<PAGE>
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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 September 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 November 10, 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 NINE MONTHS ENDED SEPTEMBER 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 September 30, 2000 and
December 31, 1999.............................................. 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999....................... 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 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.......................................... 14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 30
PART II--OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.............................................. 34
Item 2. CHANGES IN SECURITIES.......................................... 34
Item 3. DEFAULTS UPON SENIOR SECURITIES................................ 34
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 34
Item 5. OTHER INFORMATION.............................................. 34
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 34
SIGNATURES..................................................... 35
</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>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
------
INVESTMENT IN REAL ESTATE (Note 2):
Land and improvements................................ $ 263,923 $ 274,463
Buildings and improvements........................... 1,034,081 946,130
Undeveloped land and construction in progress, net... 151,453 189,645
---------- ----------
Total investment in real estate.................... 1,449,457 1,410,238
Accumulated depreciation and amortization............ (194,563) (174,427)
---------- ----------
Investment in real estate, net..................... 1,254,894 1,235,811
CASH AND CASH EQUIVALENTS............................. 12,801 26,116
RESTRICTED CASH....................................... 35,506 6,636
TENANT RECEIVABLES, NET............................... 25,181 22,078
NOTE RECEIVABLE FROM RELATED PARTY (Note 3)........... 45,278
DEFERRED FINANCING AND LEASING COSTS, NET............. 34,657 27,840
PREPAID EXPENSES AND OTHER ASSETS..................... 5,735 2,020
---------- ----------
TOTAL ASSETS....................................... $1,414,052 $1,320,501
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Secured debt (Note 4)................................ $ 387,556 $ 325,516
Unsecured line of credit (Note 4).................... 186,000 228,000
Unsecured term facility (Note 4)..................... 100,000
Accounts payable and accrued expenses................ 39,177 26,260
Accrued distributions (Note 9)....................... 13,591 13,456
Rents received in advance and tenant security
deposits............................................ 16,773 20,287
---------- ----------
Total liabilities.................................. 743,097 613,519
---------- ----------
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...... 62,900 71,920
Minority interests in Development LLCs............... 11,606 9,931
---------- ----------
Total minority interests........................... 227,007 234,053
---------- ----------
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, 26,455,400 and 27,808,410 shares issued
and outstanding, respectively....................... 265 278
Additional paid-in capital........................... 459,785 491,204
Distributions in excess of earnings.................. (16,102) (18,553)
---------- ----------
Total stockholders' equity......................... 443,948 472,929
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $1,414,052 $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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES (Note 7):
Rental income................ $ 40,555 $ 34,959 $ 117,627 $ 101,941
Tenant reimbursements........ 4,748 4,214 14,036 12,530
Interest income.............. 1,706 239 3,008 860
Other income................. 212 790 1,673 1,722
---------- ---------- ---------- ----------
Total revenues............. 47,221 40,202 136,344 117,053
---------- ---------- ---------- ----------
EXPENSES:
Property expenses............ 6,217 5,054 17,749 15,517
Real estate taxes............ 3,523 3,108 9,959 8,969
General and administrative
expenses.................... 2,890 2,266 8,077 6,781
Ground leases................ 423 331 1,211 1,002
Interest expense............. 10,024 6,501 27,800 18,420
Depreciation and
amortization................ 9,941 7,900 28,909 22,577
---------- ---------- ---------- ----------
Total expenses............. 33,018 25,160 93,705 73,266
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS BEFORE
NET GAINS ON DISPOSITIONS OF
OPERATING PROPERTIES, EQUITY
IN INCOME (LOSS) OF
UNCONSOLIDATED SUBSIDIARY AND
MINORITY INTERESTS............ 14,203 15,042 42,639 43,787
NET GAINS ON DISPOSITIONS OF
OPERATING PROPERTIES.......... 7,288 75 11,256 75
EQUITY IN INCOME (LOSS) OF
UNCONSOLIDATED SUBSIDIARY..... 28 (8) 11 (22)
---------- ---------- ---------- ----------
INCOME BEFORE MINORITY
INTERESTS..................... 21,519 15,109 53,906 43,840
---------- ---------- ---------- ----------
MINORITY INTERESTS:
Distributions on Cumulative
Redeemable Preferred units.. (3,375) (2,334) (10,125) (7,003)
Minority interest in earnings
of Operating Partnership.... (2,227) (1,830) (5,442) (5,186)
Minority interest in earnings
of Development LLCs......... (238) (34) (279) (34)
---------- ---------- ---------- ----------
Total minority interests... (5,840) (4,198) (15,846) (12,223)
---------- ---------- ---------- ----------
NET INCOME..................... $ 15,679 $ 10,911 $ 38,060 $ 31,617
========== ========== ========== ==========
Net income per common share--
basic (Note 8)................ $ 0.59 $ 0.39 $ 1.43 $ 1.14
========== ========== ========== ==========
Net income per common share--
diluted (Note 8).............. $ 0.59 $ 0.39 $ 1.42 $ 1.14
========== ========== ========== ==========
Weighted average shares
outstanding--basic (Note 8)... 26,455,400 27,658,014 26,646,871 27,640,016
========== ========== ========== ==========
Weighted average shares
outstanding--diluted (Note
8)............................ 26,696,985 27,676,512 26,757,751 27,674,515
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 38,060 $ 31,617
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................. 28,909 22,577
Provision for uncollectable tenant receivables and
deferred rent............................................ 3,508 1,744
Minority interest in earnings of Operating Partnership
and Development LLCs..................................... 5,721 5,220
Amortization of restricted stock grants................... 744 381
Net gains on dispositions of operating properties and
undeveloped land......................................... (11,256) (614)
Other..................................................... (284) (213)
Changes in assets and liabilities:
Tenant receivables....................................... (8,482) (3,120)
Deferred leasing costs................................... (1,739) (2,127)
Prepaid expenses and other assets........................ (4,430) 505
Accounts payable and accrued expenses.................... 11,920 466
Rents received in advance and tenant security deposits... (3,514) 1,762
Accrued distributions to Cumulative Redeemable Preferred
unitholders............................................. 299 52
-------- --------
Net cash provided by operating activities............... 59,456 58,250
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for operating properties..................... (8,509) (37,428)
Expenditures for undeveloped land and construction in
progress................................................. (128,401) (115,601)
Cash paid to acquire note receivable...................... (45,278)
Net proceeds received from dispositions of operating
properties............................................... 110,642 11,000
Net proceeds received from dispositions of undeveloped
land..................................................... 5,051
Decrease in escrow deposits............................... 295
Net investment in and advances (to) unconsolidated
subsidiary............................................... 470 (935)
-------- --------
Net cash used in investing activities................... (71,076) (137,618)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock............................... (41,270)
Net (repayments) borrowings on unsecured line of credit... (42,000) 18,000
Proceeds from issuance of secured and unsecured debt...... 163,961 125,000
Principal payments on secured debt........................ (10,421) (21,716)
Financing costs........................................... (3,932) (918)
Increase in restricted cash............................... (28,870) (555)
Net contributions from minority interests in Development
LLCs..................................................... 1,396
Distributions paid to common stockholders and common
unitholders.............................................. (40,559) (40,029)
-------- --------
Net cash (used) provided by financing activities........ (1,695) 79,782
-------- --------
Net (decrease) increase in cash and cash equivalents....... (13,315) 414
Cash and cash equivalents, beginning of period............. 26,116 6,443
-------- --------
Cash and cash equivalents, end of period................... $ 12,801 $ 6,857
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized interest....... $ 26,441 $ 17,287
======== ========
Distributions paid to Cumulative Redeemable Preferred
unitholders.............................................. $ 9,827 $ 6,930
======== ========
NON-CASH TRANSACTIONS:
Accrual of distributions payable (Note 9)................. $ 13,591 $ 13,567
======== ========
Issuance of secured 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
Nine Months Ended September 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 September 30, 2000, the Company's stabilized portfolio of operating
properties consisted of 80 office buildings (the "Office Properties") and 78
industrial buildings (the "Industrial Properties"), which encompassed an
aggregate of approximately 6.3 million and 5.8 million rentable square feet,
respectively, and was approximately 96.9% occupied. 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. As of September 30, 2000,
the Company had recently completed construction on two office properties
encompassing an aggregate of approximately 294,700 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 September 30, 2000, the
Company had eight office properties under construction which when completed
are expected to encompass an aggregate of approximately 606,000 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 September 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 SEC 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
6
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 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. 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 Company expects that the
infrastructure improvements will be completed in the third quarter of 2001.
