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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12675
KILROY REALTY CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 95-4598246
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2250 East Imperial Highway, Suite 1200 90245
El Segundo, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 563-5500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the shares of common stock held by non-
affiliates of the registrant was approximately $721,831,122 based on the
closing price on the New York Stock Exchange for such shares on March 26,
2001.
As of March 26, 2001, 26,893,857 shares of common stock, par value $.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement with respect to its 2001 Annual
Meeting of Stockholders to be filed not later than 120 days after the end of
the registrant's fiscal year are incorporated by reference into Part III
hereof.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 15
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 25
Item 6. Selected Financial Data....................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risks... 47
Item 8. Financial Statements and Supplementary Data................... 51
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 51
PART III
Item 10. Directors and Executive Officers of the Registrant............ 52
Item 11. Executive Compensation........................................ 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 52
Item 13. Certain Relationships and Related Transactions................ 52
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 53
PART I
ITEM 1. BUSINESS
The Company
Kilroy Realty Corporation (the "Company") owns, operates, develops, and
acquires Class A suburban office and industrial real estate in key suburban
submarkets, primarily in Southern California, that the Company believes have
strategic advantages and strong barriers to entry. The Company, which
operates, qualifies, and intends to continue to qualify as a self-administered
and self-managed real estate investment trust ("REIT") for federal and state
income tax purposes, was incorporated in September 1996 and commenced
operations upon the completion of its initial public offering in January 1997.
The Company is the successor to the real estate business of Kilroy Industries,
a California corporation ("KI"), and certain of its affiliated corporations,
partnerships and trusts (collectively, the "Kilroy Group").
As of December 31, 2000, the Company's portfolio of stabilized operating
properties was comprised of 83 office buildings (the "Office Properties") and
78 industrial buildings (the "Industrial Properties," and together with the
Office Properties, the "Properties") which encompassed an aggregate of
approximately 6.6 million and 5.8 million rentable square feet, respectively.
The Properties include 21 properties that the Company developed and then
stabilized during 2000 and 1999 encompassing an aggregate of approximately
809,000 and 1.2 million rentable square feet, respectively. As of December 31,
2000, the Office Properties were approximately 96.2% leased to 302 tenants and
the Industrial Properties were 97.8% leased to 220 tenants. All but ten of the
Properties are located in Southern California.
The Company's stabilized portfolio excludes projects currently under
construction or in pre-development and "lease-up" properties. The Company
defines "lease-up" properties as properties recently developed by the Company
that have not yet reached 95% occupancy. The Company had one lease-up property
at December 31, 2000, encompassing an aggregate of approximately 197,300
rentable square feet, which stabilized on January 15, 2001. As of December 31,
2000, the Company had 11 office properties under construction or committed for
construction which when completed are expected to encompass an aggregate of
approximately 964,400 rentable square feet at a total estimated investment of
approximately $232 million. In addition, as of December 31, 2000, the Company
owned approximately 67 acres of undeveloped land upon which the Company
currently expects to develop an aggregate of approximately 1.3 million
rentable square feet of office space within the next three to four years. All
of the Company's development projects and undeveloped land parcels are located
in Southern California.
The Company owns its interests in all of the Properties through Kilroy
Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance
Partnership, L.P., a Delaware limited partnership (the "Finance Partnership").
The Company conducts substantially all of its activities through the Operating
Partnership in which, as of December 31, 2000, it owned an approximate 87.6%
general partnership interest. The remaining 12.4% limited partnership interest
in the Operating Partnership was owned by certain of the Company's executive
officers and directors, certain of their affiliates, and other outside
investors. As the sole general partner of the Operating Partnership, the
Company has control over the management of the Operating Partnership, which
owns 137 of the Company's 161 Properties. The remaining properties, other than
six buildings which are owned by the Operating Partnership through KR-Carmel
Partners and KR-Gateway Partners, (together, the "Development LLCs"), in which
the Operating Partnership owned a 50% managing interest at December 31, 2000,
are owned by the Finance Partnership. Kilroy Realty Finance, Inc., a wholly-
owned subsidiary of the Company, is the sole general partner of the Finance
Partnership and owns a 1% general partnership interest. The Operating
Partnership owns the remaining 99% limited partnership interest of the Finance
Partnership. Unless otherwise indicated, all references to the Company include
the Operating Partnership, the Finance Partnership, the Development LLCs and
all wholly-owned subsidiaries and controlled entities.
As of December 31, 2000 the Operating Partnership owned 100% of the non-
voting preferred stock and a 95% economic interest in Kilroy Services, Inc.
("KSI"), an unconsolidated subsidiary of the Company. All of
1
the voting interest was held by John B. Kilroy, Sr., the Chairman of the
Company's Board of Directors, and John B. Kilroy, Jr., the Company's President
and Chief Executive Officer. Prior to December 31, 2000, the operating results
of the development services business conducted by KSI were accounted for under
the equity method of accounting. On January 1, 2001, KSI was merged into a
newly formed entity, Kilroy Services, LLC ("KSLLC"). In connection with the
merger, the interests held by Messers Kilroy were liquidated and KSLLC became
a wholly owned subsidiary of the Company. KSLLC will be consolidated for
financial reporting purposes beginning January 1, 2001.
Current Year Highlights
The Company continued to successfully attain its primary business objective
of maximizing growth in Funds From Operations, as defined by the National
Association of Real Estate Investment Trusts, ("NAREIT") through accomplishing
the following during the year ended December 31, 2000:
. Execution of lease agreements on approximately 2.0 million rentable
square feet of office and industrial space, including both renewals and
turnovers, at average rental rates 23.7% above 1999 average rental rates
on a basis consistent with generally accepted accounting principles
("GAAP").
. Achievement of 96.9% average occupancy for the Company's stabilized
portfolio for the year ended December 31, 2000. Occupancy was 97.0% at
December 31, 2000.
. Completion of nine office buildings encompassing approximately 1.0
million rentable square feet at a total estimated investment of $203
million. These properties were approximately 98% occupied at December
31, 2000.
. Continued improvement of the quality of the Company's portfolio through
reinvesting approximately $114 million of capital obtained from the sale
of mature, non-strategic assets, into brand new, state-of-the-market
assets that the Company is developing in attractive coastal submarkets
in Southern California.
. Acquisition of approximately 20 acres of undeveloped land and the
initiation of actions to acquire an office complex containing
approximately 366,000 rentable square feet. In January 2001, the Company
completed the acquisition of this office complex and began the
redevelopment of one of the buildings.
. Execution of seven new secured and unsecured debt financings that
provided the Company with approximately $239 million of additional
future borrowing capacity. The Company's total debt as a percentage of
total market capitalization was approximately 41.9% at December 31,
2000.
. Execution of interest rate swap and interest rate cap agreements that
resulted in approximately 82.1% of the Company's total debt being fixed
or capped at December 31, 2000.
Business and Growth Strategies
Growth Strategies. The Company believes that a number of factors will
enable it to continue to achieve its objectives of long-term sustainable
growth in net operating income, defined as operating revenues less property
and related expenses (property expenses, real estate taxes and ground leases)
before depreciation, and Funds From Operations, as defined by NAREIT, as well
as maximization of long-term stockholder value including: (i) the opportunity
to lease available space at attractive rental rates because of high demand and
frictional vacancy levels in the Southern California submarkets in which most
of the properties are located; (ii) the quality and location of the Company's
properties; (iii) the Company's existing substantial development pipeline as
established over the past several years; (iv) the Company's access to
development and leasing opportunities as a result of its extensive experience
and significant working relationships with major Southern California corporate
tenants, municipalities and landowners given the Company's over 50-year
presence in the Southern California market; and (v) the Company's ability to
efficiently manage its assets as a low cost provider of commercial real estate
due to its core capabilities in all aspects of real estate ownership including
property management, leasing, marketing, financing, accounting, legal,
construction management and new development. Management believes that the
Company is well positioned to capitalize on existing opportunities because of
its extensive experience in its submarkets, its seasoned management team and
its proven ability to develop, lease, acquire and efficiently manage office
and industrial properties.
2
Operating Strategies. The Company focuses on enhancing growth in net
operating income and Funds From Operations from its properties by: (i)
maintaining higher than average occupancy rates; (ii) maximizing cash flow
from the properties through active leasing, early renewals, increasing
contractual base rent to current market levels as leases expire and effective
property management; (iii) structuring leases to maximize returns and internal
growth and underwriting leases to manage portfolio credit risk; (iv) managing
operating expenses through the efficient use of internal management, leasing,
marketing, financing, accounting and construction management functions; (v)
maintaining and developing long-term relationships with a diverse tenant
group; (vi) managing the buildings in a way that offers the maximum degree of
utility and operational efficiency to tenants; (vii) continuing to emphasize
capital improvements to enhance the properties' competitive advantages in
their respective markets and improve the efficiency of building systems; and
(viii) attracting and retaining motivated employees by providing financial and
other incentives to meet the Company's operating and financial goals.
Development Strategies. The Company and its predecessors have developed
office and industrial properties, including high technology facilities,
primarily located in Southern California, for its own portfolio and for third
parties, since 1947. Over the past several years, the Company has established
a substantial development pipeline in its two target market regions, Los
Angeles and San Diego Counties. The Company's, in-process, committed and
future development pipeline (including projects held through joint venture
arrangements) can support future development of approximately an aggregate of
2.3 million rentable square feet of office space at a total budgeted cost of
approximately $486 million within the next three to four years. The Company's
strategy with respect to development is as follows: (i) reinvest capital from
strategic dispositions of mature, non-strategic assets into new, state-of-the-
market development assets with higher cash flows and rates of return; (ii)
maintain a disciplined approach to development by focusing on pre-leasing,
phasing and cost control; (iii) continue to expand the Company's build-to-suit
program where it develops properties committed to be leased by specific
tenants since such strategy provides for lower risk development; (iv) pursue
redevelopment opportunities in land constrained markets since such efforts
achieve similar returns to new development with reduced entitlement risk and
shorter construction periods; and (v) to be the premier low-cost provider of
two four-story campus style office buildings in Southern California.
During 2000 and 1999, the Company completed an aggregate of 19 buildings
encompassing an aggregate of approximately 1.9 million rentable square feet at
an aggregate cost of approximately $305 million. As of December 31, 2000, the
Company had 11 office buildings under construction or committed for
construction which when completed are expected to encompass an aggregate of
approximately 964,400 rentable square feet at a total estimated investment of
approximately $232 million. The Company may engage in the additional
development of office and/or industrial properties, primarily in Southern
California, when market conditions support a favorable risk-adjusted return on
such development. The Company's activities with third-party owners in Southern
California are expected to give the Company further access to development
opportunities. There can be no assurance, however, that the Company will be
able to successfully develop any of the properties or that it will have access
to additional development opportunities.
Financing Strategies. The Company's financing policies and objectives are
determined by the Company's Board of Directors. The Company's goal is to limit
its dependence on leverage and maintain a conservative ratio of debt to total
market capitalization (total debt of the Company as a percentage of the market
value of issued and outstanding shares of common stock, including interests
exchangeable therefor, plus total debt). This ratio may be increased or
decreased without the consent of the Company's stockholders and the Company's
organizational documents do not limit the amount of indebtedness that the
Company may incur. At December 31, 2000, total debt constituted approximately
41.9% of the total market capitalization of the Company. The Company's funding
strategies are as follows: (i) maintain financial flexibility and the ability
to access a variety of capital sources; (ii) maintain a staggered debt
maturity schedule to limit risk exposure to any particular point in the
capital and credit market cycles; (iii) complete financing deals in advance of
the need for capital; and (iv) manage interest rate exposure.
3
The Company intends to utilize one or more sources of capital for future
growth, which may include undistributed cash flow, borrowings under the
Company's unsecured credit facility (the "Credit Facility"), the issuance of
debt or equity securities and other bank and/or institutional borrowings.
There can be no assurance, however, that the Company will be able to obtain
capital on terms favorable to the Company.
Significant Tenants
As of March 22, 2001, the Company's ten largest office tenants represented
approximately 28.9% of total annual base rental revenues, defined as
annualized monthly contractual rents from existing tenants at December 31,
2000 determined on a straight-line basis over the term of the related lease in
accordance with GAAP, and its ten largest industrial tenants represented
approximately 9.3% of total annual base rental revenues. Of this amount, its
largest tenant, The Boeing Company, currently leases an aggregate of
approximately 776,900 rentable square feet of office space under twelve
separate leases, representing approximately 9.2% of the Company's total annual
base rental revenues at December 31, 2000. The base periods for 14.9% of The
Boeing Company leases expire over the next 18 months. The base periods for the
remaining leases for The Boeing Company expire during the period from January
2004 through August 2005.
The Company's five largest office tenants, based on annualized base rental
revenues, include: The Boeing Company; Peregrine Systems, Inc.; Epson America,
Inc.; Epicor Software Corporation; and Intuit, Inc. The Company's five largest
industrial tenants, based on annualized base rental revenues, include:
Celestica California, Inc.; Qwest Communications Corporation; Mattel, Inc.;
Abovenet Communications, Inc.; and OmniPak (d.b.a. Raven Industries); (See
Item 2: Properties--Tenant Information for further discussion on the Company's
tenant base.)
Employees
As of March 22, 2001, the Company, through the Operating Partnership and
KSI employed 143 persons. The Company, the Operating Partnership and KSI
believe that relations with their employees are good.
Government Regulations
Many laws and governmental regulations are applicable to the Company's
properties and changes in these laws and regulations, or their interpretation
by agencies and the courts, occur frequently.
Costs of Compliance with the Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations
must meet federal requirements related to access and use by disabled persons.
Although management believes that its properties substantially comply with
present requirements of the ADA, none of its properties have been audited and
investigations of all of its properties have not been conducted to determine
compliance. The Company may incur additional costs of complying with the ADA.
Additional federal, state and local laws also may require modifications to the
Company's properties, or restrict its ability to renovate the properties.
Management cannot predict the ultimate amount of the cost of compliance with
the ADA or other legislation. If the Company incurs substantial costs to
comply with the ADA and any other legislation, its financial condition,
results of operations, cash flow, quoted per share trading price of its common
stock and ability to pay distributions to stockholders could be adversely
affected.
Environmental Matters
Costs related to government regulation and private
litigation. Environmental laws and regulations hold the Company liable for the
costs of removal or remediation of certain hazardous or toxic substances
released on its properties. These laws could impose liability without regard
to whether the Company is responsible for, or even knew of, the presence or
release of the hazardous materials. Government investigations and remediation
actions may have substantial costs and the presence of hazardous substances on
a property could result in personal injury or similar claims by private
plaintiffs. For instance, if asbestos-containing materials and other
4
hazardous or toxic substances were found on the Company's properties, third
parties might seek recovery from the Company for personal injuries associated
with the existence of those substances. As of December 31, 2000, 30 of the
Company's properties contained asbestos-containing materials. Various laws
also impose liability on persons who arrange for the disposal or treatment of
hazardous or toxic substances for the cost of removal or remediation of
hazardous substances at the disposal or treatment facility. These laws often
impose liability whether or not the person arranging for the disposal ever
owned or operated the disposal facility. As the owner and operator of its
properties, the Company may be considered to have arranged for the disposal or
treatment of hazardous or toxic substances.
Use of hazardous materials by some of our tenants. Some of the Company's
tenants routinely handle hazardous substances and wastes on its properties as
part of their routine operations. Environmental laws and regulations subject
these tenants, and potentially the Company, to liability resulting from such
activities. The Company requires its tenants, in their leases, to comply with
these environmental laws and regulations and to indemnify the Company for any
related liabilities. As of December 31, 2000, less than 5% of the Company's
tenants routinely handled hazardous substances and/or wastes on the Company's
properties as part of their routine operations. These tenants were primarily
involved in the light industrial and warehouse business and more specifically
the light electronics assembly business. Management does not believe that
these activities by its tenants will have any material adverse effect on the
Company's operations. Furthermore, management is unaware of any material
noncompliance, liability or claim relating to hazardous or toxic substances or
petroleum products in connection with any of the Company's properties.
Existing conditions at some of our properties. Independent environmental
consultants have conducted Phase I or similar environmental site assessments
on all of the Company's properties. The Company generally obtains these
assessments prior to the acquisition of a property and may later update them
as required for subsequent financing of the property or as requested by
tenants. Site assessments generally include a historical review, a public
records review, an investigation of the surveyed site and surrounding
properties, and the issuance of a written report. These assessments do not
generally include soil samplings or subsurface investigations. The Company's
site assessments revealed that 30 of its properties contain asbestos-
containing materials and that historical operations at or near some of its
properties, including the operation of underground storage tanks, may have
caused soil or groundwater contamination. Prior owners of the affected
properties conducted clean-up of contamination in the soils on the properties
and management does not believe that further clean-up of the soils is
required. None of the Company's site assessments revealed any other
environmental liability that management believes would have a material adverse
effect on the Company's business, assets, or results of operations. Management
is not aware of any such condition, liability, or concern by any other means
that would give rise to material environmental liability. However, the
assessments may have failed to reveal all environmental conditions,
liabilities, or compliance concerns; there may be material environmental
conditions, liabilities, or compliance concerns that arose at a property after
the review was completed; future laws, ordinances or regulations may impose
material additional environmental liability; and current environmental
conditions at the Company's properties may be affected in the future by
tenants, third parties, or the condition of land or operations near its
properties (such as the presence of underground storage tanks). The Company
cannot give assurance that the costs of future environmental compliance will
not affect its ability to make distributions to stockholders.
Environmental insurance coverage limits. The Company carries what
management believes to be sufficient environmental insurance to cover any
potential liability for soil and groundwater contamination at the affected
sites identified in the environmental site assessments. However, management
cannot provide any assurance that the Company's insurance coverage will be
sufficient or that its liability, if any, will not have a material adverse
effect on the Company's financial condition, results of its operations, cash
flow, quoted per share trading price of its common stock and ability to pay
distributions to stockholders.
Other federal, state and local regulations. The Company's properties are
subject to various federal, state and local regulatory requirements, such as
state and local fire and life safety requirements. If the Company failed to
comply with these various requirements, it might incur governmental fines or
private damage awards.
5
Management believes that the Company's properties are currently in material
compliance with all of these regulatory requirements. However, management does
not know whether existing requirements will change or whether future
requirements will require the Company to make significant unanticipated
expenditures that will adversely affect its ability to make distributions to
its stockholders. The City of Los Angeles adopted regulations relating to the
repair of welded steel moment frames located in certain areas damaged as a
result of the January 17, 1994 Northridge earthquake in Southern California.
Currently, these regulations apply to only one of the Company's properties
representing approximately 78,000 rentable square feet. Management believes
that this property complies with these regulations. Management does not know,
however, whether other regulatory agencies will adopt similar regulations or
whether the Company will acquire additional properties which may be subject to
these or similar regulations. Management believes, based in part on
engineering reports which are generally obtained at the time the properties
are acquired, that all of its properties comply in all material respects with
the current regulations. However, if the Company were required to make
significant expenditures under applicable regulations, its financial
condition, results of operations, cash flow, quoted per share trading price of
its common stock and ability to pay distributions to stockholders could be
adversely affected.
Business Risks
This document contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933, as amended (the "1933
Act"), and Section 21E of the Exchange Act of 1934, as amended (the "1934
Act")) pertaining to, among other things, the Company's future results of
operations, cash available for distribution, property acquisitions, lease
renewals, increases in base rent, development activities, sources of growth,
planned development and expansion of owned or leased property, capital
requirements, compliance with contractual obligations and federal, state and
local regulations, conditions of properties, environmental findings and
general business, industry and economic conditions applicable to the Company.
These statements are based largely on the Company's current expectations and
are subject to a number of risks and uncertainties. Actual results could
differ materially from these forward-looking statements. Factors that can
cause actual results to differ materially include, but are not limited to,
those discussed below. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
following factors should be considered in addition to the other information
contained herein in evaluating the Company and its business:
Most of the Company's properties depend upon the Southern California
economy. As of December 31, 2000, 89.7% of the aggregate square footage of the
Company's stabilized portfolio and 92.2% of the Company's annualized base
rent, excluding expense reimbursements and rental abatements, came from
properties located in Southern California. The Company's ability to make
expected distributions to stockholders depends on its ability to generate
Funds From Operations in excess of scheduled principal payments on debt,
payments on the preferred limited partnership units issued by the Operating
Partnership, and capital expenditure requirements. Events and conditions
applicable to owners and operators of real property that are beyond the
Company's control may decrease funds available for distribution and the value
of the Company's properties. These events include: local oversupply or
reduction in demand of office, industrial or other commercial space; inability
to collect rent from tenants; vacancies or inability to rent spaces on
favorable terms; inability to finance property development and acquisitions on
favorable terms; increased operating costs, including insurance premiums,
utilities, and real estate taxes; costs of complying with changes in
governmental regulations; the relative illiquidity of real estate investments;
changing submarket demographics and property damage resulting from seismic
activity. The geographical concentration of the Company's properties may
expose it to greater economic risks than if it owned properties in several
geographic regions. Any adverse economic or real estate developments in the
Southern California region could adversely impact the Company's financial
condition, results from operations and cash flows.
Increasing utility costs and power outages in California may have an
adverse effect on the Company's operating results. Uncertainties and problems
associated with the deregulation of the electric industry in California have
resulted in higher utility costs and intermittent service interruptions in
some areas of the state.
6
However, approximately 75% (based on net rentable square footage) of the
Company's current leases require tenants to pay utility costs directly;
therefore, eliminating the Company's exposure. The remaining 25% of the
Company's leases provide that the tenants reimburse the Company for utility
costs in excess of a base year amount.
Although the Company has not experienced any material trends or effects
arising from this regional issue, it is possible that some of its tenants may
not fulfill their lease obligations or reimburse the Company for their share
of any significant utility increases. In addition it is possible that the
Company may not be able to retain or replace its tenants if energy problems in
California continue or worsen. As a result the Company's financial condition,
results of operations, and cash flows may be adversely affected.
The Company's debt level reduces cash available for distribution and may
expose the Company to the risk of default under its debt obligations. Payments
of principal and interest on borrowings may leave the Company with
insufficient cash resources to operate its properties or to pay distributions
necessary to maintain its REIT qualification. The Company's level of debt and
the limitations imposed by its debt agreements may have important consequences
on the Company, including the following: cash flow may be insufficient to meet
required principal and interest payments; the Company may be unable to
refinance its indebtedness at maturity or the refinancing terms may be less
favorable than the terms of its original indebtedness; the Company may be
forced to dispose of one or more of its properties, possibly on
disadvantageous terms; the Company may default on its obligations and the
lenders or mortgagees may foreclose on the properties that secure the loans
and receive an assignment of rents and leases; the Company's default under one
mortgage loan with cross default provisions could result in a default on other
indebtedness; and the Company may be unable to complete its development plans
or pursue other development opportunities. If one or more of these events were
to occur, the Company's financial position, results of operations, cash flow,
quoted per share trading price of its common stock and ability to pay
distributions to stockholders could be adversely affected. In addition,
foreclosures could create taxable income without accompanying cash proceeds, a
circumstance which could hinder the Company's ability to meet the strict REIT
distribution requirements imposed by the Internal Revenue Code of 1986, as
amended. As of December 31, 2000, the Company had approximately $724 million
aggregate principal amount of indebtedness, $5.7 million of which is due prior
to December 31, 2001. The Company's total debt represented 41.9% of its total
market capitalization at December 31, 2000.
The Company faces significant competition which may decrease the occupancy
and rental rates of its properties. The Company competes with several
developers, owners and operators of office, industrial and other commercial
real estate, many of which have higher vacancy rates. Substantially all of the
Company's properties are located in areas with similar properties as its
competitors. For instance, the occupancy rate for the Company's Long Beach
Airport office property portfolio at December 31, 2000 was 94.1%, in
comparison to 90.9%, for the Long Beach Airport office submarket in total. The
Company believes that its lower vacancy rates means that, on average, its
competitors have more space currently available for lease than the Company. As
a result, the Company's competitors have an incentive to decrease rental rates
until their available space is leased. If the Company's competitors offer
space at rental rates below current market rates, the Company may be pressured
to reduce its rental rates below those currently charged in order to retain
tenants when its tenant leases expire. As a result, the Company's financial
condition, results of operations and cash flows may be adversely affected.
Potential losses may not be covered by insurance. The Company carries
comprehensive liability, fire, extended coverage and rental loss insurance
covering all of its properties. Management believes the policy specifications
and insured limits are appropriate given the relative risk of loss, the cost
of the coverage and industry practice. The Company does not carry insurance
for generally uninsurable losses such as loss from riots or acts of God. Some
of the Company's policies, like those covering losses due to floods, are
subject to limitations involving large deductibles or co-payments and policy
limits. In addition, the Company carries earthquake insurance on properties
located in areas known to be subject to earthquakes in an amount and with
7
deductions which management believes are commercially reasonable. As of
December 31, 2000, 80 of the Office Properties aggregating 6.1 million square
feet (representing approximately 49.0% of the Company's stabilized portfolio
based on aggregate square footage and approximately 70.4% based on annualized
base rent) were located in areas known to be subject to earthquakes. As of
December 31, 2000, 74 of the Company's Industrial Properties aggregating 5.4
million square feet (representing approximately 43.4% of the Company's
stabilized portfolio based on aggregate square footage and approximately 23.5%
based on annualized base rent) were located in areas known to be subject to
earthquakes. While the Company presently carries earthquake insurance on these
properties, the amount of its earthquake insurance coverage may not be
sufficient to cover losses from earthquakes. In addition, the Company may
discontinue earthquake insurance on some or all of its properties in the
future if the cost of premiums for earthquake insurance exceeds the value of
the coverage discounted for the risk of loss. If the Company experiences a
loss which is uninsured or which exceeds policy limits, it could lose the
capital invested in the damaged properties as well as the anticipated future
revenue from those properties. In addition, if the damaged properties are
subject to recourse indebtedness, the Company would continue to be liable for
the indebtedness, even if the properties were unrepairable.
The Company may be unable to successfully complete and operate developed
properties. There are several risks associated with property development. The
Company may be unable to obtain construction financing on favorable terms or
may be unable to obtain permanent financing at all or on advantageous terms if
development projects are financed through construction loans. In addition, the
Company may not complete development projects on schedule or within budgeted
amounts; the Company may encounter delays or refusals in obtaining all
necessary zoning, land use, building, occupancy, and other required
governmental permits and authorizations; the Company may expend funds on and
devote management's time to projects which the Company may not complete. Also,
the Company may lease the developed properties at below expected rental rates.
For example, during the fourth quarter of 1998, the Company withdrew its
participation from a master planned commercial development prior to the
commencement of construction. Also, during the third quarter of 2000, the
Company delayed commencement of construction on one of its projects by four
months. The project was an assemblage in an urban infill location that
required the relocation of some existing businesses. The Company encountered
delays when one of the existing tenants experienced difficulty in relocating
as a result of the high leasing demand and tight supply constraints in that
sub-market.
If one or more of these events were to occur in connection with projects
currently under development, the Company's financial position, results of
operations, cash flow, quoted per share trading price of its common stock and
ability to pay distributions to stockholders could be adversely affected.
While the Company primarily develops office and industrial properties in
Southern California markets, it may in the future develop properties for
retail or other use and expand its business to other geographic regions where
it expects the development of property to result in favorable risk-adjusted
returns on its investment. Presently, the Company does not possess the same
level of familiarity with development of other property types or outside
markets which could adversely affect its ability to develop properties or to
achieve expected performance.
The Company may be unable to complete acquisitions and successfully operate
acquired properties. The Company may acquire office and industrial properties
when strategic opportunities exist. The Company's ability to acquire
properties on favorable terms and successfully operate them is subject to the
following risks: the potential inability to acquire a desired property because
of competition from other real estate investors with significant capital,
including both publicly traded REITs and institutional investment funds; even
if the Company enters into agreements for the acquisition of office and
industrial properties, these agreements are subject to customary conditions to
closing, including completion of due diligence investigations to management's
satisfaction; the Company may be unable to finance the acquisition on
favorable terms; the Company may spend more than budgeted amounts to make
necessary improvements or renovations to acquired properties; and the Company
may lease the acquired properties at below expected rental rates. If the
Company cannot finance property acquisitions on favorable terms or operate
acquired properties to meet financial expectations, its financial position,
results of operations, cash flow, quoted per share trading price of its common
stock and ability to pay distributions to stockholders could be adversely
affected.
8
The Company could default on leases for land on which some of its
properties are located. The Company owns ten office buildings located on
various parcels, each of which the Company leases on a long-term basis. If the
Company defaults under the terms of any particular lease, it may lose the
property subject to the lease. The Company may not be able to renegotiate a
new lease on favorable terms, if at all, upon expiration of the lease and all
of its options. The loss of these properties or an increase of rental expense
would have an adverse effect on the Company's financial position, results of
operations, cash flow, quoted per share trading price of its common stock and
ability to pay distributions to stockholders. The Company has approximately
1.3 million aggregate rentable square feet of rental space located on these
leased parcels at December 31, 2000. The leases for the land under the SeaTac
Office Center, including renewal options, expire in 2062. The lease for the
land under 9455 Towne Center in San Diego expires in October 2043. The primary
lease for the land under 12312 West Olympic Boulevard in Santa Monica expires
in January 2065 with a smaller secondary lease expiring in September 2011. The
leases for the land under the Kilroy Airport Center, Long Beach expire in
2035. Subsequent to December 31, 2000, the Company acquired the fee interest
in the land at 9455 Towne Center Drive in San Diego, California and the ground
lease was terminated.
The Company depends on significant tenants. As of March 22, 2001, the
Company's ten largest office tenants represented approximately 28.9% of total
annualized base rent at December 31, 2000 and its ten largest industrial
tenants represented approximately 9.3% of total annualized base rent at
December 31, 2000. Of this amount, its largest tenant, The Boeing Company,
currently leases approximately 776,900 rentable square feet of office space,
representing approximately 9.2% of the Company's total annual base rental
revenues. See further discussion on the composition of the Company's tenants
by industry at "Item 2--Properties." The Company's revenue and cash available
for distribution to stockholders would be disproportionately and materially
adversely affected if any of its significant tenants were to become bankrupt
or insolvent, or suffer a downturn in their business, or fail to renew their
leases at all or on terms less favorable to the Company than their current
terms.
Downturns in tenants' businesses may reduce the Company's cash flow. As of
December 31, 2000, the Company derived approximately 96.6% of its revenues
from rental income and tenant reimbursements. A tenant may experience a
downturn in its business, which may weaken its financial condition and result
in its failure to make timely rental payments. In the event of default by a
tenant, the Company may experience delays in enforcing its rights as landlord
and may incur substantial costs in protecting its investment. The bankruptcy
or insolvency of a major tenant also may adversely affect the income produced
by the Company's properties. If any tenant becomes a debtor in a case under
the Bankruptcy Code, the Company cannot evict the tenant solely because of the
bankruptcy. On the other hand, the bankruptcy court might authorize the tenant
to reject and terminate its lease. The Company's claim against the tenant for
unpaid, future rent would be subject to a statutory cap that might be
substantially less than the remaining rent actually owed under the lease. Even
so, the Company's claim for unpaid rent would likely not be paid in full. This
shortfall could adversely affect the Company's cash flow and its ability to
make distributions to stockholders. Although the Company has not experienced
material losses from tenant bankruptcies, the Company may experience losses as
a result of tenants filing for bankruptcy protection in the future.
Subsequent to December 31, 2000, one of the Company's tenants, eToys, Inc.
("eToys"), defaulted under its lease with the Company covering 151,000
rentable square feet of office space. In connection with the execution of the
lease, eToys had provided the Company with $15.0 million in letters of credit,
which were established pursuant to the lease to provide credit support to
eToys lease obligations. In January 2001, the Company exercised its rights
under the lease and the letters of credit and drew down $15.0 million.
Subsequent to the Company drawing the $15.0 million, eToys filed for
protection under Chapter 11 of the federal bankruptcy laws. As discussed in
the preceding paragraph, the Company may experience losses in connection with
the bankruptcy of eToys, including losses resulting from costs, delays and
rental rate decreases the Company may experience in its ability to release the
space, and any losses resulting from the bankruptcy could be material to the
Company's consolidated results from operations.
The Company may be unable to renew leases or re-let space as leases
expire. As of December 31, 2000, leases representing approximately 14.2% and
6.1% of the square footage of the Company's properties will expire
9
in 2001 and 2002, respectively. Above market rental rates on some of the
Company's properties may force it to renew or re-lease some expiring leases at
lower rates. While the Company believes that the average rental rates for most
of its properties are below currently quoted market rates in each of its
submarkets, the Company cannot give any assurance that leases will be renewed
or that its properties will be re-leased at rental rates equal to or above the
current rental rates. If the rental rates for the Company's properties
decrease, existing tenants do not renew their leases, or the Company does not
re-lease a significant portion of its available space, its financial position,
results of operations, cash flow, quoted per share trading price of its common
stock and ability to pay distributions to its stockholders would be adversely
affected.
Real estate assets are illiquid and the Company may not be able to sell its
properties when it desires. The Company's investments in its properties are
relatively illiquid which limits the Company's ability to sell its properties
quickly in response to changes in economic or other conditions. In addition,
the Internal Revenue Code of 1986, as amended, generally imposes a 100%
prohibited transaction tax on profits the Company derives from sales of
properties held primarily for sale to customers in the ordinary course of
business, which could effect the Company's ability to sell properties. These
restrictions on the Company' ability to sell its properties could have an
adverse effect on its financial position, results from operations, cash flow,
quoted per share trading price of its common stock and ability to repay
indebtedness and to pay distributions to stockholders.
Common limited partners of the Operating Partnership have limited approval
rights which may prevent the Company from completing a change of control
transaction which may be in the best interests of stockholders. The Company
may not withdraw from the Operating Partnership or transfer its general
partnership interest or admit another general partner without the approval of
a majority of the common limited partnership unitholders except in the case of
a "termination transaction" which requires the approval of 60% of the common
limited partnership unitholders, which include the Company because of its
percentage holding of the common limited partnership units it holds in its
capacity as general partner. The right of common limited partners to vote on
these transactions could limit the Company's ability to complete a change of
control transaction that might otherwise be in the best interest of its
stockholders.
Limited partners of the Operating Partnership must approve the dissolution
of the Operating Partnership and the disposition of properties they
contributed. For as long as limited partners own at least 5% of all of the
common units of the Operating Partnership, the Company must obtain the
approval of limited partners holding a majority of the common units before it
may dissolve the partnership or sell the property located at 2260 East
Imperial Highway at Kilroy Airport Center in El Segundo prior to January 31,
2004. As of December 31, 2000, limited partners owned approximately 12.4% of
the outstanding interests in the Operating Partnership. In addition, the
Company may not sell 11 of its properties prior to October 31, 2002 without
the consent of the limited partners that contributed the properties to the
Operating Partnership, except in connection with the sale or transfer of all
or substantially all of its assets or those of the Operating Partnership or in
connection with a transaction which does not cause the limited partners that
contributed the property to recognize taxable income. In addition, the
Operating Partnership agreed to use commercially reasonable efforts to
minimize the tax consequences to common limited partners resulting from the
repayment, refinancing, replacement or restructuring of debt, or any sale,
exchange or other disposition of any of its other assets. The exercise of one
or more of these approval rights by the limited partners could delay or
prevent the Company from completing a transaction which may be in the best
interest of its stockholders.
