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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12675
KILROY REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 95-4598246
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
2250 EAST IMPERIAL HIGHWAY, SUITE 1200, EL SEGUNDO, CALIFORNIA 90245
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
----------------
(310) 563-5500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of November 13, 1997, 24,475,000 shares of common stock, par value $.01
per share, were outstanding.
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TABLE OF CONTENTS
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated balance sheet of Kilroy Realty Corporation as of
September 30, 1997 (Unaudited) and Combined Balance Sheet of
the Kilroy Group (predecessor to Kilroy Realty Corporation) as
of December 31, 1996........................................... 3
Consolidated Statement of Operations of Kilroy Realty
Corporation for the period February 1, 1997 to September 30,
1997 and the Combined Statements of Operations of the Kilroy
Group for the period January 1, 1997 to January 31, 1997 and
the nine months ended September 30, 1996 (Unaudited)........... 4
Consolidated Statement of Operations of Kilroy Realty
Corporation for the three months ended September 30, 1997 and
the Combined Statement of Operations of the Kilroy Group for
the three months ended September 30, 1996 (Unaudited).......... 5
Consolidated Statement of Cash Flows of Kilroy Realty
Corporation for the nine months ended September 30, 1997 and
the Combined Statement of Cash Flows of the Kilroy Group for
the nine months ended September 30, 1996 (Unaudited)........... 6
Notes to the Kilroy Realty Corporation Consolidated and Kilroy
Group Combined financial statements............................ 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 14
PART II--OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.............................................. 20
Item 2. CHANGES IN SECURITIES.......................................... 20
Item 3. DEFAULTS UPON SENIOR SECURITIES................................ 20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 20
Item 5. OTHER INFORMATION.............................................. 20
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 20
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KILROY REALTY CORPORATION (THE "COMPANY") AND
KILROY GROUP (PREDECESSOR TO THE COMPANY)
CONSOLIDATED BALANCE SHEET OF THE COMPANY AND
COMBINED BALANCE SHEET OF THE KILROY GROUP
(IN THOUSANDS, EXCEPT SHARE DATA)
KILROY REALTY
CORPORATION KILROY GROUP
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
ASSETS
RENTAL PROPERTIES (Notes 1, 2, 3 and 5):
Land.............................................. $ 124,276 $ 12,490
Buildings and improvements........................ 462,902 214,847
--------- ---------
Total rental properties......................... 587,178 227,337
Accumulated depreciation and amortization......... (117,552) (109,668)
--------- ---------
Rental properties, net.......................... 469,626 117,669
CASH AND CASH EQUIVALENTS........................... 74,890
RESTRICTED CASH..................................... 4,634
TENANT RECEIVABLES, NET............................. 3,764 3,042
INVESTMENT IN SUBSIDIARY............................ 267
ESCROW DEPOSITS..................................... 1,179
DEFERRED CHARGES AND OTHER ASSETS, NET (Note 4)..... 18,184 7,628
--------- ---------
TOTAL............................................. $ 572,544 $ 128,339
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Mortgage debt (Note 5)............................ $ 104,054 $ 223,297
Accounts payable and accrued expenses............. 9,794 7,614
Accrued dividends (Note 8)........................ 10,576
Accrued cost of option buy-out and tenant
improvement (Note 2)............................. 1,390
Rents received in advance and tenant security
deposits......................................... 10,902 9,815
--------- ---------
Total liabilities............................... 135,326 242,116
COMMITMENTS AND CONTINGENCIES (Note 6)..............
MINORITY INTEREST................................... 45,120
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 30,000,000 shares
authorized: none issued and outstanding..........
Common stock, $.01 par value, 150,000,000 shares
authorized: 24,475,000 shares issued and
outstanding ..................................... 245
Additional paid-in capital........................ 397,445
Distributions in excess of earnings/(deficit)..... (5,592) (113,777)
--------- ---------
Total stockholders' equity/(accumulated
deficit)....................................... 392,098 (113,777)
--------- ---------
TOTAL............................................. $ 572,544 $ 128,339
========= =========
See accompanying notes to consolidated and combined financial statements.
3
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
KILROY KILROY
KILROY GROUP GROUP
REALTY CORPORATION JANUARY 1, NINE MONTHS
FEBRUARY 1, 1997 TO ENDED
1997 TO JANUARY 31, SEPTEMBER 30,
SEPTEMBER 30, 1997 1997 1996
------------------ ----------- -------------
REVENUES:
Rental income................... $ 35,878 $2,760 $26,473
Tenant reimbursements........... 3,441 275 2,583
Interest income................. 2,875
Development services............ 14 580
Other income.................... 454 4 65
---------- ------ -------
Total revenues................ 42,648 3,053 29,701
---------- ------ -------
EXPENSES:
Property expenses............... 5,999 579 5,042
Real estate taxes............... 1,925 106 970
General and administrative...... 3,652 78 1,607
Ground lease.................... 670 64 579
Development expense............. 46 584
Option buy-out cost............. 3,150
Interest expense................ 6,714 1,895 16,234
Depreciation and amortization... 8,404 787 6,838
---------- ------ -------
Total expenses................ 27,364 3,555 35,004
---------- ------ -------
INCOME (LOSS) BEFORE EQUITY IN
INCOME OF SUBSIDIARY, MINORITY
INTEREST AND EXTRAORDINARY
GAINS............................ 15,284 (502) (5,303)
EQUITY IN INCOME OF UNCONSOLIDATED
SUBSIDIARY....................... 187
MINORITY INTEREST................. (2,231)
---------- ------ -------
INCOME (LOSS) BEFORE EXTRAORDINARY
GAINS............................ 13,240 (502) (5,303)
EXTRAORDINARY GAINS............... 3,204 20,095
---------- ------ -------
NET INCOME........................ $ 13,240 $2,702 $14,792
========== ====== =======
Net income per common share....... $ .82
==========
Weighted average shares
outstanding...................... 16,162,243
==========
See accompanying notes to consolidated and combined financial statements.
4
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
KILROY REALTY
CORPORATION KILROY GROUP
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
REVENUES:
Rental income................................... $ 16,418 $ 8,879
Tenant reimbursements........................... 1,631 793
Interest income................................. 900
Development services............................ 122
Other income.................................... 158 54
---------- -------
Total revenues................................ 19,107 9,848
---------- -------
EXPENSES:
Property expenses............................... 2,724 1,757
Real estate taxes............................... 998 337
General and administrative...................... 1,477 543
Ground lease.................................... 206 189
Development expense............................. 193
Sale of air rights.............................. 3,150
Interest expense................................ 2,637 5,508
Depreciation and amortization................... 3,660 2,279
---------- -------
Total expenses................................ 11,702 13,956
---------- -------
INCOME (LOSS) BEFORE EQUITY IN INCOME OF
SUBSIDIARY AND MINORITY INTEREST................. 7,405 (4,108)
EQUITY IN INCOME OF UNCONSOLIDATED SUBSIDIARY..... 52
MINORITY INTEREST................................. (977)
---------- -------
NET INCOME (LOSS)................................. $ 6,480 $(4,108)
========== =======
Net income per common share....................... $ .34
==========
Weighted average shares outstanding............... 18,931,522
==========
See accompanying notes to consolidated and combined financial statements.