The cash portion of the purchase price was funded primarily with existing
working capital.
Dispositions
During the nine months ended September 30, 2000, the Company sold, through
six separate transactions, nine office and nine industrial buildings
encompassing an aggregate of approximately 956,500 rentable square feet, to
unaffiliated third parties for an aggregate sales price of $113.6 million as
follows:
<TABLE>
<CAPTION>
Month of Rentable Square Sales Price
Property Type Location Disposition # of Buildings Feet ($ 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
Industrial.............. San Jose, CA July 5 431,400 62.4
Office.................. Fullerton, CA August 4 152,000 11.0
--- ------- ------
Total ............................................. 18 956,500 $113.6
=== ======= ======
</TABLE>
Completed Development Projects
During the nine months ended September 30, 2000, the Company completed the
development of and stabilized seven office buildings encompassing an aggregate
of approximately 630,500 rentable square feet as shown on the table below.
<TABLE>
<CAPTION>
Completion & Rentable Square Stabilized
Property Type Location Stabilization Date # of Buildings Feet Occupancy(1)
------------- ------------- ------------------ -------------- --------------- -----------
<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%
Office ................. San Diego, CA Q3 2000 2 103,000 100%
Office ................. San Diego, CA Q3 2000 1 62,400 100%
Office ................. West LA, CA Q3 2000 1 151,000 100%(/1/)
--- -------
Total ................................................. 7 630,500
=== =======
</TABLE>
--------
(1) All of these properties were included in the Company's stabilized
portfolio at September 30, 2000, with the exception of the office
project in West LA since occupancy commenced on October 2, 2000. As a
result, this property will be included in the Company's stabilized
portfolio starting in October 2000.
7
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At September 30, 2000, the Company had recently completed construction on
two office properties encompassing an aggregate of approximately 294,700
rentable square feet, which were in the lease-up phase as follows:
<TABLE>
<CAPTION>
Rentable Square Occupancy at
Property Type Location Completion Date # of Buildings Feet September 30, 2000
------------- -------------- --------------- -------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Office.................. Long Beach, CA Q2 2000 1 192,400 87%
Office.................. Calabasas, CA Q2 2000 1 102,300 81%
--- -------
Total ............................................... 2 294,700 85%
=== =======
</TABLE>
3. Notes Receivable from Related Party
In May 2000, the Company initiated actions that put it in a position to
potentially acquire the fee interest in a three building office complex
located in El Segundo, California from 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, which
encompasses approximately 366,000 aggregate rentable square feet, 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 contained a 60-day right of
first offer that gave Hughes, under certain circumstances, the right to offer
to purchase the complex. Hughes has waived this 60-day right of first offer.
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 the first trust deed on the complex, has an annual interest rate of
9.63% and matures 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 receives all of the
net operating income from the complex under a related agreement. In addition,
the Company also receives payment of an additional $98,000 per month from
KAICO through October 2000. The Company records these amounts on a cash basis
as interest income on the consolidated statement of operations. For the period
from May 1 to September 30, 2000, the Company recorded approximately $1.9
million of interest income related to this note receivable.
On October 13, 2000, the Company and KAICO agreed to modify the terms of
the existing note receivable to write down the principal value and accrued
interest owed on the note to $45.3 million. A wholly-owned subsidiary of the
Company concurrently acquired a 25% tenancy in common interest in the complex
from KAICO subject to 25% or $11.3 million of the $45.3 million note in
exchange for 1,133 common units of the Operating Partnership valued at
approximately $30,000 based upon the closing share price of the Company's
common stock as reported on the New York Stock Exchange.
The Company and KAICO also entered into agreements whereby the Company
agreed to pay KAICO approximately $3.3 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 $3.3 million, $2.3 million was paid to KAICO in May 2000 and
$0.4 million was paid to KAICO in October 2000.
8
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company, in its capacity as manager of the property, was named as a
codefendant in litigation that was pending between KAICO and Hughes with
respect to the lease on the complex. In October 2000, the litigation was
settled without adverse effect upon the Company's financial condition, results
of operations and cash flows.
4. Unsecured Line of Credit and Debt
As of September 30, 2000, the Company had borrowings of $186 million
outstanding under its revolving unsecured line of credit (the "Credit
Facility") and availability of approximately $80.0 million. Availability under
the Credit Facility is based upon the value of the Company's pool of
unencumbered assets and is reduced by amounts outstanding under the Credit
Facility and the Company's $100.0 million unsecured term facility, as
discussed in the following paragraph. The Credit Facility bears interest at an
annual rate between LIBOR plus 1.13% and LIBOR plus 1.75% (8.14% at September
30, 2000), depending upon the Company's leverage ratio at the time of
borrowing. The Company expects to use the Credit Facility to finance
development expenditures, to fund potential undeveloped land acquisitions and
for general corporate purposes.
In September 2000, the Company borrowed $100.0 million under an unsecured
debt facility from a bank group led by The Chase Manhattan Bank and Morgan
Guaranty Trust Company of New York. The $100.0 million facility, which matures
in September 2002 with two one-year extension options, requires monthly
interest-only payments based upon an annual interest rate between LIBOR plus
1.13% and LIBOR plus 1.75% (8.13% at September 30, 2000), depending upon the
Company's leverage ratio at the time of borrowing. Availability under the
Company's Credit Facility, as discussed above, takes into consideration
amounts outstanding under both the Credit Facility and this $100.0 million
facility, since a common pool of unencumbered assets is used to determine
availability for both financings.
In February 2000, the Company entered into an interest rate swap agreement
with a total notional amount of $150.0 million to effectively limit interest
expense on the Company's variable 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 variable 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 $150.0 million to effectively limit
interest expense on the Company's variable 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 is amortized over the
life of the agreement and included 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 $42.0 million and an
annual interest rate of LIBOR plus 2.70% (9.26% at September 30, 2000) at
September 30, 2000, matures in April 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 part of a multi-phased office project 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 San
Diego, California. In October 2000, the construction loan was modified to
increase the total commitment to $61.0 million and to decrease the interest
rate on $37.2 million of the loan to LIBOR plus 2.00%. 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 had completed as of September 30, 2000, and improvements on one of the
two remaining buildings to be constructed.
9
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 variable 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 the interest rate cap agreement was
approximately $38.9 million at September 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% (8.37% at September 30,
2000), amortizes over 25 years, and matures in June 2004. The mortgage loan is
secured by two office 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 repay an intercompany loan to the
Operating Partnership. The Operating Partnership concurrently used the
proceeds to repay borrowings under the Company's Credit Facility.
In July 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-rate
mortgage note payable which has an annual interest rate of LIBOR plus 1.75%
and matures in October 2003.
In October 2000, the Company obtained a construction loan with a total
commitment of $18.5 million. The construction loan bears interest at an annual
rate of LIBOR plus 1.75% and matures in October 2002, with the option to
extend for up to one twelve-month period. The proceeds from the construction
loan are being used to finance the development of an office project in San
Diego, California that is expected to encompass an aggregate of approximately
102,900 rentable square feet upon completion. The construction loan is secured
by the improvements to be constructed.
In October 2000, the Company obtained a construction loan with a total
commitment of $13.3 million. The construction loan bears interest at an annual
rate of LIBOR plus 1.75% and matures in March 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 two office buildings in San Diego,
California that are expected to encompass an aggregate of approximately
119,000 rentable square feet upon completion. The construction loan is secured
by a first deed of trust on the project.
