for the three months ended June 30, 2000 compared to
the three months ended June 30, 1999. Of this increase, 10% was attributable
to two additional months of ground lease expense at one of the Core Office
Portfolio properties, and the remaining increase was attributable to increases
in ground lease expense at several other properties.
Net operating income, as defined, from Office Properties increased $2.8
million, or 13.5% to $23.4 million for the three months ended June 30, 2000
compared to $20.6 million for the three months ended June 30, 1999. Of this
increase, $0.1 million was generated by the Core Office Portfolio and
represented a 0.4% increase in net operating income for the Core Office
Portfolio. Of the remaining increase of $2.7 million, $2.6 million was
generated by the Office Development Properties and $0.1 million was generated
by the Net Office Acquisitions and Dispositions.
15
<PAGE>
Industrial Properties
<TABLE>
<CAPTION>
Total Industrial Portfolio Core Industrial Portfolio
---------------------------------- ---------------------------------
Dollar Percentage Dollar Percentage
2000 1999 Change Change 2000 1999 Change Change
------- ------- ------ ---------- ------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Rental income......... $11,911 $10,603 $1,308 12.3% $10,412 $8,932 $1,480 16.6%
Tenant
reimbursements....... 1,307 1,227 80 6.5 1,074 1,035 39 3.8
Other income.......... 42 40 2 5.0 41 24 17 70.8
------- ------- ------ ------- ------ ------
Total............... 13,260 11,870 1,390 11.7 11,527 9,991 1,536 15.4
------- ------- ------ ------- ------ ------
Property and related
expenses:
Property expenses..... 864 715 149 20.8 665 562 103 18.3
Real estate taxes..... 986 1,226 (240) (19.6) 823 1,096 (273) (24.9)
------- ------- ------ ------- ------ ------
Total............... 1,850 1,941 (91) (4.7) 1,488 1,658 (170) (10.3)
------- ------- ------ ------- ------ ------
Net operating income, as
defined................ $11,410 $ 9,929 $1,481 14.9% $10,039 $8,333 $1,706 20.5%
======= ======= ====== ======= ====== ======
</TABLE>
Total revenues from Industrial Properties increased $1.4 million, or 11.7%
to $13.3 million for the three months ended June 30, 2000 compared to $11.9
million for the three months ended June 30, 1999. Rental income from
Industrial Properties increased $1.3 million, or 12.3% to $11.9 million for
the three months ended June 30, 2000 compared to $10.6 million for the three
months ended June 30, 1999. An increase of $1.5 million was generated by the
stabilized industrial properties owned at January 1, 1999 and still owned at
June 30, 2000 (the "Core Industrial Portfolio") and represented a 16.6%
increase in rental income for the Core Industrial Portfolio. This increase in
rental income from the Core Industrial Portfolio is primarily attributable to
an increase in occupancy with additional growth provided by increases in
rental rates on renewed and re-leased space in this portfolio. An increase of
$0.5 million in rental income was generated by the industrial properties
developed by the Company in 2000 and 1999 (the "Industrial Development
Properties"), offset by a decrease of $0.7 million in rental income attributed
to the seven industrial buildings sold subsequent to June 30, 1999 (the
"Industrial Dispositions").
Tenant reimbursements from Industrial Properties increased $0.1 million, or
6.5% to $1.3 million for the three months ended June 30, 2000 compared to $1.2
million for three months ended June 30, 1999. The increase was primarily
generated by the Industrial Development Properties. Other income from
Industrial Properties remained consistent for the three months ended June 30,
2000 compared to the same period in 1999.
Total expenses from Industrial Properties decreased $0.1 million, or 4.7%
to $1.8 million for the three months ended June 30, 2000 compared to $1.9
million for the three months ended June 30, 1999. Property expenses from
Industrial Properties increased by $0.1 million, or 20.8% to $0.8 million for
the three months ended June 30, 2000 compared to $0.7 million for the three
months ended June 30, 1999. An increase in property expenses of $0.1 million
in the Core Industrial Portfolio due to increased occupancy and a $0.1 million
increase from the Industrial Development Portfolio were offset by a decrease
of $0.1 million in property expenses for the Industrial Dispositions. Real
estate taxes decreased by $0.2 million for the three months ended June 30,
2000 compared to the three months ended June 30, 1999. A $0.2 million decrease
in real estate taxes was attributable to the Core Industrial Portfolio which
was due primarily to the effect of prior year property taxes which were
successfully appealed by the Company in 2000. An increase of $0.1 million for
the Industrial Development Portfolio was offset by a decrease of $0.1 million
for the Industrial Dispositions.
Net operating income, as defined, from Industrial Properties increased $1.5
million, or 14.9% to $11.4 million for the three months ended June 30, 2000
compared to $9.9 million for the three months ended June 30, 1999. An increase
of $1.7 million was generated by the Core Industrial Portfolio and represented
a 20.5% increase in net operating income for the Core Industrial Portfolio. An
increase of $0.4 million in net operating income generated by the Industrial
Development Properties was offset by a decrease of $0.6 million in net
operating income from the Industrial Dispositions.
16
<PAGE>
Non-Property Related Income and Expenses
Interest income increased $0.8 million, or 359.7% to $1.0 million for the
three months ended June 30, 2000 compared to $0.2 million for the three months
ended June 30, 1999. The increase was due primarily to the receipt of interest
income on a note receivable acquired in May 2000.
General and administrative expenses increased $0.4 million, or 16.1% to
$2.6 million for the three months ended June 30, 2000 compared to $2.2 million
for the three months ended June 30, 1999. This increase was primarily due to
higher salaries and benefits.
Interest expense increased $3.8 million, or 61.5% to $10.0 million for the
three months ended June 30, 2000 compared to $6.2 million for the three months
ended June 30, 1999, primarily due to a net increase in aggregate indebtedness
and higher interest rates. The Company's weighted average annual interest rate
increased approximately 1.1% to 8.2% at June 30, 2000 as compared to 7.1% at
June 30, 1999.