5
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 15,942 $ 14,792
Adjustment to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 9,191 6,838
Provision for bad debts............................... 172 920
Extraordinary gain.................................... (3,204) (20,095)
Minority interest in earnings......................... 2,231
Equity in income of unconsolidated subsidiary......... 187
Changes in assets and liabilities:
Tenant receivables.................................. (894) (310)
Deferred charges and other assets................... (9,157) 929
Accounts payable and accrued expenses............... 2,180 1,149
Accrued cost of option buy-out and tenant
improvements....................................... (1,390) 3,650
Rents received in advance and tenant security
deposits........................................... 1,087 272
--------- --------
Net cash provided by operating activities......... 16,345 8,145
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for rental properties...................... (349,212) (2,140)
Escrow deposits......................................... (1,179)
Net investment in and advances to unconsolidated
subsidiary............................................. (454)
--------- --------
Net cash used in investing activities............. (350,845) (2,140)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock..................... 543,764
Proceeds received from debt............................. 98,000 21,057
Principal payments on debt.............................. (219,406) (18,256)
Cash paid for loan costs................................ (3,989) (2,617)
Restricted cash......................................... (4,634)
Dividends paid.......................................... (11,125)
Deemed and actual contributions from (distributions to)
partners, net.......................................... 6,780 (6,189)
--------- --------
Net cash provided by (used in) financing
activities....................................... 409,390 (6,005)
--------- --------
Net increase in cash and cash equivalents................. 74,890
Cash and cash equivalents, beginning of period ...........
--------- --------
Cash and cash equivalents, end of period ................. $ 74,890 $ 0
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 10,980 $ 14,289
========= ========
NON-CASH TRANSACTIONS:
Accrual of dividend payable............................. $ 10,576
=========
Issuance of units of Kilroy Realty, L.P. to acquire
properties............................................. $ 3,979
=========
Issuance of note payable to acquire properties.......... $ 6,650
=========
See accompanying notes to consolidated and combined financial statements.
6
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1. ORGANIZATION, FORMATION TRANSACTIONS AND OTHER CAPITAL TRANSACTIONS
Kilroy Realty Corporation (the "Company") was incorporated in Maryland in
September 1996 and is the successor to the operations of the Kilroy Group
("KG"). KG consists of the combination of Kilroy Industries ("KI") and various
entities, the properties of which were under common control of KI and/or its
stockholders, including John B. Kilroy, Sr. and John B. Kilroy, Jr. The
Company's Chairman of the Board of Directors, and President and Chief
Executive Officer are John B. Kilroy, Sr. and John B. Kilroy, Jr.,
respectively. KI has historically provided acquisition, development,
financing, construction and leasing services with respect to the properties
held by KG. KI has also provided development services to third-party owners of
properties for a fee. The accompanying combined financial statements of KG
have been presented on a combined basis because of common ownership and
management and because the entities were the subject of a business combination
in 1997 with the Company.
On January 31, 1997, the Company completed an initial public offering of
12,500,000 shares of its $.01 par value per share, common stock. The offering
price was $23.00 per share resulting in gross proceeds of $287,500,000. On
February 7, 1997, the underwriters exercised their over-allotment option and,
accordingly, the Company issued 1,875,000 additional shares of common stock
and received gross proceeds of $43,125,000. The aggregate proceeds to the
Company, net of underwriters' discount, advisory fee and offering costs were
approximately $302,800,000. The initial public offering, including the
exercise of the over-allotment option in connection therewith, is hereinafter
referred to as the "IPO".
The following transactions occurred simultaneously with the completion of
the IPO (collectively, the "Formation Transactions"):
. The Company consummated various purchase agreements to acquire four
properties for approximately $58,000,000 in cash. The four properties had
aggregate operating revenues of approximately $9,100,000 and net
operating income (before depreciation, amortization and interest) of
approximately $6,300,000 during the year ended December 31, 1996.
. The Company became the sole general partner of Kilroy Realty, L.P. (the
"Operating Partnership"). Upon completion of the IPO, the Company
contributed substantially all of the net proceeds of the Offering in
exchange for an approximate 84.5% interest in the Operating Partnership.
The Company also contributed cash to purchase 100% of Kilroy Realty
Finance, Inc. ("Finance Inc."), which was formed to serve as the general
partner of Kilroy Realty Finance Partnership, L.P. (the "Finance
Partnership"). The Operating Partnership executed various option and
purchase agreements whereby it issued 2,652,374 units in the Operating
Partnership ("Units"), representing an approximate 15.5% partnership
interest, to the continuing investors in exchange for interest in
properties. The continuing investors included John B. Kilroy, Sr. and
John B. Kilroy, Jr., certain family members and certain entities owned by
them. The Operating Partnership contributed certain properties to the
Finance Partnership in exchange for a limited partnership interest
therein. All properties acquired by the Company are held by or through
the Operating Partnership or the Finance Partnership. Unless otherwise
indicated, all references to the Company include the Operating
Partnership, the Finance Partnership and Finance Inc.
. The Finance Partnership and the Operating Partnership borrowed
$84,000,000 and $12,000,000, respectively, under two mortgage loans.
. The Company used a portion of the IPO proceeds and the proceeds of the
new mortgage borrowings of $96,000,000 to repay approximately
$219,000,000 of indebtedness.
7
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
. The Operating Partnership contributed certain assets valued at
approximately $100,000 to Kilroy Services, Inc. for 100% of its non-
voting preferred common stock, representing a 5% ownership interest and a
95% economic interest in Kilroy Services, Inc. The voting common stock is
owned entirely by John B. Kilroy, Sr. and John B. Kilroy, Jr.
In June 1997, the Operating Partnership issued 165,102 limited partnership
units, with an aggregate value of approximately $3,979,000, in connection with
certain property acquisitions (See Note 3).
On August 20, 1997, the Company completed a follow-on public offering (the
"August Offering") of 10,000,000 shares of, $.01 par value per share, common
stock. The offering price was $25.50 per share resulting in gross proceeds of
$255,000,000. The aggregate proceeds to the Company, net of underwriter's
discount, advisory fee and offering costs were approximately $241,000,000. The
proceeds were used to pay outstanding indebtedness and to fund acquisitions.
