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 28 --------------------------------------------------------------------------------
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 ofJune 30, 2020 ,December 31, 2019 andJune 30, 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.
COVID-19 Response
In accordance with local and state government guidance and social distancing recommendations, the majority of our employees have worked remotely sinceMarch 2020 . Our robust technology infrastructure was capable of supporting this model. We implemented rigorous protocols for remote work across the Company, including increased frequency of team update calls and frequent communication across leadership and working levels. We are leveraging technology to ensure our teams stay connected and productive, and that our culture remains strong even in these unusual circumstances. During the three months endedJune 30, 2020 , we were highly focused on planning for the health and safety of our tenants and employees and preparing our buildings in accordance with the policies, protocols and applicable legal requirements in our regions. We engaged a hygienist to assist us in designing new standard operating procedures for our buildings that include, but are not limited to, air filtration, water quality, janitorial products and procedures, social separation and screening during building access and elevator use, the use of personal protective equipment, signage, and management of construction activities. During the three months endedJune 30, 2020 , we implemented a rent relief program for the majority of our retail tenants whereby we deferred rent for the months of April toJuly 2020 in exchange for a four-month extension of their current lease term at future rental rates. We expect that we will continue to offer deferrals to the majority of our retail tenants, given that most cannot resume operations in certain of our markets where strong state and local government restrictions remain or were put back into effect. We did not create such a program for our office tenants and we evaluate office rent relief requests on a specific case by case basis. Our top 15 tenants represent 47.4% of our total annualized base rental revenues and as ofJune 30, 2020 we had collected 100% of the rent due from our top 15 tenants since the beginning of the COVID-19 pandemic. For residential tenants, deferrals of gross rent billings have been extended in accordance with the applicable local orders, which often require repayment within 12 months if such local ordinances are not extended. We analyze our total lease receivable balances, tenant creditworthiness, specific industry trends and conditions, and current economic trends and conditions in order to evaluate whether we believe substantially all of the amounts due under a tenant's lease agreement are deemed probable of collection over the term of the lease. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination. The following table sets forth information regarding the percent of contractual base rent and common area maintenance ("CAM") billings ("gross rent billings") billed, collected, forgiven, and deferred for the three months endedJune 30, 2020 : COVID-19 Modifications (3) Non-COVID-19 Modifications (4) Gross Rent Rent Deferred Rent Deferred Billings (1)
Property Type (in thousands) Rent Collected (2) Rent Forgiven (5)
Collected (6) Outstanding (7) Collected (6) Outstanding (7) Rent Outstanding (8)
Office $ 190,245 97.7 % - - 0.4 % - - 1.9 %
Residential 4,226 88.0 % - - 7.6 % - - 4.4 %
Retail 7,521 32.3 % 3.5 % - 34.5 % - - 29.7 %
Total $ 201,992 95.1 % 0.1 % - 1.8 % - - 3.0 %
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________________________
(1) Gross rent billings represents the total contractual base rent (including
tenant direct-billed parking) and CAM billings before any COVID-19 related
rent concessions for the three months ended
(2) Cash collections through
billings.
(3) Rent concessions that qualify for the accounting relief provided by the FASB
(as described in Note 1 "Organization and Basis of Presentation" to our
consolidated financial statements included in this report), as total amounts
due under the lease agreement are substantially the same or less than those
that existed in the contract before modification.
(4) Rent concessions that do not qualify for the accounting relief provided by
the FASB (as described in Note 1 "Organization and Basis of Presentation" to
our consolidated financial statements included in this report), as total
amounts due under the lease agreement are not substantially the same as those
that existed in the contract before modification, or other modifications
unrelated to the COVID-19 pandemic have been included.
(5) Amounts permanently forgiven as a percentage of gross rent billings.
(6) Collections of amounts deferred under repayment plans (as described above)
and through lease term extensions as a percentage of gross rent billings.
(7) Remaining amounts deferred under repayment plans and through lease term
extensions as a percentage of gross rent billings.
