Secured and Unsecured Debt of the Operating Partnership (Kilroy Realty, L.P. [Member]) | 9 Months Ended |
Sep. 30, 2014 |
Kilroy Realty, L.P. [Member] | ' |
Debt Instrument [Line Items] | ' |
Secured and Unsecured Debt of the Operating Partnership | ' |
Secured and Unsecured Debt of the Operating Partnership |
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Secured Debt |
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The following table sets forth the composition of our secured debt as of September 30, 2014 and December 31, 2013: |
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Type of Debt | Annual Stated Interest Rate (1) | | GAAP | | Maturity Date | | September 30, 2014 (3) | | December 31, 2013 (3) | | |
Effective Rate (1)(2) | | |
| | | | | | | (in thousands) | | |
Mortgage note payable | 4.27% | | 4.27% | | Feb-18 | | $ | 131,363 | | | $ | 133,117 | | | |
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Mortgage note payable (4) | 4.48% | | 4.48% | | Jul-27 | | 97,000 | | | 97,000 | | | |
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Mortgage note payable (4) | 6.05% | | 3.50% | | Jun-19 | | 90,065 | | | 92,502 | | | |
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Mortgage note payable | 6.51% | | 6.51% | | Feb-17 | | 66,907 | | | 67,663 | | | |
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Mortgage note payable (4) | 5.23% | | 3.50% | | Jan-16 | | 53,243 | | | 54,570 | | | |
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Mortgage note payable (4) | 5.57% | | 3.25% | | Feb-16 | | 40,611 | | | 41,654 | | | |
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Mortgage note payable (4) | 5.09% | | 3.50% | | Aug-15 | | 34,446 | | | 34,845 | | | |
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Mortgage note payable (4) | 4.94% | | 4.00% | | Apr-15 | | 26,629 | | | 27,641 | | | |
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Mortgage note payable | 7.15% | | 7.15% | | May-17 | | 7,185 | | | 8,972 | | | |
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Other | Various | | Various | | Various | | 2,447 | | | 2,470 | | | |
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Total | | | | | | | $ | 549,896 | | | $ | 560,434 | | | |
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______________ |
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-1 | All interest rates presented are fixed-rate interest rates. | | | | | | | | | | | | | | |
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-2 | This represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the amortization of discounts/premiums, excluding debt issuance costs. | | | | | | | | | | | | | | |
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-3 | Amounts reported include the amounts of unamortized debt premiums and discounts for the periods presented. | | | | | | | | | | | | | | |
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-4 | The secured debt and the related properties that secure the debt are held in a special purpose entity and the properties are not available to satisfy the debts and other obligations of the Company or the Operating Partnership. | | | | | | | | | | | | | | |
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Although our mortgage loans are secured and non-recourse to the Company and the Operating Partnership, the Company provides limited customary secured debt guarantees for items such as voluntary bankruptcy, fraud, misapplication of payments and environmental liabilities. |
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4.25% Exchangeable Senior Notes |
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The table below summarizes the balance and significant terms of the Company’s 4.25% Exchangeable Notes due November 2014 (the “4.25% Exchangeable Notes”) outstanding as of September 30, 2014 and December 31, 2013. |
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| 4.25% Exchangeable Notes | | | | | | | | |
| September 30, | | December 31, | | | | | | | | |
2014 | 2013 | | | | | | | | |
| (in thousands) | | | | | | | | |
Principal amount | $ | 135,481 | | | $ | 172,500 | | | | | | | | | |
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Unamortized discount | (432 | ) | | (4,128 | ) | | | | | | | | |
Net carrying amount of liability component | $ | 135,049 | | | $ | 168,372 | | | | | | | | | |
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Carrying amount of equity component (1) | $15,578 | | $19,835 | | | | | | | | |
Issuance date | Nov-09 | | | | | | | | |
Maturity date | Nov-14 | | | | | | | | |
Stated coupon rate (2) | 4.25% | | | | | | | | |
Effective interest rate (3) | 7.13% | | | | | | | | |
Exchange rate per $1,000 principal value of the 4.25% Exchangeable Notes, as adjusted (3) | 27.8307 | | | | | | | | |
Exchange price, as adjusted (4) | $35.93 | | | | | | | | |
Number of shares on which the aggregate consideration to be delivered on conversion is determined (4) | 3,770,531 | | 4,800,796 | | | | | | | | |