As a result of the capital transactions referred to above, as of September
30, 1997, the Company owned an 89.7% general partnership interest in the
Operating Partnership. Giving effect to the transaction referenced in Note 8,
as of November 13, 1997, the Company owned an 87.8% general partnership
interest in the Operating Partnership.
The Company is engaged in the acquisition, development, ownership and
operation of office and industrial properties located in California, Washington
and Arizona. As of September 30, 1997, the Company owned 37 office properties
encompassing approximately 3,100,000 rentable square feet and 54 industrial
properties encompassing approximately 3,800,000 rentable square feet.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the consolidated financial
position of the Company, the Operating Partnership and the Finance Partnership
at September 30, 1997 and the results of their operations for the period from
February 1, 1997 to September 30, 1997. Subsequent to the IPO, the operating
results of the service business currently conducted by Kilroy Services, Inc.
are reflected in the accompanying financial statements on the equity method of
accounting. All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
The combined financial statements of KG reflect a combination of real estate
properties, which were under common control of KI and/or its stockholders,
including John B. Kilroy, Sr. and John B. Kilroy, Jr., and which were
contributed to the Operating Partnership for 2,652,374 Units upon consummation
of the IPO. KG is considered the predecessor entity to the Company due to
common ownership and management; therefore, its combined financial statements
are presented for comparative purposes.
The accompanying interim financial statements have been prepared by the
Company's management in accordance with generally accepted accounting
principles and in conjunction with the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, the interim financial
statements presented herein, reflect all adjustments of a normal and recurring
nature which are necessary to fairly state the interim financial statements.
The results of operations for the interim period are not necessarily indicative
of the results that may be expected for the eleven months ended December 31,
1997. These financial statements should be read in conjunction with the
Company's prospectus dated January 28, 1997 and the Kilroy Group's audited
financial statements and the notes thereto included in the Kilroy Group's
Annual Report on Form 10-K for the year ended December 31, 1996.
8
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company intends to qualify as a real estate investment trust ("REIT")
under Section 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code") beginning with the taxable year ending December 31, 1997. As a
REIT, the Company will not generally be subject to corporate Federal income
taxes as long as it satisfies certain technical requirements of the Code
relating to composition of its income and assets, and requirements relating to
distributions of taxable income to shareholders.
SIGNIFICANT ACCOUNTING POLICIES:
Restricted cash--Restricted cash consists of cash held as collateral to
provide credit enhancement for the mortgage loans payable and cash reserves
for capital expenditures and tenant improvements.
Accrued cost of option buy-out and tenant improvements--In September 1996,
KG amended the terms of certain of their lease agreements. Such amendments
included a $500,000 allowance for tenant improvements. In addition, KG agreed
to pay $3,150,000 in consideration for the cancellation of an option to
purchase a 50% equity interest in Kilroy Airport Center at El Segundo, which
was reflected in the statement of operations as of December 31, 1996. In
November 1996, $2,260,000 of the total liability of $3,650,000, was paid by KI
and its stockholders. In January 1997, $100,000 of the amount was paid by KG
and the remaining balance was paid by the Company with the proceeds of the
Offering.
Recent Pronouncements--In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128 Earnings Per Share. This statement establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly
held common stock or potential common stock. This statement simplifies the
standards for computing EPS previously found in APB Opinion No. 15, Earnings
per Share, and makes them comparable to international EPS standards. This
statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company has not yet
determined the impact of adopting this statement.
In June 1997, the FASB issued SFAS No. 130 Reporting for Comprehensive
Income and No. 131, Disclosures about Segments of an Enterprise and Related
Information. These statements are effective for financial statements issued
for periods beginning after December 15, 1997. The Company has not yet
determined the impact of adopting these statements.
9
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY ACQUISITIONS
For the nine months ended September 30, 1997, the Company completed a series
of transactions to acquire 23 office buildings and 42 industrial buildings in
California (excluding the properties acquired through the Formation
Transactions, See Note 1), as follows:
NUMBER OF ACREAGE/ LOCATION OF PURCHASE PRICE
DESCRIPTION BUILDINGS SQUARE FOOTAGE PROPERTY (MILLIONS)
-------------------- --------- --------------- ------------------ --------------
Undeveloped land 15 acres Foothill Ranch, CA $ 3.2
Undeveloped land 10 acres Brea, CA 3.3
------
Total land 6.5
------
Office buildings 5 115,000 sq. ft. Anaheim, CA 8.0
Office building 1 91,000 sq. ft. Calabasas, CA 11.6
Office buildings 2 80,000 sq. ft. Torrance, CA 6.6
Office buildings 3 95,000 sq. ft. Santa Monica, CA 31.4
Office buildings 4 276,000 sq. ft. Camarillo, CA 24.2
Office building 1 67,000 sq. ft. Irvine, CA 9.8
Office buildings 2 125,000 sq. ft. Santa Ana, CA 15.6
Office building 1 31,000 sq. ft. Riverside, CA 4.4
Office building 1 22,000 sq. ft. Riverside, CA 1.8
Office building 1 61,000 sq. ft. Brea, CA 6.4
Office building 1 27,000 sq. ft. Irvine, CA 3.0
Office building 1 44,000 sq. ft. Santa Monica, CA 8.2
Industrial building 1 109,000 sq. ft. Anaheim, CA 5.3
Industrial building 1 158,000 sq. ft. Irvine, CA 12.1
Industrial buildings 7 276,000 sq. ft. Brea, CA 15.1
Industrial building 1 154,000 sq. ft. Ontario, CA 5.4
Industrial buildings 6 276,000 sq. ft. Garden Grove, CA 13.8
Industrial buildings 10 159,000 sq. ft. Irvine, CA 15.0
Industrial buildings 3 165,000 sq. ft. Diamond Bar, CA 8.6
Industrial building 1 83,000 sq. ft. Garden Grove, CA 4.5
Industrial building 1 245,000 sq. ft. Irvine, CA 14.2
Industrial building 1 64,000 sq. ft. Garden Grove, CA 3.0
Industrial buildings 7 482,000 sq. ft. Various 43.2
Industrial building 1 51,000 sq. ft. Costa Mesa, CA 4.2
Industrial building 1 144,000 sq. ft. Anaheim, CA 7.1
Industrial building 1 144,000 sq. ft. Anaheim, CA 8.1
------
Total buildings 290.6
------
Total $297.1
======
These acquisitions were funded with existing working capital and proceeds
from the IPO and the August Offering. In addition, the Company issued a
promissory note in the amount of $6,650,000 in conjunction with the purchase
of one property in Santa Monica, California (see Note 5), and the Operating
Partnership issued 165,102 limited partnership units valued at approximately
$3,979,000 in conjunction with the purchase of one office building and ten
industrial buildings located in Irvine, California (See Note 1).