(8) Uncollected gross rent billings that have not been forgiven and are not
subject to deferral arrangements as a percentage of gross rent billings. Such
amounts are subject to the Company's allowance for uncollectible accounts.
Deferrals of gross rent billings that have been extended to office and retail tenants during the period have been formalized by the execution of lease amendments that generally provide for repayment of deferred amounts through an extension of the lease term by an equivalent period of months to the deferral period. As of the date of this report, across all property types, we have collected approximately 95% of ourJuly 2020 gross rent billings, including 100% from all of our top 15 tenants. Excluding rent relief provided to certain tenants, across all property types, we collected 96% of ourJuly 2020 gross rent billings. 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. 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 prevent its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
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, density limitations, social distancing measures, 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 development portfolio was largely unaffected during the six months endedJune 30, 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 and to pay dividends and distributions to security holders. 30
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Stabilized Development Projects
During the six 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.
Completed Residential Development Projects
As of
• One Paseo (Residential Phases I & II) -
commenced construction on Phases I and II of the residential component of
this mixed-use project in
residential units, respectively. We completed the first phase during the
third quarter of 2019 and the second phase during the first quarter of2020. The total estimated investment for these phases of the residential
component of the project is approximately $290.0 million . As of June 30,
2020 , 68% of the Phase I units were leased and 21% of the Phase II units
were leased.
In-Process Development Projects - Tenant Improvement
As of
• 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. During the three months ended
2020, we completed construction and commenced revenue recognition on the
first phase of the project, representing approximately 49% of the project.
The remaining two phases are currently expected to stabilize in the second
halves of 2021 and 2022.
• One Paseo (Office) - Del Mar , San Diego, California . We commenced
construction on the office component of this project in
which encompasses 285,000 square feet of office space at a total estimated
investment of
the project was 91% leased. During the three months ended
we completed construction and commenced revenue recognition on 22,000
square feet, representing approximately 8% of the project. In
we commenced revenue recognition on an additional 36,000 square feet,
bringing the total revenue commenced on this project to approximately 20%
as of the date of his report. 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.
31--------------------------------------------------------------------------------
•
In
approximately 160,000 square feet of office space at a total estimated
investment of
publicly traded 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 $100.0 million . Phase III was
completed and delivered in July 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
As ofJune 30, 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$7.0 billion , depending on successfully obtaining entitlements and market conditions. The following table sets forth information about our future development pipeline. Total Costs Approx. as of 6/30/2020 Developable ($ in millions) Future Development Pipeline Location Square Feet (1) (2) San Diego County 600,000 - Santa Fe Summit - Phases II and III 56 Corridor 650,000$ 81.6 1335 Broadway & 901 Park Boulevard East Village TBD 46.6
1,750,000 -
331.3
Flower Mart SOMA 2,300,000 418.7
Greater Seattle
SIX0 - Office & Residential Seattle CBD TBD 141.8
TOTAL: $ 1,020.0
