The computation of expected volatility is based on a blend of the historical volatility of our shares of common stock over approximately 5.82.9 years, as that is expected to be most consistent with future volatility and equates to a time period twice as long as the approximate 2.9-year performance period of the RSUs, and implied volatility data based on the observed pricing of six month publicly-traded options on our shares of common stock. The risk-free interest rate is based on the yield curve on zero-coupon U.S. Treasury STRIP securities in effect at January 31, 2020.February 18, 2021.
Our rental income is primarily comprised of payments defined under leases and are either subject to scheduled fixed increases or adjustments in rent based on the Consumer Price Index. Additionally, rental income includes variable payments for tenant reimbursements of property-related expenses and payments based on a percentage of tenant’s sales.
The table below sets forth the allocation of rental income between fixed and variable payments and collectability reversals or recoveries for the three and ninesix months ended SeptemberJune 30, 2021 and 2020:
21
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
9.11. Commitments and Contingencies
General
As of SeptemberJune 30, 2020,2021, we had commitments of approximately $737.4 million,$1.0 billion, excluding our ground lease commitments, for contracts and executed leases directly related to our operating and development properties.
Ground Leases
The following table summarizes our properties that are held subject to long-term noncancellable ground lease obligations as of June 30, 2021 and the respective contractual expiration dates:
|
| | | | |
Property | Contractual Expiration Date (1) |
601 108th Ave NE, Bellevue, WA(2) | November 2093 |
701, 801 and 837 N. 34th Street, Seattle, WA (2)(3) | December 2041 |
1701 Page Mill Road and 3150 Porter Drive, Palo Alto, CA | December 2067 |
Kilroy Airport Center Phases I, II, and III, Long Beach, CA | July 2084 |
3243 S. La Cienega Boulevard, Los Angeles, CA | October 2106 |
200 W. 6th St. Austin, TX (4) | December 2112 |
____________________
| |
(1) | Reflects the contractual expiration date prior to the impact of any extension or purchase options held by the Company. |
| |
(2) | The Company has 3 10-year and 1 45-year extension options for this ground lease, which if exercised would extend the expiration date to December 2116. These extension options are not assumed to be exercised in our calculation of the present value of the future minimum lease payments for this lease. |
(1) Reflects the contractual expiration date prior to the impact of any extension or purchase options held by the Company.
(2) In July 2021, we completed the acquisition of the land subject to this ground lease. Refer to Note 17 “Subsequent Events” for additional information.
(3) The Company has 3 10-year and 1 45-year extension options for this ground lease, which if exercised would extend the expiration date to December 2116. These extension options are not assumed to be exercised in our calculation of the present value of the future minimum lease payments for this lease.
(4) We entered into this ground lease in connection with a development property acquisition in June 2021. Refer to Note 2 “Acquisitions” for additional information.
To determine the discount rates used to calculate the present value of the minimum future lease payments for our ground leases, we used a hypothetical curve derived from unsecured corporate borrowing rates over the lease term. The weighted average discount rate used to determine the present value of our minimum lease payments was 5.11%4.74%. As of SeptemberJune 30, 2020,2021, the weighted average remaining lease term of our ground leases is 5466 years. For the three months ended SeptemberJune 30, 20202021 and 2019,2020, variable lease costs totaling $0.7$0.6 million and $0.7$0.9 million, respectively, were recorded to ground lease expense on our consolidated statements of operations. For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, variable lease costs totaling $2.4$0.9 million and $2.3$1.7 million, respectively, were recorded to ground leaseslease expense on our consolidated statements of operations.
The minimum commitment under our ground leases as of SeptemberJune 30, 20202021 for future periods is summarized as follows:
| | Year Ending | (in thousands) | Year Ending | (in thousands) |
Remaining 2020 | $ | 1,411 |
| |
2021 | 5,641 |
| |
Remaining 2021 | | Remaining 2021 | $ | 3,699 | |
2022 | 5,642 |
| 2022 | 7,435 | |
2023 | 5,662 |
| 2023 | 7,489 | |
2024 | 5,662 |
| 2024 | 7,525 | |
2025 | 5,662 |
| 2025 | 7,561 | |
2026 | | 2026 | 7,597 | |
Thereafter | 280,723 |
| Thereafter | 440,411 | |
Total undiscounted cash flows (1)(2)(3)(4)(5)(6) | 310,403 |
| |
Total undiscounted cash flows (1)(2)(3)(4)(5)(6)(7) | | Total undiscounted cash flows (1)(2)(3)(4)(5)(6)(7) | 481,717 | |
Present value discount | (212,467 | ) | Present value discount | (337,832) | |
Ground lease liabilities | $ | 97,936 |
| Ground lease liabilities | $ | 143,885 | |
________________________ | |
(1) | Excludes contingent future rent payments based on gross income or adjusted gross income and reflects the minimum ground lease obligations before the impact of ground lease extension options. |
| |
(2) | One of our ground lease obligations is subject to a fair market value adjustment every five years; however, the lease includes ground rent subprotection and infrastructure rent credits which currently limit our annual rental obligations to $1.0 million. The contractual obligations for that ground lease included above assumes the lesser of $1.0 million or annual lease rental obligation in effect as of September 30, 2020. |
| |
(3) | One of our ground lease obligations includes a component which is based on the percentage of gross income that exceeds the minimum ground rent. The minimum rent is subject to increases every five years based on 50% of the average annual percentage rent for the previous five years. The contractual obligations for that lease included above assume the current annual ground lease obligation in effect at September 30, 2020 for the remainder of the lease term since we cannot predict future adjustments. |
| |
(4) | One of our ground lease obligations is subject to a fair market value adjustment every five years based on a combination of CPI adjustments and third-party appraisals limited to maximum increases annually. The contractual obligations for that lease included above assume the current annual ground lease obligation in effect at September 30, 2020 for the remainder of the lease term since we cannot predict future adjustments. |
| |
(5) | One of our ground lease obligations includes a component which is based on the percentage of adjusted gross income that exceeds the minimum ground rent. The minimum rent is subject to increases every ten years by an amount equal to 60% of the average annual percentage rent for the previous three years. The contractual obligations for this lease included above assume the current annual ground lease obligation in effect at September 30, 2020 for the remainder of the lease term since we cannot predict future adjustments. |
| |
(6) | One of our ground lease obligations is subject to fixed 5% ground rent increases every five years, with the next increase occurring on December 1, 2022. |
(1)Excludes contingent future rent payments based on gross income or adjusted gross income and reflects the minimum ground lease obligations before the impact of ground lease extension options.
(2)One of our ground lease obligations is subject to a fair market value adjustment every five years; however, the lease includes ground rent subprotection and infrastructure rent credits, which currently limit our annual rental obligations to $1.0 million. The contractual obligations for that ground lease included above assumes the lesser of $1.0 million or annual lease rental obligation in effect as of June 30, 2021.
(3)One of our ground lease obligations includes a component that is based on the percentage of gross income that exceeds the minimum ground rent. The minimum rent is subject to increases every five years based on 50% of the average annual percentage rent for the previous five years. The contractual obligations for that lease included above assume the current annual ground lease obligation in effect at June 30, 2021 for the remainder of the lease term since we cannot predict future adjustments.
(4)One of our ground lease obligations is subject to a fair market value adjustment every five years based on a combination of CPI adjustments and third-party appraisals limited to maximum increases annually. The contractual obligations for that lease included above assume the current annual ground lease obligation in effect at June 30, 2021 for the remainder of the lease term since we cannot predict future adjustments.
(5)One of our ground lease obligations includes a component that is based on the percentage of adjusted gross income that exceeds the minimum ground rent. The minimum rent is subject to increases every ten years by an amount equal to 60% of the average annual percentage rent for the previous three years. The contractual obligations for this lease included above assume the current annual ground lease obligation in effect at June 30, 2021 for the remainder of the lease term since we cannot predict future adjustments.
(6)One of our ground lease obligations is subject to fixed 5% ground rent increases every five years, with the next increase occurring on December 1, 2022.
(7)One of our ground lease obligations is subject to fixed 2% ground rent increases every year, with ground rent resets occurring every ten years based on CPI. The contractual obligations for that lease included above assume increases for the remaining current ten-year period based on the current annual ground lease obligation in effect at June 30, 2021 and no subsequent changes for the remainder of the lease term since we cannot predict future CPI adjustments.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Environmental Matters
We follow the policy of monitoring all of our properties, including acquisition, development and existing stabilized portfolio properties, for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to our stabilized portfolio properties that would have a material adverse effect on our financial condition, results of operations and cash flow, or that we believe would require additional disclosure or the recording of a loss contingency.
As of SeptemberJune 30, 2020,2021, we had accrued environmental remediation liabilities of approximately $72.0$77.6 million recorded on our consolidated balance sheets in connection with certain of our in-process and future development projects. The accrued environmental remediation liabilities represent the remaining costs we estimate we will incur prior to and during the development process at various development acquisition sites. These estimates, which we developed with the assistance of third party experts, consist primarily of the removal of contaminated soil, performing environmental closure activities, constructing remedial systems and other related costs since we are required to dispose of any existing contaminated soil and sometimes perform other environmental closure or remedial activities when we develop new buildings at these sites.
We record estimated environmental remediation obligations for acquired properties at the acquisition date when we are aware of such costs and when such costs are probable of being incurred and can be reasonably estimated. Estimated costs related to development environmental remediation liabilities are recorded as an increase to the cost of the development project. Actual costs are recorded as a decrease to the liability when incurred. These accruals are adjusted as an increase or decrease to the development project costs and as an increase or decrease to the accrued environmental remediation liability if we obtain further information or circumstances change. The environmental remediation obligations recorded at SeptemberJune 30, 20202021 were not discounted to their present values since the amount and timing of cash payments are not fixed. It is possible that we could incur additional environmental remediation costs in connection with these development projects. However, potential additional environmental costs for these development projects cannot be reasonably estimated at this time and certain changes in estimates could occur as the site conditions, final project timing, design elements, actual soil conditions and other aspects of the projects, which may depend upon municipal and other approvals beyond the control of the Company, are determined.
Other than the accrued environmental liabilities discussed above, we are not aware of any unasserted claims and assessments with respect to an environmental liability that we believe would require additional disclosure or the recording of an additional loss contingency.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
10.12. Fair Value Measurements and Disclosures
Assets and Liabilities Reported at Fair Value
The only assets we record at fair value on our consolidated financial statements are the marketable securities related to our Deferred Compensation Plan. The following table sets forth the fair value of our marketable securities as of SeptemberJune 30, 20202021 and December 31, 2019:2020:
| | | Fair Value (Level 1) (1) | | Fair Value (Level 1) (1) |
| September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
Description | (in thousands) | Description | (in thousands) |
Marketable securities (2) | $ | 25,073 |
| | $ | 27,098 |
| Marketable securities (2) | $ | 25,885 | | | $ | 27,481 | |
________________________ | |
(1) | Based on quoted prices in active markets for identical securities. |
| |
(2) | The marketable securities are held in a limited rabbi trust. |
(1) Based on quoted prices in active markets for identical securities.
(2) The marketable securities are held in a limited rabbi trust.
We report the change in the fair value of the marketable securities at the end of each accounting period in interest income and other net investment gain (loss) in the consolidated statements of operations.
We also adjust the related Deferred Compensation Plan liability to fair value at the end of each accounting period based on the performance of the benchmark funds selected by each participant, which results in a corresponding increase or decrease to compensation cost included in general and administrative expenses on our consolidated statements of operations for the period.
The following table sets forth the net gain (loss) on marketable securities recorded during the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Description | (in thousands) | | (in thousands) |
Net gain (loss) on marketable securities | $ | 1,261 | | | $ | 2,662 | | | $ | 2,565 | | | $ | (564) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Description | (in thousands) | | (in thousands) |
Net gain on marketable securities | $ | 1,658 |
| | $ | 673 |
| | $ | 1,094 |
| | $ | 2,898 |
|
Financial Instruments Disclosed at Fair Value
The following table sets forth the carrying value and the fair value of our other financial instruments as of SeptemberJune 30, 20202021 and December 31, 2019:2020:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| Carrying Value | | Fair Value (1) | | Carrying Value | | Fair Value (1) | | Carrying Value | | Fair Value (1) | | Carrying Value | | Fair Value (1) |
| (in thousands) | | (in thousands) |
Liabilities | | | | | | | | Liabilities | |
Secured debt, net | $ | 254,854 |
| | $ | 268,518 |
| | $ | 258,593 |
| | $ | 272,997 |
| Secured debt, net | $ | 251,000 | | | $ | 278,882 | | | $ | 253,582 | | | $ | 282,559 | |
Unsecured debt, net | $ | 3,668,976 |
| | $ | 4,024,194 |
| | $ | 3,049,185 |
| | $ | 3,252,217 |
| Unsecured debt, net | $ | 3,672,152 | | | $ | 4,014,791 | | | $ | 3,670,099 | | | $ | 4,089,339 | |
Unsecured line of credit | $ | 0 |
| | $ | 0 |
| | $ | 245,000 |
| | $ | 245,195 |
| |
|
________________________ | |
(1) | Fair value calculated using Level II inputs, which are based on model-derived valuations in which significant inputs and significant value drivers are observable in active markets. |
(1)Fair value calculated using Level II inputs, which are based on model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
11.13. Net Income Available to Common Stockholders Per Share of the Company
The following table reconciles the numerator and denominator in computing the Company’s basic and diluted per-share computations for net income available to common stockholders for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands, except share and per share amounts) |
Numerator: | | | | | | | |
Net income available to common stockholders | $ | 49,028 |
| | $ | 43,846 |
| | $ | 108,463 |
| | $ | 122,943 |
|
Allocation to participating securities (1) | (572 | ) | | (530 | ) | | (1,657 | ) | | (1,582 | ) |
Numerator for basic and diluted net income available to common stockholders | $ | 48,456 |
| | $ | 43,316 |
| | $ | 106,806 |
| | $ | 121,361 |
|
Denominator: | | | | | | | |
Basic weighted average vested shares outstanding | 115,226,324 |
| | 104,841,176 |
| | 112,405,817 |
| | 102,252,739 |
|
Effect of dilutive securities | 441,333 |
| | 518,728 |
| | 470,058 |
| | 619,697 |
|
Diluted weighted average vested shares and common stock equivalents outstanding | 115,667,657 |
| | 105,359,904 |
| | 112,875,875 |
| | 102,872,436 |
|
Basic earnings per share: | | | | | | | |
Net income available to common stockholders per share | $ | 0.42 |
| | $ | 0.41 |
| | $ | 0.95 |
| | $ | 1.19 |
|
Diluted earnings per share: | | | | | | | |
Net income available to common stockholders per share | $ | 0.42 |
| | $ | 0.41 |
| | $ | 0.95 |
| | $ | 1.18 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands, except share and per share amounts) |
Numerator: | | | | | | | |
Net income available to common stockholders | $ | 35,839 | | | $ | 19,618 | | | $ | 533,470 | | | $ | 59,435 | |
| | | | | | | |
Allocation to participating securities (1) | (371) | | | (542) | | | (736) | | | (1,085) | |
Numerator for basic and diluted net income available to common stockholders | $ | 35,468 | | | $ | 19,076 | | | $ | 532,734 | | | $ | 58,350 | |
Denominator: | | | | | | | |
Basic weighted average vested shares outstanding | 116,451,931 | | | 115,084,897 | | | 116,398,450 | | | 110,980,066 | |
Effect of dilutive securities | 465,532 | | | 454,828 | | | 461,295 | | | 484,581 | |
Diluted weighted average vested shares and common stock equivalents outstanding | 116,917,463 | | | 115,539,725 | | | 116,859,745 | | | 111,464,647 | |
Basic earnings per share: | | | | | | | |
Net income available to common stockholders per share | $ | 0.30 | | | $ | 0.17 | | | $ | 4.58 | | | $ | 0.53 | |
Diluted earnings per share: | | | | | | | |
Net income available to common stockholders per share | $ | 0.30 | | | $ | 0.17 | | | $ | 4.56 | | | $ | 0.52 | |
________________________
| |
(1) | Participating securities include nonvested shares, certain time-based RSUs and vested market measure-based RSUs. |
(1)Participating securities include certain time-based RSUs and vested market measure-based RSUs.
Share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities. The impact of potentially dilutive common shares, including stock options, RSUs and other securities are considered in our diluted earnings per share calculation for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020. Certain market measure-based RSUs are not included in dilutive securities for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, as not all performance metrics had been met by the end of the applicable reporting periods. See Note 79 “Share-Based Compensation” for additional information regarding share-based compensation.
25
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
12.14. Net Income Available to Common Unitholders Per Unit of the Operating Partnership
The following table reconciles the numerator and denominator in computing the Operating Partnership’s basic and diluted per-unit computations for net income available to common unitholders for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in thousands, except unit and per unit amounts) |
Numerator: | | | | | | | |
Net income available to common unitholders | $ | 49,728 |
| | $ | 44,589 |
| | $ | 109,955 |
| | $ | 124,998 |
|
Allocation to participating securities (1) | (572 | ) | | (530 | ) | | (1,657 | ) | | (1,582 | ) |
Numerator for basic and diluted net income available to common unitholders | $ | 49,156 |
| | $ | 44,059 |
| | $ | 108,298 |
| | $ | 123,416 |
|
Denominator: | | | | | | | |
Basic weighted average vested units outstanding | 117,158,160 |
| | 106,864,463 |
| | 114,394,706 |
| | 104,276,187 |
Effect of dilutive securities | 441,333 |
| | 518,728 |
| | 470,058 |
| | 619,697 |
|
Diluted weighted average vested units and common unit equivalents outstanding | 117,599,493 |
| | 107,383,191 |
| | 114,864,764 |
| | 104,895,884 |
|
Basic earnings per unit: | | | | | | | |
Net income available to common unitholders per unit | $ | 0.42 |
| | $ | 0.41 |
| | $ | 0.95 |
| | $ | 1.18 |
|
Diluted earnings per unit: | | | | | | | |
Net income available to common unitholders per unit | $ | 0.42 |
| | $ | 0.41 |
| | $ | 0.94 |
| | $ | 1.18 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands, except unit and per unit amounts) |
Numerator: | | | | | | | |
Net income available to common unitholders | $ | 36,193 | | | $ | 19,838 | | | $ | 538,710 | | | $ | 60,227 | |
| | | | | | | |
Allocation to participating securities (1) | (371) | | | (542) | | | (736) | | | (1,085) | |
Numerator for basic and diluted net income available to common unitholders | $ | 35,822 | | | $ | 19,296 | | | $ | 537,974 | | | $ | 59,142 | |
Denominator: | | | | | | | |
Basic weighted average vested units outstanding | 117,602,505 | | | 117,098,562 | | | 117,549,024 | | | 112,997,795 |
Effect of dilutive securities | 465,532 | | | 454,828 | | | 461,295 | | | 484,581 | |
Diluted weighted average vested units and common unit equivalents outstanding | 118,068,037 | | | 117,553,390 | | | 118,010,319 | | | 113,482,376 | |
Basic earnings per unit: | | | | | | | |
Net income available to common unitholders per unit | $ | 0.30 | | | $ | 0.16 | | | $ | 4.58 | | | $ | 0.52 | |
Diluted earnings per unit: | | | | | | | |
Net income available to common unitholders per unit | $ | 0.30 | | | $ | 0.16 | | | $ | 4.56 | | | $ | 0.52 | |
________________________
| |
(1) | (1)Participating securities include nonvested shares, certain time-based RSUs and vested market measure-based RSUs. |
Share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities. The impact of potentially dilutive common units, including stock options, RSUs and other securities are considered in our diluted earnings per share calculation for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019.2020. Certain market measure-based RSUs are not included in dilutive securities for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, as not all performance metrics had been met by the end of the applicable reporting periods. See Note 79 “Share-Based Compensation” for additional information regarding share-based compensation.
26
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
13.15. Supplemental Cash Flow Information of the Company
Supplemental cash flow information follows (in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
SUPPLEMENTAL CASH FLOWS INFORMATION: | | | |
Cash paid for interest, net of capitalized interest of $33,244 and $39,952 as of June 30, 2021 and 2020, respectively | $ | 41,520 | | | $ | 25,494 | |
Cash paid for amounts included in the measurement of ground lease liabilities | $ | 2,887 | | | $ | 2,905 | |
NON-CASH INVESTING TRANSACTIONS: | | | |
Accrual for expenditures for operating properties and development properties | $ | 85,490 | | | $ | 131,892 | |
Tenant improvements funded directly by tenants | $ | 4,265 | | | $ | 7,210 | |
Assumption of accrued liabilities in connection with acquisitions (Notes 2 and 11) | $ | 37,572 | | | $ | 0 | |
| | | |
| | | |
| | | |
Initial measurement of operating right of use ground lease assets (Notes 2 and 11) | $ | 46,430 | | | $ | 0 | |
Initial measurement of operating ground lease liabilities (Notes 2 and 11) | $ | 46,430 | | | $ | 0 | |
NON-CASH FINANCING TRANSACTIONS: | | | |
Accrual of dividends and distributions payable to common stockholders and common unitholders (Note 17) | $ | 59,455 | | | $ | 57,600 | |
| | | |
Exchange of common units of the Operating Partnership into shares of the Company’s common stock | $ | 0 | | | $ | 3,843 | |
| | | |
| | | |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
SUPPLEMENTAL CASH FLOWS INFORMATION: | | | |
Cash paid for interest, net of capitalized interest of $58,405 and $58,337 as of September 30, 2020 and 2019, respectively | $ | 35,898 |
| | $ | 28,139 |
|
Cash paid for amounts included in the measurement of ground lease liabilities | $ | 4,686 |
| | $ | 3,917 |
|
NON-CASH INVESTING TRANSACTIONS: | | | |
Accrual for expenditures for operating properties and development properties | $ | 154,253 |
| | $ | 148,468 |
|
Tenant improvements funded directly by tenants | $ | 9,118 |
| | $ | 10,254 |
|
Assumption of accrued liabilities in connection with acquisitions | $ | 0 |
| | $ | 3,967 |
|
Initial measurement of operating right of use ground lease assets | $ | — |
| | $ | 82,938 |
|
Initial measurement of operating ground lease liabilities | $ | — |
| | $ | 87,409 |
|
NON-CASH FINANCING TRANSACTIONS: | | | |
Accrual of dividends and distributions payable to common stockholders and common unitholders (Note 15) | $ | 59,416 |
| | $ | 53,205 |
|
Exchange of common units of the Operating Partnership into shares of the Company’s common stock | $ | 3,972 |
| | $ | 78 |
|
The following is a reconciliation of our cash and cash equivalents and restricted cash at the beginning and end of the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
| (in thousands) |
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH: | | | |
Cash and cash equivalents at beginning of period | $ | 731,991 | | | $ | 60,044 | |
Restricted cash at beginning of period | 91,139 | | | 16,300 | |
Cash and cash equivalents and restricted cash at beginning of period | $ | 823,130 | | | $ | 76,344 | |
| | | |
Cash and cash equivalents at end of period | $ | 519,307 | | | $ | 605,012 | |
Restricted cash at end of period | 450,457 | | | 16,300 | |
Cash and cash equivalents and restricted cash at end of period | $ | 969,764 | | | $ | 621,312 | |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
| (in thousands) |
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH: | | | |
Cash and cash equivalents at beginning of period | $ | 60,044 |
| | $ | 51,604 |
|
Restricted cash at beginning of period | 16,300 |
| | 119,430 |
|
Cash and cash equivalents and restricted cash at beginning of period | $ | 76,344 |
| | $ | 171,034 |
|
| | | |
Cash and cash equivalents at end of period | $ | 849,009 |
| | $ | 297,620 |
|
Restricted cash at end of period | 16,300 |
| | 6,300 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 865,309 |
| | $ | 303,920 |
|
14.16. Supplemental Cash Flow Information of the Operating Partnership:
Supplemental cash flow information follows (in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
SUPPLEMENTAL CASH FLOWS INFORMATION: | | | |
Cash paid for interest, net of capitalized interest of $33,244 and $39,952 as of June 30, 2021 and 2020, respectively | $ | 41,520 | | | $ | 25,494 | |
Cash paid for amounts included in the measurement of ground lease liabilities | $ | 2,887 | | | $ | 2,905 | |
NON-CASH INVESTING TRANSACTIONS: | | | |
Accrual for expenditures for operating properties and development properties | $ | 85,490 | | | $ | 131,892 | |
Tenant improvements funded directly by tenants | $ | 4,265 | | | $ | 7,210 | |
Assumption of accrued liabilities in connection with acquisitions (Notes 2 and 11) | $ | 37,572 | | | $ | 0 | |
| | | |
| | | |
| | | |
Initial measurement of operating right of use ground lease assets (Notes 2 and 11) | $ | 46,430 | | | $ | 0 | |
Initial measurement of operating ground lease liabilities (Notes 2 and 11) | $ | 46,430 | | | $ | 0 | |
NON-CASH FINANCING TRANSACTIONS: | | | |
Accrual of distributions payable to common unitholders (Note 17) | $ | 59,455 | | | $ | 57,600 | |
| | | |
| | | |
| | | |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
SUPPLEMENTAL CASH FLOWS INFORMATION: | | | |
Cash paid for interest, net of capitalized interest of $58,405 and $58,337 as of September 30, 2020 and 2019, respectively | $ | 35,898 |
| | $ | 28,139 |
|
Cash paid for amounts included in the measurement of ground lease liabilities | $ | 4,686 |
| | $ | 3,917 |
|
NON-CASH INVESTING TRANSACTIONS: | | | |
Accrual for expenditures for operating properties and development properties | $ | 154,253 |
| | $ | 148,468 |
|
Tenant improvements funded directly by tenants | $ | 9,118 |
| | $ | 10,254 |
|
Assumption of accrued liabilities in connection with acquisitions | $ | 0 |
| | $ | 3,967 |
|
Initial measurement of operating right of use ground lease assets | $ | — |
| | $ | 82,938 |
|
Initial measurement of operating ground lease liabilities | $ | — |
| | $ | 87,409 |
|
NON-CASH FINANCING TRANSACTIONS: | | | |
Accrual of distributions payable to common unitholders (Note 15) | $ | 59,416 |
| | $ | 53,205 |
|
KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following is a reconciliation of our cash and cash equivalents and restricted cash at the beginning and end of the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
| (in thousands) |
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH: | | | |
Cash and cash equivalents at beginning of period | $ | 731,991 | | | $ | 60,044 | |
Restricted cash at beginning of period | 91,139 | | | 16,300 | |
Cash and cash equivalents and restricted cash at beginning of period | $ | 823,130 | | | $ | 76,344 | |
| | | |
Cash and cash equivalents at end of period | $ | 519,307 | | | $ | 605,012 | |
Restricted cash at end of period | 450,457 | | | 16,300 | |
Cash and cash equivalents and restricted cash at end of period | $ | 969,764 | | | $ | 621,312 | |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
| (in thousands) |
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH: | | | |
Cash and cash equivalents at beginning of period | $ | 60,044 |
| | $ | 51,604 |
|
Restricted cash at beginning of period | 16,300 |
| | 119,430 |
|
Cash and cash equivalents and restricted cash at beginning of period | $ | 76,344 |
| | $ | 171,034 |
|
| | | |
Cash and cash equivalents at end of period | $ | 849,009 |
| | $ | 297,620 |
|
Restricted cash at end of period | 16,300 |
| | 6,300 |
|
Cash and cash equivalents and restricted cash at end of period | $ | 865,309 |
| | $ | 303,920 |
|
15.17. Subsequent Events
On OctoberJuly 8, 2021, we completed the acquisition of the land that was subject to a ground lease underlying the property at 601 108th Avenue NE in Bellevue, Washington for $47.0 million.