_______________ |
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-1 | The $15.6 million carrying amount of the equity component at September 30, 2014 represents the proportionate amount of the initial $19.8 million carrying value of the equity component allocated to the remaining $135.5 million outstanding principal balance of the 4.25% Exchangeable Notes at September 30, 2014. | | | | | | | | | | | | | | |
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-2 | Interest on the 4.25% Exchangeable Notes is payable semi-annually in arrears on May 15th and November 15th of each year. | | | | | | | | | | | | | | |
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-3 | The rate at which we record interest expense for financial reporting purposes, which reflects the amortization of the discounts on the 4.25% Exchangeable Notes. This rate represents our conventional debt borrowing rate at the date of issuance. | | | | | | | | | | | | | | |
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-4 | The exchange rate, exchange price and the number of shares to be delivered upon conversion are subject to adjustment under certain circumstances including increases in our common dividends. | | | | | | | | | | | | | | |
During the nine months ended September 30, 2014, the Company settled early exchanges of the 4.25% Exchangeable Notes with an aggregate principal amount of $37.0 million. For these exchanges, the number of shares issued in excess of the exchange value was calculated on a proportionate basis for each day of a 30 trading-day observation following the exchange date. For the exchange settlements, the Company paid the noteholders a total of $37.0 million in cash for the principal amount and issued to the noteholders a total of 431,270 shares of our common stock for the excess exchange value. As a result of the exchanges, the Company exercised the equivalent proportionate amount of its capped call options and, and in connection received 111,206 shares of our common stock from the counterparties. This reduced the shares of common stock issued in connection with the exchanges to 320,064 shares. |
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Upon exchange of the balance of the 4.25% Exchangeable Notes at maturity, the holders will receive (i) cash up to the principal amount of the 4.25% Exchangeable Notes and (ii) to the extent the exchange value exceeds the principal amount of the 4.25% Exchangeable Notes, shares of the Company’s common stock. Any shares of common stock delivered for settlement will be based on a daily exchange value calculated on a proportionate basis for each day of a 30 trading-day observation period. |
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The 4.25% Exchangeable Notes are exchangeable for shares of the Company’s common stock prior to maturity only upon the occurrence of certain events. During the three and nine months ended September 30, 2014, the closing sale price per share of the common stock of the Company was more than 130% of the exchange price per share of the Company’s common stock for at least 20 trading days in the specified period. As a result, for the three month period ended September 30, 2014, the 4.25% Exchangeable Notes were exchangeable at the exchange rate stated above and may be exchangeable thereafter, if one or more of the events were again to occur during future measurement periods. |
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In connection with the offering of the 4.25% Exchangeable Notes, we entered into capped call option transactions (“capped calls”) to mitigate the dilutive impact of the potential exchange of the 4.25% Exchangeable Notes. The capped calls, as amended, are separate transactions entered into by us with the relevant financial institutions, are not part of the terms of the 4.25% Exchangeable Notes, and do not affect the holders’ rights under the 4.25% Exchangeable Notes. The strike prices of the capped calls, which are subject to customary anti-dilution adjustments, correspond to the exchange prices of the applicable 4.25% Exchangeable Notes. The table below summarizes our capped call option positions for the 4.25% Exchangeable Notes as of September 30, 2014 and December 31, 2013. |
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| 4.25% Exchangeable Notes | | | | | | | | |
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| September 30, 2014 | | December 31, 2013 | | | | | | | | |
Referenced shares of common stock (1) | 3,770,531 | | | 4,800,796 | | | | | | | | | |
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Exchange price, including effect of capped calls | $ | 42.81 | | | $ | 42.81 | | | | | | | | | |
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________________________ |
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-1 | The referenced shares of common stock decreased during the nine months ended September 30, 2014 as a result of the settled exchanges of the 4.25% Exchangeable Notes totaling $37.0 million. | | | | | | | | | | | | | | |