________________________(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 and six months endedJune 30, 2020 , we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately$2.1 billion and$2.2 billion , respectively, as it was determined these projects qualified for interest and other carrying cost capitalization under GAAP. During the three and six months endedJune 30, 2019 , we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately$2.0 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, 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 and six months endedJune 30, 2020 , we capitalized$20.5 million and$41.9 million , respectively, of interest to our qualifying development projects. For the three and six months endedJune 30, 2019 , we capitalized$20.9 million and$40.3 million , respectively, of interest to our qualifying development projects. For the three and six months endedJune 30, 2020 , we capitalized$6.2 million and$11.3 million , respectively, of internal 32 -------------------------------------------------------------------------------- costs to our qualifying development projects. For the three and six months endedJune 30, 2019 , we capitalized$6.3 million and$12.9 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 (which has been and may continue to be constrained for some potential buyers due to the ongoing COVID-19 pandemic's impact on economic and market conditions, including the financial markets), 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, 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 ofJune 30, 2020 , there was approximately$52.1 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 1.9 years. The ultimate amount of compensation cost recognized related to outstanding nonvested RSUs issued under share-based compensation arrangements may vary for performance-based RSUs that are still in the performance period based on performance against applicable performance-based vesting goals. The$52.1 million of unrecognized compensation cost does not reflect the future compensation cost for any potential share-based awards that may be issued subsequent toJune 30, 2020 . Share-based compensation expense for potential future awards could be affected by our operating and development performance, financial results, stock price, performance against applicable performance-based vesting goals, market conditions and other factors. For additional information regarding our equity incentive awards, see Note 7 "Share-Based Compensation" to our consolidated financial statements included in this report. 33 --------------------------------------------------------------------------------
Information on Leases Commenced and Executed
Leasing Activity and Changes in Rental Rates. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties, newly acquired properties with vacant space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Negative trends in one or more of these factors could adversely affect our rental income in future periods. The following tables set forth certain information regarding leasing activity for our stabilized portfolio during the three and six months endedJune 30, 2020 . For Leases Commenced 1st & 2nd Generation (1)(2) 2nd Generation (1)(2) Weighted Number of Leases (3) Rentable Square Feet (3) TI/LC per Changes in Average Retention TI/LC per Sq. Ft. / Changes in Cash Rents Lease Term New Renewal New Renewal Rates (4) Sq. Ft. (5) Year Rents (6)(7) (8) (in months) Three Months Ended June 30, 2020 13 9 111,968 233,263 50.1 %$ 61.16 $ 10.05 37.2 % 15.4 % 73 Six Months Ended June 30, 2020 23 18 159,894 323,330 40.4 %$ 54.49 $ 8.38 36.4 % 16.6 % 78 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 June 30, 2020 5 9 53,214 233,263$ 54.10 $ 9.02 30.0 % 10.7 % 72 Six Months Ended June 30, 2020 12 18 184,875 323,330$ 56.72 $ 8.62 36.9 % 18.6 % 79 ________________________
(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 leases of approximately 48,603 rentable square feet for
the three months ended
approximately 87,355 and 70,868 rentable square feet, respectively, for the
six months ended
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
months ended
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 atJune 30, 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 properties 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. 34 -------------------------------------------------------------------------------- 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 35 395,942 3.1 %$ 17,080 2.5 % $ 43.14 2021 78 764,334 5.8 % 32,319 4.6 % 42.28 2022 65 749,808 5.8 % 32,351 4.7 % 43.15 2023 81 1,299,381 10.0 % 68,853 9.9 % 52.99 2024 58 945,844 7.3 % 46,338 6.6 % 48.99 2025 53 663,871 5.1 % 32,304 4.6 % 48.66 Total 370 4,819,180 37.1 %$ 229,245 32.9 % $ 47.57 # 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 22 243,813 1.9 % $ 9,465 1.4 % $ 38.82 San Diego 7 61,044 0.5 % 2,340 0.3 % 38.33 2020 San Francisco Bay Area 5 68,651 0.5 % 4,545 0.7 % 66.20 Greater Seattle 1 22,434 0.2 % 730 0.1 % 32.54 Total 35 395,942 3.1 % $ 17,080 2.5 % $ 43.14 Greater Los Angeles 49 330,964 2.5 % $ 13,084 1.8 % $ 39.53 San Diego 15 187,468 1.4 % 6,795 1.0 % 36.25 2021 San Francisco Bay Area 10 234,125 1.8 % 11,947 1.7 % 51.03 Greater Seattle 4 11,777 0.1 % 493 0.1 % 41.86 Total 78 764,334 5.8 % $ 32,319 4.6 % $ 42.28