Total interest capitalized for the three months ended September 30, 2000
and 1999 was $4.3 million and $3.2 million, respectively. Total interest
capitalized for the nine months ended September 30, 2000 and 1999 was $13.5
million and $8.1 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 September 30, 2000.
During the nine months ended September 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
10
<PAGE>
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Credit Facility. The Company
did not repurchase any shares of common stock in the second or third quarters
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 resulting from any such exchange. 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 September 30, 2000.
11
<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 September Nine Months Ended
30, September 30,
---------------- ------------------
2000 1999 2000 1999
------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Revenues and Expenses:
Office Properties:
Operating revenues..................... $33,604 $27,270 $ 94,562 $ 80,039
Property and related expenses.......... 8,183 6,798 23,150 19,995
------- ------- -------- --------
Net operating income, as defined....... 25,421 20,472 71,412 60,044
------- ------- -------- --------
Industrial Properties:
Operating revenues..................... 11,911 12,693 38,774 36,154
Property and related expenses.......... 1,980 1,695 5,769 5,493
------- ------- -------- --------
Net operating income, as defined....... 9,931 10,998 33,005 30,661
------- ------- -------- --------
Total Reportable Segments:
Operating revenues..................... 45,515 39,963 133,336 116,193
Property and related expenses.......... 10,163 8,493 28,919 25,488
------- ------- -------- --------
Net operating income, as defined....... 35,352 31,470 104,417 90,705
------- ------- -------- --------
Reconciliation to Consolidated Net
Income:
Total net operating income, as defined,
for reportable segments............... 35,352 31,470 104,417 90,705
Other unallocated revenues:
Interest income...................... 1,706 239 3,008 860
Other unallocated expenses:
General and administrative expenses.. 2,890 2,266 8,077 6,781
Interest expense..................... 10,024 6,501 27,800 18,420
Depreciation and amortization........ 9,941 7,900 28,909 22,577
------- ------- -------- --------
Net income from operations before net
gains on dispositions of operating
properties, equity in income (loss) of
unconsolidated subsidiary and minority
interests............................. 14,203 15,042 42,639 43,787
Net gains on dispositions of operating
properties............................ 7,288 75 11,256 75
Equity in income (loss) of
unconsolidated subsidiary............. 28 (8) 11 (22)
Minority interests..................... (5,840) (4,198) (15,846) (12,223)
------- ------- -------- --------
Net income............................. $15,679 $10,911 $ 38,060 $ 31,617
======= ======= ======== ========
</TABLE>
12
<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 September 30, 2000 Three Months Ended September 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................... $ 15,679 26,455,400 $ 0.59 $ 10,911 27,658,014 $ 0.39
Effect of dilutive
securities:
Stock options
granted.............. 241,585 18,498
------------ --------------- ---------- ------------ --------------- ----------
Diluted................. $ 15,679 26,696,985 $ 0.59 $ 10,911 27,676,512 $ 0.39
============ =============== ========== ============ =============== ==========
<CAPTION>
Nine Months Ended September 30, 2000 Nine Months Ended September 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................... $ 38,060 26,646,871 $ 1.43 $ 31,617 27,640,016 $ 1.14
Effect of dilutive
securities:
Stock options
granted.............. 110,880 (.01) 34,499
------------ --------------- ---------- ------------ --------------- ----------
Diluted................. $ 38,060 26,757,751 $ 1.42 $ 31,617 27,674,515 $ 1.14
============ =============== ========== ============ =============== ==========
</TABLE>
At September 30, 2000, Company employees and directors held options to
purchase 63,000 shares of the Company's common stock that 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 October 17, 2000, aggregate distributions of $13.6 million were paid to
common stockholders and common unitholders of record on September 30, 2000.
On October 13, 2000, the Company agreed to modify the terms of the note
receivable with KAICO and acquired a 25% tenancy in common interest in the
KAICO complex (see Note 3).
On October 6, 2000, a consolidated entity of the Company obtained an $18.5
million construction loan (See Note 4).
On October 17, 2000, the Company obtained a $13.3 million construction loan
(see Note 4).
13
<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.
Some of the enclosed information presented is forward-looking in nature,
including information concerning development timing and investment amounts.
Although the information is based on the Company's current expectations,
actual results could vary from expectations stated here. Numerous factors will
affect the Company's actual results, some of which are beyond its control.
These include the timing and strength of regional economic growth, the
strength of commercial and industrial real estate markets, competitive market
conditions, future interest rate levels and capital market conditions. You are
cautioned not to place undue reliance on this information, which speaks only
as of the date of this report. The Company assumes no obligation to update
publicly any forward-looking information, whether as a result of new
information, future events or otherwise. For a discussion of important risks
related to the Company's business, and an investment in its securities,
including risks that could cause actual results and events to differ
materially from results and events referred to in the forward-looking
information, see the discussion under the caption "business risks" in the
Company's annual report on Form 10-K for the year ended December 31, 1999. In
light of these risks, uncertainties and assumptions, the forward-looking
events contained herein might not occur.
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 September 30, 2000.
Results of Operations
The Company continues to capitalize on its substantial development pipeline
which at September 30, 2000 consisted of an aggregate of approximately 1.1
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 nine months ended September 30, 2000, the
Company completed and stabilized seven office buildings encompassing an
aggregate of approximately 630,500 rentable square feet. During the fourth
quarter of 1999, the Company completed and stabilized one office building
encompassing an aggregate of approximately 52,400 rentable square feet and
stabilized two industrial buildings encompassing an aggregate of approximately
178,800 rentable square feet. 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 September 30, 2000, the Company had two
office buildings encompassing an aggregate of approximately 294,700 rentable
square feet in the lease-up phase and eight office projects under construction
which when completed are expected to encompass an aggregate of approximately
606,100 rentable square feet.
During the nine months ended September 30, 2000, the Company sold nine
industrial and nine office buildings encompassing an aggregate of
approximately 669,800 and 286,700 rentable square feet, respectively, for an
aggregate sales price of $113.6 million. During the fourth quarter of 1999,
the Company disposed of five office and one industrial building encompassing
an aggregate of approximately 113,700 and 56,700 rentable
14
<PAGE>
square feet, respectively, for an aggregate sales price of $11.6 million. The
Company did not acquire any operating properties during the nine months ended
September 30, 2000, or during the fourth quarter of 1999.
As a result of the properties acquired and the projects developed by the
Company subsequent to September 30, 1999, net of the effect of properties
disposed of subsequent to September 30, 1999, rentable square footage in the
Company's portfolio of stabilized properties decreased by an aggregate of
approximately 524,000 rentable square feet, or 4.1% to 12.1 million rentable
square feet at September 30, 2000 compared to 12.6 million rentable square
feet at September 30, 1999. As of September 30, 2000, the Company's stabilized
portfolio was comprised of 80 office properties (the "Office Properties")
encompassing an aggregate of approximately 6.3 million rentable square feet
and 78 industrial properties (the "Industrial Properties") encompassing an
aggregate of approximately 5.8 million rentable square feet. The stabilized
portfolio occupancy rate at September 30, 2000 was 96.9%, with the Office and
Industrial Properties 95.3% and 98.7% occupied, respectively.
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
<TABLE>
<CAPTION>
Three Months
Ended September
30,
--------------- Dollar Percentage
2000 1999 Change Change
------- ------- ------ ----------
(unaudited, dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Rental income............................. $40,555 $34,959 $5,596 16.0 %
Tenant reimbursements..................... 4,748 4,214 534 12.7
Interest income........................... 1,706 239 1,467 613.8
Other income.............................. 212 790 (578) (73.2)
------- ------- ------
Total revenues.......................... 47,221 40,202 7,019 17.5
------- ------- ------
Expenses:
Property expenses......................... 6,217 5,054 1,163 23.0
Real estate taxes......................... 3,523 3,108 415 13.4
General and administrative expenses....... 2,890 2,266 624 27.5
Ground leases............................. 423 331 92 27.8
Interest expense.......................... 10,024 6,501 3,523 54.2
Depreciation and amortization............. 9,941 7,900 2,041 25.8
------- ------- ------
Total expenses.......................... 33,018 25,160 7,858 31.2
------- ------- ------
Income from operations before net gains on
dispositions of operating properties,
equity in income (loss) of unconsolidated
subsidiary and minority interests.......... $14,203 $15,042 $ (839) (5.6)%
======= ======= ======
</TABLE>
15
<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 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 September 30, 2000 and 1999.
