KILROY REALTY CORPORATION The following discussion relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. The results of operations discussion is combined for the Company and theOperating Partnership because there are no material differences in the results of operations between the two reporting entities.
Forward-Looking Statements
Statements contained in this "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not historical facts may be forward-looking statements. Forward-looking statements include, among other things, statements or information concerning our plans, objectives, capital resources, portfolio performance, results of operations, projected future occupancy and rental rates, lease expirations, debt maturities, potential investments, strategies such as capital recycling, development and redevelopment activity, projected construction costs, projected construction commencement and completion dates, projected square footage of space that could be constructed on undeveloped land that we own, projected rentable square footage of or number of units in properties under construction or in the development pipeline, anticipated proceeds from capital recycling activity or other dispositions and anticipated dates of those activities or dispositions, projected increases in the value of properties, dispositions, future executive incentive compensation, pending, potential or proposed acquisitions, plans to grow our Net Operating Income and FFO, our ability to re-lease properties at or above current market rates, anticipated market conditions and demographics and other forward-looking financial data, as well as the discussion in "-Factors That May Influence Future Results of Operations," "-Liquidity and Capital Resource of the Company," and "-Liquidity and Capital Resources of theOperating Partnership ." Forward-looking statements can be identified by the use of words such as "believes," "expects," "projects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates" or "anticipates" and the negative of these words and phrases and similar expressions that do not relate to historical matters. Forward-looking statements are based on our current expectations, beliefs and assumptions, and are not guarantees of future performance. Forward-looking statements are inherently subject to uncertainties, risks, changes in circumstances, trends and factors that are difficult to predict, many of which are outside of our control. Accordingly, actual performance, results and events may vary materially from those indicated or implied in the forward-looking statements, and you should not rely on the forward-looking statements as predictions of future performance, results or events. Numerous factors could cause actual future performance, results and events to differ materially from those indicated in the forward-looking statements, including, among others: global market and general economic conditions and their effect on our liquidity and financial conditions and those of our tenants; adverse economic or real estate conditions generally, and specifically, in the States ofCalifornia andWashington ; risks associated with our investment in real estate assets, which are illiquid and with trends in the real estate industry; defaults on or non-renewal of leases by tenants; any significant downturn in tenants' businesses; our ability to re-lease property at or above current market rates; costs to comply with government regulations, including environmental remediation; the availability of cash for distribution and debt service and exposure to risk of default under debt obligations; increases in interest rates and our ability to manage interest rate exposure; the availability of financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue development, redevelopment and acquisition opportunities and refinance existing debt; a decline in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing, and which may result in write-offs or impairment charges; significant competition, which may decrease the occupancy and rental rates of properties; potential losses that may not be covered by insurance; the ability to successfully complete acquisitions and dispositions on announced terms; the ability to successfully operate acquired, developed and redeveloped properties; the ability to successfully complete development and redevelopment projects on schedule and within budgeted amounts; delays or refusals in obtaining all necessary zoning, land use and other required entitlements, governmental permits and authorizations for our development and redevelopment properties; increases in anticipated capital expenditures, tenant improvement and/or leasing costs; defaults on leases for land on which some of our properties are located; adverse changes to, or enactment or implementations of, tax laws or other applicable laws, regulations or legislation, as well as business and consumer reactions to such changes; risks associated with joint venture investments, including our lack of sole decision-making authority, our reliance on co-venturers' financial condition and disputes between us and our co-venturers; environmental uncertainties and risks related to natural disasters; our ability to maintain our status as a REIT; and uncertainties regarding the impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business and the economy generally. The factors included in this report are not exhaustive and additional factors could adversely affect our business and financial performance. For a discussion of additional factors that could materially adversely affect the Company's and theOperating Partnership's business and financial performance, see the discussion below and in "Part II - Other Information, Item 1A. Risk Factors" of this report, as well as in "Part I, Item 1A. Risk Factors" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's and theOperating Partnership's annual report on Form 10-K for the year endedDecember 31, 2019 and their respective other filings with theSEC . All forward-looking statements are based on information that was available and speak only as of the dates on which they were made. We assume no obligation 26 --------------------------------------------------------------------------------
to update any forward-looking statement that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws.
Overview and Background
We are a self-administered REIT active in premier office and mixed-use submarkets along theWest Coast . We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties in the coastal regions ofGreater Los Angeles ,San Diego County , theSan Francisco Bay Area andGreater Seattle , which we believe have strategic advantages and strong barriers to entry. We own our interests in all of our real properties through theOperating Partnership and theFinance Partnership and generally conduct substantially all of our operations through theOperating Partnership . We owned an approximate 98.3%, 98.1%, and 98.0% general partnership interest in theOperating Partnership as ofMarch 31, 2020 ,December 31, 2019 andMarch 31, 2019 . All of our properties are held in fee except for the fourteen office buildings that are held subject to long-term ground leases for the land.
Factors That May Influence Future Results of Operations
Development Program
We believe that a portion of our long-term future growth will continue to come from the completion of our in-process development projects and, subject to market conditions, executing on our future development pipeline, including expanding entitlements. Over the past several years, we increased our focus on development opportunities and expanded our future development pipeline through targeted acquisitions of development opportunities on theWest Coast . We have a proactive planning process by which we continually evaluate the size, timing, costs and scope of our development program and, as necessary, scale activity to reflect the economic conditions and the real estate fundamentals that exist in our submarkets. We expect to execute on our development program with prudence and will be pursuing opportunities with attractive economic returns in strategic locations with proximity to public transportation or transportation access and retail amenities and in markets with strong fundamentals and visible demand. We plan to develop in phases as appropriate and we generally favor starting projects with pre-leasing activity, as appropriate. The global impact of the COVID-19 pandemic has been rapidly evolving and, as cases of the illness caused by the virus have continued to be identified in additional countries, many countries, includingthe United States , have reacted by instituting quarantines and restrictions on travel. In addition, all the states where we own properties and/or have development projects (i.e.,California andWashington ), have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, "shelter in place" rules, restrictions on types of business that may continue to operate and/or restrictions on types of construction projects that may continue, although, in certain cases, exceptions are available for essential retail, research and laboratory activities, essential building services, such as cleaning and maintenance, and certain essential construction projects. Our active development portfolio was largely unaffected during the three months endedMarch 31, 2020 ; however, the COVID-19 pandemic, and restrictions intended to prevent its spread, may cause delays or increase costs associated with building materials or construction services necessary for construction which could adversely impact our ability to continue or complete construction as planned, on budget or at all for our development projects. Refer to "Part II - Other Information, Item IA. Risk Factors" included in this report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations.
Stabilized Development Projects
During the three months ended
• The Exchange on 16th,
construction on this project in
approximately 750,370 gross rentable square feet consisting of 738,081
square feet of office space and 12,289 square feet of retail space at a
total estimated investment of $585.0 million . The office space in the
project is 100% leased to Dropbox, Inc. We completed construction and
commenced revenue recognition on the first two phases comprising
approximately 82% of the project in 2019 and on the final phase of the
project during the three months ended March 31, 2020 .
• One Paseo (Retail) - Del Mar , San Diego, California . We commencedconstruction on the retail component of this mixed-use project in December
2016, which is comprised of approximately 95,871 square feet of retail
space with a total estimated investment of
2020, the retail space of the project was 100% leased and 90% occupied.
27
--------------------------------------------------------------------------------Completed Residential Development Projects
As of
• One Paseo (Residential Phases I and II) -
We commenced construction on Phases I and II of the residential component
of this mixed-use project in
225 residential units, respectively. We completed the first phase during
the third quarter of 2019 and the second phase during the first quarter of
2020. The total estimated investment for these phases of the residential
component of the project is approximately
2020, 70% of the Phase I units were leased and 17% of the Phase II units
were leased.
In-Process Development Projects - Tenant Improvement
During the three months ended
• Netflix // On Vine,
the office component of this mixed-use project in
includes the project's overall infrastructure and site work and
approximately 355,000 square feet of office space for a total estimated
investment of
leased to Netflix, Inc. We currently expect this project to stabilize in
the first quarter of 2021.
• 333 Dexter, South Lake Union , Seattle, Washington . We commenced
construction on this project in June 2017 . This project encompassesapproximately 635,000 square feet of office space at a total estimated
investment of
Fortune 50 publicly traded company. The project is currently estimated to
stabilize in the second half of 2022.