The Company's Chairman of the Board of Directors and its President and Chief
Executive Officer each have potential conflicts of interest with the Company.
The Company's Chairman of the Board of Directors and its President and
Chief Executive Officer each have substantial influence over the Company's
affairs. John B. Kilroy, Sr. and John B. Kilroy, Jr., the Company's Chairman
of the Board of Directors and President and Chief Executive Officer,
respectively, together hold two of the six seats on the Company's Board of
Directors. They also beneficially own common limited partnership units
exchangeable for an aggregate of 1,795,572 shares of the Company's common
stock and currently vested options to purchase an aggregate of 433,334 shares
of common stock, representing a total of approximately 8.4%
10
of the total outstanding shares of common stock as of December 31, 2000.
Pursuant to the Company's charter no other stockholder may own, actually or
constructively, more than 7.0% of the Company's common stock. The Board of
Directors has waived the ownership limits with respect to John B. Kilroy, Sr.,
John B., Kilroy, Jr., members of their families and some affiliated entities.
Consequently, Messrs. Kilroy have substantial influence on the Company and
could exercise their influence in a manner that is not in the best interest of
the Company's stockholders. Also, they may, in the future, have a substantial
influence on the outcome of any matters submitted to the Company's
stockholders for approval.
There are limits on the ownership of the Company's capital stock which
limit the opportunities for a change of control at a premium to existing
stockholders. Provisions of the Maryland General Corporation Law, the
Company's charter, the Company's bylaws, and the Operating Partnership's
partnership agreement may delay, defer, or prevent a change in control over
the Company or the removal of existing management. Any of these actions might
prevent the stockholders from receiving a premium for their shares of stock
over the then prevailing market prices.
The Internal Revenue Code sets forth stringent ownership limits on the
Company as a result of its decision to be taxed as a REIT, including: no more
than 50% in value of the Company's capital stock may be owned, actually or
constructively, by five or fewer individuals, including some entities, during
the last half of a taxable year; subject to exceptions, the Company's common
stock shares must be held by a minimum of 100 persons for at least 335 days of
a 12-month taxable year, or a proportionate part of a short taxable year; and
if the Company, or any entity which owns 10% or more of its capital stock,
actually or constructively owns 10% or more of one of the Company's tenants,
or a tenant of any partnership in which the Company is a partner, then any
rents that the Company receives from that tenant in question will not be
qualifying income for purposes of the Internal Revenue Code's REIT gross
income tests regardless of whether the Company receives the rents directly or
through a partnership.
The Company's charter establishes clear ownership limits to protect its
REIT status. No single stockholder may own, either actually or constructively,
more than 7.0% of the Company's common stock outstanding. Similarly, no single
holder of the Company's Series A Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock may actually or constructively own any class or
series of its preferred stock, so that their total capital stock ownership
would exceed 7.0% by value of the Company's total capital stock, and no single
holder of Series B Preferred Stock, if issued, may actually or constructively
own more than 7.0% of the Company's Series B Preferred Stock.
The Board of Directors may waive the ownership limits if it is satisfied
that the excess ownership would not jeopardize the Company's REIT status and
if it believes that the waiver would be in the Company's best interests. The
Board of Directors has waived the ownership limits with respect to John B.
Kilroy, Sr., John B. Kilroy, Jr., members of their families and some
affiliated entities. These named individuals and entities may own either
actually or constructively, in the aggregate, up to 21% of the outstanding
common stock.
If anyone acquires shares in excess of any ownership limits, the transfer
to the transferee will be void with respect to these excess shares; the excess
shares will be automatically transferred from the transferee or owner to a
trust for the benefit of a qualified charitable organization, the purported
transferee or owner will have no right to vote those excess shares, and the
purported transferee or owner will have no right to receive dividends or other
distributions from these excess shares.
The Company's charter contains provisions that may delay, defer, or prevent a
change of control transaction.
The Company's Board of Directors is divided into classes that serve
staggered terms. The Company's Board of Directors is divided into three
classes with staggered terms. The staggered terms for directors may reduce the
possibility of a tender offer or an attempt to complete a change of control
transaction even if a tender offer or a change in control was in the Company's
stockholders' interest.
11
The Company could issue preferred stock without stockholder approval. The
Company's charter authorizes its Board of Directors to issue up to 30,000,000
shares of preferred stock, including convertible preferred stock, without
stockholder approval. The Board of Directors may establish the preferences,
rights and other terms, including the right to vote and the right to convert
into common stock any shares issued. The issuance of preferred stock could
delay or prevent a tender offer or a change of control even if a tender offer
or a change of control was in the Company's stockholders' interest. The
Operating Partnership has issued 1,500,000 Series A Cumulative Redeemable
Preferred units which in the future may be exchanged one-for-one into shares
of 8.075% Series A Cumulative Redeemable Preferred stock, 700,000 Series C
Cumulative Redeemable Preferred units which in the future may be exchanged one
for one into shares of 9.375% Series C Cumulative Redeemable Preferred stock,
and 900,000 Series D Cumulative Redeemable Preferred units which in the future
may be exchanged one for one into shares of 9.250% Series D Cumulative
Redeemable Preferred stock. In addition, the Company has designated and
authorized the issuance of up to 400,000 shares of Series B Junior
Participating Preferred stock. However, no shares of preferred stock of any
series are currently issued or outstanding.
The Company has a stockholders' rights plan. In October 1998, the Company's
Board of Directors adopted a stockholders' rights plan and declared a
distribution of one preferred share purchase right for each outstanding share
of common stock. The rights have anti-takeover effects and would cause
substantial dilution to a person or group that attempts to acquire the Company
on terms that the Company's Board of Directors does not approve. The Company
may redeem the shares for $.01 per right, prior to the time that a person or
group has acquired beneficial ownership of 15% or more of its common stock.
Therefore, the rights should not interfere with any merger or business
combination approved by the Company's Board of Directors.
The staggered terms for directors, the future issuance of additional common
or preferred stock and the Company's stockholders rights plan may: delay or
prevent a change of control, even if a change of control might be beneficial
to the Company's stockholders; deter tender offers that may be beneficial to
the Company's stockholders; or limit stockholders' opportunity to receive a
potential premium for their shares if an investor attempted to gain shares
beyond the Company's ownership limits or otherwise to effect a change of
control.
Loss of the Company's REIT status would have significant adverse
consequences to it and the value of the Company's stock. The Company currently
operates and has operated since 1997 in a manner that is intended to allow it
to qualify as a REIT for federal income tax purposes under the Internal
Revenue Code. If the Company were to lose its REIT status, it would face
serious tax consequences that would substantially reduce the funds available
for distribution to stockholders for each of the years involved because: the
Company would not be allowed a deduction for distributions to stockholders in
computing its taxable income and would be subject to federal income tax at
regular corporate rates; the Company could be subject to the federal
alternative minimum tax and possibly increased state and local taxes; and
unless entitled to relief under statutory provisions, the Company could not
elect to be subject to tax as a REIT for four taxable years following the year
during which it was disqualified. In addition, if the Company fails to qualify
as a REIT, it will not be required to make distributions to stockholders and
all distributions to stockholders will be subject to tax as ordinary income to
the extent of the Company's current and accumulated earnings and profits. As a
result of all these factors, the Company's failure to qualify as a REIT also
could impair its ability to expand its business and raise capital, and would
adversely affect the value of the Company's common stock.
Qualification as a REIT involves the application of highly technical and
complex Internal Revenue Code provisions for which there are only limited
judicial and administrative interpretations. The complexity of these
provisions and of the applicable treasury regulations that have been
promulgated under the Internal Revenue Code is greater in the case of a REIT
that holds its assets through a partnership. The determination of various
factual matters and circumstances not entirely within the Company's control
may affect its ability to qualify as a REIT. For example, in order to qualify
as a REIT, at least 95% of the Company's gross income in any year must be
derived from qualifying sources. Also, the Company must make distributions to
stockholders aggregating annually at least 95% of its net taxable income (90%
beginning January 1, 2001), excluding capital gains. In addition, legislation,
new regulations, administrative interpretations or court decisions may
adversely affect the
12
Company's investors or the Company's ability to qualify as a REIT for tax
purposes. Although management believes that the Company is organized and
operates in a manner so as to qualify as a REIT, no assurance can be given
that the Company has been or will continue to be organized or be able to
operate in a manner so as to qualify or remain qualified as a REIT for tax
purposes.
To maintain its REIT status, the Company may be forced to borrow funds on a
short-term basis during unfavorable market conditions. To qualify as a REIT,
the Company generally must distribute to its stockholders at least 95% (90%
beginning January 1, 2001) of its net taxable income each year, excluding
capital gains, and the Company is subject to regular corporate income taxes to
the extent that it distributes less than 100% of its net taxable income each
year. In addition, the Company will be subject to a 4% nondeductible excise
tax on the amount, if any, by which certain distributions paid in any calendar
year are less than the sum of 85% of its ordinary income, 95% of its capital
gain net income and 100% of its undistributed income from prior years. In
order to maintain its REIT status, the Company may need to borrow funds on a
short term basis to meet the REIT distribution requirements even if the then
prevailing market conditions are not favorable for these borrowings. These
short-term borrowing needs could result from differences in timing between the
actual receipt of income and inclusion of income for federal income tax
purposes, or the effect of non-deductible capital expenditures, the creation
of reserves or required debt or amortization payments.
The Company's growth depends on external sources of capital which are
outside of the Company's control. The Company is required under the Internal
Revenue Code to distribute at least 95% of its taxable income (90% beginning
January 1, 2001), determined without regard to the dividends-paid deduction
and excluding any net capital gain. Because of this distribution requirement,
it may not be able to fund future capital needs, including any necessary
development financing, from operating cash flow. Consequently, management
relies on third-party sources of capital to fund the Company's capital needs.
The Company may not be able to obtain the financing on favorable terms or at
all. Any additional debt the Company incurs will increase its leverage. Access
to third-party sources of capital depends, in part, on: general market
conditions; the market's perception of the Company's growth potential; the
Company's current and expected future earnings; the Company's cash
distributions; and the market price per share of the Company's common stock.
If the Company cannot obtain capital from third-party sources, it may not be
able to acquire properties when strategic opportunities exist or make the cash
distributions to stockholders necessary to maintain its qualification as a
REIT.
The Company's Board of Directors may change investment and financing policies
without stockholder approval and become more highly leveraged which may
increase the Company's risk of default under its debt obligations.
The Company is not limited in its ability to incur debt. The Company's
Board of Directors adopted a policy of limiting indebtedness to approximately
50% of the Company's total market capitalization. Total market capitalization
is the market value of the Company's capital stock, including interests and
units exchangeable for shares of capital stock, plus total debt. However, the
Company's organizational documents do not limit the amount or percentage of
indebtedness, funded or otherwise, that it may incur. The Company's Board of
Directors may alter or eliminate management's current policy on borrowing at
any time without stockholder approval. If this policy changed, the Company
could become more highly leveraged which would result in an increase in its
debt service and which could adversely affect cash flow and the ability to
make expected distributions to stockholders. Higher leverage also increases
the risk of default on the Company's obligations.
The Company may issue additional shares of capital stock without
stockholder approval that may dilute shareholder investment. The Company may
issue shares of its common stock, preferred stock or other equity or debt
securities without stockholder approval. Similarly, the Company may cause the
Operating Partnership to offer its common or preferred units for contributions
of cash or property without approval by the limited partners of the Operating
Partnership or the Company's stockholders. Existing stockholders have no
preemptive rights to acquire any of these securities, and any issuance of
equity securities under these circumstances may dilute a stockholder's
investment.
13
The Company may invest in securities related to real estate which could
adversely affect its ability to make distributions to stockholders. The
Company may purchase securities issued by entities which own real estate and
may, in the future, also invest in mortgages. In general, investments in
mortgages include several risks, including: borrowers may fail to make debt
service payments or pay the principal when due; the value of the mortgaged
property may be less than the principal amount of the mortgage note securing
the property; and interest rates payable on the mortgages may be lower than
the Company's cost for the funds used to acquire these mortgages. Owning these
securities may not entitle the Company to control the ownership, operation and
management of the underlying real estate. In addition, the Company may have no
control over the distributions with respect to these securities, which could
adversely affect its ability to make distributions to stockholders.
Sales of a substantial number of shares of common stock, or the perception
that this could occur, could result in decreasing the market price per share
for the Company's common stock. Management cannot predict whether future
issuances of shares of the Company's common stock or the availability of
shares for resale in the open market will result in decreasing the market
price per share of its common stock.
As of December 31, 2000, 26,475,470 shares of the Company's common stock
were issued and outstanding and the Company had reserved for future issuance
the following shares of common stock: 3,748,545 shares issuable upon the
exchange, at the Company's option, of common units issued in connection with
the formation of the Operating Partnership and in connection with property
acquisitions; 2,704,930 shares issuable under the Company's 1997 Stock Option
and Incentive Plan; and 1,000,000 shares issuable under the Company's Dividend
Reinvestment and Direct Stock Purchase Plan. Of the 26,475,470 shares of
common stock presently outstanding, all but 195,000 shares may be freely
traded in the public market by persons other than the Company's affiliates. In
addition, the Company has filed or has agreed to file registration statements
covering all of the shares of common stock reserved for future issuance.
Consequently, if and when the shares are issued, they may be freely traded in
the public markets.
14
ITEM 2. PROPERTIES
General
As of December 31, 2000, the Company's portfolio of stabilized operating
properties was comprised of 83 Office Properties and 78 Industrial Properties
which encompassed an aggregate of approximately 6.6 million and 5.8 million
rentable square feet, respectively. The Properties include 21 properties that
the Company developed and then stabilized during 2000 and 1999 encompassing an
aggregate of approximately 809,000 and 1.2 million rentable square feet,
respectively. As of December 31, 2000, the Office Properties were
approximately 96.2% leased to 302 tenants and the Industrial Properties were
97.8% leased to 220 tenants. All but ten of the Properties are located in
Southern California.
The Company's stabilized portfolio excludes projects currently under
construction or in pre-development and "lease-up" properties. The Company
defines "lease-up" properties as properties recently developed by the Company
that have not yet reached 95% occupancy. The Company had one lease-up property
at December 31, 2000, encompassing an aggregate of 197,300 rentable square
feet, which stabilized on January 15, 2001. As of December 31, 2000, the
Company had 11 office properties under construction or committed for
construction which when completed are expected to encompass an aggregate of
approximately 964,400 rentable square feet at a total estimated investment of
approximately $232 million. All of the Company's development projects are
located in Southern California.
In general, the Office Properties are leased to tenants on a full service
gross basis and the Industrial Properties are leased to tenants on a triple
net basis. Under a full service lease, the landlord is obligated to pay the
tenant's proportionate share of taxes, insurance and operating expenses up to
the amount incurred during the tenant's first year of occupancy ("Base Year")
or a negotiated amount approximating the tenant's pro rata share of real
estate taxes, insurance and operating expenses ("Expense Stop"). The tenant
pays its pro-rata share of increases in expenses above the Base Year or
Expense Stop. Under a triple net lease, tenants pay their proportionate share
of real estate taxes, operating costs and utility costs.
The Company believes that all of its properties are well maintained and,
based on engineering reports obtained within the last five years, do not
require significant capital improvements. As of December 31, 2000, the Company
managed all of its 83 Office Properties and 76 of its 78 Industrial Properties
through internal property managers.
15
The Office and Industrial Properties
The following table sets forth certain information relating to each of the
Office and Industrial Properties owned as of December 31, 2000. The Company
(through the Operating Partnership and the Finance Partnership) owns a 100%
interest in all of the Office and Industrial Properties, except for the six
office buildings located at 3579 Valley Center Drive, 5005/5010 Wateridge
Vista Drive and 4955 Directors Place in which the Company owns a 50% interest
through the Development LLCs, and the six office buildings located at Kilroy
Airport Center, Long Beach, three office buildings located at the SeaTac
Office Center, and one office building located at 9455 Towne Center Drive in
San Diego, California, each of which are held subject to leases for the land
on which the properties are located expiring in 2035, 2062, and 2043 (assuming
the exercise of the Company's options to extend such leases), respectively.
Subsequent to December 31, 2000, the Company acquired the fee interest in the
land at 9455 Towne Center Drive in San Diego, California and the ground lease
was terminated.
Average
Net Percentage Annual Base Base Rent
No. of Year Built/ Rentable Leased at Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/00(1) ($000's)(2) ($)(3)
- ----------------- --------- ----------- ----------- ----------- ----------- -----------
Office Properties:
Los Angeles County
26541 Agoura Road
Calabasas,
California(7).......... 1 1988 90,878 100.0% $ 1,955 $21.51
5151-5155 Camino Ruiz
Camarillo,
California(7)(4)....... 4 1982 276,216 100.0% 2,705 9.79
4880 Santa Rosa Road
Camarillo,
California(7).......... 1 1998 41,131 100.0% 720 17.51
Kilroy Airport Center,
El Segundo
2250 E. Imperial
Highway(5)............. 1 1983 291,187 96.0% 5,163 17.73
2260 E. Imperial
Highway(6)............ 1 1983 291,187 100.0% 7,448 25.58
2240 E. Imperial
Highway(8)............ 1 1983 118,933 100.0% 1,877 15.78
El Segundo, California
185 S. Douglas Street
El Segundo,
California(7).......... 1 1978 60,000 100.0% 1,523 25.38
525 N. Brand Blvd.
Glendale, California... 1 1990 43,647 100.0% 1,255 28.74
Kilroy Airport Center,
Long Beach
3900 Kilroy Airport
Way.................... 1 1987 126,840 97.3% 2,805 22.12
3880 Kilroy Airport
Way................... 1 1987 98,243 100.0% 1,326 13.49
3760 Kilroy Airport
Way................... 1 1989 165,279 80.0% 3,231 19.55
3780 Kilroy Airport
Way................... 1 1989 219,743 96.4% 5,691 25.90
3750 Kilroy Airport
Way................... 1 1989 10,592 100.0% 147 13.85
3840 Kilroy Airport
Way................... 1 1999 136,026 100.0% 3,520 25.87
Long Beach, California
12312 W. Olympic Blvd.
Los Angeles,
California(7)......... 1 1950/1998 78,000 100.0% 1,613 20.68
2100 Colorado Avenue
Santa Monica,
California(7).......... 3 1992 94,844 100.0% 2,891 30.48
1633 26th Street
Santa Monica,
California(7).......... 1 1972/1997 43,800 100.0% 845 19.30
3130 Wilshire Blvd.
Santa Monica,
California............ 1 1969/1998 88,338 97.9% 2,200 24.91
501 Santa Monica Blvd.
Santa Monica,
California............ 1 1974 70,089 96.3% 1,774 25.30
2829 Townsgate Road
Thousand Oaks,
California............. 1 1990 81,158 100.0% 2,029 25.01
23600-23610 Telo Avenue
Torrance,
California(9).......... 2 1984 79,967 87.2% 887 11.09
24025 Park Sorrento
Calabasas, California.. 1 2000 102,264 96.8% 2,920 28.55
12200 W. Olympic Blvd.
Los Angeles,
California(7)......... 1 2000 151,000 100.0% 5,033 33.33
--- ---------- --------
Subtotal/Weighted
Average--
Los Angeles County..... 29 2,759,362 97.3% 59,558 21.58
--- ---------- --------
16
Average
Net Percentage Annual Base Base Rent
No. of Year Built/ Rentable Leased at Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/00(1) ($000's)(2) ($)(3)
- ----------------- --------- ----------- ----------- ----------- ----------- -----------
Orange County
La Palma Business Center
4175 E. La Palma Avenue
Anaheim, California.... 1 1985 42,790 96.6% $ 782 $18.28
8101 Kaiser Blvd.
Anaheim, California.... 1 1988 60,177 100.0% 1,313 21.81
Anaheim Corporate Center
Anaheim,
California(10)......... 4 1985 158,785 97.1% 2,071 13.04
1240 & 1250 Lakeview
Avenue
Anaheim, California.... 2 1987 78,903 96.0% 987 12.51
601 Valencia Avenue,
Brea, California(7).... 1 1982 60,891 100.0% 801 13.15
111 Pacifica
Irvine, California..... 1 1991 67,381 61.0% 1,070 15.88
9451 Toledo Way
Irvine, California(7).. 1 1984 27,200 100.0% 442 16.25
2501 Pullman/1700 E.
Carnegie
Santa Ana, California.. 2 1969/1988 129,766 -- -- --
--- ---------- --------
Subtotal/Weighted
Average--
Orange County.......... 13 625,893 73.6% 7,466 11.93
--- ---------- --------
San Diego County
5770 Armada Drive
Carlsbad,
California(7).......... 1 1998 81,712 100.0% 1,077 13.17
2231 Rutherford
Carlsbad, California... 1 1998 39,000 100.0% 598 15.32
6215/6220 Greenwich
Drive
San Diego,
California(11)......... 2 1996 212,214 100.0% 3,353 15.80
6055 Lusk Avenue
San Diego,
California(7).......... 1 1997 93,000 100.0% 1,149 12.35
6260 Sequence Drive
San Diego,
California(7).......... 1 1997 130,000 100.0% 1,199 9.22
6290 Sequence Drive
San Diego,
California(7).......... 2 1997 152,415 100.0% 2,084 13.68
6340 & 6350 Sequence
Drive
San Diego,
California(7).......... 2 1998 199,000 100.0% 2,952 14.83
15378 Avenue of Science
San Diego,
California(7).......... 1 1984 68,910 100.0% 625 9.06
Pacific Corporate Center
San Diego,
California(12)......... 7 1995 411,339 100.0% 5,407 13.14
3990 Ruffin Road
San Diego, California.. 1 1998 45,634 100.0% 665 14.57
9455 Towne Center Drive
San Diego,
California(7).......... 1 1998 45,195 100.0% 610 13.50
12225-12235 El Camino
Real
San Diego,
California(13)......... 2 1998 115,513 100.0% 2,251 19.49
4690 Executive Drive
San Diego,
California(7).......... 1 1999 50,929 100.0% 957 18.80
12348 High Bluff Drive
San Diego,
California(14)......... 1 1999 40,274 100.0% 1,175 29.19
9785/9791 Towne Center
Drive
San Diego,
California(7).......... 2 1999 126,000 100.0% 2,250 17.86
5005/5010 Wateridge
Vista Drive
San Diego,
California(7).......... 2 1999 172,778 100.0% 3,351 19.40
3579 Valley Center Drive
San Diego,
California(14)......... 3 1999 294,122 100.0% 9,240 31.42
Carmel Mountain
Technology Center
San Diego, California.. 2 2000 103,000 100.0% 2,782 27.01
4955 Directors Place
San Diego,
California(7).......... 1 2000 76,246 100.0% 2,652 34.78
12390 El Camino Real
San Diego,
California(7).......... 1 2000 72,332 100.0% 1,596 22.07
--- ---------- --------
Subtotal/Weighted
Average--
San Diego County....... 35 2,529,613 100.0% 45,973 18.17
--- ---------- --------
17
Average
Net Percentage Annual Base Base Rent
No. of Year Built/ Rentable Leased at Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/00(1) ($000's)(2) ($)(3)
- ----------------- --------- ----------- ----------- ----------- ----------- -----------
Other
4351 Latham Avenue
Riverside, California.. 1 1990 21,357 100.0% $ 369 $17.30
4361 Latham Avenue
Riverside,
California(15)......... 1 1992 30,581 92.9% 540 17.67
3750 University Avenue
Riverside, California.. 1 1982 124,986 91.3% 2,603 20.83
SeaTac Office Center
18000 Pacific Highway.. 1 1974 209,978 100.0% 3,359 16.00
17930 Pacific Highway.. 1 1980/1997 211,213 100.0% 2,172 10.28
17900 Pacific Highway.. 1 1980 111,460 100.0% 2,088 18.73
--- ---------- --------
Seattle, Washington
Subtotal/Weighted
Average--
Other.................. 6 709,575 98.2% 11,131 15.69
--- ---------- --------
TOTAL/WEIGHTED AVERAGE
OFFICE PROPERTIES...... 83 6,624,443 96.2% $124,128 $18.74
--- ---------- --------
Industrial Properties:
Los Angeles County
Walnut Park Business
Center
Diamond Bar,
California............. 3 1987 165,420 99.5% 1,318 7.97
2031 E. Mariposa Avenue
El Segundo,
California............. 1 1954 192,053 100.0% 2,023 10.53
2260 E. El Segundo Blvd.
El Segundo,
California............ 1 1979 113,820 100.0% 1,467 12.89
2265 E. El Segundo Blvd.
El Segundo,
California............ 1 1978 76,570 100.0% 556 7.27
2270 E. El Segundo Blvd.
El Segundo,
California............ 1 1975 6,362 100.0% 88 13.80
--- ---------- --------
Subtotal/Weighted
Average--
Los Angeles County..... 7 554,225 99.8% 5,452 9.84
--- ---------- --------
Orange County
3340 E. La Palma Avenue
Anaheim, California.... 1 1966 153,320 40.8% 410 2.68
1000 E. Ball Road
Anaheim, California.... 1 1956 100,000 100.0% 639 6.39
1230 S. Lewis Road
Anaheim, California.... 1 1982 57,730 100.0% 313 5.43
4155 E. La Palma Avenue
Anaheim,
California(16)......... 1 1985 74,618 100.0% 764 10.24
4123 E. La Palma Avenue
Anaheim,
California(16)......... 1 1985 69,472 100.0% 518 7.46
5325 East Hunter Avenue
Anaheim, California.... 1 1983 109,449 100.0% 609 5.57
3130-3150 Miraloma
Anaheim, California.... 1 1970 144,000 100.0% 687 4.77
3125 E. Coronado Street
Anaheim, California.... 1 1970 144,000 100.0% 879 6.10
5115 E. La Palma Avenue
Anaheim, California.... 1 1967/1998 286,139 100.0% 1,453 5.08
1250 N. Tustin Avenue
Anaheim, California.... 1 1984 84,185 100.0% 754 8.95
Anaheim Tech Center
Anaheim, California.... 5 1999 593,992 100.0% 3,844 6.47
3250 East Carpenter
Anaheim, California.... 1 1998 41,225 100.0% 271 6.57
Brea Industrial Complex
Brea, California(17)... 7 1981 276,278 97.8% 1,762 6.38
Brea Industrial--Lambert
Road
Brea, California(16)... 2 1999 178,811 100.0% 1,264 7.07
1675 MacArthur
Costa Mesa,
California............. 1 1986 50,842 100.0% 515 10.13
18
Average
Net Percentage Annual Base Base Rent
No. of Year Built/ Rentable Leased at Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/00(1) ($000's)(2) ($)(3)
- ----------------- --------- ----------- ----------- ----------- ----------- -----------
892/909 Towne Center
Drive
Foothill Ranch,
California............. 1 1998 303,533 100.0% $ 2,499 $ 8.23
12681/12691 Pala Drive
Garden Grove,
California............. 1 1970 84,700 100.0% 582 6.87
Garden Grove Industrial
Complex
Garden Grove,
California(18)......... 6 1971 275,971 100.0% 1,706 6.18
12752-12822 Monarch
Street
Garden Grove,
California............. 1 1970 277,037 100.0% 1,068 3.85
7421 Orangewood Avenue
Garden Grove,
California............. 1 1981 82,602 100.0% 575 6.96
12400 Industry Street
Garden Grove,
California............. 1 1972 64,200 100.0% 370 5.76
17150 Von Karman
Irvine, California..... 1 1977 157,458 100.0% 1,087 6.90
184-220 Technology Drive
Irvine, California..... 10 1990 157,499 92.4% 1,864 11.84
9401 Toledo Way
Irvine, California..... 1 1984 244,800 100.0% 2,417 9.87
2055 S.E. Main Street
Irvine,
California(19)......... 1 1973 47,583 100.0% 373 7.83
13645-13885 Alton
Parkway
Irvine,
California(20)......... 9 1989 143,117 88.2% 1,139 7.95
1951 E. Carnegie
Santa Ana, California.. 1 1981 100,000 100.0% 802 8.02
14831 Franklin Avenue
Tustin,
California(19)......... 1 1978 36,256 100.0% 250 6.91
2911 Dow Avenue
Tustin, California..... 1 1998 54,720 100.0% 361 6.60
--- ---------- --------
Subtotal/Weighted
Average--
Orange County.......... 62 4,393,537 97.1% 29,775 6.78
--- ---------- --------
San Diego County
6828 Nancy Ridge Drive
San Diego, California.. 1 1982 39,669 100.0% 385 9.70
--- ---------- --------
Subtotal/Weighted
Average--
San Diego County....... 1 39,669 100.0% 385 9.70
--- ---------- --------
Other
41093 County Center
Drive
Temecula, California... 1 1997 77,582 100.0% 546 7.04
1840 Aerojet Way
Las Vegas, Nevada...... 1 1993 102,948 100.0% 505 4.91
1900 Aerojet Way
Las Vegas, Nevada...... 1 1995 106,717 100.0% 514 4.82
795 Trademark Drive
Reno, Nevada........... 1 1998 75,257 100.0% 809 10.75
5115 N. 27th Avenue
Phoenix, Arizona(21)... 1 1962 130,877 100.0% 649 4.96
199/201 North Sunrise
Avenue
Roseville,
California(22)(23)..... 2 1981 162,203 100.0% 1,618 9.97
3735 Imperial Highway
Stockton, California... 1 1996 164,540 100.0% 1,180 7.17
--- ---------- --------
Subtotal/Weighted
Average--
Other.................. 8 820,124 100.0% 5,821 7.10
--- ---------- --------
TOTAL/WEIGHTED AVERAGE
INDUSTRIAL PROPERTIES.. 78 5,807,555 97.8% $ 41,433 $ 7.13
--- ---------- ----- --------
TOTAL/WEIGHTED AVERAGE
ALL PROPERTIES......... 161 12,431,998 97.0% $165,561 $13.32
=== ========== ===== ========
(footnotes on next page)
19
- --------
(1) Based on all leases at the respective properties in effect as of December
31, 2000.
(2) Calculated as base rent for the year ended December 31, 2000, determined
in accordance with generally accepted accounting principles ("GAAP"), and
annualized to reflect a twelve-month period. Unless otherwise indicated,
leases at the Industrial Properties are written on a triple net basis and
leases at the Office Properties are written on a full service gross basis,
with the landlord obligated to pay the tenant's proportionate share of
taxes, insurance and operating expenses up to the amount incurred during
the tenant's first year of occupancy ("Base Year") or a negotiated amount
approximating the tenant's pro rata share of real estate taxes, insurance
and operating expenses ("Expense Stop"). Each tenant pays its pro rata
share of increases in expenses above the Base Year of Expense Stop.
(3) Calculated as Annual Base Rent divided by net rentable square feet leased
at December 31, 2000.
(4) The four properties at 5151-5155 Camino Ruiz were built between 1982 and
1985.
(5) For this property, leases with The Boeing Company for approximately 96,000
rentable square feet and SDRC Software Products Marketing Division, Inc.
for approximately 6,800 rentable square feet are written on a full service
gross basis, except that there is no Expense Stop.
(6) For this property, the lease with The Boeing Company is written on a
modified full service gross basis under which The Boeing Company pays for
all utilities and other internal maintenance costs with respect to the
leased space and, in addition, pays its pro rata share of real estate
taxes, insurance, and certain other expenses including common area
expenses.
(7) For this property, the lease is written on a triple net basis.
(8) For this property, leases with The Boeing Company for approximately
103,000 rentable square feet are written on a full service gross basis,
except that there is no Expense Stop.
(9) For this property, a lease for approximately 41,000 rentable square feet
is written on a modified gross basis, with the tenant paying its share of
taxes and insurance above base year amounts. The leases for the remaining
23,000 rentable square feet are written on a full service gross basis.
(10) For this property, leases for approximately 70,500 rentable square feet
are written on a full service gross basis, with the tenants paying no
expense reimbursement, leases for approximately 48,500 rentable square
feet are written on a modified full service gross basis, and leases for
approximately 21,000 rentable square feet are written on a triple net
basis.
(11) This property includes an expansion building with 71,000 rentable square
feet developed by the Company in 2000.
(12) The leases for this property are written on a modified net basis, with
the tenants responsible for their pro-rata share of common area expenses
and real estate taxes.
(13) For this property, a lease for 60,840 rentable square feet is written on
a triple net basis.
(14) For this property, the leases are written on a modified full service
gross basis, with the tenants responsible for paying utilities directly.
(15) For this property, a lease for 15,728 rentable square feet is written on
a triple net basis, and leases for 15,114 rentable square feet are
written on a modified full service gross basis.
(16) The leases for these industrial properties are written on a modified
triple net basis, with the tenants responsible for estimated allocated
common area expenses.
(17) The seven properties at the Brea Industrial Complex were built between
1981 and 1988.
(18) The six properties at the Garden Grove Industrial Complex were built
between 1971 and 1985.
(19) For this property, the lease is written on a full service gross basis.
(20) For this property, leases for approximately 53,000 rentable square feet
are written on a full service gross basis, with the tenants paying no
expense reimbursement, leases for approximately 53,000 rentable square
feet are written on a modified triple net basis with the tenants
responsible for estimated allocated common area expenses.
(21) This industrial property was originally designed for multi-tenant use and
currently is leased to a single tenant and utilized as an indoor multi-
vendor retail marketplace.
(22) For this property, leases for approximately 115,500 rentable square feet
are written on a triple net basis and, leases for approximately 46,500
rentable square feet are written on a full service basis, with the
tenants paying no expense reimbursement.
(23) This two-building property was managed by third-party property managers
at December 31, 2000.
20
Development Projects
The following table sets forth certain information relating to each of the
development projects that the Company had under construction at December 31,
2000. The table also sets forth projects committed for future development at
December 31, 2000. The Company owns a 100% interest in all of the development
projects other than Peregrine Systems Corporate Center--Building 3 and
Sorrento Gateway--Lot 4 in which the Company owns a 50% managing interest
through one of the Development LLCs. The Company had one lease-up property at
December 31, 2000, encompassing an aggregate of approximately 197,300 rentable
square feet, which stabilized on January 15, 2001. The remaining eight
development properties completed by the Company during 2000, encompassing an
aggregate of approximately 809,000 rentable square feet, were stabilized at
December 31, 2000. All of the development projects under construction and
committed for development at December 31, 2000 were office projects.
