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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2250 EAST IMPERIAL HIGHWAY, SUITE 1200, EL SEGUNDO, CALIFORNIA 90254
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(310) 563-5500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of August 13, 1998, 27,649,210 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 Sheets of Kilroy Realty Corporation as of
June 30, 1998 (Unaudited) and December 31, 1997................ 3
Consolidated Statements of Operations of Kilroy Realty
Corporation for the six months ended June 30, 1998 and the
period February 1, 1997 to June 30, 1997 and the Combined
Statement of Operations of the Kilroy Group for the period
January 1, 1997 to January 31, 1997 (Unaudited)................ 4
Consolidated Statements of Operations of Kilroy Realty
Corporation for three months ended June 30, 1998 and 1997
(Unaudited).................................................... 5
Consolidated Statements of Cash Flows of Kilroy Realty
Corporation for the six months ended June 30, 1998 and 1997
(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.......................................... 12
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
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
------
INVESTMENT IN REAL ESTATE (Note 2):
Land and improvements............................... $ 242,234 $177,118
Buildings and improvements.......................... 772,809 622,901
Land and construction in progress................... 86,188 34,671
---------- --------
Total investment in real estate................... 1,101,231 834,690
Accumulated depreciation............................ (133,037) (121,780)
---------- --------
Investment in real estate, net.................... 968,194 712,910
CASH AND CASH EQUIVALENTS............................. 7,851 8,929
RESTRICTED CASH....................................... 5,695 5,680
TENANT RECEIVABLES, NET............................... 9,753 7,367
NOTES RECEIVABLE FROM RELATED PARTY (Note 3).......... 2,153
ESCROW DEPOSITS....................................... 2,145 5,114
DEFERRED FINANCING AND LEASING COSTS, NET............. 14,774 13,052
PREPAID EXPENSES AND OTHER ASSETS, NET................ 4,557 4,602
---------- --------
TOTAL ASSETS...................................... $1,015,122 $757,654
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Mortgage debt....................................... $ 134,445 $131,363
Line of credit (Note 4)............................. 223,000 142,000
Accounts payable and accrued expenses............... 10,601 9,711
Accrued distributions (Note 7)...................... 12,815 10,804
Rents received in advance and tenant security
deposits........................................... 13,172 11,441
---------- --------
Total liabilities................................. 394,033 305,319
---------- --------
COMMITMENTS AND CONTINGENCIES (Note 3)................
MINORITY INTERESTS (Note 5):
8.075% Series A cumulative redeemable preferred
unitholders........................................ 74,480
Common unitholders.................................. 68,982 55,185
---------- --------
Total minority interests.......................... 143,462 55,185
---------- --------
STOCKHOLDERS' EQUITY (Note 6):
Preferred stock, $.01 par value, 28,300,000 shares
authorized
None issued and outstanding.......................
8.075% Series A Cumulative Redeemable Preferred
Stock, $.01 par value, 1,700,000 shares authorized,
none issued and outstanding........................
Common stock, $.01 par value, 150,000,000 shares
authorized: 27,649,210 and 24,475,000 shares issued
and outstanding, respectively ..................... 276 245
Additional paid-in capital.......................... 486,976 403,163
Distributions in excess of earnings................. (9,625) (6,258)
---------- --------
Total stockholders' equity........................ 477,627 397,150
---------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,015,122 $757,654
========== ========
See accompanying notes to consolidated and combined financial statements.
3
KILROY REALTY CORPORATION (THE "COMPANY") CONSOLIDATED AND
KILROY GROUP (PREDECESSOR TO THE COMPANY) COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
KILROY REALTY
CORPORATION KILROY
----------------------- GROUP
SIX MONTHS FEBRUARY 1, JANUARY 1,
ENDED 1997 TO 1997 TO
JUNE 30, JUNE 30, JANUARY 31,
1998 1997 1997
---------- ----------- -----------
REVENUES:
Rental income............................ $ 54,448 $ 19,460 $2,760
Tenant reimbursements.................... 6,273 1,810 275
Interest income.......................... 883 1,975
Other income............................. 867 296 18
---------- ---------- ------
Total revenues......................... 62,471 23,541 3,053
---------- ---------- ------
EXPENSES:
Property expenses........................ 9,037 3,275 643
Real estate taxes........................ 3,754 927 106
General and administrative............... 3,702 2,175 78
Ground leases............................ 595 464 64
Interest expense......................... 9,379 4,077 1,895
Depreciation and amortization............ 12,419 4,744 787
---------- ---------- ------
Total expenses......................... 38,886 15,662 3,555
---------- ---------- ------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN,
EQUITY IN (LOSS) INCOME OF UNCONSOLIDATED
SUBSIDIARY AND MINORITY INTERESTS......... 23,585 7,879 (502)
EQUITY IN (LOSS) INCOME OF UNCONSOLIDATED
SUBSIDIARY................................ (25) 135
---------- ---------- ------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN AND
MINORITY INTERESTS........................ 23,560 8,014 (502)
---------- ----------
MINORITY INTERESTS:
Distributions on 8.075% Series A
Cumulative Redeemable Preferred units... (2,254)
Minority interest in earnings............ (2,642) (1,254)
---------- ---------- ------
Total minority interests............... (4,896) (1,254)
---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN.... 18,664 6,760 (502)
EXTRAORDINARY GAIN......................... 3,204
---------- ---------- ------
NET INCOME................................. $ 18,664 $ 6,760 $2,702
========== ========== ======
Net income per common share--basic......... $ 0.71 $ 0.47
========== ==========
Net income per common share--diluted....... $ 0.71 $ 0.46
========== ==========
Weighted average shares outstanding--basic. 26,324,554 14,475,000
========== ==========
Weighted average shares outstanding--dilut-
ed........................................ 26,466,797 14,548,188
========== ==========
See accompanying notes to consolidated and combined financial statements.