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The capped calls are expected to terminate upon the earlier of the maturity date of the 4.25% Exchangeable Notes or upon the date upon which the 4.25% Exchangeable Notes are no longer outstanding resulting from an exchange or repurchase by us. The initial cost of the capped calls were recorded as a reduction to additional paid-in capital. |
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For the three and nine months ended September 30, 2014 and 2013, the per share average trading price of the Company’s common stock on the NYSE was higher than the $35.93 exchange price for the 4.25% Exchangeable Notes, as presented below: |
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| Three Months Ended September 30, | | Nine Months Ended September 30, | | | | | | | | |
| 2014 | | 2013 | | 2014 | | 2013 | | | | | | | | |
Per share average trading price of the Company’s common stock | $62.06 | | $51.57 | | $59.27 | | $52.42 | | | | | | | | |
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The 4.25% Exchangeable Notes were exchangeable as of September 30, 2014 and September 30, 2013. If the 4.25% Exchangeable Notes outstanding as of those dates were exchanged, the approximate fair value of the shares upon exchange at September 30, 2014 and 2013, using the per share average trading price presented in the table above, would have been as follows: |
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (in thousands) |
Approximate fair value of shares upon exchange | $ | 229,840 | | | $ | 245,200 | | | $ | 223,732 | | | $ | 248,000 | |
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Principal amount of the 4.25% Exchangeable Notes | 135,481 | | | 172,500 | | | 135,481 | | | 172,500 | |
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Approximate fair value in excess amount of principal amount | $ | 94,359 | | | $ | 72,700 | | | $ | 88,251 | | | $ | 75,500 | |
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See Notes 14 and 15 for a discussion of the impact of the 4.25% Exchangeable Notes on our diluted earnings per share and unit calculations for the periods presented. |
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Interest Expense for the 4.25% Exchangeable Notes |
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The unamortized discount on the 4.25% Exchangeable Notes is accreted as additional interest expense from the date of issuance through the maturity date of the applicable Exchangeable Notes. The following table summarizes the total interest expense attributable to the 4.25% Exchangeable Notes based on the respective effective interest rates, before the effect of capitalized interest, for the three and nine months September 30, 2014 and 2013: |
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (in thousands) |
Contractual interest payments | $ | 1,439 | | | $ | 1,833 | | | $ | 4,908 | | | $ | 5,498 | |
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Amortization of discount | 1,004 | | | 1,116 | | | 3,337 | | | 3,291 | |
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Interest expense attributable to the 4.25% Exchangeable Notes | $ | 2,443 | | | $ | 2,949 | | | $ | 8,245 | | | $ | 8,789 | |
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Unsecured Senior Notes |
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In July 2014, the Operating Partnership issued $400.0 million aggregate principal amount of unsecured senior notes in a registered public offering. The outstanding balance of the unsecured senior notes is included in unsecured debt, net of the initial issuance discount of $4.4 million, on our consolidated balance sheets. The unsecured senior notes, which are scheduled to mature on August 15, 2029, require semi-annual interest payments each February and August based on a stated annual interest rate of 4.250%. The Company used a portion of the net proceeds for general corporate purposes, including the repayment of borrowings under the Operating Partnership’s revolving credit facility. |
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The following table summarizes the balance and significant terms of the registered unsecured senior notes issued by the Operating Partnership as of September 30, 2014 and December 31, 2013: |
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| | | | | | | | | Principal Amount as of |
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| Issuance date | | Maturity date | | Stated | | Effective interest rate (1) | | September 30, | | December 31, |
coupon rate | 2014 | 2013 |
| | | | | | | | | (in thousands) |
4.250% Unsecured Senior Notes (2) | Jul-14 | | Aug-29 | | 4.25% | | 4.35% | | $ | 400,000 | | | $ | — | |
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Unamortized discount | | | | | | | | | (4,422 | ) | | — | |