• One Paseo (Office) - Del Mar , San Diego, California . We commenced
construction on the office component of this project in December 2018 ,which encompasses 285,000 square feet of office space at a total estimated
investment of
the project was 91% leased. We currently expect the project to stabilize
in the second quarter of 2021.
In-Process Development Projects - Under Construction
As of
•
2019, we commenced construction on Phase I of this 39-acre life science
campus situated on the waterfront in South San Francisco . This first phase
encompasses approximately 656,000 square feet of office space at a total
estimated investment of
We currently expect this project to stabilize in the fourth quarter of
2021.
•
In
approximately 160,000 square feet of office space at a total estimated
investment of $110.0 million . The project is 100% leased to a major
technology company. We currently expect this project to stabilize in the
first quarter of 2021.
• Living // On Vine,
residential component of this project in
193 residential units at a total estimated investment of
We currently expect the residential component to be completed in the first
quarter of 2021.
• One Paseo (Residential Phase III) -
commenced construction on Phase III of the residential component of this
mixed-use project in
units. The total estimated investment for Phase III of the residential
component of the project is approximately $95.0 million . Phase III is
expected to be completed and delivered late in the second quarter of 2020.
• 2100 Kettner, Little Italy , San Diego, California . We commenced
construction on this project in
of approximately 200,000 square feet of office space for a total estimated
investment of
Future Development Pipeline
28-------------------------------------------------------------------------------- As ofMarch 31, 2020 , our future development pipeline included five future projects located inGreater Seattle , theSan Francisco Bay Area andSan Diego County with an aggregate cost basis of approximately$1.0 billion at which we believe we could develop more than 6.0 million rentable square feet for a total estimated investment of approximately$5.0 billion to$7.0 billion , depending on successfully obtaining entitlements and market conditions. The following table sets forth information about our future development pipeline. Approx. Total Costs Developable as of 3/31/2020 Future Development Pipeline Location Square Feet (1) ($ in millions)(2) San Diego County 600,000 - Santa Fe Summit - Phases II and III 56 Corridor 650,000 $ 81.2 1335 Broadway & 901 Park Boulevard East Village TBD 45.7
1,750,000 -
339.4
Flower Mart SOMA 2,300,000 411.1
Greater Seattle
Seattle CBD Project Seattle CBD TBD 137.9
TOTAL: $ 1,015.3
________________________(1) The developable square feet and scope of projects could change materially
from estimated data provided due to one or more of the following: any
significant changes in the economy, market conditions, our markets, tenant
requirements and demands, construction costs, new supply, regulatory and
entitlement processes or project design.
(2) Represents cash paid and costs incurred, including accrued liabilities in
accordance with GAAP, as of
Fluctuations in our development activities could cause fluctuations in the average development asset balances qualifying for interest and other carrying cost and internal cost capitalization in future periods. During the three months endedMarch 31, 2020 and 2019, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately$2.2 billion and$1.9 billion , respectively, as it was determined these projects qualified for interest and other carrying cost capitalization under GAAP. In the event of an extended cessation of development activities, such projects may potentially no longer qualify for capitalization of interest or other carrying costs. However, we believe a cessation of development activities caused by events outside of our control, such as those as a result of government restrictions aimed at stopping the spread of COVID-19, would not impact our ability to capitalize interest and other carrying costs. For the three months endedMarch 31, 2020 and 2019, we capitalized$21.4 million and$19.4 million , respectively, of interest to our qualifying development projects. For the three months endedMarch 31, 2020 and 2019, we capitalized$5.1 million and$6.6 million , respectively, of internal costs to our qualifying development projects. Capital Recycling Program. We continuously evaluate opportunities for the potential disposition of non-core properties and undeveloped land in our portfolio or the formation of strategic ventures with the intent of recycling the proceeds generated into capital used to fund new operating and development acquisitions, to finance development and redevelopment expenditures, to repay long-term debt and for other general corporate purposes. As part of this strategy, we attempt to enter into Section 1031 Exchanges and other tax deferred transaction structures, when possible, to defer some or all of the taxable gains on the sales, if any, for federal and state income tax purposes. See the "Liquidity and Capital Resources of theOperating Partnership - Liquidity Sources" section for further discussion of our capital recycling activities. The timing of any potential future disposition or strategic venture transactions will depend on market conditions and other factors, including but not limited to our capital needs, the availability of financing for potential buyers, and our ability to defer some or all of the taxable gains on the sales. We cannot assure that we will dispose of any additional properties, enter into any additional strategic ventures, or that we will be able to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange or be able to use other tax deferred structures in connection with our strategy. See the "Liquidity and Capital Resources of theOperating Partnership - Liquidity Sources" section for further information. Acquisitions. As part of our growth strategy, which is highly dependent on market conditions and business cycles, among other factors, we continue to evaluate strategic opportunities and remain a disciplined buyer of development and redevelopment opportunities as well as value-add operating properties. We continue to focus on growth opportunities inWest Coast markets populated by knowledge and creative based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services. Against the backdrop of market volatility, we expect to manage a strong balance sheet, 29 -------------------------------------------------------------------------------- execute on our development program and selectively evaluate opportunities that either add immediate Net Operating Income to our portfolio or play a strategic role in our future growth. In connection with our growth strategy, we often have one or more potential acquisitions of properties and/or undeveloped land under consideration that are in varying stages of negotiation and due diligence review, or under contract, at any point in time. However, we cannot provide assurance that we will enter into any agreements to acquire properties, or undeveloped land, or, that the potential acquisitions contemplated by any agreements we may enter into the future will be completed. In addition, acquisitions are subject to various risks and uncertainties and we may be unable to complete an acquisition after making a nonrefundable deposit or incurring acquisition-related costs. Incentive Compensation. Our Executive Compensation Committee determines compensation, including cash bonuses and equity incentives, for our executive officers, as defined in Rule 16 under the Exchange Act. For 2020, the annual cash bonus program was structured to allow the Executive Compensation Committee to evaluate a variety of key quantitative and qualitative metrics at the end of the year and make a determination based on the Company's and management's overall performance. Our Executive Compensation Committee also grants equity incentive awards from time to time that include performance-based and/or market-measure based vesting requirements and time-based vesting requirements. As a result, accrued incentive compensation and compensation expense for future awards may be affected by our operating and development performance, financial results, stock price, performance against applicable performance-based vesting goals, market conditions, liquidity measures and other factors. Consequently, we cannot predict the amounts that will be recorded in future periods related to such incentive compensation. As ofMarch 31, 2020 , there was approximately$63.8 million of total unrecognized compensation cost related to outstanding nonvested shares of restricted common stock and RSUs issued under share-based compensation arrangements. Those costs are expected to be recognized over a weighted-average period of 2.1 years. The$63.8 million of unrecognized compensation cost does not reflect the future compensation cost for any potential share-based awards that may be issued subsequent toMarch 31, 2020 . Share-based compensation expense for potential future awards could be affected by our operating and development performance, financial results, stock price, performance against applicable performance-based vesting goals, market conditions and other factors. 30 --------------------------------------------------------------------------------
Information on Leases Commenced and Executed
Leasing Activity and Changes in Rental Rates. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties, newly acquired properties with vacant space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Negative trends in one or more of these factors could adversely affect our rental income in future periods. The following tables set forth certain information regarding leasing activity for our stabilized portfolio during the three months endedMarch 31, 2020 . For Leases Commenced 1st & 2nd Generation (1)(2) 2nd Generation (1)(2) Weighted Rentable Square Feet TI/LC per Changes in Average Number of Leases (3) (3) Retention TI/LC per Sq. Ft. / Changes in Cash Rents Lease Term New Renewal New Renewal Rates (4) Sq. Ft. (5) Year Rents (6)(7) (8) (in months) Three Months Ended March 31, 2020 10 9 47,926 90,067 27.0 %$ 37.57 $ 5.01 31.1 % 21.0 % 90 For Leases Executed (9) 1st & 2nd Generation (1)(2) 2nd Generation (1)(2) Weighted Number of Leases (3) Rentable Square Feet (3) Average Lease Term TI/LC per TI/LC per Sq. Changes in Changes in (in New Renewal New Renewal Sq. Ft. (5) Ft. / Year Rents (6)(7) Cash Rents (8) months) Three Months Ended March 31, 2020 7 9 131,661 90,067$ 60.11 $ 8.29 57.5 % 45.3 % 87 ________________________
(1) Includes 100% of consolidated property partnerships.