4
KILROY REALTY CORPORATION CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
----------------------
1998 1997
---------- ----------
REVENUES:
Rental income........................................ $ 28,988 $ 12,350
Tenant reimbursements................................ 3,450 1,104
Interest income...................................... 409 1,004
Development services.................................
Other income......................................... 673 111
---------- ----------
Total revenues..................................... 33,520 14,569
---------- ----------
EXPENSES:
Property expenses.................................... 5,066 2,036
Real estate taxes.................................... 2,068 574
General and administrative........................... 2,143 1,450
Ground leases........................................ 290 279
Interest expense..................................... 4,593 2,546
Depreciation and amortization........................ 6,565 3,000
---------- ----------
Total expenses..................................... 20,725 9,885
---------- ----------
INCOME BEFORE EQUITY IN (LOSS) INCOME OF UNCONSOLIDATED
SUBSIDIARY AND MINORITY INTERESTS..................... 12,795 4,684
EQUITY IN (LOSS) INCOME OF UNCONSOLIDATED SUBSIDIARY... (24) 192
---------- ----------
INCOME BEFORE MINORITY INTERESTS....................... 12,771 4,876
---------- ----------
MINORITY INTERESTS:
Distributions on 8.075% Series A Cumulative
Redeemable Preferred Units (Note 5)................. (1,554)
Minority interest in earnings........................ (1,432) (768)
---------- ----------
Total minority interests........................... (2,986) (768)
---------- ----------
NET INCOME............................................. $ 9,785 $ 4,108
========== ==========
Net income per common share--basic..................... $ 0.36 $ 0.28
========== ==========
Net income per common share--diluted................... $ 0.36 $ 0.28
========== ==========
Weighted average shares outstanding--basic............. 27,406,618 14,475,000
========== ==========
Weighted average shares outstanding--diluted........... 27,520,681 14,520,744
========== ==========
See accompanying notes to consolidated and combined financial statements.
5
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 18,664 $ 9,462
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 12,419 5,531
Provision for bad debts.................................. 402 168
Restricted stock compensation............................ 230 192
Extraordinary gain....................................... (3,204)
Minority interest in earnings............................ 2,642 1,254
Accrued distributions on 8.075% Series A Cumulative
Redeemable Preferred Units.............................. 1,514
Equity in loss (income) of unconsolidated subsidiary..... 25 (135)
Changes in assets and liabilities:
Tenant receivables...................................... (2,788) (885)
Deferred leasing costs, net............................. (1,733) (4,309)
Prepaid expenses and other assets, net.................. (113) 598
Accounts payable and accrued expenses................... 890 (3,034)
Accrued cost of option buy-out and tenant improvements.. (1,390)
Rents received in advance and tenant security deposits.. 1,731 1,521
-------- --------
Net cash provided by operating activities.............. 33,883 5,769
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for rental properties........................ (213,009) (219,315)
Expenditures for land and construction in progress........ (37,583)
Disbursement for note receivable.......................... (2,153)
Escrow deposits, net...................................... 2,969 (16,935)
Net investment in and advances to unconsolidated
subsidiary............................................... (69) (351)
-------- --------
Net cash used in investing activities.................. (249,845) (236,601)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of common stock............... 82,192 302,780
Net proceeds from issuance of 8.075% Series A Cumulative
Redeemable Preferred Units............................... 72,966
Proceeds from issuance of mortgage debt................... 5,000 96,000
Principal payments on mortgage debt....................... (1,918) (219,147)
Net borrowings on line of credit.......................... 81,000 92,000
Finance costs............................................. (1,151) (3,215)
Restricted cash........................................... (15) (5,724)
Distributions paid........................................ (23,190) (3,739)
Deemed and actual contributions from partners, net........ 6,173
-------- --------
Net cash provided by financing activities.............. 214,884 265,128
-------- --------
Net (decrease) increase in cash and cash equivalents....... (1,078) 34,296
Cash and cash equivalents, beginning of period............. 8,929
-------- --------
Cash and cash equivalents, end of period .................. $ 7,851 $ 34,296
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest................................... $ 12,322 $ 8,119
======== ========
Distributions paid on 8.075% Series A Cumulative
Redeemable Preferred Units.............................. $ 740
======== ========
NON-CASH TRANSACTIONS:
Accrual of distributions payable......................... $ 12,815 $ 6,701
======== ========
Issuance of units of the Operating Partnership to acquire
properties (Note 2)..................................... $ 16,031 $ 3,979
======== ========
See accompanying notes to consolidated and combined financial statements.
6
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Kilroy Realty Corporation (the "Company") owns, operates and develops office
and industrial real estate, primarily in Southern California. The Company
commenced operations in January 1997 and operates as a self-administered real
estate investment trust ("REIT"). The Company succeeded to the real estate
business of the Kilroy Group, the Company's predecessor, which 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 of the properties contributed to the
Company in connection with its formation, the formation of Kilroy Realty, L.P.
(the "Operating Partnership") and completion of the Company's IPO
(collectively the "Formation Transactions") on January 31, 1997. As of June
30, 1998, the Company's stabilized portfolio consisted of 77 office buildings
and 82 industrial buildings, which encompassed approximately 5.4 million and
5.6 million rentable square feet, respectively, and was 92.1% leased. The
Company owns its interests in all of the properties through the Operating
Partnership and Kilroy Realty Finance Partnership, L.P.
The majority of the properties are located in Southern California. The
ability of the tenants to honor the terms of their respective leases is
dependent upon the economic, regulatory and social factors affecting the
communities and industries in which the tenants operate.