Depreciation and amortization increased $2.2 million, or 29.3% to $ 9.7
million for the three months ended June 30, 2000 compared to $7.5 million for
the three months ended June 30, 1999. The increase was due primarily to a full
quarter of depreciation on properties developed by the Company subsequent to
June 30, 1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------- Dollar Percentage
2000 1999 Change Change
------- ------- ------- ----------
(unaudited, dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Rental income............................ $77,072 $66,982 $10,090 15.1%
Tenant reimbursements.................... 9,288 8,316 972 11.7
Interest income.......................... 1,302 621 681 109.7
Other income............................. 1,461 932 529 56.8
------- ------- -------
Total revenues......................... 89,123 76,851 12,272 16.0
------- ------- -------
Expenses:
Property expenses........................ 11,532 10,463 1,069 10.2
Real estate taxes........................ 6,436 5,861 575 9.8
General and administrative expenses...... 5,187 4,515 672 14.9
Ground leases............................ 788 671 117 17.4
Interest expense......................... 17,776 11,919 5,857 49.1
Depreciation and amortization............ 18,968 14,677 4,291 29.2
------- ------- -------
Total expenses......................... 60,687 48,106 12,581 26.2
------- ------- -------
Income from operations before gains on
dispositions of operating
properties, equity in loss of
unconsolidated subsidiary and
minority interests........................ $28,436 $28,745 $ (309) (1.1%)
======= ======= =======
</TABLE>
17
<PAGE>
Rental Operations
Management evaluates the operations of its portfolio based on operating
property type. The following tables compare the net operating income, defined
as operating revenues (rental income, tenant reimbursements, other income)
less property and related expenses (property expenses, real estate taxes and
ground leases) before depreciation, for the Office and Industrial Properties
for the six months ended June 30, 2000 and 1999.
Office Properties
<TABLE>
<CAPTION>
Total Office Portfolio Core Office Portfolio
---------------------------------- ----------------------------------
Dollar Percentage Dollar Percentage
2000 1999 Change Change 2000 1999 Change Change
------- ------- ------ ---------- ------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Rental income......... $54,037 $46,102 $7,935 17.2% $44,942 $43,293 $1,649 3.8%
Tenant
reimbursements....... 6,449 5,784 665 11.5 5,802 5,619 183 3.3
Other income.......... 472 882 (410) (46.5) 225 340 (115) (33.8)
------- ------- ------ ------- ------- ------
Total............... 60,958 52,768 8,190 15.5 50,969 49,252 1,717 3.5
------- ------- ------ ------- ------- ------
Property and related
expenses:
Property expenses..... 9,886 9,037 849 9.4 8,969 8,628 341 4.0
Real estate taxes..... 4,292 3,490 802 23.0 3,469 3,248 221 6.8
Ground leases......... 789 671 117 17.4 712 644 68 10.6
------- ------- ------ ------- ------- ------
Total............... 14,967 13,198 1,768 13.4 13,150 12,520 630 5.0
------- ------- ------ ------- ------- ------
Net operating income, as
defined................ $45,991 $39,570 $6,422 16.2% $37,819 $36,732 $1,087 3.0%
======= ======= ====== ======= ======= ======
</TABLE>
Total revenues from Office Properties increased $8.2 million, or 15.5% to
$61.0 million for the six months ended June 30, 2000 compared to $52.8 million
for the six months ended June 30, 1999. Rental income from Office Properties
increased $7.9 million, or 17.2% to $54.0 million for the six months ended
June 30, 2000 compared to $46.1 million for the six months ended June 30,
1999. Rental income generated by the stabilized office properties owned at
January 1, 1999 and still owned at June 30, 2000 (the "Core Office Portfolio")
increased $1.6 million, or 3.8% for the six months ended June 30, 2000 as
compared to the six months ended June 30, 1999. This increase was primarily
attributable to an increase in occupancy. Average occupancy in the Core Office
Portfolio increased 2.6% to 96.8% for the six months ended June 30, 2000
compared to 94.2% for the six months ended June 30, 1999. In addition, there
was an increase in rental income generated by a change in rental rates of
2.2%. Of the remaining increase of $6.3 million in rental income from office
properties, an increase of $5.9 million was generated by the office properties
developed by the Company in 2000 and 1999 (the "Office Development
Properties"), and an increase of $0.4 million was generated by the office
properties acquired in 1999, offset by the effect of the office properties
sold during 1999 and 2000 (the "Net Office Acquisitions and Dispositions").
Tenant reimbursements from Office Properties increased $0.7 million, or
11.5% to $6.5 million for the six months ended June 30, 2000 compared to $5.8
million for the six months ended June 30, 1999. An increase of $0.2 million in
tenant reimbursements was generated by the Core Office Portfolio which was
primarily due to the increase in occupancy in this portfolio. An increase of
$0.3 million was generated by the Office Development Properties and the
remaining increase of $0.2 million was generated by the Net Office
Acquisitions and Dispositions. Other income from Office Properties decreased
$0.4 million or 46.5% to $0.5 million for the six months ended June 30, 2000
compared to $0.9 million for the six months ended June 30, 1999. Other income
for the six months ended June 30, 1999 included $0.5 million in gains on the
sale of thirteen acres of undeveloped land in Calabasas and San Diego,
California. The remaining amounts in other income from Office Properties for
both periods consisted primarily of lease termination fees, management fees
and tenant late charges.