________________________
(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 1.1 million rentable square feet, or 7.7%, of currently available space in our stabilized portfolio, leases representing approximately 3.1% and 5.8% 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 1.2 million rentable square feet or 7.1% of our total annualized base rental revenue. Adjusting for leases executed as ofJune 30, 2020 but not yet commenced, the remaining 2020 and 2021 expirations would be 290,226 and 587,282 square feet, respectively. Sublease Space. Of our leased space as ofJune 30, 2020 , approximately 849,307 rentable square feet, or 5.9% of the square footage in our stabilized portfolio, was available for sublease, primarily in theSan Francisco Bay Area andGreater Seattle regions. Of the 5.9% of available sublease space in our stabilized portfolio as ofJune 30, 2020 , approximately 2.7% was vacant space, and the remaining 3.2% was occupied. Of the approximately 849,307 rentable square feet available for sublease as ofJune 30, 2020 , approximately 17,137 rentable square feet representing two leases are scheduled to expire in 2020, and approximately 15,907 rentable square feet representing five leases are scheduled to expire in 2021. 35
--------------------------------------------------------------------------------
Stabilized Portfolio Information
As ofJune 30, 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 atJune 30, 2020 . Our stabilized portfolio also excludes our future development pipeline, which as ofJune 30, 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 ofJune 30, 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 recently completed residential phases I and II 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 fromJune 30, 2019 toJune 30, 2020 : Number of Rentable Buildings Square Feet Total as of June 30, 2019 94 13,546,615 Acquisitions 19 151,908 Completed development properties placed in-service 2 846,241 Dispositions (1 ) (271,556 ) Remeasurement - 54,664 Total as of June 30, 2020 (1) 114 14,327,872 ________________________
(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).
Occupancy Information
The following table sets forth certain information regarding our stabilized
portfolio:
Number of Rentable Occupancy at (1)
Region Buildings Square Feet 6/30/2020 3/31/2020 12/31/2019
Greater Los Angeles 51 4,029,919 91.2 % 94.0 % 95.2 %
San Diego County 22 2,146,253 87.4 % 88.3 % 89.7 %
San Francisco Bay Area 33 6,349,910 93.7 % 94.3 % 95.0 %
Greater Seattle 8 1,801,790 95.9 % 95.5 % 97.7 %
Total Stabilized Office Portfolio 114 14,327,872 92.3 % 93.5 % 94.6 %
36--------------------------------------------------------------------------------
Average Occupancy
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Stabilized Office Portfolio (1) 92.8 % 93.5 % 93.2 % 93.3 %
Same Store Portfolio (2) 92.5 % 93.9 % 93.1 % 93.6 %
Residential Portfolio (3) 85.0 % 76.5 % 89.3 % 73.4 %
________________________(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
June 30, 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
The following table sets forth information about our 15 largest tenants based upon annualized base rental revenues, as defined below, as ofJune 30, 2020 . We have collectedJuly 2020 contractual rents from all of our top 15 tenants. Percentage of Total Annualized Base Annualized Percentage of Year(s) of Rental Revenue (1)
Rentable Base Rental
Region (2) Square Feet Revenue Feet Expiration
(in thousands)
San Francisco Bay
Dropbox, Inc. Area $ 55,998 738,081 7.9 % 5.0 % 2033
San Francisco Bay
GM Cruise, LLC Area 36,337 374,618 5.1 % 2.6 % 2031
LinkedIn Corporation / San Francisco Bay 2024 /
Microsoft Corporation Area 29,752 663,460 4.2 % 4.5 % 2026
San Francisco Bay
Area / Greater 2027 /
Adobe Systems, Inc. Seattle 27,897 513,111 3.9 % 3.5 % 2031
San Francisco Bay 2031 /
salesforce.com, inc. Area 24,076 451,763 3.4 % 3.1 % 2032
Greater Los
DIRECTV, LLC Angeles 23,152 684,411 3.3 % 4.7 % 2027
San Francisco Bay 2021 /
Box, Inc. Area 22,441 371,792 3.2 % 2.5 % 2028
San Francisco Bay
Okta, Inc. Area 18,263 218,100 2.6 % 1.5 % 2028
2020 /
Greater Los 2023 /
Riot Games, Inc. Angeles 15,554 251,509 2.2 % 1.7 % 2024
San Francisco Bay
Synopsys, Inc. Area 15,492 340,913 2.2 % 2.3 % 2030
Fortune 50
Publicly-Traded
Company (3) Greater Seattle 15,355 311,983 2.2 % 2.1 % 2033
Viacom International, Greater Los
Inc. Angeles 13,718 211,343 1.9 % 1.4 % 2028
San Francisco Bay
DoorDash, Inc. Area 13,531 135,137 1.9 % 0.9 % 2032
Amazon.com Greater Seattle 12,397 277,399 1.7 % 1.9 % 2030
Nektar Therapeutics, San Francisco Bay
Inc. Area 12,297 135,350 1.7 % 0.9 % 2030
Total $ 336,260 5,678,970 47.4 % 38.6 %
________________________(1) Annualized base rental revenue 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. Excludes month-to-month leases and vacant space as of
(2) Includes 100% of the annualized base rental revenues of consolidated property
partnerships.