(2) First generation leasing includes space where we have made capital
expenditures that result in additional revenue generated when the space is
re-leased. Second generation leasing includes space where we have made
capital expenditures to maintain the current market revenue stream.
(3) Represents leasing activity for leases that commenced or were signed during
the period, including first and second generation space, net of
month-to-month leases. Excludes leasing on new construction.
(4) Calculated as the percentage of space either renewed or expanded into by
existing tenants or subtenants at lease expiration.
(5) Tenant improvements and leasing commissions per square foot exclude
tenant-funded tenant improvements.
(6) Calculated as the change between GAAP rents for new/renewed leases and the
expiring GAAP rents for the same space. Excludes leases for which the space
was vacant longer than one year or vacant when the property was acquired.
(7) Excludes commenced and executed leases of approximately 38,752 and 70,868
rentable square feet, respectively, for the three months ended
2020, for which the space was vacant longer than one year or being leased for
the first time. Space vacant for more than one year is excluded from our
change in rents calculations to provide a more meaningful market comparison.
(8) Calculated as the change between stated rents for new/renewed leases and the
expiring stated rents for the same space. Excludes leases for which the space
was vacant longer than one year or vacant when the property was acquired.
(9) During the three months ended
square feet were signed but not commenced as of
Our rental rates and occupancy are impacted by general economic conditions, including the pace of regional economic growth, access to capital, and potentially the current COVID-19 pandemic and restrictions intended to prevent its spread. Therefore, we cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current market rates. In addition, due to uncertainty of current market events as a result of the COVID-19 pandemic and the impact it has had on recent transaction volume in our markets, we are currently unable to provide meaningful information on the weighted average cash rental rates for our total stabilized portfolio compared to current market rates atMarch 31, 2020 . In addition it is possible that the COVID-19 pandemic may have an adverse impact on our ability to renew leases or re-lease available space in our proprieties on favorable terms or at all in the future, including as a result of a deterioration in the economic and market conditions due to restrictions intended to prevent the spread of COVID-19. Additionally, decreased demand and other negative trends or unforeseeable events that impair our ability to timely renew or re-lease space could have further negative effects on our future financial condition, results of operations, and cash flows. 31 -------------------------------------------------------------------------------- Scheduled Lease Expirations. The following tables set forth certain information regarding our lease expirations for our stabilized portfolio for the remainder of 2020 and the next five years and by region for the remainder of 2020 and in 2021. Lease Expirations (1) Number of % of Total Annualized Base Expiring Total % of Total Annualized Base Annualized Base Rent per Sq. Ft. Year of Lease Expiration Leases Square Feet Leased Sq. Ft. Rent (2)(3) Rent (2) (2) (in thousands) Remainder of 2020 53 677,934 5.3 %$ 29,929 4.3 % $ 44.15 2021 81 842,815 6.4 % 36,455 5.3 % 43.25 2022 62 749,300 5.8 % 32,462 4.6 % 43.32 2023 77 1,233,952 9.4 % 65,432 9.4 % 53.03 2024 60 952,945 7.2 % 46,791 6.7 % 49.10 2025 51 634,142 4.8 % 30,781 4.4 % 48.54 Total 384 5,091,088 38.9 %$ 241,850 34.7 % $ 47.50 # of % of Total Expiring Total % of Total Annualized Annualized Annualized Rent Year Region Leases Square Feet Leased Sq. Ft. Base Rent (2)(3) Base Rent (2) per Sq. Ft. (2) Greater Los Angeles 30 349,319 2.7 % $ 13,724 2.0 % $ 39.29 San Diego 12 151,138 1.2 % 6,345 0.9 % 41.98 2020 San Francisco Bay Area 10 155,043 1.2 % 9,130 1.3 % 58.89 Greater Seattle 1 22,434 0.2 % 730 0.1 % 32.54 Total 53 677,934 5.3 % $ 29,929 4.3 % $ 44.15 Greater Los Angeles 47 285,279 2.2 % $ 11,630 1.7 % $ 40.77 San Diego 14 289,090 2.2 % 11,635 1.7 % 40.25 2021 San Francisco Bay Area 11 239,093 1.8 % 12,245 1.8 % 51.21 Greater Seattle 9 29,353 0.2 % 945 0.1 % 32.19 Total 81 842,815 6.4 % $ 36,455 5.3 % $ 43.25
________________________
(1) For leases that have been renewed early with existing tenants, the expiration
date and annualized base rent information presented takes into consideration
the renewed lease terms. Excludes leases not commenced as of
space leased under month-to-month leases, storage leases, vacant space and
future lease renewal options not executed as of
(2) Annualized base rent includes the impact of straight-lining rent escalations
and the amortization of free rent periods and excludes the impact of the
following: amortization of deferred revenue related tenant-funded tenant
improvements, amortization of above/below market rents, amortization for
lease incentives due under existing leases and expense reimbursement revenue.
Additionally, the underlying leases contain various expense structures
including full service gross, modified gross and triple net. Percentages
represent percentage of total portfolio annualized contractual base rental
revenue. For additional information on tenant improvement and leasing
commission costs incurred by the Company for the current reporting period,
please see further discussion under the caption "Information on Leases
Commenced and Executed."
(3) Includes 100% of annualized base rent of consolidated property partnerships.
In addition to the 0.9 million rentable square feet, or 6.5%, of currently available space in our stabilized portfolio, leases representing approximately 5.3% and 6.4% of the occupied square footage of our stabilized portfolio are scheduled to expire during the remainder of 2020 and in 2021, respectively. The leases scheduled to expire during the remainder of 2020 and in 2021 represent approximately 1.5 million rentable square feet or 9.6% of our total annualized base rental revenue. Adjusting for leases executed as ofMarch 31, 2020 but not yet commenced, the remaining 2020 and 2021 expirations would be 504,457 and 669,548 square feet, respectively. 32 --------------------------------------------------------------------------------
Stabilized Portfolio Information
As ofMarch 31, 2020 , our stabilized portfolio was comprised of 114 office properties encompassing an aggregate of approximately 14.3 million rentable square feet and 200 residential units at our residential tower inHollywood, California . Our stabilized portfolio includes all of our properties with the exception of development and redevelopment properties currently committed for construction, under construction, or in the tenant improvement phase, undeveloped land, recently completed residential properties not yet stabilized and real estate assets held for sale. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We define properties in the tenant improvement phase as office properties that we are developing or redeveloping where the project has reached cold shell condition and is ready for tenant improvements, which may require additional major base building construction before being placed in service. Projects in the tenant improvement phase are added to our stabilized portfolio once the project reaches the earlier of 95% occupancy or one year from the date of the cessation of major base building construction activities. Costs capitalized to construction in progress for development and redevelopment properties are transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets as the historical cost of the property as the projects are placed in service. We did not have any redevelopment or held for sale properties atMarch 31, 2020 . Our stabilized portfolio also excludes our future development pipeline, which as ofMarch 31, 2020 was comprised of five potential development sites, representing approximately 61 gross acres of undeveloped land on which we believe we have the potential to develop more than 6.0 million rentable square feet, depending upon economic conditions. As ofMarch 31, 2020 , the following properties were excluded from our stabilized portfolio: Estimated Rentable Number of Square Feet (1) / Properties/Projects Units In-process development projects - tenant improvement 3
1,275,000
In-process development projects - under construction (2) 5
1,016,000
Completed residential development project (3) 2
462 units
________________________
(1) Estimated rentable square feet upon completion.
(2) In addition to the estimated office and life science rentable square feet
noted above, development projects under construction also include 339
residential units.
(3) Represents our recently completed residential phases at our mixed-use
development in
The following table reconciles the changes in the rentable square feet in our stabilized office portfolio of operating properties fromMarch 31, 2019 toMarch 31, 2020 : Number of Rentable Buildings Square Feet Total as of March 31, 2019 94 13,236,373 Acquisitions 19 151,908
Completed development properties placed in-service 3 1,223,393 Dispositions
(2 ) (355,654 )
Remeasurement - 67,552
Total as of March 31, 2020 (1) 114 14,323,572
________________________
(1) Includes four properties owned by consolidated property partnerships (see
Note 1 "Organization, Ownership and Basis of Presentation" to our
consolidated financial statements included in this report for additional
information).