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Net carrying amount | | | | | | | | | $ | 395,578 | | | $ | — | |
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3.800% Unsecured Senior Notes (3) | Jan-13 | | Jan-23 | | 3.80% | | 3.80% | | $ | 300,000 | | | $ | 300,000 | |
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Unamortized discount | | | | | | | | | (82 | ) | | (90 | ) |
Net carrying amount | | | | | | | | | $ | 299,918 | | | $ | 299,910 | |
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4.800% Unsecured Senior Notes (4) | Jul-11 | | Jul-18 | | 4.80% | | 4.83% | | $ | 325,000 | | | $ | 325,000 | |
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Unamortized discount | | | | | | | | | (283 | ) | | (339 | ) |
Net carrying amount | | | | | | | | | $ | 324,717 | | | $ | 324,661 | |
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6.625% Unsecured Senior Notes (5) | May-10 | | Jun-20 | | 6.63% | | 6.74% | | $ | 250,000 | | | $ | 250,000 | |
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Unamortized discount | | | | | | | | | (1,207 | ) | | (1,367 | ) |
Net carrying amount | | | | | | | | | $ | 248,793 | | | $ | 248,633 | |
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5.000% Unsecured Senior Notes (6) | Nov-10 | | Nov-15 | | 5.00% | | 5.01% | | $ | 325,000 | | | $ | 325,000 | |
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Unamortized discount | | | | | | | | | (44 | ) | | (73 | ) |
Net carrying amount | | | | | | | | | $ | 324,956 | | | $ | 324,927 | |
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________________________ |
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-1 | This represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the amortization of initial issuance discounts, excluding debt issuance costs. | | | | | | | | | | | | | | |
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-2 | Interest on the 4.250% unsecured senior notes is payable semi-annually in arrears on February 15th and August 15th of each year. | | | | | | | | | | | | | | |
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-3 | Interest on the 3.800% unsecured senior notes is payable semi-annually in arrears on January 15th and July 15th of each year. | | | | | | | | | | | | | | |
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-4 | Interest on the 4.800% unsecured senior notes is payable semi-annually in arrears on January 15th and July 15th of each year. | | | | | | | | | | | | | | |
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-5 | Interest on the 6.625% unsecured senior notes is payable semi-annually in arrears on June 1st and December 1st of each year. | | | | | | | | | | | | | | |
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-6 | Interest on the 5.000% unsecured senior notes is payable semi-annually in arrears on May 3rd and November 3rd of each year. | | | | | | | | | | | | | | |
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In addition to the registered unsecured senior notes listed above, we also had outstanding Series B unsecured senior notes with an aggregate principal balance of $83.0 million and effective interest rate of 6.45% as of December 31, 2013. We repaid the notes upon maturity in August 2014. |
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Unsecured Revolving Credit Facility and Term Loan Facility |
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In the second quarter of 2014, the Company amended the terms of our unsecured revolving credit facility and the Company’s $150.0 million term loan facility. The amendment increased the size of the Company’s unsecured line of credit to $600.0 million, extended the maturity to July 2019 on both the credit facility and term loan facility, reduced the annual interest rate on the unsecured revolving credit facility to LIBOR plus 1.250% and reduced the annual interest rate on the term loan facility to LIBOR plus 1.400%. The amendment did not affect the outstanding borrowings under the credit facility. |
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The following table summarizes the balance and terms of our unsecured revolving credit facility as of September 30, 2014 and December 31, 2013: |
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| September 30, 2014 | | December 31, 2013 | | | | | | | | |
| (in thousands) | | | | | | | | |
Outstanding borrowings | $ | — | | | $ | 45,000 | | | | | | | | | |
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Remaining borrowing capacity | 600,000 | | | 455,000 | | | | | | | | | |
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Total borrowing capacity (1) | $ | 600,000 | | | $ | 500,000 | | | | | | | | | |
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Interest rate (2)(3) | — | % | | 1.62 | % | | | | | | | | |
Facility fee-annual rate (4) | 0.25% | | 0.30% | | | | | | | | |
Maturity date | Jul-19 | | Apr-17 | | | | | | | | |