On July 14, 2020,2021, aggregate dividends, distributions and dividend equivalents of $59.4$59.5 million were paid to common stockholders, common unitholders and RSU holders of record on SeptemberJune 30, 2020.2021.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. The results of operations discussion is combined for the Company and the Operating Partnership because there are no material differences in the results of operations between the two reporting entities.
Forward-Looking Statements
Statements contained in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts may be forward-looking statements. Forward-looking statements include, among other things, statements or information concerning our plans, objectives, capital resources, portfolio performance, results of operations, projected future occupancy and rental rates, lease expirations, debt maturities, potential investments, strategies such as capital recycling, development and redevelopment activity, projected construction costs, projected construction commencement and completion dates, projected square footage of space that could be constructed on undeveloped land that we own, projected rentable square footage of or number of units in properties under construction or in the development pipeline, anticipated proceeds from capital recycling activity or other dispositions and anticipated dates of those activities or dispositions, projected increases in the value of properties, dispositions, future executive incentive compensation, pending, potential or proposed acquisitions, plans to grow our Net Operating Income and FFO, our ability to re-lease properties at or above current market rates, anticipated market conditions and demographics and other forward-looking financial data, as well as the discussion in “—Factors That May Influence Future Results of Operations,” “—Liquidity and Capital Resource of the Company,” and “—Liquidity and Capital Resources of the Operating Partnership.” Forward-looking statements can be identified by the use of words such as “believes,” “expects,” “projects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” and the negative of these words and phrases and similar expressions that do not relate to historical matters. Forward-looking statements are based on our current expectations, beliefs and assumptions, and are not guarantees of future performance. Forward-looking statements are inherently subject to uncertainties, risks, changes in circumstances, trends and factors that are difficult to predict, many of which are outside of our control. Accordingly, actual performance, results and events may vary materially from those indicated or implied in the forward-looking statements, and you should not rely on the forward-looking statements as predictions of future performance, results or events. Numerous factors could cause actual future performance, results and events to differ materially from those indicated in the forward-looking statements, including, among others: global market and general economic conditions and their effect on our liquidity and financial conditions and those of our tenants; adverse economic or real estate conditions generally, and specifically, in the States of California, Texas and Washington; risks associated with our investment in real estate assets, which are illiquid and with trends in the real estate industry; defaults on or non-renewal of leases by tenants; any significant downturn in tenants'tenants’ businesses; our ability to re-lease property at or above current market rates; costs to comply with government regulations, including environmental remediation; the availability of cash for distribution and debt service and exposure to risk of default under debt obligations; increases in interest rates and our ability to manage interest rate exposure; the availability of financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue development, redevelopment and acquisition opportunities and refinance existing debt; a decline in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing, and which may result in write-offs or impairment charges; significant competition, which may decrease the occupancy and rental rates of properties; potential losses that may not be covered by insurance; the ability to successfully complete acquisitions and dispositions on announced terms; the ability to successfully operate acquired, developed and redeveloped properties; the ability to successfully complete development and redevelopment projects on schedule and within budgeted amounts; delays or refusals in obtaining all necessary zoning, land use and other required entitlements, governmental permits and authorizations for our development and redevelopment properties; increases in anticipated capital expenditures, tenant improvement and/or leasing costs; defaults on leases for land on which some of our properties are located; adverse changes to, or enactment or implementations of, tax laws or other applicable laws, regulations or legislation, as well as business and consumer reactions to such changes; risks associated with joint venture investments, including our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers; environmental uncertainties and risks related to natural disasters; our ability to maintain our status as a REIT; and uncertainties regarding the impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business and the economy generally. The factors included in this report are not exhaustive and additional factors could adversely affect our business and financial performance. For a discussion of additional factors that could materially adversely affect the Company’s and the Operating Partnership’s business and financial performance, see the discussion below, and in “Part II – Other Information, Item 1A. Risk Factors” of this report, as well as in “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s and the Operating Partnership’s annual report on Form 10-K for the year ended December 31, 20192020 and their respective other filings with the
SEC. All forward-looking statements are based on information that was available and speak only as of the dates on which they were made. We assume no obligation
to update any forward-looking statement that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws.
Overview and Background
We are a self-administered REIT active in premier office and mixed-use submarkets alongin the West Coast.United States. We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties in the coastal regions of Greater Los Angeles, San Diego County, the San Francisco Bay Area, the Pacific Northwest and Greater Seattle,Austin, Texas, which we believe have strategic advantages and strong barriers to entry. We own our interests in all of our real properties through the Operating Partnership and generally conduct substantially all of our operations through the Operating Partnership. We owned an approximate 98.4%99.0%, 98.1%99.0%, and 98.1%98.3% general partnership interest in the Operating Partnership as of SeptemberJune 30, 2020, 2021, December 31, 20192020 and SeptemberJune 30, 2019. All2020. As of June 30, 2021, all of our properties are held in fee except for the fourteenfifteen office buildings that are held subject to long-term ground leases for the land.
COVID-19 Response
In accordance with local and state government guidance and social distancing recommendations, the majority of our employees have worked remotely sincebeginning in March 2020. Our robust technology infrastructure was capableemployees began transitioning back to the office during the three months ended March 31, 2021 and as of supporting this model. We implemented rigorous protocols for remote work across the Company, including increased frequencyJune 30, 2021, all of team update calls and frequent communication across leadership and working levels. We are leveraging technologyour employees have returned to ensure our teams stay connected and productive, and that our culture remains strong even in these unusual circumstances.offices on a full-time basis.
Since March 2020, we have been highly focused on planning for the health and safety of our tenants and employees and preparing our buildings in accordance with the policies, protocols and applicable legal requirements in our regions. We hold our occupants’ health at the highest level of importance and have taken extensive steps to facilitate safe work environments. We engaged aan industrial hygienist to assist us in designing new standard operating procedures for our buildings that include, but are not limited to, air filtration, water quality, janitorial products and procedures, social separation and screening during building access and elevator use, the use of personal protective equipment, signage, and management of construction activities. Our buildings have remained open to tenants and we have begun to see certain tenants returning to the workplace where local ordinances and restrictions allow.workplace. We have been in communication with tenants regarding return to work protocols and safety measures, which meet or exceed best practices fromlocal and state government guidelines. Our properties received the highest level of pandemic preparedness review through a third-party who verified that all recommended CDC and local guidelines.WHO measures have been successfully implemented, including on-site air, water and germ testing.
We have implemented a rent relief program for the majority of our retail tenants whereby we deferred rent sincefrom April 2020 to June 2021 in exchange for an extension of their current lease term for an equivalent number of months at future rental rates. We expect that we will continue to offerare no longer offering rent relief to the majority of our retail tenants given that most cannot resume full operations in certain of our markets where strong state and local government restrictions remain or were put back into effect, althoughwe will evaluate any future retail rent relief requests on a specific case by case basis and only consider those which have a justifiable financial basis. Additionally, the form of relief offeredprovided to retail tenants may vary in the future. We did not create such a rent relief program for our office tenants. WeInstead, we evaluate office rent relief requests on a specific case by case basis and only consider those which have a justifiable financial basis. Our top 15 tenants represent 48.0% of our total annualized base rental revenues and as of September 30, 2020, we had collected 100% of the rent due from our top 15 tenants since the beginning of the COVID-19 pandemic. For residential tenants, deferrals of gross rent billings have been extended in accordance with the applicable local orders, which often require repayment within 12 months if such local ordinances are not extended.
We analyze our total lease receivable balances, tenant creditworthiness, specific industry trends and conditions, and current economic trends and conditions in order to evaluate whether we believe substantially all of the amounts due under a tenant’s lease agreement are deemed probable of collection over the term of the lease. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount whichthat would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination.
The following table sets forth information regarding the percent of contractual base rent and common area maintenance (“CAM”) billings (“gross rent billings”) billed, collected, forgiven, and deferred for the three months ended September 30, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | COVID-19 Modifications (3) | | Non-COVID-19 Modifications (4) | | |
Property Type | | Gross Rent Billings (1) (in thousands) | | Rent Collected (2) | | Rent Forgiven (5) | | Rent Deferred | | Rent Deferred | | Rent Outstanding (8) |
| Collected (6) | | Outstanding (7) | | Collected (6) | | Outstanding (7) | |
| | | | | | | | | | | | | | | | |
Office | | $ | 191,625 |
| | 97.8 | % | | — |
| | — |
| | 0.3 | % | | — | | 0.3 | % | | 1.6 | % |
Residential | | 4,155 |
| | 89.4 | % | | — |
| | 0.1 | % | | 8.5 | % | | — | | — |
| | 2.0 | % |
Retail | | 7,529 |
| | 47.5 | % | | 3.5 | % | | — |
| | 25.6 | % | | — | | 10.9 | % | | 12.5 | % |
| | | | | | | | | | | | | | | | |
Total | | $ | 203,309 |
| | 95.8 | % | | 0.1 | % | | — |
| | 1.4 | % | | — | | 0.7 | % | | 2.0 | % |
| | | | | | | | | | | | | | | | |
________________________
| |
(1) | Gross rent billings represents the total contractual base rent (including tenant direct-billed parking) and CAM billings before any COVID-19 related rent concessions for the three months ended September 30, 2020. |
| |
(2) | Cash collections through September 30, 2020 as a percentage of gross rent billings. |
| |
(3) | Rent concessions that qualify for the accounting relief provided by the FASB (as described in Note 1 “Organization and Basis of Presentation” to our consolidated financial statements included in this report), as total amounts due under the lease agreement are substantially the same or less than those that existed in the contract before modification. |
| |
(4) | Rent concessions that do not qualify for the accounting relief provided by the FASB (as described in Note 1 “Organization and Basis of Presentation” to our consolidated financial statements included in this report), as total amounts due under the lease agreement are not substantially the same as those that existed in the contract before modification, or other modifications unrelated to the COVID-19 pandemic have been included. |
| |
(5) | Amounts permanently forgiven as a percentage of gross rent billings. |
| |
(6) | Collections of amounts deferred under repayment plans (as described above) and through lease term extensions as a percentage of gross rent billings. |
| |
(7) | Remaining amounts deferred under repayment plans and through lease term extensions as a percentage of gross rent billings. |
| |
(8) | Uncollected gross rent billings that have not been forgiven and are not subject to deferral arrangements as a percentage of gross rent billings. Such amounts are subject to the Company’s allowance for uncollectible accounts. |
The following table sets forth information regarding the percent of contractual base rent and common area maintenance (“CAM”) billings (“gross rent billings”) billed, collected, forgiven, and deferred for the nine months ended September 30, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | COVID-19 Modifications (3) | | Non-COVID-19 Modifications (4) | | |
Property Type | | Gross Rent Billings (1) (in thousands) | | Rent Collected (2) | | Rent Forgiven (5) | | Rent Deferred | | Rent Deferred | | Rent Outstanding (8) |
| Collected (6) | | Outstanding (7) | | Collected (6) | | Outstanding (7) | |
| | | | | | | | | | | | | | | | |
Office | | $ | 556,775 |
| | 98.6 | % | | — |
| | — |
| | 0.4 | % | | — | | 0.1 | % | | 0.9 | % |
Residential | | 12,361 |
| | 92.3 | % | | — |
| | 1.1 | % | | 5.4 | % | | — | | — |
| | 1.2 | % |
Retail | | 23,744 |
| | 53.6 | % | | 2.3 | % | | — |
| | 20.9 | % | | — | | 6.8 | % | | 16.4 | % |
| | | | | | | | | | | | | | | | |
Total | | $ | 592,880 |
| | 96.7 | % | | 0.1 | % | | — |
| | 1.3 | % | | — | | 0.4 | % | | 1.5 | % |
| | | | | | | | | | | | | | | | |
________________________
| |
(1) | Gross rent billings represents the total contractual base rent (including tenant direct-billed parking) and CAM billings before any COVID-19 related rent concessions for the nine months ended September 30, 2020. |
| |
(2) | Cash collections through September 30, 2020 as a percentage of gross rent billings. |
| |
(3) | Rent concessions that qualify for the accounting relief provided by the FASB (as described in Note 1 “Organization and Basis of Presentation” to our consolidated financial statements included in this report), as total amounts due under the lease agreement are substantially the same or less than those that existed in the contract before modification. |
| |
(4) | Rent concessions that do not qualify for the accounting relief provided by the FASB (as described in Note 1 “Organization and Basis of Presentation” to our consolidated financial statements included in this report), as total amounts due under the lease agreement are not substantially the same as those that existed in the contract before modification, or other modifications unrelated to the COVID-19 pandemic have been included. |
| |
(5) | Amounts permanently forgiven as a percentage of gross rent billings. |
| |
(6) | Collections of amounts deferred under repayment plans (as described above) and through lease term extensions as a percentage of gross rent billings. |
| |
(7) | Remaining amounts deferred under repayment plans and through lease term extensions as a percentage of gross rent billings. |
| |
(8) | Uncollected gross rent billings that have not been forgiven and are not subject to deferral arrangements as a percentage of gross rent billings. Such amounts are subject to the Company’s allowance for uncollectible accounts. |
Deferrals of gross rent billings that have been extended to office and retail tenants during the period have been formalized by the execution of lease amendments that generally provide for repayment of deferred amounts through an extension of the lease term by an equivalent period of months to the deferral period.
As of the date of this report, across Not all property types,tenant relief requests will ultimately result in lease amendments and we have not relinquished our contractual rights under our lease agreements where rent concessions have not yet been granted. Our rent collections and rent relief requests to-date may not be indicative of collections, concessions or requests in future periods.
For the three months ended June 30, 2021, we collected approximately 94%97% of our October 2020 gross rent billings, including 100% from all ofwhich is consistent with our top 15 tenants. Excluding2020 collections. Gross rent relief provided to certain tenants, across all property types, we collected 95% of our October 2020 grossbillings represents the total contractual base rent billings.(including tenant direct-billed parking) and CAM billings before any COVID-19 related rent concessions for the three months ended June 30, 2021. We are continuing to monitor the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on occupancy, rental rates and rent collections. Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent for such period, as well as working with certain tenants who have requested rent deferrals, we can provide no assurance that such efforts or our efforts in future periods will be successful, particularly in the event that the COVID-19 pandemic, and restrictions intended to prevent its spread, continue for a prolonged period. Several vaccines for COVID-19 have received emergency use authorization from the FDA and are currently being administered across the country. Despite growing vaccination rates, we believe COVID-19 will continue to impact the normal operations of our tenants. The continued impact of the pandemic on our and our tenants’ businesses is largely dependent on efforts to stem the spread of COVID-19, including governmental efforts to distribute vaccines and overall vaccination rates in the areas in which we own properties and/or have development projects. Refer to “Part II – Other Information,I, Item IA. Risk Factors” included in thisour annual report on Form 10-K for the year ended December 31, 2020 for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Factors That May Influence Future Results of Operations
Development Program
We believe that a portion of our long-term future growth will continue to come from the completion of our in-process development projects and, subject to market conditions, executing on our future development pipeline, including expanding entitlements. Over the past several years, we increased our focus on development opportunities and expanded our future development pipeline through targeted acquisitions of development opportunities on the West Coast.Coast and in June 2021 we expanded into Austin, Texas through our acquisition of the Indeed Tower, which is in the tenant improvement phase.
We have a proactive planning process by which we continually evaluate the size, timing, costs and scope of our development program and, as necessary, scale activity to reflect the economic conditions and the real estate fundamentals that exist in our submarkets. We expect to execute on our development program with prudence and will be pursuing opportunities with attractive economic returns in strategic locations with proximity to public transportation or transportation access and retail amenities and in markets with strong fundamentals and visible demand. We plan to develop in phases, as appropriate, and we generally favor starting projects with pre-leasing activity, as appropriate.activity.
The global impact of the COVID-19 pandemic continues to evolve rapidly and, as cases of the illness caused by the virus have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines and restrictions on travel. In addition, all the states where we own properties and/or have development projects (i.e., California and Washington), have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, “shelter in place” rules, density limitations, social distancing measures, restrictions on types of business that may continue to operate and/or restrictions on types of construction projects that may continue, although, in certain cases, exceptions are available for essential retail, research and laboratory activities, essential building services, such as cleaning and maintenance, and certain essential construction projects. OurConsistent with 2020, our development portfolio was largely unaffected by the COVID-19 pandemic during the ninesix months ended SeptemberJune 30, 2020;2021; however, the COVID-19 pandemic, and future restrictions intended to prevent its spread if case rates surge again, may cause delays or increase costs associated with building materials or construction services necessary for construction which could adversely impact our ability to continue or complete construction as planned, on budget or at all for our development projects, and may delay the start of construction on our future development pipeline projects. Refer to “Part II – Other Information,I, Item IA. Risk Factors” included in thisour annual report on Form 10-K for the year ended December 31, 2020 for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Stabilized Development Projects
During the ninesix months ended SeptemberJune 30, 2020,2021, we completed and added the following projects to our stabilized portfolio:
The Exchange on 16th, Mission Bay,•9455 Towne Centre Drive, University Towne Center, San Francisco,Diego, California. WeIn March 2019, we commenced construction on this project, in June 2015. This projectwhich totals approximately 750,370 gross rentable square feet consisting of 738,081160,444 square feet of office space and 12,289 square feet of retail space at a total estimated investment of $585.0$95.0 million. The office space in the project is 100% leased to Dropbox, Inc.a Fortune 50 publicly traded company. We completed construction and commenced revenue recognition on the first two phases comprising approximately 82% of the project in 2019 and on the final phase of the project during the three months ended March 31, 2020.2021.
One•12860 El Camino Real (One Paseo (Retail) - Office Building 1), Del Mar, San Diego, California. We commenced construction on the retailoffice component of this mixed-use project in December 2016,2018, which is comprised of approximately 95,871encompasses 92,042 square feet of retailoffice space withat a total estimated investment of $100.0$65.0 million. We completed construction on the building in June 2020. At SeptemberJune 30, 2020,2021, the retail space of the projectbuilding was 100% leased and 92% occupied.
Completed Residential Development Projects
As of September 30, 2020, we had completed all three phasescommenced revenue recognition on approximately 82% of the following residential development project:building.
| |
• | One Paseo (Residential Phases I, II, and III) - Del Mar, San Diego, California. We commenced construction on the residential component of this mixed-use project in December 2016. Phases I, II, and III are comprised of 237, 225 and 146 residential units, respectively. We completed Phase I during the third quarter of 2019, Phase II during the first quarter of 2020, and Phase III during the third quarter of 2020. The total estimated investment for all three phases of the residential component of the project is approximately $390.0 million. As of the date of this report, 76% of the Phase I units were leased, 45% of the Phase II units were leased, and 22% of the Phase III units were leased.
|
In-Process Development Projects - Tenant Improvement
As of September 30, 2020, the following projects were in the tenant improvement phase:
Netflix // On Vine, Hollywood, California. We commenced construction on the office component of this mixed-use project in January 2018, which includes the project’s overall infrastructure and site work and approximately 355,000 square feet of office space for a total estimated investment of $300.0 million. The office space of this project is 100% leased to Netflix, Inc. We currently expect this project to stabilize in the fourth quarter of 2020.
| |
• | 333 Dexter, South Lake Union, Seattle, Washington. We commenced construction on this project in June 2017. This project encompasses approximately 635,000 square feet of office space at a total estimated investment of $410.0 millionand 100% of the project is leased to a Fortune 50 publicly traded company. In June 2020, we completed construction and commenced revenue recognition on the first phase of the project, representing approximately 49% of the project. The remaining two phases are currently expected to stabilize in the second half of 2022.
|
| |
• | One Paseo (Office) - Del Mar, San Diego, California. We commenced construction on the office component of this project in December 2018, which encompasses 285,000 square feet of office space at a total estimated investment of $205.0 million. At September 30, 2020, the office component of the project was 91%leased. In June 2020, we completed construction and commenced revenue recognition on 22,000 square feet, representing approximately 8% of the project.During the three months ended September 30, 2020, we commenced revenue recognition on an additional 136,000 square feet, and in October 2020 we commenced revenue recognition on another 10,000 square feet, bringing the total revenue commenced on this project to approximately 59% as of the date of this report. We currently expect the project to stabilize in the second quarter of 2021.
|
| |
• | 9455 Towne Centre Drive, University Towne Center, San Diego, California. In March 2019, we commenced construction on this project which totals approximately 160,000square feet of office space at a total estimated investment of $110.0 million. The project is 100% leased to a Fortune 50 publicly traded company. We currently expect this project to stabilize in the first quarter of 2021.
|
In-Process Development Projects - Under Construction
As of September 30, 2020, we had three projects in our in-process development pipeline that were under construction:
| |
• | Kilroy Oyster Point (Phase I), South San Francisco, California. In March 2019, we commenced construction on Phase I of this 39-acre life science campus situated on the waterfront in South San Francisco. This first phase encompasses approximately656,000 square feet of office space at a total estimated investment of $570.0 million and is 100% leased to two tenants. We currently expect this project to stabilize in the fourth quarter of 2021.
|
Living // On Vine,•Jardine, Hollywood, California. We commenced construction on the residential component of this project in December 2018, which encompasses 193 residential units at a total estimated investment of $200.0$185.0 million. We completed construction and commenced revenue recognition during the three months ended June 30, 2021.