33--------------------------------------------------------------------------------
Occupancy Information
The following table sets forth certain information regarding our stabilized
portfolio:
Number of Rentable Occupancy at (1)
Region Buildings Square Feet 3/31/2020 12/31/2019 9/30/2019
Greater Los Angeles 51 4,027,131 94.0 % 95.2 % 95.1 %
San Diego County 22 2,144,741 88.3 % 89.7 % 90.4 %
San Francisco Bay Area 33 6,349,910 94.3 % 95.0 % 89.1 %
Greater Seattle 8 1,801,790 95.5 % 97.7 % 97.2 %
Total Stabilized Office Portfolio 114 14,323,572 93.5 % 94.6 % 92.1 %
Average Occupancy
Three Months Ended March 31,
2020 2019
Stabilized Office Portfolio (1) 93.7 % 93.1 %
Same Store Portfolio (2) 93.7 % 93.2 %
Residential Portfolio (3) 93.5 % 72.8 %
________________________(1) Occupancy percentages reported are based on our stabilized office portfolio
as of the end of the period presented and exclude occupancy percentages of
properties held for sale.
(2) Occupancy percentages reported are based on office properties owned and
stabilized as of January 1, 2019 and still owned and stabilized as of
March 31, 2020 and exclude our residential tower. See discussion under
"Results of Operations" for additional information.
(3) Our residential portfolio consists of our 200-unit residential tower located
in
units that are not yet stabilized.
Significant Tenants
As ofMarch 31, 2020 , 47.4% of our total annualized base rental revenue was attributable to our top 15 tenants who leased 39.4% of our total rentable square footage. We have collectedApril 2020 contractual rents from all of our top 15 tenants. 34
--------------------------------------------------------------------------------
Results of Operations
Net Operating Income
Management internally evaluates the operating performance and financial results of our stabilized portfolio based on Net Operating Income. We define "Net Operating Income" as consolidated operating revenues (rental income and other property income) less consolidated operating expenses (property expenses, real estate taxes and ground leases). Net Operating Income is considered by management to be an important and appropriate supplemental performance measure to net income because we believe it helps both investors and management to understand the core operations of our properties excluding corporate and financing-related costs and non-cash depreciation and amortization. Net Operating Income is an unlevered operating performance metric of our properties and allows for a useful comparison of the operating performance of individual assets or groups of assets. This measure thereby provides an operating perspective not immediately apparent from GAAP income from operations or net income. In addition, Net Operating Income is considered by many in the real estate industry to be a useful starting point for determining the value of a real estate asset or group of assets. Other real estate companies may use different methodologies for calculating Net Operating Income, and accordingly, our presentation of Net Operating Income may not be comparable to other real estate companies. Because of the exclusion of the items shown in the reconciliation below, Net Operating Income should only be used as a supplemental measure of our financial performance and not as an alternative to GAAP income from operations or net income.
Management further evaluates Net Operating Income by evaluating the performance from the following property groups:
•
office properties that were owned and included in our stabilized
portfolio for two comparable reporting periods, i.e., owned and
included in our stabilized portfolio as of January 1, 2019 and still
owned and included in the stabilized portfolio as of March 31, 2020 ,
including our residential tower in Hollywood, California ;
•
our in-process development projects, expenses for certain of our future
development project and the results generated by our 462 completed
residential units that are not yet stabilized and the following
stabilized development properties:
•One office development project that was added to the stabilized portfolio in the second quarter of 2019; •One office development project that was added to the stabilized portfolio in the first quarter of 2020; and •One retail development project that was added to the stabilized portfolio in the first quarter of 2020;
•
acquisition through the periods presented, for the 19-building creative
office campus we acquired during 2019; and
•
disposed of in the second quarter of 2019 and the one property disposed
of in the fourth quarter of 2019.
The following table sets forth certain information regarding the property groups
within our stabilized office portfolio as of
Rentable
Group # of Buildings Square Feet
Same Store Properties 92 12,931,083
Stabilized Development Properties 3 1,240,581
Acquisition Properties 19 151,908
Total Stabilized Portfolio 114 14,323,572
35--------------------------------------------------------------------------------
Comparison of the Three Months Ended
The following table summarizes our Net Operating Income, as defined, for our
total portfolio for the three months ended
Three Months Ended March 31, Dollar Percentage
2020 2019 Change Change
($ in thousands)
Reconciliation of Net Income Available to
Common Stockholders to Net Operating
Income, as defined:
Net Income Available to Common
Stockholders $ 39,817 $ 36,903 $ 2,914 7.9 %
Net income attributable to noncontrolling
common units of the Operating Partnership 705 700 5 0.7 %
Net income attributable to noncontrolling
interests in consolidated property
partnerships 4,896 4,191 705 16.8 %
Net income $ 45,418 $ 41,794 $ 3,624 8.7 %
Unallocated expense (income):
General and administrative expenses 19,010 23,341 (4,331 ) (18.6 )%
Leasing costs 1,456 1,757 (301 ) (17.1 )%
Depreciation and amortization 74,370 66,135 8,235 12.5 %
Interest income and other net investment
gain 3,128 (1,828 ) 4,956 (271.1 )%
Interest expense 14,444 11,243
3,201 28.5 %
Net Operating Income, as defined
The following tables summarize our Net Operating Income, as defined, for our
total portfolio for the three months ended
Three Months Ended March 31,
2020 2019
Same Store Develop-ment Acquisi-tion Disposi-tion Total Same Store Develop-ment Acquisi-tion Disposi-tion Total
(in thousands)
Operating revenues:
Rental income $ 186,414 $ 28,429 $ 3,790 $ - $ 218,633 $ 188,441 $ 8,025 $ - $ 2,916 $ 199,382
Other property income 2,179 433 83 - 2,695 1,711 67 - 42 1,820
Total 188,593 28,862 3,873 - 221,328 190,152 8,092 - 2,958 201,202
Property and related
expenses:
Property expenses 34,757 3,843 383 - 38,983 36,295 1,061 - 793 38,149
Real estate taxes 17,246 4,418 538 - 22,202 17,110 1,212 - 317 18,639
Ground leases 2,109 - 208 - 2,317 1,972 - - - 1,972
Total 54,112 8,261 1,129 - 63,502 55,377 2,273 - 1,110 58,760
Net Operating Income,
as defined $ 134,481 $ 20,601 $ 2,744 $ - $ 157,826 $ 134,775 $ 5,819 $ - $ 1,848 $ 142,442
36
--------------------------------------------------------------------------------
Three Months Ended
Same Store Development Acquisition Disposition Total
Dollar Percent Dollar Percent Dollar Percent
Dollar Change Percent Change Change Change Change Change Dollar Change Percent Change Change Change
($ in thousands)
Operating
revenues:
Rental income $ (2,027 ) (1.1 )% $ 20,404 254.3 % $ 3,790 100.0 % $ (2,916 ) (100.0 )% $ 19,251 9.7 %
Other property
income 468 27.4 % 366 546.3 % 83 100.0 % (42 ) (100.0 )% 875 48.1 %
Total (1,559 ) (0.8 )% 20,770 256.7 % 3,873 100.0 % (2,958 ) (100.0 )% 20,126 10.0 %
Property and
related expenses:
Property expenses (1,538 ) (4.2 )% 2,782 262.2 % 383 100.0 % (793 ) (100.0 )% 834 2.2 %
Real estate taxes 136 0.8 % 3,206 264.5 % 538 100.0 % (317 ) (100.0 )% 3,563 19.1 %
Ground leases 137 6.9 % - - % 208 100.0 % - - % 345 17.5 %
Total (1,265 ) (2.3 )% 5,988 263.4 % 1,129 100.0 % (1,110 ) (100.0 )% 4,742 8.1 %
Net Operating
Income,
as defined $ (294 ) (0.2 )% $ 14,782 254.0 % $ 2,744 100.0 % $ (1,848 ) (100.0 )% $ 15,384 10.8 %
Net Operating Income increased
• A decrease in Net Operating Income of
• A decrease in rental income of
•$5.9 million reduction in revenue during the three months endedMarch 31, 2020 related to the cumulative impact of
transitioning one
co-working tenant and one retail tenant to a cash basis of revenue
recognition as a result of the COVID-19 pandemic;
• $3.1 million net decrease primarily related to the improved credit
quality of a tenant in 2019 for which the Company recorded a bad
debt reserve in 2018;
• $3.1 million decrease due to an early lease termination fee received
in 2019 for a tenant in the San Francisco Bay Area ;
• $1.5 million decrease in recoveries of recurring expenses related to
property taxes, repairs and maintenance, security, janitorial,
utilities, parking and various other recurring expenses primarily
due to the following:
• $1.0 million decrease due to a tenant in the San Francisco Bay
Area's change from a triple net lease to a modified net lease,
resulting in payment of expenses directly to vendors;
• $0.8 million decrease due to prior year adjustments recorded in
2019 resulting from higher operating expense and property tax
adjustments for the 2018 expense year; partially offset by
• $0.3 million increase primarily due to higher occupancy at three
properties; partially offset by
• $9.8 million increase from new leases and renewals at higher rates
across all regions; and
• $1.8 million increase due to higher occupancy primarily inthe San
Francisco Bay Area and Greater Seattle regions; partially offset by
• An increase in other property income of$0.5 million primarily due to
higher transient and special event parking income at five properties.