18
<PAGE>
Total expenses from Office Properties increased $1.8 million, or 13.4% to
$15.0 million for the six months ended June 30, 2000 compared to $13.2 million
for the six months ended June 30, 1999. Property expenses increased
$0.8 million, or 9.4% to $9.9 million for the six months ended June 30, 2000
compared to $9.1 million for the six months ended June 30, 1999. An increase
of $0.3 million in property expenses was attributable to the Core Office
Properties which was due to occupancy gains and increased salaries and
benefits. Of the remaining increase of $0.5 million in property expenses, an
increase of $0.6 million was attributable to the Office Development Portfolio
which was offset by a $0.1 million decrease attributable to the Net Office
Acquisitions and Dispositions. Real estate taxes increased $0.8 million, or
23.0% to $4.3 million for the six months ended June 30, 2000 as compared to
$3.5 million for the six months ended June 30, 1999. Of this increase, $0.2
million was attributable to real estate taxes on the Core Office Portfolio. An
increase of $0.5 million was attributable to the Office Development Properties
and the remaining increase of $0.1 million was attributable to the Net Office
Acquisitions and Dispositions. Ground lease expense from Office Properties
increased $0.1, or 17.4% for the six months ended June 30, 2000 compared to
the six months ended June 30, 1999. Of this increase, 7.0% was attributable to
two additional months of ground lease expense at one of the Core Office
Portfolio properties, and the remaining increase was attributable to increases
in ground lease expense at several other properties.
Net operating income, as defined, from Office Properties increased $6.4
million, or 16.2% to $46.0 million for the six months ended June 30, 2000
compared to $39.6 million for the six months ended June 30, 1999. Of this
increase, $1.1 million was generated by the Core Office Portfolio and
represented a 3.0% increase in net operating income for the Core Office
Portfolio. Of the remaining increase of $5.3 million, $4.8 million was
generated by the Office Development Properties and $0.5 million was generated
by the Net Office Acquisitions and Dispositions.
Industrial Properties
<TABLE>
<CAPTION>
Total Industrial Portfolio Core Industrial Portfolio
---------------------------------- ----------------------------------
Dollar Percentage Dollar Percentage
2000 1999 Change Change 2000 1999 Change Change
------- ------- ------ ---------- ------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Rental income......... $23,035 $20,880 $2,155 10.3% $19,783 $17,859 $1,924 10.8%
Tenant
reimbursements....... 2,839 2,532 307 12.1 2,341 2,250 91 4.0
Other income.......... 989 50 939 1,878.0 988 32 956 2,987.5
------- ------- ------ ------- ------- ------
Total............... 26,863 23,462 3,401 14.5 23,112 20,141 2,971 14.8
------- ------- ------ ------- ------- ------
Property and related
expenses:
Property expenses....... 1,645 1,426 219 15.4 1,364 1,200 164 13.7
Real estate taxes....... 2,144 2,371 (227) (9.6) 1,809 2,123 (314) (14.8)
------- ------- ------ ------- ------- ------
Total............... 3,789 3,797 (8) (0.2) 3,173 3,323 (150) (4.5)
------- ------- ------ ------- ------- ------
Net operating income, as
defined................ $23,074 $19,665 $3,409 17.3% $19,939 $16,818 $3,121 18.6%
======= ======= ====== ======= ======= ======
</TABLE>
Total revenues from Industrial Properties increased $3.4 million, or 14.5%
to $26.9 million for the six months ended June 30, 2000 compared to $23.5
million for the six months ended June 30, 1999. Rental income from Industrial
Properties increased $2.1 million, or 10.3% to $23.0 million for the six
months ended June 30, 2000 compared to $20.9 million for the six months ended
June 30, 1999. An increase of $1.9 million was generated by the stabilized
Industrial Properties owned at January 1, 1999 and still owned at June 30,
2000 (the "Core Industrial Portfolio") and represented a 10.8% increase in
rental income for the Core Industrial Portfolio. This increase in rental
income for the Core Industrial Portfolio is primarily attributable to an
increase in occupancy with additional growth provided by increases in rental
rates on renewed and re-leased space in this portfolio. An increase of $1.4
million in rental income generated by the industrial properties developed by
the Company in 2000 and 1999 (the "Industrial Development Properties"), was
offset by a decrease of $1.2 million in rental income attributed to the seven
industrial buildings sold subsequent to June 30, 1999 (the "Industrial
Dispositions").
19
<PAGE>
Tenant reimbursements from Industrial Properties increased $0.3 million, or
12.1% to $2.8 million for the six months ended June 30, 2000 compared to $2.5
million for six months ended June 30, 1999. Of this increase, $0.1 million was
generated by the Core Industrial Portfolio. An increase of $0.3 million was
attributable to the Industrial Development Properties which was partially
offset by a $0.1 million decrease attributable to the Industrial Dispositions.
Other income from Industrial Properties increased by $0.9 million for the six
months ended June 30, 2000 compared to the six months ended June 30, 1999.
Other income for the six months ended June 30, 2000 included a $0.9 million
lease termination fee from a building in El Segundo, California. Net of a $0.4
million write-off of the related deferred rent receivable balance, the Company
recognized a net lease termination fee of $0.5 million on this transaction.
The building was subsequently re-leased to a single tenant under a 15-year
lease at a higher rental rate.
Total expenses from Industrial Properties remained consistent at $3.8 million
for the six months ended June 30, 2000 and June 30, 1999. Property expenses from
Industrial Properties increased by $0.2 million, or 15.4% to $1.6 million for
the six months ended June 30, 2000 compared to $1.4 million for the six months
ended June 30, 1999. Increases of $0.2 million in the Core Industrial Portfolio
and $0.1 million in the Industrial Development Portfolio were offset by a
decrease of $0.1 million in property expense at the Industrial Dispositions. The
increase in property expenses for the Core Industrial Portfolio is primarily due
to the occupancy gains in that portfolio. As the majority of the leases signed
allow for recovery of expenses from the tenants, this increase in expenses is
partially offset by an increase in tenant reimbursement income. Real estate
taxes decreased by $0.2 million or 9.6% to $2.2 million for the six months ended
June 30, 2000 compared to $2.4 million for the six months ended June 30, 1999. A
decrease of $0.3 million was attributable to the Core Industrial Portfolio which
was due primarily to the effect of prior year property taxes which were
successfully appealed by the Company in 2000. An increase of $0.2 million in
real estate taxes for the Industrial Development Portfolio was offset by a
decrease of $0.1 million for the Industrial Dispositions.