(3) In June, the Company commenced GAAP revenue recognition on Phase I of this
tenant's lease at 333 Dexter, which represents approximately 49% of the
635,000 square foot project located in the South Lake Union submarket of
Seattle .
37--------------------------------------------------------------------------------
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 June 30, 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 12,935,383
Stabilized Development Properties 3 1,240,581
Acquisition Properties 19 151,908
Total Stabilized Portfolio 114 14,327,872
38--------------------------------------------------------------------------------
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 June 30, 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 $ 19,618 $ 42,194 $ (22,576 ) (53.5 )%
Net income attributable to noncontrolling
common units of the Operating Partnership 367 871 (504 ) (57.9 )%
Net income attributable to noncontrolling
interests in consolidated property
partnerships 4,367 4,150 217 5.2 %
Net income $ 24,352 $ 47,215 $ (22,863 ) (48.4 )%
Unallocated expense (income):
General and administrative expenses 38,597 19,857 18,740 94.4 %
Leasing costs 1,330 2,650 (1,320 ) (49.8 )%
Depreciation and amortization 80,085 68,252 11,833 17.3 %
Interest income and other net investment
gain (2,838 ) (616 ) (2,222 ) 360.7 %
Interest expense 15,884 11,727 4,157 35.4 %
Gains on sales of depreciable operating
properties - (7,169 ) 7,169 (100.0 )%
Net Operating Income, as defined $ 157,410 $ 141,916
The following tables summarize our Net Operating Income, as defined, for our
total portfolio for the three months ended
Three Months Ended June 30,
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 $ 182,323 $ 32,962 $ 3,071 $ - $ 218,356 $ 185,711 $ 9,169 $ - $ 2,749 $ 197,629
Other property income 922 149 (4 ) - 1,067 2,291 253 - 319 2,863
Total 183,245 33,111 3,067 - 219,423 188,002 9,422 - 3,068 200,492
Property and related
expenses:
Property expenses 32,936 4,649 244 - 37,829 36,154 1,609 - 773 38,536
Real estate taxes 17,214 4,120 520 - 21,854 17,067 554 - 305 17,926
Ground leases 2,121 - 209 - 2,330 2,114 - - - 2,114
Total 52,271 8,769 973 - 62,013 55,335 2,163 - 1,078 58,576
Net Operating Income,
as defined $ 130,974 $ 24,342 $ 2,094 $ - $ 157,410 $ 132,667 $ 7,259 $ - $ 1,990 $ 141,916
39
--------------------------------------------------------------------------------
Three Months Ended June 30, 2020 as compared to the Three Months Ended June 30, 2019
Same Store Development Acquisition Disposition Total
Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change
($ in thousands)
Operating revenues:
Rental income $ (3,388 ) (1.8 )% $ 23,793 259.5 % $ 3,071 100.0 % $ (2,749 ) (100.0 )% $ 20,727 10.5 %
Other property
income (1,369 ) (59.8 )% (104 ) (41.1 )% (4 ) (100.0 )% (319 ) (100.0 )% (1,796 ) (62.7 )%
Total (4,757 ) (2.5 )% 23,689 251.4 % 3,067 100.0 % (3,068 ) (100.0 )% 18,931 9.4 %
Property and
related expenses:
Property expenses (3,218 ) (8.9 )% 3,040 188.9 % 244 100.0 % (773 ) (100.0 )% (707 ) (1.8 )%
Real estate taxes 147 0.9 % 3,566 643.7 % 520 100.0 % (305 ) (100.0 )% 3,928 21.9 %
Ground leases 7 0.3 % - - % 209 100.0 % - - % 216 10.2 %
Total (3,064 ) (5.5 )% 6,606 305.4 % 973 100.0 % (1,078 ) (100.0 )% 3,437 5.9 %
Net Operating
Income,
as defined $ (1,693 ) (1.3 )% $ 17,083 235.3 % $ 2,094 100.0 % $ (1,990 ) (100.0 )% $ 15,494 10.9 %
Net Operating Income increased
• A decrease in Net Operating Income of
• A decrease in rental income of
•$3.7 million of reversals of revenue related to the
creditworthiness
of certain tenants primarily as a result of the COVID-19 pandemic;