We expect daily, special event and transient parking to be impacted
while restrictions intended to prevent the spread of COVID-19 are in
effect;
• A decrease in property and related expenses of
due to the following:
37--------------------------------------------------------------------------------
•$1.0 million decrease in property expenses due to a tenant in theSan Francisco Bay Area's change from a triple net lease to a modified net lease, resulting in payment of expenses directly to vendors; •$0.5 million decrease in reimbursable property expenses including janitorial, utilities, engineering, parking, and various other recurring expenses due to several tenants implementing work from home policies due to the COVID-19 pandemic. Reimbursable property expenses may fluctuate in future periods depending upon
restrictions
and social distancing requirements intended to prevent the spread of
COVID-19 and how long they remain effective;
• An increase in Net Operating Income of $14.8 million attributable to theDevelopment Properties ;
• An increase in Net Operating Income of
Acquisition Properties ; and • A decrease in Net Operating Income of$1.8 million attributable to theDisposition Properties . We are continuing to monitor the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on occupancy, rental rates and rent collections. As of the date of this report, across all property types, we have collected approximately 96% of ourApril 2020 contractual rent billings, including from all of our top 15 tenants and excluding a rent relief program with certain retail tenants. Adjusted for the retail rent relief program, we have collected 93% of contractual rent billings. We have not yet observed any notable or significant changes in occupancy or rental rates. Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent for such period, as well as working with certain tenants who have requested rent deferrals, we can provide no assurance that such efforts or our efforts in future periods will be successful, particularly in the event that the COVID-19 pandemic, and restrictions intended to prevent its spread, continue for a prolonged period. Refer to "Part II - Other Information, Item IA. Risk Factors" included in this report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations.
Other Expenses and Income
General and Administrative Expenses
General and administrative expenses decreased by approximately$4.3 million , or 18.6%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to:
• A decrease of
Company's deferred compensation plan and the resultant impact of reducing
compensation expense, which is offset by the losses on the underlying
marketable securities which are included in interest income and other net
investment (loss) gain in the consolidated statements of operations; and
• A decrease of
Leasing Costs
Leasing costs decreased by$0.3 million or 17.1%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to a higher level of leasing activity during the three months endedMarch 31, 2019 and changes in personnel.
Depreciation and Amortization
Depreciation and amortization increased$8.2 million , or 12.5%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to the following:
• A decrease of
• An increase of
• An increase of$2.7 million attributable to theAcquisition Properties ; partially offset by 38
--------------------------------------------------------------------------------
• A decrease of
Interest Expense
The following table sets forth our gross interest expense, including debt discounts/premiums and deferred financing cost amortization, and capitalized interest, including capitalized debt discounts/premiums and deferred financing cost amortization, for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, Dollar Percentage 2020 2019 Change Change (in thousands) Gross interest expense$ 35,862 $ 30,680 $ 5,182 16.9 % Capitalized interest and deferred financing costs (21,418 ) (19,437 ) (1,981 ) 10.2 % Interest expense$ 14,444 $ 11,243 $ 3,201 28.5 % Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased$5.2 million , or 16.9%, for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 primarily due to an increase in the average outstanding debt balance for the three months endedMarch 31, 2020 . Capitalized interest and deferred financing costs increased$2.0 million , or 10.2%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to an increase in the average development asset balances qualifying for interest capitalization during the three months endedMarch 31, 2020 . During the three months endedMarch 31, 2020 and 2019, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately$2.2 billion and$1.9 billion , respectively. In the event of an extended cessation of development activities to get any of these projects ready for its intended use, such projects could potentially no longer qualify for capitalization of interest or other carrying costs. However, we believe a cessation of development activities caused by events outside of our control, such as those as a result of government restrictions aimed at stopping the spread of COVID-19, would not impact our ability to capitalize interest and other carrying costs. Refer to "Part II - Other Information, Item IA. Risk Factors" included in this report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations.
Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships
Net income attributable to noncontrolling interests in consolidated property partnerships increased by$0.7 million or 16.8% for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to a new lease at a higher rate at one property held in a property partnership in 2020. The amounts reported for the three months endedMarch 31, 2020 and 2019 are comprised of the noncontrolling interest's share of net income for100 First Street Member, LLC ("100First LLC ") and303 Second Street Member, LLC ("303Second LLC ") and the noncontrolling interest's share of net income forRedwood City Partners, LLC ("Redwood LLC "). 39 --------------------------------------------------------------------------------
Liquidity and Capital Resources of the Company
In this "Liquidity and Capital Resources of the Company" section, the term the "Company" refers only toKilroy Realty Corporation on an unconsolidated basis and excludes theOperating Partnership and all other subsidiaries. The Company's business is operated primarily through theOperating Partnership . Distributions from theOperating Partnership are the Company's primary source of capital. The Company believes theOperating Partnership's sources of working capital, specifically its cash flow from operations and borrowings available under its unsecured revolving credit facility and funds from its capital recycling program, including strategic ventures, are adequate for it to make its distribution payments to the Company and, in turn, for the Company to make its dividend payments to its common stockholders for the next twelve months. Cash flows from operating activities generated by theOperating Partnership for the three months endedMarch 31, 2020 were sufficient to cover the Company's payment of cash dividends to its stockholders. However, there can be no assurance that theOperating Partnership's sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distributions to the Company. The unavailability of capital could adversely affect theOperating Partnership's ability to make distributions to the Company, which would in turn, adversely affect the Company's ability to pay cash dividends to its stockholders. The Company is a well-known seasoned issuer and the Company and theOperating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred stock, common stock, depositary shares, warrants and guarantees of debt securities and by theOperating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and theOperating Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. When the Company receives proceeds from the sales of its preferred or common stock, it generally contributes the net proceeds from those sales to theOperating Partnership in exchange for corresponding preferred or common partnership units of theOperating Partnership .The Operating Partnership may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under its unsecured revolving credit facility, to develop new or existing properties, to make acquisitions of properties or portfolios of properties, or for general corporate purposes. As the sole general partner with control of theOperating Partnership , the Company consolidates theOperating Partnership for financial reporting purposes, and the Company does not have significant assets other than its investment in theOperating Partnership . Therefore, the assets and liabilities and the revenues and expenses of the Company and theOperating Partnership are substantially the same on their respective financial statements. The section entitled "Liquidity and Capital Resources of theOperating Partnership " should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a consolidated basis and how the Company is operated as a whole.