In-Process Development Projects - Tenant Improvement
As of June 30, 2021, the following projects were in the tenant improvement phase:
•333 Dexter, South Lake Union, Seattle, Washington. We commenced construction on this project in June 2017. This project encompasses approximately 635,000 square feet of office space at a total estimated investment of $410.0 million and 100% of the project is leased to a Fortune 50 publicly traded company. In June 2020, we completed construction and commenced revenue recognition on the first phase of the project, representing approximately 49% of the project. The remaining two phases are currently expected to reach stabilization in the second half of 2022.
•One Paseo - Office (Building 2), Del Mar, San Diego, California. We commenced construction on the office component of this project in December 2018, which encompasses 195,000 square feet of office space at a total estimated investment of $145.0 million. At June 30, 2021, the building was 100% leased. We completed construction in June 2020 and as of the date of this report, we have commenced revenue recognition on approximately 89% of the project. We currently expect the residential componentproject to be completedreach stabilization in the firstthird quarter of 2021.
•Kilroy Oyster Point (Phase 1), South San Francisco, California. In March 2019, we commenced construction on Phase 1 of this 39-acre life science campus situated on the waterfront in South San Francisco. This first phase encompasses approximately 656,000 square feet of office space at a total estimated investment of $570.0 million and is 100% leased to two tenants. We currently expect this project to reach stabilization in the fourth quarter of 2021.
•Indeed Tower, Austin CBD, Austin, Texas. We acquired this project upon core/shell completion in June 2021. This project encompasses approximately 734,000 square feet of office space at a total estimated investment of $680.0 million and is 57% leased to four tenants with 42% of the space leased to Indeed.com through 2034. We currently expect this project to reach stabilization in the fourth quarter of 2022.
In-Process Development Projects - Under Construction
As of June 30, 2021, we had two projects in our in-process development pipeline that were under construction:
•2100 Kettner, Little Italy, San Diego, California. We commenced construction on this project in September 2019. This project is comprised of approximately 200,000235,000 square feet of office space for a total estimated investment of $140.0 million. We currently expect this project to progress to the tenant improvement phase in the third quarter of 2021.
•Kilroy Oyster Point (Phase 2), South San Francisco, California. In June 2021, we commenced construction on Phase 2 of this 39-acre life science campus situated on the waterfront in South San Francisco. The second phase encompasses approximately 875,000 square feet of office space at a total estimated investment of $940.0 million.
In-Process Development Projects - Committed
As of June 30, 2021, the following project was committed for construction:
•9514 Towne Centre Drive, University Towne Center, San Diego, California. We expect to commence construction on this project during the fourth quarter of 2021, which is comprised of approximately 71,000 square feet of office space at a total estimated investment of $60.0 million. This project is currently committed with an executed definitive agreement for 100% of the building.
Future Development Pipeline
As of SeptemberJune 30, 2020,2021, our future development pipeline included fivesix future projects located in Greater Seattle, the San Francisco Bay Area and San Diego County with an aggregate cost basis of approximately $1.0 billion at which we believe we could develop more than 6.05.5 million rentable square feet for a total estimated investment of approximately $5.0 billion to $7.0 billion, depending on successfully obtaining entitlements and market conditions.
The following table sets forth information about our future development pipeline.
| | Future Development Pipeline | | Location | | Approx. Developable Square Feet (1) | | Total Costs as of 9/30/2020 ($ in millions) (2) | Future Development Pipeline | | Location | | Approx. Developable Square Feet (1) | | Total Costs as of 6/30/2021 ($ in millions) (2) |
| | | | | | | | | |
San Diego County | | | San Diego County | |
Santa Fe Summit – Phases II and III | | 56 Corridor | | 600,000 - 650,000 | | $ | 81.6 |
| |
1335 Broadway & 901 Park Boulevard | | East Village | | TBD | | 47.4 |
| |
Santa Fe Summit – Phases 2 and 3 | | Santa Fe Summit – Phases 2 and 3 | | 56 Corridor | | 600,000 - 650,000 | | $ | 83.3 | |
2045 Pacific Highway | | 2045 Pacific Highway | | Little Italy | | 275,000 | | 47.4 | |
Kilroy East Village | | Kilroy East Village | | East Village | | TBD | | 59.7 | |
San Francisco Bay Area | | | San Francisco Bay Area | |
Kilroy Oyster Point - Phases II - IV | | South San Francisco | | 1,750,000 - 1,900,000 | | 343.8 |
| |
Kilroy Oyster Point - Phases 3 and 4 | | Kilroy Oyster Point - Phases 3 and 4 | | South San Francisco | | 875,000 - 1,000,000 | | 211.6 | |
Flower Mart | | SOMA | | 2,300,000 | | 425.9 |
| Flower Mart | | SOMA | | 2,300,000 | | 448.0 | |
Greater Seattle | | | Greater Seattle | |
SIX0 - Office & Residential | | Seattle CBD | | TBD | | 143.6 |
| SIX0 - Office & Residential | | Seattle CBD | | TBD | | 148.8 | |
TOTAL: | |
| | $ | 1,042.3 |
| TOTAL: | | $ | 998.8 | |
________________________
| |
(1) | The developable square feet and scope of projects could change materially from estimated data provided due to one or more of the following: any significant changes in the economy, market conditions, our markets, tenant requirements and demands, construction costs, new supply, regulatory and entitlement processes or project design. |
| |
(2) | Represents cash paid and costs incurred, including accrued liabilities in accordance with GAAP, as of September 30, 2020. |
(1)The developable square feet and scope of projects could change materially from estimated data provided due to one or more of the following: any significant changes in the economy, market conditions, our markets, tenant requirements and demands, construction costs, new supply, regulatory and entitlement processes or project design.
(2)Represents cash paid and costs incurred, including accrued liabilities in accordance with GAAP, as of June 30, 2021.
Fluctuations in our development activities could cause fluctuations in the average development asset balances qualifying for interest and other carrying cost and internal cost capitalization in future periods. During the three and ninesix months ended SeptemberJune 30, 2021, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately $1.8 billion, as it was determined these projects qualified for interest and other carrying cost capitalization under GAAP. During the three and six months ended June 30, 2020, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately $1.9$2.1 billion and $2.1 billion, respectively, as it was determined these projects qualified for interest and other carrying cost capitalization under GAAP. During the three and nine months ended September 30, 2019, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately $2.0 billion and $1.9$2.2 billion, respectively, as it was determined these projects qualified for interest and other carrying cost capitalization under GAAP. In the event of an extended cessation of development activities, such projects may potentially no longer qualify for capitalization of interest or other carrying costs. However, a cessation of development activities caused by events outside of our control, such as those as a result of government restrictions aimed at stopping the spread of COVID-19, would not impact our ability to capitalize interest and other carrying costs. For the three and ninesix months ended SeptemberJune 30, 2020,2021, we capitalized $19.3$18.1 million and $61.3$35.0 million, respectively, of interest to our qualifying development projects. For the three and ninesix months ended SeptemberJune 30, 2019,2020, we capitalized $20.6$20.5 million and $60.9$41.9 million, respectively, of interest to our qualifying development projects. For the three and ninesix months ended SeptemberJune 30, 2020,2021, we capitalized $5.1$4.9 million and $16.4$10.4 million, respectively, of internal costs to our qualifying development projects. For the three and ninesix months ended SeptemberJune 30, 2019,2020, we capitalized $6.8$6.2 million and $19.8$11.3 million, respectively, of internal costs to our qualifying development projects.
Capital Recycling Program. We continuously evaluate opportunities for the potential disposition of non-core properties and undeveloped land in our portfolio or the formation of strategic ventures with the intent of recycling the proceeds generated into capital used to fund new operating and development acquisitions, to finance development and redevelopment expenditures, to repay long-term debt and for other general corporate purposes. As part of this strategy, we attempt to enter into Section 1031 Exchanges and other tax deferred transaction structures, when possible, to defer some or all of the taxable gains on the sales, if
any, for federal and state income tax purposes. See the “Liquidity and Capital Resources of the Operating Partnership – Liquidity Sources” section for further discussion of our capital recycling activities.
In connection with our capital recycling strategy, during the six months ended June 30, 2021, we completed the sale of one operating property in San Francisco, California to an unaffiliated third party for gross proceeds of $1.08 billion, or approximately $1,440 per square foot. A portion of the proceeds from the sale were used to fund the acquisition of two development properties totaling $622.2 million. The timing of any potential future disposition or strategic venture transactions will depend on market conditions and other factors, including but not limited to our capital needs, the availability of financing for potential buyers (which has been and may continue to be constrained for some potential buyers due to the ongoing COVID-19 pandemic’s impact on economic and market conditions, including the financial markets), and our ability to defer some or all of the taxable gains on the sales. We cannot assure that we will dispose of any additional properties, enter into any additional strategic ventures, or that we will be able to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange or be able to use other tax
deferred structures in connection with our strategy. See the “Liquidity and Capital Resources of the Operating Partnership – Liquidity Sources” section for further information.
Acquisitions. During the six months ended June 30, 2021, we acquired two development properties in two transactions for a total cash purchase price of $622.2 million. As part of our growth strategy, which is highly dependent on market conditions and business cycles, among other factors, we continue to evaluate strategic opportunities and remain a disciplined buyer of development and redevelopment opportunities as well as value-add and strategic operating properties. We focus on growth opportunities primarily in West Coast markets populated by knowledge and creative basedcreative-based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services. Against the backdrop of market volatility, we expect to manage a strong balance sheet, execute on our development program and selectively evaluate opportunities that we believe have the potential to either add immediate Net Operating Income to our portfolio or play a strategic role in our future growth.
In connection with our growth strategy, we often have one or more potential acquisitions of properties and/or undeveloped land under consideration that are in varying stages of negotiation and due diligence review, or under contract, at any point in time. However, we cannot provide assurance that we will enter into any agreements to acquire properties or undeveloped land, or that the potential acquisitions contemplated by any agreements we may enter into the future will be completed. In addition, acquisitions are subject to various risks and uncertainties and we may be unable to complete an acquisition after making a nonrefundable deposit or incurring acquisition-related costs.
Incentive Compensation. Our Executive Compensation Committee determines compensation, including cash bonuses and equity incentives, for our executive officers, as defined in Rule 16 under the Exchange Act. For 2020,2021, the annual cash bonus program was structured to allow the Executive Compensation Committee to evaluate a variety of key quantitative and qualitative metrics at the end of the year and make a determination based on the Company’s and management’s overall performance. Our Executive Compensation Committee also grants equity incentive awards from time to time that include performance-based and/or market-measure based vesting requirements and time-based vesting requirements. As a result, accrued incentive compensation and compensation expense for future awards may be affected by our operating and development performance, financial results, stock price, performance against applicable performance-based vesting goals, market conditions, liquidity measures, forfeitures and other factors. Consequently, we cannot predict the amounts that will be recorded in future periods related to such incentive compensation.
As of SeptemberJune 30, 2020,2021, there was approximately $42.6$41.8 million of total unrecognized compensation cost related to outstanding nonvested shares of restricted common stock and RSUs issued under share-based compensation arrangements. Those costs are expected to be recognized over a weighted-average period of 1.61.5 years. The ultimate amount of compensation cost recognized related to outstanding nonvested RSUs issued under share-based compensation arrangements may vary for performance-based RSUs that are still in the performance period based on performance against applicable performance-based vesting goals. The $42.6$41.8 million of unrecognized compensation cost does not reflect the future compensation cost for any potential share-based awards that may be issued subsequent to SeptemberJune 30, 2020. Share-based compensation expense for potential future awards could be affected by our operating and development performance, financial results, stock price, performance against applicable performance-based vesting goals, market conditions and other factors.2021. For additional information regarding our equity incentive awards, see Note 79 “Share-Based Compensation” to our consolidated financial statements included in this report.
35
Information on Leases Commenced and Executed
Leasing Activity and Changes in Rental Rates. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties, newly acquired properties with vacant space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Negative trends in one or more of these factors could adversely affect our rental income in future periods. The following tables set forth certain information regarding leasing activity for our stabilized portfolio during the three and ninesix months ended SeptemberJune 30, 2020.2021.
For Leases Commenced | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1st & 2nd Generation (1)(2) | | 2nd Generation (1)(2) |
| Number of Leases (3) | | Rentable Square Feet (3) | | Retention Rates (4) | | TI/LC per Sq. Ft. (5) | | TI/LC per Sq. Ft. / Year | | Changes in Rents (6)(7) | | Changes in Cash Rents (8) | | Weighted Average Lease Term (in months) |
| New | | Renewal | | New | | Renewal | | |
Three Months Ended June 30, 2021 | 10 | | | 8 | | | 138,543 | | | 65,571 | | | 39.1 | % | | $ | 61.73 | | | $ | 10.43 | | | 45.2 | % | | 24.0 | % | | 71 | |
Six Months Ended June 30, 2021 | 22 | | | 21 | | | 594,296 | | | 206,271 | | | 40.8 | % | | $ | 74.24 | | | $ | 11.00 | | | 54.2 | % | | 31.5 | % | | 81 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1st & 2nd Generation (1)(2) | | 2nd Generation (1)(2) |
| Number of Leases (3) | | Rentable Square Feet (3) | | Retention Rates (4) | | TI/LC per Sq. Ft. (5) | | TI/LC per Sq. Ft. / Year | | Changes in Rents (6)(7) | | Changes in Cash Rents (8) | | Weighted Average Lease Term (in months) |
| New | | Renewal | | New | | Renewal | | |
Three Months Ended September 30, 2020 | 10 |
| | 10 |
| | 165,010 |
| | 114,813 |
| | 37.1 | % | | $ | 37.47 |
| | $ | 10.97 |
| | 33.1 | % | | 14.7 | % | | 41 |
|
Nine Months Ended September 30, 2020 | 33 |
| | 28 |
| | 324,904 |
| | 438,143 |
| | 39.5 | % | | $ | 49.03 |
| | $ | 9.05 |
| | 35.7 | % | | 16.1 | % | | 65 |
|
For Leases Executed (9)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1st & 2nd Generation (1)(2) | | 2nd Generation (1)(2) |
| Number of Leases (3) | | Rentable Square Feet (3) | | TI/LC per Sq. Ft. (5) | | TI/LC per Sq. Ft. / Year | | Changes in Rents (6)(7) | | Changes in Cash Rents (8) | | Weighted Average Lease Term (in months) |
| New | | Renewal | | New | | Renewal | | | | |
Three Months Ended September 30, 2020 | 3 |
| | 10 |
| | 8,250 |
| | 114,813 |
| | $ | 5.13 |
| | $ | 3.62 |
| | 32.1 | % | | 14.6 | % | | 17 |
|
Nine Months Ended September 30, 2020 | 15 |
| | 28 |
| | 193,125 |
| | 438,143 |
| | $ | 48.01 |
| | $ | 8.73 |
|
| 35.7 | % | | 17.5 | % | | 66 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1st & 2nd Generation (1)(2) | | 2nd Generation (1)(2) |
| Number of Leases (3) | | Rentable Square Feet (3) | | TI/LC per Sq. Ft. (5) | | TI/LC per Sq. Ft. / Year | | Changes in Rents (6)(7) | | Changes in Cash Rents (8) | | Weighted Average Lease Term (in months) |
| New | | Renewal | | New | | Renewal | | | | |
Three Months Ended June 30, 2021 | 10 | | | 8 | | | 131,933 | | | 65,571 | | | $ | 48.06 | | | $ | 9.01 | | | 25.6 | % | | 8.7 | % | | 64 | |
Six Months Ended June 30, 2021 | 19 | | | 21 | | | 198,592 | | | 206,271 | | | $ | 30.48 | | | $ | 7.32 | | | 20.1 | % | | 6.7 | % | | 50 | |
________________________
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(1) | Includes 100% of consolidated property partnerships. |
| |
(2) | First generation leasing includes space where we have made capital expenditures that result in additional revenue generated when the space is re-leased. Second generation leasing includes space where we have made capital expenditures to maintain the current market revenue stream. |
| |
(3) | Represents leasing activity for leases that commenced or were signed during the period, including first and second generation space, net of month-to-month leases. Excludes leasing on new construction. |
| |
(4) | Calculated as the percentage of space either renewed or expanded into by existing tenants or subtenants at lease expiration. |
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(5) | Tenant improvements and leasing commissions per square foot exclude tenant-funded tenant improvements. |
| |
(6) | Calculated as the change between GAAP rents for new/renewed leases and the expiring GAAP rents for the same space. Excludes leases for which the space was vacant longer than one year or vacant when the property was acquired. |
| |
(7) | Excludes commenced and executed leases of approximately 135,727(1)Includes 100% of consolidated property partnerships. (2)First generation leasing includes space where we have made capital expenditures that result in additional revenue generated when the space is re-leased. Second generation leasing includes space where we have made capital expenditures to maintain the current market revenue stream. (3)Represents leasing activity for leases that commenced or were signed during the period, including first and second generation space, net of month-to-month leases. Excludes leasing on new construction. (4)Calculated as the percentage of space either renewed or expanded into by existing tenants or subtenants at lease expiration. (5)Tenant improvements and leasing commissions per square foot exclude tenant-funded tenant improvements. (6)Calculated as the change between GAAP rents for new/renewed leases and the expiring GAAP rents for the same space. Excludes leases for which the space was vacant longer than one year or vacant when the property was acquired. (7)Excludes commenced and executed leases of approximately 55,098 and 16,136 rentable square feet, respectively, for the three months ended June 30, 2021 and commenced and executed leases of approximately 222,835 and 61,638 rentable square feet, respectively, for the six months ended June 30, 2021, for which the space was vacant longer than one year or being leased for the first time. Space vacant for more than one year is excluded from our change in rents calculations to provide a more meaningful market comparison. (8)Calculated as the change between stated rents for new/renewed leases and the expiring stated rents for the same space. Excludes leases for which the space was vacant longer than one year or vacant when the property was acquired. (9)During the three months ended June 30, 2021, 10 new leases totaling 137,438 rentable square feet were signed but not commenced as of June 30, 2021. During the six months ended June 30, 2021, 12 new leases totaling 149,577 rentable square feet were signed but not commenced as of June 30, 2021.
and 1,236 rentable square feet, respectively, for the three months ended September 30, 2020 and commenced and executed leases of approximately 250,269 and 72,104 rentable square feet, respectively, for the nine months ended September 30, 2020, for which the space was vacant longer than one year or being leased for the first time. Space vacant for more than one year is excluded from our change in rents calculations to provide a more meaningful market comparison.
|
| |
(8) | Calculated as the change between stated rents for new/renewed leases and the expiring stated rents for the same space. Excludes leases for which the space was vacant longer than one year or vacant when the property was acquired. |
| |
(9) | During the three months ended September 30, 2020, 2 new leases totaling 1,924 square feet were signed but not commenced as of September 30, 2020. For the nine months ended September 30, 2020, 7 new leases totaling 114,553 square feet were signed but not commenced as of September 30, 2020. |
Our rental rates and occupancy are impacted by general economic conditions, including the pace of regional economic growth and access to capital, and potentially the current COVID-19 pandemic and restrictions intended to prevent its spread.capital. Therefore, we cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current market rates. In addition, due to uncertaintythe low level of current market eventsrecent transaction volume as a result of the COVID-19 pandemic, and the impact it has had on recent transaction volume in our markets, we are currently unable to provide meaningful information on the weighted average cash rental rates for our total stabilized portfolio compared to current market rates at SeptemberJune 30, 2020. In addition it is possible that the COVID-19 pandemic may have an adverse impact on our ability to renew leases or re-lease available space in our properties on favorable terms or at all in the future, including as a result of a deterioration in the economic and market conditions due to2021. As restrictions intended to prevent the spread of COVID-19. TheseCOVID-19 began to be lifted during the six months ended June 30, 2021, we saw an increase in prospective tenant tours and inquiries. While we do not believe that our development leasing and ability to renew leases scheduled to expire has been significantly impacted by the COVID-19 pandemic, we do believe that the impact of the restrictions and social distancing guidelines limited our abilityand the economic uncertainty caused by the COVID-19 pandemic has impacted the timing and volume of leasing and may continue to physically show space to prospective tenants.do so in the future, particularly if case rates surge again. Additionally, decreased demand, increased competition (including sublease space available from our tenants) and other negative trends or unforeseeable events that impair our ability to timely renew or re-lease space could have further negative effects on our future financial condition, results of operations, and cash flows.
36
Scheduled Lease Expirations. The following tables set forth certain information regarding our lease expirations for our stabilized portfolio for the remainder of 20202021 and the next five years and by region for the remainder of 20202021 and in 2021.2022.
Lease Expirations (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year of Lease Expiration | | Number of Expiring Leases | | Total Square Feet | | % of Total Leased Sq. Ft. | | Annualized Base Rent (2)(3) | | % of Total Annualized Base Rent (2) | | Annualized Base Rent per Sq. Ft. (2) |
| | | | | | | | (in thousands) | | | | |
Remainder of 2021 (4) | | 33 | | | 333,304 | | | 2.6 | % | | $ | 14,887 | | | 2.2 | % | | $ | 44.66 | |
2022 (4) | | 72 | | | 768,814 | | | 6.0 | % | | 31,827 | | | 4.7 | % | | 41.40 | |
2023 | | 76 | | | 1,196,717 | | | 9.4 | % | | 63,640 | | | 9.3 | % | | 53.18 | |
2024 | | 63 | | | 989,196 | | | 7.7 | % | | 48,365 | | | 7.1 | % | | 48.89 | |
2025 | | 56 | | | 773,736 | | | 6.0 | % | | 38,943 | | | 5.7 | % | | 50.33 | |
2026 | | 43 | | | 1,717,490 | | | 13.4 | % | | 78,698 | | | 11.5 | % | | 45.82 | |
Total | | 343 | | | 5,779,257 | | | 45.1 | % | | $ | 276,360 | | | 40.5 | % | | $ | 47.82 | |
|
| | | | | | | | | | | | | | | | | | | | |
Year of Lease Expiration | | Number of Expiring Leases | | Total Square Feet | | % of Total Leased Sq. Ft. | | Annualized Base Rent (2)(3) | | % of Total Annualized Base Rent (2) | | Annualized Base Rent per Sq. Ft. (2) |
| | | | | | | | (in thousands) | | | | |
Remainder of 2020 | | 19 |
| | 285,979 |
| | 2.2 | % | | $ | 12,281 |
| | 1.8 | % | | $ | 42.94 |
|
2021 | | 74 |
| | 624,156 |
| | 4.8 | % | | 27,479 |
| | 3.9 | % | | 44.03 |
|
2022 | | 69 |
| | 853,426 |
| | 6.5 | % | | 36,742 |
| | 5.2 | % | | 43.05 |
|
2023 | | 79 |
| | 1,264,737 |
| | 9.7 | % | | 67,187 |
| | 9.6 | % | | 53.12 |
|
2024 | | 58 |
| | 959,822 |
| | 7.4 | % | | 46,938 |
| | 6.7 | % | | 48.90 |
|
2025 | | 57 |
| | 646,079 |
| | 5.0 | % | | 31,681 |
| | 4.5 | % | | 49.04 |
|
Total | | 356 |
| | 4,634,199 |
| | 35.6 | % | | $ | 222,308 |
| | 31.7 | % | | $ | 47.97 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
Year | | Region | | # of Expiring Leases | | Total Square Feet | | % of Total Leased Sq. Ft. | | Annualized Base Rent (2)(3) | | % of Total Annualized Base Rent (2) | | Annualized Rent per Sq. Ft. (2) |
2020 | | Greater Los Angeles | | 11 |
| | 188,743 |
| | 1.4 | % | | $ | 7,407 |
| | 1.1 | % | | $ | 39.24 |
|
| San Diego | | 4 |
| | 41,294 |
| | 0.3 | % | | 1,275 |
| | 0.2 | % | | 30.88 |
|
| San Francisco Bay Area | | 4 |
| | 55,942 |
| | 0.5 | % | | 3,599 |
| | 0.5 | % | | 64.33 |
|
| Greater Seattle | | — |
| | — |
| | — | % | | — |
| | — | % | | — |
|
| Total | | 19 |
| | 285,979 |
| | 2.2 | % | | $ | 12,281 |
| | 1.8 | % | | $ | 42.94 |
|
| | | | | | | | | | | | | | |
2021 | | Greater Los Angeles | | 46 |
| | 238,684 |
| | 1.8 | % | | $ | 9,619 |
| | 1.4 | % | | $ | 40.30 |
|
| San Diego | | 15 |
| | 140,808 |
| | 1.1 | % | | 5,474 |
| | 0.8 | % | | 38.88 |
|
| San Francisco Bay Area | | 9 |
| | 232,887 |
| | 1.8 | % | | 11,893 |
| | 1.6 | % | | 51.07 |
|
| Greater Seattle | | 4 |
| | 11,777 |
| | 0.1 | % | | 493 |
| | 0.1 | % | | 41.86 |
|
| Total | | 74 |
| | 624,156 |
| | 4.8 | % | | $ | 27,479 |
| | 3.9 | % | | $ | 44.03 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year | | Region | | # of Expiring Leases | | Total Square Feet | | % of Total Leased Sq. Ft. | | Annualized Base Rent (2)(3) | | % of Total Annualized Base Rent (2) | | Annualized Rent per Sq. Ft. (2) |
2021 (4) | | Greater Los Angeles | | 23 | | | 143,422 | | | 1.1 | % | | $ | 5,902 | | | 0.9 | % | | $ | 41.15 | |
| | | | | | | | | | | | | |
| San Diego County | | 3 | | | 11,967 | | | 0.1 | % | | 415 | | | 0.1 | % | | 34.68 | |
| San Francisco Bay Area | | 6 | | | 176,643 | | | 1.4 | % | | 8,512 | | | 1.2 | % | | 48.19 | |
| Greater Seattle | | 1 | | | 1,272 | | | — | % | | 58 | | | — | % | | 45.60 | |
| Total | | 33 | | | 333,304 | | | 2.6 | % | | $ | 14,887 | | | 2.2 | % | | $ | 44.66 | |
| | | | | | | | | | | | | | |
2022 (4) | | Greater Los Angeles | | 53 | | | 473,871 | | | 3.7 | % | | $ | 19,973 | | | 2.9 | % | | $ | 42.15 | |
| | | | | | | | | | | | | |
| San Diego County | | 10 | | | 214,463 | | | 1.7 | % | | 7,617 | | | 1.1 | % | | 35.52 | |
| San Francisco Bay Area | | 5 | | | 50,108 | | | 0.4 | % | | 3,180 | | | 0.5 | % | | 63.46 | |
| Greater Seattle | | 4 | | | 30,372 | | | 0.2 | % | | 1,057 | | | 0.2 | % | | 34.80 | |
| Total | | 72 | | | 768,814 | | | 6.0 | % | | $ | 31,827 | | | 4.7 | % | | $ | 41.40 | |
| | | | | | | | | | | | | | |
________________________
| |
(1) | For leases that have been renewed early with existing tenants, the expiration date and annualized base rent information presented takes into consideration the renewed lease terms. Excludes leases not commenced as of September 30, 2020, space leased under month-to-month leases, storage leases, vacant space and future lease renewal options not executed as of September 30, 2020. |
| |
(2) | Annualized base rent includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense reimbursement revenue. Additionally, the underlying leases contain various expense structures including full service gross, modified gross and triple net. Percentages represent percentage of total portfolio annualized contractual base rental revenue. For additional information on tenant improvement and leasing commission costs incurred by the Company for the current reporting period, please see further discussion under the caption “Information on Leases Commenced and Executed.” |
| |
(3) | Includes 100% of annualized base rent of consolidated property partnerships. |
(1)For leases that have been renewed early with existing tenants, the expiration date and annualized base rent information presented takes into consideration the renewed lease terms. Excludes leases not commenced as of June 30, 2021, space leased under month-to-month leases, storage leases, vacant space and future lease renewal options not executed as of June 30, 2021.