Office Properties
<TABLE>
<CAPTION>
Total Office Portfolio Core Office Portfolio(1)
---------------------------------- ----------------------------------
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......... $29,997 $23,829 $6,168 25.9 % $21,836 $21,022 $ 814 3.9 %
Tenant reimbursement.. 3,423 2,729 694 25.4 3,032 2,552 480 18.8
Other income.......... 183 712 (529) (74.3) 116 694 (578) (83.3)
------- ------- ------ ------- ------- -----
Total............... 33,603 27,270 6,333 23.2 24,984 24,268 716 3.0
------- ------- ------ ------- ------- -----
Property and related
expenses:
Property expenses..... 5,241 4,502 739 16.4 4,324 4,232 92 2.2
Real estate taxes..... 2,519 1,965 554 28.2 1,731 1,757 (26) (1.5)
Ground leases......... 423 331 92 27.8 333 327 6 1.8
------- ------- ------ ------- ------- -----
Total............... 8,183 6,798 1,385 20.4 6,388 6,316 72 1.1
------- ------- ------ ------- ------- -----
Net operating income, as
defined................ $25,420 $20,472 $4,948 24.2 % $18,596 $17,952 $ 644 3.6 %
======= ======= ====== ======= ======= =====
</TABLE>
--------
(1) Stabilized office properties owned at January 1, 1999 and still owned at
September 30, 2000.
Total revenues from Office Properties increased $6.3 million, or 23.2% to
$33.6 million for the three months ended September 30, 2000 compared to $27.3
million for the three months ended September 30, 1999. Rental income from
Office Properties increased $6.2 million, or 25.9% to $30.0 million for the
three months ended September 30, 2000 compared to $23.8 million for the three
months ended September 30, 1999. Rental income generated by the Core Office
Portfolio increased $0.8 million, or 3.9% for the three months ended September
30, 2000 as compared to the three months ended September 30, 1999. This
increase was primarily attributable to an increase in occupancy with
additional growth provided by increases in rental rates on renewed and
released space in this portfolio. Average occupancy in the Core Office
Portfolio increased 2.6% to 94.4% for the three months ended September 30,
2000 compared to 91.8% for the three months ended September 30, 1999. Of the
remaining increase of $5.4 million in rental income from office properties, an
increase of $6.2 million was generated by the office properties developed by
the Company in 2000 and 1999 (the "Office Development Properties"), offset by
a decrease of $0.8 million in rental income attributed to the 14 office
buildings sold during 2000 and 1999, net of the three office buildings
acquired in 1999 (the "Net Office Acquisitions and Dispositions").
Tenant reimbursements from Office Properties increased $0.7 million, or
25.4% to $3.4 million for the three months ended September 30, 2000 compared
to $2.7 million for the three months ended September 30, 1999. An increase of
$0.5 million, or 18.8% in tenant reimbursements was generated by the Core
Office Portfolio and was primarily due to the collection of amounts identified
in common area maintenance reconciliations as well as an increase in average
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 Net Office
Acquisitions and Dispositions. Other income from Office Properties decreased
$0.5 million or 74.3% to $0.2 million for the three months ended September 30,
2000 compared to $0.7 million for the three months ended September 30, 1999.
Other income for the three months ended September 30, 1999 included a $0.5
million lease termination fee. The remaining amounts in other income from
Office Properties for both periods consisted primarily of lease termination
fees, management fees and tenant late charges.
16
<PAGE>
Total expenses from Office Properties increased $1.4 million, or 20.4% to
$8.2 million for the three months ended September 30, 2000 compared to $6.8
million for the three months ended September 30, 1999. Property expenses
increased $0.7 million, or 16.4% to $5.2 million for the three months ended
September 30, 2000 compared to $4.5 million for the three months ended
September 30, 1999. An increase of $0.1 million in property expenses was
attributable to the Core Office Portfolio as a result of increased variable
expenses due to occupancy gains. Of the remaining increase of $0.6 million, an
increase of $0.8 million attributable to the Office Development Properties was
offset by a decrease of $0.2 million from the Net Office Acquisitions and
Dispositions. Real estate taxes increased $0.6 million, or 28.2% to $2.5
million for the three months ended September 30, 2000 as compared to $1.9
million for the three months ended September 30, 1999. This increase was
attributable to the Office Development Properties. Real estate taxes for the
Core Office Portfolio remained consistent for the three months ended September
30, 2000 compared to the comparable period in 1999. Ground lease expense from
Office Properties increased $0.1 million, or 27.8% for the three months ended
September 30, 2000 compared to the three months ended September 30, 1999. This
increase was attributable to ground leases at two of the Office Development
Properties.
Net operating income, as defined, from Office Properties increased $5.0
million, or 24.2% to $25.4 million for the three months ended September 30,
2000 compared to $20.4 million for the three months ended September 30, 1999.
Of this increase, $0.6 million was generated by the Core Office Portfolio and
represented a 3.6% increase in net operating income for the Core Office
Portfolio. The remaining increase of $4.4 million was generated by an increase
of $4.9 million from the Office Development Properties, offset by a $0.5
million decrease generated by the Net Office Acquisitions and Dispositions.
Industrial Properties
<TABLE>
<CAPTION>
Total Industrial Portfolio Core Industrial Portfolio(1)
----------------------------------- --------------------------------
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......... $10,558 $11,130 $ (572) (5.1)% $ 9,046 $8,297 $749 9.0 %
Tenant
reimbursements....... 1,325 1,485 (160) (10.8) 1,177 953 224 23.5
Other income.......... 29 78 (49) (62.3) 30 41 (11) (26.8)
------- ------- ------- ------- ------ ----
Total............... 11,912 12,693 (781) (6.2) 10,253 9,291 962 10.4
------- ------- ------- ------- ------ ----
Property and related
expenses:
Property expenses..... 976 552 424 76.8 527 401 126 31.4
Real estate taxes..... 1,004 1,143 (139) (12.2) 860 881 (21) (2.4)
------- ------- ------- ------- ------ ----
Total............... 1,980 1,695 285 16.8 1,387 1,282 105 8.2
------- ------- ------- ------- ------ ----
Net operating income, as
defined................ $ 9,932 $10,998 $(1,066) (9.7)% $ 8,866 $8,009 $857 10.7 %
======= ======= ======= ======= ====== ====
</TABLE>
--------
(1) Stabilized industrial properties owned at January 1, 1999 and still owned
at September 30, 2000.
Total revenues from Industrial Properties decreased $0.8 million, or 6.2%
to $11.9 million for the three months ended September 30, 2000 compared to
$12.7 million for the three months ended September 30, 1999. Rental income
from Industrial Properties decreased $0.6 million, or 5.1% to $10.5 million
for the three months ended September 30, 2000 compared to $11.1 million for
the three months ended September 30, 1999. An increase of $0.7 million was
generated by the Core Industrial Portfolio and represented a 9.0% 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 $0.4
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 $1.7 million in rental income attributed to the 14
industrial buildings sold during 1999 and 2000 (the "Industrial
Dispositions").
17
<PAGE>
Tenant reimbursements from Industrial Properties decreased $0.2 million, or
10.8% to $1.3 million for the three months ended September 30, 2000 compared
to $1.5 million for three months ended September 30, 1999. An increase of $0.2
million was primarily attributable to an increase in property expenses
reimbursable by tenants in the Core Industrial Portfolio. In addition, an
increase of $0.1 million generated by the Industrial Development Properties
was offset by a $0.3 million decrease generated by the Industrial
Dispositions. Other income from Industrial Properties remained consistent for
the three months ended September 30, 2000 compared to the comparable period in
1999.