Percentage
Projected Leased or
Estimated Total Square Feet under LOI at
Stabilization Estimated upon December 31,
Project Name/Submarket Date(1) Investment(2) Completion 2000(3)
---------------------- ---------------- ------------- ----------- ------------
(in thousands)
Development Projects
Under Construction:
Calabasas Park Centre--
Phase II/Calabasas,
CA..................... 1st Quarter 2002 $ 19,656 98,706 67%
Calabasas Park Centre--
Phase III/Calabasas,
CA..................... 1st Quarter 2002 2,381 11,744 0%
Innovation Corporate
Center--Lot 8/San
Diego, CA.............. 2nd Quarter 2002 8,358 48,833 50%
Innovation Corporate
Center--Lot 12/San
Diego, CA.............. 2nd Quarter 2002 11,510 70,617 0%
Pacific Technology
Center/San Diego, CA... 2nd Quarter 2001 12,001 67,995 100%
Peregrine Systems
Corporate Ctr--Bldg.
3(4)/ Del Mar, CA...... 2nd Quarter 2002 27,209 129,752 100%
Sorrento Rim Business
Park II/San Diego, CA.. 2nd Quarter 2001 25,055 102,875 100%
Westside Media Center--
Phase III/West LA, CA.. 1st Quarter 2003 53,457 151,000 0%
-------- -------
Total Development
Projects Under
Construction......... 159,627 681,522 57%
-------- -------
Committed Development:
Brobeck, Phleger &
Harrison Expansion/Del
Mar, CA................ 2nd Quarter 2002 22,880 89,168 100%
Imperial &
Sepulveda(5)/El
Segundo, CA............ 4th Quarter 2002 34,397 133,678 0%
Sorrento Gateway--Lot
4(4)/San Diego, CA..... 1st Quarter 2002 15,485 60,060 100%
-------- -------
Total Committed
Development.......... 72,762 282,906 53%
-------- -------
Total In-Process and
Committed Development
Projects............. $232,389 964,428 56%
======== =======
- --------
(1) Based on management's estimation of the earlier of stabilized occupancy
(95.0%) or one year from the date of substantial completion.
(2) Represents total projected development costs at December 31, 2000.
(3) Represents executed leases and signed letters of intent to lease
calculated on a square footage basis at December 31, 2000.
(4) Project is being developed by a Development LLC in which the Company holds
a 50% managing interest. The estimated investment figure includes the
capital required to purchase the remaining 50% interest in the project.
(5) The Company owned a 25% tenancy-in-common interest in this project at
December 31, 2000 and acquired the remaining 75% tenancy-in-common
interest on January 9, 2001.
21
Tenant Information
The following table sets forth information as to the Company's ten largest
office and industrial tenants as of March 22, 2001 based upon annualized
rental revenues for the year ended December 31, 2000.
Percentage
of Total
Annual Base Base Lease
Rental Rental Initial Lease Expiration
Tenant Name Revenues(1) Revenues Date(2) Date
----------- -------------- ---------- -------------- -------------
(in thousands)
Office Properties(3):
The Boeing Company...... $15,693 9.2% August 1984 Various(4)
Peregrine Systems,
Inc. .................. 9,193 5.4 October 1999 Various(5)
Epson America, Inc...... 4,239 2.5 October 1999 Various(6)
Epicor Software
Corporation............ 3,351 2.0 September 1999 August 2009
Intuit, Inc. ........... 3,128 1.8 November 1997 April 2007
Unisys Corporation...... 2,797 1.6 March 1997 April 2001
Sony Music
Entertainment, Inc. ... 2,796 1.6 June 1997 December 2008
SCAN Health Plan........ 3,186 1.9 February 1996 February 2009
Diversa Corporation..... 2,652 1.6 November 2000 November 2015
Northwest Airlines,
Inc. .................. 2,289 1.3 Various(7) Various(7)
------- ----
Total Office
Properties........... $49,324 28.9%
======= ====
Industrial Properties:
Celestica California,
Inc. .................. $ 2,576 1.5% May 1998 May 2008
Qwest Communications
Corporation............ 2,416 1.4 November 2000 October 2015
Mattel, Inc. ........... 2,023 1.2 May 1990 October 2005
AboveNet Communications,
Inc. .................. 1,494 0.9 March 2000 August 2015
OmniPak................. 1,453 0.9 August 1998 July 2008
Targus, Inc. ........... 1,451 0.9 December 1998 Various(8)
Kraft Foods, Inc. ...... 1,173 0.7 February 1996 February 2006
Packard Hughes
Interconnect........... 1,087 0.6 January 1996 January 2001
Southern Plastic Mold,
Inc. .................. 1,057 0.6 September 1997 Various(9)
Extron Electronics...... 953 0.6 February 1995 Various(10)
------- ----
Total Industrial
Properties........... $15,683 9.3%
======= ====
- --------
(1) Determined on a straight-line basis over the term of the related lease
in accordance with GAAP.
(2) Represents date of first relationship between tenant and the Company or
the Company's predecessor, the Kilroy Group.
(3) Subsequent to December 31, 2000, one of the Company's tenants, eToys,
Inc. ("eToys"), defaulted on its lease and declared bankruptcy. In
January 2001, the Company drew $15.0 million under letters of credit
that the Company held as credit support under the terms of the lease.
The eToys lease for 151,000 rentable square feet would have represented
approximately $5.6 million or 3.3% of the Company's annual base rental
revenues at December 31, 2000 had eToys not defaulted on their lease
subsequent to year end.
(4) Boeing Commercial Airplane Group lease at Sea Tac Office Center expires
in December 2004. The Boeing Company leases at Kilroy Airport Center
Long Beach of 49,988, 43,636, 6,814, 26,620, 24,536, 11,100, 8,404 and
15,547 net rentable square feet expire January 2002, August 2005,
January 2001, December 2001 (26,620 and 24,536), June 2005, August 2005,
and September 2005, respectively. Boeing Satellite Systems, Inc. leases
of 286,151 and 100,978 net rentable square feet expire July 2004 and
January 2004, respectively; and a lease of 7,515 expires November 2001,
respectively.
(5) Peregrine Systems, Inc. leases of 52,375, 129,680 and 112,067 net
rentable square feet expire September 2010, April 2012 and July 2011,
respectively.
(6) Epson America, Inc. leases of 162,858 and 3,717 net rentable square feet
expire October 2009 and October 2002, respectively.
(7) Northwest Airlines, Inc. leases of 60,000 and 27,861 net rentable square
feet began on initial lease dates of August 1978 and May 1980 and expire
February 2001 and April 2005, respectively.
(8) Targus, Inc. leases of 200,646 and 65,447 net rentable square feet
expire March 2009 and October 2005, respectively.
(9) Southern Plastic Mold, Inc. leases of 144,000 and 44,000 rentable square
feet expire September 2003 and February 2005, respectively.
(10) Extron Electronics leases of 100,000 and 57,730 net rentable square feet
expire April 2005 and January 2005, respectively.
22
At December 31, 2000, the Company's tenant base was comprised of the
following industries, broken down by percentage of total portfolio base rent:
manufacturing, 34.1%; services, 32.3%; transportation, communications and
public utilities, 11.5%; finance, insurance and real estate, 10.7%; wholesale
trade, 4.6%; retail trade, 3.5%; government, 2.1%; construction, 1.0%; and
agriculture, forestry and fishing, 0.2%. Following is a list comprised of a
representative sample of 25 of the Company's tenants whose annual base rental
revenues were less than 1.0% of the Company's total annual base revenue at
December 31, 2000:
Capital Products, Inc. Matrix Rehabilitation, Inc. Pleasant Holidays LLC
Critchfield Mechanical, Inc. Motion City Films Principia Financial Services
Cybermann, Inc. Netsol International, Inc. QTC Management Inc.
EVA Airways Corporation New Zealand Tourism Board Studio Acoustics Inc.
Facilities Protection Systems North Star Network Solutions Systems Technology Associates
Fiberlink Communications, Inc. Nucleus Electronics Corp. Wescom Credit Union
Hemlock Printers (USA), Inc. Pacific Food Services, Inc. Western Global Telecomm
Integrity Dental Technology Penn Mutual Life Insurance Co.
Longstar International, Inc. Perio Support, Inc.
Lease Expirations
The following table sets forth a summary of the Company's lease expirations
for the Office and Industrial Properties for each of the ten years beginning
with 2001, assuming that none of the tenants exercise renewal options or
termination rights.
Percentage of Average Annual
Net Rentable Total Leased Annual Base Rent Per Net
Area Subject Square Feet Rent Under Rentable
Number of to Expiring Represented Expiring Square Foot
Expiring Leases by Expiring Leases Represented by
Year of Lease Expiration Leases(1) (Sq. Ft.) Leases(2) (000's)(3) Expiring Leases
- ------------------------ --------- ------------ ------------- ----------- ---------------
Office Properties:
2001.................... 68 879,677 14.1% $ 14,734 $16.75
2002.................... 57 407,110 6.5 6,974 17.13
2003.................... 51 271,549 4.4 5,323 19.60
2004.................... 50 772,479 12.4 17,364 22.48
2005.................... 50 915,230 14.7 16,722 18.27
2006.................... 24 530,948 8.5 12,112 22.81
2007.................... 15 630,304 10.1 12,097 19.19
2008.................... 6 313,092 5.0 6,225 19.88
2009.................... 10 772,982 12.4 18,260 23.62
2010 and beyond......... 12 745,127 11.9 26,255 35.24
--- ---------- ----- --------
343 6,238,498 100.0% $136,066 $21.81
--- ---------- --------
Industrial Properties:
2001.................... 74 799,932 14.2% $ 5,674 $ 7.09
2002.................... 50 316,658 5.6 2,929 9.25
2003.................... 40 735,605 13.1 5,158 7.01
2004.................... 15 535,472 9.5 3,825 7.14
2005.................... 15 746,635 13.3 5,586 7.48
2006.................... 6 457,336 8.1 3,249 7.10
2007.................... 3 164,595 2.9 1,397 8.49
2008.................... 5 839,712 14.9 6,268 7.46
2009.................... 9 530,066 9.4 3,996 7.54
2010 and beyond......... 5 503,978 9.0 6,489 12.88
--- ---------- ----- --------
222 5,629,989 100.0% $ 44,571 $ 7.92
--- ---------- --------
Total Portfolio......... 565 11,868,487 100.0% $180,637 $15.22
=== ========== ========
(footnotes on next page)
23
- --------
(1) Includes tenants only. Excludes leases for amenity, retail, parking and
month-to-month tenants. Some tenants have multiple leases.
(2) Based on total leased square footage for the respective portfolios as of
December 31, 2000 unless a lease for a replacement tenant had been
executed on or before January 1, 2001.
(3) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases
executed on or before January 1, 2001.
Secured Debt
At December 31, 2000, the Operating Partnership had 14 secured mortgage and
construction loans outstanding, representing aggregate indebtedness of
approximately $433 million, which were secured by certain of the Properties
and development projects (the "Secured Obligations"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and Note 6 to the Company's consolidated
financial statements included herewith. Management believes that as of
December 31, 2000, the value of the properties securing the respective Secured
Obligations in each case exceeded the principal amount of the outstanding
obligation.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of the Company's properties are presently
subject to any material litigation nor, to the Company's knowledge, is any
material litigation threatened against any of them which if determined
unfavorably to the Company would have a material adverse effect on the
Company's cash flows, financial condition or results of operations. The
Company is party to litigation arising in the ordinary course of business,
none of which if determined unfavorably to the Company is expected to have a
material adverse effect on the Company's cash flows, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the year ended December 31, 2000.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the New York Stock Exchange
("NYSE") on January 28, 1997, under the symbol "KRC." The following table
illustrates the high, low and closing prices by quarter during 2000 and 1999
as reported on the NYSE. On March 20, 2001, there were approximately 235
registered holders of the Company's common stock.
Common
Stock
Dividends
2000 High Low Close Declared
- ---- ------ ------ ------ ---------
First quarter.................................... $21.56 $19.44 $21.06 $0.4500
Second quarter................................... 26.50 21.19 25.95 0.4500
Third quarter.................................... 26.94 24.81 26.69 0.4500
Fourth quarter................................... 29.13 25.56 28.06 0.4500
Common
Stock
Dividends
1999 High Low Close Declared
- ---- ------ ------ ------ ---------
First quarter.................................... $23.38 $19.94 $20.50 $0.4200
Second quarter................................... 26.19 19.69 24.38 0.4200
Third quarter.................................... 24.31 20.31 21.13 0.4200
Fourth quarter................................... 22.38 18.00 22.38 0.4200
The Company pays distributions to common stockholders on or about the 17th
day of each January, April, July and October at the discretion of the Board of
Directors. Distribution amounts depend on the Company's Funds From Operations,
financial condition and capital requirements, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), and such other factors as the Board of Directors
deems relevant.
During 2000, the Company issued 481,290 shares of common stock upon the
conversion of 481,290 common limited partnership units of the Operating
Partnership by limited partners. The issuances of the common shares on a one-
for-one basis were made pursuant to the terms set forth in the partnership
agreement of the Operating Partnership. The shares of common stock were issued
in transactions, not requiring registration under federal securities laws
pursuant to Section 4(2) of the Securities Act of 1933.
On October 13, 2000, the Operating Partnership issued 1,133 common limited
partnership units of the Operating Partnership, valued by the Company at
approximately $30,000 based upon the closing share price of the Company's
common stock as reported on the NYSE at the time of the respective
transactions, to Kilroy Airport Imperial Co. ("KAICO"), a partnership owned by
John B. Kilroy, Sr., the Company's Chairman of the Board of Directors, John B.
Kilroy, Jr. the Company's President and Chief Executive Officer, and certain
other Kilroy family members, in connection with the acquisition of the 25%
tenancy-in-common interest in the KAICO complex (see Note 13 to the Company's
consolidated financial statements). The common limited partnership units were
issued in reliance upon an exemption from registration provided by Regulation
D under the Securities Act as a transaction by an issuer not involving a
public offering. These units may be redeemed at the option of the Company for
cash or shares of the Company's common stock.
25
ITEM 6. SELECTED FINANCIAL DATA
Kilroy Realty Corporation and the Kilroy Group
(in thousands, except per share, square footage and occupancy data)
Kilroy Realty Corporation Consolidated Kilroy Group Combined
--------------------------------------------------- ------------------------
February 1, January 1,
Year Ended Year Ended Year Ended 1997 to 1997 to Year Ended
December 31, December 31, December 31, December 31, January 31, December 31,
2000 1999 1998 1997 1997 1996
------------ ------------ ------------ ------------ ----------- ------------
Statements of Operations
Data:
Rental income.......... $161,236 $140,182 $117,338 $56,069 $2,760 $35,022
Tenant
reimbursements........ 19,441 16,316 14,956 6,751 306 3,752
Development services... 14 698
Interest income........ 4,602 1,175 1,698 3,571
Other income........... 1,834 2,027 3,096 889 4 76
-------- -------- -------- ------- ------ -------
Total revenues....... 187,113 159,700 137,088 67,280 3,084 39,548
-------- -------- -------- ------- ------ -------
Property expenses...... 23,347 20,669 19,281 8,770 579 6,788
Real estate taxes...... 14,591 12,369 10,383 4,199 137 1,673
General and
administrative
expenses.............. 11,114 9,091 7,739 4,949 78 2,383
Ground leases.......... 1,643 1,397 1,223 938 64 768
Provision for
potentially
unrecoverable pre-
development costs..... 1,700
Development expenses... 46 650
Option buy-out cost ... 3,150
Interest expense....... 39,109 26,309 20,568 9,738 1,895 21,853
Depreciation and
amortization.......... 41,125 33,794 26,200 13,236 787 9,111
-------- -------- -------- ------- ------ -------
Total expenses....... 130,929 103,629 87,094 41,830 3,586 46,376
-------- -------- -------- ------- ------ -------
Income (loss) before
net gains on
dispositions of
operating properties,
equity in income of
unconsolidated
subsidiary, minority
interests and
extraordinary gains... 56,184 56,071 49,994 25,450 (502) (6,828)
Net gains on
dispositions of
operating
properties............ 11,256 46
Equity in income of
unconsolidated
subsidiary............ 10 17 5 23
-------- -------- -------- ------- ------ -------
Income (loss) before
minority interests
and extraordinary
gains................. 67,450 56,134 49,999 25,473 (502) (6,828)
Minority interests:
Distributions on
Cumulative
Redeemable Preferred
units............... (13,500) (9,560) (5,556)
Minority interest in
earnings of
Operating
Partnership......... (6,683) (6,480) (5,621) (3,413)
Minority interest in
earnings of
Development LLCs.... (421) (199)
-------- -------- -------- ------- ------ -------
Total minority
interests............. (20,604) (16,239) (11,177) (3,413)
-------- -------- -------- -------
Income (loss) before
extraordinary gains... 46,846 39,895 38,822 22,060 (502) (6,828)
Extraordinary gains--
extinguishment of
debt.................. 3,204 20,095
-------- -------- -------- ------- ------ -------
Net income........... $ 46,846 $ 39,895 $ 38,822 $22,060 $2,702 $13,267
======== ======== ======== ======= ====== =======
Share Data:
Weighted average
shares outstanding--
basic................. 26,599 27,701 26,989 18,445
======== ======== ======== =======
Weighted average
shares outstanding--
diluted............... 26,755 27,727 27,060 18,539
======== ======== ======== =======
Net income per common
share--basic.......... $ 1.76 $ 1.44 $ 1.44 $ 1.20
======== ======== ======== =======
Net income per common
share--diluted........ $ 1.75 $ 1.44 $ 1.43 $ 1.19
======== ======== ======== =======
Distributions per
common share.......... $ 1.80 $ 1.68 $ 1.62 $ 1.42
======== ======== ======== =======
26
December 31,
-----------------------------------------------------------
Kilroy Group
Kilroy Realty Corporation Consolidated Combined
--------------------------------------------- ------------
2000 1999 1998 1997 1996
---------- ---------- ---------- --------- ------------
Balance Sheet Data:
Investment in real
estate, before
accumulated
depreciation and
amortization.......... $1,496,477 $1,410,238 $1,194,284 $ 834,690 $ 227,337
Total assets........... 1,457,169 1,320,501 1,109,217 757,654 128,339
Total debt............. 723,688 553,516 405,383 273,363 223,297
Total liabilities...... 789,010 613,519 452,818 305,319 242,116
Total minority
interests............. 226,734 234,053 180,500 55,185
Total stockholders'
equity/(accumulated
deficit).............. 441,425 472,929 475,899 397,150 (113,777)
Other Data:
Funds From
Operations(1)(2)...... $ 83,471 $ 80,631 $ 71,174 $ 39,142 $ 5,433
Cash flows from(3):
Operating
activities.......... 74,009 84,635 73,429 28,928 5,520
Investing
activities.......... (117,731) (192,795) (343,717) (551,956) (2,354)
Financing
activities.......... 35,206 127,833 267,802 531,957 (3,166)
Office Properties:
Rentable square
footage............. 6,624,423 6,147,985 5,600,459 4,200,734 1,688,383
Occupancy............ 96.2% 96.4% 95.7% 94.3% 76.0%
Industrial Properties:
Rentable square
footage............. 5,807,555 6,477,132 6,157,107 5,027,716 916,570
Occupancy............ 97.8% 96.9% 96.0% 91.9% 97.6%
- --------
(1) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), "Funds From Operations" represents net income (loss) before
minority interest of common unitholders (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization
(excluding amortization of deferred financing costs and depreciation of
non-real estate assets) and after adjustments for unconsolidated
partnerships and joint ventures. Non-cash adjustments to arrive at Funds
From Operations were as follows: in all periods, depreciation and
amortization; in 1996, gains on extinguishment of debt; and in 2000, 1999,
1998 and 1997 non-cash amortization of restricted stock grants. Further,
in 1996, non-recurring items (option buy-out cost) were excluded.
Management considers Funds From Operations an appropriate measure of
performance of an equity REIT because it is predicated on cash flow
analyses. The Company computes Funds From Operations in accordance with
standards established by the Board of Governors of NAREIT in its March
1995 White Paper as clarified by the November 1999 NAREIT National policy
bulletin which became effective on January 1, 2000, which may differ from
the methodology for calculating Funds From Operations utilized by other
equity REITs and, accordingly, may not be comparable to Funds From
Operations reported by such other REITs. Further, Funds From Operations
does not represent amounts available for management's discretionary use
because of needed capital reinvestment or expansion, debt service
obligations, or other commitments and uncertainties. See the notes to the
financial statements of the Company. Funds From Operations should not be
considered as an alternative to net income (loss) (computed in accordance
with GAAP) as an indicator of the properties' financial performance or to
cash flow from operating activities (computed in accordance with GAAP) as
a measure or indicator of the properties' liquidity, nor is it indicative
of funds available to fund the properties' cash needs, including the
Company's ability to pay dividends or make distributions.
(2) Funds From Operations for 1997 is derived from the results of operations
of Kilroy Realty Corporation for the period February 1, 1997 to December
31, 1997.
(3) Cash flow for 1997 represents the cash flow of the Kilroy Group for the
period January 1, 1997 to January 31, 1997 and Kilroy Realty Corporation
for the period February 1, 1997 to December 31, 1997.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to the consolidated financial statements
of the Company and should be read in conjunction with the financial statements
and notes thereto appearing elsewhere in this report. Statements contained in
this "Management's Discussion and Analysis of Financial Condition and Results
of Operations" that are not historical facts may be forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected.
Some of the enclosed information presented is forward-looking in nature,
including information concerning development timing and investment amounts.
Although the information is based on the Company's current expectations,
actual results could vary from expectations stated here. Numerous factors will
affect the Company's actual results, some of which are beyond its control.
These include the timing and strength of regional economic growth, the
strength of commercial and industrial real estate markets, competitive market
conditions, future interest rate levels and capital market conditions. You are
cautioned not to place undue reliance on this information, which speaks only
as of the date of this report. The Company assumes no obligation to update
publicly any forward-looking information, whether as a result of new
information, future events or otherwise. For a discussion of important risks
related to the Company's business, and an investment in its securities,
including risks that could cause actual results and events to differ
materially from results and events referred to in the forward-looking
information, see the discussion under the caption "business risks" in Item 1-
Business. In light of these risks, uncertainties and assumptions, the forward-
looking events contained herein might not occur.
Overview and Background
The Company, which owns, develops, operates, and acquires office and
industrial real estate, primarily in Southern California, commenced operations
upon the completion of its initial public offering in January 1997 and
operates as a self-administered REIT. The Company owns its interests in all of
its properties through the Operating Partnership and the Finance Partnership
and conducts substantially all of its operations through the Operating
Partnership. The Company owned an 87.6% and 86.8% general partnership interest
in the Operating Partnership as of December 31, 2000 and 1999, respectively.
The Finance Partnership is a wholly-owned subsidiary of the Company.
The Company's revenue is derived primarily from rental income, including
tenant reimbursements. The Company's revenue growth in 2000 was due primarily
to operating results from $327 million of development projects completed and
added to the Company's portfolio of stabilized properties in 1999 and 2000 and
was also due to a 7.1% increase in net operating income from the Company's
"Core Portfolio". The Company defines its "Core Portfolio" as stabilized
properties owned at January 1, 1999 and still owned at December 31, 2000.
Management believes that the most significant part of the Company's revenue
growth within the next two to three years will come from its substantial
development pipeline of approximately 1.3 million rentable square feet of
office space to be developed over the next three to four years. Management
also believes that continued success of the real estate market in the
Company's principal markets will result in strong demand for office and
industrial space. Consequently, management currently expects that the
Company's revenue in the next one to two years will also grow as a result of
re-leasing, at generally higher lease rates, approximately 1.3 million square
feet of office space and 1.1 million square feet of industrial space currently
subject to leases expiring during the next two years.
Factors Which May Affect Future Results of Operations
As 89.7% of the total net rentable square footage of the Company's
stabilized portfolio is located in California, the Company's operating results
are and will continue to be affected by uncertainties and problems associated
with the deregulation of the electric industry in California. Such
deregulation has resulted in higher utility costs in some areas of the state
and intermittent service interruptions. As of the date of this report, the
Company has not experienced any material trends or effects arising from this
regional issue. Approximately 75% (based on net rentable square footage) of
the Company's current leases require tenants to pay utility costs
28
directly; therefore, eliminating the Company's exposure. The remaining 25% of
the Company's leases provide that the tenants reimburse the Company for utility
costs in excess of a base year amount. See "Risk factors--Increasing utility
costs and power outages in California may have an adverse effect on the
Company's operating results."
Results of Operations
During the year ended December 31, 2000, the Company completed the
development of nine office buildings encompassing an aggregate of approximately
$1.0 million rentable square feet. During the year ended December 31, 1999, the
Company completed the development of six office and four industrial buildings
encompassing an aggregate of approximately 472,200 and 390,200 rentable square
feet, respectively. All of the aforementioned development projects completed by
the Company during 2000 and 1999 were included in the Company's portfolio of
stabilized operating properties at December 31, 2000 with the exception of one
property which became stabilized on January 15, 2001. The Company's stabilized
portfolio consists of all of the Company's Office and Industrial Properties,
excluding projects currently under construction or in pre-development and
properties developed by the Company that have not reached 95.0% occupancy
("lease-up" properties). At December 31, 2000, the Company had eleven office
buildings under construction or committed for construction which when completed
are expected to encompass an aggregate of approximately 964,400 rentable square
feet.
During the year ended December 31, 2000, the Company disposed of nine office
and nine industrial buildings encompassing 286,700 and 669,800 aggregate
rentable square feet, respectively, for an aggregate sales price of $113.6
million at a net gain of approximately $11.3 million. During the year ended
December 31, 1999, the Company acquired three office buildings encompassing an
aggregate of approximately 176,900 rentable square feet, for an aggregate
acquisition cost of $30.6 million, and disposed of five office and five
industrial building encompassing 113,700 and 335,800 aggregate rentable square
feet, respectively for an aggregate sales price of $22.6 million. Operating
results for acquired properties are included in the consolidated financial
statements of the Company subsequent to their respective acquisition dates.
As a result of the properties developed by the Company subsequent to
December 31, 1999, net of the effect of properties disposed of during 2000,
rentable square footage in the Company's portfolio of stabilized operating
properties decreased approximately 0.2 million rentable square feet, or 1.6%,
to 12.4 million rentable square feet at December 31, 2000 compared to 12.6
million rentable square feet at December 31, 1999. As of December 31, 2000, the
Company's portfolio of stabilized operating properties was comprised of 83
Office Properties encompassing 6.6 million rentable square feet and 78
Industrial Properties encompassing 5.8 million rentable square feet. The
stabilized portfolio occupancy rate at December 31, 2000 was 97.0%, with the
Office and Industrial Properties 96.2% and 97.8% occupied, respectively, as of
such date.
29
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Year ended
December 31,
----------------- Dollar Percentage
2000 1999 Change Change
-------- -------- ------- ----------
(dollars in thousands)
Revenues:
Rental income......................... $161,236 $140,182 $21,054 15.0%
Tenant reimbursements................. 19,441 16,316 3,125 19.2
Interest income....................... 4,602 1,175 3,427 291.7
Other income.......................... 1,834 2,027 (193) (9.5)
-------- -------- -------
Total revenues...................... 187,113 159,700 27,413 17.2
======== ======== =======
Expenses:
Property expenses..................... 23,347 20,669 2,678 13.0
Real estate taxes..................... 14,591 12,369 2,222 18.0
General and administrative expenses... 11,114 9,091 2,023 22.3
Ground leases......................... 1,643 1,397 246 17.7
Interest expense...................... 39,109 26,309 12,800 48.7
Depreciation and amortization......... 41,125 33,794 7,331 21.7
-------- -------- -------
Total expenses...................... 130,929 103,629 27,300 26.3
======== ======== =======
Income from operations before net gains
on dispositions of operating
properties, equity in income of
unconsolidated subsidiary, and minority
interests.............................. $ 56,184 $ 56,071 $ 113 0.2%
======== ======== =======
Rental Operations
Management evaluates the operations of its portfolio based on operating
property segment type. The following tables compare the net operating income,
defined as operating revenues less property and related expenses (property
expenses, real estate taxes and ground leases) before depreciation, for the
Office and Industrial Properties for the years ended December 31, 2000 and
1999.
Office Properties
Total Office Portfolio Core Office Portfolio(1)
------------------------------------ ----------------------------------
Dollar Percentage Dollar Percentage
2000 1999 Change Change 2000 1999 Change Change
-------- ------- ------- ---------- ------- ------- ------ ----------
(dollars in thousands)
Operating revenues:
Rental income......... $117,309 $96,527 $20,782 21.5% $90,056 $86,804 $3,252 3.7%
Tenant
reimbursements....... 14,077 10,966 3,111 28.4 12,109 10,340 1,769 17.1
Other income.......... 786 1,779 (993) (55.8) 523 1,206 (683) (56.6)
-------- ------- ------- ------- ------- ------
Total............... 132,172 109,272 22,900 21.0 102,688 98,350 4,338 4.4
-------- ------- ------- ------- ------- ------
Property and related
expenses:
Property expenses..... 19,596 17,553 2,043 11.6 16,684 16,539 145 0.9
Real estate taxes..... 10,527 7,589 2,938 38.7 8,055 6,716 1,339 19.9
Ground leases......... 1,643 1,397 246 17.6 1,390 1,336 54 4.0
-------- ------- ------- ------- ------- ------
Total............... 31,766 26,539 5,227 19.7 26,129 24,591 1,538 6.3
-------- ------- ------- ------- ------- ------
Net operating income, as
defined................ $100,406 $82,733 $17,673 21.4% $76,559 $73,759 $2,800 3.8%
======== ======= ======= ======= ======= ======
- --------
(1) Stabilized office properties owned at January 1, 1999 and still owned at
December 31, 2000.
30
Total revenues from Office Properties increased $22.9 million, or 21.0% to
$132.2 million for the year ended December 31, 2000 compared to $109.3 million
for the year ended December 31, 1999. Rental income from Office Properties
increased $20.8 million, or 21.5% to $117.3 million for the year ended
December 31, 2000 compared to $96.5 million for the year ended December 31,
1999. Of this increase, $19.1 million was generated by the office buildings
developed by the Company in 1999 and 2000 (the "Office Development
Properties") which was offset by a decrease of $1.5 million generated by
office buildings acquired during 1999, net of the effect of office properties
disposed of during 1999 and 2000 (the "Net Office Dispositions"). The
remaining $3.2 million increase was generated by the Core Office Portfolio and
represented a 3.7% increase in rental income for the Core Office Properties.
This increase was attributable to both an increase in rental rates and an
increase in average occupancy. Average occupancy for the Core Office
Properties increased 1.6%, to 95.4% at December 31, 2000 from 93.8% at
December 31, 1999.
Tenant reimbursements from Office Properties increased $3.1 million, or
28.4% to $14.1 million for the year ended December 31, 2000 compared to $11.0
million for the year ended December 31, 1999. An increase of $1.3 million in
tenant reimbursements was generated by the Office Development Properties net
of Net Office Dispositions. The remaining increase of $1.8 million in tenant
reimbursements was generated by the Core Office Properties which was primarily
due to the collection of amounts identified in common area maintenance
reconciliations. In addition, $0.8 million relates to an amount recorded for
estimated tenant reimbursement of supplemental real estate taxes accrued in
2000. Other income from Office Properties decreased $1.0 million, or 55.8% to
$0.8 million for the year ended December 31, 2000 compared to $1.8 million for
the same period in 1999. For the year ended December 31, 1999, other income
from Office Properties included $0.5 million in gains from the sale of 13
acres of undeveloped land in Calabasas and San Diego, California. In addition,
in 1999 the Company earned a $0.5 million consulting fee for assisting an
existing tenant with potential expansion plans. The remaining amounts in other
income from Office Properties for both periods consisted primarily of lease
termination fees, management fees and tenant late charges.
Total expenses from Office Properties increased $5.2 million, or 19.7% to
$31.8 million for the year ended December 31, 2000 compared to $26.6 million
for the year ended December 31, 1999. Property expenses increased $2.0
million, or 11.6% to $19.6 million for the year ended December 31, 2000
compared to $17.6 million for the year ended December 31, 1999. An increase of
$1.9 million in property expenses was attributable to the Office Development
Properties net of Net Office Dispositions. The remaining increase of
$0.1 million in property expenses was attributable to the Core Office
Properties and was due primarily to increased salaries and benefits for
property management personnel. Real estate taxes increased $2.9 million, or
38.7% to $10.5 million for the year ended December 31, 2000 compared to $7.6
million for the year ended December 31, 1999. An increase of $1.6 million was
attributable to the Office Development Properties net of Net Office
Dispositions. The remaining increase of $1.3 million was attributable to the
Core Office Properties. This increase at the Core Office Properties was due
primarily to a one-time $1.1 million adjustment for potential supplemental
real estate taxes. As noted above, the Company recorded $0.8 million in
estimated tenant reimbursements related to this one-time adjustment. Ground
lease expense increased $0.2 million for the year ended December 31, 2000
compared to the same period in 1999 primarily due to ground lease expense at
two of the Office Development Properties.
Net operating income, as defined, from Office Properties increased $17.7
million, or 21.4% to $100.4 million for the year ended December 31, 2000
compared to $82.7 million for the year ended December 31, 1999. Of this
increase, $14.9 million was generated by the Office Development Properties net
of Net Office Dispositions. The remaining increase of $2.8 million was
generated by the Core Office Properties and represented a 3.8% increase in net
operating income for the Core Office Properties.
31
Industrial Properties
Total Industrial Portfolio Core Industrial Portfolio(1)
---------------------------------- ----------------------------------
Dollar Percentage Dollar Percentage
2000 1999 Change Change 2000 1999 Change Change
------- ------- ------ ---------- ------- ------- ------ ----------
(dollars in thousands)
Operating revenues:
Rental income......... $43,927 $43,655 $ 272 0.6% $38,447 $34,981 $3,466 9.9%
Tenant
reimbursements....... 5,364 5,350 14 0.3 4,468 4,118 350 8.5
Other income.......... 1,048 248 800 322.6 1,048 123 925 752.0
------- ------- ------ ------- ------- ------
Total............... 50,339 49,253 1,086 2.2 43,963 39,222 4,741 12.1
------- ------- ------ ------- ------- ------
Property and related
expenses:
Property expenses..... 3,751 3,116 635 20.4 2,954 2,555 399 15.6
Real estate taxes..... 4,064 4,780 (716) (15.0) 3,514 3,910 (396) (10.1)
------- ------- ------ ------- ------- ------
Total............... 7,815 7,896 (81) (1.0) 6,468 6,465 3 0.0
------- ------- ------ ------- ------- ------
Net operating income, as
defined................ $42,524 $41,357 $1,167 2.8% $37,495 $32,757 $4,738 14.5%
======= ======= ====== ======= ======= ======
- --------
(1) Stabilized industrial properties owned at January 1, 1999 and still owned
at December 31, 2000.