10
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets are summarized as follows for the Company
at September 30, 1997 and the Kilroy Group at December 31, 1996, respectively:
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(IN THOUSANDS)
Deferred assets:
Deferred financing costs....................... $ 3,989 $ 2,968
Deferred leasing costs......................... 14,641 11,563
------- -------
Total deferred assets.......................... 18,630 14,531
Accumulated amortization......................... (6,664) (7,728)
------- -------
Deferred assets, net............................. 11,966 6,803
Prepaid expenses and other....................... 6,218 825
------- -------
Total deferred charges and other assets, net..... $18,184 $ 7,628
======= =======
5. DEBT
At September 30, 1997, mortgage debt consists of an $83,404,000 mortgage
loan (the "Permanent Loan") secured by certain of the properties, a
$14,000,000 mortgage loan (the "SeaTac Loan") secured by an office complex in
Seattle, Washington and a $6,650,000 promissory note (the "Promissory Note")
secured by an office building in Santa Monica.
The Permanent Loan requires monthly principal and interest payments based on
an interest rate of 8.35%, amortizes over a 25-year period and matures in
2022, but is subject to increases in the effective interest rate beginning in
2005. The SeaTac Loan requires monthly payments of interest based on a
variable rate of LIBOR plus 1.5% (7.2% at September 30, 1997). The SeaTac Loan
matures in January 1998 with an option to extend for six months. The
Promissory Note was repaid on October 31, 1997. As of September 30, 1997 the
loans have a weighted average interest rate of 8.2%.
Scheduled principal payments for the above mortgage loans at September 30,
1997 are as follows:
Year Ending December 31,
1997 (3 months).............................................. $ 6,914
1998......................................................... 15,115
1999......................................................... 1,212
2000......................................................... 1,317
2001......................................................... 1,431
Thereafter................................................. 78,065
--------
Total.................................................... $104,054
========
As of September 30, 1997 the Company maintained a $200,000,000 secured
revolving credit facility (the "Credit Facility") which was increased to
$250,000,000 on October 31, 1997. The Credit Facility matures on May 30, 1999,
with an option to extend for one year, and bears interest based on a variable
rate that ranges from LIBOR plus 1.38% to LIBOR plus 1.5% depending on the
Company's leverage ratios. The Credit Facility is used to finance property
acquisitions and development and for general corporate purposes. As of
September 30, 1997, there are no borrowings outstanding and the Company has
$153,000,000 available under the Credit Facility. Availability under the
Credit Facility is subject to, among other things, the value of the underlying
collateral securing it.
11
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Subsequent to September 30, 1997, the Company assumed $33,600,000 in
mortgage debt in connection with the purchase of certain properties. The debt
is comprised of a $11,700,000 note, a $8,000,000 note and a $13,900,000 note.
The $11,700,000 note bears interest at 8.43% and matures on November 1, 2018.
The $8,000,000 note bears interest at 8.21% and matures on October 1, 2013.
The $13,900,000 note bears interest at 8.45% and matures on December 1, 2005.
Principal and interest are payable monthly on all three notes.
The carrying value of the fixed rate Permanent Loan and the Promissory Note
at September 30, 1997 approximate fair value based on terms currently offered
to the Company. The carrying values of the variable rate SeaTac Loan also
approximates fair value at September 30, 1997.
In January 1997, KG recorded an extraordinary gain of $3,204,000 consisting
of approximately $1,283,000 of unamortized deferred financing fees written off
and a net gain on partial forgiveness of a mortgage obligation of $4,487,000.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company has a noncancelable ground lease obligation on
Kilroy Airport Center Long Beach with an initial lease period expiring on July
17, 2035, classified as an operating lease. Further, the Company has
noncancelable ground lease obligations on the SeaTac Office Center expiring on
December 31, 2032, with an option to extend the leases for an additional 30
years. Rentals are subject to adjustments every five years based on changes in
the Consumer Price Index.
The minimum commitments under these leases as of September 30, 1997 are as
follows (in thousands):
Year Ending December 31,
1997 (3 months)............................................... $ 270
1998.......................................................... 1,099
1999.......................................................... 1,260
2000.......................................................... 1,394
2001.......................................................... 1,394
Thereafter.................................................. 46,004
-------
Total..................................................... $51,421
=======
7. STOCK OPTIONS
The Company has established a stock option and incentive plan for the
purpose of attracting and retaining qualified executives and to reward them
for superior performance in achieving the Company's business goals and
enhancing stockholder value. As of September 30, 1997, 1,100,000 of the
Company's authorized options to purchase shares have been granted to
directors, officers and employees and an additional 300,000 have been reserved
for issuance under such plan. Subsequent to September 30, 1997, 95,000 options
were granted to executives and a newly appointed director of the Company. The
term of each option is ten years from the date of grant. Each option vests 33
1/3% per year over three years beginning on the first anniversary date of the
grant and is exercisable at a price per share equal to the fair market value
on the date of grant.
12
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. SUBSEQUENT EVENTS
Subsequent to September 30, 1997, the Company acquired the following
properties with proceeds from the August Offering, borrowings on the Credit
Facility, the assumption of $33,600,000 of mortgage debt and the issuance of
588,736 Operating Partnership units valued at approximately $15,284,000. Eight
of the properties were acquired from The Allen Group, a San Diego-based real
estate and investment company.
DESCRIPTION ACREAGE/SQUARE FOOTAGE LOCATION OF PROPERTY PURCHASE PRICE (MILLIONS)
----------- ---------------------- -------------------- -------------------------
Office building 141,000 sq. ft San Diego, CA $ 20.4
Office building 93,000 sq. ft San Diego, CA 11.8
Office building 130,000 sq. ft San Diego, CA 12.9
Office building 90,000 sq. ft San Diego, CA 9.6
Industrial building 165,000 sq. ft Stockton, CA 11.3
Industrial building 103,000 sq. ft Las Vegas, NV 4.4
Industrial building 107,000 sq. ft Las Vegas, NV 4.7
Industrial building 78,000 sq. ft. Temecula, CA 4.5
------
Subtotal/Properties acquired
from The Allen Group 79.6
Office building 124,000 sq. ft. Riverside, CA 22.5
Industrial building 100,000 sq. ft. Santa Ana, CA 6.0
Industrial building 291,000 sq. ft. Anaheim, CA 9.5
------
Total $117.6
======
On October 10, 1997 dividends of $10,576,000 were paid to stockholders' and
unitholders' of record on September 30, 1997.
9. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma information for the nine months ended
September 30, 1997 and 1996 are presented as if the Formation Transactions,
August Offering and Acquisitions, as described in Note 1 and Note 3,
respectively, to the financial statements had occurred on January 1, 1996.
Such pro forma information is based upon the historical consolidated financial
statements of the Company and the Kilroy Group and should be read in
conjunction with the consolidated and combined financial statements and the
notes thereto.