Total expenses from Industrial Properties increased $0.3 million, or 16.8%
to $2.0 million for the three months ended September 30, 2000 compared to $1.7
million for the three months ended September 30, 1999. Property expenses from
Industrial Properties increased by $0.4 million, or 76.8% to $1.0 million for
the three months ended September 30, 2000 compared to $0.6 million for the
three months ended September 30, 1999. An increase of $0.1 million in property
expenses generated by the Core Industrial Portfolio was due to increased
occupancy. Of the remaining increase of $0.3 million, $0.2 million was from
the Industrial Development Portfolio and $0.1 million was from Industrial
Dispositions. Real estate taxes decreased by $0.1 million for the three months
ended September 30, 2000 compared to the three months ended September 30,
1999. Real estate taxes for the Core Industrial Portfolio remained consistent
for the three months ended September 30, 2000 compared to the same period in
1999. An increase of $0.1 million from the Industrial Development Portfolio
was offset by a decrease of $0.2 million from the Industrial Dispositions.
Net operating income, as defined, from Industrial Properties decreased $1.1
million, or 9.7% to $9.9 million for the three months ended September 30, 2000
compared to $11.0 million for the three months ended September 30, 1999. An
increase of $0.8 million was generated by the Core Industrial Portfolio and
represented a 10.7% increase in net operating income for the Core Industrial
Portfolio. This was offset by a decrease of $1.9 million in net operating
income from the Industrial Dispositions.
Non-Property Related Income and Expenses
Interest income increased $1.5 million, or 613.8% to $1.7 million for the
three months ended September 30, 2000 compared to $0.2 million for the three
months ended September 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 $0.6 million, or 27.5% to
$2.9 million for the three months ended September 30, 2000 compared to $2.3
million for the three months ended September 30, 1999. This increase was
primarily due to higher salaries and benefits.
Interest expense increased $3.5 million, or 54.2% to $10.0 million for the
three months ended September 30, 2000 compared to $6.5 million for the three
months ended September 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 1.02 % to 8.17% at September 30, 2000 as
compared to 7.15% at September 30, 1999.
Depreciation and amortization increased $2.0 million, or 25.8% to $9.9
million for the three months ended September 30, 2000 compared to $7.9 million
for the three months ended September 30, 1999. The increase was due primarily
to depreciation on properties developed by the Company subsequent to September
30, 1999.
18
<PAGE>
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------- Dollar Percentage
2000 1999 Change Change
-------- -------- ------- ----------
(unaudited, dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Rental income.......................... $117,627 $101,941 $15,686 15.4 %
Tenant reimbursements.................. 14,036 12,530 1,506 12.0
Interest income........................ 3,008 860 2,148 249.8
Other income........................... 1,673 1,722 (49) (2.8)
-------- -------- -------
Total revenues....................... 136,344 117,053 19,291 16.5
-------- -------- -------
Expenses:
Property expenses...................... 17,749 15,517 2,232 14.4
Real estate taxes...................... 9,959 8,969 990 11.0
General and administrative expenses.... 8,077 6,781 1,296 19.1
Ground leases.......................... 1,211 1,002 209 20.9
Interest expense....................... 27,800 18,420 9,380 50.9
Depreciation and amortization.......... 28,909 22,577 6,332 28.0
-------- -------- -------
Total expenses....................... 93,705 73,266 20,439 27.9
-------- -------- -------
Income from operations before net gains
on dispositions of operating properties,
equity in income (loss) of
unconsolidated subsidiary and minority
interests............................... $ 42,639 $ 43,787 $(1,148) (2.6)%
======== ======== =======
</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, 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 nine months ended September 30, 2000 and 1999.
Office Properties
<TABLE>
<CAPTION>
Total Office Portfolio Core Office Portfolio(1)
----------------------------------- ----------------------------------
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......... $84,034 $69,931 $14,103 20.2% $67,257 $64,776 $2,481 3.8%
Tenant
reimbursements....... 9,872 8,513 1,359 16.0 8,861 8,202 659 8.0
Other income.......... 656 1,595 (939) (58.9) 343 1,034 (691) (66.8)
------- ------- ------- ------- ------- ------
Total............... 94,562 80,039 14,523 18.1 76,461 74,012 2,449 3.3
------- ------- ------- ------- ------- ------
Property and related
expenses:
Property expenses..... 15,128 13,538 1,590 11.7 13,390 12,946 444 3.4
Real estate taxes..... 6,811 5,455 1,356 24.9 5,261 5,082 179 3.5
Ground leases......... 1,211 1,002 209 20.9 1,045 972 73 7.5
------- ------- ------- ------- ------- ------
Total............... 23,150 19,995 3,155 15.8 19,696 19,000 696 3.7
------- ------- ------- ------- ------- ------
Net operating income, as
defined................ $71,412 $60,044 $11,368 18.9% $56,765 $55,012 $1,753 3.2%
======= ======= ======= ======= ======= ======
</TABLE>
--------
(1) Stabilized office properties owned at January 1, 1999 and still owned at
September 30, 2000.
Total revenues from Office Properties increased $14.5 million, or 18.1% to
$94.5 million for the nine months ended September 30, 2000 compared to $80.0
million for the nine months ended September 30, 1999. Rental income from
Office Properties increased $14.1 million, or 20.2% to $84.0 million for the
nine months
19
<PAGE>
ended September 30, 2000 compared to $69.9 million for the nine months ended
September 30, 1999. Rental income generated by the Core Office Portfolio
increased $2.5 million, or 3.8% for the nine months ended September 30, 2000
as compared to the nine months ended September 30, 1999. This increase was
primarily attributable to an increase in occupancy. Average occupancy in the
Core Office Portfolio increased 2.5% to 95.5% for the nine months ended
September 30, 2000 compared to 93.0% for the nine months ended September 30,
1999. In addition, there was an increase in rental income generated by an
increase in rental rates. The remaining increase of $11.6 million in rental
income from office properties was generated by an increase of $12.1 million
from the office properties developed by the Company in 2000 and 1999 (the
"Office Development Properties"), offset by a decrease of $0.5 million from
the 14 office properties sold during 1999 and 2000, net of the office
properties acquired in 1999 (the "Net Office Acquisitions and Dispositions").
Tenant reimbursements from Office Properties increased $1.4 million, or
16.0% to $9.9 million for the nine months ended September 30, 2000 compared to
$8.5 million for the nine months ended September 30, 1999. An increase of $0.7
million in tenant reimbursements was generated by the Core Office Portfolio
which was primarily due to the collection of amounts identified in common area
maintenance reconciliations as well as an increase in average occupancy in
this portfolio. An increase of $0.4 million was generated by the Office
Development Properties and the remaining increase of $0.3 million was
generated by the Net Office Acquisitions and Dispositions. Other income from
Office Properties decreased $0.9 million or 58.9% to $0.7 million for the nine
months ended September 30, 2000 compared to $1.6 million for the nine months
ended September 30, 1999. Other income for the nine months ended September 30,
1999 included $0.5 million in gain on the sale of 13 acres of undeveloped land
in Calabasas and San Diego, California and a $0.5 million lease termination
fee from one tenant at a Core Office Portfolio property. 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 $3.1 million, or 15.8% to
$23.1 million for the nine months ended September 30, 2000 compared to $20.0
million for the nine months ended September 30, 1999. Property expenses
increased $1.6 million, or 11.7% to $15.1 million for the nine months ended
September 30, 2000 compared to $13.5 million for the nine months ended
September 30, 1999. An increase of $0.4 million in property expenses was
attributable to the Core Office Portfolio which was due to occupancy gains and
increased salaries and benefits. Of the remaining increase of $1.2 million in
property expenses, an increase of $1.4 million was attributable to the Office
Development Properties which was offset by a $0.2 million decrease
attributable to the Net Office Acquisitions and Dispositions. Real estate
taxes increased $1.4 million, or 24.9% to $6.8 million for the nine months
ended September 30, 2000 as compared to $5.4 million for the nine months ended
September 30, 1999. Of this increase, $0.2 million was attributable to real
estate taxes on the Core Office Portfolio. The remaining increase of $1.2
million was attributable to the Office Development Properties. Ground lease
expense from Office Properties increased $0.2 million, or 20.9% for the nine
months ended September 30, 2000 compared to the nine months ended September
30, 1999. Of this increase, $0.1 million was attributable to the Core Office
Portfolio properties, and the remaining $0.1 million increase was attributable
to ground leases at two of the Office Development Properties.