(2)Annualized base rent includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense reimbursement revenue. Additionally, the underlying leases contain various expense structures including full service gross, modified gross and triple net. Percentages represent percentage of total portfolio annualized contractual base rental revenue. For additional information on tenant improvement and leasing commission costs incurred by the Company for the current reporting period, please see further discussion under the caption “Information on Leases Commenced and Executed.”
(3)Includes 100% of annualized base rent of consolidated property partnerships.
(4)Adjusting for leases executed as of June 30, 2021 but not yet commenced, the 2021 and 2022 expirations would be reduced by 78,759 and 50,343 square feet, respectively.
In addition to the 1.11.2 million rentable square feet, or 7.8%8.2%, of currently available space in our stabilized portfolio, leases representing approximately 2.2%2.6% and 4.8%6.0% of the occupied square footage of our stabilized portfolio are scheduled to expire during the remainder of 20202021 and in 2021,2022, respectively. The leases scheduled to expire during the remainder of 20202021 and in 20212022 represent approximately 0.91.1 million rentable square feet or 5.7%6.9% of our total annualized base rental revenue. Adjusting for leases executed as of SeptemberJune 30, 20202021 but not yet commenced, the remaining 20202021 and 20212022 expirations would be 212,094254,545 and 497,976718,471 square feet, respectively.
Sublease Space. Of our leased space as of SeptemberJune 30, 2020,2021, approximately 1,295,1991,459,413 rentable square feet, or 9.0%10.3% of the square footage in our stabilized portfolio, was available for sublease, primarily in the San Francisco Bay Area and Greater Seattle regions.region. Of the 9.0%10.3% of available sublease space in our stabilized portfolio as of SeptemberJune 30, 2020,2021, approximately 6.3%7.4% was vacant space, and the remaining 2.7%2.9% was occupied. Of the approximately 1,295,1991,459,413 rentable square feet available for sublease as of SeptemberJune 30, 2020,2021, approximately 10,44112,146 rentable square feet representing one lease is scheduled to expire in 2020, and approximately 14,934 rentable square feet representing six4 leases are scheduled to expire in 2021.2021, and approximately 50,465 rentable square feet representing 8 leases are scheduled to expire in 2022.
37
Stabilized Portfolio Information
As of SeptemberJune 30, 2020,2021, our stabilized portfolio was comprised of 114118 office properties encompassing an aggregate of approximately 14.314.2 million rentable square feet and 2001,001 residential units at our residential tower in Hollywood, California.units. Our stabilized portfolio includes all of our properties with the exception of development and redevelopment properties currently committed for construction, under construction, or in the tenant improvement phase, undeveloped land recently completed residential properties not yet stabilized and real estate assets held for sale. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We define properties in the tenant improvement phase as office and life science properties that we are developing or redeveloping where the project has reached cold shell condition and is ready for tenant improvements, which may require additional major base building construction before being placed in service. Projects in the tenant improvement phase are added to our stabilized portfolio once the project reaches the earlier of 95% occupancy or one year from the date of the cessation of major base building construction activities. Costs capitalized to construction in progress for development and redevelopment properties are transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets as the historical cost of the property as the projects or phases of projects are placed in service.
We did not have any redevelopment or held for sale properties at SeptemberJune 30, 2020.2021. Our stabilized portfolio also excludes our future development pipeline, which as of SeptemberJune 30, 20202021 was comprised of fivesix potential development sites, representing approximately 6159 gross acres of undeveloped land on which we believe we have the potential to develop more than 6.05.5 million rentable square feet, depending upon economic conditions.
As of SeptemberJune 30, 2020,2021, the following properties were excluded from our stabilized portfolio:
|
| | | | |
| Number of Properties/Projects | | Estimated Rentable Square Feet (1) / Units |
In-process development projects - tenant improvement | 4 | | 1,435,000 |
|
In-process development projects - under construction (2) | 3 | | 856,000 |
|
Completed residential development project (3) | 1 | | 608 units |
|
| | | | | | | | | | | |
| Number of Properties/Projects | | Estimated Rentable Square Feet (1) |
| | | |
| | | |
In-process development projects - tenant improvement (2) | 4 | | 2,220,000 | |
In-process development projects - under construction | 2 | | 1,110,000 | |
| | | |
________________________
| |
(1) | Estimated rentable square feet upon completion. |
| |
(2) | In addition to the estimated office and life science rentable square feet noted above, development projects under construction also include 193 residential units. |
| |
(3) | Represents all three recently completed residential phases at our mixed-use development in San Diego, California that are not yet stabilized. |
(1)Estimated rentable square feet upon completion.
(2)Includes the development property acquired in Austin, Texas during the three months ended June 30, 2021. Refer to Note 2 “Acquisitions” to our consolidated financial statements included in this report for additional information.
The following table reconciles the changes in the rentable square feet in our stabilized office portfolio of operating properties from SeptemberJune 30, 20192020 to SeptemberJune 30, 2020:2021:
|
| | | | | |
| Number of Buildings | | Rentable Square Feet |
Total as of September 30, 2019 | 93 |
| | 13,322,212 |
|
Acquisitions | 19 |
| | 151,908 |
|
Completed development properties placed in-service | 2 |
| | 846,241 |
|
Remeasurement | — |
| | 9,246 |
|
Total as of September 30, 2020 (1) | 114 |
| | 14,329,607 |
|
| | | | | | | | | | | |
| Number of Buildings | | Rentable Square Feet |
Total as of June 30, 2020 | 114 | | | 14,327,872 | |
| | | |
Completed development properties placed in-service | 6 | | | 613,874 | |
Dispositions | (2) | | | (837,517) | |
Remeasurement | — | | | 47,445 | |
Total as of June 30, 2021 (1) | 118 | | | 14,151,674 | |
________________________
| |
(1) | Includes four properties owned by consolidated property partnerships (see Note 1 “Organization, Ownership and Basis of Presentation” to our consolidated financial statements included in this report for additional information). |
(1)Includes four properties owned by consolidated property partnerships (see Note 1 “Organization, Ownership and Basis of Presentation” to our consolidated financial statements included in this report for additional information).
Occupancy Information
The following table sets forth certain information regarding our stabilized portfolio:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Region | | Number of Buildings | | Rentable Square Feet | | Occupancy at (1) |
| 6/30/2021 | | 3/31/2021 | | 12/31/2020 |
Greater Los Angeles | | 55 | | | 4,409,591 | | | 86.7 | % | | 87.5 | % | | 88.1 | % |
| | | | | | | | | | |
San Diego County | | 24 | | | 2,410,303 | | | 91.0 | % | | 87.4 | % | | 85.2 | % |
San Francisco Bay Area | | 31 | | | 5,527,722 | | | 94.7 | % | | 94.3 | % | | 94.5 | % |
Greater Seattle | | 8 | | | 1,804,058 | | | 96.5 | % | | 97.8 | % | | 94.7 | % |
Total Stabilized Office Portfolio | | 118 | | | 14,151,674 | | | 91.8 | % | | 91.5 | % | | 91.2 | % |
|
| | | | | | | | | | | | | | | |
Region | | Number of Buildings | | Rentable Square Feet | | Occupancy at (1) |
| 9/30/2020 | | 6/30/2020 | | 12/31/2019 |
Greater Los Angeles | | 51 |
| | 4,031,201 |
| | 90.8 | % | | 91.2 | % | | 95.2 | % |
San Diego County | | 22 |
| | 2,146,706 |
| | 86.7 | % | | 87.4 | % | | 89.7 | % |
San Francisco Bay Area | | 33 |
| | 6,349,910 |
| | 94.2 | % | | 93.7 | % | | 95.0 | % |
Greater Seattle | | 8 |
| | 1,801,790 |
| | 94.7 | % | | 95.9 | % | | 97.7 | % |
Total Stabilized Office Portfolio | | 114 |
| | 14,329,607 |
| | 92.2 | % | | 92.3 | % | | 94.6 | % |
| | | Average Occupancy | | Average Occupancy |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Stabilized Office Portfolio (1) | 92.3 | % | | 93.2 | % | | 92.9 | % | | 93.3 | % | Stabilized Office Portfolio (1) | 91.7 | % | | 92.8 | % | | 91.6 | % | | 93.2 | % |
Same Store Portfolio (2) | 92.0 | % | | 93.8 | % | | 92.7 | % | | 93.6 | % | Same Store Portfolio (2) | 91.4 | % | | 92.4 | % | | 91.1 | % | | 93.0 | % |
Residential Portfolio (3) | 85.0 | % | | 87.8 | % | | 87.8 | % | | 78.5 | % | Residential Portfolio (3) | 71.9 | % | | 85.0 | % | | 70.6 | % | | 89.3 | % |
________________________
| |
(1) | Occupancy percentages reported are based on our stabilized office portfolio as of the end of the period presented and exclude occupancy percentages of properties held for sale. |
| |
(2) | Occupancy percentages reported are based on office properties owned and stabilized as of January 1, 2019 and still owned and stabilized as of September 30, 2020 and exclude our residential portfolio. See discussion under “Results of Operations” for additional information. |
| |
(3) | Our residential portfolio consists of our 200-unit residential tower located in Hollywood, California and excludes 608 recently completed residential units that are not yet stabilized. |
(1)Occupancy percentages reported are based on our stabilized office portfolio as of the end of the period presented and exclude occupancy percentages of properties held for sale. Represents physical and economic occupancy.
(2)Occupancy percentages reported are based on office properties owned and stabilized as of January 1, 2020 and still owned and stabilized as of June 30, 2021 and exclude our residential portfolio. See discussion under “Results of Operations” for additional information.
(3)Our residential portfolio consists of our 200-unit residential tower and 193-unit Jardine project in Hollywood, California and 608 residential units at our One Paseo mixed-use project in Del Mar, California.
Significant Tenants
The following table sets forth information about our 15 largest tenants based upon annualized base rental revenues, as defined below, as of SeptemberJune 30, 2020. We have collected October 2020 contractual rents from all of our top 15 tenants.2021.
| | Tenant Name | | Region | | Annualized Base Rental Revenue (1) (2) | | Rentable Square Feet | | Percentage of Total Annualized Base Rental Revenue | | Percentage of Total Rentable Square Feet | | Year(s) of Lease Expiration | Tenant Name | | Region | | Annualized Base Rental Revenue (1) (2) | | Rentable Square Feet | | Percentage of Total Annualized Base Rental Revenue | | Percentage of Total Rentable Square Feet | | Year(s) of Lease Expiration |
| | (in thousands) | | | | | | | | | | | | (in thousands) | | | | | | | | |
Dropbox, Inc. | | San Francisco Bay Area | | $ | 55,998 |
| | 738,081 |
| | 7.8 | % | | 5.0 | % | | 2033 | |
GM Cruise, LLC | | San Francisco Bay Area | | 36,337 |
| | 374,618 |
| | 5.1 | % | | 2.6 | % | | 2031 | GM Cruise, LLC | | San Francisco Bay Area | | $ | 36,337 | | | 374,618 | | | 5.2 | % | | 2.6 | % | | 2031 |
LinkedIn Corporation / Microsoft Corporation | | San Francisco Bay Area | | 29,752 |
| | 663,460 |
| | 4.2 | % | | 4.5 | % | | 2024 / 2026 | LinkedIn Corporation / Microsoft Corporation | | San Francisco Bay Area | | 29,752 | | | 663,460 | | | 4.3 | % | | 4.6 | % | | 2024 / 2026 |
Adobe Systems, Inc. | | San Francisco Bay Area / Greater Seattle | | 27,897 |
| | 513,111 |
| | 3.9 | % | | 3.5 | % | | 2027 / 2031 | Adobe Systems, Inc. | | San Francisco Bay Area / Greater Seattle | | 27,897 | | | 513,111 | | | 4.0 | % | | 3.5 | % | | 2027 / 2031 |
salesforce.com, inc. | | San Francisco Bay Area | | 24,076 |
| | 451,763 |
| | 3.4 | % | | 3.1 | % | | 2031 / 2032 | salesforce.com, inc. | | San Francisco Bay Area | | 24,076 | | | 451,763 | | | 3.4 | % | | 3.1 | % | | 2031 / 2032 |
DIRECTV, LLC | | Greater Los Angeles | | 23,152 |
| | 684,411 |
| | 3.2 | % | | 4.7 | % | | 2027 | |
DIRECTV, LLC (3) | | DIRECTV, LLC (3) | | Greater Los Angeles | | 23,152 | | | 684,411 | | | 3.3 | % | | 4.7 | % | | 2027 |
Fortune 50 Publicly-Traded Company | | Fortune 50 Publicly-Traded Company | | Greater Seattle / San Diego County | | 23,059 | | | 472,427 | | | 3.3 | % | | 3.3 | % | | 2032 / 2033 |
Box, Inc. | | San Francisco Bay Area | | 22,441 |
| | 371,792 |
| | 3.1 | % | | 2.5 | % | | 2021 / 2028 | Box, Inc. | | San Francisco Bay Area | | 22,441 | | | 372,673 | | | 3.2 | % | | 2.6 | % | | 2021 / 2028 |
Okta, Inc. | | San Francisco Bay Area | | 22,331 |
| | 265,979 |
| | 3.1 | % | | 1.8 | % | | 2028 | Okta, Inc. | | San Francisco Bay Area | | 22,387 | | | 273,371 | | | 3.2 | % | | 1.9 | % | | 2028 |
Netflix, Inc. | | Netflix, Inc. | | Greater Los Angeles | | 21,943 | | | 362,868 | | | 3.1 | % | | 2.5 | % | | 2021 / 2032 |
DoorDash, Inc. | | DoorDash, Inc. | | San Francisco Bay Area | | 18,650 | | | 184,968 | | | 2.7 | % | | 1.3 | % | | 2032 |
Amazon.com | | Amazon.com | | Greater Seattle | | 16,923 | | | 405,278 | | | 2.4 | % | | 2.8 | % | | 2023 / 2029 / 2030 |
Synopsys, Inc. | | Synopsys, Inc. | | San Francisco Bay Area | | 15,492 | | | 342,891 | | | 2.2 | % | | 2.4 | % | | 2030 |
Riot Games, Inc. | | Greater Los Angeles | | 15,554 |
| | 251,509 |
| | 2.2 | % | | 1.7 | % | | 2023 / 2024 | Riot Games, Inc. | | Greater Los Angeles | | 15,152 | | | 243,051 | | | 2.2 | % | | 1.7 | % | | 2023 / 2024 |
Synopsys, Inc. | | San Francisco Bay Area | | 15,492 |
| | 340,913 |
| | 2.2 | % | | 2.3 | % | | 2030 | |
Fortune 50 Publicly-Traded Company | | Greater Seattle | | 15,355 |
| | 311,983 |
| | 2.2 | % | | 2.1 | % | | 2033 | |
Amazon.com | | Greater Seattle | | 14,760 |
| | 348,880 |
| | 2.1 | % | | 2.4 | % | | 2023 / 2030 | |
Neurocrine Biosciences, Inc. | | Neurocrine Biosciences, Inc. | | San Diego County | | 13,914 | | | 254,578 | | | 2.0 | % | | 1.8 | % | | 2024 / 2031 |
Viacom International, Inc. | | Greater Los Angeles | | 13,718 |
| | 211,343 |
| | 1.9 | % | | 1.4 | % | | 2028 | Viacom International, Inc. | | Greater Los Angeles | | 13,718 | | | 211,343 | | | 2.0 | % | | 1.5 | % | | 2028 |
DoorDash, Inc | | San Francisco Bay Area | | 13,531 |
| | 135,137 |
| | 1.9 | % | | 0.9 | % | | 2032 | |
Nektar Therapeutics, Inc. | | San Francisco Bay Area | | 12,297 |
| | 135,350 |
| | 1.7 | % | | 0.9 | % | | 2030 | |
Total | | $ | 342,691 |
| | 5,798,330 |
| | 48.0 | % | | 39.4 | % | | Total | | | | $ | 324,893 | | | 5,810,811 | | | 46.5 | % | | 40.3 | % | |
________________________
| |
(1) | Annualized base rental revenue includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases, and expense reimbursement revenue. Excludes month-to-month leases and vacant space as of September 30, 2020. |
| |
(2) | Includes 100% of the annualized base rental revenues of consolidated property partnerships. |
(1)Annualized base rental revenue includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases, and expense reimbursement revenue. Excludes month-to-month leases and vacant space as of June 30, 2021.
(2)Includes 100% of the annualized base rental revenues of consolidated property partnerships.
(3)On April 5, 2021, DIRECTV, LLC’s successor-in-interest (“DIRECTV”) filed suit in Los Angeles Superior Court against a subsidiary of the Company, claiming that DIRECTV properly exercised its contraction rights as to certain space leased by DIRECTV at the property located at 2250 East Imperial Highway, El Segundo, California. The Company strongly disagrees with the contentions made by DIRECTV and will vigorously defend the litigation.
39
Results of Operations
Net Operating Income
Management internally evaluates the operating performance and financial results of our stabilized portfolio based on Net Operating Income. We define “Net Operating Income” as consolidated operating revenues (rental income and other property income) less consolidated operating expenses (property expenses, real estate taxes and ground leases).
Net Operating Income is considered by management to be an important and appropriate supplemental performance measure to net income because we believe it helps both investors and management to understand the core operations of our properties excluding corporate and financing-related costs and non-cash depreciation and amortization. Net Operating Income is an unlevered operating performance metric of our properties and allows for a useful comparison of the operating performance of individual assets or groups of assets. This measure thereby provides an operating perspective not immediately apparent from GAAP income from operations or net income. In addition, Net Operating Income is considered by many in the real estate industry to be a useful starting point for determining the value of a real estate asset or group of assets. Other real estate companies may use different methodologies for calculating Net Operating Income, and accordingly, our presentation of Net Operating Income may not be comparable to other real estate companies. Because of the exclusion of the items shown in the reconciliation below, Net Operating Income should only be used as a supplemental measure of our financial performance and not as an alternative to GAAP income from operations or net income.
Management further evaluates Net Operating Income by evaluating the performance from the following property groups:
•Same Store Properties – includes the consolidated results of all of the office properties that were owned and included in our stabilized portfolio for two comparable reporting periods, i.e., owned and included in our stabilized portfolio as of January 1, 20192020 and still owned and included in the stabilized portfolio as of SeptemberJune 30, 2020,2021, including our 200-unit residential tower in Hollywood, California;
•Development Properties – includes the results generated by certain of our in-process development projects, expenses for certain of our future development project and the results generated by our 608 completed residential units that are not yet stabilized and the following stabilized development properties:
◦One office development project that was added to the stabilized portfolio in the second quarter of 2019;
◦One office development project that was added to the stabilized portfolio in the first quarter of 2020; and
◦One retail development project that was added to the stabilized portfolio in the first quarter of 2020;
◦One office development project that was added to the stabilized portfolio in the fourth quarter of 2020;
Acquisition Properties – includes◦One office development project that was added to the results, fromstabilized portfolio in the datesfirst quarter of acquisition through2021
◦One office building that was added to the periods presented, forstabilized portfolio in the 19-building creative office campus we acquired during 2019;second quarter of 2021;
◦608 residential units at our One Paseo mixed-use project in Del Mar, California that were added to the stabilized portfolio in the third quarter of 2020; and
◦193 residential units at our Jardine project in Hollywood, California that were added to the stabilized portfolio in the second quarter of 2021; and
•Disposition Properties– includes the results of the one property disposed of in the second quarter of 2019 and the one property disposed of in the fourth quarter of 2019.2020 and one property disposed of in the first quarter of 2021.
The following table sets forth certain information regarding the property groups within our stabilized office portfolio as of SeptemberJune 30, 2020:2021:
| | | | | | | | | | | | | | |
Group | | # of Buildings | | Rentable Square Feet |
Same Store Properties | | 111 | | 13,441,929 | |
Stabilized Development Properties (1) | | 7 | | | 709,745 | |
| | | | |
Total Stabilized Portfolio | | 118 | | 14,151,674 | |
________________________
(1)Excludes development projects in the tenant improvement phase, our in-process development projects and future development projects.
|
| | | | | | |
Group | | # of Buildings | | Rentable Square Feet |
Same Store Properties | | 92 |
| | 12,937,118 |
|
Stabilized Development Properties | | 3 |
| | 1,240,581 |
|
Acquisition Properties | | 19 |
| | 151,908 |
|
Total Stabilized Portfolio | | 114 |
| | 14,329,607 |
|
Comparison of the Three Months Ended SeptemberJune 30, 20202021 to the Three Months Ended SeptemberJune 30, 2019
2020
The following table summarizes our Net Operating Income, as defined, for our total portfolio for the three months ended SeptemberJune 30, 20202021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Dollar Change | | Percentage Change |
| 2021 | | 2020 | |
| ($ in thousands) |
Reconciliation of Net Income Available to Common Stockholders to Net Operating Income, as defined: | | | | | | | |
Net Income Available to Common Stockholders | $ | 35,839 | | | $ | 19,618 | | | $ | 16,221 | | | 82.7 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income attributable to noncontrolling common units of the Operating Partnership | 354 | | | 367 | | | (13) | | | (3.5) | % |
Net income attributable to noncontrolling interests in consolidated property partnerships | 6,687 | | | 4,367 | | | 2,320 | | | 53.1 | % |
Net income | $ | 42,880 | | | $ | 24,352 | | | $ | 18,528 | | | 76.1 | % |
Unallocated expense (income): | | | | | | | |
General and administrative expenses | 24,507 | | | 38,597 | | | (14,090) | | | (36.5) | % |
Leasing costs | 883 | | | 1,330 | | | (447) | | | (33.6) | % |
Depreciation and amortization | 73,589 | | | 80,085 | | | (6,496) | | | (8.1) | % |
Interest income and other net investment (gain) loss | (1,337) | | | (2,838) | | | 1,501 | | | (52.9) | % |
Interest expense | 21,390 | | | 15,884 | | | 5,506 | | | 34.7 | % |
| | | | | | | |
| | | | | | | |
Gain on sale of depreciable operating property | (543) | | | — | | | (543) | | | 100.0 | % |
Net Operating Income, as defined | $ | 161,369 | | | $ | 157,410 | | | $ | 3,959 | | | 2.5 | % |
2019.