Distribution Requirements
The Company is required to distribute 90% of its taxable income (subject to certain adjustments and excluding net capital gains) on an annual basis to maintain qualification as a REIT for federal income tax purposes and is required to pay income tax at regular corporate rates to the extent it distributes less than 100% of its taxable income (including capital gains). As a result of these distribution requirements, theOperating Partnership cannot rely on retained earnings to fund its on-going operations to the same extent as other companies whose parent companies are not REITs. In addition, the Company may be required to use borrowings under theOperating Partnership's revolving credit facility, if necessary, to meet REIT distribution requirements and maintain its REIT status. The Company may also need to continue to raise capital in the equity markets to fund theOperating Partnership's working capital needs, as well as potential developments of new or existing properties or acquisitions. The Company intends to continue to make, but has not committed to make, regular quarterly cash distributions to common stockholders, and through theOperating Partnership , common unitholders from theOperating Partnership's cash flow from operating activities. All such distributions are at the discretion of the Board of Directors. As the Company intends to maintain distributions at a level sufficient to meet the REIT distribution requirements and minimize its obligation to pay income and excise taxes, it will continue to evaluate whether the current levels of distribution are appropriate to do so throughout 2020. In addition, in the event the Company is unable to identify and complete the acquisition of suitable replacement properties to effect Section 1031 Exchanges or is unable to successfully complete Section 1031 Exchanges to defer some or all of the taxable gains related to property dispositions as a result of the COVID-19 pandemic or any other reason, the Company may elect to distribute a special dividend to its common stockholders and common unitholders in order to minimize or eliminate income taxes on such gains. The Company considers market factors and its performance in addition to REIT requirements in determining its distribution levels. 40 -------------------------------------------------------------------------------- Amounts accumulated for distribution to stockholders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which is consistent with the Company's intention to maintain its qualification as a REIT. Such investments may include, for example, obligations of theGovernment National Mortgage Association , other governmental agency securities, certificates of deposit, and interest-bearing bank deposits. OnFebruary 12, 2020 , the Board of Directors declared a regular quarterly cash dividend of$0.485 . The regular quarterly cash dividend is payable to stockholders of record onMarch 31, 2020 and a corresponding cash distribution of$0.485 perOperating Partnership unit is payable to holders of theOperating Partnership's common limited partnership interests of record onMarch 31, 2020 , including those owned by the Company. The total cash quarterly dividends and distributions paid onApril 15, 2020 were$56.8 million .
Debt Covenants
The covenants contained within certain of our unsecured debt obligations generally prohibit the Company from paying dividends during an event of default in excess of an amount which results in distributions to us in an amount sufficient to permit us to pay dividends to our stockholders that we reasonably believe are necessary to (a) maintain our qualification as a REIT for federal and state income tax purposes and (b) avoid the payment of federal or state income or excise tax.
Capitalization
As ofMarch 31, 2020 , our total debt as a percentage of total market capitalization was 33.2%, which was calculated based on the closing price per share of the Company's common stock of$63.70 onMarch 31, 2020 as shown in the following table: Aggregate Principal Amount or % of Total Shares/Units at $ Value Market March 31, 2020 Equivalent Capitalization ($ in thousands) Debt: (1) Unsecured Line of Credit$ 380,000 3.4 % Unsecured Term Loan Facility 150,000 1.3 % Unsecured Senior Notes due 2023 300,000 2.7 % Unsecured Senior Notes due 2024 425,000 3.8 % Unsecured Senior Notes due 2025 400,000 3.6 % Unsecured Senior Notes Series A & B due 2026 250,000 2.2 % Unsecured Senior Notes due 2028 400,000 3.6 % Unsecured Senior Notes due 2029 400,000 3.6 % Unsecured Senior Notes Series A & B due 2027 & 250,000 2.2 %
2029
Unsecured Senior Notes due 2030 500,000 4.5 % Secured debt 258,236 2.3 % Total debt$ 3,713,236 33.2 % Equity and Noncontrolling Interests in theOperating Partnership : (2) Common limited partnership units outstanding (3) 2,021,287$ 128,756 1.2 % Shares of common stock outstanding 115,067,924 7,329,827 65.6 % Total Equity and Noncontrolling Interests in the$ 7,458,583 66.8 %Operating Partnership Total Market Capitalization$ 11,171,819 100.0 %
________________________
(1) Represents gross aggregate principal amount due at maturity before the effect
of the following at
financing costs on the unsecured term loan facility, unsecured senior notes,
and secured debt and
senior notes. Excludes
2031 the
private placement offering.
(2) Value based on closing price per share of our common stock of
(3) Includes common units of the
does not include noncontrolling interests in consolidated property
partnerships.
41--------------------------------------------------------------------------------
Liquidity and Capital Resources of the
In this "Liquidity and Capital Resources of the
General
Our primary liquidity sources and uses are as follows:
Liquidity Sources
• Net cash flow from operations;
• Borrowings under the
facility and term loan facility;
• Proceeds from our capital recycling program, including the disposition
of assets and the formation of strategic ventures;
• Proceeds from additional secured or unsecured debt financings; and
• Proceeds from public or private issuance of debt, equity or preferred
equity securities.
Liquidity Uses
• Development and redevelopment costs;
• Operating property or undeveloped land acquisitions;
• Property operating and corporate expenses;
• Capital expenditures, tenant improvement and leasing costs;
• Debt service and principal payments, including debt maturities;
• Distributions to common security holders;
• Repurchases and redemptions of outstanding common stock of the Company; and
• Outstanding debt repurchases, redemptions and repayments.
General Strategy
Our general strategy is to maintain a conservative balance sheet with a strong credit profile and to maintain a capital structure that allows for financial flexibility and diversification of capital resources. We manage our capital structure to reflect a long-term investment approach and utilize multiple sources of capital to meet our long-term capital requirements. We believe that our current projected liquidity requirements for the next twelve-month period, as set forth above under the caption "-Liquidity Uses," will be satisfied using a combination of the liquidity sources listed above, although there can be no assurance in this regard. We believe our conservative leverage and staggered debt maturities provide us with financial flexibility and enhance our ability to obtain additional sources of liquidity if necessary, and, therefore, we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities. As of the date of this report, we have no material debt maturities prior toJuly 2022 , at which time our revolving credit facility and term loan mature. As a result of settling various forward equity sale agreements during the three months endedMarch 31, 2020 , as well as the completion of a private placement offering of$350.0 million in unsecured senior notes onApril 28, 2020 , we had approximately$1.0 billion in cash and cash equivalents as ofApril 28, 2020 , with an additional$370.0 million available under our unsecured revolving credit facility. We believe that this available liquidity makes us well positioned to navigate macroeconomic uncertainty resulting from the COVID-19 pandemic. 42 --------------------------------------------------------------------------------
Liquidity Sources
Unsecured Revolving Credit Facility and Term Loan Facility
The following table summarizes the balance and terms of our unsecured revolving
credit facility as of
March 31, 2020 December 31, 2019 (in thousands)
Outstanding borrowings
505,000
Total borrowing capacity (1)
1.85 % 2.76 %
Facility fee-annual rate (3) 0.200%
Maturity date July 2022 ________________________
(1) We may elect to borrow, subject to bank approval and obtaining commitments
for any additional borrowing capacity, up to an additional
under an accordion feature under the terms of the unsecured revolving credit
facility and unsecured term loan facility.
(2) Our unsecured revolving credit facility interest rate was calculated based
the contractual rate of LIBOR plus 1.000% as of
(3) Our facility fee is paid on a quarterly basis and is calculated based on the
total borrowing capacity. In addition to the facility fee, we incurred debt
origination and legal costs. As of
million and
respectively, which are included in prepaid expenses and other assets, net on
our consolidated balance sheets, remained to be amortized through the
maturity date of our unsecured revolving credit facility.
We intend to borrow under the unsecured revolving credit facility as necessary
for general corporate purposes, to finance development and redevelopment
expenditures, to fund potential acquisitions and to potentially repay long-term
debt to supplement cash balances given uncertainties and volatility in market
conditions.
The following table summarizes the balance and terms of our unsecured term loan
facility as of
March 31, 2020 December 31, 2019
(in thousands)
Outstanding borrowings $ 150,000 $ 150,000
Remaining borrowing capacity - -
Total borrowing capacity (1)
2.03 % 2.85 %
Undrawn facility fee-annual rate 0.200%
Maturity date July 2022 ________________________
(1) As of
unamortized deferred financing costs, respectively, remained to be amortized
through the maturity date of our unsecured term loan facility.
(2) Our unsecured term loan facility interest rate was calculated based on the
contractual rate of LIBOR plus 1.100% as of
2019.
Capital Recycling Program
As discussed in the section "Factors That May Influence Future Results of
Operations - Capital Recycling Program," we continuously evaluate opportunities
for the potential disposition of properties and undeveloped land in our
portfolio or the formation of strategic ventures with the intent of recycling
the proceeds generated from the disposition of less strategic or core assets
into capital used to finance development expenditures, to fund new acquisitions,
to repay long-term debt and for other general corporate purposes. As part of
this strategy, we attempt to enter into Section 1031 Exchanges, when possible,
to defer some or all of the taxable gains on the sales, if any, for federal and
state income tax purposes.