Net operating income, as defined, from Office Properties increased $11.4
million, or 18.9% to $71.4 million for the nine months ended September 30,
2000 compared to $60.0 million for the nine months ended September 30, 1999.
Of this increase, $1.8 million was generated by the Core Office Portfolio and
represented a 3.2% increase in net operating income for the Core Office
Portfolio. The remaining increase of $9.6 million was generated by the Office
Development Properties.
20
<PAGE>
Industrial Properties
<TABLE>
<CAPTION>
Total Industrial Portfolio Core Industrial Portfolio(1)
---------------------------------- ----------------------------------
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 ........ $33,593 $32,010 $1,583 4.9% $29,376 $26,722 $2,654 9.9%
Tenant reimbursements
..................... 4,164 4,017 147 3.7 3,567 3,236 331 10.2
Other income ......... 1,017 127 890 700.8 1,018 73 945 1294.5
------- ------- ------ ------- ------- ------
Total............... 38,774 36,154 2,620 7.2 33,961 30,031 3,930 13.1
------- ------- ------ ------- ------- ------
Property and related
expenses:
Property expenses .... 2,621 1,979 642 32.4 1,894 1,604 290 18.1
Real estate taxes .... 3,148 3,514 (366) (10.4) 2,713 3,046 (333) (10.9)
------- ------- ------ ------- ------- ------
Total .............. 5,769 5,493 276 5.0 4,607 4,650 (43) (0.9)
------- ------- ------ ------- ------- ------
Net operating income, as
defined................ $33,005 $30,661 $2,344 7.6% $29,354 $25,381 $3,973 15.7%
======= ======= ====== ======= ======= ======
</TABLE>
--------
(1) Stabilized industrial properties owned at January 1, 1999 and still owned
at September 30, 2000.
Total revenues from Industrial Properties increased $2.6 million, or 7.2%
to $38.8 million for the nine months ended September 30, 2000 compared to
$36.2 million for the nine months ended September 30, 1999. Rental income from
Industrial Properties increased $1.6 million, or 4.9% to $33.6 million for the
nine months ended September 30, 2000 compared to $32.0 million for the nine
months ended September 30, 1999. An increase of $2.7 million was generated by
the Core Industrial Portfolio and represented a 9.9% increase in rental income
for the Core Industrial Portfolio. This increase in rental income for the Core
Industrial Portfolio is 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 $1.7 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
$2.8 million in rental income attributed to the 14 industrial buildings sold
during 1999 and 2000 (the "Industrial Dispositions").
Tenant reimbursements from Industrial Properties increased $0.2 million, or
3.7% to $4.2 million for the nine months ended September 30, 2000 compared to
$4.0 million for nine months ended September 30, 1999. Of this increase, $0.3
million was generated by the Core Industrial Portfolio. An increase of $0.3
million attributable to the Industrial Development Properties was offset by a
$0.4 million decrease attributable to the Industrial Dispositions. Other
income from Industrial Properties increased by $0.9 million for the nine
months ended September 30, 2000 compared to the nine months ended September
30, 1999. Other income for the nine months ended September 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 increased $0.3 million, or 5.0%
to $5.8 million for the nine months ended September 30, 2000 compared to $5.5
million for the nine months ended September 30, 1999. Property expenses from
Industrial Properties increased by $0.6 million, or 32.4% to $2.6 million for
the nine months ended September 30, 2000 compared to $2.0 million for the nine
months ended September 30, 1999. Increases of $0.3 million in the Core
Industrial Portfolio and $0.4 million in the Industrial Development Properties
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
21
<PAGE>
majority of the leases signed allow for recovery of expenses from the tenants,
this increase in expenses is offset by an increase in tenant reimbursement
income. Real estate taxes decreased by $0.4 million, or 10.4% to $3.1 million
for the nine months ended September 30, 2000 compared to $3.5 million for the
nine months ended September 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 real estate taxes which were successfully appealed by the
Company in 2000. An increase of $0.3 million in real estate taxes for the
Industrial Development Properties was offset by a decrease of $0.4 million for
the Industrial Dispositions.
Net operating income, as defined, from Industrial Properties increased $2.3
million, or 7.6% to $33.0 million for the nine months ended September 30, 2000
compared to $30.7 million for the nine months ended September 30, 1999. An
increase of $4.0 million was generated by the Core Industrial Portfolio and
represented a 15.7% increase in net operating income for the Core Industrial
Portfolio. In addition, an increase of $1.3 million generated by the
Industrial Development Properties was offset by a decrease of $2.8 million
from the Industrial Dispositions.
Non-Property Related Income and Expenses
Interest income increased $2.1 million, or 249.8% to $3.0 million for the
nine months ended September 30, 2000 compared to $0.9 million for the nine
months ended September 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 $1.3 million, or 19.1% to
$8.1 million for the nine months ended September 30, 2000 compared to $6.8
million for the nine months ended September 30, 2000. This increase was due
primarily to higher salaries and benefits.
Interest expense increased $9.4 million, or 50.9% to $27.8 million for the
nine months ended September 30, 2000 compared to $18.4 million for the nine
months ended September 30, 1999, primarily due to a net increase in aggregate
indebtedness and higher interest rates. The Company's weighted average
interest rate increased approximately 1.02% to 8.17% at September 30, 2000 as
compared to 7.15% at September 30, 1999.
Depreciation and amortization increased $6.3 million, or 28.0% to $28.9
million for the nine months ended September 30, 2000 compared to $22.6 million
for the nine months ended September 30, 1999. The increase was primarily due
to depreciation on properties developed by the Company subsequent to September
30, 1999.
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% (8.14% at September 30, 2000), depending upon the
Company's leverage ratio at the time of borrowing, and matures in November
2002. As of September 30, 2000, the Company had borrowings of $186 million
outstanding under the Credit Facility and availability of approximately $80.0
million. Availability under the Credit Facility is based upon the value of the
Company's unencumbered assets and is reduced by the amounts outstanding under
the Credit Facility and the Company's $100.0 million unsecured term facility
discussed in the following paragraph. The Company uses the Credit Facility to
finance development expenditures, to fund potential undeveloped land
acquisitions and for general corporate purposes.
In September 2000, the Company borrowed $100.0 million under an unsecured
debt facility from a bank group led by The Chase Manhattan Bank and Morgan
Guaranty Trust Company of New York. The $100.0 million facility, which matures
in September 2002 with two one-year extension options, requires monthly
interest-only payments based upon an annual interest rate between LIBOR plus
1.13% and LIBOR plus 1.75% (8.13% at September 30, 2000), and prices based
upon the same pricing tiers and leverage ratio at the time of borrowing.
Availability under the Company's Credit Facility, as discussed above, takes
into consideration amounts outstanding under both the Credit Facility and this
$100.0 million facility, since the same pool of unencumbered assets is used to
determine availability for both financings.
22
<PAGE>
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 $42.0 million and an
annual rate of LIBOR plus 2.70% (9.26% at September 30, 2000) at September 30,
2000, matures in April 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 part of a multi-phased office project 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 San
Diego, California. In October 2000, the construction loan agreement was
modified to increase the total commitment to $61.0 million, and to decrease
the interest rate on $37.2 million of the loan to LIBOR plus 2.00%. 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 had completed as of September 30, 2000, and all improvements on one of
the two remaining buildings 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% (8.37% at September 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 mortgage loan to repay an intercompany loan to the Operating
Partnership. The Operating Partnership concurrently used the proceeds to repay
borrowings under the Company's Credit Facility.