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Dollar Change | | Percentage Change |
| 2020 | | 2019 | |
| ($ in thousands) |
Reconciliation of Net Income Available to Common Stockholders to Net Operating Income, as defined: | | | | | | |
|
|
Net Income Available to Common Stockholders | $ | 49,028 |
| | $ | 43,846 |
| | $ | 5,182 |
| | 11.8 | % |
Net income attributable to noncontrolling common units of the Operating Partnership | 785 |
| | 852 |
| | (67 | ) | | (7.9 | )% |
Net income attributable to noncontrolling interests in consolidated property partnerships | 4,258 |
| | 3,600 |
| | 658 |
| | 18.3 | % |
Net income | $ | 54,071 |
| | $ | 48,298 |
| | $ | 5,773 |
| | 12.0 | % |
Unallocated expense (income): | | | | | | | |
General and administrative expenses | 18,572 |
| | 22,576 |
| | (4,004 | ) | | (17.7 | )% |
Leasing costs | 986 |
| | 1,192 |
| | (206 | ) | | (17.3 | )% |
Depreciation and amortization | 71,863 |
| | 69,230 |
| | 2,633 |
| | 3.8 | % |
Interest income and other net investment gain | (1,869 | ) | | (761 | ) | | (1,108 | ) | | 145.6 | % |
Interest expense | 19,468 |
| | 11,635 |
| | 7,833 |
| | 67.3 | % |
Net Operating Income, as defined | $ | 163,091 |
| | $ | 152,170 |
| | $ | 10,921 |
| | 7.2 | % |
The following tables summarize our Net Operating Income, as defined, for our total portfolio for the three months ended SeptemberJune 30, 20202021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2021 | | 2020 |
| Same Store | | Develop-ment | | | | Disposition | | Total | | Same Store | | Develop-ment | | | | Disposition | | Total |
| (in thousands) |
Operating revenues: | | | | | | | | | | | | | | | | | | | |
Rental income | $ | 201,009 | | | $ | 24,284 | | | | | $ | (820) | | | $ | 224,473 | | | $ | 191,136 | | | $ | 4,956 | | | | | $ | 22,264 | | | $ | 218,356 | |
| | | | | | | | | | | | | | | | | | | |
Other property income | 1,249 | | | 256 | | | | | 5 | | | 1,510 | | | 919 | | | 132 | | | | | 16 | | | 1,067 | |
Total | 202,258 | | | 24,540 | | | | | (815) | | | 225,983 | | | 192,055 | | | 5,088 | | | | | 22,280 | | | 219,423 | |
Property and related expenses: | | | | | | | | | | | | | | | | | | | |
Property expenses | 36,141 | | | 4,260 | | | | | 81 | | | 40,482 | | | 34,065 | | | 1,257 | | | | | 2,507 | | | 37,829 | |
Real estate taxes | 18,927 | | | 4,094 | | | | | (912) | | | 22,109 | | | 17,978 | | | 1,065 | | | | | 2,811 | | | 21,854 | |
| | | | | | | | | | | | | | | | | | | |
Ground leases | 1,985 | | | 38 | | | | | — | | | 2,023 | | | 2,330 | | | — | | | | | — | | | 2,330 | |
Total | 57,053 | | | 8,392 | | | | | (831) | | | 64,614 | | | 54,373 | | | 2,322 | | | | | 5,318 | | | 62,013 | |
Net Operating Income, as defined | $ | 145,205 | | | $ | 16,148 | | | | | $ | 16 | | | $ | 161,369 | | | $ | 137,682 | | | $ | 2,766 | | | | | $ | 16,962 | | | $ | 157,410 | |
2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2020 | | 2019 |
| Same Store | | Develop-ment | | Acquisi-tion | | Disposi-tion | | Total | | Same Store | | Develop-ment | | Acquisi-tion | | Disposi-tion | | Total |
| (in thousands) |
Operating revenues: | | | | | | | | | | | | | | | | | | | |
Rental income | $ | 185,992 |
| | $ | 37,985 |
| | $ | 3,145 |
| | $ | — |
| | $ | 227,122 |
| | $ | 190,998 |
| | $ | 19,488 |
| | $ | — |
| | $ | 1,835 |
| | $ | 212,321 |
|
Other property income | 1,040 |
| | 147 |
| | 5 |
| | — |
| | 1,192 |
| | 2,705 |
| | 377 |
| | — |
| | 122 |
| | 3,204 |
|
Total | 187,032 |
| | 38,132 |
| | 3,150 |
| | — |
| | 228,314 |
| | 193,703 |
| | 19,865 |
| | — |
| | 1,957 |
| | 215,525 |
|
Property and related expenses: | | | | | | | | | | | | | | | | | | | |
Property expenses | 33,220 |
| | 5,634 |
| | 382 |
| | — |
| | 39,236 |
| | 37,402 |
| | 3,298 |
| | — |
| | 608 |
| | 41,308 |
|
Real estate taxes | 17,378 |
| | 5,974 |
| | 516 |
| | — |
| | 23,868 |
| | 17,060 |
| | 2,647 |
| | — |
| | 291 |
| | 19,998 |
|
Ground leases | 1,905 |
| | — |
| | 214 |
| | — |
| | 2,119 |
| | 2,049 |
| | — |
| | — |
| | — |
| | 2,049 |
|
Total | 52,503 |
| | 11,608 |
| | 1,112 |
| | — |
| | 65,223 |
| | 56,511 |
| | 5,945 |
| | — |
| | 899 |
| | 63,355 |
|
Net Operating Income, as defined | $ | 134,529 |
| | $ | 26,524 |
| | $ | 2,038 |
| | $ | — |
| | $ | 163,091 |
| | $ | 137,192 |
| | $ | 13,920 |
| | $ | — |
| | $ | 1,058 |
| | $ | 152,170 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 as compared to the Three Months Ended September 30, 2019 |
| Same Store | | Development | | Acquisition | | Disposition | | Total |
| Dollar Change | | Percent Change | | Dollar Change | | Percent Change | | Dollar Change | | Percent Change | | Dollar Change | | Percent Change | | Dollar Change | | Percent Change |
| ($ in thousands) |
Operating revenues: | | | | | | | | | | | | | | | | | | | |
Rental income | $ | (5,006 | ) | | (2.6 | )% | | $ | 18,497 |
| | 94.9 | % | | $ | 3,145 |
| | 100.0 | % | | $ | (1,835 | ) | | (100.0 | )% | | $ | 14,801 |
| | 7.0 | % |
Other property income | (1,665 | ) | | (61.6 | )% | | (230 | ) | | (61.0 | )% | | 5 |
| | 100.0 | % | | (122 | ) | | (100.0 | )% | | (2,012 | ) | | (62.8 | )% |
Total | (6,671 | ) | | (3.4 | )% | | 18,267 |
| | 92.0 | % | | 3,150 |
| | 100.0 | % | | (1,957 | ) | | (100.0 | )% | | 12,789 |
| | 5.9 | % |
Property and related expenses: | | | | | | | | | | | | | | | | | | | |
Property expenses | (4,182 | ) | | (11.2 | )% | | 2,336 |
| | 70.8 | % | | 382 |
| | 100.0 | % | | (608 | ) | | (100.0 | )% | | (2,072 | ) | | (5.0 | )% |
Real estate taxes | 318 |
| | 1.9 | % | | 3,327 |
| | 125.7 | % | | 516 |
| | 100.0 | % | | (291 | ) | | (100.0 | )% | | 3,870 |
| | 19.4 | % |
Ground leases | (144 | ) | | (7.0 | )% | | — |
| | — | % | | 214 |
| | 100.0 | % | | — |
| | — | % | | 70 |
| | 3.4 | % |
Total | (4,008 | ) | | (7.1 | )% | | 5,663 |
| | 95.3 | % | | 1,112 |
| | 100.0 | % | | (899 | ) | | (100.0 | )% | | 1,868 |
| | 2.9 | % |
Net Operating Income, as defined | $ | (2,663 | ) | | (1.9 | )% | | $ | 12,604 |
| | 90.5 | % | | $ | 2,038 |
| | 100.0 | % | | $ | (1,058 | ) | | (100.0 | )% | | $ | 10,921 |
| | 7.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 as compared to the Three Months Ended June 30, 2020 |
| Same Store | | Development | | | | Disposition | | Total |
| Dollar Change | | Percent Change | | Dollar Change | | Percent Change | | | | | | Dollar Change | | Percent Change | | Dollar Change | | Percent Change |
| ($ in thousands) |
Operating revenues: | | | | | | | | | | | | | | | | | | | |
Rental income | $ | 9,873 | | | 5.2 | % | | $ | 19,328 | | | 390.0 | % | | | | | | $ | (23,084) | | | (103.7) | % | | $ | 6,117 | | | 2.8 | % |
| | | | | | | | | | | | | | | | | | | |
Other property income | 330 | | | 35.9 | % | | 124 | | | 93.9 | % | | | | | | (11) | | | (68.8) | % | | 443 | | | 41.5 | % |
Total | 10,203 | | | 5.3 | % | | 19,452 | | | 382.3 | % | | | | | | (23,095) | | | (103.7) | % | | 6,560 | | | 3.0 | % |
Property and related expenses: | | | | | | | | | | | | | | | | | | | |
Property expenses | 2,076 | | | 6.1 | % | | 3,003 | | | 238.9 | % | | | | | | (2,426) | | | (96.8) | % | | 2,653 | | | 7.0 | % |
Real estate taxes | 949 | | | 5.3 | % | | 3,029 | | | 284.4 | % | | | | | | (3,723) | | | (132.4) | % | | 255 | | | 1.2 | % |
| | | | | | | | | | | | | | | | | | | |
Ground leases | (345) | | | (14.8) | % | | 38 | | | 100.0 | % | | | | | | — | | | — | % | | (307) | | | (13.2) | % |
Total | 2,680 | | | 4.9 | % | | 6,070 | | | 261.4 | % | | | | | | (6,149) | | | (115.6) | % | | 2,601 | | | 4.2 | % |
Net Operating Income, as defined | $ | 7,523 | | | 5.5 | % | | $ | 13,382 | | | 483.8 | % | | | | | | $ | (16,946) | | | (99.9) | % | | $ | 3,959 | | | 2.5 | % |
Net Operating Income increased $10.9$4.0 million, or 7.2%2.5%, for the three months ended SeptemberJune 30, 20202021 as compared to the three months ended SeptemberJune 30, 20192020 resulting from:
A decrease•An increase in Net Operating Income of $2.7$7.5 million attributable to the Same Store Properties, which was driven by the following activity:
A decrease•An increase in total operating revenues of $6.7$10.2 million primarily due to:
•$7.06.2 million increase due to lower charges against rental income in 2021 related to tenant creditworthiness considerations primarily as a result of COVID-19, predominantly for retail tenants, of which $1.5 million was related to payments of past due amounts from tenants on a cash basis of revenue recognition;
•A net $1.9 million increase resulting from a $2.7 million increase from new leases and renewals at higher rates primarily in the San Francisco Bay Area Greater Los Angeles, and San Diego County regions;regions, offset by
$6.9 million decrease related to the impact of COVID-19, comprised of:
$2.1 million decrease due to charges against rental income due to tenant creditworthiness considerations, tenants on a cash basis of revenue recognition and abatements given due to the COVID-19 pandemic;
$1.5 million decrease due to lower parking income resulting from a reduction in the number of monthly parking spaces rented as a result of COVID-19 stay-at-home orders;
$1.6 million decrease due to lower reimbursable operating expenses resulting from COVID-19 stay-at-home orders; and
$1.7 million decrease in other property income primarily due to lower transient and special event parking income at a number of properties in the San Francisco Bay Area, Greater Seattle and Greater Los Angeles regions. We expect daily, special event and transient parking to be impacted while restrictions intended to prevent the spread of COVID-19 remain in effect;
$3.1 million decrease due to early lease termination fees received in 2019 for two tenants in the San Francisco Bay Area;
$2.7$0.8 million decrease due to lower occupancy primarily in the Greater Los Angeles and San Diego County regions; andregion;
•$0.91.7 million decreaseincrease in recoveriesthe tenant reimbursement component of rental income related to:
•$1.9 million increase primarily due to higher reimbursable operating expenses;
•$0.4 million increase due to higher occupancy primarily related to new tenants with 2020 base years and one tenant that receivedtwo tenants; partially offset by
•$0.6 million decrease due to a property tax exemption commencingrelated to one tenant; and
•$0.4 million increase due to a termination fee received in July 2020;2021 related to one tenant;
A decrease•An increase in property and related expenses of $4.0$2.7 million primarily due to the following:
•$3.61.4 million decreaseincrease in reimbursable property expenses including janitorial,repairs and maintenance, engineering, utilities, security, parking, and various other recurring expenses as tenants begin returning to the office;
•$0.9 million increase in real estate taxes due to several tenants implementing work from home policiesrefunds received in 2020 related to a lower assessment on one property and higher annual property taxes across the portfolio; partially offset by a property tax exemption related to one tenant;
•$0.7 million increase due to the COVID-19 pandemic.insurance refunds received in 2020 related to non-recurring expenses and increases in various other non-recurring expenses; partially offset by
We anticipate lower reimbursable property expenses and corresponding tenant recoveries as a result of lower usage of our buildings by tenants while restrictions intended to prevent the spread of COVID-19 are in effect; and
•$0.3 million decrease primarilyin ground lease expense due to lower non-reimbursable expenses;property taxes for one ground lease and lower percentage rent for two ground leases;
•An increase in Net Operating Income of $12.6$13.4 million attributable to the Development Properties driven by one office development project that was added to the stabilized portfolio in the first quarter of 2020 and the commencement of revenue recognition on the first phase of one office development project in June 2020; and
An increase in Net Operating Income of $2.0 million attributable to the Acquisition Properties; partially offset by
•A decrease in Net Operating Income of $1.1$16.9 million attributable to the Disposition Properties.
Other Expenses and Income
General and Administrative Expenses
General and administrative expenses decreased by approximately $4.0$14.1 million, or 17.7%36.5%, for the three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020 primarily due to:to the following:
•A decrease of $4.8$14.5 million in compensation related expenses, primarily due to lower compensation accruals and other related cost cutting measures as a result of COVID-19 and severance costs incurred in 20192020 related to the departure of twoan executive officers;officer and certain other employees; and
•A decrease of $1.6$0.9 million primarily related to a settlement payment received from a previously disclosed litigation matter;the mark-to-market adjustment for the Company’s deferred compensation plan, which is offset by gains on the underlying marketable securities included in interest income and other net investment gains in the consolidated statements of operations; partially offset by
•An increase of $2.4$1.3 million primarily due to an increase in professional service fees and employee travel and other corporate expenses related to political contributions for statewide ballot measures.employees returning back to our offices.
Leasing Costs
Leasing costs decreased by $0.2$0.4 million or 17.3%33.6%, for the three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020 primarily due to a lower level of leasing activity during the three months ended September 30, 2020.changes in personnel.
Depreciation and Amortization
Depreciation and amortization increased $2.6decreased $6.5 million, or 3.8%8.1%, for the three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020 primarily due to the following:
An increase of $5.9 million attributable to the Development Properties; and
An increase of $2.2 million attributable to the Acquisition Properties; partially offset by
•A decrease of $4.6$10.2 million attributable to the Same Store Properties; and
•A decrease of $0.9$3.8 million attributable to the Disposition Properties.Properties; partially offset by
•An increase of $7.5 million attributable to the Development Properties.
Interest Expense
The following table sets forth our gross interest expense, including debt discounts and deferred financing cost amortization, and capitalized interest, including capitalized debt discounts and deferred financing cost amortization, for the three months ended SeptemberJune 30, 20202021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2021 | | 2020 | | Dollar Change | | Percentage Change |
| (in thousands) | | | | |
Gross interest expense | $ | 39,463 | | | $ | 36,400 | | | $ | 3,063 | | | 8.4 | % |
Capitalized interest and deferred financing costs | (18,073) | | | (20,516) | | | 2,443 | | | (11.9) | % |
Interest expense | $ | 21,390 | | | $ | 15,884 | | | $ | 5,506 | | | 34.7 | % |
2019:
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | |
| 2020 | | 2019 | | Dollar Change | | Percentage Change |
| (in thousands) | | | | |
Gross interest expense | $ | 38,807 |
| | $ | 32,220 |
| | $ | 6,587 |
| | 20.4 | % |
Capitalized interest and deferred financing costs | (19,339 | ) | | (20,585 | ) | | 1,246 |
| | (6.1 | )% |
Interest expense | $ | 19,468 |
| | $ | 11,635 |
| | $ | 7,833 |
| | 67.3 | % |
Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased $6.6$3.1 million, or 20.4%8.4%,for the three months ended SeptemberJune 30, 20202021 as compared to the three months ended SeptemberJune 30, 20192020 primarily due to an increase in the average outstanding debt balance for the three months ended SeptemberJune 30, 2020.2021.
Capitalized interest and deferred financing costs decreased $1.2$2.4 million, or 6.1%11.9%, for the three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020 primarily due to a decrease in the weighted average development asset balances qualifying for interest ratecapitalization during the three months ended SeptemberJune 30, 2020.2021. During the three months ended SeptemberJune 30, 20202021 and 2019,2020, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately $1.9$1.8 billion and $2.0$2.1 billion, respectively.respectively, as it was determined these projects qualified for interest and other carrying cost capitalization under GAAP. In the event of an extended cessation of development activities to get any of these projects ready for its intended use, such projects could potentially no longer qualify for capitalization of interest or other carrying costs. However, a cessation of development activities caused by events outside of our control, such as those as a result of government restrictions aimed at stopping the spread of COVID-19, would not impact our ability to capitalize interest and other carrying costs. Refer to “Part II – Other Information, Item IA. Risk Factors” included in this report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships
Net income attributable to noncontrolling interests in consolidated property partnerships increased by $0.7$2.3 million or 18.3% for53.1% or the three months ended SeptemberJune 30, 20202021 compared to the three months ended SeptemberJune 30, 20192020 primarily due to a new leaseleases at a higher raterates at one propertytwo properties held in atwo property partnership in 2020.partnerships. The amounts reported for the three months ended SeptemberJune 30, 20202021 and 20192020 are comprised of the noncontrolling interest’s share of net income for 100 First Street Member, LLC (“100 First LLC”) and 303 Second Street Member, LLC (“303 Second LLC”) and the noncontrolling interest's share of net income for Redwood City Partners, LLC (“Redwood LLC”).