This unaudited pro forma condensed consolidated information does not purport
to represent what the actual results of operations of the Company would have
been assuming such Formation Transactions, August Offering and Acquisitions
had been completed as set forth above, nor do they purport to predict the
results of operations for future periods.
PRO FORMA INCOME STATEMENT
(IN THOUSANDS, EXCEPT SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
--------------- ---------------
Total revenues................................ $ 59,084 $ 58,195
=============== ===============
Net income before extraordinary items......... $ 20,811 $ 16,849
=============== ===============
Net income.................................... $ 24,015 $ 16,849
=============== ===============
Income per share of common stock.............. $ 0.98 $ 0.69
=============== ===============
Weighted average number of shares of common
stock outstanding............................ 24,475,000 24,475,000
=============== ===============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to the consolidated financial statements of
Kilroy Realty Corporation (the "Company") and the combined financial
statements of the Company's predecessor, the Kilroy Group, that should be read
in conjunction with the financial statements and related notes thereto
included in the Form 10-K of the Company for the year ended December 31, 1996.
OVERVIEW AND BACKGROUND
The Company owns, operates and develops commercial and industrial real
estate, primarily in Southern California. The Company was formed in January
1997 as a self-administered real estate investment trust (a "REIT") and
succeeded to the Kilroy Group's real estate business. The Kilroy Group, the
Company's predecessor, had been engaged in the acquisition, management,
financing, construction and leasing of commercial and industrial properties.
The combined financial statements of the Kilroy Group comprise the operations,
assets and liabilities of the properties contributed to the Company in
connection with the formation transactions following the initial public
offering on January 31, 1997 (the "IPO") (see Note 1 to the Consolidated
Financial Statements for a discussion of the organization and formation of the
Company). As of September 30, 1997, the Company owned 37 office buildings and
54 industrial buildings that encompassed approximately 3,100,000 and 3,800,000
rentable square feet, respectively, and were 96.0% leased. The Company owns
all of the properties through the Operating Partnership and the Finance
Partnership.
As a result of the formation transactions in the first quarter, acquisitions
during the second and third quarters and the August Offering, the Company's
total assets increased to $572,544,000, including real estate assets of
$469,626,000, net of accumulated depreciation at September 30, 1997. The
market capitalization of the Company based on the market value of the
24,475,000 issued and outstanding shares of the Company's common stock,
2,817,476 Operating Partnership units and the $104,054,000 of debt outstanding
at September 30, 1997 was $840,951,000. The Company's total debt-to-market
capitalization ratio at September 30, 1997 was 12.4%.
Income is derived primarily from rental revenue (including tenant
reimbursements). As a result of the Company's acquisitions in the current
fiscal year, the financial data shows significant increases in total revenues
and expenses from quarter to quarter. For the foregoing reasons, management
does not believe the year to year and quarter to quarter financial data are
comparable.
The Company anticipates that the more significant part of its revenue growth
in the next one to two years will come from additional acquisitions rather
than from occupancy and market rent increases in its current portfolio.
However, the Company notes that if the Southern California office and
industrial rental market continues to improve, then rental rate increases will
become a more substantial part of its revenue growth.
RESULTS OF OPERATIONS
The Company's management believes that in order to provide meaningful
historical analysis of the financial statements, certain adjustments must be
made to the historical Kilroy Group financial statements to make accounting
periods comparable. Accordingly the results of operations for the period
January 1, 1997 to January 31, 1997 have been adjusted to reflect interest
income, general and administrative expenses, interest expense and
extraordinary gains as if the IPO had been consummated on January 1, 1997. The
following sections discuss the results of operations as adjusted.
14
Adjusted Nine Months Ended September 30, 1997 compared to Nine Months Ended
September 30, 1996
NINE MONTHS ENDED
SEPTEMBER 30,
(IN THOUSANDS)
---------------------
1997 1996
------------- -------
(AS ADJUSTED)
REVENUES:
Rental income..................................... $ 38,638 $26,473
Tenant reimbursements............................. 3,716 2,583
Interest income................................... 3,361 --
Development services.............................. 14 580
Other income...................................... 458 65
-------- -------
Total revenues.................................. 46,187 29,701
-------- -------
EXPENSES:
Property expenses................................. 6,578 5,042
Real estate taxes................................. 2,031 970
General and administrative........................ 4,015 1,607
Ground leases..................................... 734 579
Development expense............................... 46 584
Sale of air rights................................ -- 3,150
Interest expense.................................. 7,480 16,234
Depreciation and amortization..................... 9,191 6,838
-------- -------
Total expenses.................................. 30,075 35,004
-------- -------
ADJUSTED INCOME (LOSS) BEFORE MINORITY INTEREST..... $ 16,112 $(5,303)
======== =======
Total revenues increased $16.5 million, or 55.5%, for the nine months ended
September 30, 1997 compared to the same period of 1996. Rental income
increased $12.1 million, or 46.0%, to $38.6 million for the nine months ended
September 30, 1997 compared to $26.5 million in the same period in 1996.
Rental income from office properties increased $8.5 million during the nine
months ended September 30, 1997 from the comparable period in 1996. This
improvement was due to an increase in office space under lease from 1,288,000
square feet at September 30, 1996 to 2,678,000 square feet at September 30,
1997, an increase of 1,390,000 square feet. Approximately 338,000 square feet
reflects four office properties acquired in connection with the IPO and
988,000 rentable square feet represents twenty-three office buildings
purchased during the nine months ended September 30, 1997. The remaining
increase is primarily the result of leasing activity at Kilroy Airport Center
at El Segundo and Kilroy Airport Center, Long Beach. The increase in square
footage under lease was offset by a decrease in average rent per rentable
square foot at Kilroy Airport Center at El Segundo, from $21.69 per square
foot for the nine months ended September 30, 1996 to $19.96 for the same
period in 1997 as a result of the re-negotiation and extension of a lease with
Hughes Space and Communications in November 1996. Rental income also decreased
at the SeaTac Office Center by $0.3 million for the nine months ended
September 30, 1997 compared to the same period in 1996 due to the expiration
of 48,000 rentable square feet on December 31, 1996. During the nine months
ended September 30, 1997, 40,000 square feet of this space was re-leased at a
comparable rate per square foot. Rental income from industrial properties
increased $3.6 million during the nine months ended September 30, 1997
compared to the same period in 1996. This improvement was due to an increase
in industrial space under lease from 832,000 square feet at September 30, 1996
to 3,745,000 square feet at September 30, 1997, an increase of 2,913,000
square feet. The increase was due to the purchase of three industrial
buildings in connection with the IPO with approximately 380,000 square feet
under lease at September 30, 1997, and the purchase of forty-two industrial
buildings during the nine months ended September 30, 1997 with approximately
2,471,000 square feet under lease. The remaining increase was primarily due to
the lease up of 62,000 square feet at 3340 E. La Palma Avenue. Tenant
reimbursements increased to $3.7 million in 1997 from $2.6 million for the
same period in 1996. The $1.1 million increase was primarily due
15
to tenant reimbursements from the office and industrial buildings purchased in
connection with the IPO and during the nine months ended September 30, 1997.