Total revenues from Industrial Properties increased $1.1 million, or 2.2%
to $50.3 million for the year ended December 31, 2000 compared to $49.2
million for the year ended December 31, 1999. Rental income from Industrial
Properties increased $0.3 million, or 0.6% to $43.9 million for the year ended
December 31, 2000 compared to $43.6 million for the year ended December 31,
1999. Of this increase, $1.7 million was generated by the industrial buildings
developed by the Company in 1999 and 2000 (the "Industrial Development
Properties") offset by a decrease of $4.9 million generated by the industrial
buildings disposed of during 1999 and 2000 (the "Industrial Dispositions").
The remaining $3.5 million increase was generated by the Core Industrial
Portfolio which represented a 9.9% increase in rental income for the Core
Industrial Properties. This increase was attributable to both an increase in
average occupancy of 0.7% and an increase in rental rates for the Core
Industrial Properties.
Tenant reimbursements from Industrial Properties remained consistent for
the years ended December 31, 2000 and 1999. A decrease of $0.3 million was
attributable to the Industrial Dispositions and the Industrial Development
Properties, which was offset by an increase of $0.3 million attributable to
the Core Industrial Portfolio. Other income from Industrial Properties
increased $0.8 million, or 322.6% to $1.1 million for the year ended December
31, 2000 compared to $0.3 million for the comparable period in 1999. Other
income for the years ended December 31, 2000 and 1999 consisted primarily of
lease termination fees.
Total expenses from Industrial Properties decreased $0.1 million, or 1.0%
to $7.8 million for the year ended December 31, 2000 compared to $7.9 million
for the year ended December 31, 1999. Property expenses increased $0.6
million, or 20.4% to $3.7 million for the year ended December 31, 2000
compared to $3.1 million for the year ended December 31, 1999. An increase of
$0.2 million in property expenses was attributable to the Industrial
Dispositions and the Industrial Development Properties. The remaining increase
of $0.4 million in property expenses was attributable to the Core Industrial
Portfolio. This increase was due to increased salaries and benefits for
property management personnel, and increases in variable costs due to higher
occupancy. Real estate taxes decreased $0.7 million, or 15.0% to $4.1 million
for the year ended December 31, 2000 compared to $4.8 million for the year
ended December 31, 1999. Of this decrease, $0.3 million was attributable to
the Net Industrial Dispositions and Industrial Development Properties. The
remaining $0.4 million decrease was attributable to the Core Industrial
Portfolio and was primarily due to the effect of prior year real estate taxes
which were successfully appealed and refunded to the Company in 2000.
32
Net operating income, as defined, from Industrial Properties increased $1.2
million, or 2.8% to $42.5 million for the year ended December 31, 2000
compared to $41.3 million for the year ended December 31, 1999. An increase of
$4.8 million generated by the Core Industrial Portfolio, which represented a
14.5% increase in net operating income for the Core Industrial Portfolio, was
offset by a $3.6 million decrease generated by the Industrial Dispositions and
the Industrial Development Properties.
Non-Property Related Income and Expenses
Interest income increased $3.4 million, or 291.7% to $4.6 million for the
year ended December 31, 2000 compared to $1.2 million for the year ended
December 31, 1999. This increase was due primarily to the receipt of interest
income on a note receivable acquired in May 2000.
General and administrative expenses increased $2.0 million, or 22.3% to
$11.1 million for the year ended December 31, 2000 compared to $9.1 million
for the year ended December 31, 1999. This increase was due primarily to
annual increases for salaries and benefits and a $0.8 million increase in non-
cash amortization of restricted stock grants.
Interest expense increased $12.8 million, or 48.7% to $39.1 million for the
year ended December 31, 2000 compared to $26.3 million for the same period in
1999, primarily due to a net increase in the Company's aggregate indebtedness
during 2000 and a general increase in market LIBOR rates during 2000. The
Company's weighted average interest rate increased approximately 0.5% to 8.2%
at December 31, 2000 compared to 7.7% at December 31, 1999.
Depreciation and amortization expense increased $7.3 million, or 21.7% to
$41.1 million for the year ended December 31, 2000 compared to $33.8 million
for the same period in 1999. The increase was primarily due to depreciation on
the Office and Industrial Development Properties developed by the Company in
1999 and 2000.
Income
Net income before net gains on dispositions of operating properties, equity
in income of unconsolidated subsidiary, and minority interests increased $0.1
million or 0.2% to $56.2 million for the year ended December 31, 2000 from
$56.1 million for the year ended December 31, 1999. The increase was due to
the increase in net operating income from the Office and Industrial Properties
of $17.7 million and $1.2 million, respectively, offset primarily by an
increase in interest expense of $12.8 million and an increase in depreciation
and amortization of $7.3 million.
33
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Year ended
December 31,
----------------- Dollar Percentage
1999 1998 Change Change
-------- -------- ------- ----------
(dollars in thousands)
Revenues:
Rental income......................... $140,182 $117,338 $22,844 19.5%
Tenant reimbursements................. 16,316 14,956 1,360 9.1
Interest income....................... 1,175 1,698 (523) (30.8)
Other income.......................... 2,027 3,096 (1,069) (34.5)
-------- -------- -------
Total revenues...................... 159,700 137,088 22,612 16.5
-------- -------- -------
Expenses:
Property expenses..................... 20,669 19,281 1,388 7.2
Real estate taxes..................... 12,369 10,383 1,986 19.1
General and administrative expenses... 9,091 7,739 1,352 17.5
Ground leases......................... 1,397 1,223 174 14.2
Provision for potentially
unrecoverable pre-development costs.. 1,700 (1,700) (100.0)
Interest expense...................... 26,309 20,568 5,741 27.9
Depreciation and amortization......... 33,794 26,200 7,594 29.0
-------- -------- -------
Total expenses...................... 103,629 87,094 16,535 19.0
-------- -------- -------
Income from operations before net gains
on dispositions of operating
properties, equity in income of
unconsolidated subsidiary, and minority
interests.............................. $ 56,071 $ 49,994 $ 6,077 12.2%
======== ======== =======
Rental Operations
Management evaluates the operations of its portfolio based on operating
property segment type. The following tables compare the net operating income,
defined as operating revenues less property and related expenses (property
expenses, real estate taxes and ground leases) before depreciation, for the
Office and Industrial Properties for the years ended December 31, 1999 and
1998.
Office Properties
Total Office Portfolio Core Office Portfolio(1)
------------------------------------ ----------------------------------
Dollar Percentage Dollar Percentage
1999 1998 Change Change 1999 1998 Change Change
-------- ------- ------- ---------- ------- ------- ------ ----------
(dollars in thousands)
Operating revenues:
Rental income......... $ 96,527 $82,164 $14,363 17.5% $67,937 $66,233 $1,704 2.6%
Tenant
reimbursements....... 10,966 10,957 9 0.1 8,931 9,623 (692) (7.2)
Other income.......... 1,779 2,956 (1,177) (39.8) 1,027 319 708 221.9
-------- ------- ------- ------- ------- ------
Total............... 109,272 96,077 13,195 13.7 77,895 76,175 1,720 2.3
-------- ------- ------- ------- ------- ------
Property and related
expenses:
Property expenses..... 17,553 16,373 1,180 7.2 12,819 13,214 (395) (3.0)
Real estate taxes..... 7,589 6,567 1,022 15.6 4,925 5,028 (103) (2.0)
Ground leases......... 1,397 1,223 174 14.2 1,171 1,127 44 3.9
-------- ------- ------- ------- ------- ------
Total............... 26,539 24,163 2,376 9.8 18,915 19,369 (454) (2.3)
-------- ------- ------- ------- ------- ------
Net operating income, as
defined................ $ 82,733 $71,914 $10,819 15.0% $58,980 $56,806 $2,174 3.8%
======== ======= ======= ======= ======= ======
- --------
(1) Stabilized office properties owned at January 1, 1998 and still owned at
December 31, 1999.
34
Total revenues from Office Properties increased $13.2 million, or 13.7% to
$109.3 million for the year ended December 31, 1999 compared to $96.1 million
for the year ended December 31, 1998. Rental income from Office Properties
increased $14.4 million, or 17.5% to $96.5 million for the year ended December
31, 1999 compared to $82.1 million for the year ended December 31, 1998. Of
this increase, $7.2 million was generated by office buildings acquired during
1998 and 1999, net of the effect of office properties disposed of during 1999,
(the "Net Office Acquisitions") and $5.5 million was generated by the office
buildings developed by the Company in 1998 and 1999 (the "Office Development
Properties"). The remaining $1.7 million of the increase was generated by the
stabilized office properties owned at January 1, 1998 and still owned at
December 31, 1999 (the "Core Office Properties"), and represented a 2.6%
increase in rental income for the Core Office Properties. This increase was
primarily attributable to increases in rental rates. Average occupancy for the
Core Office Properties decreased 0.8%, to 93.4% at December 31, 1999 from
94.2% at December 31, 1998.
Tenant reimbursements from Office Properties remained consistent for the
years ended December 31, 1999 and 1998. An increase of $0.7 million in tenant
reimbursements generated by the Net Office Acquisitions and Office Development
Properties was offset by a decrease of $0.7 million in tenant reimbursements
generated by the Core Office Properties. This decrease in tenant
reimbursements for the Core Office Properties is due in part to the decrease
in average occupancy in this portfolio, and also to the decrease in property
expenses for this portfolio of properties as discussed below. Other income
from Office Properties decreased $1.2 million, or 39.8% to $1.8 million for
the year ended December 31, 1999 compared to $3.0 million for the same period
in 1998. For the year ended December 31, 1999, other income from Office
Properties included $0.5 million in gains from the sale of 13 acres of
undeveloped land in Calabasas and San Diego, California and $0.8 million in
lease termination fees from Core Office Portfolio properties. Other income
from Office Properties for the year ended December 31, 1998 included a $1.9
million net lease termination fee from an office property in San Diego,
California and $0.5 million in lease termination fees at various properties.
In addition, in 1998 the Company earned a $0.5 million consulting fee for
assisting an existing tenant with potential expansion plans. The remaining
amounts in other income from Office Properties for both periods consisted
primarily of management fees and tenant late charges.
Total expenses from Office Properties increased $2.4 million, or 9.8% to
$26.5 million for the year ended December 31, 1999 compared to $24.1 million
for the year ended December 31, 1998. Property expenses increased $1.2
million, or 7.2% to $17.6 million for the year ended December 31, 1999
compared to $16.4 million for the year ended December 31, 1998. An increase of
$1.6 million in property expenses attributable to the Net Office Acquisitions
and the Office Development Properties was offset by a $0.4 million decrease in
property expenses at the Core Office Properties. This decrease was primarily
attributable to renegotiated property insurance premiums and a decrease in
electricity expense resulting from the implementation of energy management
systems in several of the buildings. Real estate taxes increased $1.0 million,
or 15.6% to $7.6 million for the year ended December 31, 1999 compared to $6.6
million for the year ended December 31, 1998. An increase of $1.1 million
attributable to the Net Office Acquisitions and the Office Development
Properties was offset by a decrease of $0.1 million for the Core Office
Properties. This decrease at the Core Office Properties was due primarily to
the effects of prior year property taxes which were successfully appealed and
refunded to the Company in 1999. Ground lease expense increased $0.2 million
for the year ended December 31, 1999 compared to the same period in 1998
primarily due to a full year of ground lease expense at one of the 1998 office
acquisition properties.
Net operating income, as defined, from Office Properties increased $10.8
million, or 15.0% to $82.7 million for the year ended December 31, 1999
compared to $71.9 million for the year ended December 31, 1998. Of this
increase, $8.8 million was generated by the Net Office Acquisitions and the
Office Development Properties. The remaining increase of $2.0 million was
generated by the Core Office Properties and represented a 3.8% increase in net
operating income for the Core Office Properties.
35
Industrial Properties
Total Industrial Portfolio Core Industrial Portfolio(1)
--------------------------------- ----------------------------------
Dollar Percentage Dollar Percentage
1999 1998 Change Change 1999 1998 Change Change
------- ------- ------ ---------- ------- ------- ------ ----------
(dollars in thousands)
Operating revenues:
Rental income......... $43,655 $35,174 $8,481 24.1% $29,869 $29,290 $ 579 2.0%
Tenant reimbursement.. 5,350 3,999 1,351 33.8 3,669 3,435 234 6.8
Other income.......... 248 140 108 77.1 167 111 56 50.5
------- ------- ------ ------- ------- ------
Total............... 49,253 39,313 9,940 25.3 33,705 32,836 869 2.6
------- ------- ------ ------- ------- ------
Property and related
expenses:
Property expenses..... 3,116 2,908 208 7.2 1,733 2,097 (364) (17.4)
Real estate taxes..... 4,780 3,816 964 25.3 3,293 3,083 210 6.8
------- ------- ------ ------- ------- ------
Total............... 7,896 6,724 1,172 17.4 5,026 5,180 (154) (3.0)
------- ------- ------ ------- ------- ------
Net operating income, as
defined................ $41,357 $32,589 $8,768 26.9% $28,679 $27,656 $1,023 3.7%
======= ======= ====== ======= ======= ======
- --------
(1) Stabilized industrial properties owned at January 1, 1998 and still owned
at December 31, 1999.
Total revenues from Industrial Properties increased $9.9 million, or 25.3%
to $49.2 million for the year ended December 31, 1999 compared to $39.3
million for the year ended December 31, 1998. Rental income from Industrial
Properties increased $8.5 million, or 24.1% to $43.7 million for the year
ended December 31, 1999 compared to $35.2 million for the year ended December
31, 1998. Of this increase, $3.3 million was generated by the industrial
buildings acquired during 1998 and 1999, net of the effect of the industrial
buildings disposed of during 1999 (the "Net Industrial Acquisitions") and $4.6
million was generated by the industrial buildings developed by the Company in
1998 and 1999 (the "Industrial Development Properties"). The remaining $0.6
million of the increase was generated by the stabilized industrial buildings
owned at January 1, 1998 and still owned at December 31, 1999 (the "Core
Industrial Properties"), and represented a 2.0% increase in rental income for
the Core Industrial Properties. This increase was attributable to both an
increase in average occupancy of 0.6% and an increase in rental rates for this
portfolio.
Tenant reimbursements from Industrial Properties increased $1.4 million, or
33.8% to $5.4 million for the year ended December 31, 1999 compared to $4.0
million for year ended December 31, 1998. Of this increase, $1.2 million was
attributable to the Net Industrial Acquisitions and the Industrial Development
Properties. The remaining $0.2 million was attributable to the Core Industrial
Properties and was primarily due to an increase in real estate taxes
reimbursable by tenants. Other income from Industrial Properties increased
$0.1 million, or 77.1% to $0.2 million for the year ended December 31, 1999
compared to $0.1 million for the comparable period in 1998. Other income for
the years ended December 31, 1999 and 1998 consisted primarily of lease
termination fees.
Total expenses from Industrial Properties increased $1.2 million, or 17.4%
to $7.9 million for the year ended December 31, 1999 compared to $6.7 million
for the year ended December 31, 1998. Property expenses increased $0.2
million, or 7.2% to $3.1 million for the year ended December 31, 1999 compared
to $2.9 million for the year ended December 31, 1998. An increase of $0.6
million in property expenses attributable to the Net Industrial Acquisitions
and the Industrial Development Properties was offset by a decrease of $0.4
million in property expenses at the Core Industrial Properties. This decrease
was primarily due to renegotiated property insurance premiums and a decrease
in electricity expense resulting from the implementation of energy management
systems at several of the buildings. Real estate taxes increased $1.0 million,
or 25.3% to $4.8 million for the year ended December 31, 1999 compared to $3.8
million for the year ended December 31, 1998. Of this increase, $0.8 million
was attributable to the Net Industrial Acquisitions and Industrial
36
Development Properties. The remaining $0.2 million increase was generated by
the Core Industrial Properties and was primarily due to acquisition related
assessments on industrial buildings acquired by the Company in 1997.
Net operating income, as defined, from Industrial Properties increased $8.8
million, or 26.9% to $41.4 million for the year ended December 31, 1999
compared to $32.6 million for the year ended December 31, 1998. Of this
increase, $7.8 million was generated by the Net Industrial Acquisitions and
the Industrial Development Properties. The remaining increase of $1.0 million
was generated by the Core Industrial Properties and represented a 3.7%
increase in net operating income for the Core Industrial Properties.
Non-Property Related Income and Expenses
Interest income decreased $0.5 million, or 30.8% to $1.2 million for the
year ended December 31, 1999 compared to $1.7 million for the year ended
December 31, 1998. This decrease was due primarily to the receipt of interest
income on notes receivable from related parties for three months during the
year ended December 31, 1999 versus seven months for the year ended December
31, 1998.
General and administrative expenses increased $1.4 million, or 17.5% to
$9.1 million for the year ended December 31, 1999 compared to $7.7 million for
the year ended December 31, 1998. This increase was due primarily to annual
increases for salaries and benefits and increased depreciation related to the
Company's increased investment in its information systems.
Interest expense increased $5.7 million, or 27.9% to $26.3 million for the
year ended December 31, 1999 compared to $20.6 million for the same period in
1998, primarily due to a net increase in the Company's aggregate indebtedness
during 1999 and a general increase in market LIBOR rates during 1999. The
Company's weighted average interest rate increased 0.4% to 7.7% at December
31, 1999 compared to 7.3% at December 31, 1998.
Depreciation and amortization expense increased $7.6 million, or 29.0% to
$33.8 million for the year ended December 31, 1999 compared to $26.2 million
for the same period in 1998. The increase was primarily due to depreciation on
the Net Office and Industrial Acquisitions and the Office and Industrial
Development Properties.
Income
Net income before gains on dispositions of operating properties, equity in
income of unconsolidated subsidiary, and minority interests increased $6.1
million, or 12.2% to $56.1 million for the year ended December 31, 1999 from
$50.0 million for the year ended December 31, 1998. The increase was primarily
due to the increase in net operating income from the Office and Industrial
Properties of $10.8 million and $8.8 million, respectively, offset primarily
by an increase in interest expense of $5.7 million and an increase in
depreciation and amortization of $7.6 million.
Liquidity and Capital Resources
The Company has a $400 million unsecured revolving credit facility (the
"Credit Facility") which bears interest at an annual rate between LIBOR plus
1.13% and LIBOR plus 1.75% (8.26% at December 31, 2000), depending upon the
Company's leverage ratio at the time of borrowing, and matures in November
2002. As of December 31, 2000, the Company had borrowings of $191 million
outstanding under the Credit Facility and availability of approximately
$75.0 million. The Company uses the Credit Facility to finance development
expenditures, to fund potential undeveloped land acquisitions and for general
corporate purposes.
In September 2000, the Company borrowed $100.0 million under an unsecured
debt facility from a bank group led by The Chase Manhattan Bank and Morgan
Guaranty Trust Company of New York. The $100.0 million facility, which matures
in September 2002 with two one-year extension options, requires monthly
interest-only
37
payments based upon an annual interest rate which ranges between LIBOR plus
1.13% and LIBOR plus 1.75% (8.19% at December 31, 2000), depending upon the
Company's leverage ratio at the time of borrowing.
In April 2000, one of the Development LLCs obtained a non-recourse
construction loan with a total commitment of $57.0 million. The construction
loan, which had an outstanding balance of approximately $50.1 million and an
annual interest rate between LIBOR plus 2.00% and LIBOR plus 2.70% at
December 31, 2000, matures in April 2002, with the option to extend for up to
two six-month periods. The proceeds from the construction loan are being used
to finance the development of part of a multi-phased office project that the
Company is developing in San Diego, California, with The Allen Group, a group
of affiliated real estate development and investment companies based in San
Diego, California. In October 2000, the construction loan agreement was
modified to increase the total commitment to $61.0 million, and to decrease
the interest rate on $37.2 million of the loan from LIBOR plus 2.70% to LIBOR
plus 2.00%. The project is expected to encompass approximately 550,000
rentable square feet of office space upon completion of all phases. The
construction loan is secured by the land for the entire project, the three
phases of the project that the Company had completed as of December 31, 2000,
and all improvements on one of the two remaining buildings to be constructed.
In June 2000, one of the Development LLCs borrowed $22.0 million under a
mortgage loan that requires monthly principal and interest payments based on a
floating annual interest rate of LIBOR plus 1.75%, amortizes over 25 years,
and matures in June 2004. The mortgage loan is secured by two buildings that
the Company developed with The Allen Group and completed in the fourth quarter
of 1999. The Development LLC used the proceeds from the mortgage loan to repay
cash received from the Operating Partnership. The Operating Partnership used
the proceeds to repay borrowings under the Company's Credit Facility.
In October 2000, the Company obtained a construction loan with a total
commitment of $18.5 million. The construction loan, which had an outstanding
balance at December 31, 2000 of approximately $9.4 million, bears interest at
an annual rate of LIBOR plus 1.75% and matures in October 2002, with the
option to extend for twelve months. The proceeds from the construction loan
are being used to finance the development of an office project in San Diego,
California that is expected to encompass an aggregate of approximately 102,900
rentable square feet upon completion. The construction loan is secured by the
improvements to be constructed.
In October 2000, the Company obtained a construction loan with a total
commitment of $13.3 million. The construction loan, which had an outstanding
balance at December 31, 2000 of approximately $4.7 million, bears interest at
an annual rate of LIBOR plus 1.75% and matures in April 2002, with the option
to extend for up to two six-month periods. The proceeds from the construction
loan are being used to finance the development of two office buildings in San
Diego, California that are expected to encompass an aggregate of approximately
119,000 rentable square feet upon completion. The construction loan is secured
by a first deed of trust on the project.
In November 2000, one of the Development LLCs obtained a construction loan
with a total commitment of $11.8 million. The construction loan, which had an
outstanding balance at December 31, 2000 of approximately $11.4 million, bears
interest at an annual rate of LIBOR plus 3.00% and matures in November 2002,
with the option to extend for up to two six-month periods. The proceeds from
the construction loan are being used to finance the development costs of an
office building in San Diego, California that encompasses an aggregate of
approximately 76,200 rentable square feet. The construction loan is secured by
a first deed of trust on the project.
In December 2000, the Company borrowed $12.8 million under a mortgage loan
that is secured by one Office Property requires monthly principal and interest
payments based on an annual interest rate of 8.13% and matures in November
2014. The property securing this loan also secures the Company's $10.6 million
mortgage loan. The Company used the proceeds from the mortgage loan to repay
borrowings under the Credit Facility and to finance development expenditures.
38
The following table sets forth the composition and contractual terms of the
Company's secured debt at December 31, 2000 and December 31, 1999:
2000 1999
-------- --------
(in thousands)
Mortgage note payable, due April 2009, fixed interest at
7.20%, monthly principal and interest payments.......... $ 92,465 $ 93,953
Mortgage note payable, due October 2003, interest at
LIBOR plus 1.75%, (8.32% and 7.94% at December 31, 2000
and 1999, respectively), monthly interest-only
payments(a)(b).......................................... 83,213 90,000
Mortgage note payable, due February 2022, fixed interest
at 8.35%, monthly principal and interest payments(c).... 79,495 80,812
Construction loan payable, due April 2002, interest
between LIBOR plus 2.00% and LIBOR plus 2.70%, (8.86% at
December 31, 2000)(b)(d)(e)............................. 50,068
Mortgage note payable, due May 2017, fixed interest at
7.15%, monthly principal and interest payments.......... 28,549 29,440
Mortgage note payable, due June 2004, interest at LIBOR
plus 1.75%, (8.49% at December 31, 2000), monthly
principal and interest payments(b)...................... 21,890
Mortgage loan payable, due November 2014, fixed interest
at 8.13%, monthly principle and interest payments....... 12,844
Mortgage note payable, due December 2005, fixed interest
at 8.45%, monthly principal and interest payments....... 12,523 12,973
Construction loan payable, due November 2002, interest at
LIBOR plus 3.00% (9.73% at December 31, 2000)(b)(e)..... 11,367
Mortgage note payable, due November 2014, fixed interest
at 8.43%, monthly principal and interest payments....... 10,578 10,966
Construction loan payable, due October 2002, interest at
LIBOR plus 1.75% (8.37% at December 31, 2000)(b)(f)..... 9,399
Mortgage note payable, due December 2003, fixed interest
at 10.00%, monthly interest accrued through December 31,
2000, no interest accrues thereafter.................... 8,500
Mortgage note payable, due October 2013, fixed interest
at 8.21%, monthly principal and interest payments....... 7,070 7,372
Construction loan payable, due April 2002, interest at
LIBOR plus 1.75% (9.10% at December 31, 2000)(b)(e)..... 4,727
-------- --------
$432,688 $325,516
======== ========
- --------
(a) During the year ended December 31, 2000, the Company partially paid down
$6.8 million of the original $90.0 million principal balance in connection
with the disposition of an industrial property in Carlsbad, California.
(b) The variable interest rates stated as of December 31, 2000 and 1999 are
based on the last repricing date during the respective year. The repricing
rates may not be equal to LIBOR at December 31, 2000 and 1999.
(c) Beginning February 2005, the mortgage note is subject to increases in the
effective annual interest rate to the greater of 13.35% or the sum of the
interest rate for U.S. Treasury Securities maturing 15 years from the
reset date plus 2.00%.
(d) In May 2000, the Company, through one of the Development LLCs, entered
into an interest rate cap agreement with a LIBOR based cap rate of 8.50%
to effectively limit interest expense on the this variable rate
construction loan during periods of increasing interest rates. The
agreement has an initial notional amount of $21.1 million that increases
to $57.0 million during the period from May 2000 through August 2001, and
then remains at $57.0 million until expiration in April 2002. The notional
amount of the interest rate cap agreement was approximately $42.0 million
at December 31, 2000.
(e) This loan contains options to extend the maturity for up to two six-month
periods.
(f) This loan contains an option to extend the maturity twelve months.
39
The following table sets forth certain information with respect to the
maturities and scheduled principal repayments of the Company's secured debt at
December 31, 2000, assuming the exercise of all available debt extension
options:
Year Ending
----------- (in thousands)
2001......................................................... $ 5,675
2002......................................................... 6,148
2003......................................................... 173,919
2004......................................................... 27,719
2005......................................................... 16,965
Thereafter................................................... 202,262
--------
Total....................................................... $432,688
========
The following table sets forth certain information with respect to the
Company's aggregate debt composition at December 31, 2000 and 1999:
Weighted Average
Percentage of Total Debt Interest Rate
------------------------- -------------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Secured vs. unsecured:
Secured............... 59.8% 58.8% 8.2% 7.8%
Unsecured............. 40.2% 41.2% 8.3% 7.6%
Fixed rate vs. variable
rate:
Fixed rate(1)(5)...... 55.6% 42.5% 8.1% 7.8%
Variable
rate(2)(3)(4)........ 44.4% 57.5% 8.4% 7.7%
- --------
(1) At December 31, 2000, the Company had an interest rate swap agreement to
fix LIBOR on $150 million of its floating rate debt at 6.95% that expires
in February 2002.
(2) At December 31, 2000, the Company had an interest rate cap agreement to
cap LIBOR on $150 million of its floating rate debt at 6.50%. The Company
terminated this interest rate cap agreement in January 2001.
(3) In January 2001, the Company entered into an interest rate swap agreement
to fix LIBOR on $150 million of its floating rate debt starting in January
2001 and expiring in November 2002.
(4) At December 31, 2000, the Company, through one of the Development LLCs,
had an interest-rate cap agreement to cap LIBOR on its floating rate
construction debt at 8.50% that expires in April 2002. The notional
amount of the cap increases over the life of the agreement as the balance
of the related construction loan increases. At December 31, 2000, the
notional amount of the interest rate cap was approximately $42.0 million.
(5) The percentage of fixed rate debt to total debt at December 31, 2000 does
not take into consideration the portion of floating rate debt capped by
the Company's interest-rate cap agreements. Including the effects of the
interest-rate cap agreements, the Company had fixed or capped
approximately 82.1% of its total outstanding debt at December 31, 2000.
In December 1999, the Company announced the approval of its share
repurchase program, pursuant to which the Company is authorized to repurchase
up to an aggregate of 3.0 million shares of its outstanding common stock,
representing up to approximately 11% of the Company's outstanding shares at
the time the program was announced. During December 1999, the Company
repurchased 265,000 shares in open market transactions for an aggregate
repurchase price of $5.4 million or $20.19 per share. During the first quarter
of 2000, the Company repurchased 1,999,300 shares of its common stock in open
market transactions for an aggregate repurchase price of $41.2 million or
$20.58 per share. The Company did not repurchase any shares during the
remainder of 2000. Repurchases to date total 2,264,300 shares for an aggregate
repurchase price of $46.5 million or $20.54 per share. Repurchases were funded
primarily through working capital, borrowings on the Company's unsecured
revolving credit facility, and proceeds received from the Company's
disposition program. Depending on market conditions, the Company will evaluate
the opportunity to repurchase additional shares in the future.
40
In February 1998, the SEC declared effective the Company's "shelf"
registration statement on Form S-3 with respect to $400 million of the
Company's equity securities. As of March 22, 2001, an aggregate of
$313 million of equity securities were available for issuance under the
registration statement.
Capital Expenditures
As of December 31, 2000, the Company had an aggregate of approximately
964,400 rentable square feet of office space that was either under
construction or committed for construction at a total budgeted cost of
approximately $232 million. The Company has spent an aggregate of
approximately $111 million on these projects as of December 31, 2000. The
Company intends to finance $18 million of the remaining $121 million of
presently budgeted development costs with proceeds from construction loans
obtained in 2000. The Company intends to finance the remaining $103 million of
budgeted development costs with additional construction loan financing,
proceeds from the Company's dispositions program of non-strategic assets,
borrowings under the Credit Facility and from working capital.
In connection with an agreement signed with The Allen Group in October
1997, the Company agreed to purchase one office property encompassing
approximately 128,000 rentable square feet, subject to the property meeting
certain occupancy thresholds and other tenancy requirements. The purchase
price for this property will be determined at the time of acquisition based on
the net operating income at the time of acquisition. The Company expects that
in the event that this acquisition does occur, it would be financed with
borrowings under the Credit Facility and the issuance of common limited
partnership units of the Operating Partnership.
The Company believes that it will have sufficient capital resources to
satisfy its obligations and planned capital expenditures for the next twelve
months. The Company expects to meet its long-term liquidity requirements
including possible future development and undeveloped land acquisitions,
through retained cash flow, borrowings under the Credit Facility, proceeds
from the Company's dispositions program, long-term secured and unsecured
borrowings, or the issuance of common or preferred units of the Operating
Partnership.
41
Historical Recurring Capital Expenditures, Tenant Improvements and Leasing
Costs
The following tables set forth the non-incremental revenue generating
recurring capital expenditures, excluding expenditures that are recoverable
from tenants, tenant improvements and leasing commissions for renewed and re-
tenanted space incurred for the three years ended December 31, 2000, 1999, and
1998 on a per square foot basis.
Year Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
Office Properties:
Capital Expenditures:
Capital expenditures per square foot............... $ 0.14 $ 0.08 $ 0.20
Tenant Improvement and Leasing Costs(1):
Replacement tenant square feet..................... 297,578 196,615 276,992
Tenant improvements per square foot leased....... $ 5.03 $ 5.61 $ 1.21
Leasing commissions per square foot leased....... $ 4.26 $ 4.18 $ 2.12
Total per square foot............................ $ 9.29 $ 9.79 $ 3.33
Renewal tenant square feet......................... 244,221 421,685 265,154
Tenant improvements per square foot leased....... $ 3.28 $ 2.85 $ 1.00
Leasing commissions per square foot leased....... $ 1.69 $ 0.84 $ 0.89
Total per square foot............................ $ 4.97 $ 3.69 $ 1.89
Total per square foot per year....................... $ 3.66 $ 2.32 $ 0.84
Average lease term (in years)........................ 3.9 5.8 6.2
Industrial Properties:
Capital Expenditures:
Capital expenditures per square foot............... $ 0.05 $ 0.02 $ 0.05
Tenant Improvement and Leasing Costs(1):
Replacement tenant square feet..................... 279,866 323,432 420,194
Tenant improvements per square foot leased....... $ 1.24 $ 2.41 $ 0.61
Leasing commissions per square foot leased....... $ 1.15 $ 1.76 $ 0.44
Total per square foot............................ $ 2.39 $ 4.17 $ 1.05
Renewal tenant square feet......................... 604,492 398,184 549,158
Tenant improvements per square foot leased....... $ 0.50 $ 0.20 $ 0.06
Leasing commissions per square foot leased....... $ 0.41 $ 0.07 $ 0.16
Total per square foot............................ $ 0.91 $ 0.27 $ 0.22
Total per square foot per year....................... $ 0.66 $ 0.94 $ 0.22
Average lease term (in years)........................ 5.0 4.7 5.8
- --------
(1) Includes only tenants with lease terms of 12 months or longer. Excludes
leases for amenity, parking, retail and month-to-month tenants.
Capital expenditures may fluctuate in any given period subject to the
nature, extent, and timing of improvements required to be made to the
properties. The Company believes that all of its Office and Industrial
Properties are well maintained and, based on engineering reports obtained
within the last five years, do not require significant capital improvements.
Tenant improvements and leasing costs may also fluctuate in any given year
depending upon factors such as the property, the term of the lease, the type
of lease, the involvement of external leasing agents and overall market
conditions.
42
Building and Lease Information
The following tables set forth certain information regarding the Company's
Office and Industrial Properties at December 31, 2000:
Occupancy by Segment Type
Square Feet
Number of -------------------------------
Region Buildings Total Leased Available Occupancy
- ------ --------- ---------- ---------- --------- ---------
Office Properties:
Los Angeles............... 29 2,759,362 2,685,349 74,013 97.3%
Orange County............. 13 625,893 460,590 165,303 73.6
San Diego................. 35 2,529,613 2,529,613 100.0
Other..................... 6 709,575 696,550 13,025 98.2
--- ---------- ---------- ------- -----
83 6,624,443 6,372,102 252,341 96.2%
--- ---------- ---------- ------- -----
Industrial Properties:
Los Angeles............... 7 554,225 553,370 855 99.8%
Orange County............. 62 4,393,537 4,268,033 125,504 97.1
San Diego................. 1 39,669 39,669 100.0
Other..................... 8 820,124 820,124 100.0
--- ---------- ---------- ------- -----
78 5,807,555 5,681,196 126,359 97.8%
--- ---------- ---------- ------- -----
Total Portfolio............. 161 12,431,998 12,053,298 378,700 97.0%
=== ========== ========== ======= =====
Leasing Activity by Segment Type
For the year ended December 31, 2000
Weighted
Changes Average
Number of Changes in in Cash Retention Lease Term
Leases(1) Square Feet(1) Rents(2) Rents(3) Rates(4) (in months)
----------- ----------------- ---------- ------- --------- -----------
New Renewal New(5) Renewal
--- ------- --------- -------
Office Properties....... 54 49 393,461 244,221 21.6% 15.9% 52.0% 47
Industrial Properties... 42 35 729,533 604,492 27.4% 13.1% 50.4% 60
--- --- --------- ------- ---- ----
Total Portfolio......... 96 84 1,122,994 848,713 23.7% 14.9% 50.9% 55
=== === ========= ======= ==== ====
- --------
(1) Includes first and second generation space, net of month-to-month leases.