Comparison of the NineSix Months Ended SeptemberJune 30, 20202021 to the NineSix Months Ended SeptemberJune 30, 20192020
The following table summarizes our Net Operating Income, as defined, for our total portfolio for the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Dollar Change | | Percentage Change |
| 2021 | | 2020 | |
| ($ in thousands) |
Reconciliation of Net Income Available to Common Stockholders to Net Operating Income, as defined: | | | | | | | |
Net Income Available to Common Stockholders | $ | 533,470 | | | $ | 59,435 | | | $ | 474,035 | | | 797.6 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income attributable to noncontrolling common units of the Operating Partnership | 5,240 | | | 1,072 | | | 4,168 | | | 388.8 | % |
Net income attributable to noncontrolling interests in consolidated property partnerships | 11,581 | | | 9,263 | | | 2,318 | | | 25.0 | % |
Net income | $ | 550,291 | | | $ | 69,770 | | | $ | 480,521 | | | 688.7 | % |
Unallocated expense (income): | | | | | | | |
General and administrative expenses | 46,492 | | | 57,607 | | | (11,115) | | | (19.3) | % |
Leasing Costs | 1,575 | | | 2,786 | | | (1,211) | | | (43.5) | % |
| | | | | | | |
Depreciation and amortization | 149,521 | | | 154,455 | | | (4,934) | | | (3.2) | % |
Interest income and other net investment gain | (2,710) | | | 290 | | | (3,000) | | | (1,034.5) | % |
Interest expense | 43,724 | | | 30,328 | | | 13,396 | | | 44.2 | % |
| | | | | | | |
| | | | | | | |
Gains on sales of depreciable operating properties | (457,831) | | | — | | | (457,831) | | | (100.0) | % |
Net Operating Income, as defined | $ | 331,062 | | | $ | 315,236 | | | $ | 15,826 | | | 5.0 | % |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Dollar Change | | Percentage Change |
| 2020 | | 2019 | |
| ($ in thousands) |
Reconciliation of Net Income Available to Common Stockholders to Net Operating Income, as defined: | | | | | | | |
Net Income Available to Common Stockholders | $ | 108,463 |
| | $ | 122,943 |
| | $ | (14,480 | ) | | (11.8 | )% |
Net income attributable to noncontrolling common units of the Operating Partnership | 1,857 |
| | 2,423 |
| | (566 | ) | | (23.4 | )% |
Net income attributable to noncontrolling interests in consolidated property partnerships | 13,521 |
| | 11,941 |
| | 1,580 |
| | 13.2 | % |
Net income | $ | 123,841 |
| | $ | 137,307 |
| | $ | (13,466 | ) | | (9.8 | )% |
Unallocated expense (income): | | | | | | | |
General and administrative expenses | 76,179 |
| | 65,774 |
| | 10,405 |
| | 15.8 | % |
Leasing Costs | 3,772 |
| | 5,599 |
| | (1,827 | ) | | (32.6 | )% |
Depreciation and amortization | 226,318 |
| | 203,617 |
| | 22,701 |
| | 11.1 | % |
Interest income and other net investment gain | (1,579 | ) | | (3,205 | ) | | 1,626 |
| | (50.7 | )% |
Interest expense | 49,796 |
| | 34,605 |
| | 15,191 |
| | 43.9 | % |
Gains on sales of depreciable operating properties | — |
| | (7,169 | ) | | 7,169 |
| | (100.0 | )% |
Net Operating Income, as defined | $ | 478,327 |
| | $ | 436,528 |
| | $ | 41,799 |
| | 9.6 | % |
The following tables summarize our Net Operating Income, as defined, for our total portfolio for the ninesix months ended SeptemberJune 30, 20202021 and 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
| Same Store | | Develop-ment | | | | Disposition | | Total | | Same Store | | Develop-ment | | | | Disposition | | Total |
| (in thousands) |
Operating revenues: | | | | | | | | | | | | | | | | | | | |
Rental income | $ | 393,778 | | | $ | 46,118 | | | | | $ | 19,233 | | | $ | 459,129 | | | $ | 387,406 | | | $ | 8,372 | | | | | $ | 41,211 | | | $ | 436,989 | |
| | | | | | | | | | | | | | | | | | | |
Other property income | 2,013 | | | 470 | | | | | 17 | | | 2,500 | | | 3,183 | | | 282 | | | | | 297 | | | 3,762 | |
Total | 395,791 | | | 46,588 | | | | | 19,250 | | | 461,629 | | | 390,589 | | | 8,654 | | | | | 41,508 | | | 440,751 | |
Property and related expenses: | | | | | | | | | | | | | | | | | | | |
Property expenses | 69,861 | | | 7,350 | | | | | 2,130 | | | 79,341 | | | 70,276 | | | 2,472 | | | | | 4,064 | | | 76,812 | |
Real estate taxes | 37,749 | | | 7,788 | | | | | 1,838 | | | 47,375 | | | 36,784 | | | 1,973 | | | | | 5,299 | | | 44,056 | |
| | | | | | | | | | | | | | | | | | | |
Ground leases | 3,813 | | | 38 | | | | | — | | | 3,851 | | | 4,647 | | | — | | | | | — | | | 4,647 | |
Total | 111,423 | | | 15,176 | | | | | 3,968 | | | 130,567 | | | 111,707 | | | 4,445 | | | | | 9,363 | | | 125,515 | |
Net Operating Income, as defined | $ | 284,368 | | | $ | 31,412 | | | | | $ | 15,282 | | | $ | 331,062 | | | $ | 278,882 | | | $ | 4,209 | | | | | $ | 32,145 | | | $ | 315,236 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
| Same Store | | Develop-ment | | Acquisi-tion | | Disposi-tion | | Total | | Same Store | | Develop-ment | | Acquisi-tion | | Disposi-tion | | Total |
| (in thousands) |
Operating revenues: | | | | | | | | | | | | | | | | | | | |
Rental income | $ | 554,729 |
| | $ | 99,375 |
| | $ | 10,007 |
| | $ | — |
| | $ | 664,111 |
| | $ | 565,150 |
| | $ | 36,683 |
| | $ | — |
| | $ | 7,499 |
| | $ | 609,332 |
|
Other property income | 4,142 |
| | 728 |
| | 84 |
| | — |
| | 4,954 |
| | 6,707 |
| | 697 |
| | — |
| | 483 |
| | 7,887 |
|
Total | 558,871 |
| | 100,103 |
| | 10,091 |
| | — |
| | 669,065 |
| | 571,857 |
| | 37,380 |
| | — |
| | 7,982 |
| | 617,219 |
|
Property and related expenses: | | | | | | | | | | | | | | | | | | | |
Property expenses | 100,913 |
| | 14,126 |
| | 1,009 |
| | — |
| | 116,048 |
| | 109,851 |
| | 5,969 |
| | — |
| | 2,173 |
| | 117,993 |
|
Real estate taxes | 51,838 |
| | 14,513 |
| | 1,573 |
| | — |
| | 67,924 |
| | 51,237 |
| | 4,412 |
| | — |
| | 914 |
| | 56,563 |
|
Ground leases | 6,135 |
| | — |
| | 631 |
| | — |
| | 6,766 |
| | 6,135 |
| | — |
| | — |
| | — |
| | 6,135 |
|
Total | 158,886 |
| | 28,639 |
| | 3,213 |
| | — |
| | 190,738 |
| | 167,223 |
| | 10,381 |
| | — |
| | 3,087 |
| | 180,691 |
|
Net Operating Income, as defined | $ | 399,985 |
| | $ | 71,464 |
| | $ | 6,878 |
| | $ | — |
| | $ | 478,327 |
| | $ | 404,634 |
| | $ | 26,999 |
| | $ | — |
| | $ | 4,895 |
| | $ | 436,528 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 as compared to the Six Months Ended June 30, 2020 |
| Same Store | | Development | | | | Disposition | | Total |
| Dollar Change | | Percent Change | | Dollar Change | | Percent Change | | | | | | Dollar Change | | Percent Change | | Dollar Change | | Percent Change |
| ($ in thousands) |
Operating revenues: | | | | | | | | | | | | | | | | | | | |
Rental income | $ | 6,372 | | | 1.6 | % | | $ | 37,746 | | | 450.9 | % | | | | | | $ | (21,978) | | | (53.3) | % | | $ | 22,140 | | | 5.1 | % |
| | | | | | | | | | | | | | | | | | | |
Other property income | (1,170) | | | (36.8) | % | | 188 | | | 66.7 | % | | | | | | (280) | | | (94.3) | % | | (1,262) | | | (33.5) | % |
Total | 5,202 | | | 1.3 | % | | 37,934 | | | 438.3 | % | | | | | | (22,258) | | | (53.6) | % | | 20,878 | | | 4.7 | % |
Property and related expenses: | | | | | | | | | | | | | | | | | | | |
Property expenses | (415) | | | (0.6) | % | | 4,878 | | | 197.3 | % | | | | | | (1,934) | | | (47.6) | % | | 2,529 | | | 3.3 | % |
Real estate taxes | 965 | | | 2.6 | % | | 5,815 | | | 294.7 | % | | | | | | (3,461) | | | (65.3) | % | | 3,319 | | | 7.5 | % |
| | | | | | | | | | | | | | | | | | | |
Ground leases | (834) | | | (17.9) | % | | 38 | | | 100.0 | % | | | | | | — | | | — | % | | (796) | | | (17.1) | % |
Total | (284) | | | (0.3) | % | | 10,731 | | | 241.4 | % | | | | | | (5,395) | | | (57.6) | % | | 5,052 | | | 4.0 | % |
Net Operating Income, as defined | $ | 5,486 | | | 2.0 | % | | $ | 27,203 | | | 646.3 | % | | | | | | $ | (16,863) | | | (52.5) | % | | $ | 15,826 | | | 5.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 as compared to the Nine Months Ended September 30, 2019 |
| Same Store | | Development | | Acquisition | | Disposition | | Total |
| Dollar Change | | Percent Change | | Dollar Change | | Percent Change | | Dollar Change | | Percent Change | | Dollar Change | | Percent Change | | Dollar Change | | Percent Change |
| ($ in thousands) |
Operating revenues: | | | | | | | | | | | | | | | | | | | |
Rental income | $ | (10,421 | ) | | (1.8 | )% | | $ | 62,692 |
| | 170.9 | % | | $ | 10,007 |
| | 100.0 | % | | $ | (7,499 | ) | | (100.0 | )% | | $ | 54,779 |
| | 9.0 | % |
Other property income | (2,565 | ) | | (38.2 | )% | | 31 |
| | 4.4 | % | | 84 |
| | 100.0 | % | | (483 | ) | | (100.0 | )% | | (2,933 | ) | | (37.2 | )% |
Total | (12,986 | ) | | (2.3 | )% | | 62,723 |
| | 167.8 | % | | 10,091 |
| | 100.0 | % | | (7,982 | ) | | (100.0 | )% | | 51,846 |
| | 8.4 | % |
Property and related expenses: | | | | | | | | | | | | | | | | | | | |
Property expenses | (8,938 | ) | | (8.1 | )% | | 8,157 |
| | 136.7 | % | | 1,009 |
| | 100.0 | % | | (2,173 | ) | | (100.0 | )% | | (1,945 | ) | | (1.6 | )% |
Real estate taxes | 601 |
| | 1.2 | % | | 10,101 |
| | 228.9 | % | | 1,573 |
| | 100.0 | % | | (914 | ) | | (100.0 | )% | | 11,361 |
| | 20.1 | % |
Ground leases | — |
| | — | % | | — |
| | — | % | | 631 |
| | 100.0 | % | | — |
| | — | % | | 631 |
| | 10.3 | % |
Total | (8,337 | ) | | (5.0 | )% | | 18,258 |
| | 175.9 | % | | 3,213 |
| | 100.0 | % | | (3,087 | ) | | (100.0 | )% | | 10,047 |
| | 5.6 | % |
Net Operating Income, as defined | $ | (4,649 | ) | | (1.1 | )% | | $ | 44,465 |
| | 164.7 | % | | $ | 6,878 |
| | 100.0 | % | | $ | (4,895 | ) | | (100.0 | )% | | $ | 41,799 |
| | 9.6 | % |
Net Operating Income increased $41.8$15.8 million, or 9.6%5.0%, for the ninesix months ended SeptemberJune 30, 20202021 as compared to the ninesix months ended SeptemberJune 30, 20192020 primarily resulting from:
A decrease•An increase of $4.6$5.5 million attributable to the Same Store Properties primarily resulting from:
A decrease•An increase in total operating revenues of $13.0$5.2 million primarily due to:
•$24.87.9 million increase from new leases and renewals at higher rates at various properties across the portfolio; offset by
$18.8 million decreaseprimarily due to the impact of COVID-19, comprised of:
$11.8 million decrease primarily due tolower charges against rental income duerelated to tenant creditworthiness considerations and abatements provided to tenantsprimarily as a result of the COVID-19 pandemic;
•$2.50.8 million increase in the tenant reimbursements component of rental income due to higher operating expenses, higher occupancy, and base year adjustments for certain properties, partially offset by a property tax exemption for one tenant and abatements related to one tenant; and
•$0.4 million increase due to early lease termination fees received in 2021 primarily related to one tenant; partially offset by
•$3.6 million decrease due to lower parking income, resulting fromof which $2.4 million relates to a reduction in the number of monthly parking spaces rented as a result of COVID-19 stay-at-home orders;
$1.9orders and $1.2 million decrease due to lower reimbursable operating expenses as a result of the COVID-19 pandemic; and
$2.6 million decrease in other property income primarily duerelates to lower transient and special event parking income at a number of properties in the San Francisco Bay Area, Greater Seattle and Greater Los Angeles regions. We expect daily, special event and transient parking to be impacted while restrictions intended to prevent the spread of COVID-19 areremain in effect; and
•$9.30.2 million decrease primarily due to early lease termination fees received in 2019 for two tenants in the San Francisco Bay Area;
$4.2 million net decrease primarily related to the improved credit quality of a tenant in 2019 for which the Company recorded a bad debt reserve in 2018;
$2.8 million decrease due to lower occupancy primarily in the Greater Los Angeles and San Diego County regions; andregion;
•$2.50.4 million decrease in the tenant reimbursement component of rental income due to a tenant in the San Francisco Bay Area’s change from a triple net lease to a modified net lease, resulting in payment ofproperty expenses directly to vendors, and new tenants with 2020 base years;
A decrease in property and related expenses of $8.3 million primarily due to a decrease in reimbursable expenses such as utilities, parking, and janitorial, security,partially offset by an increase in various non-recurring expenses; and various other recurring expenses
•$0.8 million decrease in ground rent due to several tenants implementing work from home policiesreductions in property taxes related to two ground lease land parcels and lower percentage rent; partially offset by
•$1.0 million increase in real estate taxes due to an increase in annual taxes across the COVID-19 pandemic. We anticipate lower reimbursableportfolio, refunds received in 2020 related to a reduced assessed value for one property, expenses and corresponding tenant recoveries aspartially offset by a result of lower usage of our buildings by tenants in while restrictions intendedproperty tax exemption related to prevent the spread of COVID-19 are in effect;one property;
•An increase of $44.5$27.2 million attributable to the Development Properties driven by one office development project that was added to the stabilized portfolio in the first quarter of 2020 and the commencement of revenue recognition on the first phase of one office development project in June of 2020; and
An increase of $6.9 million attributable to the Acquisition Properties; partially offset by
•A decrease of $4.9$16.9 million attributable to the Disposition Properties.
Other Expenses and Income
General and Administrative Expenses
General and administrative expenses increased $10.4decreased $11.1 million, or 15.8%19.3%, for the ninesix months ended SeptemberJune 30, 20202021 compared to the ninesix months ended SeptemberJune 30, 20192020 primarily due to the following:
An increase•A decrease of $10.3$12.6 million in compensation related expenses, primarily due to increased severance costs related to the departure of an executive officer and certain other employees net of severance costs associated with departures of executive officers in 2019, lower compensation accruals and other related cost-cutting measures as a results of COVID-19; and2020; partially offset by
•An increase of $2.4$1.5 million primarily due to political contributions for statewide ballot measures; partially offset by
A decrease of $2.3 million primarily duerelated to the settlementmark-to-market adjustment for the Company’s deferred compensation plan, which is offset by gains on the underlying marketable securities included in interest income and other net investment gains in the consolidated statements of a previously disclosed litigation matter.operations.
Leasing Costs
Leasing costs decreased by $1.8$1.2 million or 32.6%43.5%, for the ninesix months ended SeptemberJune 30, 20202021 compared to the ninesix months ended SeptemberJune 30, 20192020 primarily due to changes in personnel and a lower level of leasing activity during the ninesix months ended SeptemberJune 30, 2020.2021.
Depreciation and Amortization
Depreciation and amortization increased $22.7decreased $4.9 million, or 11.1%3.2%, for the ninesix months ended SeptemberJune 30, 20202021 compared to the ninesix months ended SeptemberJune 30, 20192020 primarily due to the following:
An increase of $22.7 million attributable to the Development Properties; and
An increase of $7.1 million attributable to the Acquisition Properties; partially offset by
•A decrease of $4.0$9.8 million attributable to the Same Store Properties; and
•A decrease of $3.1$7.7 million attributable to the Disposition Properties.Properties; partially offset by
47
•An increase of $12.6 million attributable to the Development Properties.
Interest Expense
The following table sets forth our gross interest expense, including debt discounts/premiumsdiscounts and deferred financing cost amortization, and capitalized interest, including capitalized debt discounts/premiumsdiscounts and deferred financing cost amortization for the ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2021 | | 2020 | | Dollar Change | | Percentage Change |
| (in thousands) | | | | |
Gross interest expense | $ | 78,705 | | | $ | 72,262 | | | $ | 6,443 | | | 8.9 | % |
Capitalized interest and deferred financing costs | (34,981) | | | (41,934) | | | 6,953 | | | (16.6) | % |
Interest expense | $ | 43,724 | | | $ | 30,328 | | | $ | 13,396 | | | 44.2 | % |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | | | |
| 2020 | | 2019 | | Dollar Change | | Percentage Change |
| (in thousands) | | | | |
Gross interest expense | $ | 111,069 |
| | $ | 95,507 |
| | $ | 15,562 |
| | 16.3 | % |
Capitalized interest and deferred financing costs | (61,273 | ) | | (60,902 | ) | | (371 | ) | | 0.6 | % |
Interest expense | $ | 49,796 |
| | $ | 34,605 |
| | $ | 15,191 |
| | 43.9 | % |
Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased $15.6$6.4 million or 16.3%8.9% for the ninesix months ended SeptemberJune 30, 20202021 as compared to the ninesix months ended SeptemberJune 30, 20192020 primarily due to an increase in our average debt balance for the ninesix months ended SeptemberJune 30, 2020.
2021.
Capitalized interest and deferred financing costs increased $0.4decreased $7.0 million or 0.6%16.6%, for the ninesix months ended SeptemberJune 30, 20202021 compared to the ninesix months ended SeptemberJune 30, 20192020 primarily due to an increasea decrease in the average development asset balances qualifying for interest capitalization for the ninesix months ended SeptemberJune 30, 2020.2021. During the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately$2.1 billionand$1.9 $1.8 billion and $2.2 billion, respectively.
Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships
Net income attributable to noncontrolling interests in consolidated property partnerships increased $1.6$2.3 million or 13.2%25.0% for the ninesix months ended SeptemberJune 30, 20202021 compared to the ninesix months ended SeptemberJune 30, 20192020 primarily due to a new leaseleases at a higher raterates at one propertytwo properties held in atwo property partnership in 2020.partnerships. The amounts reported for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 are comprised of the noncontrolling interest’s share of net income for 100 First Street Member, LLC (“100 First LLC”), 303 Second Street Member (“303 Second LLC”) and Redwood City Partners, LLC (“Redwood LLC”).
Liquidity and Capital Resources of the Company
In this “Liquidity and Capital Resources of the Company” section, the term the “Company” refers only to Kilroy Realty Corporation on an unconsolidated basis and excludes the Operating Partnership and all other subsidiaries.
The Company’s business is operated primarily through the Operating Partnership. Distributions from the Operating Partnership are the Company’s primary source of capital. The Company believes the Operating Partnership’s sources of working capital, specifically its cash flow from operations and borrowings available under its unsecured revolving credit facility and funds from its capital recycling program, including strategic ventures, are adequate for it to make its distribution payments to the Company and, in turn, for the Company to make its dividend payments to its common stockholders for the next twelve months. Cash flows from operating activities generated by the Operating Partnership for the ninesix months ended SeptemberJune 30, 20202021 were sufficient to cover the Company’s payment of cash dividends to its stockholders. However, there can be no assurance that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distributions to the Company. The unavailability of capital could adversely affect the Operating Partnership’s ability to make distributions to the Company, which would in turn, adversely affect the Company’s ability to pay cash dividends to its stockholders.
The Company is a well-known seasoned issuer and the Company and the Operating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred stock, common stock, depositary shares, warrants and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and the Operating Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. When the Company receives proceeds from the sales of its preferred or common stock, it generally contributes the net proceeds from those sales to the Operating Partnership in exchange for corresponding preferred or common partnership units of the Operating Partnership. The Operating Partnership may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under its unsecured revolving credit facility, to develop new or existing properties, to make acquisitions of properties or portfolios of properties, or for general corporate purposes.
As the sole general partner with control of the Operating Partnership, the Company consolidates the Operating Partnership for financial reporting purposes, and the Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities and the revenues and expenses of the Company and the Operating Partnership are substantially the same on their respective financial statements. The section entitled “Liquidity and Capital Resources of the Operating Partnership” should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a consolidated basis and how the Company is operated as a whole.
COVID-19 Liquidity Highlights
As of June 30, 2021, we had approximately $519.3 million in cash and cash equivalents and approximately $450.5 million of restricted cash, of which $431.5 million is remaining from the operating property disposition completed during the six months ended June 30, 2021 and may be released from the qualified intermediary at our direction, should we choose not to complete a Section 1031 Exchange. As of the date of this report, we have no material debt maturities prior to July 2022, at which time our revolving credit facility matures. As of October 27, 2020, we had approximately $685.0 million in cash and cash equivalents, with an additional $750.0 million$1.1 billion available under our unsecured revolving credit facility as a result of settling various forward equity sale agreements and the completion of a private placement of $350.0 millionour next material debt maturity occurs in unsecured senior notes and a public offering of $425.0 million in green unsecured senior notes during the nine months ended September 30, 2020.January 2023. We believe that thisour available liquidity demonstrates a strong balance sheet and makes us well positioned to navigate uncertainty resulting from the COVID-19 pandemic.any additional future uncertainties. In addition, as discussed above, the Company is a well-known seasoned issuer and has historically been able to raise capital on a timely basis in the public markets, as well as the private markets, as demonstrated by the transactions listed above.markets. Any future financings, however, will depend on market conditions for both capital raises and for the investment of anysuch proceeds, and there can be no assurances that we will successfully obtain such financings.
Distribution Requirements
The Company is required to distribute 90% of its taxable income (subject to certain adjustments and excluding net capital gains) on an annual basis to maintain qualification as a REIT for federal income tax purposes and is required to pay income tax at regular corporate rates to the extent it distributes less than 100% of its taxable income (including capital gains). As a result of these distribution requirements, the Operating Partnership cannot rely on retained earnings to fund its on-going operations to the same extent as other companies whose parent companies are not REITs. In addition, the Company may be required to use borrowings under the Operating Partnership’s revolving credit facility, if necessary, to meet REIT distribution requirements and maintain its
REIT status. The Company may also need to continue to raise capital in the equity markets to fund the Operating Partnership’s working capital needs, as well as potential developments of new or existing properties or acquisitions.
The Company intends to continue to make, but has not committed to make, regular quarterly cash distributions to common stockholders, and through the Operating Partnership, to common unitholders from the Operating Partnership’s cash flow from operating activities. All such distributions are at the discretion of the Board of Directors. As the Company intends to maintain distributions at a level sufficient to meet the REIT distribution requirements and minimize its obligation to pay income and excise taxes, it will continue to evaluate whether the current levels of distribution are appropriate to do so throughout 2020.2021. In addition, in the event the Company is unable to identify and complete the acquisition of suitable replacement properties to effect Section 1031 Exchanges or is unable to successfully complete Section 1031 Exchanges to defer some or all of the taxable gains related to property dispositions as a resultthe disposition completed during the six months ended June 30, 2021 for gross proceeds of the COVID-19 pandemic$1.08 billion or any other reason,future dispositions (or in the event additional legislation is enacted that further modifies or repeals laws with respect to Section 1031 Exchanges), the Company may electbe required to distribute a special dividend to its common stockholders and common unitholders in order to minimize or eliminate income taxes on such gains. The Company considers market factors and its performance in addition to REIT requirements in determining its distribution levels. Amounts accumulated for distribution to stockholders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which is consistent with the Company’s intention to maintain its qualification as a REIT. Such investments may include, for example, obligations of the Government National Mortgage Association, other governmental agency securities, certificates of deposit, and interest-bearing bank deposits.
OnAugust 26, 2020, May 20, 2021, the Board of Directors declared a regular quarterly cash dividend of $0.50 an increase of 3.1% from the prior regular quarterly cash dividend of $0.485 per share of common stock. The regular quarterly cash dividend is payable to stockholders of record on SeptemberJune 30, 20202021 and a corresponding cash distribution of $0.50 per Operating Partnership unit is payable to holders of the Operating Partnership’s common limited partnership interests of record on SeptemberJune 30, 2020,2021, including those owned by the Company. The total cash quarterly dividends and distributions paid on OctoberJuly 14, 20202021 were $58.658.8 million.
Debt Covenants
The covenants contained within certain of our unsecured debt obligations generally prohibit the Company from paying dividends during an event of default in excess of an amount which results in distributions to us in an amount sufficient to permit us to pay dividends to our stockholders that we reasonably believe are necessary to (a) maintain our qualification as a REIT for federal and state income tax purposes and (b) avoid the payment of federal or state income or excise tax.
Capitalization
As of SeptemberJune 30, 2020,2021, our total debt as a percentage of total market capitalization was 39.4%32.5%, which was calculated based on the closing price per share of the Company’s common stock of $51.96$69.64 on SeptemberJune 30, 20202021 as shown in the following table:
| | | Shares/Units at September 30, 2020 | | Aggregate Principal Amount or $ Value Equivalent | | % of Total Market Capitalization | | Shares/Units at June 30, 2021 | | Aggregate Principal Amount or $ Value Equivalent | | % of Total Market Capitalization |
| ($ in thousands) | | ($ in thousands) |
Debt: (1)(2) | | | | | Debt: (1)(2) | |
| Unsecured Senior Notes due 2023 | | $ | 300,000 |
| | 3.0 | % | Unsecured Senior Notes due 2023 | | $ | 300,000 | | | 2.5 | % |
Unsecured Senior Notes due 2024 | | 425,000 |
| | 4.2 | % | Unsecured Senior Notes due 2024 | | 425,000 | | | 3.5 | % |
Unsecured Senior Notes due 2025 | | 400,000 |
| | 4.0 | % | Unsecured Senior Notes due 2025 | | 400,000 | | | 3.3 | % |
Unsecured Senior Notes Series A & B due 2026 | | 250,000 |
| | 2.5 | % | Unsecured Senior Notes Series A & B due 2026 | | 250,000 | | | 2.0 | % |
Unsecured Senior Notes due 2028 | | 400,000 |
| | 4.0 | % | Unsecured Senior Notes due 2028 | | 400,000 | | | 3.3 | % |
Unsecured Senior Notes due 2029 | | 400,000 |
| | 4.0 | % | Unsecured Senior Notes due 2029 | | 400,000 | | | 3.3 | % |
Unsecured Senior Notes Series A & B due 2027 & 2029 | | 250,000 |
| | 2.5 | % | Unsecured Senior Notes Series A & B due 2027 & 2029 | | 250,000 | | | 2.0 | % |
Unsecured Senior Notes due 2030 | | 500,000 |
| | 5.0 | % | Unsecured Senior Notes due 2030 | | 500,000 | | | 4.1 | % |
Unsecured Senior Notes due 2031 | | 350,000 |
| | 3.5 | % | Unsecured Senior Notes due 2031 | | 350,000 | | | 2.9 | % |
Unsecured Senior Notes due 2032 | | 425,000 |
| | 4.2 | % | Unsecured Senior Notes due 2032 | | 425,000 | | | 3.5 | % |
Secured debt | | 255,668 |
| | 2.5 | % | Secured debt | | 251,720 | | | 2.1 | % |
Total debt | | $ | 3,955,668 |
| | 39.4 | % | Total debt | | $ | 3,951,720 | | | 32.5 | % |
Equity and Noncontrolling Interests in the Operating Partnership: (3) | | | | | Equity and Noncontrolling Interests in the Operating Partnership: (3) | |
Common limited partnership units outstanding (4) | 1,931,574 | | $ | 100,365 |
| | 1.0 | % | Common limited partnership units outstanding (4) | 1,150,574 | | $ | 80,126 | | | 0.7 | % |
Shares of common stock outstanding | 115,247,221 | | 5,988,246 |
| | 59.6 | % | Shares of common stock outstanding | 116,454,210 | | 8,109,871 | | | 66.8 | % |
Total Equity and Noncontrolling Interests in the Operating Partnership | | $ | 6,088,611 |
| | 60.6 | % | Total Equity and Noncontrolling Interests in the Operating Partnership | | $ | 8,189,997 | | | 67.5 | % |
Total Market Capitalization | | $ | 10,044,279 |
| | 100.0 | % | Total Market Capitalization | | $ | 12,141,717 | | | 100.0 | % |
________________________ | |
(1) | Represents gross aggregate principal amount due at maturity before the effect of the following at September 30, 2020: $23.3 millionof unamortized deferred financing costs on the unsecured senior notes and secured debt and $8.5(1) Represents gross aggregate principal amount due at maturity before the effect of the following at June 30, 2021: $20.8 million of unamortized deferred financing costs on the unsecured senior notes and secured debt and $7.7 million of unamortized discounts for the unsecured senior notes. |
| |
(2) | As of September 30, 2020, there was no outstanding balance on the unsecured revolving credit facility. During the three months ended September 30, 2020, we fully repaid the $150.0 million unsecured term loan facility.
|
| |
(3) | Value based on closing price per share of our common stock of $51.96 as of September 30, 2020. |
| |
(4) | Includes common units of the Operating Partnership not owned by the Company; does not include noncontrolling interests in consolidated property partnerships. |
(2) As of June 30, 2021, there was no outstanding balance on the unsecured revolving credit facility.