Interest income increased $3.4 million due to interest earned on the $116.2
million of net IPO proceeds remaining after the purchase of the properties and
the repayment of debt in connection with the IPO, and the $146.0 million of
net proceeds from the August Offering remaining after the repayment of
borrowings on the Credit Facility. Other income for the nine months ended
September 30, 1997 includes a $0.1 million gain on the sale of furniture and
equipment, $0.1 million in revenues which were previously written off as
uncollectible, and $0.1 million in property management fees. Development
services are now performed by an unconsolidated subsidiary of the company.
Expenses for the nine months ended September 30, 1997 decreased by $4.9
million, or 14.1%, to $30.1 million compared to $35.0 million for the nine
months ended September 30, 1996. Property expenses and real estate taxes
increased $1.5 million and $1.1 million, respectively, primarily due to the
properties purchased in connection with the IPO and during the nine months
ended September 30, 1997. General and administrative expenses increased $2.4
million, or 150%, for the nine months ended June 30, 1997 compared to the same
period in 1996, due to increased management and administrative costs
associated with the increased portfolio size and the operations of the Company
as a public real estate investment trust. Ground lease expense increased
$0.2 million during the nine months ended September 30, 1997 over the same
period in 1996 primarily as a result of a ground lease on one of the
properties purchased in connection with the IPO. Interest expense decreased
$8.8 million, or 53.9%, to $7.4 million for the nine months ended September
30, 1997 from $16.2 million for the nine months ended September 30, 1996,
primarily as a result of the repayment of $127.4 million in debt in connection
with the IPO.
Net income was $16.1 million for the nine months ended September 30, 1997
compared to a $5.3 million loss for the same period in 1996. The net change of
$21.4 million is due primarily to an increase in rental income of $12.1
million, an increase in interest income of $3.4 million, a decrease of $3.2 in
the sale of air rights and a decrease in interest expense of $8.8 million.
These changes were partially offset by an increase in real estate taxes of
$1.5 million, an increase in general and administrative expenses of $2.4
million and an increase in depreciation and amortization of $2.4 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $250.0 million secured revolving credit facility (the
"Credit Facility"), which bears interest at a rate that ranges from LIBOR plus
1.38% to 1.50% depending on the Company's leverage ratios, and matures in May
1999, subject to a one year option to extend the term. The Credit Facility is
secured by certain properties of the Company and the availability of funds is
subject to, among other things, the value of those properties. Availability
under the Credit Facility was $153.0 million at September 30, 1997. There were
no borrowings outstanding at September 30, 1997.
In addition, the Operating Partnership has debt outstanding as of September
30, 1997 of $104.1 million, comprised of an $83.4 million mortgage loan, a
$14.0 million mortgage loan and a $6.7 million promissory note. The $83.4
million mortgage loan requires monthly principal and interest payments based
on an interest rate of 8.35%, amortizes over 25 years and matures in 2022. In
February 2005, the interest rate resets to the greater of 13.35% or the sum of
the interest rate for U.S. Treasury Securities maturing 15 years from the
reset date plus 5.0%. The $14.0 million mortgage loan requires monthly
payments of interest computed at a variable rate based on LIBOR plus 1.50%.
The $14 million mortgage matures in January 1998. The promissory was repaid on
October 31, 1997.
On August 20, 1997, the Company completed a follow-on public offering of
10,000,000 shares of, $.01 par value per share, common stock. The offering
price was $25.50 per share resulting in gross proceeds of $255.0 million. The
aggregate proceeds to the Company, net of underwriter's discount, advisory fee
and offering costs were approximately $241.0 million. The proceeds were used
to pay outstanding borrowings on the Credit Facility and to fund acquisitions.
Through September 30, 1997, the Company purchased 65 office and industrial
buildings for an aggregate acquisition cost of $291.0 million. The purchase
price for such properties was funded out of net proceeds from the IPO and the
August Offering, from borrowings under the Credit Facility, issuance of a
promissory note and, in part for two properties, the issuance of limited
partnership units in the Operating Partnership.
16
In June 1997, the Company leased approximately 211,000 square feet of office
space at the SeaTac Office Center. In connection with the lease, the Company
agreed to make $3.25 million of tenant improvements which the Company expects
to fund from working capital or borrowings under the Credit Facility. The
Company will pay for the tenant improvements upon completion and anticipates
that the work will be completed by December 31, 1997. The Company also expects
to spend approximately $2.0 million in connection with non-recurring capital
improvements at the SeaTac Office Center and $500,000 of earthquake related
improvements at certain other properties. As of September 30, 1997 the Company
has spent approximately $240,000 on capital improvements at the SeaTac Office
Center and $103,000 on earthquake related improvements.
Subsequent to September 30, 1997, the Company purchased eleven office and
industrial buildings for an aggregate acquisition cost of $117.7 million. The
acquisitions were funded from proceeds from the August Offering and the Credit
Facility. In addition, the Operating Partnership issued 588,736 limited
partnership units valued at approximately $15.3 million and the Company
assumed $33.6 million of mortgage debt in connection with the purchases. The
debt is comprised of a $11.7 million note, a $8.0 million note and a $13.9
million note. The $11.7 million note bears interest at 8.43% and matures on
November 1, 2018. The $8.0 million note bears interest at 8.21% and matures on
October 1, 2013. The $13.9 million note bears interest at 8.45% and matures on
December 1, 2005. Principal and interest are payable monthly on all three
notes.
The Company owns approximately 60 acres of developable property and plans to
develop an aggregate of over 2.0 million rentable square feet of office or
industrial space, subject to required entitlements and other governmental
approvals. Of this amount, the Company has commenced development of
approximately 1.0 million rentable square feet of industrial space in 1997 at
a total budgeted cost of $65.0 million. The Company has also agreed to
purchase a 50% managing interest in 50 acres of land in San Diego County owned
by The Allen Group upon completion of necessary entitlements and
infrastructure. The Company will finance all development with borrowings under
the Credit Facility and working capital.
The Company makes quarterly distributions to stockholders from cash
available for distribution and, if necessary to satisfy distribution
requirements to maintain its status as a REIT, the Company may use borrowings
under its Credit Facility. All such distributions are at the discretion of the
Board of Directors. Amounts accumulated for distribution will be invested
primarily in interest-bearing accounts and short-term interest-bearing
securities, which are consistent with the Company's intention to qualify for
taxation 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.