Excludes leasing on new construction. First generation space is defined as
the space first leased by the Company.
(2) Calculated as the change between GAAP rents for new/renewed leases and the
expiring GAAP rents for the same space.
(3) Calculated as the change between stated rents for new/renewed leases and
the expiring stated rents for the same space.
(4) Calculated as the percentage of space either renewed or expanded into by
existing tenants at lease expiration.
(5) The lease-up of 1,122,994 square feet to new tenants includes re-leasing
of 577,444 square feet and first generation leasing of 545,550 square
feet.
Distribution Policy
The Company makes quarterly distributions to common stockholders from cash
available for distribution and, if necessary to meet REIT distribution
requirements and maintain its REIT status, may use borrowings under the Credit
Facility. All such distributions are at the discretion of the Board of
Directors. Amounts accumulated for distribution are invested primarily in
interest-bearing accounts and short-term interest-bearing securities, which
are consistent with the Company's intention to maintain its qualification as a
REIT. Such investments may include, for example, obligations of the Government
National Mortgage Association, other governmental agency securities,
certificates of deposit and interest-bearing bank deposits.
43
Historical Cash Flows
The principal sources of funding for development, acquisitions, and capital
expenditures are the Credit Facility, cash flow from operating activities,
secured and unsecured debt financing and proceeds from the Company's
dispositions program. The Company's net cash provided by operating activities
decreased $10.6 million, or 12.5% to $74.0 million for the year ended December
31, 2000 compared to $84.6 million for the year ended December 31, 1999. This
decrease was primarily attributable to timing differences in payments of
accounts payable and other receivable balances at the end of each comparable
period.
Net cash used in investing activities decreased $75.1 million, or 39.0% to
$117.7 million for the year ended December 31, 2000 compared to $192.8 million
for the year ended December 31, 1999. Cash used in investing activities for
the year ended December 31, 2000 consisted primarily of the purchase of 20
acres of undeveloped land for $15.5 million less $8.5 million for a mortgage
note payable issued in connection with the acquisition, expenditures for
construction in progress of $159.4 million, $15.9 million in additional tenant
improvements and capital expenditures, and $45.3 million paid to acquire a
note receivable, net of the effect of net proceeds received from the sale of
nine office and nine industrial buildings of approximately $110.6 million.
Cash used in investing activities for the year ended December 31, 1999
consisted primarily of the purchase of three office properties for $30.6
million less $3.6 million of contributed value in exchange for which the
Company issued common limited partnership units of the Operating Partnership
and the repayment of an existing $2.3 million note receivable, the purchase of
the minority interest in one office complex for $1.2 million, the purchase of
86 acres of undeveloped land for $38.7 million less $6.3 million of
contributed value in exchange for which the Company issued common limited
partnership units of the Operating Partnership, expenditures for construction
in progress of $144.0 million, and $17.0 million in additional tenant
improvements and capital expenditures, net of the effect of net proceeds
received from the sale of five office and five industrial properties of
approximately $22.6 million and the sale of 13 acres of undeveloped land of
approximately $5.1 million.
Net cash provided by financing activities decreased $92.6 million, or 72.5%
to $35.2 million for the year ended December 31, 2000 as compared to $127.8
million for the year ended December 31, 1999. Cash provided by financing
activities for the year ended December 31, 2000 consisted primarily of $194.6
million in net proceeds from the issuance of secured and unsecured debt
partially offset by $37.0 million in repayments to the Credit Facility, $54.2
million in distributions paid to common stockholders and common unitholders,
$41.3 million paid for securities purchased in the Company's stock repurchase
program and a $28.4 million increase in restricted cash representing cash
received from property dispositions that are held at Qualified Intermediaries
for future use in tax deferred exchanges. Cash provided by financing
activities for the year ended December 31, 1999 consisted primarily of the
issuance of $45.0 million of 9.250% Series D Preferred units (net of $1.2
million aggregate transaction costs) and $186.7 million in net proceeds from
the issuance of secured debt partially offset by $54.0 million in
distributions paid to common stockholders and common unitholders,
$44.0 million in repayments to the Credit Facility and $5.4 million paid for
securities purchased in the Company's stock repurchase program.
Funds From Operations
Industry analysts generally consider Funds From Operations, as defined by
NAREIT, an alternative measure of performance for an equity REIT. Funds From
Operations is defined by NAREIT to mean net income (loss) before minority
interests of common unitholders (computed in accordance with GAAP), excluding
gains (or losses) from debt restructuring and sales of property, plus real
estate related depreciation and amortization (excluding amortization of
deferred financing costs and depreciation of non-real estate assets), and
after adjustment for unconsolidated partnerships and joint ventures. The
Company considers Funds From Operations an appropriate measure of performance
of an equity REIT because it is predicated on cash flow analyses. The Company
believes that in order to facilitate a clear understanding of the historical
operating results of the Company, Funds From Operations should be examined in
conjunction with net income as presented in the financial statements included
elsewhere in this report. The Company computes Funds From Operations in
accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper as
44
clarified by the November 1999 NAREIT National Policy Bulletin which became
effective on January 1, 2000, which may differ from the methodologies used by
other equity REITs and, accordingly, may not be comparable to Funds From
Operations published by such other REITs. Funds From Operations should not be
considered as an alternative to net income (loss) (computed in accordance with
GAAP) as an indicator of the properties' financial performance or to cash flow
from operating activities (computed in accordance with GAAP) as an indicator
of the properties' liquidity, nor is it indicative of funds available to fund
the properties' cash needs, including the Company's ability to pay dividends
or make distributions.
The following table presents the Company's Funds from Operations, by
quarter, for the years ended December 31, 2000, 1999 and 1998:
2000 Quarter Ended
----------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
(in thousands)
Net income....................... $ 8,786 $15,679 $12,804 $ 9,578
Adjustments:
Minority interest in earnings
of Operating Partnership...... 1,241 2,227 1,843 1,372
Depreciation and amortization.. 11,037 9,941 9,645 9,323
(Gains) losses on dispositions
of operating properties....... (7,288) (4,273) 305
Non-cash amortization of
restricted stock grants....... 508 508 134 102
------- ------- ------- -------
Funds From Operations............ $21,572 $21,067 $20,153 $20,680
======= ======= ======= =======
1999 Quarter Ended
----------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
(in thousands)
Net income....................... $ 8,278 $10,911 $10,796 $ 9,910
Adjustments:
Minority interest in earnings
of Operating Partnership...... 1,294 1,830 1,820 1,536
Depreciation and amortization.. 11,217 7,900 7,460 7,217
(Gains) losses on dispositions
of operating properties....... 29 (75)
Non-cash amortization of
restricted stock grants....... 127 127 127 127
------- ------- ------- -------
Funds From Operations............ $20,945 $20,693 $20,203 $18,790
======= ======= ======= =======
1998 Quarter Ended
----------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------
(in thousands)
Net income....................... $10,173 $ 9,985 $ 9,785 $ 8,879
Adjustments:
Minority interest in earnings
of Operating Partnership...... 1,528 1,451 1,432 1,210
Depreciation and amortization.. 7,041 6,740 6,565 5,854
Non-cash amortization of
restricted stock grants....... 126 175 112 118
------- ------- ------- -------
Funds From Operations............ $18,868 $18,351 $17,894 $16,061
======= ======= ======= =======
Inflation
The majority of the Company's leases require tenants to pay most operating
expenses, including real estate taxes and insurance, and increases in common
area maintenance expenses. The effect of such provisions is to reduce the
Company's exposure to increases in costs and operating expenses resulting from
inflation.
45
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") and Statement of Financial Accounting
Standards No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment of FASB Statement No. 133" ("SFAS 138") in
June 1998 and June 2000, respectively. SFAS 133 and SFAS 138 are effective for
fiscal years beginning after June 15, 2000 and require all derivatives to be
recorded on the balance sheet at fair value. If the derivative instrument
qualifies as a hedge, depending on the nature of the hedge, changes in fair
value of the derivative will either be offset against the change in fair value
of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value
will be immediately recognized in earnings. The Company adopted SFAS 133 and
138 on January 1, 2001 and recorded a $2.0 million non-cash charge to other
comprehensive income and a $1.4 million non-cash charge to the income
statement as the cumulative effect of a change in accounting principle.
46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about the Company's changes in primary risk exposures from
December 31, 1999 to December 31, 2000 and changes subsequent to December 31,
2000, is incorporated herein by reference from "Item 2: Management Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Tabular Presentation of Market Risk
The tabular presentations below provide information about the Company's
interest rate sensitive financial and derivative instruments as of December
31, 2000 and 1999. All of the Company's interest rate sensitive financial and
derivative instruments are designated as held for purposes other than trading.
Presentation at December 31, 2000
For the Credit Facility, the table presents the assumption that the
outstanding principal balance at December 31, 2000 will be paid upon the
Credit Facility's maturity in November 2002. The table also presents the
expected maximum contractual weighted average interest rate index for
outstanding Credit Facility borrowings from 2001 through 2002.
For variable rate secured debt and unsecured term debt, the table presents
the assumption that all available debt extension options will either be
exercised or extended and that the outstanding principal balance at December
31, 2000 will be paid upon the extended debt maturities. The table also
presents the contractual weighted average interest rate index for outstanding
variable rate mortgage debt borrowings from 2001 through 2004.
For fixed rate secured debt, the table presents the assumption that the
outstanding principal balance at December 31, 2000 will be paid according to
scheduled principal payments and that the Company will not prepay any of the
outstanding principal balance. The table also presents the related contractual
weighted-average interest rate at December 31, 2000 for outstanding fixed rate
secured debt borrowings from 2001 through 2005 and thereafter.
For the Series A and Series C Cumulative Redeemable Preferred units
(collectively, the "Series A and Series C Preferred units") the table reflects
the assumption that the Company is not contractually obligated to repay the
outstanding balance of the Series A and Series C Preferred units since the
Series A and Series C Preferred units will either remain outstanding or be
converted into shares of the Company's 8.075% Series A and 9.375% Series C
Cumulative Redeemable Preferred stock, respectively, in 2008 when the Series A
and Series C Preferred units become exchangeable at the option of the majority
of the holders. For the Series D Cumulative Redeemable Preferred units (the
"Series D Preferred units"), the table reflects the assumption that the
Company is not contractually obligated to repay the outstanding balance of the
Series D Preferred units since the Series D Preferred units will either remain
outstanding or be converted into shares of the 9.250% Series D Cumulative
Redeemable Preferred stock in 2009 when the Series D Preferred units become
exchangeable at the option of the majority of the holders. The table also
presents the related weighted-average interest rate at December 31, 2000 for
outstanding collectively, Series A, C and D Preferred units from 2001 through
the exchange date. The same interest rates will apply when the collectively,
Series A, C or D Preferred units are exchanged into the respective Series A, C
or D Cumulative Redeemable Preferred stock.
47
For the interest rate cap agreement, the table presents the notional
amount, cap rate and the related interest rate index upon which the cap rate
is based, by contractual maturity date. For the interest rate swap agreement,
the table presents the notional amount, maximum contractual fixed pay rate,
and related interest rate index upon which the floating receive rate is based,
by contractual maturity date. Notional amounts are used solely to calculate
the contractual cash flow to be received under the contract and do not reflect
outstanding principal balances at December 31, 2000.
Interest Rate Risk Analysis--Tabular Presentation
Financial Assets and Liabilities
Outstanding Principal by Expected Maturity Date
(dollars in millions)
Fair Value
Maturity Date at
-------------------------------------------- December 31,
2001 2002 2003 2004 2005 Thereafter Total 2000
------ ------ ------ ------ ----- ---------- ------ ------------
Liabilities:
Unsecured line of
credit:
Variable rate......... $191.0 $191.0 $191.0
Average interest rate
index................ LIBOR LIBOR
+1.50% +1.50%
Secured debt & unsecured
term debt:
Variable rate......... $ 0.3 $ 0.3 $159.1 $121.0 $280.7 $280.7
Average interest rate
index................ LIBOR LIBOR LIBOR LIBOR
+1.78% +1.78% +1.78% +1.78%
Fixed rate............ $ 5.4 $ 5.8 $ 14.8 $ 6.8 $17.0 $202.2 $252.0 $256.7
Average interest
rate................. 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%
Series A, C and D
Preferred units:
Fixed rate............ $142.1
Average interest
rate................. 8.71% 8.71% 8.71% 8.71% 8.71% 8.71%
48
Interest Rate Risk Analysis--Tabular Presentation
Financial Derivative Instruments
Notional Amounts by Contractual Maturity
(dollars in millions)
Fair Value
Maturity Date at
-------------------------------------- December 31,
2001 2002 2003 2004 2005 Thereafter Total 2000
----- ------ ---- ---- ---- ---------- ------ ------------
Interest Rate
Derivatives Used to
Hedge Variable Rate
Debt:
Interest rate cap
agreements:
Notional amount....... $207.0 $207.0 $ 0.1
Cap rate.............. 7.05% 7.05%
Forward rate index.... LIBOR LIBOR
Interest rate swap
agreement:
Notional amount....... $150.0 $150.0 $(2.0)
Fixed pay interest
rate................. 6.95% 6.95%
Floating receive
interest rate index.. LIBOR LIBOR
Presentation at December 31, 1999
For the Credit Facility, the table presents the assumption that the
outstanding principal balance at December 31, 1999 will be paid upon the
Credit Facility's maturity in November 2002. The table also presents the
expected maximum contractual weighted average interest rate index for
outstanding Credit Facility borrowings from 2000 through 2002.
For variable rate secured debt, the table presents the assumption that the
outstanding principal balance at December 31, 1999 will be paid according to
scheduled principal payments. The table also presents the contractual weighted
average interest rate index for outstanding variable rate mortgage debt
borrowings from 2000 through 2003.
For fixed rate secured debt, the table presents the assumption that the
outstanding principal balance at December 31, 1999 will be paid according to
scheduled principal payments and that the Company will not prepay any of the
outstanding principal balance. The table also presents the related weighted-
average interest rate at December 31, 1999 for outstanding fixed rate mortgage
debt borrowings from 2000 through 2004 and thereafter.
For the Series A, C and D Preferred units the table presents the same
assumptions as discussed for the presentation at December 31, 2000.
49
For interest rate caps, the table presents notional amounts, average cap
rates and the related interest rate index upon which cap rates are based, by
contractual maturity date. Notional amounts are used solely to calculate the
contractual cash flow to be received under the contract and do not reflect
outstanding principal balances at December 31, 1999.
Interest Rate Risk Analysis--Tabular Presentation
Financial Assets and Liabilities
Outstanding Principal by Expected Maturity Date
(dollars in millions)
Maturity Date Fair Value at
--------------------------------------------- December 31,
2000 2001 2002 2003 2004 Thereafter Total 1999
------ ------ ------ ------ ------ ---------- ------ -------------
Liabilities:
Unsecured line of
credit:
Variable rate......... $228.0 $228.0 $228.0
Average interest rate
index................ LIBOR LIBOR LIBOR
+1.50% +1.50% +1.50%
Secured debt:
Variable rate......... $ 90.0 $ 90.0 $ 90.0
Average interest rate
index................ LIBOR LIBOR LIBOR LIBOR LIBOR
+1.75% +1.75% +1.75% +1.75% +1.75%
Fixed rate............ $ 4.8 $ 5.2 $ 5.6 $ 6.1 $ 6.6 $207.2 $235.5 $225.4
Average interest
rate................. 7.75% 7.75% 7.75% 7.75% 7.75% 7.75%
Series A, C and D
Preferred units:
Fixed rate............ $145.9
Average interest
rate................. 8.71% 8.71% 8.71% 8.71% 8.71% 8.71%
Interest Rate Risk Analysis--Tabular Presentation
Financial Derivative Instruments
Notional Amounts by Contractual Maturity
(dollars in millions)
Maturity Date Fair Value at
--------------------------------------------- December 31,
2000 2001 2002 2003 2004 Thereafter Total 1999
------ ------ ------ ------ ------ ---------- ------ -------------
Interest Rate
Derivatives Used to
Hedge the Line of
Credit:
Interest rate cap
agreements:
Notional amount....... $150.0 $150.0 $ --
Cap rate.............. 6.50%
Forward rate index.... LIBOR
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting
presently scheduled to be held on May 22, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting
presently scheduled to be held on May 22, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting
presently scheduled to be held on May 22, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting
presently scheduled to be held on May 22, 2001.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Schedules
The following consolidated financial information is included as a separate
section of this annual report on Form 10-K:
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999.......... F-3
Consolidated Statements of Operations for the Years ended December 31,
2000, 1999 and 1998.................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 2000, 1999 and 1998..................................... F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
2000, 1999 and 1998.................................................. F-6
Notes to Consolidated Financial Statements............................ F-7
Schedule of Valuation and Qualifying Accounts......................... F-38
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements and notes
thereto.
(3) 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)
3.4 Articles Supplementary of the Registrant designating 8.075% Series A
Cumulative Redeemable Preferred Stock(10)
3.5 Articles Supplementary of the Registrant, designating 8.075% Series A
Cumulative Redeemable Preferred Stock(13)
3.6 Articles Supplementary of the Registrant designating its Series B
Junior Participating Preferred Stock(23)
3.7 Articles Supplementary of the Registrant designating its 9.375% Series
C Cumulative Redeemable Preferred Stock(15)
3.8 Articles Supplementary of the Registrant designating its 9.250% Series
D Cumulative Redeemable Preferred Stock(20)
4.1 Registration Rights Agreement, dated January 31, 1998(1)
4.2 Registration Rights Agreement, dated February 6, 1999(10)
4.3 Registration Rights Agreement, dated April 20, 1999(13)
4.4 Registration Rights Agreement, dated November 24, 1999(15)
4.5 Registration Rights Agreement, dated as of October 31, 1998(7)
53
Exhibit
Number Description
------- -----------
4.6 Rights Agreement, dated as of October 2, 1999 between Kilroy Realty
Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent, which includes the form of Articles Supplementary of the
Series B Junior Participating Preferred Stock of Kilroy Realty
Corporation as Exhibit A, the form of Right Certificate as Exhibit B
and the Summary of Rights to Purchase Preferred Shares as Exhibit
C(16)
4.7 Registration Rights Agreement, dated as of December 9, 1999(20)
*4.8 Registration Rights Agreement, dated as of October 6, 2000
4.9 The Company is party to agreements in connection with long-term debt
obligations, none of which individually exceeds ten percent of the
total assets of the Company on a consolidated basis. Pursuant to Item
601(b)(4)(iii)(A) of Regulation S-K, the Company agrees to furnish
copies of these agreements to the Commission upon request
10.1 Fourth Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P., dated November 24, 1999(15)
10.2 Omnibus Agreement, dated as of October 30, 1996, by and among Kilroy
Realty, L.P. and the parties named therein(1)
10.3 Supplemental Representations, Warranties and Indemnity Agreement by
and among Kilroy Realty, L.P. and the parties named therein(1)
10.4 Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries(1)
10.5 1998 Stock Option and Incentive Plan of the Registrant and Kilroy
Realty, L.P(1)
10.6 Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P.
with certain officers and directors(1)
10.7 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)
10.8 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)
10.9 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)
10.10 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)
10.11 Lease Agreement, dated December 30, 1988, by and between Kilroy Long
Beach Associates and City of Long Beach for Kilroy Long Beach Phase
II(1)
10.12 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)
10.13 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)
10.14 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)
10.15 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)
10.16 Development Agreement by and between Kilroy Long Beach Associates and
the City of Long Beach(1)
10.17 Amendment No. 1 to Development Agreement by and between Kilroy Long
Beach Associates and the City of Long Beach(1)
54
Exhibit
Number Description
------- -----------
10.18 Ground Lease by and between Frederick Boysen and Ted Boysen and Kilroy
Industries, dated May 15, 1969, for SeaTac Office Center(1)
10.19 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)
10.20 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)
10.21 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)
10.22 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)
10.23 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)
10.24 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)
10.25 Property Management Agreement between Kilroy Realty Finance
Partnership, L.P. and Kilroy Realty, L.P.(1)
10.26 Environmental Indemnity Agreement(1)
10.27 Option Agreement by and between Kilroy Realty, L.P. and Kilroy Airport
Imperial Co.(1)
10.28 Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates(1)
10.29 Employment Agreement between the Registrant and John B. Kilroy, Jr.(1)
10.30 Employment Agreement between the Registrant and Richard E. Moran
Jr.(1)
10.31 Employment Agreement between the Registrant and Jeffrey C. Hawken(1)
10.32 Employment Agreement between the Registrant and C. Hugh Greenup(1)
10.33 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Sr.(1)
10.34 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Jr.(1)
10.35 License Agreement by and among the Registrant and the other persons
named therein(1)
10.36 Form of Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases, Rents
and Security Deposits(1)
10.37 Mortgage Note(1)
10.38 Indemnity Agreement(1)
10.39 Assignment of Leases, Rents and Security Deposits(1)
10.40 Variable Interest Rate Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of
Leases and Rents(1)
10.41 Environmental Indemnity Agreement(1)
10.42 Assignment, Rents and Security Deposits(1)
10.43 Form of Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases and Rents(1)
10.44 Assignment of Leases, Rents and Security Deposits(1)
10.45 Purchase and Sale Agreement and Joint Escrow Instructions, dated April
30, 1998, by and between Mission Land Company, Mission-Vacaville,
L.P. and Kilroy Realty, L.P.(2)
55
Exhibit
Number Description
------- -----------
10.46 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
April 30, 1998, by and between Camarillo Partners and Kilroy Realty,
L.P.(2)
10.47 Purchase and Sale Agreement and Escrow Instructions, dated May 5,
1998, by and between Kilroy Realty, L.P. and Pullman Carnegie
Associates(4)
10.48 Amendment to Purchase and Sale Agreement and Escrow Instructions,
dated June 27, 1998, by and between Pullman Carnegie Associates and
Kilroy Realty, L.P.(4)
10.49 Purchase and Sale Agreement, Contribution Agreement and Joint Escrow
Instructions, dated May 12, 1998, by and between Shidler West
Acquisition Company, LLC and Kilroy Realty, L.P.(3)
10.50 First Amendment to Purchase and Sale Agreement, Contribution Agreement
and Joint Escrow Instructions, dated June 6, 1998, between Kilroy
Realty, L.P. and Shidler West Acquisition Company, L.L.C. and Kilroy
Realty, L.P.(3)
10.51 Second Amendment to Purchase and Sale Agreement, Contribution
Agreement and Joint Escrow Instructions, dated June 12, 1998, by and
between Shidler West Acquisition Company, LLC and Kilroy Realty,
L.P.(3)
10.52 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
June 12, 1998, by and between Mazda Motor of America, Inc. and Kilroy
Realty, L.P.(4)
10.53 Amendment to Agreement of Purchase and Sale and Joint Escrow
Instructions, dated June 30, 1998, by and between Mazda Motor of
America, Inc. and Kilroy Realty, L.P.(4)
10.54 Agreement for Purchase and Sale of 2100 Colorado Avenue, Santa Monica,
California, dated June 16, 1998, by and between Santa Monica Number
Seven Associates L.P. and Kilroy Realty L.P.(4)
10.55 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, 1998(5)
10.56 Purchase and Sale Agreement and Joint Escrow Instructions, dated July
10, 1998, by and between Kilroy Realty, L.P. and Mission Square
Partners(6)
10.57 First Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated August 22, 1998(6)
10.58 Second Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 5, 1998(6)
10.59 Third Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 19, 1998(6)
10.60 Fourth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 22, 1998(6)
10.61 Fifth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 23, 1998(6)
10.62 Sixth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 25, 1998(6)
10.63 Seventh Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 29, 1998(6)
56
Exhibit
Number Description
------- -----------
10.64 Eighth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated October 2, 1998(6)
10.65 Ninth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated October 24, 1998(6)
10.66 Contribution Agreement, dated October 21, 1998, by and between Kilroy
Realty, L.P. and Kilroy Realty Corporation and The Allen Group and
the Allens(8)
10.67 Purchase and Sale Agreement and Escrow Instructions, dated December
11, 1998, by and between Kilroy Realty, L.P. and Swede-Cal
Properties, Inc., Viking Investors of Southern California, L.P. and
Viking Investors of Southern California II, L.P.(9)
10.68 Amendment to the Contribution Agreement, dated October 14, 1999, by
and between Kilroy Realty, L.P. and Kilroy Realty Corporation and The
Allen Group and the Allens, dated October 21, 1998(15)
10.69 Amended and Restated Revolving Credit Agreement, dated as of October
8, 1999 among Kilroy Realty, L.P., Morgan Guaranty Trust Company of
New York, as Bank and as Lead Agent for the Banks, and the Banks
listed therein.(14)
10.70 Amended and Restated Guaranty of Payment, dated as of October 8, 1999,
between Kilroy Realty Corporation and Morgan Guaranty Trust Company
of New York.(14)
10.71 Promissory Notes Aggregating $95.0 Million Payable to Teachers
Insurance and Annuity Association of America(18)
10.72 Form of Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing Statement Securing Promissory Notes
Payable to Teachers Insurance and Annuity Association of America(18)
10.73 Second Amended and Restated Revolving Credit Agreement and Form of
Notes Aggregating $400 million(19)
10.74 Second Amended and Restated Guaranty of Payment(19)
10.75 Credit Agreement and Form of Promissory Notes Aggregating $90.0
million(19)
10.76 Variable Interest Rate Deed of Trust, Leasehold Deed of Trust,
Assignment of Rents, Security Agreement and Fixture Filing(19)
10.77 Guaranty of Recourse Obligations of Borrowing(19)
10.78 First Amendment to Fourth Amended and Restated Agreement of Limited
Partnership of Kilroy Realty, L.P., dated December 9, 1999(21)
*10.79 Second Amendment to Fourth Amended and Restated Agreement of Limited
Partnership of Kilroy Realty, L.P., dated December 30, 1999
*10.80 Admission of New Partner and Amendment to New Partnership Agreement
dated October 6, 2000
10.81 Credit Agreement and Form of Promissory Notes Aggregating $100.0
million(22)
21.1 List of Subsidiaries of the Registrant(17)
*23.1 Consent of Deloitte & Touche LLP
*24.1 Power of Attorney (included in the signature page of this Form 10-K)
- --------
* Filed herewith
** Previously filed
(1) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) as declared effective in January 28, 1998 and incorporated
herein by reference.
57
(2) Previously filed as exhibit 10.11 and 10.12, respectively, to the Current
Report on Form 8-K, dated May 22, 1998, 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, dated June 30, 1998, 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, dated June 30, 1998, and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-32261), and incorporated herein by reference.
(6) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended September 30, 1998, and incorporated herein by reference.
(7) Previously filed as an exhibit to the Current Report on Form 8-K/A, dated
October 29, 1998, and incorporated herein by reference.
(8) Previously filed as exhibit 10.70 and 10.71, respectively, to the Current
Report on Form 8-K, dated November 7, 1998, and incorporated herein by
reference.
(9) Previously filed as exhibit 10.70 to the Current Report on Form 8-K,
dated December 17, 1998, and incorporated herein by reference.
(10) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated February 6, 1999 and incorporated herein by reference.
(11) Previously filed as an exhibits to the Current Report on Form 8-K (No. 1-
12675) dated October 2, 1999 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated October 29, 1998 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated April 20, 1999 and incorporated herein by reference.
(14) Previously filed as an exhibit on Form 10-Q (No. 1-12675) for the
quarterly period ended September 30, 1999 and incorporated herein by
reference.
(15) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated November 24, 1999 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated October 2, 1999 and incorporated herein by reference.
(17) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) and incorporated herein by reference.
(18) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended March 31, 1999, and incorporated herein by reference.
(19) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended September 30, 1999, and incorporated herein by reference.
(20) Previously filed as exhibit 3.8 to the annual report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference.
(21) Previously filed as exhibit 4.18 to the Registration Statement on Form S-
3 (No. 333-34638) and incorporated herein by reference.
(22) Previously filed as an exhibit on Form 10-Q for the quarterly period
ended September 30, 2000, and incorporated herein by reference.
(23) Previously filed as an exhibit on the Registration Statement on Form S-3
(No. 333-72229) as declared effective on September 15, 1999, and
incorporated herein by reference.
(b) Reports on Form 8K
The Company filed two Current Reports on Form 8-K (No. 1-12675) dated May
8, 2000 and November 2, 2000 in connection with its quarterly earnings
releases.
58
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 March 26, 2001.
Kilroy Realty Corporation
/s/ John B. Kilroy, Jr.
By: _________________________________
John B. Kilroy, Jr.
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Kilroy Realty Corporation, hereby severally constitute John B.
Kilroy, Sr., John B. Kilroy, Jr., Jeffrey C. Hawken, Richard E. Moran Jr. and
Ann Marie Whitney, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names
in the capacities indicated below, the Form 10-K filed herewith and any and
all amendments to said Form 10-K, and generally to do all such things in our
names and in our capacities as officers and directors to enable Kilroy Realty
Corporation to comply with the provisions of the Securities Exchange Act of
1934, and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to said Form 10-K and any and all amendments
thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ John B. Kilroy, Sr. Chairman of the Board March 26, 2001
____________________________________
John B. Kilroy, Sr.
/s/ John B. Kilroy, Jr. President, Chief March 26, 2001
____________________________________ Executive Officer and
John B. Kilroy, Jr. Director (Principal
Executive Officer)
/s/ Richard E. Moran Jr. Executive Vice President March 26, 2001
____________________________________ and Chief Financial
Richard E. Moran Jr. Officer (Principal
Financial Officer)
/s/ Ann Marie Whitney Senior Vice President March 26, 2001
____________________________________ and Controller
Ann Marie Whitney (Principal Accounting
Officer)
/s/ John R. D'Eathe Director March 26, 2001
____________________________________
John R. D'Eathe
59
Name Title Date
---- ----- ----
/s/ William P. Dickey Director March 26, 2001
____________________________________
William P. Dickey
/s/ Matthew J. Hart Director March 26, 2001
____________________________________
Matthew J. Hart
/s/ Dale F. Kinsella Director March 26, 2001
____________________________________
Dale F. Kinsella
60
KILROY REALTY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND 1999
AND FOR THE THREE YEARS THEN ENDED
TABLE OF CONTENTS
Page
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999............. F-3
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998..................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999
and 1998................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Kilroy Realty Corporation:
We have audited the accompanying consolidated balance sheets of Kilroy
Realty Corporation (the "Company") as of December 31, 2000 and 1999 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the index at
Item 8. These financial statements and the financial statement schedule are
the responsibility of the management of the Company. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December
31, 2000 and 1999, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects, the information set forth
therein.
Deloitte & Touche LLP
Los Angeles, California
March 9, 2001
F-2
KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
----------------------
2000 1999
---------- ----------
ASSETS
INVESTMENT IN REAL ESTATE (Notes 2, 3, 6, 13, 15, 19,
and 20):
Land and improvements................................ $ 266,444 $ 274,463
Buildings and improvements........................... 1,054,995 946,130
Undeveloped land and construction in progress, net... 162,633 189,645
Investment in unconsolidated real estate............. 12,405
---------- ----------
Total investment in real estate..................... 1,496,477 1,410,238
Accumulated depreciation and amortization............ (205,332) (174,427)
---------- ----------
Investment in real estate, net...................... 1,291,145 1,235,811
CASH AND CASH EQUIVALENTS.............................. 17,600 26,116
RESTRICTED CASH (Note 2)............................... 35,014 6,636
TENANT RECEIVABLES, NET (Note 4)....................... 32,521 22,078
NOTE RECEIVABLE FROM RELATED PARTY (Note 13)........... 33,274
DEFERRED FINANCING AND LEASING COSTS, NET (Note 5)..... 39,674 27,840
PREPAID EXPENSES AND OTHER ASSETS...................... 7,941 2,020
---------- ----------
TOTAL ASSETS........................................ $1,457,169 $1,320,501
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Secured debt (Note 6)................................ $ 432,688 $ 325,516
Unsecured line of credit (Note 7).................... 191,000 228,000
Unsecured term facility (Note 7)..................... 100,000
Accounts payable and accrued expenses................ 33,911 26,260
Accrued distributions (Note 9)....................... 13,601 13,456
Rents received in advance and tenant security
deposits............................................ 17,810 20,287
---------- ----------
Total liabilities................................... $ 789,010 $ 613,519
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)
MINORITY INTERESTS (Note 8):
8.075% Series A Cumulative Redeemable Preferred
unitholders......................................... 73,716 73,716
9.375% Series C Cumulative Redeemable Preferred
unitholders......................................... 34,464 34,464
9.250% Series D Cumulative Redeemable Preferred
unitholders......................................... 44,321 44,022
Common unitholders of the Operating Partnership...... 62,485 71,920
Minority interest in Development LLCs................ 11,748 9,931
---------- ----------
Total minority interests............................ 226,734 234,053
---------- ----------
STOCKHOLDERS' EQUITY (Note 9):
Preferred stock, $.01 par value, 26,200,000 shares
authorized, none issued and outstanding.............
8.075% Series A Cumulative Redeemable Preferred
stock, $.01 par value,
1,700,000 shares authorized, none issued and
outstanding.........................................
Series B Junior Participating Preferred stock, $.01
par value,
400,000 shares authorized, none issued and
outstanding.........................................
9.375% Series C Cumulative Redeemable Preferred
stock, $.01 par value,
700,000 shares authorized, none issued and
outstanding.........................................
9.250% Series D Cumulative Redeemable Preferred
stock, $.01 par value,
1,000,000 shares authorized, none issued and
outstanding.........................................
Common stock, $.01 par value, 150,000,000 shares
authorized, 26,475,470 and 27,808,410 shares issued
and outstanding, respectively....................... 265 278
Additional paid-in capital........................... 460,390 491,204
Distributions in excess of earnings.................. (19,230) (18,553)
---------- ----------
Total stockholders' equity.......................... 441,425 472,929
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $1,457,169 $1,320,501
========== ==========
See accompanying notes to consolidated financial statements.