Any potential future disposition transactions and the timing of any potential
future capital recycling transactions will depend on market conditions and other
factors, including but not limited to our capital needs, the availability of
financing for potential buyers given the current economic environment as a
result of the COVID-19 pandemic, and our ability to defer some or all of the
taxable gains on the sales. In addition, we cannot assure you that we will
dispose of any additional properties, or that we will be able to identify and
complete the acquisitions of suitable replacement properties to effect
Section 1031 Exchanges to defer some or all of the taxable gains related to our
capital recycling program.
43--------------------------------------------------------------------------------
Forward Equity Offering and Settlement
OnFebruary 18, 2020 , the Company entered into forward equity sale agreements with certain financial institutions acting as forward purchasers in connection with an offering of 5,750,000 shares of common stock at an initial gross offering price of$494.5 million , or$86.00 per share, before underwriting discounts, commissions and offering expenses. The forward purchasers borrowed and sold an aggregate of 5,750,000 shares of common stock in the offering. OnMarch 25, 2020 , the Company physically settled these forward equity sale agreements. Upon settlement, the Company issued 5,750,000 shares of common stock for net proceeds of$474.9 million and contributed the net proceeds to theOperating Partnership in exchange for an equal number of units in theOperating Partnership .
At-The-Market Stock Offering Program
Under our current at-the-market stock offering program, which commencedJune 2018 , we may offer and sell shares of our common stock with an aggregate gross sales price of up to$500.0 million from time to time in "at-the-market" offerings. In connection with the at-the-market program, the Company may enter into forward equity sale agreements with certain financial institutions acting as forward purchasers whereby, at our discretion, the forward purchasers may borrow and sell shares of our common stock under our at-the-market program. The use of a forward equity sale agreement allows the Company to lock in a share price on the sale of shares of our common stock at the time the agreement is executed but defer settling the forward equity sale agreements and receiving the proceeds from the sale of shares until a later date. During the year endedDecember 31, 2019 , we executed various 12-month forward equity sale agreements under our at-the-market program with financial institutions acting as forward purchasers to sell an aggregate of 3,147,110 shares of common stock at a weighted average sales price of$80.08 per share before underwriting discounts, commissions and offering expenses. During the three months endedMarch 31, 2020 , we physically settled all forward equity sale agreements entered into in 2019. Upon settlement, the Company issued 3,147,110 shares of common stock for net proceeds of$247.3 million and contributed the net proceeds to theOperating Partnership in exchange for an equal number of units in theOperating Partnership . We did not enter into any forward equity sale agreements under our at-the-market program during the three months endedMarch 31, 2020 . Since commencement of our current at-the-market program, we have completed sales of 3,594,576 shares of common stock throughMarch 31, 2020 . As ofMarch 31, 2020 , we may offer and sell shares of our common stock having an aggregate gross sales price up to approximately$214.2 million under our current at-the-market program. The Company did not complete any direct sales of common stock under the program during the three months endedMarch 31, 2020 . The following table sets forth information regarding settlements of forward equity sale agreements under our at-the-market offering program for the three months endedMarch 31, 2020 : Three Months EndedMarch 31, 2020 (in millions, except share and per share data) Shares of common stock settled during the period
3,147,110
Weighted average price per share of common stock $
80.08
Aggregate gross proceeds $
252.0
Aggregate net proceeds after selling commissions $
247.3
The proceeds from sales will be used to fund development expenditures and general corporate purposes. Actual future sales will depend upon a variety of factors, including but not limited to, market conditions, the trading price of the Company's common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under this program.
Shelf Registration Statement
The Company is a well-known seasoned issuer and the Company and theOperating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred stock, common stock, depository shares and guarantees of debt securities and by theOperating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and theOperating Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. When the Company receives proceeds from the sales of its preferred or common stock, it 44 -------------------------------------------------------------------------------- generally contributes the net proceeds from those sales to theOperating Partnership in exchange for corresponding preferred or common partnership units of theOperating Partnership .The Operating Partnership may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under its unsecured revolving credit facility, to develop new or existing properties, to make acquisitions of properties or portfolios of properties, or for general corporate purposes.
Unsecured and Secured Debt
The aggregate principal amount of the unsecured and secured debt of the
Aggregate Principal
Amount Outstanding
(in thousands)
Unsecured Line of Credit $ 380,000
Unsecured Term Loan Facility 150,000
Unsecured Senior Notes due 2023 300,000
Unsecured Senior Notes due 2024
425,000
Unsecured Senior Notes due 2025
400,000
Unsecured Senior Notes Series A & B due 2026
250,000
Unsecured Senior Notes due 2028
400,000
Unsecured Senior Notes due 2029
400,000
Unsecured Senior Notes Series A & B due 2027 & 2029
250,000
Unsecured Senior Notes due 2030
500,000
Secured Debt
258,236
Total Unsecured and Secured Debt $
3,713,236
Less: Unamortized Net Discounts and Deferred Financing Costs (1) (25,774 ) Total Debt, Net $ 3,687,462 ________________________
(1) Includes
unsecured term loan facility, unsecured senior notes, and secured debt and
Excludes unamortized deferred financing costs on the unsecured revolving
credit facility, which are included in prepaid expenses and other assets, net
on our consolidated balance sheets. Also excludes
unsecured senior notes due 2031 the
2020 in connection with a private placement offering.
Unsecured Senior Notes - Private Placement
On
Debt Composition
The composition of theOperating Partnership's aggregate debt balances between secured and unsecured and fixed-rate and variable-rate debt as ofMarch 31, 2020 andDecember 31, 2019 was as follows: Percentage of Total Debt (1)
Weighted Average Interest Rate (1)
March 31, 2020 December 31, 2019 March 31, 2020 December 31, 2019
Secured vs. unsecured:
Unsecured 93.0 % 92.8 % 3.6 % 3.8 %
Secured 7.0 % 7.2 % 3.9 % 3.9 %
Variable-rate vs. fixed-rate:
Variable-rate 14.3 % 11.0 % 1.9 % 2.8 %
Fixed-rate (2) 85.7 % 89.0 % 3.9 % 3.9 %
Stated rate (2) 3.6 % 3.8 %
GAAP effective rate (3) 3.6 % 3.8 %
GAAP effective rate including debt
issuance costs 3.8 % 4.0 %
________________________(1) As of the end of the period presented.
(2) Excludes the impact of the amortization of any debt discounts/premiums and
deferred financing costs.
(3) Includes the impact of the amortization of any debt discounts/premiums,
excluding deferred financing costs.
45--------------------------------------------------------------------------------
Liquidity Uses Contractual Obligations Refer to our 2019 Annual Report on Form 10-K for a discussion of our contractual obligations. There have been no material changes, outside of the ordinary course of business, to these contractual obligations during the three months endedMarch 31, 2020 . Other Liquidity Uses Development As ofMarch 31, 2020 , we had five development projects under construction. These projects have a total estimated investment of approximately$1.1 billion of which we have incurred approximately$585.2 million and committed an additional$492.0 million as ofMarch 31, 2020 , of which$174.0 million is currently expected to be spent through the end of 2020. In addition, as ofMarch 31, 2020 , we had three development projects in the tenant improvement phase. These projects have a total estimated investment of approximately$915.0 million of which we have incurred approximately$680.0 million , net of retention, and committed an additional$235.0 million as ofMarch 31, 2020 , of which$188.0 million is currently expected to be spent through the end of 2020. We also had two stabilized development projects and two completed phases of a residential project with a total estimated investment of$1.13 billion of which we have incurred approximately$1.09 billion and committed an additional$40.0 million as ofMarch 31, 2020 and$34.0 million is currently expected to be spent through the end of 2020. Furthermore, we currently believe we may spend up to$15.0 million on future development pipeline projects that we expect we may commence construction on throughout the remainder of 2020. Ultimate timing of these expenditures may fluctuate given construction progress and leasing status of the projects. Additionally, the COVID-19 pandemic, and restrictions intended to prevent its spread, could cause delays or increase costs associated with building materials or construction services necessary for construction in the future, which could adversely impact our ability to continue or complete construction as planned, on budget or at all. We expect that any material additional development activities will be funded with borrowings under the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program, or strategic venture opportunities.
Debt Maturities
We believe our conservative leverage and staggered debt maturities provide us with financial flexibility and enhance our ability to obtain additional sources of liquidity if necessary, and, therefore, we believe we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities. However, we can provide no assurance that we will have access to the public or private debt or equity markets in the future on favorable terms or at all. Refer to "Part II - Other Information, Item IA. Risk Factors" included in this report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations. Our next debt maturities occur inJuly 2022 and relate to our unsecured revolving credit facility and term loan facility.