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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 $300.0 million under an accordion feature under the terms of the unsecured revolving credit facility and term loan facility. | | | | | | | | | | | | | | |
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-2 | Our revolving credit facility interest rate was calculated based on an annual rate of LIBOR plus 1.250% as of September 30, 2014. | | | | | | | | | | | | | | |
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-3 | Our revolving credit facility interest rate was calculated based on an annual rate of LIBOR plus 1.450% as of December 31, 2013. | | | | | | | | | | | | | | |
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-4 | 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, 2014, $6.2 million of deferred financing costs remains to be amortized through the amended maturity date of our unsecured revolving credit facility. | | | | | | | | | | | | | | |
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The Company intends to borrow amounts under the unsecured revolving credit facility from time to time for general corporate purposes, to fund potential acquisitions, to finance development and redevelopment expenditures and to potentially repay long-term debt. |
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The following table summarizes the balance and terms of our term loan facility as of September 30, 2014 and December 31, 2013: |
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| September 30, 2014 | | December 31, 2013 | | | | | | | | |
| (in thousands) | | | | | | | | |
Outstanding borrowings | $ | 150,000 | | | $ | 150,000 | | | | | | | | | |
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Interest rate | 1.4 | % | | 1.75 | % | | | | | | | | |
Maturity date | Jul-19 | | | Mar-16 | | | | | | | | | |
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Debt Covenants and Restrictions |
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The revolving credit facility, the term loan facility, the unsecured senior notes, and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Some of the more restrictive financial covenants include a maximum ratio of total debt to total asset value, a minimum fixed-charge coverage ratio, a minimum unsecured debt ratio and a minimum unencumbered asset pool debt service coverage ratio. Noncompliance with one or more of the covenants and restrictions could result in the full principal balance of the associated debt becoming immediately due and payable. We believe we were in compliance with all of our debt covenants as of September 30, 2014. |
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Debt Maturities |
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The following table summarizes the stated debt maturities and scheduled amortization payments, excluding debt discounts and premiums, as of September 30, 2014: |
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Year | (in thousands) | | | | | | | | | | | | |
Remaining 2014 | $ | 138,009 | | | | | | | | | | | | | |
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2015 | 395,104 | | | | | | | | | | | | | |
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2016 | 99,431 | | | | | | | | | | | | | |
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2017 | 71,748 | | | | | | | | | | | | | |
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2018 | 451,728 | | | | | | | | | | | | | |
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Thereafter | 1,268,013 | | | | | | | | | | | | | |
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Total (1) | $ | 2,424,033 | | | | | | | | | | | | | |
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________________________ |
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-1 | Includes gross principal balance of outstanding debt before impact of net unamortized premiums totaling approximately $4.9 million. | | | | | | | | | | | | | | |
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Capitalized Interest and Loan Fees |
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The following table sets forth gross interest expense reported in continuing operations, including debt discount/premium and loan cost amortization, net of capitalized interest, for the three and nine months ended September 30, 2014 and 2013. The interest expense capitalized was recorded as a cost of development and redevelopment, and increased the carrying value of undeveloped land and construction in progress. |
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (in thousands) |
Gross interest expense | $ | 29,936 | | | $ | 27,942 | | | $ | 85,740 | | | $ | 83,322 | |
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Capitalized interest and loan fees | (13,328 | ) | | (9,089 | ) | | (35,860 | ) | | (25,301 | ) |
Interest expense | $ | 16,608 | | | $ | 18,853 | | | $ | 49,880 | | | $ | 58,021 | |
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