Net operating income, as defined, from Industrial Properties increased $3.4
million, or 17.3% to $23.1 million for the six months ended June 30, 2000
compared to $19.7 million for the six months ended June 30, 1999. Of this
increase, $3.1 million was generated by the Core Industrial Portfolio and
represented a 18.6% increase in net operating income for the Core Industrial
Portfolio. An increase of $1.3 million generated by the Industrial Development
Properties was offset by a decrease of $1.0 million from the Industrial
Dispositions.
Non-Property Related Income and Expenses
Interest income increased $0.7 million, or 109.7% to $1.3 million for the
six months ended June 30, 2000 compared to $0.6 million for the six months
ended June 30, 1999. The increase was due primarily to the receipt of interest
income on a note receivable acquired in May 2000.
General and administrative expenses increased $0.7 million, or 14.9% to
$5.2 million for the six months ended June 30, 2000 compared to $4.5 million
for the six months ended June 30, 2000. This increase was due primarily to
higher salaries and benefits.
Interest expense increased $5.9 million, or 49.1% to $17.8 million for the
six months ended June 30, 2000 compared to $11.9 million for the six months
ended June 30, 1999, primarily due to a net increase in aggregate indebtedness
and higher interest rates. The Company's weighted average annual interest rate
increased approximately 1.1% to 8.2% at June 30, 2000 as compared to 7.1% at
June 30, 1999.
Depreciation and amortization increased $4.3 million, or 29.2% to $19.0
million for the six months ended June 30, 2000 compared to $14.7 million for
the six months ended June 30, 1999. The increase was due primarily to a full
six months of depreciation on properties acquired and developed by the Company
subsequent to June 30, 1999.
20
<PAGE>
Liquidity and Capital Resources
The Company has a $400 million unsecured revolving credit facility (the
"Credit Facility") which bears interest at an annual rate between LIBOR plus
1.13% and LIBOR plus 1.75% (8.18% at June 30, 2000), depending upon the
Company's leverage ratio at the time of borrowing, and matures in November
2002. As of June 30, 2000, the Company had borrowings of $305 million
outstanding under the Credit Facility and availability of approximately $54.6
million. Availability under the Credit Facility is based upon the value of the
Company's unencumbered assets. The Company uses the Credit Facility to finance
development expenditures, to fund potential undeveloped land acquisitions and
for general corporate purposes.
In April 2000, one of the Development LLCs obtained a non-recourse
construction loan with a total commitment of $57.0 million. The construction
loan, which had an outstanding balance of approximately $32.4 million at June
30, 2000, bears interest at an annual rate of LIBOR plus 2.70% (9.37% at June
30, 2000) and matures on April 17, 2002, with the option to extend for up to
two six-month periods. The proceeds from the construction loan are being used
to finance the development of one of the multi-phased office projects that the
Company is developing in San Diego, California, with The Allen Group, a group
of affiliated real estate development and investment companies based in
Visalia, California. The project is expected to encompass an aggregate of
approximately 550,000 rentable square feet of office space upon completion of
all phases. The construction loan is secured by the land for the entire
project, the three phases of the project that the Company has completed as of
June 30, 2000, and all improvements to be constructed.
In June 2000, one of the Development LLCs borrowed $22.0 million under a
mortgage loan that requires monthly principal and interest payments based on a
floating annual interest rate of LIBOR plus 1.75% (8.40% at June 30, 2000),
amortizes over 25 years, and matures in June 2004. The mortgage loan is
secured by two buildings that the Company developed with The Allen Group and
completed in the fourth quarter of 1999. The Development LLC used the proceeds
from the secured debt facility to fund development expenditures on the
remaining phases of the multi-phased office project to be constructed.
The following table sets forth the composition of the Company's mortgage
debt at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(in thousands)
<S> <C> <C>
Mortgage note payable, due April 2009, fixed interest at 7.20%,
monthly principal and interest payments.................................... $ 93,222 $ 93,953
Mortgage note payable, due October 2003, interest at LIBOR plus 1.75%,
(8.44% and 7.94% at June 30, 2000 and December 31, 1999, respectively),
monthly interest-only payments............................................. 90,000 90,000
Mortgage note payable, due February 2022, fixed interest at 8.35%,
monthly principal and interest payments(a)................................. 80,168 80,812
Mortgage note payable, due May 2017, fixed interest at 7.15%,
monthly principal and interest payments.................................... 29,002 29,440
Construction loan payable, due April 2002, interest at LIBOR plus 2.70%,
(9.37% at June 30, 2000)................................................... 32,388
Mortgage note payable, due June 2004, interest at LIBOR plus 1.75%,
(8.40% at June 30, 2000),
monthly principal and interest payments.................................... 22,000
Mortgage note payable, due December 2005, fixed interest at 8.45%,
monthly principal and interest payments.................................... 12,753 12,973
Mortgage note payable, due November 2014, fixed interest at 8.43%,
monthly principal and interest payments.................................... 10,776 10,966
Mortgage note payable, due December 2003, fixed interest at 10.00%,
monthly interest accrued through December 31, 2000, no
interest accrues thereafter................................................ 8,500
Mortgage note payable, due October 2013, fixed interest at 8.21%,
monthly principal and interest payments.................................... 7,225 7,372
-------- --------
$386,034 $325,516
======== ========
</TABLE>
-------
(a) Beginning February 2005, the mortgage note is subject to increases in the
effective annual interest rate to the greater of 13.35% or the sum of the
interest rate for U.S. Treasury Securities maturing 15 years from the
reset date plus 2.00%.