(3) Value based on closing price per share of our common stock of $69.64 as of June 30, 2021.
(4) Includes common units of the Operating Partnership not owned by the Company; does not include noncontrolling interests in consolidated property partnerships.
51
Liquidity and Capital Resources of the Operating Partnership
In this “Liquidity and Capital Resources of the Operating Partnership” section, the terms “we,” “our,” and “us” refer to the Operating Partnership or the Operating Partnership and the Company together, as the context requires.
General
Our primary liquidity sources and uses are as follows:
Liquidity Sources
•Net cash flow from operations;
•Borrowings under the Operating Partnership’s unsecured revolving credit facility and term loan facility;
•Proceeds from our capital recycling program, including the disposition of assets and the formation of strategic ventures;
•Proceeds from additional secured or unsecured debt financings; and
•Proceeds from public or private issuance of debt, equity or preferred equity securities.
Liquidity Uses
•Development and redevelopment costs;
•Operating property or undeveloped land acquisitions;
•Property operating and corporate expenses;
•Capital expenditures, tenant improvement and leasing costs;
•Debt service and principal payments, including debt maturities;
•Distributions to common security holders;
•Repurchases and redemptions of outstanding common stock of the Company; and
•Outstanding debt repurchases, redemptions and repayments.
General Strategy
Our general strategy is to maintain a conservative balance sheet with a strong credit profile and to maintain a capital structure that allows for financial flexibility and diversification of capital resources. We manage our capital structure to reflect a long-term investment approach and utilize multiple sources of capital to meet our long-term capital requirements. We believe that our current projected liquidity requirements for the next twelve-month period, as set forth above under the caption “—Liquidity Uses,” will be satisfied using a combination of the liquidity sources listed above, although there can be no assurance in this regard. We believe our conservative leverage and staggered debt maturities provide us with financial flexibility and enhance our ability to obtain additional sources of liquidity if necessary, and, therefore, we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities.securities, although there can be no assurance in this regard.
52
Liquidity Sources
Unsecured Revolving Credit Facility
In April 2021, the Operating Partnership amended and Term Loan Facilityrestated the terms of its unsecured revolving credit facility. The amendment and restatement increased the size of the unsecured revolving credit facility from $750.0 million to $1.1 billion, reduced the borrowing costs, extended the maturity date of the unsecured revolving credit facility to July 2025, with two six-month extension options, and added a sustainability-linked pricing component whereby the interest rate is lowered by 0.01% if certain sustainability performance targets are met. The LIBOR replacement provisions of the unsecured revolving credit facility permit the use of rates based on the secured overnight financing rate (“SOFR”) administered by the Federal Reserve Bank of New York.
The following table summarizes the balance and terms of our unsecured revolving credit facility as of SeptemberJune 30, 20202021 and December 31, 2019:2020:
| | | September 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
| (in thousands) | | (in thousands) |
Outstanding borrowings | $ | — |
| | $ | 245,000 |
| Outstanding borrowings | $ | — | | | $ | — | |
Remaining borrowing capacity | 750,000 |
| | 505,000 |
| Remaining borrowing capacity | 1,100,000 | | | 750,000 | |
Total borrowing capacity (1) | $ | 750,000 |
| | $ | 750,000 |
| Total borrowing capacity (1) | $ | 1,100,000 | | | $ | 750,000 | |
Interest rate (2) | 1.15 | % | | 2.76 | % | Interest rate (2) | 1.00 | % | | 1.14 | % |
Facility fee-annual rate (3) | 0.200% | Facility fee-annual rate (3) | 0.200% |
Maturity date | July 2022 | Maturity date | July 2025 | | July 2022 |
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(1) | We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional $600.0 million under an accordion feature under the terms of the unsecured revolving credit facility and unsecured term loan facility. |
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(2) | Our unsecured revolving credit facility interest rate was calculated based the contractual rate of LIBOR plus 1.000% as of September 30, 2020 and December 31, 2019. |
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(3) | Our facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, we incurred debt origination and legal costs. As of September 30, 2020 and December 31, 2019, $2.4 million and $3.4 million of unamortized deferred financing costs, respectively, which are included in prepaid expenses and other assets, net on our consolidated balance sheets, remained to be amortized through the maturity date of our unsecured revolving credit facility. |
(1)We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional $500.0 million and $600.0 million as of June 30, 2021 and December 31, 2020, respectively, under an accordion feature under the terms of the unsecured revolving credit facility.
(2)Our unsecured revolving credit facility interest rate was calculated based on the contractual rate of LIBOR plus 0.900% and LIBOR plus 1.000% as of June 30, 2021 and December 31, 2020, respectively.
(3)Our facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, we incurred debt origination and legal costs. As of June 30, 2021 and December 31, 2020, $8.3 millionand $2.1 million of unamortized deferred financing costs, respectively, which are included in prepaid expenses and other assets, net on our consolidated balance sheets, remained to be amortized through the respective maturity dates presented of our unsecured revolving credit facility.
We intend to borrow under the unsecured revolving credit facility as necessary for general corporate purposes, to finance development and redevelopment expenditures, to fund potential acquisitions and to potentially repay long-term debt to supplement cash balances given uncertainties and volatility in market conditions.
In August 2020, the Company repaid in full the $150.0 million unsecured term loan facility. The following table summarizes the balance and terms of our unsecured term loan facility as of December 31, 2019:
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| | | |
| December 31, 2019 |
| |
Outstanding borrowings | $ | 150,000 |
|
Remaining borrowing capacity | — |
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Total borrowing capacity (1) | $ | 150,000 |
|
Interest rate (2) | 2.85 | % |
Undrawn facility fee-annual rate | 0.200 | % |
Maturity date | July 2022 |
|
________________________ | |
(1) | As of December 31, 2019, $0.7 million of unamortized deferred financing costs remained to be amortized through the maturity date of our unsecured term loan facility. |
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(2) | Our unsecured term loan facility interest rate was calculated based on the contractual rate of LIBOR plus 1.100% as of December 31, 2019. |
Capital Recycling Program
As discussed in the section “Factors That May Influence Future Results of Operations - Capital Recycling Program,” we continuously evaluate opportunities for the potential disposition of properties and undeveloped land in our portfolio or the formation of strategic ventures with the intent of recycling the proceeds generated from the disposition of less strategic or core assets into capital used to finance development expenditures, to fund new acquisitions, to repay long-term debt and for other general corporate purposes. As part of this strategy, we attempt to enter into Section 1031 Exchanges, when possible, to defer some or all of the taxable gains on the sales, if any, for federal and state income tax purposes.
We currently anticipate that,In connection with our capital recycling strategy, during the six months ended June 30, 2021, we completed the sale of one operating property in San Francisco, California to an unaffiliated third party for gross proceeds of $1.08 billion, or approximately $1,440 per square foot. During the three months ended June 30, 2021, a portion of the proceeds from the sale were used to fund two development acquisitions totaling $622.2 million and as of June 30, 2021, $431.5 million of the proceeds from the sale are still temporarily being held by a qualified intermediary, at our direction, for the remainderpurpose of 2020, we could raise additional capital of approximately $75.0 million through our dispositions program.facilitating a Section 1031 Exchange. Any potential future disposition transactions and the timing of any potential future capital recycling transactions will depend on market conditions and other factors, including but not limited to our capital needs, the availability of financing for potential buyers (which has been and may continue to be constrained for some potential buyers due to the ongoing COVID-19 pandemic’s impact on economic and market conditions, including the financial markets), and our ability to defer some or all of the taxable gains on the sales. In addition, we cannot assure you that we will dispose of any additional properties, or that we will be able to identify and complete the acquisitions of suitable replacement properties to effect Section 1031 Exchanges to defer some or all of the taxable gains related to our capital recycling program. In the event we are unable to complete dispositions as planned, we may raise capital through other sources of liquidity including our available unsecured revolving credit facility or the public or private issuance of unsecured debt.
Forward Equity Offering and Settlement
On February 18, 2020, the Company entered into forward equity sale agreements with certain financial institutions acting as forward purchasers in connection with an offering of 5,750,000 shares of common stock at an initial gross offering price of $494.5 million, or $86.00 per share, before underwriting discounts, commissions and offering expenses. The forward purchasers borrowed and sold an aggregate of 5,750,000 shares of common stock in the offering.
On March 25, 2020, the Company physically settled these forward equity sale agreements. Upon settlement, the Company issued 5,750,000 shares of common stock for net proceeds of $474.9 million and contributed the net proceeds to the Operating Partnership in exchange for an equal number of units in the Operating Partnership.
At-The-Market Stock Offering Program
Under our current at-the-market stock offering program, which commenced June 2018, we may offer and sell shares of our common stock with an aggregate gross sales price of up to $500.0 million from time to time in “at-the-market” offerings. In connection with the at-the-market program, the Company may enter into forward equity sale agreements with certain financial institutions acting as forward purchasers whereby, at our discretion, the forward purchasers may borrow and sell shares of our common stock under our at-the-market program. The use of a forward equity sale agreement allows the Company to lock in a share price on the sale of shares of our common stock at the time the agreement is executed but defer settling the forward equity sale agreements and receiving the proceeds from the sale of shares until a later date.
During the year ended December 31, 2019, we executed various 12-month The Company did not have any outstanding forward equity sale agreements under our at-the-market program with financial institutions acting as forward purchasers to sell an aggregate of 3,147,110 shares of common stockbe settled at a weighted average sales price of $80.08 per share before underwriting discounts, commissions and offering expenses.June 30, 2021.
In March 2020, we physically settled all forward equity sale agreements entered into in 2019. Upon settlement, the Company issued 3,147,110 shares of common stock for net proceeds of $247.3 million and contributed the net proceeds to the Operating Partnership in exchange for an equal number of units in the Operating Partnership. We did not enter into any forward equity sale agreements under our at-the-market program during the nine months ended September 30, 2020.
Since commencement of our current at-the-market program, we have completed sales of 3,594,576 shares of common stock through SeptemberJune 30, 2020.2021. As of SeptemberJune 30, 2020,2021, we may offer and sell shares of our common stock having an aggregate gross sales price up to approximately $214.2 million under our current at-the-market program.
The Company did not complete any direct sales of common stock under the program during the three or ninesix months ended SeptemberJune 30, 2020. The following table sets forth information regarding settlements of forward equity sale agreements under our at-the-market offering program for the nine months ended September 30, 2020:2021.
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| | | |
| Nine Months Ended September 30, 2020 |
| (in millions, except share and per share data) |
Shares of common stock settled during the period | 3,147,110 |
|
Weighted average price per share of common stock | $ | 80.08 |
|
Aggregate gross proceeds | $ | 252.0 |
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Aggregate net proceeds after selling commissions | $ | 247.3 |
|
The proceeds from sales will be used to fund development expenditures and general corporate purposes. Actual future sales will depend upon a variety of factors, including but not limited to, market conditions, the trading price of the Company’s common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under this program.
Shelf Registration Statement
The Company is a well-known seasoned issuer and the Company and the Operating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred stock, common stock, depository shares and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and the Operating Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. During the nine months ended September 30, 2020, the Company’s stock price ranged from $49.01 to $88.28, an 80% swing, as a result of COVID-19 and the resultant impact on the capital markets and economy. If current conditions continue for an extended period of time, capitalCapital raising could be more challenging under current market conditions than under conditionsthose prior to COVID-19.COVID-19, particularly if case rates surge again. When the Company receives proceeds from the sales of its preferred or common stock, it generally contributes the net proceeds from those sales to the Operating Partnership in exchange for corresponding preferred or common partnership units of the Operating Partnership. The Operating Partnership may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under its unsecured revolving credit facility, to develop new or existing properties, to make acquisitions of properties or portfolios of properties, or for general corporate purposes.
Unsecured and Secured Debt
The aggregate principal amount of the unsecured and secured debt of the Operating Partnership outstanding as of SeptemberJune 30, 20202021 was as follows:
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| | | |
| Aggregate Principal Amount Outstanding |
| (in thousands) |
Unsecured Senior Notes due 2023 | $ | 300,000 |
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Unsecured Senior Notes due 2024 | 425,000 |
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Unsecured Senior Notes due 2025 | 400,000 |
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Unsecured Senior Notes Series A & B due 2026 | 250,000 |
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Unsecured Senior Notes due 2028 | 400,000 |
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Unsecured Senior Notes due 2029 | 400,000 |
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Unsecured Senior Notes Series A & B due 2027 & 2029 | 250,000 |
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Unsecured Senior Notes due 2030 | 500,000 |
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Unsecured Senior Notes due 2031 | 350,000 |
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Unsecured Senior Notes due 2032 | 425,000 |
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Secured Debt | 255,668 |
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Total Unsecured and Secured Debt (1) | 3,955,668 |
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Less: Unamortized Net Discounts and Deferred Financing Costs (2) | (31,838 | ) |
Total Debt, Net | $ | 3,923,830 |
|
________________________
| | | | | |
| Aggregate Principal Amount Outstanding |
| (in thousands) |
| |
(1) | As of September 30, 2020, there was no outstanding balance on the unsecured revolving credit facility. During the three months ended September 30, 2020, we fully repaid the $150.0 million unsecured term loan facility.
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(2)Unsecured Senior Notes due 2023 | Includes $23.3 million of unamortized deferred financing costs on the unsecured senior notes$ | 300,000 | |
Unsecured Senior Notes due 2024 | 425,000 | |
Unsecured Senior Notes due 2025 | 400,000 | |
Unsecured Senior Notes Series A & B due 2026 | 250,000 | |
Unsecured Senior Notes due 2028 | 400,000 | |
Unsecured Senior Notes due 2029 | 400,000 | |
Unsecured Senior Notes Series A & B due 2027 & 2029 | 250,000 | |
Unsecured Senior Notes due 2030 | 500,000 | |
Unsecured Senior Notes due 2031 | 350,000 | |
Unsecured Senior Notes due 2032 | 425,000 | |
Secured Debt | 251,720 | |
Total Unsecured and secured debtSecured Debt (1) | 3,951,720 | |
Less: Unamortized Net Discounts and $8.5Deferred Financing Costs (2) | (28,568) | |
Total Debt, Net | $ | 3,923,152 | |
________________________
(1)As of June 30, 2021, there was no outstanding balance on the unsecured revolving credit facility.
(2)Includes $20.8 million of unamortized deferred financing costs on the unsecured senior notes and secured debt and $7.7 million of unamortized discounts for the unsecured senior notes. Excludes unamortized deferred financing costs on the unsecured revolving credit facility, which are included in prepaid expenses and other assets, net on our consolidated balance sheets.
Unsecured Senior Notes - Registered Offering
In August 2020, the Operating Partnership issued $425.0 million aggregate principal amount of green unsecured senior notes in a registered public offering. The outstanding balance of the unsecured senior notes is included in unsecured debt, net of an initial issuance discount of $2.7 million, on our consolidated balance sheets. The unsecured senior notes, which are scheduled to mature on November 15, 2032, require semi-annual interest payments each May and November based on a stated annual interest rate of 2.500%. The Operating Partnership may redeem the notes at any time prior to August 15, 2032, either in whole or in part, subject to the payment of an early redemption premium prior to a par call option period commencing three months prior to maturity.
Unsecured Senior Notes - Private Placement
On April 28, 2020, the Operating Partnership entered into a Note Purchase Agreement in connection with the issuance and sale of $350.0 million principal amount of the Operating Partnership's 4.27% Senior Notes due January 31, 2031 (the “Notes”), pursuant to a private placement. The Notes mature on their due date, unless earlier redeemed or prepaid pursuant to the terms of the Note Purchase Agreement. Interest on the Notes is payable semi-annually in arrears on April 18 and October 18 of each year beginning October 18, 2020.
Debt Composition
The composition of the Operating Partnership’s aggregate debt balances between secured and unsecured and fixed-rate and variable-rate debt as of SeptemberJune 30, 20202021 and December 31, 20192020 was as follows:
| | | Percentage of Total Debt (1) | | Weighted Average Interest Rate (1) | | Percentage of Total Debt (1) | | Weighted Average Interest Rate (1) |
| September 30, 2020 (2) | | December 31, 2019 | | September 30, 2020 (2) | | December 31, 2019 | | June 30, 2021 (2) | | December 31, 2020 | | June 30, 2021 (2) | | December 31, 2020 |
Secured vs. unsecured: | | | | | | | | Secured vs. unsecured: | | | | | | | |
Unsecured | 93.5 | % | | 92.8 | % | | 3.8 | % | | 3.8 | % | Unsecured | 93.6 | % | | 93.6 | % | | 3.8 | % | | 3.8 | % |
Secured | 6.5 | % | | 7.2 | % | | 3.9 | % | | 3.9 | % | Secured | 6.4 | % | | 6.4 | % | | 3.9 | % | | 3.9 | % |
Variable-rate vs. fixed-rate: | | | | | | | | Variable-rate vs. fixed-rate: | |
Variable-rate | — | % | | 11.0 | % | | — | % | | 2.8 | % | Variable-rate | — | % | | — | % | | — | % | | — | % |
Fixed-rate (3) | 100.0 | % | | 89.0 | % | | 3.8 | % | | 3.9 | % | Fixed-rate (3) | 100.0 | % | | 100.0 | % | | 3.8 | % | | 3.8 | % |
Stated rate (3) | | | | | 3.8 | % | | 3.8 | % | Stated rate (3) | | 3.8 | % | | 3.8 | % |
GAAP effective rate (4) | | | | | 3.8 | % | | 3.8 | % | GAAP effective rate (4) | | 3.8 | % | | 3.8 | % |
GAAP effective rate including debt issuance costs | | | | | 4.1 | % | | 4.0 | % | GAAP effective rate including debt issuance costs | | 4.0 | % | | 4.0 | % |
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(1) | As of the end of the period presented. |
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(2) | As of September 30, 2020,(1) As of the end of the period presented. (2) As of June 30, 2021, there was no outstanding balance on the unsecured revolving credit facility. During the three months ended September 30, 2020, we fully repaid the $150.0 million unsecured term loan facility. (3) Excludes the impact of the amortization of any debt discounts/premiums and deferred financing costs. (4) Includes the impact of the amortization of any debt discounts/premiums, excluding deferred financing costs.
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(3) | Excludes the impact of the amortization of any debt discounts/premiums and deferred financing costs. |
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(4) | Includes the impact of the amortization of any debt discounts/premiums, excluding deferred financing costs. |
Liquidity Uses
Contractual Obligations
Refer to our 20192020 Annual Report on Form 10-K for a discussion of our contractual obligations. There have been no material changes, outside of the ordinary course of business, to these contractual obligations during the ninesix months ended SeptemberJune 30, 2020.2021.
Other Liquidity Uses
Development
As of SeptemberJune 30, 2020,2021, we had threetwo development projects under construction. These projects have a total estimated investment of approximately $910.0 million$1.1 billion of which we have incurred approximately $539.9$271.0 million, net of retention, and committed an additional $366.0$809.0 million as of SeptemberJune 30, 2020,2021, of which $40.0$36.0 million is currently expected to be spent through the end of 2020.2021. In addition, as of SeptemberJune 30, 2020,2021, we hadfourdevelopment projects in the tenant improvement phase. These projects have a total estimated investment of approximately $1.03$1.8 billion, of which we have incurred approximately $850.0 million,$1.5 billion, net of retention, and committed an additional $175.0$305.0 million as of SeptemberJune 30, 2020,2021, of which $64.0$102.0 million is currently expected to be spent through the end of 2020.2021. We also had twofour stabilized development projects with a total estimated investment of $860.0$645.0 million, of which $7.0$64.0 million remains to be spent as of SeptemberJune 30, 2020,2021, and is expected to be spent through the end of 2020. Ultimate2021. Furthermore, we currently believe we may spend up to $25.0 million on committed and future development pipeline projects that we may commence construction on throughout the remainder of 2021. The ultimate timing of these expenditures may fluctuate given construction progress and leasing status of the projects. Additionally,projects, or as a result of events outside our control, such as delays or increased costs as a result of the COVID-19 pandemic, and restrictions intended to prevent its spread, could cause delays or increase costs associated with building materials or construction services necessary for construction in the future, which could adversely impact our ability to continue or complete construction as planned, on budget or at all, and may delay the start of construction on our future development pipeline projects.pandemic. We expect that any material additional development activities will be funded with borrowings under the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program, or strategic venture opportunities. We cannot provide assurance that development projects will be completed on the terms, for the amounts or on the timelines currently contemplated, or at all.
Debt Maturities
We believe our conservative leverage, and staggered debt maturities and recent unsecured line of credit amendment provide us with financial flexibility and enhance our ability to obtain additional sources of liquidity if necessary, and, therefore, we believe we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities. However, we can provide no assurance that we will have access to the public or private debt or equity markets in the future on favorable terms or at all. Refer to “Part II – Other Information, Item IA. Risk Factors” included in this report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders. Our next debt maturity occurs in July 2022 and relates to our unsecured revolving credit facility, under which we currently do not have any amounts borrowed.January 2023.
Potential Future Acquisitions
As discussed in the section “Factors That May Influence Future Results of Operations - Acquisitions,” we continue to evaluate strategic opportunities and remain a disciplined buyer of development and redevelopment opportunities as well as value-add and strategic operating properties, dependent on market conditions and business cycles, among other factors. We focus on growth opportunities primarily in West Coast markets populated by knowledge and creative based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services. AnyWe expect that any material acquisitions will be funded with borrowings under the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program, the formation of strategic ventures or through the assumption of existing debt.debt, although there can be no assurance in this regard.
We cannot provide assurance that we will enter into any agreements to acquire properties or undeveloped land, or that the potential acquisitions contemplated by any agreements we may enter into in the future will be completed.
Share Repurchases
As of SeptemberJune 30, 2020,2021, 4,935,826 shares remained eligible for repurchase under a share repurchase program approved by the Company's board of directors in 2016. Under this program, repurchases may be made in open market transactions at prevailing prices or through privately negotiated transactions. We may elect to repurchase shares of our common stock under this program in the future depending upon various factors, including market conditions, the trading price of our common stock and our other
uses of capital. This program does not have a termination date and repurchases may be discontinued at any time. We intend to fund repurchases, if any, primarily with the proceeds from property dispositions.
Other Potential Future Liquidity Uses
The amounts we incur for tenant improvements and leasing costs depend on leasing activity in each period. Tenant improvements and leasing costs generally fluctuate in any given period depending on factors such as the type and condition of the property, the term of the lease, the type of the lease, the involvement of external leasing agents, and overall market conditions. Capital expenditures may fluctuate in any given period subject to the nature, extent and timing of improvements required to maintain our properties. As a result ofWhile the COVID-19 pandemic we believe that for the remainder of 2020, we will likely reduce capital spending as a result of deferring non-essential capital projects at either our or our tenant’s election, and thatrestrictions intended to prevent its spread remain in effect, there may be a reduction incontinued lower level of leasing activity when compared to levels prior to the full year of 2019.COVID-19 pandemic.