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 year ended December 31,
1998. These financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
7
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
2. PROPERTY ACQUISITIONS
During the six months ended June 30, 1998, the Company completed a series of
transactions to acquire 41 acres of undeveloped land, 23 office buildings and
15 industrial buildings in California and Nevada, as follows:
NUMBER OF LOCATION OF PURCHASE PRICE
DESCRIPTION BUILDINGS ACREAGE/SQUARE FOOTAGE PROPERTY (MILLIONS)
----------- --------- ---------------------- ---------------- --------------
Undeveloped land........ 2 acres San Diego, CA $1.7
Undeveloped land........ 13 acres San Diego, CA 9.5
Undeveloped land........ 4 acres San Diego, CA 1.8
Undeveloped land........ 4 acres San Diego, CA 2.6
Undeveloped land........ 18 acres Calabasas, CA 2.9
------
Subtotal Undeveloped
land................. 18.5
------
Office building......... 1 48,000 sq. ft. Los Angeles, CA 7.6
Office buildings........ 4 149,000 sq. ft. Fullerton, CA 10.6
Office building......... 1 70,000 sq. ft. Santa Monica, CA 16.6
Office buildings........ 2 79,000 sq. ft. Anaheim, CA 7.1
Office building......... 1 82,000 sq. ft. Carlsbad, CA 10.5
Office buildings........ 2 200,000 sq. ft. San Diego, CA 29.5
Office building......... 1 41,000 sq. ft. Camarillo, CA 5.0
Office building......... 1 69,000 sq. ft. San Diego, CA 7.3
Office buildings........ 7 411,000 sq. ft. San Diego, CA 54.5
Office building......... 1 46,000 sq. ft. San Diego, CA 6.2
Office building......... 1 39,000 sq. ft. San Diego, CA 5.2
Office building......... 1 45,000 sq. ft. San Diego, CA 3.9
Industrial buildings.... 9 143,000 sq. ft. Irvine, CA 12.6
Industrial buildings.... 3 234,000 sq. ft. San Jose, CA 27.9
Industrial building..... 1 75,000 sq. ft. Reno, NV 6.9
Industrial building..... 1 84,000 sq. ft. Anaheim, CA 6.2
Industrial building..... 1 52,000 sq. ft. Tustin, CA 3.5
------
Subtotal office and industrial buildings................................ 221.1
------
Total.................................................................. $239.6
======
These acquisitions were funded primarily with existing working capital and
borrowings on the line of credit. The Operating Partnership issued 496,220
common limited partnership units valued at approximately $13,511,000 in
connection with the acquisition of two office buildings located in San Diego,
California and one industrial building located in Reno, Nevada from entities
controlled by Richard S. Allen, a member of the Company's board of directors.
In April 1998, 18 acres of undeveloped land in Calabasas, California were
acquired from a partnership owned by John B. Kilroy, Sr. and John B. Kilroy,
Jr., the Company's Chairman and its President and Chief Executive Officer,
respectively, in exchange for $346,000 in cash and the issuance of 90,787
common limited partnership units of the Operating Partnership valued at
$2,520,000. The land is part of a 66 acre development site in Calabasas
California which is presently entitled for over one million rentable square
feet of office, retail and hotel development. The infrastructure improvements
on the land were financed with Mello Roos bonds which have a current principal
balance of approximately $17,200,000. Principal and interest on the bonds will
be charged to the Company and other owners through property tax bills through
2008 based on the relative value of land and buildings on the site. Based on
the planned development of the total site, the Company's obligation for its
portion of the development site is estimated at $9,000,000 but may vary
depending on the actual size and number of buildings built. The costs will be
charged to operations as incurred.
8
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
3. NOTES RECEIVABLE FROM RELATED PARTY
On May 7, 1998 the Company entered into an agreement to loan up to
$8,545,000 to a limited partnership controlled by Richard S. Allen, a member
of the board of directors of the Company. Advances on the note will be used
for infrastructure improvements on land in San Diego which secures the note.
Pursuant to a separate agreement with the borrower, the Company will acquire a
50% interest in the land upon the completion of all infrastructure
improvements. Interest accrues on all outstanding borrowings at a rate of
LIBOR plus 1.85% (7.54% at June 30, 1998) and the note is due upon the
acquisition of the 50% interest in the land by the Company. At June 30, 1998,
$2,153,000 was outstanding on the note.
On May 22, 1998 the Company entered into an agreement to loan up to
$2,250,000 to a limited liability company also controlled by Richard S. Allen.
Advances on the note will be used for tenant improvements and upgrades to a
building in San Diego which secures the note. Pursuant to a separate agreement
with the borrower, the Company will acquire the building on or before June 30,
1999 subject to the completion of improvements. The note matures on the
acquisition date. Interest accrues on all outstanding borrowings at a rate of
prime plus 1%. There were no advances outstanding at June 30, 1998.
4. LINE OF CREDIT
On February 24, 1998, the Operating Partnership entered into a $350,000,000
unsecured revolving line of credit (together with the previous line of credit,
the "Credit Facility") replacing the Operating Partnership's previous
$250,000,000 secured revolving credit facility. The new Credit Facility
matures in February 2000, and bears interest at either LIBOR plus 1.00%, LIBOR
plus 1.125% or LIBOR plus 1.25%, depending on the Company's leverage ratios at
the time of borrowing.
Borrowings outstanding at June 30, 1998 were $223,000,000. Availability
under the Credit Facility at June 30, 1998 was $118,811,000 based on the value
of the Company's unencumbered assets. The fee for unused funds is 0.25% based
on outstanding balances.