Potential Future Acquisitions
As discussed in the section "Factors That May Influence Future Results of Operations - Acquisitions," we continue to evaluate strategic opportunities and remain a disciplined buyer of development and redevelopment opportunities as well as value-add operating properties, dependent on market conditions and business cycles, among other factors. We continue to focus on growth opportunities inWest Coast markets populated by knowledge and creative based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services. Any material acquisitions will be funded with borrowings under the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program, the formation of strategic ventures or through the assumption of existing debt. We cannot provide assurance that we will enter into any agreements to acquire properties, or undeveloped land, or that the potential acquisitions contemplated by any agreements we may enter into in the future will be completed.
Share Repurchases
As ofMarch 31, 2020 , 4,935,826 shares remained eligible for repurchase under a share repurchase program approved by the Company's board of directors in 2016. Under this program, repurchases may be made in open market transactions at prevailing 46 -------------------------------------------------------------------------------- prices or through privately negotiated transactions. We may elect to repurchase shares of our common stock under this program in the future depending upon various factors, including market conditions, the trading price of our common stock and our other uses of capital. This program does not have a termination date and repurchases may be discontinued at any time. We intend to fund repurchases, if any, primarily with the proceeds from property dispositions.
Other Potential Future Liquidity Uses
The amounts we incur for tenant improvements and leasing costs depend on leasing activity in each period. Tenant improvements and leasing costs generally fluctuate in any given period depending on factors such as the type and condition of the property, the term of the lease, the type of the lease, the involvement of external leasing agents, and overall market conditions. Capital expenditures may fluctuate in any given period subject to the nature, extent and timing of improvements required to maintain our properties.
Factors That May Influence Future Sources of Capital and Liquidity of the
Company and the
We continue to evaluate sources of financing for our business activities,
including borrowings under the unsecured revolving credit facility, issuance of
public and private equity securities, unsecured debt and fixed-rate secured
mortgage financing, proceeds from the disposition of selective assets through
our capital recycling program, and the formation of strategic ventures. However,
our ability to obtain new financing or refinance existing borrowings on
favorable terms could be impacted by various factors, including the state of the
macro economy, the state of the credit and equity markets, significant tenant
defaults, a decline in the demand for office properties, a decrease in market
rental rates or market values of real estate assets in our submarkets, and the
amount of our future borrowings. These events could result in the following:
• Decreases in our cash flows from operations, which could create further
dependence on the unsecured revolving credit facility;
• An increase in the proportion of variable-rate debt, which could
increase our sensitivity to interest rate fluctuations in the future;
• A decrease in the value of our properties, which could have an adverse
effect on the Operating Partnership's ability to incur additional debt,
refinance existing debt at competitive rates, or comply with its
existing debt obligations; and
• The impact of the COVID-19 pandemic, and restrictions intended to
prevents its spread, on capital and credit markets and our tenants
(refer to "Part II - Other Information, Item IA. Risk Factors" of this
report for additional information).
In addition to the factors noted above, the Operating Partnership's credit
ratings are subject to ongoing evaluation by credit rating agencies and may be
changed or withdrawn by a rating agency in the future if, in its judgment,
circumstances warrant. In the event that the Operating Partnership's credit
ratings are downgraded, we may incur higher borrowing costs and may experience
difficulty in obtaining additional financing or refinancing existing
indebtedness.
47
--------------------------------------------------------------------------------Debt Covenants
The unsecured revolving credit facility, unsecured term loan facility, unsecured term loan, unsecured senior notes, and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Key existing financial covenants and their covenant levels include: Unsecured Credit and Term Loan Facility and Private Placement Notes (as defined in the applicable Credit Actual
Performance
Agreements): Covenant Level as of March 31, 2020 Total debt to total asset value less than 60% 29% Fixed charge coverage ratio greater than 1.5x 3.4x Unsecured debt ratio greater than 1.67x 3.48x Unencumbered asset pool debt service coverage greater than 1.75x
4.02x
Unsecured Senior Notes due 2023, 2024, 2025, 2028, 2029 and 2030 (as defined in the applicable Indentures): Total debt to total asset value less than 60%
34%
Interest coverage greater than 1.5x
10.4x
Secured debt to total asset value less than 40%
2%
Unencumbered asset pool value to unsecured debt greater than 150% 304%The Operating Partnership was in compliance with all of its debt covenants as ofMarch 31, 2020 . Our current expectation is that theOperating Partnership will continue to meet the requirements of its debt covenants in both the short and long term. We believe theOperating Partnership has adequate cushion between actual performance and debt covenant levels. However, in the event of an economic slowdown or continued volatility in the credit markets, there is no certainty that theOperating Partnership will be able to continue to satisfy all the covenant requirements.
Consolidated Historical Cash Flow Summary
The following summary discussion of our consolidated historical cash flow is based on the consolidated statements of cash flows in Item 1. "Financial Statements" and is not meant to be an all-inclusive discussion of the changes in our cash flow for the periods presented below. Changes in our cash flow include changes in cash and cash equivalents and restricted cash. Our historical cash flow activity for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 is as follows: Three Months Ended March 31, Dollar Percentage 2020 2019 Change Change ($ in thousands)
Net cash provided by operating activities
2,120 1.0 %
Net cash provided by (used in) financing
activities 790,562 (1,299 ) 791,861 *NM
Net increase (decrease) in cash and cash
equivalents $ 702,090 $ (115,041 ) $ 817,131 710.3 %
________________________
* Percentage not meaningful
Operating Activities
Our cash flows from operating activities depends on numerous factors including
the occupancy level of our portfolio, the rental rates achieved on our leases,
the collectability of rent and recoveries from our tenants, the level of
operating expenses, the impact of property acquisitions, completed development
projects and related financing activities, and other general and administrative
costs. Our net cash provided by operating activities increased by $23.2 million ,
or 23.2%, for the three months ended March 31, 2020 compared to the three months
ended March 31, 2019 primarily due to cash rents received during the three
months ended March 31, 2020 from several tenants who had free rent and
beneficial occupancy periods during the three months ended March 31, 2019 . See
additional information under the caption "-Results of Operations."
Investing Activities
Our cash flows from investing activities is generally used to fund development
and operating property acquisitions, expenditures for development projects, and
recurring and nonrecurring capital expenditures for our operating properties,
net of proceeds received from dispositions of real estate assets. Our net cash
used in investing activities remained generally consistent
48
--------------------------------------------------------------------------------
for the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 and was comprised of expenditures for our development program and
stabilized operating properties.
Financing Activities
Our cash flows from financing activities is principally impacted by our capital raising activities, net of dividends and distributions paid to common and preferred security holders. Our net cash provided by financing activities increased by$791.9 million , for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to the net proceeds received upon physical settlement of ourFebruary 2020 forward equity sale agreements pursuant to which we issued 5,750,000 shares of common stock and the forward equity sale agreements entered into during the year endedDecember 31, 2019 under our at-the-market program pursuant to which we issued 3,147,110 shares of common stock.
Off-Balance Sheet Arrangements
As of
49
--------------------------------------------------------------------------------Non-GAAP Supplemental Financial Measure: Funds From Operations ("FFO")
We calculate FFO in accordance with the 2018 Restated White Paper on FFO approved by theBoard of Governors of NAREIT. The White Paper defines FFO as net income or loss calculated in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains and losses from sales of depreciable real estate and impairment write-downs associated with depreciable real estate, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustment for unconsolidated partnerships and joint ventures. Our calculation of FFO includes the amortization of deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets. We also add back net income attributable to noncontrolling common units of theOperating Partnership because we report FFO attributable to common stockholders and common unitholders. We believe that FFO is a useful supplemental measure of our operating performance. The exclusion from FFO of gains and losses from the sale of operating real estate assets allows investors and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those operating results between periods. Also, because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons of operating performance to other REITs. However, other REITs may use different methodologies to calculate FFO, and accordingly, our FFO may not be comparable to all other REITs. Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets, we believe that FFO along with the required GAAP presentations provides a more complete measurement of our performance relative to our competitors and a more appropriate basis on which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide. However, FFO should not be viewed as an alternative measure of our operating performance because it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs and could materially impact our results from operations.
The following table presents our FFO for the three months ended
© Edgar Online, source