The Company believes that it will have sufficient capital resources to
satisfy its obligations for the next twelve months. The Company expects to
meet certain of its long-term liquidity requirements, including the repayment
of long-term debt of $83.4 million (less scheduled principal repayments) in
2005, the repayment of debt of $14.0 million in January 1998 and possible
property acquisitions and development, through long-term secured and unsecured
borrowings, including the Credit Facility, and the issuance of debt securities
or additional equity securities of the Company or, possibly in connection with
acquisitions of land or improved properties, the issuance of units of the
Operating Partnership.
HISTORICAL CASH FLOWS
Historically, the Kilroy Group's principal sources of funding for operations
and capital expenditures were cash flow from operating activities and secured
debt financing.
The Company's net cash from operating activities increased $8.2 million,
from $8.1 million in 1996 to $16.3 million in 1997. There was an increase in
income before extraordinary gain of $18.0 million, from a $5.3 million loss in
1996 to income of $12.7 million in 1997. The additional operating cash flow in
1997 was used to pay for deferred charges and other assets of $9.2 million and
accrued option buy out and tenant improvements of $1.4 million.
17
Net cash used in investing activities increased $348.7 million to $350.8
million for the nine months ended September 30, 1997 from $2.1 million for
1996. The increase was due to the purchase of 25 acres of land, 23 office
buildings and 42 industrial buildings for an aggregate purchase price of
$286.4 million (net of $4.0 million paid in units of the Operating Partnership
and $6.7 million of debt issued), seven buildings purchased for $58.0 million
in connection with the IPO and additional tenant improvements and capital
expenditures of $ 4.8 million.
Cash flows provided by financing activities totaled $409.4 million for the
nine months ended September 30, 1997 compared to net cash used in financing
activities of $6.0 million in the 1996 period. The increase is primarily due
to net proceeds from the IPO of $302.8 million, a net repayment of debt of
$121.4 million and net proceeds from the August Offering of $241.0 million in
the 1997 period, compared to net proceeds from debt of $2.8 million in the
1996 period. In addition, there were dividends of $11.1 million and loan costs
and restricted cash of $4.0 million and $4.6 million, respectively, in the
1997 period compared to loan costs of $2.6 million in the 1996 period. In 1997
there was a contribution from partners of $6.8 million, compared to a net
distribution of $6.2 million in 1996.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations, as defined by
NAREIT, an alternative measure of performance for an equity REIT. Funds from
Operations is defined by NAREIT to mean net income (loss) determined in
accordance with GAAP, excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization (other than amortization
of deferred financing costs and depreciation of non-real estate assets), and
after adjustment for unconsolidated partnerships and joint ventures. The
Company believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, Funds from Operations
should be examined in conjunction with net income (loss) as presented in the
financial statements included elsewhere in this report. The Company computes
Funds from Operations in accordance with standards established by the Board of
Governors of NAREIT in its March 1995 White Paper, which may differ from the
methodologies used by other equity REITs and, accordingly, may not be
comparable to that published by such other REITs. Funds from Operations should
not be considered as an alternative to net income (loss), as an indication of
the Company's performance or to cash flows as a measure of liquidity or the
ability to pay dividends or make distributions.
The following table presents the Company's Funds from Operations for the
period from February 1, 1997 to September 30, 1997 and the three months ended
September 30, 1997:
FEBRUARY 1, THREE MONTHS
1997 TO ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1997
------------- -------------
Net income................................... $13,240 $ 6,480
Add
Minority interest........................ 2,231 977
Depreciation and amortization............ 8,404 3,660
Depreciation and amortization on
unconsolidated subsidiary............... 8 3
Other.................................... 307 115
------- -------
Funds from Operations........................ $24,190 $11,235
======= =======
18
The following table presents the Company's Funds Available for Distribution
for the period from February 1, 1997 to September 30, 1997 and the three months
ended September 30, 1997:
FEBRUARY 1, THREE MONTHS
1997 TO ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1997
------------- -------------
Funds from Operations........................ $24,190 $11,235
Adjustments
Amortization of deferred financing
costs................................... 625 404
Tenant improvements, leasing commissions
and recurring capital expenditures...... (806) (274)
Net effect of straight-line rents.......... (289) (214)
------- -------
Funds Available for Distribution............. $23,720 $11,151
======= =======
INFLATION
The majority of the Company's tenant leases require tenants to pay most
operating expenses, including real estate taxes and insurance, and increases in
common area maintenance expenses, which reduce the Company's exposure to
increases in costs and operating expenses resulting from inflation.
19
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the three months ended September 30, 1997, no legal proceedings were
initiated against or on behalf of the Company, the adverse determination of
which would have a material adverse effect upon the financial condition and
results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES--NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NONE
ITEM 5. OTHER INFORMATION--NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
3.1 Articles of Amendment and Restatement of the Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.(1)
3.3 Form of Certificate for Common Stock of the Registrant.(1)
10.1 Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P.(1)
10.2 Form of Registration Rights Agreement among the Registrant and the
persons named therein.(1)
10.3 Omnibus Agreement, dated as of October 30, 1996, by and among Kilroy
Realty, L.P. and the parties named therein.(1)
10.4 Supplemental Representations, Warranties and Indemnity Agreement by
and among Kilroy Realty, L.P. and the parties named therein.(1)
10.5 Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries.(1)
10.6 1997 Stock Option and Incentive Plan of the Registrant and Kilroy
Realty, L.P.(1)
10.7 Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P.
with certain officers and directors.(1)
10.8 Lease Agreement, dated January 24, 1989, by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase I.(1)
10.9 First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase I.(1)
10.10 Lease Agreement, dated July 17, 1985, by and between Kilroy Long Beach
Associates and the City of Long Beach for Kilroy Long Beach Phase
III.(1)
10.11 Lease Agreement, dated April 21, 1988, by and between Kilroy Long
Beach Associates and the Board of Water Commissioners of the City of
Long Beach, acting for and on behalf of the City of Long Beach, for
Long Beach Phase IV.(1)
10.12 Lease Agreement, dated December 30, 1988, by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase II.(1)
20
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
10.13 First Amendment to Lease, dated January 24, 1989, by and between
Kilroy Long Beach Associates and the City of Long Beach for Kilroy
Long Beach Phase III.(1)
10.14 Second Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.(1)
10.15 First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase II.(1)
10.16 Third Amendment to Lease Agreement, dated October 10, 1994, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.(1)
10.17 Development Agreement by and between Kilroy Long Beach Associates and
the City of Long Beach.(1)
10.18 Amendment No. 1 to Development Agreement by and between Kilroy Long
Beach Associates and the City of Long Beach.(1)
10.19 Ground Lease by and between Frederick Boysen and Ted Boysen and Kilroy
Industries, dated May 15, 1969, for SeaTac Office Center.(1)
10.20 Amendment No. 1 to Ground Lease and Grant of Easement, dated April 27,
1973, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.(1)
10.21 Amendment No. 2 to Ground Lease and Grant of Easement, dated May 17,
1977, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.(1)
10.22 Airspace Lease, dated July 10, 1980, by and among the Washington State
Department of Transportation, as lessor, and Sea Tac Properties, Ltd.