5. MINORITY INTERESTS
On February 6, 1998, the Company issued 1,200,000 8.075% Series A Cumulative
Redeemable Preferred Units, representing limited partnership interests in the
Operating Partnership (the "Preferred Units"), with a liquidation value of
$50.00 per unit, in exchange for a gross contribution to the Operating
Partnership of $60,000,000. The Company used the contribution proceeds, less
applicable transactions costs and expenses of $1,626,000, for the repayment of
borrowings outstanding on the Credit Facility. On April 22, 1998 the Company
issued an additional 300,000 Preferred Units for a gross contribution to the
Operating Partnership of $15,000,000. The Company used the contribution
proceeds, less applicable transaction costs and expenses of $408,000 for the
repayment of borrowings outstanding on the Credit Facility. The Preferred
Units, which may be called by the Operating Partnership at par on or after
February 6, 2003, have no stated maturity or mandatory redemption and are not
convertible into any other securities of the Operating Partnership. The
Preferred Units are exchangeable at the option of the majority of the holders
for shares of the Company's 8.075% Series A Cumulative Preferred Stock
beginning February 6, 2008 which may be accelerated under certain
circumstances.
6. STOCKHOLDERS EQUITY
In January 1998, the Company filed a "shelf" registration statement on Form
S-3 with the Securities and Exchange Commission (the "SEC") which registered
$400,000,000 of equity securities of the Company. The
9
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
registration statement was declared effective by the SEC on February 11, 1998.
Through August 10, 1998 the Company completed four public offerings
aggregating 3,012,326 shares of Common Stock and two direct placements
aggregating 161,884 shares of Common Stock with aggregate net proceeds of
$82.2 million. The Company used such net proceeds to repay borrowings under
the Credit Facility.
As a result of the capital transactions referred to above and the issuance
of Common Units in connection with the purchase of certain properties (Note
2), the Company owned an 87.4% general partnership interest in the Operating
Partnership as of June 30, 1998.
7. SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Company acquired ten acres of undeveloped
land in San Diego, California from unaffiliated third parties with borrowings
on the Credit Facility and available working capital. The purchase price was
$5.8 million.
On July 10, 1998 distributions of $12,815,000 were paid to stockholders and
unitholders of record on June 30, 1998. In addition distributions of
$1,514,000 were paid to the 8.075% Series A Cumulative Redeemable Preferred
Unitholders.
8. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted-
average number of common shares outstanding for the period. Diluted earnings
per share is computed by dividing net income by the sum of the weighted-
average number of common shares outstanding for the period plus the assumed
exercise of all dilutive securities. The following table reconciles the
numerator and denominator of the basic and diluted per-share computations for
net income:
SIX MONTHS ENDED PERIOD FEBRUARY 1, 1997 THROUGH
JUNE 30, 1998 JUNE 30, 1997
----------------------------------- -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Basic................... $18,664 26,324,554 $0.71 $6,760 14,475,000 $0.47
Effect of Dilutive
Securities:
Stock options......... 142,243 73,188
------- ---------- ----- ------ ---------- -----
Diluted................. $18,664 26,466,797 $0.71 $6,760 14,548,188 $0.46
======= ========== ===== ====== ========== =====
10
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
9. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma information for the six months ended
June 30, 1998 and 1997 are presented as if the acquisitions described in Note
2 to the financial statements had occurred on January 1, 1997. Such pro forma
information is based upon the consolidated statements of operations of the
Company for the six months ended June 30, 1998 and the period from February 1,
1997 to June 30, 1997 and the combined statement of operations of the Kilroy
Group for the period January 1, 1997 to January 31, 1997, 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 property 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 AND PER SHARE DATA)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997
---------- ----------
Total revenues........................................... $ 65,773 $ 34,759
========== ==========
Net income before extraordinary items.................... $ 18,211 $ 6,814
========== ==========
Net income............................................... $ 18,211 $ 10,018
========== ==========
Net income per common share-basic........................ $ 0.69 $ 0.69
========== ==========
Net income per common share-diluted...................... $ 0.69 $ 0.69
========== ==========
Weighted average shares outstanding-basic................ 26,324,554 14,475,000
========== ==========
Weighted average shares outstanding-diluted.............. 26,466,797 14,548,188
========== ==========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to the consolidated financial statements of
the Company, and the combined financial statements of the Company's
predecessor, the Kilroy Group, and should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
OVERVIEW AND BACKGROUND
Kilroy Realty Corporation (the "Company") owns, operates and develops office
and industrial real estate, primarily in Southern California. The Company
commenced operations in January 1997 and operates as a self-administered real
estate investment trust. The Company succeeded to the real estate business of
the Kilroy Group, the Company's predecessor, which 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 its formation, the formation of Kilroy
Realty, L.P. (the '"Operating Partnership") and completion of the Company's
IPO (collectively (the "Formation Transactions") on January 31, 1997. As of
June 30, 1998, the Company's portfolio of stabilized properties consisted of
77 office buildings and 82 industrial buildings, which encompassed
approximately 5.4 million and 5.6 million rentable square feet, respectively,
and were 92.1% leased. The Company owns its interests in all of the properties
through the Operating Partnership and Kilroy Realty Finance Partnership, L.P.
RESULTS OF OPERATIONS
During 1997, the Company acquired 96 office and industrial buildings
totaling 2.2 million and 3.7 million rentable square feet, respectively, for
an aggregate acquisition cost of $507.4 million. During the six months ended
June 30, 1998, the Company acquired 38 office and industrial buildings
totaling 1.3 million and 589,000 rentable square feet, respectively, for a
total investment of $221.1 million. As the 1998 Acquisitions were acquired on
various dates, a full six months of revenue and expenses were not recognized
for these properties during the period ended June 30, 1998.
As a result of the properties acquired subsequent to June 30, 1997, rentable
square footage in the Company's portfolio of stabilized properties increased
5.8 million, or 110.8% to 11.0 million rentable square feet at June 30, 1998
compared to 5.2 million rentable square feet at June 30, 1997. As of June 30,
1998, the Company's portfolio of stabilized properties was comprised of 77
office properties encompassing 5.4 million rentable square feet and 82
industrial properties encompassing 5.6 million rentable square feet. The
portfolio occupancy rate at June 30, 1998 was 92.1%, with the office and
industrial properties 95.2% and 89.2% leased, respectively, as of such date.