F-3
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
REVENUES (Note 15):
Rental income............................ $ 161,236 $ 140,182 $ 117,338
Tenant reimbursements.................... 19,441 16,316 14,956
Interest income.......................... 4,602 1,175 1,698
Other income (Note 2).................... 1,834 2,027 3,096
---------- ---------- ----------
Total revenues......................... 187,113 159,700 137,088
---------- ---------- ----------
EXPENSES:
Property expenses........................ 23,347 20,669 19,281
Real estate taxes........................ 14,591 12,369 10,383
General and administrative expenses...... 11,114 9,091 7,739
Ground leases............................ 1,643 1,397 1,223
Provision for potentially unrecoverable
pre-development costs................... 1,700
Interest expense......................... 39,109 26,309 20,568
Depreciation and amortization............ 41,125 33,794 26,200
---------- ---------- ----------
Total expenses......................... 130,929 103,629 87,094
---------- ---------- ----------
INCOME FROM OPERATIONS BEFORE NET GAINS ON
DISPOSITIONS OF OPERATING PROPERTIES,
EQUITY IN INCOME OF UNCONSOLIDATED
SUBSIDIARY, AND MINORITY INTERESTS........ 56,184 56,071 49,994
NET GAINS ON DISPOSITIONS OF OPERATING
PROPERTIES................................ 11,256 46
EQUITY IN INCOME OF UNCONSOLIDATED
SUBSIDIARY................................ 10 17 5
---------- ---------- ----------
INCOME BEFORE MINORITY INTERESTS........... 67,450 56,134 49,999
MINORITY INTERESTS:
Distributions on Cumulative Redeemable
Preferred units......................... (13,500) (9,560) (5,556)
Minority interest in earnings of
Operating Partnership................... (6,683) (6,480) (5,621)
Minority interest in earnings of
Development LLCs........................ (421) (199)
---------- ---------- ----------
Total minority interests............... (20,604) (16,239) (11,177)
---------- ---------- ----------
NET INCOME................................. $ 46,846 $ 39,895 $ 38,822
========== ========== ==========
Net income per common share--basic (Note
16)....................................... $ 1.76 $ 1.44 $ 1.44
========== ========== ==========
Net income per common share--diluted (Note
16)....................................... $ 1.75 $ 1.44 $ 1.43
========== ========== ==========
Weighted average shares outstanding--basic
(Note 16)................................. 26,598,926 27,701,495 26,989,422
========== ========== ==========
Weighted average shares outstanding--
diluted (Note 16) ........................ 26,754,984 27,727,303 27,059,988
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share data)
Additional Distributions
Number of Common Paid-in in Excess of
Shares Stock Capital Earnings Total
---------- ------ ---------- ------------- --------
BALANCE AT DECEMBER 31,
1997.................... 24,475,000 $245 $403,163 $ (6,258) $397,150
Issuance of common
stock................. 3,174,210 31 81,782 81,813
Non-cash amortization
of restricted stock
grants (Note 11)...... 531 531
Repurchase of common
stock................. (10,000) (285) (285)
Adjustment for minority
interest.............. 2,276 2,276
Dividends declared
($1.62 per share)..... (44,408) (44,408)
Net income............. 38,822 38,822
---------- ---- -------- -------- --------
BALANCE AT DECEMBER 31,
1998.................... 27,639,210 276 487,467 (11,844) 475,899
Conversion of common
units of the Operating
Partnership (Note 9).. 444,200 4 (15,644) (15,640)
Non-cash amortization
of restricted stock
grants (Note 11)...... 508 508
Repurchase of common
stock (Note 9)........ (275,000) (2) (5,564) (5,566)
Adjustment for minority
interest.............. 24,437 24,437
Dividends declared
($1.68 per share)..... (46,604) (46,604)
Net income............. 39,895 39,895
---------- ---- -------- -------- --------
BALANCE AT DECEMBER 31,
1999.................... 27,808,410 278 491,204 (18,553) 472,929
Repurchase of common
stock (Note 9)........ (2,009,300) (20) (41,440) (41,460)
Conversion of common
units of the Operating
Partnership (Note 9).. 481,290 5 (10,714) (10,709)
Issuance of restricted
stock (Note 11)....... 175,000 2 2
Non-cash amortization
of restricted stock
grants (Note 11)...... 1,252 1,252
Exercise of stock
options (Note 11)..... 20,070 192 192
Adjustment for minority
interest.............. 19,896 19,896
Dividends declared
($1.80 per share)..... (47,523) (47,523)
Net income............. 46,846 46,846
---------- ---- -------- -------- --------
BALANCE AT DECEMBER 31,
2000.................... 26,475,470 $265 $460,390 $(19,230) $441,425
========== ==== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 46,846 $ 39,895 $ 38,822
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 41,125 33,794 26,200
Provision for uncollectible tenant
receivables and unbilled deferred rent.... 3,650 2,158 1,107
Provision for potentially unrecoverable
pre-development costs..................... 1,700
Minority interests in earnings of Operating
Partnership and Development LLCs.......... 7,104 6,679 5,621
Non-cash amortization of restricted stock
grants.................................... 1,252 508 531
Net gains on dispositions of operating
properties and undeveloped land........... (11,256) (585)
Other...................................... 523 (216) (281)
Changes in assets and liabilities:
Tenant receivables....................... (15,963) (5,317) (9,370)
Deferred leasing costs................... (3,814) (4,808) (2,652)
Prepaid expenses and other assets........ (2,371) (698) 1,483
Accounts payable and accrued expenses.... 7,143 10,392 7,455
Rents received in advance and tenant
security deposits....................... (529) 2,538 1,719
Accrued distributions to Cumulative
Redeemable Preferred unitholders........ 299 295 1,094
--------- --------- ---------
Net cash provided by operating
activities............................. 74,009 84,635 73,429
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for operating properties........ (15,899) (43,159) (242,287)
Expenditures for undeveloped land and
construction in progress.................... (166,391) (178,244) (98,438)
Net proceeds received from dispositions of
operating properties........................ 110,639 22,612
Net proceeds received from dispositions of
undeveloped land............................ 5,051
Cash paid to acquire note receivable from
related party............................... (45,278) (8,798)
(Increase) decrease in escrow deposits....... (1,106) 350 4,764
Net investment in unconsolidated subsidiary.. 304 595 1,042
--------- --------- ---------
Net cash used in investing activities... (117,731) (192,795) (343,717)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock... 81,813
Repurchases of common stock.................. (41,266) (5,350)
Proceeds from issuance of secured and
unsecured debt.............................. 210,405 215,000 5,000
Net (repayments) borrowings on unsecured line
of credit................................... (37,000) (44,000) 130,000
Net proceeds from issuance of Cumulative
Redeemable Preferred units.................. 43,779 107,034
Principal payments on secured debt........... (11,733) (22,867) (2,979)
Financing costs.............................. (4,068) (5,392) (3,007)
(Increase) decrease in restricted cash....... (28,378) 260 (1,216)
Distributions paid to common stockholders and
common unitholders.......................... (54,150) (53,597) (48,843)
Net contributions from minority interests in
Development LLCs............................ 1,396
--------- --------- ---------
Net cash provided by financing
activities............................. 35,206 127,833 267,802
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. (8,516) 19,673 (2,486)
Cash and cash equivalents, beginning of year.. 26,116 6,443 8,929
--------- --------- ---------
Cash and cash equivalents, end of year........ $ 17,600 $ 26,116 $ 6,443
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized
interest.................................... $ 37,289 $ 25,035 $ 18,442
========= ========= =========
Distributions paid to Cumulative Redeemable
Preferred unitholders....................... $ 13,202 $ 9,265 $ 4,462
========= ========= =========
NON-CASH TRANSACTIONS:
Accrual of distributions payable (Note 9).... $ 13,601 $ 13,456 $ 12,895
========= ========= =========
Issuance of secured note payable in
connection with undeveloped land acquisition
(Note 3).................................... $ 8,500
=========
Note receivable from related party satisfied
in connection with investment in
unconsolidated real estate (Note 13)........ $ 11,319
=========
Issuance of common limited partnership units
of the Operating Partnership to acquire
operating properties and undeveloped land
(Notes 3 and 13)............................ $ 9,915 $ 20,569
========= =========
Minority interest recorded in connection with
Development LLCs undeveloped land
acquisitions (Notes 3, 8 and 13)............ $ 9,732
=========
Note receivable from related parties repaid
in connection with operating property
acquisition (Note 13)....................... $ 2,267
=========
Note receivable from related parties
satisfied in connection with Development
LLCs undeveloped land acquisitions (Note
13)......................................... $ 6,531
=========
See accompanying notes to consolidated financial statements.
F-6
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 2000
1. Organization and Ownership
Kilroy Realty Corporation (the "Company") develops, owns, and operates
office and industrial real estate located in California, Washington, Nevada
and Arizona. The Company, which qualifies and operates as a self-administered
real estate investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended, commenced operations upon the completion of its initial public
offering in January 1997. The Company is the successor to the real estate
business of the Kilroy Group, which consisted of the combination of Kilroy
Industries ("KI") and various entities, the properties of which were under the
common control of KI and/or its stockholders, including the Company's Chairman
of the Board of Directors, John B. Kilroy, Sr., and the Company's President
and Chief Executive Officer, John B. Kilroy, Jr.
As of December 31, 2000, the Company's portfolio of stabilized operating
properties was comprised of 83 office buildings (the "Office Properties") and
78 industrial buildings (the "Industrial Properties," and together with the
Office Properties, the "Properties") which encompassed approximately 6.6
million and 5.8 million rentable square feet, respectively, and was 97.0%
occupied. The Properties include 21 properties developed by the Company and
stabilized during 2000 and 1999 which encompass an aggregate of approximately
809,000 and 1.2 million rentable square feet, respectively. All but ten of the
Properties are included in Southern California.
The Company's stabilized portfolio excludes projects currently under
construction or in pre-development and "lease-up" properties. The Company
defines "lease-up" properties as properties recently developed by the Company
that have not yet reached 95% occupancy. The Company had one lease-up property
at December 31, 2000, encompassing an aggregate of 197,300 rentable square
feet, which stabilized on January 15, 2001. As of December 31, 2000, the
Company had eleven office properties under construction or committed for
construction which when completed are expected to encompass an aggregate of
approximately 964,400 rentable square feet. All of the Company's development
projects are located in Southern California.
The Company owns its interests in all of the Properties through Kilroy
Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance
Partnership, L.P. (the "Finance Partnership"). The Company conducts
substantially all of its activities through the Operating Partnership in
which, as of December 31, 2000 and 1999, it owned an 87.6% and 86.8% general
partnership interest, respectively. The remaining 12.4% and 13.2% limited
partnership interest in the Operating Partnership as of December 31, 2000 and
1999, respectively, was owned by certain of the Company's executive officers
and directors, certain of their affiliates, and other outside investors (see
Note 8). Kilroy Realty Finance, Inc, ("Finance Inc."), a wholly-owned
subsidiary of the Company, is the sole general partner of the Finance
Partnership and owns a 1% general partnership interest. The Operating
Partnership owns the remaining 99% limited partnership interest.
During the first of quarter 1999, the Company, through the Operating
Partnership, became a 50% managing partner in two limited liability companies,
Kilroy Gateway Partners, L.L.C. and Kilroy Carmel Partners, L.L.C.
(collectively, the "Development LLCs") as a result of the acquisitions of
certain undeveloped land and the simultaneous contribution of such land to the
Development LLCs (see Notes 3 and 13). The Development LLCs were formed to
develop two multi-phased office projects in San Diego, California. The Allen
Group, a group of affiliated real estate development and investment companies
based in San Diego, California, is the other 50% joint venture partner. Unless
otherwise indicated, all references to the Company include the Operating
Partnership, the Finance Partnership, the Development LLCs, and all wholly-
owned subsidiaries and controlled entities.
F-7
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 2000, the Operating Partnership owned 100% of the non-
voting preferred stock and a 95% economic interest in Kilroy Services, Inc.
("KSI"). 100% of the voting interest was held by John B. Kilroy, Sr., the
Chairman of the Company's Board of Directors, and John B. Kilroy, Jr., the
Company's President and Chief Executive Officer. Prior to December 31, 2000,
the operating results of the development services business conducted by KSI
were accounted for under the equity method of accounting. On January 1, 2001,
KSI was merged into a newly formed entity, Kilroy Services, LLC ("KSLLC"). In
connection with the merger, the interests held by Messers Kilroy were
liquidated resulting in Messers Kilroy receiving $8,000 in cash and KSLLC
became a wholly-owned subsidiary of the Company. As a result, KSLLC will be
consolidated for financial reporting purposes beginning January 1, 2001.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation:
The consolidated financial statements of the Company include the
consolidated financial position and results of operations of the Company, the
Operating Partnership, the Finance Partnership and all wholly-owned
subsidiaries and controlled entities. The consolidated financial statements as
of and for the years ended December 31, 2000 and 1999 also include the
consolidated financial position and results of operations of the Development
LLCs. The Development LLCs are consolidated for financial reporting purposes
since the Company holds significant control over the entities through a 50%
managing partner ownership interest, combined with the ability to control all
significant development and operating decisions. The operating results of the
development services business conducted by Kilroy Services, Inc. ("KSI") are
accounted for under the equity method of accounting. All significant
intercompany balances and transactions have been eliminated in the
consolidated financial statements.
Significant Accounting Policies:
Operating properties--Operating properties are carried at the lower of
historical cost less accumulated depreciation or estimated fair value. The
cost of operating properties includes the purchase price or development costs
of the properties. Costs incurred for the acquisition, renovation and
betterment of the operating properties are capitalized to the Company's
investment in that property. Maintenance and repairs are charged to expense as
incurred. The Company's stabilized portfolio of operating properties consists
of all of the Company's Office and Industrial Properties, excluding projects
currently under construction or in pre-development and lease-up properties.
Lease-up properties are included in land and improvements and building and
improvements on the consolidated balance sheets.
The Company evaluates fair value for financial reporting purposes on a
property by property basis using future undiscounted cash flows, excluding
interest charges. In the event that periodic assessments or other factors
reveal a potential impairment condition, the Company would recognize an
impairment loss to the extent the carrying amount exceeded the fair value of
the property. The Company had not recorded any such impairment losses at
December 31, 2000, 1999 and 1998.
Depreciation and amortization--The cost of buildings and improvements are
depreciated on the straight-line method over estimated useful lives of 25 to
40 years for buildings and the shorter of the lease term or useful life,
ranging from one to 20 years, for tenant improvements. Depreciation expense
for buildings and improvements for the three years ended December 31, 2000,
1999 and 1998, was $35.6 million, $29.0 million, and $23.7 million,
respectively.
Construction in progress--Project costs clearly associated with the
development and construction of a real estate project are capitalized as
construction in progress. In addition, interest, real estate taxes and other
costs are
F-8
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
capitalized during the period in which activities necessary to get the
property ready for its intended use are in progress. Once the development and
construction of the building shell of a real estate project is completed, the
costs capitalized to construction in progress are transferred to land and
improvements and buildings and improvements on the consolidated balance sheets
as the historical cost of the property.
Cash and cash equivalents--The Company considers all money market funds
with an original maturity of three months or less at the date of purchase to
be cash equivalents.
Restricted cash--Restricted cash consists of cash held as collateral to
provide credit enhancement for the Company's mortgage debt, cash reserves for
property taxes, capital expenditures and tenant improvements, and at December
31, 2000, $28.4 million in proceeds received from property dispositions that
are held at Qualified Intermediaries for future use in tax-deferred exchanges.
Tenant receivables and related revenue recognition--Leases with tenants are
accounted for as operating leases. Minimum annual rentals are recognized on a
straight-line basis over the term of the related lease. Unbilled deferred rent
receivables represent the amount that straight-line rental income exceeds
rents currently due under the lease agreement. Included in tenant receivables
are tenant reimbursements which are comprised of additional amounts receivable
from tenants based on common area maintenance expenses and certain other
expenses that are accrued in the period in which the related expenses are
incurred.
Tenant receivables and unbilled deferred rent receivables are carried net
of an allowance for uncollectible tenant receivables and unbilled deferred
rent. Management's determination of the adequacy of the allowance is based
upon evaluations of individual receivables, past loss experience, current
economic conditions, and other relevant factors. The allowance is increased by
provisions charged against income.
Deferred financing and leasing costs--Costs incurred in connection with
debt financing and property leasing are capitalized as deferred financing and
leasing costs. Deferred financing costs include loan fees which are amortized
using the effective interest method over the terms of the respective loans.
Deferred leasing costs include leasing commissions which are amortized on the
straight-line method over the initial lives of the leases which range from one
to 15 years.
Minority interests--Minority interests represent the preferred and common
limited partnership interests in the Operating Partnership and interests held
by The Allen Group in the Development LLCs.
Other income--Other income includes revenue earned from lease termination
fees and management fees. For the year ended December 31, 2000, other income
also included the equity in earnings from unconsolidated real estate (see Note
13) and for the year ended December 31, 1999, other income includes gains on
dispositions of undeveloped land.
Income taxes--The Company believes it qualifies and intends to continue to
qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended (the "Code"), beginning with the
F-9
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
taxable year ended December 31, 1997. As a REIT, the Company is generally not
subject to corporate Federal income taxes so long as it distributes at least
95% of its taxable income to its stockholders and satisfies certain quarterly
requirements of the Code relating to the composition of its income and assets.
Pursuant to recently enacted legislation the 95% distribution requirement will
be reduced to 90% effective for taxable years beginning after December 31,
2000. The Company had met all of its REIT distribution and technical
requirements at December 31, 2000, 1999 and 1998. State income tax
requirements are essentially the same as Federal tax requirements.
Fair value of financial instruments--The Company calculates the fair value
of financial instruments using available market information and appropriate
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and in
many cases, could not be realized in immediate settlement of the instrument.
Fair values for certain financial instruments and all non-financial
instruments are not required to be disclosed. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company
at December 31, 2000 and 1999.
Derivative financial instruments--The Company periodically enters into
derivative financial instruments such as interest rate caps and interest rate
swaps to effectively limit interest expense on the Company's floating rate
debt during periods of rising interest rates. These derivative financial
instruments are designated as hedges and deferral accounting has been applied.
Net amounts paid or received under these agreements are recognized as
adjustments to interest expense The initial premiums on cap agreements are
amortized over the life of the agreement using the straight-line method.
Use of estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported periods. Actual results could
differ from those estimates.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year's presentation.
Concentration of credit risk--151 of the Company's total 161 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 in which the tenants operate.
For the year ended December 31, 2000, the Company's largest tenant as
defined by the percentage of the Company's total base rental revenues, The
Boeing Company, accounted for approximately 9.2% of the Company's total base
revenues. During the years ended December 31, 1999 and 1998, Hughes Space and
Communications was the Company's largest tenant and accounted for 6.4% and
7.4% of the Company's base rental revenues. During the year ended December 31,
2000, The Boeing Company acquired Hughes Space & Communications' business and
related operations. Had this merger occurred prior to the year 2000, The
Boeing Company and Hughes Space and Communications together accounted for
approximately 10.2% and 11.6% of the Company's total base revenues, for the
years ended December 31, 1999 and 1998, respectively. At December 31, 2000,
the Company had no outstanding tenant receivables from this tenant.
The Company has cash in financial institutions which is insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $0.1 million per
institution. At December 31, 2000 and 1999, the Company had cash accounts in
excess of FDIC insured limits.
F-10
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent accounting pronouncements--The Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") and Statement of
Financial Accounting Standards No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No.
133." ("SFAS 138") in June 1998 and June 2000, respectively. SFAS 133 and SFAS
138 are effective for fiscal years beginning after June 15, 2000 and require
all derivatives to be recorded on the balance sheet at fair value. If the
derivative instrument qualifies as a hedge, depending on the nature of the
hedge, changes in fair value of the derivative will either be offset against
the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company adopted SFAS 133 and 138 on January 1, 2001 and recorded a $2.0
million non-cash charge to other comprehensive income and a $1.4 million non-
cash charge to the income statement as the cumulative effect of change in
accounting principle.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). In June 2000, the
SEC issued SAB 101B to defer the effective date for implementation of SAB 101
until the fourth quarter of fiscal 2000. SAB 101 summarizes certain of the
SEC's views in applying accounting principles generally accepted in the United
States of America to revenue recognition in financial statements. The adoption
of SAB 101 did not have a material impact on the Company's financial position
or results of operations.
3. Acquisitions, Dispositions, and Completed Development Projects
Acquisitions of Undeveloped Land
During the year ended December 31, 2000, the Company acquired 20 acres of
undeveloped land through two separate transactions from two unaffiliated third
parties for $15.5 million, consisting of $7.0 million in cash and the issuance
of an $8.5 million mortgage note payable due to one of the sellers. The $8.5
million mortgage note is payable upon the earlier of the successful completion
of infrastructure improvements to the undeveloped land that the seller is
obligated to perform, or December 31, 2003, the note's stated maturity.
Through December 31, 2000 the note accrued interest at 10.00% per annum. If
the infrastructure improvements are not completed by December 31, 2000, the
note will not accrue any additional interest and the principal balance of the
note will be reduced at the rate of $1,000 per day. As of December 31, 2000,
the infrastructure improvements were not completed. The Company currently
expects that the infrastructure improvements will be completed in the fourth
quarter of 2001.
During the year ended December 31, 1999, the Company consummated a series
of transactions to acquire 31 acres of undeveloped land for an aggregate
purchase price of approximately $16.3 million in cash and 119,460 common
limited partnership units of the Operating Partnership valued at approximately
$2.5 million based upon the closing share price of the Company's common stock
as reported on the New York Stock Exchange ("NYSE") at the time of
acquisition. The common limited partnership units were issued in connection
with the acquisition of three acres of undeveloped land located in San Diego,
California from The Allen Group (see Note 13).
During the first quarter of 1999, the Company acquired a 50% interest in 55
acres of undeveloped land in San Diego, California for $16.1 million and
184,172 common limited partnership units of the Operating Partnership valued
at $3.8 million based upon the closing share price of the Company's common
stock as reported on the NYSE at the time of acquisition. The undeveloped land
was acquired pursuant to an existing agreement executed by the Company and The
Allen Group in October 1997 that provided for the joint development of two
multi-phased office projects with approximately 1.1 million aggregate rentable
square feet over the next three years (see Note 13).
F-11
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Acquisitions of Operating Properties
In October 2000, the Company acquired a 25% tenancy-in-common interest in
office complex located in El Segundo, California from Kilroy Airport Imperial
Co. The complex encompasses approximately 366,000 aggregate rentable square
feet and is comprised of two office buildings and one parking structure. The
remaining 75% tenancy-in-common interest was acquired in January 2001 (see
Notes 13 & 19).
During the year ended December 31, 1999, the Company consummated a series
of transactions to acquire three office buildings and the 12.5% minority
interest in a three-building complex the Company owns in Diamond Bar,
California for an aggregate purchase price of approximately $28.2 million in
cash and 168,402 common limited partnership units of the Operating Partnership
valued at approximately $3.6 million based upon the closing share price of the
Company's common stock as reported on the NYSE at the time of acquisition. The
three office buildings contain approximately 176,900 aggregate rentable square
feet. The common limited partnership units were issued in connection with the
acquisition of two office buildings located in San Diego, California from
entities controlled by a senior executive officer of The Allen Group (see Note
13).
The cash portions of the 2000 and 1999 operating property and undeveloped
land acquisitions were all funded primarily with existing working capital and
borrowings on the Company's revolving unsecured credit facility and unsecured
term facility.
Dispositions of Undeveloped Land
During the year ended December 31, 1999, the Company consummated a series
of transactions to sell 13 acres of undeveloped land for an aggregate sales
price of $5.1 million. As a result of the sale of eight acres in Calabasas, a
portion of the public facility bonds related to this land parcel was defeased.
The total gain on sale of $0.5 million from these dispositions is included in
other income in the consolidated statements of operations.
Dispositions of Operating Properties
During the year ended December 31, 2000, the Company sold the following
properties:
Property Month of Rentable Square Sales Price
Type Location Disposition # of Buildings Feet ($ in millions)
-------- ---------------- ----------- -------------- --------------- --------------
Industrial.. Lake Forest, CA January 2 45,300 $ 3.3
Industrial.. Garden Grove, CA April 1 110,200 6.3
Industrial.. Carlsbad, CA June 1 82,900 12.6(1)
Office...... Aliso Viejo, CA June 5 134,700 18.0
Industrial.. San Jose, CA July 5 431,400 62.4
Office...... Fullerton, CA August 4 152,000 11.0
--- ------- ------
Total.................................. 18 956,500 $113.6
=== ======= ======
- --------
(1) In connection with the disposition of the industrial property in Carlsbad,
California, the Company repaid $6.8 million on the principal balance of an
existing $90.0 million variable rate mortgage note payable (see Note 6).
F-12
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended December 31, 1999, the Company sold the following
properties:
Property Month of No. of Rentable Square Sales Price
Type Location Disposition Buildings Feet ($ in millions)
-------- -------------------- ----------- --------- --------------- --------------
Industrial.. Ventura CA August 1 125,500 $ 5.4
Industrial.. Ontario, CA August 1 153,600 5.6
Office...... Anaheim, CA December 5 113,700 8.0
Industrial.. Huntington Beach, CA December 3 56,700 3.6
--- ------- -----
Total...................................... 10 449,500 $22.6
=== ======= =====
The Company used the proceeds from its 2000 and 1999 dispositions to fund
development expenditures and to fund the Company's share repurchase program
(see Note 9).
Completed Development Projects
During the year ended December 31, 2000, the Company completed and
stabilized the following development projects:
Property No. of Rentable Square Stabilized
Type Location Stabilization Date Buildings Feet Occupancy
-------- -------------- ------------------ --------- --------------- ----------
Office.. Del Mar, CA Q1 2000 1 72,300 100%
Office.. Del Mar, CA Q2 2000 1 129,700 100%
Office.. Del Mar, CA Q2 2000 1 112,100 100%
Office.. San Diego, CA Q3 2000 1 103,000 100%
Office.. San Diego, CA Q3 2000 1 62,400 100%
Office.. West LA, CA Q3 2000 1 151,000 100%
Office.. Calabasas, CA Q4 2000 1 102,300 97%
Office.. Long Beach, CA Q4 2000 1 197,300 99%(1)
Office.. San Diego, CA Q4 2000 1 76,200 100%
--- ---------
Total................................... 9 1,006,300
=== =========
- --------
(1) This project reached 99% occupancy at January 15, 2001 and was 89%
occupied at December 31, 2000.
During the year ended December 31, 1999, the Company stabilized the
following development projects:
Property No. of Rentable Square Stabilized
Type Location Stabilization Date Buildings Feet Occupancy
-------- -------------- ------------------ --------- --------------- ----------
Office...... San Diego, CA Q2 1999 1 71,000 100%
Industrial.. Anaheim, CA Q3 1999 2 211,400 100%
Office...... Long Beach, CA Q3 1999 1 136,000 100%
Office...... Del Mar, CA Q3 1999 1 40,000 100%
Office...... San Diego, CA Q3 1999 2 172,800 100%
Industrial.. Anaheim, CA Q4 1999 3 382,500 100%(1)
Industrial.. Brea, CA Q4 1999 2 178,800 100%
Office...... Del Mar, CA Q4 1999 1 52,400 100%
--- ---------
Total....................................... 13 1,244,900
=== =========
- --------
(1) This project was completed during the year ended December 31, 1998 and
reached stabilized occupancy of at least 95% during the year ended
December 31, 1999.
F-13
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Tenant Receivables
Tenant receivables consisted of the following at December 31:
2000 1999
------- -------
(in thousands)
Tenant rent, reimbursements, and other receivables....... $13,689 $ 9,305
Unbilled deferred rent................................... 22,449 15,466
Allowance for uncollectible tenant receivables and
unbilled deferred rent.................................. (3,617) (2,693)
------- -------
Tenant receivables, net................................ $32,521 $22,078
======= =======
5. Deferred Financing and Leasing Costs
Deferred financing and leasing costs are summarized as follows at December
31:
2000 1999
-------- --------
(in thousands)
Deferred financing costs................................. $ 10,868 $ 6,892
Deferred leasing costs................................... 47,425 32,872
-------- --------
Total deferred financing and leasing costs............. 58,293 39,764
Accumulated amortization................................. (18,619) (11,924)
-------- --------
Deferred financing and leasing costs, net.............. $ 39,674 $ 27,840
======== ========
F-14
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Secured Debt
Secured debt consisted of the following at December 31:
2000 1999
-------- --------
(in thousands)
Mortgage note payable, due April 2009, fixed interest at
7.20%, monthly principal and interest payments......... $ 92,465 $ 93,953
Mortgage note payable, due October 2003, interest at
LIBOR plus 1.75%, (8.32% and 7.94% at December 31, 2000
and 1999, respectively), monthly interest-only
payments(a)(b)......................................... 83,213 90,000
Mortgage note payable, due February 2022, fixed interest
at 8.35%, monthly principal and interest payments(c)... 79,495 80,812
Construction loan payable, due April 2002, interest
between LIBOR plus 2.00% and LIBOR plus 2.70%, (8.86%
at December 31, 2000)(b)(d)(e)......................... 50,068
Mortgage note payable, due May 2017, fixed interest at
7.15%, monthly principal and interest payments......... 28,549 29,440
Mortgage note payable, due June 2004, interest at LIBOR
plus 1.75%, (8.49% at December 31, 2000), monthly
principal and interest payments(b)..................... 21,890
Mortgage loan payable, due November 2014, fixed interest
at 8.13%, monthly principle and interest payments...... 12,844
Mortgage note payable, due December 2005, fixed interest
at 8.45%, monthly principal and interest payments...... 12,523 12,973
Construction loan payable, due November 2002, interest
at LIBOR plus 3.00% (9.73% at December 31,
2000)(b)(e)............................................ 11,367
Mortgage note payable, due November 2014, fixed interest
at 8.43%, monthly principal and interest payments...... 10,578 10,966
Construction loan payable, due October 2002, interest at
LIBOR plus 1.75% (8.37% at December 31, 2000)(b)(f).... 9,399
Mortgage note payable, due December 2003, fixed interest
at 10.00%, monthly interest accrued through December
31, 2000, No interest accrues thereafter (see Note 3).. 8,500
Mortgage note payable, due October 2013, fixed interest
at 8.21%, monthly principal and interest payments...... 7,070 7,372
Construction loan payable, due April 2002, interest at
LIBOR plus 1.75% (9.10% at December 31, 2000)(b)(e).... 4,727
-------- --------
$432,688 $325,516
======== ========
- --------
(a) During the year ended December 31, 2000, the Company repaid $6.8 million
of the original $90.0 million principal balance in connection with the
disposition of an industrial property in Carlsbad, California (see Note
3).
(b) The variable interest rates stated as of December 31, 2000 and 1999 are
based on the last repricing date during the respective year. The repricing
rates may not be equal to LIBOR at December 31, 2000 and 1999.
(c) Beginning February 2005, the mortgage note is subject to increases in the
effective annual interest rate equal to the greater of 13.35% or the sum
of the interest rate for U.S. Treasury Securities maturing 15 years from
the reset date plus 2.00%.
(d) In May 2000, the Company, through one of the Development LLCs, entered
into an interest rate cap agreement with a LIBOR based cap rate of 8.50%
to effectively limit interest expense on the this variable rate
construction loan during periods of increasing interest rates. The
agreement has an initial notional amount of $21.1 million that increases
to $57.0 million during the period from May 2000 through August 2001, and
then remains at $57.0 million until expiration in April 2002. The notional
amount of the interest rate cap agreement was approximately $42.0 million
at December 31, 2000.
(e) This loan contains options to extend the maturity for up to two six-month
periods.
(f) This loan contains an option to extend the maturity for twelve months.
The Company's secured debt was secured by 60 operating properties and five
development projects under construction at December 31, 2000 with a combined
net book value of $581 million and 55 operating properties at December 31,
1999 with a combined net book value of $459 million. As of December 31, 2000
and 1999, the Company's secured debt had a weighted average interest rate of
8.16% and 7.80%, respectively.
F-15
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, seven of the Company's secured loans contained
restrictions that would require the payment of prepayment penalties for the
acceleration of outstanding debt. The secured notes payable are secured by
deeds of trust on certain of the Company's properties and the assignment of
certain rents and leases associated with those properties.
Scheduled principal payments for the above secured debt at December 31,
2000 were as follows:
Year Ending
----------- (in thousands)
2001......................................................... $ 5,675
2002......................................................... 81,709
2003......................................................... 98,358
2004......................................................... 27,719
2005......................................................... 16,965
Thereafter................................................... 202,262
--------
Total....................................................... $432,688
========
7. Unsecured Line of Credit and Unsecured Term Facility
In November 1999, the Company increased its borrowing capacity and obtained
a new $400 million unsecured revolving credit facility (the "Credit Facility")
with a bank group lead by Morgan Guaranty Trust Company of New York and The
Chase Manhattan Bank, to replace its previous $350 million Credit Facility
which was scheduled to mature in February 2000. The Credit Facility bears
interest at a rate between LIBOR plus 1.13% and LIBOR plus 1.75% (8.26% and
7.56% at December 31, 2000 and 1999, respectively), depending upon the
Company's leverage ratio at the time of borrowing, and matures in November
2002. At December 31, 2000 and 1999, the Company had borrowings of $191
million and $228 million, respectively, outstanding under the Credit Facility.
Availability under the Credit Facility, was approximately $75.0 million at
December 31, 2000. The fee for unused funds ranges from 0.20% to 0.35%
depending on the Company's leverage ratios. The Company expects to use the
available borrowing capacity under the Credit Facility to finance development
expenditures and for general corporate uses.
In September 2000, the Company borrowed $100.0 million under an unsecured
debt facility from a bank group led by The Chase Manhattan Bank and Morgan
Guaranty Trust Company of New York. The $100.0 million facility, which matures
in September 2002 with two one-year extension options, requires monthly
interest-only payments based upon an annual interest rate between LIBOR plus
1.13% and LIBOR plus 1.75% (8.19% at December 31, 2000), depending upon the
Company's leverage ratio at the time of borrowing.
In January 2001, the Company entered into an interest rate swap agreement
with a total notional amount of $150 million to effectively limit interest
expense on the Company's floating rate debt during periods of increasing
interest rates. The agreement expires in November 2002, requires the Company
to pay fixed rate interest payments based on an interest rate of 5.48% and
receive floating rate interest payments based on one-month LIBOR.
In February 2000, the Company entered into an interest rate swap agreement
with a total notional amount of $150 million to effectively limit interest
expense on the Company's floating rate debt during periods of increasing
interest rates. The agreement, which expires in February 2002, requires the
Company to pay fixed rate interest payments based on an interest rate of 6.95%
and receive floating rate interest payments based on one-month LIBOR.