21
<PAGE>
The following table sets forth certain information with respect to the
Company's aggregate debt composition at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
Percentage of Total Weighted Average
Debt Interest Rate
--------------------- ---------------------
June 30, December 31, June 30, December 31,
2000 1999 2000 1999
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Secured vs. unsecured:
Secured.......................... 55.9% 58.8% 8.1% 7.8%
Unsecured........................ 44.1% 41.2% 8.3% 7.6%
Fixed rate vs. variable rate:
Fixed rate 1, 5.......... 56.7% 42.5% 8.1% 7.8%
Variable rate 2, 3,
4............................... 43.3% 57.5% 8.3% 7.7%
</TABLE>
--------
(1) At June 30, 2000, the Company had an interest rate swap agreement to fix
LIBOR on $150 million of its floating rate debt at 6.95% that expires in
February 2002.
(2) At June 30, 2000, the Company had an interest rate cap agreement to cap
LIBOR on $150 million of its floating rate debt at 6.50% that expires in
July 2000.
(3) In February 2000, the Company entered into an 18-month interest rate cap
agreement to cap LIBOR on $150 million of its floating rate debt at 6.50%
starting in July 2000 and expiring in January 2002.
(4) In May 2000, one of the Development LLCs entered into a 24-month interest-
rate cap agreement to cap LIBOR on its floating rate construction debt at
8.50%. The notional amount of the cap will increase over the 24-month
period as the balance of the construction loan increases. At June 30,
2000, the notional amount of the interest rate cap was approximately $31.2
million.
(5) The percentage of fixed rate debt to total debt at June 30, 2000 does not
take into consideration the portion of floating rate debt capped by the
Company's interest-rate cap agreements. Including the effects of the
interest-rate cap agreements, the Company had fixed or capped
approximately 82.9% of its total outstanding debt at June 30, 2000.
In December 1999, the Company announced the implementation of its share
repurchase program, pursuant to which the Company is authorized to repurchase
up to an aggregate of 3.0 million shares of its outstanding common stock,
representing up to approximately 11% of the Company's currently outstanding
shares at the time the program was announced. During the first quarter of
2000, the Company repurchased 1,999,300 shares of its common stock in open
market transactions for an aggregate repurchase price of $41.2 million or an
average repurchase price of $20.58 per share. The Company did not repurchase
any shares during the second quarter of 2000. Repurchases to date total
2,264,300 shares for an aggregate repurchase price of $46.5 million or an
average repurchase price of $20.54 per share. Repurchases during the first
quarter of 2000 were funded primarily through working capital and borrowings
on the Company's unsecured revolving credit facility. Depending on market
conditions, the Company will evaluate the opportunity to repurchase additional
shares during the remainder of 2000.
In February 1998, the SEC declared effective the Company's "shelf"
registration statement on Form S-3 with respect to $400 million of the
Company's equity securities. As of August 11, 2000, an aggregate of
$313 million of equity securities were available for issuance under the
registration statement.
Capital Expenditures
As of June 30, 2000, the Company had an aggregate of approximately 1.3
million rentable square feet of office space that was either under
construction or committed for construction at a total budgeted cost of
approximately $256 million. The Company has spent an aggregate of
approximately $138 million on these projects as of June 30, 2000. The Company
intends to finance the presently budgeted $118 million of remaining
development costs, $14.7 million of which relates to the Company's Peregrine
Systems Corporate Center project which is being financed with proceeds from
the $57.0 million construction loan obtained in April 2000, with additional
construction loan financing, proceeds from the Company's dispositions program
of non-strategic and mature industrial assets, borrowings under the Credit
Facility and from working capital.
In connection with an agreement signed with The Allen Group in October
1997, the Company has agreed to purchase one office property encompassing
approximately 128,000 rentable square feet, subject to the property meeting
certain occupancy thresholds. The purchase price for this property will be
determined at the time of
22
<PAGE>
acquisition based on the net operating income at the time of acquisition. The
Company expects that in the event that this acquisition does occur, it would
be financed with borrowings under the Credit Facility and the issuance of
common limited partnership units of the Operating Partnership.
On May 1, 2000, the Company initiated actions that has put it in a position
to potentially acquire the fee interest in a three building office complex
located in El Segundo, California (see Note 4 to the consolidated financial
statements included at Item 1 for further discussion of this transaction). In
the first step of the transaction, the Company purchased a non-recourse note
receivable with an outstanding principal balance of $60.8 million and accrued
interest of $10.2 million from an institutional lender for $45.3 million. If
the Company acquires the fee interest, the Company currently estimates that it
could invest up to an additional $20.0 million to $30.0 million related to
this complex and expects to spend approximately $10.0 million to $20.0 million
over the next twelve months.
The Company believes that it will have sufficient capital resources to
satisfy its obligations and planned capital expenditures for the next twelve
months. The Company expects to meet its long-term liquidity requirements
including possible future development and property acquisitions, through
retained cash flow, long-term secured and unsecured borrowings, proceeds from
the Company's dispositions program, or the issuance of common or preferred
units of the Operating Partnership.