12
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
THREE MONTHS
ENDED
JUNE 30,
---------------
(IN THOUSANDS)
1998 1997
------- -------
REVENUES:
Rental income................................................ $28,988 $12,350
Tenant reimbursements........................................ 3,450 1,104
Interest income.............................................. 409 1,004
Other income................................................. 673 111
------- -------
Total revenues............................................. 33,520 14,569
------- -------
EXPENSES:
Property expenses............................................ 5,066 2,036
Real estate taxes............................................ 2,068 574
General and administrative................................... 2,143 1,450
Ground leases................................................ 290 279
Interest expense............................................. 4,593 2,546
Depreciation and amortization................................ 6,565 3,000
------- -------
Total expenses............................................. 20,725 9,885
------- -------
INCOME BEFORE EQUITY IN (LOSS) INCOME OF UNCONSOLIDATED
SUBSIDIARY, AND MINORITY INTERESTS............................ $12,795 $ 4,684
======= =======
Total revenues increased $18.9 million, or 130.1% to $33.5 million for the
three months ended June 30, 1998 compared to $14.6 million for the three
months ended June 30, 1997. Rental income increased $16.6 million, or 134.7%
to $29.0 million for the three months ended June 30, 1998 compared to $12.4
million for the three months ended June 30, 1997. Of this increase, $11.5
million was generated by properties acquired during 1997 subsequent to the IPO
on January 31, 1997 (the "1997 Acquisitions") and $4.8 million was generated
from properties acquired during the six months ended June 30, 1998 (the "1998
Acquisitions"). The remaining $.3 million increase in rental income was
generated by properties owned at the IPO and still owned at June 30, 1998 (the
"Existing Properties") and represents a 3.0% increase in rental income for the
Existing Properties. The increase is primarily the result of leasing activity
at the SeaTac Office Center, including a lease for 211,000 rentable square
feet with The Boeing Company, which was effective January 1, 1998 (the "Boeing
Lease"). In addition, during the second quarter of 1998, the Company leased
46,000 rentable square feet at the La Palma Business Center which was vacant
at June 30, 1997, at a rental rate 14.8% higher than the previous rental rate.
Excluding the Boeing lease, occupancy remained consistent and average rent per
square foot increased 2.1% for the Existing Properties for the three months
ended June 30, 1998 compared to the three months ended June 30, 1997.
Tenant reimbursements increased $2.4 million, or 212.5% to $3.5 million for
the three months ended June 30, 1998 compared to $1.1 million for the three
months ended June 30, 1997. Of this increase $1.6 million was due to tenant
reimbursements from the 1997 and 1998 Acquisitions. The remaining increase of
$.8 million was generated by the Existing Properties, of which $0.3 million
represents tenant reimbursements under the Boeing Lease. Interest income
decreased $.6 million or 59.3% to $0.4 million for the three months ended
June 30, 1998, compared to $1.0 million for the three months ended June 30,
1997, due to interest earned on the $116.2 million of net IPO proceeds during
the three months ended June 30, 1997. Other income for the three months ended
June 30, 1998 included $0.5 million in development services fees, and also
consists of lease termination fees and property management fees.
Total expenses increased $10.8 million, or 118.8%, to $20.7 million for the
three months ended June 30, 1998 compared to $9.9 million for the three months
ended June 30, 1997. Property expenses increased $3.0 million, or 148.8% to
$5.0 million and real estate taxes increased $1.5 million, or 260.3% to $2.1
million for the three months ended June 30, 1998 compared to $2.0 million and
$.6 million, respectively for the three
13
months ended June 30, 1997. Of the collective increase of $4.5 million in
property expenses and real estate taxes, $3.2 million was generated by the
1997 Acquisitions and $1.2 million was generated from the 1998 Acquisitions.
The remaining $0.1 million increase from the Existing Properties is due
primarily to an increase in property taxes due to the reassessment of property
values in connection with the IPO. General and administrative expenses
increased $.7 million, or 47.8%, to $2.1 million for the three months ended
June 30, 1998 compared to $1.4 million for the three months ended June 30,
1997, 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. Interest expense increased $2.0 million, or 80.4%, to
$4.6 million for the three months ended June 30, 1998 compared to $2.6 million
for the three months ended June 30, 1997, primarily due to $131.0 million of
borrowings on the Company's unsecured revolving credit facility and $32.9
million of mortgage debt assumed in connection with 1997 acquisitions. The
Company's weighted average interest rate decreased .9% to 7.4% at June 30,
1998 compared to 8.3% at June 30, 1997. Depreciation and amortization expense
increased $3.6 million, or 118.8%, to $6.6 million for the three months ended
June 30, 1998 compared to $3.0 million for the same period in 1997, primarily
due to depreciation on the 1997 and 1998 Acquisitions.
Net income before extraordinary gains increased $8.1 million, or 173.2% to
$12.8 million for the three months ended June 30, 1998 compared to $4.7
million for the three months ended June 30, 1997. The increase is due
primarily to an increase in rental income and tenant reimbursements of $16.6
million and $2.3 million, respectively, offset by an increase in property
expenses of $3.0 million, an increase in real estate taxes of $1.5 million, an
increase in interest expense of $2.0 million and an increase in depreciation
and amortization of $3.6 million.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO ADJUSTED SIX MONTHS ENDED JUNE 30,
1997
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 items as if the IPO had been consummated on January 1, 1997. The
following sections discuss the results of operations as adjusted.