Factors That May Influence Future Sources of Capital and Liquidity of the Company and the Operating Partnership
We continue to evaluate sources of financing for our business activities, including borrowings under the unsecured revolving credit facility, issuance of public and private equity securities, unsecured debt and fixed-rate secured mortgage financing, proceeds from the disposition of selective assets through our capital recycling program, and the formation of strategic ventures. However, our ability to obtain new financing or refinance existing borrowings on favorable terms could be impacted by various factors, including the state of the macro economy, the state of the credit and equity markets, significant tenant defaults, a decline in the demand for office properties, a decrease in market rental rates or market values of real estate assets in our submarkets, the amount of our future borrowings and the impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on capital and credit markets and our tenants (refer to “Part II – Other Information,I, Item IA. Risk Factors” of thisin our annual report on Form 10-K for the year ended December 31, 2020 for additional information). These events could result in the following:
•Decreases in our cash flows from operations, which could create further dependence on the unsecured revolving credit facility;
•An increase in the proportion of variable-rate debt, which could increase our sensitivity to interest rate fluctuations in the future; and
•A decrease in the value of our properties, which could have an adverse effect on the Operating Partnership’s ability to incur additional debt, refinance existing debt at competitive rates, or comply with its existing debt obligations.
In addition to the factors noted above, the Operating Partnership’s credit ratings are subject to ongoing evaluation by credit rating agencies and may be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. In the event that the Operating Partnership’s credit ratings are downgraded, we may incur higher borrowing costs and may experience difficulty in obtaining additional financing or refinancing existing indebtedness.
Debt Covenants
The unsecured revolving credit facility, unsecured term loan facility, unsecured term loan, unsecured senior notes, and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Key existing financial covenants and their covenant levels include:
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| | | | | | | | | | | | | |
Unsecured Credit Facility and Private Placement Notes (as defined in the applicable Credit Agreements): | | Covenant Level | | Actual Performance as of SeptemberJune 30, 2020 2021 |
Total debt to total asset value | | less than 60% | | 30%28% |
Fixed charge coverage ratio | | greater than 1.5x | | 3.3x3.0x |
Unsecured debt ratio | | greater than 1.67x | | 3.15x3.23x |
Unencumbered asset pool debt service coverage | | greater than 1.75x | | 4.04x3.55x |
| | | | |
Unsecured Senior Notes due 2023, 2024, 2025, 2028, 2029, 2030 and 2032 (as defined in the applicable Indentures): | | | | |
Total debt to total asset value | | less than 60% | | 35% |
Interest coverage | | greater than 1.5x | | 8.8x7.2x |
Secured debt to total asset value | | less than 40% | | 2% |
Unencumbered asset pool value to unsecured debt | | greater than 150% | | 295%321% |
The Operating Partnership was in compliance with all of its debt covenants as of SeptemberJune 30, 2020.2021. Our current expectation is that the Operating Partnership will continue to meet the requirements of its debt covenants in both the short and long term. In response to the COVID-19 pandemic, we have completed stress testing of our various financial covenants assuming decreases in rental income and determined that the Operating Partnership has adequate cushion between actual performance and debt covenant levels.
However, in the event of an economic slowdown or continued volatility in the credit markets, there is no certainty that the Operating Partnership will be able to continue to satisfy all the covenant requirements.
Consolidated Historical Cash Flow Summary
The following summary discussion of our consolidated historical cash flow is based on the consolidated statements of cash flows in Item 1. “Financial Statements” and is not meant to be an all-inclusive discussion of the changes in our cash flow for the periods presented below. Changes in our cash flow include changes in cash and cash equivalents and restricted cash. Our historical cash flow activity for the ninesix months ended SeptemberJune 30, 20202021 as compared to the ninesix months ended SeptemberJune 30, 20192020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 | | Dollar Change | | Percentage Change |
| ($ in thousands) | | |
Net cash provided by operating activities | $ | 216,466 | | | $ | 224,022 | | | $ | (7,556) | | | (3.4) | % |
Net cash provided by (used in) investing activities | 95,302 | | | (374,341) | | | 469,643 | | | 125.5 | % |
Net cash (used in) provided by financing activities | (165,134) | | | 695,287 | | | (860,421) | | | (123.8) | % |
Net increase in cash and cash equivalents | $ | 146,634 | | | $ | 544,968 | | | $ | (398,334) | | | (73.1) | % |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 | | Dollar Change | | Percentage Change |
| ($ in thousands) | | |
Net cash provided by operating activities | $ | 363,980 |
| | $ | 301,390 |
| | $ | 62,590 |
| | 20.8 | % |
Net cash used in investing activities | (475,701 | ) | | (727,184 | ) | | 251,483 |
| | 34.6 | % |
Net cash provided by financing activities | 900,686 |
| | 558,680 |
| | 342,006 |
| | 61.2 | % |
Net increase in cash and cash equivalents | $ | 788,965 |
| | $ | 132,886 |
| | $ | 656,079 |
| | 493.7 | % |
Operating Activities
Our cash flows from operating activities depends on numerous factors including the occupancy level of our portfolio, the rental rates achieved on our leases, the collectability of rent and recoveries from our tenants, the level of operating expenses, the impact of property acquisitions, completed development projects and related financing activities, and other general and administrative costs. Our net cash provided by operating activities increaseddecreased by $62.6$7.6 million, or 20.8%3.4%, for the ninesix months ended SeptemberJune 30, 20202021 compared to the ninesix months ended SeptemberJune 30, 20192020 primarily as a result of net changes in other operating assets related to the timing of expenditures and net cash flow from operations of development properties that became stabilized during the nine months ended September 30, 2020.expenditures. See additional information under the caption “—Results of Operations.”
Investing Activities
Our cash flows from investing activities is generally used to fund development and operating property acquisitions, expenditures for development projects, and recurring and nonrecurring capital expenditures for our operating properties, net of proceeds received from dispositions of real estate assets. OurDuring the six months ended June 30, 2021 we had net cash provided by investing activities of $95.3 million compared to net cash used in investing activities decreased by $251.5of $374.3 million or 34.6% for the ninesix months ended SeptemberJune 30, 2020 compareddue to $1.0 billion of net proceeds received from one operating property disposition completed during the ninesix months ended SeptemberJune 30, 2019 primarily due to lower2021, partially offset by $586.9 million of expenditures for acquisitions of development properties and undeveloped land and no acquisition activitycompleted during the ninesix months ended SeptemberJune 30, 2020.2021.
Financing Activities
Our cash flows from financing activities is principally impacted by our capital raising activities, net of dividends and distributions paid to common and preferred security holders. OurDuring the six months ended June 30, 2021 we had net cash used in financing activities of $165.1 million compared to net cash provided by financing activities increased by $342.0of $695.3 million or 61.2%, for the ninesix months ended SeptemberJune 30, 2020 compared to the nine months ended September 30, 2019 primarily due to theas a result of net proceeds received upon physical settlement of our February 2020 forward equity sale agreements pursuant to which we issued 5,750,000 sharesfrom the issuance of common stock and proceeds from the forward equity sale agreements entered intoissuance of unsecured debt generated during the yearsix months ended December 31, 2019 under our at-the-market program pursuant to which we issued 3,147,110 shares of common stockJune 30, 2020, partially offset by net repayments on the unsecured revolving credit facility during the ninesix months ended SeptemberJune 30, 2020.
Off-Balance Sheet Arrangements
As of September 30, 2020 and as of the date this report was filed, we did not have any off-balance sheet transactions, arrangements or obligations, including contingent obligations.
59
Non-GAAP Supplemental Financial Measure: Funds From Operations (“FFO”)
We calculate FFO in accordance with the 2018 Restated White Paper on FFO approved by the Board of Governors of NAREIT. The White Paper defines FFO as net income or loss calculated in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains and losses from sales of depreciable real estate and impairment write-downs associated with depreciable real estate, 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. Our calculation of FFO includes the amortization of deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets. We also add back net income attributable to noncontrolling common units of the Operating Partnership because we report FFO attributable to common stockholders and common unitholders.
We believe that FFO is a useful supplemental measure of our operating performance. The exclusion from FFO of gains and losses from the sale of operating real estate assets allows investors and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those operating results between periods. Also, because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons of operating performance to other REITs. However, other REITs may use different methodologies to calculate FFO, and accordingly, our FFO may not be comparable to all other REITs.
Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets, we believe that FFO along with the required GAAP presentations provides a more complete measurement of our performance relative to our competitors and a more appropriate basis on which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide.
However, FFO should not be viewed as an alternative measure of our operating performance because it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs and could materially impact our results from operations.
The following table presents our FFO for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| (in thousands) | | (in thousands) |
Net income available to common stockholders | $ | 49,028 |
| | $ | 43,846 |
| | $ | 108,463 |
| | $ | 122,943 |
| Net income available to common stockholders | $ | 35,839 | | | $ | 19,618 | | | $ | 533,470 | | | $ | 59,435 | |
Adjustments: | | | | | | | | Adjustments: | |
Net income attributable to noncontrolling common units of the Operating Partnership | 785 |
| | 852 |
| | 1,857 |
| | 2,423 |
| Net income attributable to noncontrolling common units of the Operating Partnership | 354 | | | 367 | | | 5,240 | | | 1,072 | |
Net income attributable to noncontrolling interests in consolidated property partnerships | 4,258 |
| | 3,600 |
| | 13,521 |
| | 11,941 |
| Net income attributable to noncontrolling interests in consolidated property partnerships | 6,687 | | | 4,367 | | | 11,581 | | | 9,263 | |
Depreciation and amortization of real estate assets | 70,422 |
| | 67,985 |
| | 218,841 |
| | 199,967 |
| Depreciation and amortization of real estate assets | 72,037 | | | 75,981 | | | 146,468 | | | 148,419 | |
Gains on sales of depreciable real estate | — |
| | — |
| | — |
| | (7,169 | ) | |
Gain on sale of depreciable real estate | | Gain on sale of depreciable real estate | (543) | | | — | | | (457,831) | | | — | |
Funds From Operations attributable to noncontrolling interests in consolidated property partnerships | (7,102 | ) | | (7,040 | ) | | (22,029 | ) | | (21,145 | ) | Funds From Operations attributable to noncontrolling interests in consolidated property partnerships | (9,779) | | | (7,244) | | | (18,089) | | | (14,927) | |
Funds From Operations (1)(2) | $ | 117,391 |
| | $ | 109,243 |
| | $ | 320,653 |
| | $ | 308,960 |
| Funds From Operations (1)(2) | $ | 104,595 | | | $ | 93,089 | | | $ | 220,839 | | | $ | 203,262 | |
________________________
| |
(1) | (1) Reported amounts are attributable to common stockholders, common unitholders and restricted stock unitholders. |
| |
(2) | FFO available to common stockholders and unitholders includes amortization of deferred revenue related to tenant-funded tenant improvements of $4.4 million and $6.8 million for the three months ended September 30, 2020 and 2019, respectively, and $17.4 million and $14.9 million for the nine months ended September 30, 2020 and 2019, respectively. |
(2) FFO available to common stockholders and unitholders includes amortization of deferred revenue related to tenant-funded tenant improvements of $4.7 million and $8.0 million for the three months ended June 30, 2021 and 2020, respectively, and $8.9 million and $13.0 million for the six months ended June 30, 2021 and 2020, respectively.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about our market risk is disclosed in “Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2020, and is incorporated herein by reference. There have been no material changes for the ninesix months ended SeptemberJune 30, 2020,2021, to the information provided in “Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020.
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ITEM 4. | CONTROLS AND PROCEDURES |
ITEM 4. CONTROLS AND PROCEDURES
Kilroy Realty Corporation
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of SeptemberJune 30, 2020,2021, the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of that time, the disclosure controls and procedures were effective at the reasonable assurance level.
There have been no changes that occurred during the period covered by this report in the Company’s internal control over financial reporting identified in connection with the evaluation referenced above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Kilroy Realty, L.P.
The Operating Partnership maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Operating Partnership’s reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer of its general partner, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), the Operating Partnership carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of its general partner, of the effectiveness of the design and operation of the disclosure controls and procedures as of SeptemberJune 30, 2020,2021, the end of the period covered by this report. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of its general partner concluded, as of that time, the disclosure controls and procedures were effective at the reasonable assurance level.
There have been no changes that occurred during the period covered by this report in the Operating Partnership’s internal control over financial reporting identified in connection with the evaluation referenced above that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We and our properties are subject to routine litigation incidental to our business. These matters are generally covered by insurance. As of SeptemberJune 30, 2020,2021, we are not a defendant in, and our properties are not subject to, any legal proceedings that we believe, if determined adversely to us, would have a material adverse effect upon our financial condition, results of operations or cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors included in the Company’s and the Operating Partnership’s annual report on Form 10-K for the year ended December 31, 2019,2020, other than as set forth below, which supplements the risk factors included in the Company’sCompany's and the Operating Partnership’sPartnership's annual report on Form 10-K for the year ended December 31, 2019.
2020.
The ongoing COVID-19 pandemic,
There are significant risks associated with property acquisition, development and redevelopment. We may be unable to successfully complete and operate acquired, developed and redeveloped properties, and it is possible that:
•we may be unable to lease acquired, developed or redeveloped properties on lease terms projected at the time of acquisition, development or redevelopment or within budgeted timeframes;
•the operating expenses at acquired, developed or redeveloped properties may be greater than projected at the time of acquisition, development or redevelopment, resulting in our investment being less profitable than we expected;
•we may not commence or complete development or redevelopment properties on schedule or within budgeted amounts or at all;
•we may not be able to develop or redevelop the estimated square footage and other features of our development and redevelopment properties;
•we may suspend development or redevelopment projects after construction has begun due to changes in economic conditions or other factors, and this may result in the write-off of costs, payment of additional costs or increases in overall costs when the development or redevelopment project is restarted;
•we may expend funds on and devote management’s time to acquisition, development or redevelopment properties that we may not complete and as a result we may lose deposits or fail to recover expenses already incurred;
•we may encounter delays or refusals in obtaining all necessary zoning, land use, and other required entitlements, and building, occupancy, and other required governmental permits and authorizations;
•we may encounter delays or unforeseen cost increases associated with building materials or construction services resulting from trade tensions, disruptions, tariffs, duties or restrictions intendedor an outbreak of an epidemic or pandemic;
•we may encounter delays, refusals, unforeseen cost increases and other impairments resulting from third-party litigation; and
•we may fail to prevent its spread,obtain the financial results expected from properties we acquire, develop or redevelop.
If one or more of these events were to occur in connection with our acquired properties, undeveloped land, or development or redevelopment properties under construction, we could adverselybe required to recognize an impairment loss. These events could also have an adverse impact on our business, financial condition, results of operations, cash flows, liquidityflow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
The ongoing COVID-19 pandemic,
While we historically have acquired, developed and restrictions intended to prevent its spread,redeveloped office properties in California markets, over the past few years we have already had a significant adverse impact on economic and market conditions around the worldacquired properties in 2020, including the United States and the markets in which we own properties and/or have development projects. The impact of the COVID-19 pandemic continues to evolve. All the statesgreater Seattle, where we owncurrently have eight stabilized office properties, and/or haveone development projects (i.e., Californiaproject in the tenant improvement phase and Washington) initially reacted toone future development project, and on June 22, 2021 we completed the COVID-19 pandemic by instituting quarantines, restrictions on travel, “shelteracquisition of a development project in place” rules, stay-at-home orders, density limitations, social distancing measures, restrictions on types of business that may continue to operate and/or restrictions on types of construction projects that may continue. Although some state governments and other authorities werethe tenant improvement phase in varying stages of lifting or modifying some of these measures, all the states where we own properties and/or have development projects have been forced to reinstitute these measures andAustin, Texas. We may in the future impose new, more restrictive measures, ifacquire, develop or redevelop properties for other uses and expand our business to other geographic regions where we expect the risks,
development or the perceptionacquisition of the risks, relatedproperty to the COVID-19 pandemic worsen at any time. Furthermore, althoughresult in certain cases, exceptions are available for essential retail, research and laboratory activities, essential building services, such as cleaning and maintenance, and certain essential construction projects, there can be no assurance that such exceptions will enable us to avoid adverse impactsfavorable risk-adjusted returns on our business, financial condition, resultsinvestment. Presently, we do not possess the same level of operations, cash flows, liquidityfamiliarity with Austin and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders. For instance, someother markets outside of the activities of our parking, retail space, co-working tenants and residential tenants are not covered by the exceptions listed above, and we have seen weakness and a material reduction in rent collections from these tenants that may continue for an indeterminate period pending a cessation of the adverse impacts from the COVID-19 pandemic, and restrictions intended to prevent its spread. In addition, there can be no assurance as to how long restrictions intended to prevent the spread of COVID-19 may remain in place in the states and cities where we own properties, and even if such restrictions are lifted, they may be reinstituted at a later date. If such restrictions remain in place for an extended period of time, we may experience further reductions in rents from our tenants.
Across all property types, as of September 30, 2020, we collected approximately 96% of our total gross rent billings for the three months ended September 30, 2020, including 100% from all of our top 15 tenants and as of the date of this report, we have collected 94% of our total gross rent billings for October 2020, including 100% from all of our top 15 tenants. Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent, as well as working with certain tenants who have requested rent deferrals (particularly those occupying retail space), we can provide no assurance that such efforts or our efforts in future periods will be successful. In addition, we are and will continue to be actively engaged in discussions with certain tenants regarding the adverse impacts of the COVID-19 pandemic, and restrictions intended to prevent its spread, and may afford certain additional accommodations.
In addition, we may be required to continue to comply with “social distancing” at our properties and development projects and we may be subject to certain conditions, including requiring contractors to develop COVID-19 control, mitigation, and recovery plans and satisfy certain requirements before work can continue or commence, which may increase costs, perhaps substantially. We expect to comply with any state or local requirements. Our development projects could in the future be affected by moratoriums on construction. To the extent any city issues a moratorium, we may be subject to such a moratorium unless the applicable state or city grants an exclusion for these projects because certain of our development projects may qualify as essential construction projects.
The ongoing COVID-19 pandemic, and restrictions intended to prevent its spread, could have significant adverse impacts on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and
to pay dividends and distributions to security holders in a variety of ways that are difficult to predict. Such adverse impacts could depend on, among other factors:
the financial condition of our tenants - many of which are in the technology, media, healthcare, life sciences, entertainment and professional services industries - and their ability or willingness to pay rent in full on a timely basis;
state, local, federal and industry-initiated efforts that may adversely affect landlords, including us, and their ability to collect rent and/or enforce remedies for the failure to pay rent;
our need to defer or forgive rent and restructure leases with our tenants and our ability to do so on favorable terms or at all;
significant job losses in the industries of our tenants, which may decrease demand for our office and retail space, causing market rental rates and property values to be negatively impacted;
our ability to stabilize our development projects, renew leases or re-lease available space in our proprieties on favorable terms or at all, including as a result of a general decrease in demand for our office and retail space, deterioration in the economic and market conditions in the markets in which we own properties or due to restrictions intended to prevent the spread of COVID-19 that frustrate our leasing activities;
a severe and prolonged disruption and instability in the global financial markets, including the debt and equity capital markets, all of which have already experienced and may continue to experience significant volatility, or deteriorations in credit and financing conditions, may affect our or our tenants’ ability to access capital necessary to fund our respective business operations or replace or renew maturing liabilities on a timely basis, on attractive terms or at all and may adversely affect the valuation of financial assets and liabilities, any ofCalifornia, which could affect our and our tenants’ ability to meet liquidity and capital expenditure requirements;
a refusal or failure of one or more lenders under our revolving credit facility to fund their respective financing commitments to us mayadversely affect our ability to access capital necessaryacquire, develop or redevelop properties or to fundachieve expected performance and amplify our business operations andexposure to meet our liquidity and capital expenditure requirements;
the ability of potential buyers of properties identified for potential future capital recycling transactions to obtain debt financing, which has been and may continue to be constrained for some potential buyers;
a reduction in the values of our properties that could result in impairments or limit our ability to dispose of them at attractive prices or obtain debt financing secured by our properties;
complete or partial shutdowns of one or more of our tenants’ manufacturing facilities or distribution centers, temporary or long-term disruptions in our tenants’ supply chains from local, national and international suppliers or delays in the delivery of products, services or other materials necessary for our tenants’ operations, which could force our tenants to reduce, delay or eliminate offerings of their products and services, reduce or eliminate their revenues and liquidity and/or result in their bankruptcy or insolvency;
our ability to avoid delays or cost increases associated with building materials or construction services necessary for construction that could adversely impact our ability to continue or complete construction as planned, on budget or at all;
our and our tenants’ ability to manage our respective businesses to the extent our and their management or personnel are impacted in significant numbers by the COVID-19 pandemic and are not willing, available or allowed to conduct work; and
our and our tenants’ ability to ensure business continuity in the event our continuity of operations plan is not effective or improperly implemented or deployed during the COVID-19 pandemic.
The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic or restrictions intended to prevent its spread. Nevertheless, the ongoing COVID-19 pandemic, and restrictions intended to prevent its spread, and the current financial, economic and capital markets environment and future developments in these and other areas present material risks and uncertainties with respect to our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders and could also have a material adverse effect on the market value of our securities. Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks set forth in this “Risk Factors” section and beginning on page 15 of the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019.noted above.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Recent Sales of Unregistered Securities: None.
(b) Use of Proceeds from Registered Securities: None.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers: None.
The table below reflects our purchases of common stock during each of the three months in the three-month period ended
September 30, 2020.
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| | | | | | | | | | | | | |
Period | | Total Number of Shares of Stock Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) that May Yet be Purchased Under the Plans or Programs |
July 1. 2020 - July 31, 2020 | | 58,795 |
| | $ | 56.77 |
| | — |
| | — |
|
August 1, 2020 - August 31, 2020 | | 274 |
| | 57.02 |
| | — |
| | — |
|
September 1, 2020 - September 30, 2020 | | — |
| | — |
| | — |
| | — |
|
Total | | 59,069 |
| | $ | 56.77 |
| | — |
| | — |
|
_______________
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(1) | Includes shares of common stock remitted to the Company to satisfy tax withholding obligations in connection with the distribution of, or the vesting and distribution of, restricted stock units or restricted stock in shares of common stock. The value of such shares of common stock remitted to the Company was based on the closing price of the Company’s common stock on the applicable withholding date. |
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ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4.MINE SAFETY DISCLOSURES
None.
ITEM 5.OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| | | | | | | | |
ITEM 6.Exhibit Number | EXHIBITS |
Description | | | | Exhibit
Number
| | Description | | | | 3.(i)1 | | | | | | 3.(i)2 | | | | | | 3.(i)3 | | | | | | 3.(i)4 | | | | | | 3.(i)5 | | | | | | 3.(ii)1 | | | | | | 3.(ii)2 | | | | | | 31.1*10.1 | | | | | | 10.2 | | | | | | 31.1* | | | | | | 31.2* | | | | | | 31.3* | | | | | | 31.4* | | | | | | 32.1* | | | | | | 32.2* | | | | | | 32.3* | | | | | | 32.4* | | | | | | 101.1 | | The following Kilroy Realty Corporation and Kilroy Realty, L.P. financial information for the quarter ended SeptemberJune 30, 2020,2021, formatted in inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Equity (unaudited), (iv) Consolidated Statements of Capital (unaudited), (v) Consolidated Statements of Cash Flows (unaudited) and (vi) Notes to the Consolidated Financial Statements (unaudited).(1) | | | | 104.1* | | Cover Page Interactive Data File - The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
_______________ | | | | | | * | Filed herewith. | † | Management contract or compensatory plan or arrangement. | (1) | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.
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65
SIGNATURES Pursuant to the requirements 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 OctoberJuly 29, 2020. | | | | | | | | | KILROY REALTY CORPORATION | | | | KILROY REALTY CORPORATION | | By: | | | By: | /s/ John Kilroy | | | John Kilroy President and Chief Executive Officer
(Principal Executive Officer)
| | | | | By: | /s/ Tyler H. RoseMichelle Ngo | | | Tyler H. Rose
ExecutiveMichelle Ngo Senior Vice President, and Chief Financial Officer
and Treasurer (Principal Financial Officer) | | | | | By: | /s/ Merryl E. Werber | | | Merryl E. Werber Senior Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)
|
SIGNATURES Pursuant to the requirements 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 OctoberJuly 29, 2020. | | | | | | | | | KILROY REALTY, L.P. | | | BY: | KILROY REALTY CORPORATION | | Its general partner | | | | KILROY REALTY, L.P. | | | BY:By: | KILROY REALTY CORPORATION | | Its general partner | | | | | By: | /s/ John Kilroy | | | John Kilroy President and Chief Executive Officer
(Principal Executive Officer)
| | | | | By: | /s/ Tyler H. RoseMichelle Ngo | | | Tyler H. Rose
ExecutiveMichelle Ngo Senior Vice President, and Chief Financial Officer
and Treasurer (Principal Financial Officer) | | | | | By: | /s/ Merryl E. Werber | | | Merryl E. Werber Senior Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)
|
|