In October 2000, the Company obtained a construction loan with a total
commitment of $18.5 million. The construction loan bears interest at an annual
rate of LIBOR plus 1.75% and matures in October 2002, with the option to
extend for up to one twelve-month period. The proceeds from the construction
loan are being used to finance the development of an office project in San
Diego, California that is expected to encompass an aggregate of approximately
102,900 rentable square feet upon completion. The construction loan is secured
by the improvements to be constructed.
In October 2000, the Company obtained a construction loan with a total
commitment of $13.3 million. The construction loan bears interest at an annual
rate of LIBOR plus 1.75% and matures in March 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 two office buildings in San Diego,
California that are expected to encompass an aggregate of approximately
119,000 rentable square feet upon completion. The construction loan is secured
by a first deed of trust on the project.
23
<PAGE>
The following table sets forth the composition of the Company's secured
debt at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
September 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........................................... $ 92,847 $ 93,953
Mortgage note payable, due October 2003, interest at
LIBOR plus 1.75%, (8.30% and 7.94% at September 30,
2000 and December 31, 1999, respectively), monthly
interest-only payments............................. 83,213 90,000
Mortgage note payable, due February 2022, fixed
interest at 8.35%, monthly principal and interest
payments(a)........................................ 79,835 80,812
Construction loan payable, due April 2002, interest
at LIBOR plus 2.70%, (9.26% at September 30,
2000).............................................. 41,961
Mortgage note payable, due May 2017, fixed interest
at 7.15%, monthly principal and interest payments.. 28,778 29,440
Mortgage note payable, due June 2004, interest at
LIBOR plus 1.75%, (8.37% at September 30, 2000),
monthly principal and interest payments............ 21,956
Mortgage note payable, due December 2005, fixed
interest at 8.45%, monthly principal and interest
payments........................................... 12,639 12,973
Mortgage note payable, due November 2014, fixed
interest at 8.43%, monthly principal and interest
payments........................................... 10,678 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........................................... 7,149 7,372
-------- --------
$387,556 $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%.
The following table sets forth certain information with respect to the
maturities and scheduled principal repayments of the Company's secured debt
and unsecured term facility at September 30, 2000, assuming the exercise of
available debt extension options:
<TABLE>
<CAPTION>
Year Ending Dollars
----------- --------------
(in thousands)
<S> <C>
Remaining 2000.............................................. $ 1,308
2001........................................................ 5,525
2002........................................................ 47,932
2003........................................................ 98,167
2004........................................................ 127,511
Thereafter.................................................. 207,113
--------
Total..................................................... $487,556
========
</TABLE>
24
<PAGE>
The following table sets forth certain information with respect to the
Company's aggregate debt composition at September 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
Weighted Average Interest
Percentage of Total Debt Rate
-------------------------- --------------------------
September 30, December 31, September 30, December 31,
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Secured vs. unsecured:
Secured............... 57.5% 58.8% 8.1% 7.8%
Unsecured............. 42.5% 41.2% 8.3% 7.6%
Fixed rate vs. variable
rate:
Fixed rate(1)(4)...... 58.0% 42.5% 8.1% 7.8%
Variable rate(2)(3)... 42.0% 57.5% 8.3% 7.7%
</TABLE>
--------
(1) At September 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 September 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 January 2002.
(3) At September 30, 2000, one of the Development LLCs had an interest-rate
cap agreement to cap LIBOR on its floating rate construction debt at
8.50%. The notional amount of the cap increases over the life of the
agreement as the balance of the related construction loan increases. At
September 30, 2000, the notional amount of the interest rate cap was
approximately $38.9 million.
(4) The percentage of fixed rate debt to total debt at September 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 86.0% of its total outstanding debt at September 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 or third quarters 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 in the future.
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 November 10, 2000, an aggregate of
$313 million of equity securities were available for issuance under the
registration statement.
Capital Expenditures
As of September 30, 2000, the Company had an aggregate of approximately 1.1
million rentable square feet of office space that was either under
construction or committed for construction at a total budgeted cost of
approximately $211 million. The Company has spent an aggregate of
approximately $114 million on these projects as of September 30, 2000. The
Company intends to finance the presently budgeted $97.0 million of remaining
development costs, $9.9 million of which relates to the Company's Peregrine
Systems Corporate Center project which is being financed with proceeds from
the $61.0 million Development LLC construction loan, with additional
construction loan financing, proceeds from the Company's dispositions program
of non-strategic 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 and other tenancy requirements. The purchase
price for this property will
25
<PAGE>
be determined at the time of 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 3 to the consolidated financial
statements included at Item 1 for further discussion of this transaction). The
Company presently owns a 25% tenancy in common interest in the complex. If the
Company acquires the remaining tenancy in common interest, the Company
currently estimates that it could invest up to an additional $15.0 million to
$20.0 million related to this complex 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 undeveloped land 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 September 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.............. 27 2,506,098 2,404,492 101,606 95.9%
Orange County............ 13 625,893 505,245 120,648 80.7
San Diego................ 34 2,452,429 2,397,962 54,467 97.8
Other.................... 6 709,575 688,133 21,442 97.0
--- ---------- ---------- -------
80 6,293,995 5,995,832 298,163 95.3
--- ---------- ---------- -------
Industrial Properties:
Los Angeles.............. 7 554,225 551,055 3,170 99.4
Orange County............ 62 4,393,470 4,320,579 72,891 98.3
San Diego................ 1 39,669 39,669 100.0
Other.................... 8 820,124 820,124 100.0
--- ---------- ---------- -------
78 5,807,488 5,731,427 76,061 98.7
--- ---------- ---------- -------
Total Portfolio.......... 158 12,101,483 11,727,259 374,224 96.9%
=== ========== ========== =======
</TABLE>
26
<PAGE>
Lease Expirations by Segment Type
<TABLE>
<CAPTION>
Percentage
Total of Total
Square Leased Annual Base
Footage Square Feet Rent Under
Number of 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............... 16 61,057 1.1% $ 1,407
2001......................... 71 900,381 15.5 15,361
2002......................... 57 403,440 7.0 7,231
2003......................... 46 258,500 4.5 5,048
2004......................... 49 788,505 13.6 17,999
2005......................... 47 923,201 15.9 15,363
--- --------- ---- -------
286 3,335,084 57.6 62,409
--- --------- ---- -------
Industrial Properties:
Remaining 2000............... 18 376,817 6.6 3,141
2001......................... 73 800,345 14.1 5,670
2002......................... 48 331,473 5.6 3,031
2003......................... 34 713,293 12.6 4,958
2004......................... 14 529,130 9.3 3,769
2005......................... 14 681,255 12.0 5,115
--- --------- ---- -------
201 3,432,313 60.2 25,684
--- --------- ---- -------
Total Portfolio ............. 487 6,767,397 55.9% $88,093
=== ========= =======
</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
September 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 October 1, 2000.
Leasing Activity by Segment Type
<TABLE>
<CAPTION>
Number of Change Weighted
Leases Square Feet in Average
----------- --------------- Retention GAAP Lease Term
New Renewal New Renewal Rate Rents (in months)
--- ------- ------- ------- --------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Three Months Ended September
30, 2000:
Office Properties....... 22 14 174,542 75,723 54.2% 21.3% 51
Industrial Properties... 12 8 81,671 27,105 58.8% 13.9% 59
--- --- ------- ------- ---- ---- ---
Total Portfolio......... 34 22 256,213 102,828 55.5% 20.5% 53
=== === ======= ======= ==== ==== ===
<CAPTION>
Number of Change Weighted
Leases Square Feet in Average
----------- --------------- Retention GAAP Lease Term
New Renewal New(1) Renewal Rate Rents (in months)
--- ------- ------- ------- --------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Nine Months Ended September
30, 2000:
Office Properties ...... 43 36 260,165 193,487 55.0% 22.4% 42
Industrial Properties... 32 27 402,957 380,358 61.4% 24.2% 62
--- --- ------- ------- ---- ---- ---
Total Portfolio......... 75 63 663,122 573,845 58.8% 23.0% 54
=== === ======= ======= ==== ==== ===
</TABLE>
-------
(1) The lease-up of 663,122 square feet to new tenants for the nine months
ended September 30, 2000 includes re-leasing of 400,390 square feet and
first generation leasing of 262,732 square feet.