SIX MONTHS ENDED
JUNE 30,
---------------------
(IN THOUSANDS)
1998 1997
------- -------------
(AS ADJUSTED)
REVENUES:
Rental income.......................................... $54,448 $22,220
Tenant reimbursements.................................. 6,273 2,085
Interest income........................................ 883 2,461
Other income........................................... 867 314
------- -------
Total revenues....................................... 62,471 27,080
------- -------
EXPENSES:
Property expenses...................................... 9,037 3,900
Real estate taxes...................................... 3,754 1,033
General and administrative............................. 3,702 2,538
Ground leases.......................................... 595 528
Interest expense....................................... 9,379 4,843
Depreciation and amortization.......................... 12,419 5,531
------- -------
Total expenses....................................... 38,886 18,373
------- -------
INCOME BEFORE EQUITY IN (LOSS) INCOME OF SUBSIDIARY,
MINORITY INTERESTS AND EXTRAORDINARY GAIN............... $23,585 $ 8,707
======= =======
14
Total revenues increased $35.4 million, or 130.7% to $62.5 million for the
six months ended June 30, 1998 compared to $27.1 million for the six months
ended June 30, 1997. Rental income increased $32.2 million, or 145.0% to $54.4
million for the six months ended June 30, 1998 compared to $22.2 million for
the six months ended June 30, 1997. Of this increase, $24.5 million was
generated by the 1997 Acquisitions and $6.2 million was generated from the
1998 Acquisitions. The remaining $1.5 million increase in rental income was
generated by the Existing Properties and represents a 7.3% increase in rental
income for the Existing Properties. The increase is primarily the result of
leasing activity at the SeaTac Office Center, including the Boeing Lease which
contributed $0.9 million of the increase in rental revenue. The remainder of
the increase is primarily attributable to owning the seven properties acquired
in connection with the IPO for a full six months in 1998. Excluding the Boeing
Lease, occupancy remained consistent and average rent per square foot
increased 2.2% for the Existing Properties for the six months ended June 30,
1998 compared to the six months ended June 30, 1997.
Tenant reimbursements increased $4.2 million, or 200.9% to $6.3 million for
the six months ended June 30, 1998 compared to $2.1 million for the six months
ended June 30, 1997. Of this increase, $3.0 million was attributable to tenant
reimbursements from the 1997 and 1998 Acquisitions. The remaining increase of
$1.2 million was generated by the Existing Properties, of which $0.6 million
represents tenant reimbursements under the Boeing Lease. Interest income
decreased $1.6 million or 64.1% to $0.9 million for the six months ended
June 30, 1998, compared to $2.5 million for the six months ended June 30,
1997, due to interest earned on the $116.2 million of net IPO proceeds during
the six months ended June 30, 1997. Other income for the six months ended June
30, 1998 included $0.5 million in development services fees, and lease
termination fees and property management fees.
Total expenses increased $20.5 million, or 111.6%, to $38.9 million for the
six months ended June 30, 1998 compared to $18.4 million for the six months
ended June 30, 1997. Property expenses increased $5.1 million, or 131.7% to
$9.0 million and real estate taxes increased $2.7 million, or 263.4% to $3.7
million for the six months ended June 30, 1998 compared to $3.9 million and
$1.0 million, respectively for the six months ended June 30, 1997. Of the
collective increase of $7.9 million in property expenses and real estate
taxes, $5.7 million was generated by the 1997 Acquisitions and $1.7 million
was generated from the 1998 Acquisitions. The remaining $0.5 million increase
from the Existing Properties is primarily attributable to an increase in
property taxes due to the reassessment of property values in connection with
the IPO. General and administrative expenses increased $1.2 million, or 45.9%,
to $3.7 million for the six months ended June 30, 1998 compared to $2.5
million for the six months ended June 30, 1997, due to increased management
and administrative costs associated with the increased portfolio size and the
operation of the Company as a public real estate investment trust. Ground
lease expense increased $67,000 or 12.7% during the six months ended June 30,
1998 over the same period in 1997 primarily as a result of a ground lease on
two properties purchased subsequent to the IPO. Interest expense increased
$4.5 million, or 93.7%, to $9.4 million for the six months ended June 30, 1998
compared to $4.9 million for the six months ended June 30, 1997, primarily due
to $131.0 million of borrowings on the Company's unsecured revolving credit
facility and $32.9 million of mortgage debt assumed in connection with 1997
Acquisitions. The Company's weighted average interest rate decreased .9% to
7.4% at June 30, 1998 compared to 8.3% at June 30, 1997. Depreciation and
amortization expense increased $6.9 million, or 124.5%, to $12.4 million for
the six months ended June 30, 1998 compared to $5.5 million for the same
period in 1997, due to depreciation on the 1997 and 1998 Acquisitions.
Net income before extraordinary gains increased $14.9 million, or 170.9% to
$23.6 million for the six months ended June 30, 1998 compared to $8.7 million
for the six months ended June 30, 1997. The increase is due primarily to an
increase in rental income and tenant reimbursements of $32.2 million and $4.2
million, respectively, offset by an increase in property expenses of $5.2
million, an increase in real estate taxes of $2.7 million, an increase in
interest expense of $4.5 million and an increase in depreciation and
amortization of $6.9 million.
15
LIQUIDITY AND CAPITAL RESOURCES
In February 1998, the Company obtained a $350 million unsecured revolving
credit facility (the "Credit Facility"), which bears interest at a rate of
either LIBOR plus 1.00%, LIBOR plus 1.125% or LIBOR plus 1.25% depending on
the Company's leverage ratios, and matures in February 2000. Availability
under the Credit Facility is dependent upon the value of the Company's pool of
unencumbered assets and was $101.1 million at August 10, 1998. There were
borrowings of $245.0 million outstanding at August 10, 1998.