Building and Lease Information
The following tables set forth certain information regarding the Company's
Office and Industrial Properties at June 30, 2000:
Occupancy by Segment Type
<TABLE>
<CAPTION>
Square Feet
Number of -------------------------------
Region Buildings Total Leased Available Occupancy
------ --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Office Properties:
Los Angeles.............. 28 2,554,453 2,497,491 56,962 97.8%
Orange County............ 17 778,837 674,660 104,177 86.6
San Diego................ 31 2,289,849 2,233,547 56,302 97.5
Other.................... 6 709,615 686,275 23,340 96.7
--- ---------- ---------- -------
82 6,332,754 6,091,973 240,781 96.2
--- ---------- ---------- -------
Industrial Properties:
Los Angeles.............. 7 554,225 539,537 14,688 97.3
Orange County............ 62 4,392,965 4,306,063 86,902 98.0
San Diego................ 1 39,669 39,669 100.0
Other.................... 13 1,251,507 1,251,507 100.0
--- ---------- ---------- -------
83 6,238,366 6,136,776 101,590 98.4
--- ---------- ---------- -------
Total Portfolio.......... 165 12,571,120 12,228,749 342,371 97.3%
=== ========== ========== =======
</TABLE>
23
<PAGE>
Lease Expirations by Segment Type
<TABLE>
<CAPTION>
Percentage
of Total Annual
Total Leased Base Rent
Square Square Feet Under
Number of Footage of Represented Expiring
Expiring Expiring by Expiring Leases
Year of Lease Expiration Leases(1) Leases Leases(2) (in 000's)(3)
------------------------ --------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Office Properties:
Remaining 2000.............. 41 151,494 2.6% $ 3,143
2001........................ 75 940,932 16.4 15,773
2002........................ 60 456,051 7.9 7,571
2003........................ 47 251,124 4.4 4,914
2004........................ 51 825,277 14.4 18,589
2005........................ 33 810,286 14.1 12,556
--- --------- ---- -------
307 3,435,164 59.8 62,546
--- --------- -------
Industrial Properties:
Remaining 2000.............. 32 708,986 11.3 6,979
2001........................ 70 798,374 12.7 5,620
2002........................ 44 325,195 5.2 2,962
2003........................ 36 817,838 13.0 6,731
2004........................ 16 556,705 8.9 4,251
2005........................ 15 709,924 11.3 5,692
--- --------- ---- -------
213 3,917,022 62.4 32,235
--- --------- -------
Total Portfolio............. 520 7,352,186 61.2% $94,781
=== ========= =======
</TABLE>
--------
(1) Represents the total number of tenants. Some tenants have multiple leases.
Excludes leases for amenity, retail, parking and month-to-month tenants.
(2) Based on total leased square footage for the respective portfolios as of
June 30, 2000.
(3) Determined based upon aggregate base rent to be received over the term,
divided by the term in months, multiplied by 12, including all leases
executed on or before July 1, 2000.
Leasing Activity by Segment Type
<TABLE>
<CAPTION>
Number of Weighted
Leases Square Feet Average
----------- --------------- Retention Lease Term
New Renewal New Renewal Rate (in months)
--- ------- ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
For the Three Months Ended
June 30, 2000:
Office Properties........... 12 7 67,296 28,060 67.5% 50
Industrial Properties....... 7 4 124,446 28,426 20.7% 148
--- --- ------- ------- ---- ---
Total portfolio............. 19 11 191,742 56,486 42.3% 112
=== === ======= ======= ==== ===
<CAPTION>
Number of Weighted
Leases Square Feet Average
----------- --------------- Retention Lease Term
New Renewal New(1) Renewal Rate (in months)
--- ------- ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended
June 30, 2000:
Office Properties........... 21 22 85,623 117,765 65.3% 36
Industrial Properties....... 20 19 321,286 353,253 55.3% 86
--- --- ------- ------- ---- ---
Total portfolio............. 41 41 406,909 471,018 58.2% 74
=== === ======= ======= ==== ===
</TABLE>
--------
(1) The lease-up of 406,909 square feet to new tenants for the six months
ended June 30, 2000 includes re-leasing of 285,303 square feet and first
generation leasing of 121,606 square feet.
24
<PAGE>
Historical Cash Flows
The principal sources of funding for development, acquisitions, and capital
expenditures are the Credit Facility, cash flow from operating activities,
secured and unsecured debt financing and proceeds from the Company's
dispositions program. The Company's net cash provided by operating activities
increased $2.0 million, or 12.2% to $37.9 million for the six months ended
June 30, 2000 compared to $35.9 million for the six months ended June 30,
1999. This increase was primarily attributable to an increase in net income
resulting from the Office and Industrial Development Properties and an
increase in net operating income, as defined, generated by the Core Office
Portfolio and the Core Industrial Portfolio. The increase was partially offset
by increased interest expense.
Net cash used in investing activities increased $16.5 million, or 17.8% to
$109 million for the six months ended June 30, 2000 compared to $92.4 million
for the six months ended June 30, 1999. Cash used in investing activities for
the six months ended June 30, 2000 consisted primarily of the purchase of 17
acres of undeveloped land for $11.3 million (net of an $8.5 million mortgage
note payable issued in connection with the acquisition), the sale of five
office and four industrial buildings for approximately $27.7 million (net of
approximately $1.4 million in selling costs), expenditures for construction in
progress of $76.9 million, $7.6 million in additional tenant improvements and
capital expenditures, and $45.3 million paid to acquire a note receivable.
Cash used in investing activities for the six months ended June 30, 1999
consisted primarily of the purchase of one office property for $21.1 million
(net of $3.6 million of contributed value in exchange for which the Company
issued common units of the Operating Partnership and the repayment of an
existing $2.3 million note receivable), the purchase of the minority interest
in one office complex for $1.2 million, the purchase of 67 acres of
undeveloped land for $27.1 million (net of $6.3 million of contributed value
in exchange for which the Company issued common units of the Operating
Partnership), the sale of 13 acres of undeveloped land for $5.0 million,
expenditures for construction in progress of $51.7 million, and $7.2 million
in additional tenant improvements and capital expenditures.
Net cash provided by financing activities decreased $0.1 million, or 0.2%
to $59.0 million for the six months ended June 30, 2000 compared to $59.1
million for the six months ended June 30, 1999. Cash provided by financing
activities for the six months ended June 30, 2000 consisted primarily of $77.0
million in borrowings under the Credit Facility and $52.0 million in net
proceeds from the issuance of mortgage and construction debt, partially offset
by $27.0 million in distributions paid to common stockholders and common
unitholders, and $41.3 million paid for the Company's stock repurchase
program. Cash provided by financing activities for the six months ended June
30, 1999 consisted primarily of proceeds of $104 million in net proceeds from
the issuance of mortgage debt, partially offset by $19.5 million in repayments
to the Credit Facility and $26.5 million in distributions paid to common
stockholders and common unitholders.