and Kilroy Industries, as lessee.(1)
10.23 Lease, dated April 1, 1980, by and among Bow Lake, Inc., as lessor,
and Kilroy Industries and SeaTac Properties, Ltd., as lessees for
Sea/Tac Office Center.(1)
10.24 Amendment No. 1 to Ground Lease, dated September 17, 1990, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.(1)
10.25 Amendment No. 2 to Ground Lease, dated March 21, 1991, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.(1)
10.26 Property Management Agreement between Kilroy Realty Finance
Partnership, L.P. and Kilroy Realty, L.P.(1)
10.27 Form of Environmental Indemnity Agreement.(1)
10.28 Option Agreement by and between Kilroy Realty, L.P. and Kilroy Airport
Imperial Co.(1)
10.29 Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates.(1)
10.30 Employment Agreement between the Registrant and John B. Kilroy, Jr.(1)
10.31 Employment Agreement between the Registrant and Richard E. Moran
Jr.(1)
10.32 Employment Agreement between the Registrant and Jeffrey C. Hawken.(1)
10.33 Employment Agreement between the Registrant and C. Hugh Greenup.(1)
10.34 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Sr.(1)
10.35 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Jr.(1)
10.36 License Agreement by and among the Registrant and the other persons
named therein.(1)
10.37 Form of Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases, Rents
and Security Deposits.(1)
10.38 Form of Mortgage Note.(1)
21
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
10.39 Form of Indemnity Agreement.(1)
10.40 Form of Assignment of Leases, Rents and Security Deposits.(1)
10.41 Form of Credit Agreement.(1)
10.42 Form of Variable Interest Rate Indenture of Mortgage, Deed of Trust,
Security Agreement, Financing Statement, Fixture Filing and Assignment
of Leases and Rents.(1)
10.43 Form of Environmental Indemnity Agreement.(1)
10.44 Form of Assignment, Rents and Security Deposits.(1)
10.45 Revolving Credit Agreement, dated as of May 21, 1997, among Kilroy
Realty, L.P., Morgan Guaranty Trust Company of New York and the Banks
listed herein.(5)
10.46 Form of Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases and Rents.(1)
10.47 Assignment of Leases, Rents and Security Deposits.(1)
10.48 Purchase and Sale Agreement and Joint Escrow Instructions, dated April
30, 1997, by and between Mission Land Company, Mission-Vacaville, L.P.
and Kilroy Realty, L.P.(2)
10.49 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
April 30, 1997, by and between Camarillo Partners and Kilroy Realty,
L.P.(2)
10.50 Purchase and Sale Agreement and Escrow Instructions, dated May 5,
1997, by and between Kilroy Realty, L.P. and Pullman Carnegie
Associates.(4)
10.51 Amendment to Purchase and Sale Agreement and Escrow Instructions,
dated June 27, 1997, by and between Pullman Carnegie Associates and
Kilroy Realty, L.P.(4)
10.52 Purchase and Sale Agreement, Contribution Agreement and Joint Escrow
Instructions, dated May 12, 1997, by and between Shidler West
Acquisition Company, LLC and Kilroy Realty, L.P.(3)
10.53 First Amendment to Purchase and Sale Agreement, Contribution Agreement
and Joint Escrow Instructions, dated June 6, 1997, between Kilroy
Realty, L.P. and Shidler West Acquisition Company, L.L.C.(3)
10.54 Second Amendment to Purchase and Sale Agreement, Contribution
Agreement and Joint Escrow Instructions, dated June 12, 1997, by and
between Shidler West Acquisition Company, LLC and Kilroy Realty,
L.P.(3)
10.55 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
June 12, 1997, by and between Mazda Motor of America, Inc. and Kilroy
Realty, L.P.(4)
10.56 Amendment to Agreement of Purchase and Sale and Joint Escrow
Instructions, dated June 30, 1997, by and between Mazda Motor of
America, Inc. and Kilroy Realty, L.P.(4)
10.57 Agreement for Purchase and Sale of 2100 Colorado Avenue, Santa Monica,
California, dated June 16, 1997, by and between Santa Monica Number
Seven Associates L.P. and Kilroy Realty L.P.(4)
10.58 First Amendment to Credit Agreement dated July 1, 1997.(5)
10.59 Second Amendment to Credit Agreement and First Amendment to Variable
Interest Rate Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of
Leases and Rent dated August 13, 1997.(5)
*10.60 Purchase and Sale Agreement and Joint Escrow Instructions, dated July
10, 1997, by and between Kilroy Realty, L.P. and Mission Square
Partners.
*10.61 First Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1997, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated August 22, 1997.
22
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------
*10.62 Second Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1997, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 5, 1997.
*10.63 Third Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1997, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 19, 1997.
*10.64 Fourth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1997, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 22, 1997.
*10.65 Fifth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1997, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 23, 1997.
*10.66 Sixth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1997, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 25, 1997
*10.67 Seventh Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1997, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 29, 1997.
*10.68 Eighth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1997, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated October 2, 1997.
*10.69 Ninth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1997, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated October 24, 1997.
*27.1 Financial Data Schedule.
- --------
*Filed herewith.
(1) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) as declared effective on January 28, 1997 and incorporated
herein by reference.
(2) Previously filed as Exhibit 10.11 and 10.12, respectively, to the Current
Report on Form 8-K (No. 1-12675) as filed on June 5, 1997 and incorporated
herein by reference.
(3) Previously filed as Exhibit 10.57, 10.58 and 10.59, respectively, to the
Current Report on Form 8-K (No. 1-12675) as filed on July 3, 1997 and
incorporated herein by reference.
(4) Previously filed as Exhibit 10.54, 10.59, 10.60, 10.61 and 10.62,
respectively, to the Current Report on Form 8-K (No. 1-12675) as filed on
July 15, 1997 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-32261) as filed on July 28, 1997, as amended, and incorporated by
reference.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated July 14, 1997 in
connection with the acquisition of six office and one industrial buildings.
The Company filed a Current Report on Form 8-K dated November 13, 1997 in
connection with the acquisition of four office buildings.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on November 14,
1997.
Kilroy Realty Corporation
/s/ John B. Kilroy, Jr.
By: _________________________________
JOHN B. KILROY, JR.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
/s/ Richard E. Moran, Jr.
By: _________________________________
RICHARD E. MORAN JR.
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
/s/ Ann Marie Whitney
By: _________________________________
ANN MARIE WHITNEY
VICE PRESIDENT AND CONTROLLER
24