On January 31, 1998 the Company increased the amount of its $14.0 million
mortgage loan to $19.0 million and extended the maturity date to January 31,
2000. In addition, the Company repaid a $0.9 million promissory note in
January 1998. As of June 30, 1998 the Company's mortgage loans had a weighted
average interest rate of 8.19%.
In January 1998, the Company filed a "shelf" registration statement on Form
S-3 with the Securities and Exchange Commission (the "SEC") which registered
$400 million of equity securities of the Company. The registration statement
was declared effective by the SEC on February 11, 1998. Through August 10,
1998 the Company completed four public offerings aggregating 3,012,326 shares
of Common Stock and two direct placements aggregating 161,884 shares of Common
Stock with aggregate net proceeds of $82.2 million. As of August 10, 1998, an
aggregate of $313.1 million of equity securities were issuable under the
registration statement. The Company, as general partner of the Operating
Partnership and as required by the terms and conditions of the Third Amended
and Restated Agreement of Limited Partnership of the Operating Partnership
(the "Partnership Agreement"), invested the net proceeds of such offerings in
the Operating Partnership, which used such net proceeds to repay borrowings
under the Credit Facility.
In February 1998, the Company issued 1,200,000 8.075% Series A Cumulative
Redeemable Preferred Units, representing limited partnership interests in the
Operating Partnership (the "Preferred Units"), with a liquidation value of
$50.00 per unit, in exchange for a gross contribution to the Operating
Partnership of $60.0 million. The Company used the contribution proceeds, less
applicable transactions costs and expenses of $1.6 million, for the repayment
of borrowings outstanding on the Credit Facility. On April 22, 1998 the
Company issued an additional 300,000 Preferred Units for a gross contribution
to the Operating Partnership of $15.0 million. The Company used the
contribution proceeds, less applicable transaction costs and expenses of $0.4
million for the repayment of borrowings outstanding on the Credit Facility.
The Preferred Units, which may be called by the Operating Partnership at par
on or after February 6, 2003, have no stated maturity or mandatory redemption
and are not convertible into any other securities of the Operating
Partnership. The Preferred Units are exchangeable at the option of the
majority of the holders, for shares of the Company's 8.075% Series A
Cumulative Preferred Stock, beginning February 6, 2008 which may be
accelerated under certain circumstances.
The Company believes that it will have sufficient capital resources to
satisfy its obligations for the next twelve months. The Company expects to
meet its long-term liquidity requirements and possible future development and
property acquisitions, 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 common units of
the Operating Partnership.
CAPITAL EXPENDITURES
As of June 30, 1998, the Company commenced development of approximately 1.5
million rentable square feet of space at a total budgeted cost of
approximately $109.1 million. The Company has spent an aggregate of $48.6
million on these projects as of June 30, 1998. The Company intends to finance
all development with borrowings under the Credit Facility and working capital.
At June 30, 1998, the Company had escrow deposits of $2.1 million for
contemplated acquisitions of 396,000 aggregate rentable square feet of office
and industrial buildings and approximately 40 acres of undeveloped land. The
aggregate acquisition cost of the land and buildings is estimated to be
approximately
16
$108.2 million. Subsequent to June 30, 1998 the Company completed the
acquisition of 9.7 acres of undeveloped land for an aggregate purchase price
of $5.7 million. The properties were acquired from unaffiliated third parties
with borrowings on the Credit Facility.
On October 31, 1997, the Company entered into an agreement with The Allen
Group, a group of affiliated real estate development and investment companies
based in Visalia, California ("The Allen Group"), to purchase through a series
of transactions office and industrial buildings with approximately 1,730,000
aggregate rentable square feet and develop approximately 750,000 rentable
square feet of office space for an aggregate purchase price of approximately
$300 million. The acquisition agreement with The Allen Group was based on
arms-length negotiations. Subsequent to the execution of the related
documentation, Richard S. Allen, the majority equity owner and Chief Executive
Officer of The Allen Group, was elected to serve as a director of the Company.
As of December 31, 1997, the Company completed the first phase of the
acquisitions from The Allen Group by acquiring four office and four industrial
buildings encompassing 907,000 aggregate rentable square feet for an aggregate
purchase price of approximately $80 million.
The second phase of such acquisitions is presently expected to consist of
the purchase of five office and six industrial properties located in
California and Nevada encompassing approximately 823,000 aggregate rentable
square feet at an estimated aggregate purchase price of approximately $120
million. As of June 30, 1998 the Company has completed the purchase of one
office and one industrial property encompassing approximately 275,000
aggregate renable square feet at an aggregate purchase price of $36.4 million.
The Company presently expects the remaining acquisitions to occur during 1998
and early 1999, pursuant to the completion of construction and/or stabilized
occupancy of the properties.
The third phase of the transaction with The Allen Group is presently
expected to consist of the development of two office projects in San Diego,
California with approximately 750,000 aggregate rentable square feet for an
estimated aggregate development cost of approximately $100 million. The
Company has agreed to purchase a 50% managing interest in the two projects
upon completion of all necessary entitlements and infrastructure and is
expected to manage the development of both projects. The Company has an option
to purchase The Allen Group's remaining interest in both projects for a
purchase price to be determined upon completion of the projects. The Company
presently expects development of the two office projects to commence during
the fourth quarter of 1998.