Funds from Operations
Industry analysts generally consider Funds From Operations, as defined by
NAREIT, an alternative measure of performance for an equity REIT. Funds From
Operations is defined by NAREIT to mean net income (loss) before minority
interests of common unitholders (computed in accordance with GAAP), excluding
gains (or losses) from debt restructuring and sales of property, plus real
estate related depreciation and amortization (excluding amortization of
deferred financing costs and depreciation of non-real estate assets), and
after adjustment for unconsolidated partnerships and joint ventures. The
Company considers Funds From Operations an appropriate measure of performance
of an equity REIT because it is predicated on cash flow analyses. The Company
believes that in order to facilitate a clear understanding of the historical
operating results of the Company, Funds From Operations should be examined in
conjunction with net income as presented in the financial statements included
elsewhere in this report. The Company computes Funds From Operations in
accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper as clarified by the November 1999 NAREIT National
Policy Bulletin which became effective on January 1, 2000 which may differ
from the methodologies used by other equity REITs and, accordingly, may not be
comparable to Funds From Operations published by such other REITs. Funds From
Operations should not be considered as
25
<PAGE>
an alternative to net income (loss) (computed in accordance with GAAP) as an
indicator of the properties' financial performance or to cash flow from
operating activities (computed in accordance with GAAP) as an indicator of the
properties' liquidity, nor is it indicative of funds available to fund the
properties' cash needs, including the Company's ability to pay dividends or
make distributions.
The following table presents the Company's Funds From Operations for the
three and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net income................................... $12,804 $10,796 $22,381 $20,706
Adjustments:
Minority interest in earnings of
Operating Partnership................... 1,843 1,820 3,215 3,356
Depreciation and amortization............ 9,645 7,460 18,968 14,677
Gains on dispositions of operating
properties.............................. (4,273) (3,968)
Non cash amortization of restricted stock
grants.................................. 134 127 236 254
------- ------- ------- -------
Funds From Operations........................ $20,153 $20,203 $40,832 $38,993
======= ======= ======= =======
</TABLE>
Inflation
The majority of the Company's tenant leases require tenants to pay most
operating expenses, including real estate taxes and insurance, and increases
in common area maintenance expenses, which reduce the Company's exposure to
increases in costs and operating expenses resulting from inflation.
26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in Primary Risk Exposures
Information about the Company's changes in primary risk exposures from
December 31, 1999 to June 30, 2000, is incorporated herein by reference from
"Item 2: Management Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
Tabular Presentation of Market Risk
The tabular presentations below provide information about the Company's
interest rate sensitive financial and derivative instruments as of June 30,
2000 and 1999. All of the Company's interest rate sensitive financial and
derivative instruments are designated as held for purposes other than trading.
Presentation at June 30, 2000
For the Credit Facility, the table presents the assumption that the
outstanding principal balance at June 30, 2000 will be paid upon the Credit
Facility's maturity in November 2002. The table also presents the expected
maximum contractual weighted average interest rate index for outstanding
Credit Facility borrowings from 2000 through 2002.
For variable rate mortgage debt, the table presents the assumption that the
Company will elect to exercise all available debt extension options and that
the outstanding principal balance at June 30, 2000 will be paid upon the
extended debt maturities. The table also presents the contractual weighted
average interest rate index for outstanding variable rate mortgage debt
borrowings from 2000 through 2004.
For fixed rate mortgage debt, the table presents the assumption that the
outstanding principal balance at June 30, 2000 will be paid according to
scheduled principal payments and that the Company will not prepay any of the
outstanding principal balance. The table also presents the related contractual
weighted-average interest rate at June 30, 2000 for outstanding fixed rate
mortgage debt borrowings from 2000 through 2004 and thereafter.
For the Series A and Series C Cumulative Redeemable Preferred units (the
"Series A and Series C Preferred units") the table reflects the assumption
that the Company is not contractually obligated to repay the outstanding
balance of the Series A and Series C Preferred units since the Series A and
Series C Preferred units will either remain outstanding or be converted into
shares of the Company's 8.075% Series A and 9.375% Series C Cumulative
Redeemable Preferred stock, respectively, in 2008 when the Series A and Series
C Preferred units become exchangeable at the option of the majority of the
holders. For the Series D Cumulative Redeemable Preferred units (the "Series D
Preferred units"), the table reflects the assumption that the Company is not
contractually obligated to repay the outstanding balance of the Series D
Preferred units since the Series D Preferred units will either remain
outstanding or be converted into shares of the 9.250% Series D Cumulative
Redeemable Preferred stock in 2009 when the Series D Preferred units become
exchangeable at the option of the majority of the holders. The table also
presents the related weighted-average interest rate at June 30, 2000 for
outstanding Series A, C and D Preferred units from 2000 through the exchange
date. The same interest rates will apply when the Series A, C and D Preferred
units are exchanged into the Cumulative Redeemable Preferred stock.
For interest rate caps, the table presents notional amounts, average cap
rates and the related interest rate index upon which cap rates are based, by
contractual maturity date. For interest rate swaps, the table presents
notional amounts, average maximum contractual fixed pay rates, and the related
interest rate index upon which the floating receive rates are based, by
contractual maturity date. Notional amounts are used solely to calculate the
contractual cash flow to be received under the contract and do not reflect
outstanding principal balances June 30, 2000.