F-16
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In February 2000, the Company entered into an interest rate cap agreement
with a total notional amount of $150 million to effectively limit interest
expense on the Company's floating rate debt during periods of increasing
interest rates. The agreement cost $1.9 million, began in July 2000, had a
LIBOR based cap rate of 6.50%, and a contractual expiration date of January
2002. The Company terminated this cap agreement on January 2, 2001.
As of December 31, 1999, the Company was party to two interest rate cap
agreements with a total notional amount of $150 million to effectively limit
interest expense on the Company's floating rate debt during periods of
increasing interest rates. The agreements had LIBOR based cap rates of 6.50%
and expired in July 2000.
The Credit Facility and the $100.0 million facility contain covenants
requiring the Company to meet certain financial ratios and reporting
requirements. Some of the more restrictive covenants include a minimum debt
service coverage ratio, a maximum total liabilities to total assets ratio, a
maximum total secured debt to total assets ratio, a minimum cash flow to debt
service and fixed charges ratio, a minimum consolidated tangible net worth and
a limit of development activities as compared to total assets. The Company was
in compliance with all of the Credit Facility and the $100.0 million facility
covenants at December 31, 2000 and 1999.
Interest capitalized for the years ended December 31, 2000 and 1999 and
1998 was $18.0 million, $11.3 million, and $8.2 million, respectively.
8. Minority Interests
Common Limited Partnership Unitholders
The Company owned an 87.6% and 86.8% general partnership interest in the
Operating Partnership as of December 31, 2000 and 1999, respectively. The
remaining 12.4% and 13.2% common limited partnership interest as of December
31, 2000 and 1999, respectively, was owned by certain of the Company's
executive officers and directors, certain of their affiliates, and other
outside investors in the form of common limited partnership units.
During the years ended December 31, 2000 and 1999, the Operating
Partnership issued 1,133 and 472,034 common limited partnership units in the
Operating Partnership, respectively, in connection with certain operating
property and undeveloped land acquisitions (see Notes 3 and 13).
During the year ended December 31, 2000, 481,290 common limited partnership
units of the Operating Partnership were exchanged into shares of the Company's
common stock on a one-for-one basis. Of these 481,290 common limited
partnership units, 364,200 common limited partnership units were owned by
Kilroy Industries, an entity owned by John B. Kilroy, Sr., the Chairman of the
Company's Board of Directors, and John B. Kilroy, Jr., the Company's President
and Chief Executive Officer. In addition, 1,739 of the 481,290 common limited
partnership units were owned by a Vice President of the Company (see notes 9
and 13). During the year ended December 31, 1999, 444,200 common limited
partnership units of the Operating Partnership, of which 440,000 common
limited partnership units were owned by John B. Kilroy, Sr., John B. Kilroy,
Jr., and Kilroy Industries were exchanged into shares of the Company's common
stock on a one-for-one basis (see Notes 9 and 13). Neither the Company nor the
Operating Partnership received any proceeds from the issuance of the common
stock to the identified common limited partnership unitholders.
Preferred Unitholders
In December 1999, the Company issued 900,000 9.250% Series D Cumulative
Redeemable Preferred units, representing preferred limited partnership
interests in the Operating Partnership (the "Series D Preferred units"), with
a liquidation value of $50.00 per unit, in exchange for a gross contribution
to the Operating Partnership of $45.0 million. The Company used the
contribution proceeds, less applicable transaction costs and expenses of
F-17
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$1.2 million, for the repayment of borrowings outstanding under the Credit
Facility. The Series D Preferred units, which may be called by the Operating
Partnership at a price equal to the liquidation value on or after December 9,
2004, have no stated maturity or mandatory redemption and are not convertible
into any other securities of the Operating Partnership. The Series D Preferred
units are exchangeable at the option of the majority of the holders for shares
of the Company's 9.250% Series D Cumulative Redeemable Preferred stock
beginning December 9, 2009, or earlier under certain circumstances.
As of December 31, 2000 and 1999, the Company had issued and outstanding
700,000 9.375% Series C Cumulative Redeemable Preferred units (the "Series C
Preferred units") and 1,500,000 8.075% Series A Cumulative Redeemable
Preferred units (the "Series A Preferred units"), representing preferred
limited partnership interests in the Operating Partnership with a liquidation
value of $50.00 per unit. The Series A and Series C Preferred units, which may
be called by the Operating Partnership at a price equal to the liquidation
value on or after November 24, 2003 and February 6, 2003, respectively, have
no stated maturity or mandatory redemption and are not convertible into any
other securities of the Operating Partnership. The Series A and Series C
Preferred Units are exchangeable at the option of the majority of the holders
for shares of the Company's 9.375% Series C Cumulative Redeemable Preferred
stock beginning November 24, 2008, and the Company's 8.075% Series A
Cumulative Redeemable Preferred stock beginning February 6, 2008,
respectively, or earlier under certain circumstances.
The Company makes quarterly distributions to the Series A, Series C and
Series D Preferred unitholders on the 15th day of each February, May, August
and November. Included in the Series A, Series C and Series D Preferred unit
balances on the balance sheet at December 31, 2000 were $0.8 million, $0.4
million and $0.5 million of accrued distributions payable to the Series A,
Series C and Series D Preferred unitholders, respectively. Included in the
Series A, Series C and Series D Preferred unit balances on the balance sheet
at December 31, 1999 were $0.8 million and $0.4 million and $0.2 million of
accrued distributions payable to the Series A, Series C and Series D Preferred
unitholders, respectively.
Development LLCs
The Company became a 50% managing member in each of the Development LLCs in
March 1999 as a result of the acquisition of certain undeveloped land and the
simultaneous contribution of such land to the Development LLCs (see Notes 3
and 13). The Development LLCs are consolidated for financial reporting
purposes because the Company holds a 50% ownership interest combined with the
ability to control all significant development decisions.
9. Stockholders' Equity
The Company announced the approval of its share repurchase program in
December 1999, pursuant to which the Company is authorized to repurchase up to
an aggregate of 3.0 million shares of its outstanding common stock. During the
first quarter of 2000, the Company repurchased 1,999,300 shares of its common
stock in open market transactions for an aggregate repurchase price of $41.2
million, or $20.58 per share. The Company did not repurchase any shares of
common stock in the second, third and fourth quarters of 2000. During December
1999, the Company repurchased 265,000 shares in open market transactions for
an aggregate repurchase price of $5.4 million or $20.19 per share. Repurchases
during 2000 and 1999 were funded primarily through proceeds received from the
Company's dispositions, working capital and borrowings on the Company's Credit
Facility.
In June 2000, the Company's Compensation Committee, comprised of two
independent directors, granted 175,000 shares of restricted stock to certain
key employees, the grantees. All of the shares of restricted stock
F-18
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
granted, which were sold for $0.01 per share, contain cliff-vesting provisions
such that the shares vest 100% on March 1, 2003. Compensation expense for the
restricted shares is calculated based upon the Company's closing share price
of $24.94 on the June 23, 2000 grant date, and is amortized on a straight-line
basis over the vesting period and included in general and administrative
expenses in the consolidated statements of operations. The restricted shares
have the same dividend and voting rights as common stock. The restricted
shares are included in the Company's calculation of weighted average
outstanding shares at December 31, 2000.
During 2000, 481,290 common limited partnership units of the Operating
Partnership were exchanged into shares of the Company's common stock. Of these
481,290 common limited partnership units, 364,200 common limited partnership
units were owned by Kilroy Industries, an entity owned by John B. Kilroy, Sr.,
the Chairman of the Company's Board of Directors and John B. Kilroy, Jr., the
Company's President and Chief Executive Officer. In addition, 1,739 of the
481,290 common limited partnership units, were owned by a Vice President of
the Company (see notes 8). During 1999, 444,200 common limited partnership
units of the Operating Partnership, of which 440,000 common limited
partnership units were owned by John B. Kilroy, Sr., John B. Kilroy, Jr., and
Kilroy Industries were exchanged into shares of the Company's common stock
(see Notes 8).
During 2000 and 1999, the SEC declared effective four registration
statements filed by the Company on Form S-3 which registered the potential
issuance and resale of up to a total of 4,672,902 shares of the Company's
common stock in exchange for 4,672,902 common limited partnership units of the
Operating Partnership previously issued in connection with certain 1997, 1998
and 1999 property acquisitions and the formation of the Operating Partnership.
The common limited partnership units may be exchanged at the Company's option
into shares of the Company's common stock on a one-for-one basis. Neither the
Company nor the Operating Partnership will receive any proceeds from the
issuance of the common stock resulting from any such exchange.
In September 1999, the SEC declared effective the Company's registration
statement on Form S-3 with respect to 1,000,000 shares of the Company's common
stock to be issued under the Company's Dividend Reinvestment and Direct
Purchase Plan (the "Plan"). The Plan, which is designed to provide the
Company's stockholders and other investors with a convenient and economical
method to purchase shares of the Company's common stock, consists of three
programs: the Dividend Reinvestment Program (the "DRIP"), the Cash Option
Purchase Plan (the "COPP"), and the Waiver Discount Plan (the "WDP"). The DRIP
provides existing common stockholders with the opportunity to purchase
additional shares of the Company's common stock by automatically reinvesting
all or a portion of their cash dividends. The COPP provides existing common
stockholders and other investors with the opportunity to purchase additional
shares of the Company's common stock by making optional cash purchases, at no
discount to market, between $100 to $5,000 and $750 to $5,000, respectively,
in any calendar month. The WDP provides existing common stockholders and other
investors with the opportunity to purchase additional shares of the Company's
common stock by making optional cash purchases, at a discount to market of up
to 2% of the average per share price reported on the NYSE, of greater than
$5,000 in any calendar month. The Plan acquires shares of the Company's common
stock from either new issuances directly from the Company, from the open
market or from privately negotiated transactions, except for shares acquired
under the WDP which are purchased only from previously unissued shares of
common stock. Participation in the Plan is entirely voluntary, and can be
terminated at any time. The Company intends to use the proceeds received from
the Plan, less transaction costs, for development and investment activities,
repayment of outstanding indebtedness and general corporate uses. As of
December 31, 2000, there have been no previously unissued shares acquired
under the Plan.
In May 1999, the Company filed a registration statement on Form S-8 with
the SEC that registered the potential issuance and resale of up to 1,500,000
shares of the Company's common stock issuable to the Company's employees and
directors under the 1997 Stock Option and Incentive Plan (see Note 11).
F-19
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has an effective "shelf" registration statement for the
issuance of $313 million of the Company's equity securities at March 9, 2001.
Accrued distributions at December 31, 2000 and 1999, consisted of the
following amounts payable to registered common stockholders of record holding
26,475,470 and 27,808,410 shares of common stock, respectively, and common
unitholders holding 3,748,545 and 4,228,702 common limited partnership units
of the Operating Partnership, respectively:
December 31,
---------------
2000 1999
------- -------
(in thousands)
Distributions payable to:
Common stockholders....................................... $11,914 $11,680
Common unitholders of the Operating Partnership........... 1,687 1,776
------- -------
Total accrued distributions............................. $13,601 $13,456
======= =======
10. Future Minimum Rent
The Company has operating leases with tenants that expire at various dates
through 2015 and are either subject to scheduled fixed increases or
adjustments based on the Consumer Price Index. Generally, the leases grant
tenants renewal options. Leases also provide for additional rents based on
certain operating expenses. Future minimum rent under operating leases,
excluding tenant reimbursements of certain costs, as of December 31, 2000, are
summarized as follows:
Year Ending
----------- (in thousands)
2001......................................................... $154,709
2002......................................................... 141,026
2003......................................................... 132,951
2004......................................................... 118,940
2005......................................................... 100,452
Thereafter................................................... 347,649
--------
Total....................................................... $995,727
========
11. Employee Retirement and Stock Option and Incentive Plans
Retirement Savings Plan
Effective November 1, 1997, the Company adopted a retirement savings plan
designed to qualify under Section 401(k) of the Internal Revenue Code (the
"401(k) Plan"). The 401(k) Plan allows participants to defer up to twenty
percent of their eligible compensation on a pre-tax basis, subject to certain
maximum amounts allowed by the Internal Revenue Code. The 401(k) Plan provides
for a matching contribution by the Company in an amount equal to fifty-cents
for each one dollar of participant contributions up to a maximum of five
percent of the participant's annual salary. Participants vest immediately in
the amounts contributed by the Company. Employees of the Company are eligible
to participate in the 401(k) Plan when they meet certain requirements
concerning minimum period of credited service. For the years ended December
31, 2000, 1999, and 1998, the Company contributed $0.2 million, $0.1 million,
and $0.1 million respectively to the 401(k) Plan.
F-20
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option and Incentive Plan
The Company has established a stock option and incentive plan (the "Stock
Plan") for the purpose of attracting and retaining officers and key employees,
under which restricted shares or stock options may be granted. The Stock Plan
authorizes the issuance of 3,000,000 shares of common stock of the Company. At
December 31, 2000 and 1999, an aggregate of 1,608,140 and 1,003,000 options
were exercisable for shares of the Company's common stock at a weighted
average exercise price of $23.20 and $23.24, respectively. The weighted
average exercise price of the options outstanding at December 31, 2000 and
1999 was $23.13 and $23.07, respectively, with a weighted average remaining
contractual life of 7.1 years and 8.0 years, respectively. Stock options vest
at 33 1/3% per year over three years beginning on the first anniversary date
of the grant and are exercisable at the market value on the date of the grant.
The term of each option is ten years from the date of the grant.
Restricted stock is subject to restrictions determined by the Company's
Compensation Committee. The Compensation Committee, comprised of two Directors
who are not officers of the Company, determines compensation, including awards
under the Stock Plan, for the Company's executive officers. Restricted stock
has the same dividend and voting rights as common stock and is issued and
outstanding. In connection with the Company's initial public offering in
January 1997, 100,000 shares of restricted stock were issued to an executive
officer of the Company for a price of $1,000 and vest 20% per year over a
five-year period. Compensation expense is determined by reference to the
market value of the Company's common shares and is being amortized on a
monthly basis over the five-year vesting period. Compensation expense relating
to these shares was approximately $0.4 million for the year ended December 31,
2000, and approximately $0.5 million for the years ended December 31, 1999 and
1998. On June 23, 2000, the Company granted 175,000 shares of restricted stock
to certain key employees, the grantees. The shares of restricted stock contain
stock-vesting provisions such that the shares vest 100% on March 1, 2003.
Compensation expense for the restricted shares is calculated based on the
closing per share price of $24.94 on the June 23, 2000 grant date and is
amortized on a straight-line basis over the vesting period. The compensation
expense related to this restricted stock grant was approximately $0.8 million
for the year ended December 31, 2000. In the event all of the grantees remain
with the Company until the March 1, 2003 stock-vesting date, non-cash
compensation expense related to this grant will be recorded at a rate of
approximately $1.6 million per year. Restricted shares are included in the
Company's outstanding shares at December 31, 2000.
The Company's stock option activity is summarized as follows:
Number of Weighted Average
Options Exercise Price
--------- ----------------
Outstanding at December 31, 1997................. 1,185,000 $23.80
Granted........................................ 1,339,000 23.28
Cancelled...................................... (180,000) 26.30
---------
Outstanding at December 31, 1998................. 2,344,000 23.37
Granted........................................ 25,000 20.38
Cancelled...................................... (375,000) 24.43
---------
Outstanding at December 31, 1999................. 1,994,000 23.07
Granted........................................ 95,000 23.93
Exercised...................................... (59,535) 22.42
Cancelled...................................... (16,666) 27.69
---------
Outstanding at December 31, 2000................. 2,012,799 $23.13
=========
F-21
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and will continue to use the intrinsic value
based method of accounting prescribed by Account Practice Bulletin opinion No.
25, "Accounting for Stock Issued to Employees" and FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation."
Accordingly, no compensation cost has been recognized for the options granted
under the Stock Plan. Had compensation cost for the Company's Stock Plan been
determined based on the fair value at the grant date consistent with the
provisions of SFAS No. 123, the Company's net income and net income on a per
share basis would have been adjusted to the pro forma amounts indicated below:
Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
(in thousands, except
per share amounts)
Net income:
As reported....................................... $46,846 $39,895 $38,822
Pro forma......................................... 44,638 37,264 37,265
Net income per common share--basic:
As reported....................................... 1.76 1.44 1.44
Pro forma......................................... 1.68 1.35 1.38
Net income per common share--diluted:
As reported....................................... 1.75 1.44 1.43
Pro forma......................................... $ 1.67 $ 1.34 $ 1.38
The fair value of each option grant issued in 2000, 1999, and 1998 is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions (amounts shown as 2000, 1999,
and 1998, respectively): (a) dividend yield of 6.90%, 6.73%, and 6.31%, (b)
expected volatility of the Company's stock of 26.2%, 27.0%, and 26.2%, (c)
risk free interest rate of 5.18%, 6.64%, and 4.73%, and (d) expected option
life of seven years. The effects of applying SFAS No. 123 may not be
representative of the effects on disclosed pro forma net income for future
years because options vest over several years and additional awards can be
made each year.
12. Commitments and Contingencies
Operating leases--The Company has noncancelable ground lease obligations on
the SeaTac Office Center in Seattle, Washington expiring December 2032, with
an option to extend the lease for an additional 30 years; 12312 W. Olympic
Boulevard in Santa Monica, California with the primary lease expiring in
January 2065 and a smaller secondary lease expiring in September 2011; Kilroy
Airport Center, Long Beach, California with an initial lease period expiring
July 2035; and 9455 Towne Center in San Diego, California expiring in
October 2043. On the Kilroy Airport Center and the SeaTac Office Center ground
leases, rentals are subject to adjustments every five years based on the
Consumer Price Index. On the 12312 W. Olympic Boulevard ground lease, rentals
are subject to adjustments every year based on the Consumer Price Index.
Subsequent to December 31, 2000, the Company acquired the fee interest in the
land at 9455 Towne Center in San Diego, California and the ground lease was
terminated.
F-22
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The minimum commitment under these leases at December 31, 2000 was as
follows:
Year Ending
----------- (in thousands)
2001......................................................... $ 1,946
2002......................................................... 1,957
2003......................................................... 1,967
2004......................................................... 1,957
2005......................................................... 1,954
Thereafter................................................... 46,638
-------
Total....................................................... $56,419
=======
Purchase agreement--In connection with an agreement signed with The Allen
Group in October 1997, the Company has agreed to purchase one office property
encompassing 128,000 rentable square feet, subject to the property meeting
certain occupancy thresholds and other tenancy requirements. The purchase
price for this property will be determined at the time of acquisition based on
the net operating income at that time. The Company expects that in the event
that this acquisition does occur, it would be financed with borrowings under
the Credit Facility and the issuance of common limited partnership units of
the Operating Partnership.
Litigation--Neither the Company nor any of the Company's properties are
presently subject to any material litigation nor, to the Company's knowledge,
is any material litigation threatened against any of them which if determined
unfavorably to the Company would have a material adverse effect on the
Company's cash flows, financial condition or results of operations. The
Company is party to litigation arising in the ordinary course of business,
none of which if determined unfavorably to the Company, individually or in the
aggregate, is expected to have a material adverse effect on the Company's cash
flows, financial condition or results of operations.
Environmental Matters--The Company follows the policy of monitoring its
properties for the presence of hazardous or toxic substances. While there can
be no assurance that a material environmental liability does not exist, the
Company is not currently aware of any environmental liability with respect to
the properties that would have a material effect on the Company's financial
condition, results of operations and cash flows. Further, the Company is not
aware of any environmental liability or any unasserted claim or assessment
with respect to an environmental liability that the Company believes would
require additional disclosure or the recording of a loss contingency.
13. Related-Party Transactions
Note Receivable from Related Party
In May 2000, the Company initiated actions that put it in a position to
potentially acquire the fee interest in a three building office complex
located in El Segundo, California from Kilroy Airport Imperial Co. ("KAICO"),
a partnership owned by John B. Kilroy, Sr., the Company's Chairman of the
Board of Directors, John B. Kilroy, Jr. the Company's President and Chief
Executive Officer, and certain other Kilroy family members. The complex, which
encompasses approximately 366,000 aggregate rentable square feet, is comprised
of two office buildings and a parking structure. One of the office buildings
is occupied by Hughes Space & Communications Company ("Hughes") and the other
office building is vacant.
On May 1, 2000, the Company purchased a non-recourse note receivable
secured by the aforementioned office complex with an outstanding principal
balance of $60.8 million, accrued interest of $10.2 million, an annual
interest rate of 9.63%, and a maturity date of February 1, 2005 from an
institutional lender for $45.3 million. At the time of the acquisition, KAICO
was in payment default under the terms of the note. The
F-23
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company recorded its investment in the impaired note at the $45.3 million
purchase price and recorded no additional impairment allowance since the
Company believes that the purchase price of the note is less than the fair
market value of the complex securing it as supported by independent, third-
party appraisals. The Company and KAICO also entered into agreements whereby
the Company agreed to pay KAICO approximately $3.3 million for the
reimbursement of expenditures incurred by KAICO on the complex since 1997 and
for the modification of an existing option that the Company holds to purchase
the complex. The acquisition of the note was funded with borrowings under the
Company's revolving credit facility.
As a result of the acquisition of the note, the Company received
approximately $2.7 million which was recorded as interest income. In October
2000, the Company and KAICO agreed to modify the terms of the note to write
down the principal value and accrued interest to $45.3 million. In connection
with the modification of the note in October 2000, a wholly-owned subsidiary
of the Company acquired a 25% tenancy-in-common interest in the complex from
KAICO subject to 25% or $11.3 million of the $45.3 million note in exchange
for 1,133 common units of the Operating Partnership valued at approximately
$30,000 based upon the closing share price of the Company's common stock as
reported on the New York Stock Exchange. During the fourth quarter of 2000 the
Company recorded approximately $0.2 million as other income related to its
equity in earnings from its 25% tenancy-in-common interest. The tenancy-in-
common interest is included as an investment in unconsolidated real estate in
the consolidated balance sheet as of December 31, 2000.
On January 9, 2001, the Operating Partnership acquired the remaining 75%
tenancy-in-common interest in the complex from KAICO for $33.4 million in
cash. KAICO concurrently used the proceeds to pay off the outstanding note
receivable balance and related accrued interest to the Company.
Acquisitions
In March 1999, the Company acquired three office buildings in San Diego,
California from entities controlled by a senior executive officer of The Allen
Group in exchange for $17.5 million in cash and 168,402 common units of the
Operating Partnership valued at approximately $3.6 million based upon the
closing share price of the Company's common stock as reported on the NYSE at
the time the property was acquired (see Note 3). The office property, which
contains approximately 126,000 aggregate rentable square feet and is 100%
leased through February 2014, was acquired pursuant to an existing agreement
executed by the Company and The Allen Group in October 1997, prior to The
Allen Group becoming a related party of the Company. In connection with this
anticipated transaction, the Company entered into an agreement in May 1998 to
loan $2.3 million to a limited liability company controlled by a senior
executive officer of The Allen Group to finance tenant improvements to this
property. The $2.3 million balance of the note, which was secured by the
pledge of membership interests in the limited liability company, and the
related interest, which accrued at a rate of Prime plus 1.00%, was repaid to
the Company in connection with the acquisition. A former Executive Vice
President of the Company received 98,476 of the total 168,402 common limited
partnership units issued in connection with the acquisition. The acquisition
was based upon terms that the Company believes were comparable to terms
obtainable from third-parties based on arm's-length negotiations.
In February 1999, the Company acquired three acres of undeveloped land in
San Diego, California from entities controlled by a senior executive officer
of the Allen Group in exchange for $0.4 million in cash and 119,460 common
limited partnership units of the Operating Partnership valued at approximately
$2.5 million based upon the closing share price of the Company's common stock
as reported on the NYSE at the time the undeveloped land was acquired (see
Note 3). A former Executive Vice President of the Company received 76,896 of
the total 119,460 common limited partnership units issued in connection with
the acquisition. The acquisition was based upon terms that the Company
believes were comparable to terms obtainable from third-parties based on
arm's-length negotiations.
F-24
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the first quarter of 1999, the Company acquired a 50% interest in 55
acres of undeveloped land in San Diego, California in exchange for $16.1
million and 184,172 common limited partnership units of the Operating
Partnership valued at approximately $3.8 million based upon the closing share
price of the Company's common stock as reported on the NYSE at the time the
undeveloped land was acquired (see Note 3). The interest in the undeveloped
land was acquired pursuant to an existing agreement executed by the Company
and The Allen Group in October 1997 that provided for the joint development of
two office projects with approximately 1.1 million aggregate rentable square
feet over the next three years. Both the Company and The Allen Group
contributed their respective 50% interests in the undeveloped land to the two
Development LLCs. In connection with this anticipated transaction, the Company
entered into an agreement in May 1998 to loan up to $8.5 million to a limited
partnership controlled by a senior executive officer of The Allen Group to
finance infrastructure improvements on the undeveloped land. The $8.5 million
balance of the note, which was secured by the undeveloped land, was assumed by
one of the Development LLCs. The related interest, which accrued at a rate of
LIBOR plus 1.85%, was paid to the Company by the limited partnership. A former
Executive Vice President of the Company received 69,694 of the total 184,172
common limited partnership units issued in connection with the acquisition.
The acquisition was based upon terms that the Company believes were comparable
to terms obtainable from third-parties based on arm's-length negotiations.
In March 1999, the Company acquired construction materials for its Kilroy
Airport Center, Long Beach development project from a partnership controlled
by John B. Kilroy Sr. and John B. Kilroy, Jr. for approximately $4.3 million.
The acquisition of the construction materials was based upon terms that the
Company believes were comparable to terms obtainable from third-parties based
on arm's-length negotiations.
Other Transactions
Pursuant to management agreements, the Operating Partnership provided
management and leasing services during 2000, 1999 and 1998, and KSI provided
development services during 1998, with respect to two properties, each of
which is beneficially owned by John B. Kilroy, Sr. and John B. Kilroy, Jr. The
Operating Partnership recorded fees of $0.1 million, $0.1 million and $0.2
million for the years ended December 31, 2000, 1999, and 1998, respectively,
relating to the management and leasing services. KSI recorded fees of $0.1
million for the year ended December 31, 1998 related to the development
services.
In October 1997, KSI entered into a management agreement to manage the
development of certain properties owned by entities under the common control
of a senior executive officer of The Allen Group. At December 31, 2000 and
1999, KSI had a receivable balance of $.2 million and $0.3 million for
management fees earned, respectively.
At December 31, 2000, other assets include a note receivable and accrued
interest totaling $0.3 million due from a Senior Vice President of the
Company. The note bears interest at 8%, matures in July 2005 and is secured by
real property owned by the officer.
14. Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, restricted
cash and accounts payable approximate fair value due to their short-term
maturities. The carrying amounts of the Company's variable rate secured debt
and unsecured term facility, outstanding borrowings on the Credit Facility,
and note receivable from related party approximate fair value since the
interest rates on these instruments are equivalent to rates currently offered
to the Company.
F-25
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For fixed rate secured debt, the Company estimates fair value by using
discounted cash flow analyses based on borrowing rates for similar types of
borrowing arrangements. The fair value of the Company's fixed rate secured
debt was $257 million and $225 million at December 31, 2000 and 1999,
respectively.
For the Series A, Series C, and Series D Preferred units, the Company
estimates fair value by using discounted cash flow analyses based on borrowing
rates for similar types of fixed rate financial instruments. The fair value of
the Series A, Series C and Series D Preferred units was $142 million and $146
million at December 31, 2000 and 1999, respectively.
For interest rate cap agreements and interest rate swap agreements, the
Company estimates fair value by using available market information and
appropriate valuation techniques. At December 31, 2000 and 1999, the Company's
derivative instruments had a negative fair value of $1.9 million and zero,
respectively.
15. Segment Disclosure
The Company's reportable segments consist of the two types of commercial
real estate properties for which management internally evaluates operating
performance and financial results: Office Properties and Industrial
Properties. The Company also has certain corporate level activities including
legal, accounting, finance, and management information systems which are not
considered separate operating segments.
The Company evaluates the performance of its segments based upon net
operating income. Net operating income is defined as operating revenues
(rental income, tenant reimbursements and other property income) less property
and related expenses (property expenses, real estate taxes, and ground leases)
and excludes interest income and expense, depreciation and amortization, and
corporate general and administrative expenses. The accounting policies of the
reportable segments are the same as those described in the Company's summary
of significant accounting policies (see Note 2). There is no intersegment
activity.
F-26
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables reconcile the Company's segment activity to its
consolidated results of operations and financial position as of and for the
years ended December 31, 2000, 1999 and 1998.
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Revenues and Expenses
Office Properties:
Operating revenues(1)............................ $132,172 $109,272 $ 96,077
Property and related expenses.................... 31,766 26,539 24,163
-------- -------- --------
Net operating income, as defined................. 100,406 82,733 71,914
-------- -------- --------
Industrial Properties:
Operating revenues(1)............................ 50,339 49,253 39,313
Property and related expenses.................... 7,815 7,896 6,724
-------- -------- --------
Net operating income, as defined................. 42,524 41,357 32,589
-------- -------- --------
Total Reportable Segments:
Operating revenues(1)............................ 182,511 158,525 135,390
Property and related expenses.................... 39,581 34,435 30,887
-------- -------- --------
Net operating income, as defined................. 142,930 124,090 104,503
-------- -------- --------
Reconciliation to Consolidated Net Income:
Total net operating income, as defined, for
reportable segments............................. 142,930 124,090 104,503
Other unallocated revenues:
Interest income................................ 4,602 1,175 1,698
Other unallocated expenses:
General and administrative expenses............ 11,114 9,091 7,739
Provision for potentially unrecoverable pre-
development costs............................. 1,700
Interest expense............................... 39,109 26,309 20,568
Depreciation and amortization.................. 41,125 33,794 26,200
-------- -------- --------
Income from operations before net gains on
dispositions of operating properties, equity in
income of unconsolidated subsidiary, and
minority interests.............................. 56,184 56,071 49,994
Net gains on dispositions of operating
properties...................................... 11,256 46
Equity in income of unconsolidated subsidiary.... 10 17 5
Minority interests............................... (20,604) (16,239) (11,177)
-------- -------- --------
Net income....................................... $ 46,846 $ 39,895 $ 38,822
======== ======== ========
- --------
(1) All operating revenues are comprised of amounts received from external
tenants.
F-27
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31,
---------------------
2000 1999
---------- ----------
(in thousands)
Assets:
Office Properties:
Land, buildings and improvements, net.................... $ 828,449 $ 684,629
Undeveloped land and construction in progress, net....... 162,633 189,645
Investment in unconsolidated real estate................. 12,405
Total assets............................................. 1,053,109 902,015
Industrial Properties:
Land, buildings and improvements, net.................... 287,657 361,536
Total assets............................................. 302,524 377,179
Total Reportable Segments:
Land, buildings and improvements, net.................... 1,116,106 1,046,165
Undeveloped land and construction in progress, net....... 162,633 189,645
Investment in unconsolidated real estate................. 12,405
Total assets............................................. 1,355,633 1,279,194
Reconciliation to Consolidated Assets:
Total assets for reportable segments..................... 1,355,633 1,279,194
Other unallocated assets:
Cash and cash equivalents.............................. 17,600 26,116
Restricted cash........................................ 35,014 6,636
Note receivable from related party..................... 33,274
Deferred financing costs, net.......................... 7,707 6,535
Prepaid expenses and other assets...................... 7,941 2,020
---------- ----------
Total consolidated assets............................ $1,457,169 $1,320,501
========== ==========
December 31,
----------------
2000 1999
-------- -------
(in thousands)
Capital Expenditures:(1)
Office Properties:
Expenditures for operating properties, undeveloped land and
construction in progress.................................... $155,411 $97,139
Recurring capital expenditures and tenant improvements....... 10,448 15,662
Investment in unconsolidated real estate..................... 12,405
Industrial Properties:
Expenditures for operating properties, undeveloped land and
construction in progress.................................... 47,107
Recurring capital expenditures and tenant improvements....... 4,934 4,298
Total Reportable Segments:
Expenditures for operating properties, undeveloped land and
construction in progress.................................... 155,411 144,246
Recurring capital expenditures and tenant improvements....... 15,382 19,960
Investment in unconsolidated real estate..................... 12,405
- --------
(1) Total consolidated capital expenditures are equal to the same amounts
disclosed for total reportable segments.
F-28
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. 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 Company does not consider
common limited partnership units of the Operating Partnership to be dilutive
securities since the exchange of common limited partnership units into common
stock is on a one for one basis and would not have any effect on diluted
earnings per share. The following table reconciles the numerator and
denominator of the basic and diluted per-share computations for net income for
the three years ended December 31, 2000, 1999 and 1998:
Year Ended December 31, 2000
-------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- ------------------- --------------
(in thousands, except share and per share amounts)
Basic................... $ 46,846 26,598,926 $ 1.76
Effect of dilutive
securities:
Stock options
granted.............. 156,058 (0.1)
---------------- ------------------- --------------
Diluted................. $ 46,846 26,754,984 $ 1.75
================ =================== ==============
Year Ended December 31, 1999
-------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- ------------------- --------------
(in thousands, except share and per share amounts)
Basic................... $ 39,895 27,701,495 $ 1.44
Effect of dilutive
securities:
Stock options
granted.............. 25,808
---------------- ------------------- --------------
Diluted................. $ 39,895 27,727,303 $ 1.44
================ =================== ==============
Year Ended December 31, 1998
-------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- ------------------- --------------
(in thousands, except share and per share amounts)
Basic................... $ 38,822 26,989,422 $ 1.44
Effect of dilutive
securities:
Stock options
granted.............. 70,566 (.01)
---------------- ------------------- --------------
Diluted................. $ 38,822 27,059,988 $ 1.43
================ =================== ==============
17. Tax Treatment of Distributions
The income tax reporting for distributions paid to registered common
stockholders and common limited partnership unitholders during the years ended
December 31, 2000 and 1999 was as follows:
2000 1999
------ ------
(in
thousands)
Distributions for record dates March 31, June 30, and
September 30 reportable in the current year................ $1.350 $1.260
Distributions for record date December 31 reportable in
following year............................................. 0.450 0.420
------ ------
Total distributions per share............................... $1.800 $1.680
====== ======
F-29
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The income tax treatment for distributions reportable in 2000 and 1999, as
identified in the table above, was as follows:
2000 1999
------ ------
Percent of distributions taxable as ordinary income........ 62.71% 90.48%
Percent of distributions taxable as unrecaptured section
1250 capital gains........................................ 3.56 0.71
Percent of distributions taxable as twenty percent rate
gain...................................................... 8.42
Percent of distributions not taxable as current year return
of capital................................................ 25.31 8.81
------ ------
100.00% 100.00%
====== ======
18. Quarterly Financial Information (Unaudited)
Summarized quarterly financial data for the years ended December 31, 2000
and 1999 was as follows:
2000 Quarter Ended
--------------------------------------------
June
March 31, 30, September 30, December 31,
--------- ------- ------------- ------------
(in thousands, except per share amounts)
Total revenues................ $43,764 $45,360 $47,221 $50,769
Income before minority
interests.................... 14,449 17,939 21,519 13,544
Net income.................... 9,578 12,804 15,679 8,786
Net income per common share
diluted...................... $ 0.35 $ 0.49 $ 0.59 $ 0.33
1999 Quarter Ended
--------------------------------------------
June
March 31, 30, September 30, December 31,
--------- ------- ------------- ------------
(in thousands, except per share amounts)
Total revenues................ $37,550 $39,301 $40,202 $42,647
Income before minority
interests.................... 13,780 14,951 15,109 12,294
Net income.................... 9,910 10,796 10,911 8,278
Net income per common share
diluted...................... $ 0.36 $ 0.39 $ 0.39 $ 0.30
19. Subsequent Events
On January 16, 2001, aggregate distributions of $13.6 million were paid to
common stockholders and common unitholders of record on December 31, 2000.