HISTORICAL CASH FLOWS
The Company's net cash provided by operating activities increased $28.1
million or 487.3% to $33.9 million for the six months ended June 30, 1998
compared to $5.8 million for the six months ended June 30, 1997. The increase
is primarily due to the increase in net income resulting from the 1997 and
1998 acquisitions, and increased property operating income generated by the
properties owned as of January 1, 1997. The increase was partially offset by
increased interest expense. Cash used in investing increased $13.2 million or
5.6% to $249.8 million for the six months ended June 30, 1998 compared to
$236.6 million for the six months ended June 30, 1997. The increase was
primarily due to $37.6 million spent on land and construction in progress and
a $2.2 million investment in a note receivable, offset by a decrease in
property acquisitions acquired with cash of $6.3 million or 2.9% to $213.0
million in the six months ended June 30, 1998 compared to $219.3 million in
the six months ended June 30, 1997 and cash placed in escrow. Cash provided by
financing activities decreased $50.2 million or 19.0% to $214.9 million for
the six months ended June 30, 1998 compared to $265.1 million for the six
months ended June 30, 1997. Cash provided by financing activities for the six
month ended June 30, 1998 consisted primarily of net proceeds from the
issuance of 3,012,326 shares of common stock through four public offerings,
the issuance of 161,884 shares of common stock through two direct placements,
the issuance of $75.0 million of 8.075% Series A Cumulative Redeemable
Preferred Units of the Operating Partnership and proceeds from the issuance of
mortgage debt and net borrowings on the line of credit, partially offset by
distributions paid to stockholders and minority interest holders. Cash
provided by financing activities for the six month ended June 30, 1997
consisted of net proceeds from the Company's initial public offering (the
"IPO") in January 1997, proceeds from the issuance of mortgage debt in
connection with the IPO, net borrowings on the
17
line of credit and distributions paid to stockholders and minority interest
holders. The increase in distributions of $19.5 million or 520.2% to $23.2
million for the six months ended June 30, 1998 from $3.7 million for the six
months ended June 30, 1997 is due to a greater number of shares outstanding as
well as an increase in distribution rate to $.810 per shares for the six
months ended June 30, 1998 from .775 per share for the six months ended June
30, 1997.
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 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 six
months ended June 30, 1998 and the period from February 1, 1997 to June 30,
1997.
SIX MONTHS FEBRUARY 1,
ENDED 1997 TO
JUNE 30, JUNE 30,
1998 1997
---------- -----------
(IN THOUSANDS)
Net income............................................... $18,664 $ 6,760
Add
Minority interest in earnings........................ 2,642 1,254
Depreciation and amortization........................ 12,419 4,744
Other................................................ 230 197
------- -------
Funds from Operations.................................... $33,955 $12,955
======= =======
The following table presents the Company's Funds Available for Distribution
for the six months ended June 30, 1998 and the period from February 1, 1997 to
June 30, 1997.
SIX MONTHS FEBRUARY 1,
ENDED 1997 TO
JUNE 30, JUNE 30,
1998 1997
---------- -----------
(IN THOUSANDS)
Funds from Operations................................... $33,955 $12,955
Adjustments
Amortization of deferred financing costs............ 505 404
Tenant improvements, leasing commissions and
recurring capital expenditures..................... (1,422) (532)
Net effect of straight-line rents................... (1,572) (75)
------- -------
Funds Available for Distribution........................ $31,466 $12,752
======= =======
18
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.
YEAR 2000
The Company has completed a comprehensive review of its information systems
and has launched a program to update computer systems and applications in
preparation for the Year 2000. The Company replaced its property management
and accounting system during 1997. Total incremental expenses, including
depreciation and amortization of new systems, are not expected to have a
material impact on the Company's financial condition.
The Company is initiating communications with vendors and others on whom it
relies to assure that their systems will be timely converted. However, there
can be no assurance that the systems of other companies on which the Company
relies will be timely converted or that any such failure to convert by another
company would not have an adverse effect on the Company's results of
operations.
19
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the three months ended June 30, 1998, 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
During the three months ended June 30, 1998, the Operating Partnership
issued 90,787 partnership units (the "Units") with an aggregate value of
approximately $2,520,000 to an entity owned by John B. Kilroy, Sr. and John B.
Kilroy, Jr. (the Company's Chairman of the Board and President and Chief
Executive Officer, respectively) in exchange for 18 acres of land in
Calabasas, California. The Units were issued in reliance on an exemption
registration requirement pursuant to regulation D under the Securities Act of
1933 as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of its stockholders on May 12, 1997,
stockholders elected John R. D'Eathe (22,306,650 votes for, and 635,363 votes
against or withheld) as a director of the Company for a term expiring in 2001.
The stockholders also elected William P. Dickey (22,310,295 votes for, and
631,718 votes against or withheld) as a director of the Company for a term
expiring in 2001.
In addition, the stockholders approved an amendment to the 1997 Kilroy
Realty Corporation Stock Option and Incentive Plan to increase the number of
shares of common stock issuable under the plan from 1,500,000 to 3,000,00
shares (15,567,988 votes for, 4,268,256 votes against, 128,713 votes withheld
and 2,977,056 broker non-votes).
ITEM 5. OTHER INFORMATION--NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1* Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated April 20, 1998, in
connection with the private placement of 300,000 8.075% Series A Cumulative
Redeemable Preferred Units of Kilroy Realty, L.P. and the issuance of 110,225
shares of its $.01 par value per share common stock.
The Company filed a Current Report on Form 8-K , dated April 24, 1998, in
connection with the issuance of 740,741 shares of its $.01 par value per share
common stock.
The Company filed a Current Report on Form 8-K/A, dated January 13, 1998,
which included the audited statements of certain revenues and certain expenses
of three properties acquired in January and February 1998 and the unaudited
statements of certain revenues and certain expenses of two properties acquired
in January 1998.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on August 14,
1997.
Kilroy Realty Corporation
By:
/s/ John B. Kilroy, Jr.
-------------------------------------
John B. Kilroy, Jr.
President and Chief Executive
Officer
By: /s/ Richard E. Moran Jr.
-------------------------------------
Richard E. Moran, Jr.
Executive Vice President and Chief
Financial Officer
By: /s/ Ann Marie Whitney
-------------------------------------
Ann Marie Whitney
Vice President and Controller
21