27
<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 $1.2 million, or 2.1% to $59.5 million for the nine months ended
September 30, 2000 compared to $58.3 million for the nine months ended
September 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.
Net cash used in investing activities decreased $66.5 million, or 48.3% to
$71.1 million for the nine months ended September 30, 2000 compared to $137.6
million for the nine months ended September 30, 1999. Cash used in investing
activities for the nine months ended September 30, 2000 consisted primarily of
the purchase of 17 acres of undeveloped land for $11.3 million less $8.5
million for a mortgage note payable issued in connection with the acquisition,
expenditures for construction in progress of $126 million, $8.5 million in
additional tenant improvements and capital expenditures, and $45.3 million
paid to acquire a note receivable, net of the effect of net proceeds received
from the sale of nine office and nine industrial buildings of approximately
$111 million. Cash used in investing activities for the nine months ended
September 30, 1999 consisted primarily of the purchase of two office
properties for $30.6 million less $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 less $6.3 million
of contributed value in exchange for which the Company issued common units of
the Operating Partnership, expenditures for construction in progress of
$94.8 million, and $11.4 million in additional tenant improvements and capital
expenditures, net of the effect of net proceeds received from the sale of two
industrial properties of approximately $11.0 million and the sale of 13 acres
of undeveloped land of approximately $5.1 million.
Net cash provided by financing activities decreased $81.5 million, or
102.1% to $1.7 million net cash used by financing activities for the nine
months ended September 30, 2000 as compared to $79.8 million net cash provided
by financing activities for the nine months ended September 30, 1999. Cash
used in financing activities for the nine months ended September 30, 2000
consisted primarily of $42.0 million in repayments to the Credit Facility,
$41.0 million in distributions paid to common stockholders and common
unitholders, $41.3 million paid for securities purchased in the Company's
stock repurchase program and a $28.9 million increase in restricted cash
partially offset by $154 million in net proceeds from the issuance of secured
and unsecured debt. Cash provided by financing activities for the nine months
ended September 30, 1999 consisted primarily of $103 million in net proceeds
from the issuance of secured debt and $18.0 million in borrowings under the
Credit Facility partially offset by $40.0 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
28
<PAGE>
to Funds From Operations published by such other REITs. Funds From Operations
should not be considered as 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 nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------
2000 1999 2000 1999
--------- --------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net income........................... $ 15,679 $ 10,911 $ 38,060 $ 31,617
Adjustments:
Minority interest in earnings of
Operating Partnership........... 2,227 1,830 5,442 5,186
Depreciation and amortization.... 9,941 7,900 28,909 22,577
Net gains on dispositions of
operating properties............ (7,288) (75) (11,256) (75)
Non cash amortization of
restricted stock grants......... 508 127 744 381
--------- --------- -------- --------
Funds From Operations................ $ 21,067 $ 20,693 $ 61,899 $ 59,686
========= ========= ======== ========
</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.
29
<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 September 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 September
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 September 30, 2000
For the Credit Facility, the table presents the assumption that the
outstanding principal balance at September 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 secured debt and unsecured term debt, the table presents
the assumption that all available debt extension options will either be
exercised or extended and that the outstanding principal balance at September
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 secured debt, the table presents the assumption that the
outstanding principal balance at September 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 September 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 September 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 respective Cumulative Redeemable Preferred stock.
For the interest rate cap, the table presents the notional amount, cap rate
and the related interest rate index upon which the cap rate is based, by
contractual maturity date. For the interest rate swap, the table presents the
notional amount, maximum contractual fixed pay rate, and related interest rate
index upon which the floating receive rate is 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 September 30, 2000.
30
<PAGE>
Interest Rate Risk Analysis--Tabular Presentation
Financial Assets and Liabilities
Outstanding Principal by Expected Maturity Date
September 30, 2000
(dollars in millions)
<TABLE>
<CAPTION>
Maturity Date
------------------------------------------------- Fair Value at
There- September 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............ $186.0 $186.0 $186.0
Average interest rate LIBOR LIBOR LIBOR
index................... +1.50% +1.50% +1.50%
Secured debt and unsecured term debt:
Variable rate............ $ 0.1 $ 0.3 $ 42.2 $83.6 $120.9 $247.1 $247.1
Average interest rate LIBOR LIBOR LIBOR LIBOR LIBOR
index................... +2.02% +2.02% +2.02% +2.02% +2.02%
Fixed rate............... $ 1.2 $ 5.2 $ 5.7 $14.6 $ 6.6 $207.1 $240.4 $236.6
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%
</TABLE>
Interest Rate Risk Analysis--Tabular Presentation
Financial Derivative Instruments
Notional Amounts by Contractual Maturity
September 30, 2000
(dollars in millions)
<TABLE>
<CAPTION>
Maturity Date
-------------------------------------- Fair Value at
There- September 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
agreement:
Notional amount....... $150.0 $150.0 $ 0.5
Cap rate ............. 6.50% 6.50% 6.50%
Forward rate index.... LIBOR LIBOR LIBOR
Interest rate swap
agreement:
Notional amount....... $150.0 $150.0 $(0.8)
Fixed pay interest
rate................. 8.45% 8.45% 8.45%
Floating receive LIBOR LIBOR LIBOR
interest rate index.. +1.50% +1.50% +1.50%
</TABLE>
31
<PAGE>
Presentation at September 30, 1999
For the unsecured line of credit, the table presents that the outstanding
principal balance at September 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.
For fixed rate secured debt, the table presents the assumption that the
outstanding principal balance at September 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 September 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 September 30, 1999.
For the Series A and Series C Preferred units the table presents the same
assumptions as discussed for the presentation at September 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 September 30, 1999.
Interest Rate Sensitivity Analysis
Financial Assets and Liabilities
Outstanding Principal by Expected Maturity Date
September 30, 1999
(dollars in millions)
<TABLE>
<CAPTION>
Maturity Date Fair Value at
------------------------------------------- September 30,
1999 2000 2001 2002 2003 Thereafter Total 1999
----- ------ ---- ---- ---- ---------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Line of credit:
Variable rate................ $290.0 $290.0 $290.0
LIBOR LIBOR
Average interest rate index.. +1.50% +1.50%
Secured debt:
Fixed rate................... $ 1.0 $ 4.8 $5.1 $5.6 $6.1 $214.1 $236.7 $232.4
Average interest rate........ 7.75% 7.75% 7.75% 7.75% 7.75% 7.75%
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>
32
<PAGE>
Interest Rate Sensitivity Analysis
Financial Derivative Instruments
Notional Amounts by Contractual Maturity
September 30, 1999
(dollars in millions)
<TABLE>
<CAPTION>
Maturity Date Fair Value at
---------------------------------------- September 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
agreement:
Notional amount....... $150.0 $150.0 $0.1
Cap rate.............. 6.50% 6.50%
Forward rate index.... LIBOR LIBOR
</TABLE>
33
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the three months ended September 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--None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--None
ITEM 5. OTHER INFORMATION--None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
*10.1 Credit Agreement and Form of Promissory Notes Aggregating $100.0
million.
*27.1 Financial Data Schedule.
</TABLE>
--------
* Filed herewith.
(b) Reports on Form 8-K
The Company filed the Current Report on Form 8-K (No. 1-12673), dated
November 1, 2000, in connection with its third quarter 2000 earnings release.
34
<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 November 10,
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)
35