On January 3, 2001, the Company entered into an interest rate swap agreement
with a total notional amount of $150 million that begins in January 2001 (see
Note 7).
On January 12, 2001 the Company acquired the fee interest from the City of
San Diego for 9455 Town Center Drive, San Diego. The Company previously leased
this property from the City of San Diego (see Note 12).
On January 1, 2001, KSI merged into KSLLC and became a wholly owned
subsidiary of the Company (See Note 1).
On January 9, 2001, the Company acquired the remaining 75% tenancy-in-common
interest in the KAICO complex (see Note 13).
F-30
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 22, 2001, the Company sold one industrial building encompassing
approximately 39,700 aggregate rentable square feet to an unaffiliated third
party. The building, which is located in San Diego, California, was sold for an
aggregate sales price of $3.3 million in cash.
Subsequent to December 31, 2000, one of the Company's tenants, eToys Inc.,
defaulted on its lease and declared bankruptcy. In January 2001, the Company
drew $15.0 million under letters of credit that the Company held as credit
support under the terms of the lease.
F-31
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. Schedule of Rental Property
December 31, 2000
----------------------------------------------------------------------------
Gross Amounts
Costs at which Carried
Initial Cost Capitalized at Close of Period Net
---------------------- Subsequent to -------------------------- Date of Rentable
Buildings and Acquisition/ Accumulated Acquisition(A)/ Square
Property Location Land Improvements Improvement Land Building Total Depreciation Construction(C)(1) Feet
- ----------------- -------- ------------- ------------- -------- -------- -------- ------------ ------------------ --------
(dollars in thousands)
Office
Properties:
Kilroy Airport
Center,
El Segundo
El Segundo,
California..... $ 6,141 $ 69,195 $ 22,438 $ 6,141 $ 91,633 $ 97,774 $ 56,944 1983(C) 701,307
Kilroy Airport
Center, Phase
I--
Long Beach,
California..... 24,500 24,500 24,500 2,810 1997(A) 225,217
Kilroy Airport
Center, Phase
II--
Long Beach,
California..... 47,387 10,075 57,462 57,462 25,266 1989(C) 395,480
La Palma Business
Center
4175 E. La Palma
Avenue
Anaheim,
California..... 1,518 2,612 257 1,518 2,869 4,387 384 1997(A) 42,790
2829 Townsgate
Road
Thousand Oaks,
California..... 5,248 8,001 1,594 5,248 9,595 14,843 1,061 1997(A) 81,158
181/185 S.
Douglas Street
El Segundo,
California..... 525 4,687 1,910 628 6,494 7,122 4,268 1978(C) 60,000
SeaTac Office
Center
Seattle,
Washington..... 25,993 18,102 44,095 44,095 28,682 1977(C) 532,651
23600-23610 Telo
Avenue
Torrance,
California..... 2,636 3,975 643 2,636 4,618 7,254 497 1997(A) 79,967
2100 Colorado
Avenue
Santa Monica,
California..... 5,474 26,087 547 5,476 26,632 32,108 2,615 1997(A) 94,844
5151-5155 Camino
Ruiz
Camarillo,
California..... 4,501 19,710 587 4,501 20,297 24,798 2,067 1997(A) 276,216
111 Pacifica
Irvine,
California..... 5,165 4,653 541 5,166 5,193 10,359 559 1997(A) 67,381
2501 Pullman
Santa Ana,
California..... 6,588 9,050 (501) 6,588 8,549 15,137 906 1997(A) 129,766
26541 Agoura Road
Calabasas,
California..... 1,979 9,630 2,460 1,979 12,090 14,069 1,231 1997(A) 90,878
9451 Toledo Way
Irvine,
California..... 869 1,135 2,004 2,004 249 1997(A) 27,200
1633 26th Street
Santa Monica,
California..... 2,080 6,672 329 2,040 7,041 9,081 813 1997(A) 43,800
4351 Latham
Avenue
Riverside,
California..... 307 1,555 170 307 1,725 2,032 188 1997(A) 21,357
4361 Latham
Avenue
Riverside,
California..... 764 3,577 118 765 3,694 4,459 355 1997(A) 30,581
601 Valencia
Avenue
Brea,
California..... 3,518 2,900 99 3,519 2,998 6,517 319 1997(A) 60,891
3750 University
Avenue
Riverside,
California..... 2,909 19,372 486 2,912 19,855 22,767 1,867 1997(A) 124,986
6220/6215
Greenwich Drive
San Diego,
California..... 4,796 15,863 8,242 5,148 23,753 28,901 2,269 1997(A) 212,214
6055 Lusk Avenue
San Diego,
California..... 3,935 8,008 21 3,942 8,022 11,964 726 1997(A) 93,000
6260 Sequence
Drive
San Diego,
California..... 3,206 9,803 23 3,212 9,820 13,032 888 1997(A) 130,000
6290 Sequence
Drive
San Diego,
California..... 2,403 7,349 17 2,407 7,362 9,769 666 1997(A) 90,000
F-32
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
----------------------------------------------------------------------------
Gross Amounts
Costs at which Carried
Initial Cost Capitalized at Close of Period Net
---------------------- Subsequent to -------------------------- Date of Rentable
Buildings and Acquisition/ Accumulated Acquisition(A)/ Square
Property Location Land Improvements Improvement Land Building Total Depreciation Construction(C)(1) Feet
- ----------------- -------- ------------- ------------- -------- -------- -------- ------------ ------------------ --------
(dollars in thousands)
8101 Kaiser Blvd.
Anaheim,
California..... $ 2,369 $ 6,180 $ 236 $ 2,377 $ 6,408 $ 8,785 $ 583 1997(A) 60,177
3130 Wilshire
Blvd.
Santa Monica,
California..... 8,921 6,579 3,384 9,188 9,696 18,884 1,350 1997(A) 88,338
12312 W. Olympic
Blvd.
Los Angeles,
California..... 3,325 12,202 581 3,399 12,709 16,108 1,017 1997(A) 78,000
Anaheim Corporate
Center
Anaheim,
California..... 5,305 10,149 1,612 5,311 11,755 17,066 1,145 1997(A) 158,785
525 N. Brand
Blvd.
Glendale,
California..... 1,360 8,771 114 1,373 8,872 10,245 760 1997(A) 43,647
Kilroy Airport
Long Beach--
Phase IV(2)
Long Beach,
California .... 2,088 2,088 2,088 1,274
501 Santa Monica
Blvd.
Santa Monica,
California..... 4,547 12,044 723 4,551 12,763 17,314 1,178 1998(A) 70,089
1240-1250
Lakeview Blvd.
Anaheim,
California..... 2,851 4,295 318 2,851 4,613 7,464 430 1998(A) 78,903
5770 Armada Drive
Carlsbad,
California..... 2,626 7,880 2,626 7,880 10,506 619 1998(A) 81,712
6340-6350
Sequence Drive
San Diego,
California..... 7,375 22,126 2,403 7,386 24,518 31,904 2,210 1998(A) 199,000
4880 Santa Rosa
Road
Camarillo,
California..... 2,389 2,641 21 2,389 2,662 5,051 215 1998(A) 41,131
15378 Avenue of
Science
San Diego,
California..... 3,565 3,796 3,565 3,796 7,361 289 1998(A) 68,910
10398-10421
Pacific Center
Court
San Diego,
California..... 14,979 39,634 3,063 14,978 42,698 57,676 3,415 1998(A) 411,339
3990 Ruffin Road
San Diego,
California..... 2,467 3,700 1 2,467 3,701 6,168 273 1998(A) 45,634
2231 Rutherford
Road
Carlsbad,
California..... 1,006 4,155 1 1,007 4,155 5,162 307 1998(A) 39,000
9455 Town Center
Drive
San Diego,
California..... 3,936 25 3,961 3,961 370 1998(A) 45,195
Carmel Valley
Corporate Center
San Diego,
California .... 3,207 18,176 42 3,213 18,212 21,425 1,173 1998(A) 115,513
12348 High Bluff
Drive
San Diego,
California..... 1,629 3,096 1,222 1,629 4,318 5,947 590 1999(C) 40,274
4690 Executive
Drive
San Diego,
California..... 1,623 7,926 449 1,623 8,375 9,998 415 1999(A) 50,929
LPL Financial
Complex
San Diego,
California..... 4,536 16,554 46 4,546 16,590 21,136 829 1999(A) 126,000
Sorrento Gateway
San Diego,
California..... 7,106 15,816 129 7,106 15,945 23,051 1,041 1999(C) 172,778
Kilroy Carmel
Center Building
1
San Diego,
California..... 2,167 6,897 1 2,167 6,898 9,065 357 1999(C) 52,375
Kilroy Airport
Center--Phase
III
Long Beach,
California..... 49,654 3,010 52,664 52,664 3,562 1999(C) 136,026
12390 El Camino
Real
San Diego,
California..... 3,453 11,981 52 3,453 12,033 15,486 442 2000(C) 72,332
F-33
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
----------------------------------------------------------------------------
Gross Amounts
Costs at which Carried
Initial Cost Capitalized at Close of Period
---------------------- Subsequent to -------------------------- Date of
Property Buildings and Acquisition/ Accumulated Acquisition(A)/
Location Land Improvements Improvement Land Building Total Depreciation Construction(C)(1)
-------- -------- ------------- ------------- -------- -------- -------- ------------ ------------------
(dollars in thousands)
6310 Sequence
Drive
San Diego,
California.... $ 2,941 $ 4,946 $ 2,941 $ 4,946 $ 7,887 $ 82 2000(C)
Carmel Mountain
Tech Center
San Diego,
California.... 4,286 12,622 4,286 12,622 16,908 446 2000(C)
24025 Park
Sorrento
Calabasas,
California.... 845 15,896 845 15,896 16,741 346 2000(C)
Westside Media
Center--
Phase II
Los Angeles,
California.... 4,329 43,116 $ (7,584) 4,329 35,532 39,861 430 2000(C)
Kilroy Carmel Center Building 2
San Diego,
California.... 4,184 19,352 4,184 19,352 23,536 490 2000(C)
Kilroy Carmel Center Building 5
San Diego,
California.... 3,452 16,152 1 3,452 16,153 19,605 306 2000(C)
4955 Directors
Place
San Diego,
California.... 2,521 14,122 19 2,521 14,141 16,662 125 2000(C)
-------- -------- -------- -------- -------- -------- --------
TOTAL OFFICE
PROPERTIES..... $173,057 $711,342 $105,750 $173,896 $816,253 $990,149 $161,700
-------- -------- -------- -------- -------- -------- --------
Net
Rentable
Property Square
Location Feet
-------- ---------
6310 Sequence
Drive
San Diego,
California.... 62,415
Carmel Mountain
Tech Center
San Diego,
California.... 103,000
24025 Park
Sorrento
Calabasas,
California.... 102,264
Westside Media
Center--
Phase II
Los Angeles,
California.... 151,000
Kilroy Carmel Center Building 2
San Diego,
California.... 129,680
Kilroy Carmel Center Building 5
San Diego,
California.... 112,067
4955 Directors
Place
San Diego,
California.... 76,246
---------
TOTAL OFFICE
PROPERTIES..... 6,624,443
---------
Industrial
Properties:
2031 E. Mariposa
Avenue
El Segundo,
California.... $ 132 $ 867 $ 2,698 $ 132 $ 3,565 $ 3,697 $ 3,539 1954(C)
3340 E. La Palma
Avenue
Anaheim,
California.... 67 1,521 2,996 67 4,517 4,584 4,255 1966(C)
2260 E. El
Segundo Blvd.
El Segundo,
California.... 1,423 4,194 1,692 1,703 5,606 7,309 3,615 1979(C)
2265 E. El
Segundo Blvd.
El Segundo,
California.... 1,352 2,028 651 1,571 2,460 4,031 1,797 1978(C)
1000 E. Ball
Road 1956(C)/
Anaheim,
California.... 838 1,984 921 838 2,905 3,743 2,269 1974(A)
1230 S. Lewis
Road
Anaheim,
California.... 395 1,489 2,058 395 3,547 3,942 2,796 1982(C)
12681/12691 Pala
Drive
Garden Grove,
California.... 471 2,115 2,683 471 4,798 5,269 3,699 1980(A)
2270 E. El
Segundo Blvd.
El Segundo,
California.... 361 100 156 419 198 617 97 1977(C)
5115 N. 27th
Avenue
Phoenix,
Arizona....... 125 1,206 182 125 1,388 1,513 1,168 1962(C)
12752-12822
Monarch Street
Garden Grove,
California.... 3,975 5,238 587 3,975 5,825 9,800 668 1997(A)
4155 E. La Palma
Avenue
Anaheim,
California.... 1,148 2,681 163 1,148 2,844 3,992 368 1997(A)
4125 E. La Palma
Avenue
Anaheim,
California.... 1,690 2,604 14 1,690 2,618 4,308 314 1997(A)
Brea Industrial
Properties
Brea,
California.... 1,263 13,927 206 1,263 14,133 15,396 1,469 1997(A)
Garden Grove
Industrial
Properties
Garden Grove,
California..... 1,868 11,894 357 1,868 12,251 14,119 1,324 1997(A)
Industrial
Properties:
2031 E. Mariposa
Avenue
El Segundo,
California.... 192,053
3340 E. La Palma
Avenue
Anaheim,
California.... 153,320
2260 E. El
Segundo Blvd.
El Segundo,
California.... 113,820
2265 E. El
Segundo Blvd.
El Segundo,
California.... 76,570
1000 E. Ball
Road
Anaheim,
California.... 100,000
1230 S. Lewis
Road
Anaheim,
California.... 57,730
12681/12691 Pala
Drive
Garden Grove,
California.... 84,700
2270 E. El
Segundo Blvd.
El Segundo,
California.... 6,362
5115 N. 27th
Avenue
Phoenix,
Arizona....... 130,877
12752-12822
Monarch Street
Garden Grove,
California.... 277,037
4155 E. La Palma
Avenue
Anaheim,
California.... 74,618
4125 E. La Palma
Avenue
Anaheim,
California.... 69,472
Brea Industrial
Properties
Brea,
California.... 276,278
Garden Grove
Industrial
Properties
Garden Grove,
California..... 275,971
F-34
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
-----------------------------------------------------------------------
Gross Amounts
Costs at which Carried
Initial Cost Capitalized at Close of Period Net
-------------------- Subsequent to ----------------------- Date of Rentable
Buildings and Acquisition/ Accumulated Acquisition(A)/ Square
Property Location Land Improvements Improvement Land Building Total Depreciation Construction(C)(1) Feet
----------------- ------ ------------- ------------- ------ -------- ------- ------------ ------------------ --------
(dollars in thousands)
17150 Von Karman
Irvine,
California....... $4,848 $7,342 $ 1 $4,848 $7,343 $12,191 $ 769 1997(A) 157,458
7421 Orangewood
Avenue
Garden Grove,
California....... 612 3,967 612 3,967 4,579 387 1997(A) 82,602
5325 East Hunter
Avenue
Anaheim,
California....... 1,728 3,555 1,728 3,555 5,283 372 1997(A) 109,449
184-220 Technology
Drive
Irvine,
California....... 7,464 7,621 1,151 7,464 8,772 16,236 1,411 1997(A) 157,499
9401 Toledo Way
Irvine,
California....... 8,572 7,818 (2,744) 5,665 7,981 13,646 791 1997(A) 244,800
12400 Industry
Street
Garden Grove,
California....... 943 2,110 35 943 2,145 3,088 225 1997(A) 64,200
Walnut Park
Business Center
Diamond Bar,
California....... 2,588 6,090 1,344 2,955 7,067 10,022 636 1997(A) 165,420
2055 S.E. Main
Street
Irvine,
California....... 772 2,343 44 772 2,387 3,159 233 1997(A) 47,583
201 North Sunrise
Avenue
Roseville,
California....... 2,622 11,741 2 2,622 11,743 14,365 1,118 1997(A) 162,203
14831 Franklin
Avenue
Tustin,
California....... 1,112 1,065 271 1,113 1,335 2,448 145 1997(A) 36,256
6828 Nancy Ridge
Drive
San Diego,
California....... 1,914 1,110 1 1,914 1,111 3,025 106 1997(A) 39,669
1675 MacArthur
Costa Mesa,
California....... 2,076 2,114 2,076 2,114 4,190 201 1997(A) 50,842
3130-3150 Miraloma
Anaheim,
California....... 3,335 3,727 (27) 3,335 3,700 7,035 348 1997(A) 144,000
3125 E. Coronado
Street
Anaheim,
California....... 3,669 4,341 3,669 4,341 8,010 403 1997(A) 144,000
1951 E. Carnegie
Santa Ana,
California....... 1,830 3,630 1,541 1,844 5,157 7,001 409 1997(A) 100,000
5115 E. La Palma
Avenue
Anaheim,
California....... 2,462 6,675 4,515 2,464 11,188 13,652 947 1997(A) 286,139
3735 Imperial
Highway
Stockton,
California....... 764 10,747 18 764 10,765 11,529 974 1997(A) 164,540
41093 County Center
Drive
Temecula,
California....... 1,709 2,841 7 1,712 2,845 4,557 257 1997(A) 77,582
1840 Aerojet Way
Las Vegas,
Nevada........... 727 3,792 8 728 3,799 4,527 344 1997(A) 102,948
1900 Aerojet Way
Las Vegas,
Nevada........... 644 4,093 8 645 4,100 4,745 372 1997(A) 106,717
Alton Business
Center
Irvine,
California....... 5,130 7,465 262 5,130 7,727 12,857 806 1998(A) 143,117
795 Trademark Drive
Reno, Nevada...... 1,731 5,193 11 1,734 5,201 6,935 433 1998(A) 75,257
1250 N. Tustin
Avenue
Anaheim,
California....... 2,098 4,158 2,098 4,158 6,256 317 1998(A) 84,185
2911 Dow Avenue
Tustin,
California....... 1,124 2,408 2 1,124 2,410 3,534 178 1998(A) 54,720
892/909 Towne
Center Drive
Foothill Ranch,
California....... 3,334 8,243 4,718 4,949 11,346 16,295 1,339 1998(C) 303,533
F-35
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
--------------------------------------------------------------------------------
Gross Amounts
Costs at which Carried
Initial Cost Capitalized at Close of Period Net
---------------------- Subsequent to ------------------------------ Date of Rentable
Buildings and Acquisition/ Accumulated Acquisition(A)/ Square
Property Location Land Improvements Improvement Land Building Total Depreciation Construction(C)(1) Feet
- ----------------- -------- ------------- ------------- -------- ---------- ---------- ------------ ------------------ ----------
(dollars in thousands)
3250 E. Carpenter
Avenue
Anaheim,
California..... $ 2,298 $ 2,298 $ 2,298 $ 210 1998(C) 41,225
925 & 1075
Lambert Road
Brea,
California..... $ 3,326 $ 7,020 1,717 $ 3,326 8,737 12,063 694 1999(C) 178,811
Anaheim
Technology
Center
Anaheim,
California..... 10,648 20,221 4,575 10,649 24,795 35,444 1,830 1999(C) 593,992
-------- -------- -------- -------- ---------- ---------- -------- ----------
TOTAL INDUSTRIAL
PROPERTIES...... $ 92,890 $203,278 $ 35,122 $ 92,548 $ 238,742 $ 331,290 $ 43,633 5,807,555
-------- -------- -------- -------- ---------- ---------- -------- ----------
TOTAL ALL
PROPERTIES...... $265,947 $914,620 $140,872 $266,444 $1,054,995 $1,321,439 $205,332 12,431,998
======== ======== ======== ======== ========== ========== ======== ==========
- -------
(1) Represents date of construction or acquisition by the Company, or the
Company's Predecessor, the Kilroy Group.
(2) These costs represent infrastructure costs incurred in 1989.
The aggregate gross cost of property included above for federal income tax
purposes, approximated $1.1 billion as of December 31, 2000.
F-36
KILROY REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table reconciles the historical cost of the total investment
in real estate, net from January 1, 1998 to December 31, 2000:
Year Ended December 31,
---------------------------------
2000 1999 1998
---------- ---------- ----------
(in thousands)
Land, building and improvements, beginning of
year........................................ $1,220,593 $1,081,925 $ 800,019
Net additions during period--Acquisition,
improvements, etc. (net of dispositions).. 100,846 138,668 281,906
---------- ---------- ----------
Land, building and improvements, end of
year........................................ 1,321,439 1,220,593 1,081,925
---------- ---------- ----------
Undeveloped land and construction in
progress, net, beginning of year............ 189,645 112,359 34,671
Change in undeveloped land and construction
in progress, net.......................... (27,012) 77,286 77,688
---------- ---------- ----------
Undeveloped land and construction in
progress, net, end of year.................. 162,633 189,645 112,359
---------- ---------- ----------
Investment in unconsolidated real estate..... 12,405
---------- ---------- ----------
Total investment in real estate, net, end
of year................................. $1,496,477 $1,410,238 $1,194,284
========== ========== ==========
The following table reconciles the accumulated depreciation from January 1,
1998 to December 31, 2000:
Year Ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Beginning of year................................ $174,427 $145,347 $121,780
Net additions during period--Depreciation and
amortization for the year..................... 30,905 29,080 23,657
-------- -------- --------
End of year...................................... $205,332 $174,427 $145,437
======== ======== ========
F-37
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 2000, 1999 and 1998
(in thousands)
Charged to
Costs and
Balance at Expenses Balance
Beginning or Rental at End
of Period Revenue Deductions of Period
---------- ---------- ---------- ---------
Year Ended December 31, 2000--
Allowance for uncollectible tenant
receivables and unbilled deferred
rent.............................. $2,693 $1,554 $(638) $3,617
====== ====== ===== ======
Year Ended December 31, 1999--
Allowance for uncollectible tenant
receivables and unbilled deferred
rent.............................. $1,456 $2,158 $(921) $2,693
====== ====== ===== ======
Year Ended December 31, 1998--
Allowance for uncollectible tenant
receivables and unbilled deferred
rent.............................. $1,136 $1,107 $(787) $1,456
====== ====== ===== ======
Year Ended December 31, 2000--
Allowance for potentially
unrecoverable pre-development
costs............................. $ 703 $(197) $ 506
====== ===== ======
Year Ended December 31, 1999--
Allowance for potentially
unrecoverable pre-development
costs............................. $1,700 $(997) $ 703
====== ===== ======
Year Ended December 31, 1998--
Allowance for potential
unrecoverable pre-development
costs............................. $1,700 $1,700
====== ======
F-38
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)
3.4 Articles Supplementary of the Registrant designating 8.075% Series A
Cumulative Redeemable Preferred Stock(10)
3.5 Articles Supplementary of the Registrant, designating 8.075% Series A
Cumulative Redeemable Preferred Stock(13)
3.6 Articles Supplementary of the Registrant designating its Series B
Junior Participating Preferred Stock(23)
3.7 Articles Supplementary of the Registrant designating its 9.375% Series
C Cumulative Redeemable Preferred Stock(15)
3.8 Articles Supplementary of the Registrant designating its 9.250% Series
D Cumulative Redeemable Preferred Stock(20)
4.1 Registration Rights Agreement, dated January 31, 1998(1)
4.2 Registration Rights Agreement, dated February 6, 1999(10)
4.3 Registration Rights Agreement, dated April 20, 1999(13)
4.4 Registration Rights Agreement, dated November 24, 1999(15)
4.5 Registration Rights Agreement, dated as of October 31, 1998(7)
4.6 Rights Agreement, dated as of October 2, 1999 between Kilroy Realty
Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent, which includes the form of Articles Supplementary of the
Series B Junior Participating Preferred Stock of Kilroy Realty
Corporation as Exhibit A, the form of Right Certificate as Exhibit B
and the Summary of Rights to Purchase Preferred Shares as Exhibit
C(16)
4.7 Registration Rights Agreement, dated as of December 9, 1999(20)
*4.8 Registration Rights Agreement, dated as of October 6, 2000
4.9 The Company is party to agreements in connection with long-term debt
obligations, none of which individually exceeds ten percent of the
total assets of the Company on a consolidated basis. Pursuant to Item
601(b)(4)(iii)(A) of Regulation S-K, the Company agrees to furnish
copies of these agreements to the Commission upon request.
10.1 Fourth Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P., dated November 24, 1999(15)
10.2 Omnibus Agreement, dated as of October 30, 1996, by and among Kilroy
Realty, L.P. and the parties named therein(1)
10.3 Supplemental Representations, Warranties and Indemnity Agreement by
and among Kilroy Realty, L.P. and the parties named therein(1)
10.4 Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries(1)
10.5 1998 Stock Option and Incentive Plan of the Registrant and Kilroy
Realty, L.P(1)
10.6 Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P.
with certain officers and directors(1)
10.7 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)
10.8 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)
10.9 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)
Exhibit
Number Description
------- -----------
10.10 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)
10.11 Lease Agreement, dated December 30, 1988, by and between Kilroy Long
Beach Associates and City of Long Beach for Kilroy Long Beach Phase
II(1)
10.12 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)
10.13 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)
10.14 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)
10.15 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)
10.16 Development Agreement by and between Kilroy Long Beach Associates and
the City of Long Beach(1)
10.17 Amendment No. 1 to Development Agreement by and between Kilroy Long
Beach Associates and the City of Long Beach(1)
10.18 Ground Lease by and between Frederick Boysen and Ted Boysen and Kilroy
Industries, dated May 15, 1969, for SeaTac Office Center(1)
10.19 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)
10.20 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)
10.21 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)
10.22 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)
10.23 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)
10.24 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)
10.25 Property Management Agreement between Kilroy Realty Finance
Partnership, L.P. and Kilroy Realty, L.P.(1)
10.26 Environmental Indemnity Agreement(1)
10.27 Option Agreement by and between Kilroy Realty, L.P. and Kilroy Airport
Imperial Co.(1)
10.28 Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates(1)
10.29 Employment Agreement between the Registrant and John B. Kilroy, Jr.(1)
10.30 Employment Agreement between the Registrant and Richard E. Moran
Jr.(1)
10.31 Employment Agreement between the Registrant and Jeffrey C. Hawken(1)
10.32 Employment Agreement between the Registrant and C. Hugh Greenup(1)
10.33 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Sr.(1)
10.34 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Jr.(1)
Exhibit
Number Description
------- -----------
10.35 License Agreement by and among the Registrant and the other persons
named therein(1)
10.36 Form of Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases, Rents
and Security Deposits(1)
10.37 Mortgage Note(1)
10.38 Indemnity Agreement(1)
10.39 Assignment of Leases, Rents and Security Deposits(1)
10.40 Variable Interest Rate Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of
Leases and Rents(1)
10.41 Environmental Indemnity Agreement(1)
10.42 Assignment, Rents and Security Deposits(1)
10.43 Form of Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases and Rents(1)
10.44 Assignment of Leases, Rents and Security Deposits(1)
10.45 Purchase and Sale Agreement and Joint Escrow Instructions, dated April
30, 1998, by and between Mission Land Company, Mission-Vacaville,
L.P. and Kilroy Realty, L.P.(2)
10.46 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
April 30, 1998, by and between Camarillo Partners and Kilroy Realty,
L.P.(2)
10.47 Purchase and Sale Agreement and Escrow Instructions, dated May 5,
1998, by and between Kilroy Realty, L.P. and Pullman Carnegie
Associates(4)
10.48 Amendment to Purchase and Sale Agreement and Escrow Instructions,
dated June 27, 1998, by and between Pullman Carnegie Associates and
Kilroy Realty, L.P.(4)
10.49 Purchase and Sale Agreement, Contribution Agreement and Joint Escrow
Instructions, dated May 12, 1998, by and between Shidler West
Acquisition Company, LLC and Kilroy Realty, L.P.(3)
10.50 First Amendment to Purchase and Sale Agreement, Contribution Agreement
and Joint Escrow Instructions, dated June 6, 1998, between Kilroy
Realty, L.P. and Shidler West Acquisition Company, L.L.C. and Kilroy
Realty, L.P.(3)
10.51 Second Amendment to Purchase and Sale Agreement, Contribution
Agreement and Joint Escrow Instructions, dated June 12, 1998, by and
between Shidler West Acquisition Company, LLC and Kilroy Realty,
L.P.(3)
10.52 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
June 12, 1998, by and between Mazda Motor of America, Inc. and Kilroy
Realty, L.P.(4)
10.53 Amendment to Agreement of Purchase and Sale and Joint Escrow
Instructions, dated June 30, 1998, by and between Mazda Motor of
America, Inc. and Kilroy Realty, L.P.(4)
10.54 Agreement for Purchase and Sale of 2100 Colorado Avenue, Santa Monica,
California, dated June 16, 1998, by and between Santa Monica Number
Seven Associates L.P. and Kilroy Realty L.P.(4)
10.55 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, 1998(5)
10.56 Purchase and Sale Agreement and Joint Escrow Instructions, dated July
10, 1998, by and between Kilroy Realty, L.P. and Mission Square
Partners(6)
10.57 First Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated August 22, 1998(6)
10.58 Second Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 5, 1998(6)
Exhibit
Number Description
------- -----------
10.59 Third Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 19, 1998(6)
10.60 Fourth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 22, 1998(6)
10.61 Fifth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 23, 1998(6)
10.62 Sixth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 25, 1998(6)
10.63 Seventh Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 29, 1998(6)
10.64 Eighth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated October 2, 1998(6)
10.65 Ninth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated October 24, 1998(6)
10.66 Contribution Agreement, dated October 21, 1998, by and between Kilroy
Realty, L.P. and Kilroy Realty Corporation and The Allen Group and
the Allens(8)
10.67 Purchase and Sale Agreement and Escrow Instructions, dated December
11, 1998, by and between Kilroy Realty, L.P. and Swede-Cal
Properties, Inc., Viking Investors of Southern California, L.P. and
Viking Investors of Southern California II, L.P.(9)
10.68 Amendment to the Contribution Agreement, dated October 14, 1999, by
and between Kilroy Realty, L.P. and Kilroy Realty Corporation and The
Allen Group and the Allens, dated October 21, 1998(15)
10.69 Amended and Restated Revolving Credit Agreement, dated as of October
8, 1999 among Kilroy Realty, L.P., Morgan Guaranty Trust Company of
New York, as Bank and as Lead Agent for the Banks, and the Banks
listed therein.(14)
10.70 Amended and Restated Guaranty of Payment, dated as of October 8, 1999,
between Kilroy Realty Corporation and Morgan Guaranty Trust Company
of New York.(14)
10.71 Promissory Notes Aggregating $95.0 Million Payable to Teachers
Insurance and Annuity Association of America(18)
10.72 Form of Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing Statement Securing Promissory Notes
Payable to Teachers Insurance and Annuity Association of America(18)
10.73 Second Amended and Restated Revolving Credit Agreement and Form of
Notes Aggregating $400 million(19)
10.74 Second Amended and Restated Guaranty of Payment(19)
10.75 Credit Agreement and Form of Promissory Notes Aggregating $90.0
million(19)
10.76 Variable Interest Rate Deed of Trust, Leasehold Deed of Trust,
Assignment of Rents, Security Agreement and Fixture Filing(19)
10.77 Guaranty of Recourse Obligations of Borrowing(19)
Exhibit
Number Description
------- -----------
10.78 First Amendment to Fourth Amended and Restated Agreement of Limited
Partnership of Kilroy Realty, L.P., dated December 9, 1999(21)
*10.79 Second Amendment to Fourth Amended and Restated Agreement of Limited
Partnership of Kilroy Realty, L.P., dated December 30, 1999
*10.80 Admission of New Partner and Amendment to New Partnership Agreement
dated October 6, 2000
10.81 Credit Agreement and Form of Promissory Notes Aggregating $100.0
million(22)
21.1 List of Subsidiaries of the Registrant(17)
*23.1 Consent of Deloitte & Touche LLP
*24.1 Power of Attorney (included in the signature page of this Form 10-K)
- --------
* Filed herewith
** Previously filed
(1) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) as declared effective in January 28, 1998 and
incorporated herein by reference.
(2) Previously filed as exhibit 10.11 and 10.12, respectively, to the Current
Report on Form 8-K, dated May 22, 1998, 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, dated June 30, 1998, 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, dated June 30, 1998, and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-32261), and incorporated herein by reference.
(6) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended September 30, 1998, and incorporated herein by reference.
(7) Previously filed as an exhibit to the Current Report on Form 8-K/A, dated
October 29, 1998, and incorporated herein by reference.
(8) Previously filed as exhibit 10.70 and 10.71, respectively, to the Current
Report on Form 8-K, dated November 7, 1998, and incorporated herein by
reference.
(9) Previously filed as exhibit 10.70 to the Current Report on Form 8-K,
dated December 17, 1998, and incorporated herein by reference.
(10) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated February 6, 1999 and incorporated herein by reference.
(11) Previously filed as an exhibits to the Current Report on Form 8-K (No. 1-
12675) dated October 2, 1999 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated October 29, 1998 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated April 20, 1999 and incorporated herein by reference.
(14) Previously filed as an exhibit on Form 10-Q (No. 1-12675) for the
quarterly period ended September 30, 1999 and incorporated herein by
reference.
(15) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated November 24, 1999 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated October 2, 1999 and incorporated herein by reference.
(17) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) and incorporated herein by reference.
(18) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended March 31, 1999, and incorporated herein by reference.
(19) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended September 30, 1999, and incorporated herein by reference.
(20) Previously filed as exhibit 3.8 to the annual report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference.
(21) Previously filed as exhibit 4.18 to the Registration Statement on Form S-
3 (No. 333-34638) and incorporated herein by reference.
(22) Previously filed as an exhibit on Form 10Q for the quarterly period ended
September 30, 2000 and incorporated herein by reference.
(23) Previously filed as an exhibit on the Registration Statement on Form S-3
(No. 333-72229) as declared effective on September 15, 1999, and
incorporated herein by reference.
(b) Reports on Form 8K
The Company filed two Current Reports on Form 8-K (No. 1-12675) dated May
8, 2000 and November 2, 2000 in connection with its quarterly earnings
releases.