27
<PAGE>
Interest Rate Risk Analysis--Tabular Presentation
Financial Assets and Liabilities
Outstanding Principal by Expected Maturity Date
June 30, 2000
(dollars in millions)
<TABLE>
<CAPTION>
Maturity Date
-------------------------------------------- Fair Value
There- at June 30,
2000 2001 2002 2003 2004 after Total 2000
------ ----- ------ ------ ----- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Unsecured line of
credit:
Variable rate......... $305.0 $305.0 $305.0
Average interest rate LIBOR LIBOR LIBOR
index................ +1.50% +1.50% +1.50%
Mortgage debt:
Variable rate......... $ 0.1 $ 0.2 $ 0.3 $122.7 $21.1 $144.4 $144.4
Average interest rate LIBOR LIBOR LIBOR LIBOR LIBOR
index................ +1.94% +1.94% +1.94% +1.94% +1.94%
Fixed rate............ $ 2.5 $ 5.2 $ 5.6 $ 14.6 $ 6.6 $207.1 $241.6 $237.6
Average interest
rate................. 7.83% 7.83% 7.83% 7.83% 7.83% 7.83%
Series A, C and D
Preferred units:
Fixed rate............ $142.1
Average interest
rate................. 8.71% 8.71% 8.71% 8.71% 8.71% 8.71%
Interest Rate Risk Analysis--Tabular Presentation
Financial Derivative Instruments
Notional Amounts by Contractual Maturity
June 30, 2000
(dollars in millions)
<CAPTION>
Maturity Date
-------------------------------------------- Fair Value
There- at June 30,
2000 2001 2002 2003 2004 after Total 2000
------ ----- ------ ------ ----- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
Derivatives Used to
Hedge Variable Rate
Debt:
Interest rate cap
agreements:
Notional amount....... $150.0 $150.0 $300.0 $ 1.3
Cap rate.............. 6.50% 6.50% 6.50%
Forward rate index.... LIBOR LIBOR LIBOR
Interest rate swap
agreements:
Notional amount....... $150.0 $150.0 $ 0.1
Fixed pay interest
rate................. 8.45% 8.45% 8.45%
Floating receive
interest rate LIBOR LIBOR LIBOR
index................ +1.50% +1.50% +1.50%
</TABLE>
Presentation at June 30, 1999
For the unsecured line of credit, the table presents that the outstanding
principal balance at June 30, 1999 was paid in November 1999 when the Company
obtained its new $400 million Credit Facility. The table also presents the
maximum interest rate index for outstanding Credit Facility borrowings in
1999.
28
<PAGE>
For fixed rate mortgage debt, the table presents the assumption that the
outstanding principal balance at June 30, 1999 will be paid according to
scheduled principal payments and that the Company will not prepay any of the
outstanding principal balance. The table also presents the related weighted-
average interest rate at June 30, 1999 for outstanding fixed rate mortgage
debt borrowings from 1999 through 2003 and thereafter. The Company had no
outstanding variable rate mortgage debt at June 30, 1999.
For the Series A and Series C Preferred units the table presents the same
assumptions as discussed for the presentation at June 30, 2000.
For interest rate caps, the table presents notional amounts, average cap
rates and the related interest rate index upon which cap rates are based, by
contractual maturity date. Notional amounts are used solely to calculate the
contractual cash flow to be received under the contract and do not reflect
outstanding principal balances at June 30, 1999. For interest-rate caps, the
unamortized cost of the premiums at June 30, 1999 is shown as the market value
at June 30, 1999 since the Company's exposure is limited to the costs paid to
enter into such agreements.
Interest Rate Sensitivity Analysis
Financial Assets and Liabilities
Outstanding Principal by Expected Maturity Date
June 30, 1999
(dollars in millions)
<TABLE>
<CAPTION>
Maturity Date Fair Value
------------------------------------------ at June 30,
1999 2000 2001 2002 2003 Thereafter Total 1999
------ ---- ---- ---- ---- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Line of credit:
Variable rate................ $252.5 $252.5 $252.5
Average interest rate LIBOR
index....................... +1.38%
Mortgage debt:
Fixed rate................... $ 2.2 $4.8 $5.1 $5.6 $6.1 $214.0 $237.8 $236.7
Average interest rate........ 7.79% 7.79% 7.79% 7.79% 7.79% 7.79%
Series A and C Preferred units:
Fixed rate................... $ 98.3
Average interest rate........ 8.49% 8.49% 8.49% 8.49% 8.49% 8.49%
</TABLE>
Interest Rate Sensitivity Analysis
Financial Derivative Instruments
Notional Amounts by Contractual Maturity
June 30, 1999
(dollars in millions)
<TABLE>
<CAPTION>
Unamortized
Maturity Date Cost at
---------------------------------------- June 30,
1999 2000 2001 2002 2003 Thereafter Total 1999
----- ------ ---- ---- ---- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
Derivatives Used to
Hedge the Line of
Credit:
Interest rate cap
agreements:
Notional amount....... $150.0 $150.0 $0.1
Cap rate.............. 6.50% 6.50%
Forward rate index.... LIBOR LIBOR
</TABLE>
29
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the three months ended June 30, 2000, no legal proceedings were
initiated against or on behalf of the Company, which if determined adversely
to the Company, would have a material adverse effect upon the financial
condition, results of operations and cash flows of the Company.
ITEM 2. CHANGES IN SECURITIES
During the three months ended June 30, 2000, common unitholders of the
Operating Partnership exchanged 117,090 common limited partnership units for
shares of the Company's common stock on a one-for-one basis. The 117,090
common shares issued in connection with the redemption were registered on
registration statements declared effective by the SEC in September and October
1999 and May 2000. The common units that were redeemed in connection with the
exchange were previously issued in reliance upon an exemption from
registration provided by Regulation D under the Securities Act as a
transaction by an issuer not involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of its stockholders on May 23, 2000,
stockholders elected John B. Kilroy, Jr. (23,047,612 votes for and 176,518
votes withheld or against) as a director of the Company for a term expiring in
the year 2003. The stockholders also elected Dale F. Kinsella (23,046,274
votes for and 177,856 votes withheld or against) as a director of the Company
for a term expiring in the year 2003.
ITEM 5. OTHER INFORMATION--None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*27.1 Financial Data Schedule.
</TABLE>
--------
* Filed herewith.
(b) Reports on Form 8-K--None
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on August 11,
2000.
Kilroy Realty Corporation
/s/ John B. Kilroy, Jr.
By: _________________________________
John B. Kilroy, Jr.
President and Chief Executive
Officer
(Principal Executive Officer)
/s/ Richard E. Moran Jr.
By: _________________________________
Richard E. Moran Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Ann Marie Whitney
By: _________________________________
Ann Marie Whitney
Senior Vice President and
Controller
(Principal Accounting Officer)
31