• $3.0 million decrease due to an early lease termination fee received
in 2019 for a tenant in the San Francisco Bay Area ;
• $2.0 million decrease due to lower occupancy primarily in the
Greater Los Angeles , San Francisco Bay Area , and San Diego County
regions;
• $1.6 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:
• $0.8 million decrease due to tenants on a cash basis of revenue
recognition and abatements given due to the COVID-19 pandemic;
• $0.5 million decrease due to lower operating expenses resulting
from COVID-19 stay-at-home orders; and
• $0.6 million decrease primarily due to new tenants with 2020 base years;
• $1.1 million decrease due to lower parking income resulting from a
reduction in the number of monthly parking spaces rented as a result
of COVID-19 stay-at-home orders; partially offset by
• $8.1 million increase from new leases and renewals at higher rates
primarily in the San Francisco Bay Area , San Diego County , and
Greater Seattle regions;
• A decrease in other property income of $1.4 million primarily due tolower transient and special event parking income at a number of
properties in the
Los Angeles regions. We expect daily, special event and transient parking to be impacted while restrictions intended to prevent the spread of COVID-19 remain in effect;
• A decrease in property and related expenses of
due to the following:
40-------------------------------------------------------------------------------- •$2.8 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. We anticipate lower
reimbursable property expenses and corresponding tenantrecoveries
as a result of lower usage of our buildings by tenants while
restrictions intended to prevent the spread of COVID-19 are in
effect; and
• $0.4 million decrease due to insurance reimbursementsreceived in
2020 for expenses incurred in 2019;
• An increase in Net Operating Income of
Development Properties driven by the following activity:
•
development project that was added to the stabilized portfolio in the
first quarter of 2020; partially offset by
•
higher property expenses and real estate taxes related to one office
development project that was added to the stabilized portfolio in the
first quarter of 2020 and ceased capitalization of real estate taxes;
• An increase in Net Operating Income of $2.1 million attributable to theAcquisition Properties ; and • A decrease in Net Operating Income of$2.0 million attributable to theDisposition Properties .
Other Expenses and Income
General and Administrative Expenses
General and administrative expenses increased by approximately$18.7 million , or 94.4%, for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 primarily due to:
• An increase of
announced departure of an executive officer and the departure of certain
other employees;
• A increase 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 gain (loss) in the consolidated statements of operations;
partially offset by
• A decrease of
accruals and other related cost cutting measures as a result of COVID-19.
Leasing Costs Leasing costs decreased by$1.3 million or 49.8%, for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 primarily due to a higher level of leasing activity during the three months endedJune 30, 2019 and changes in personnel.
Depreciation and Amortization
Depreciation and amortization increased
• An increase of
• An increase of
• An increase of$2.2 million attributable to theAcquisition Properties ; partially offset by 41
--------------------------------------------------------------------------------
• A decrease of
Interest Expense
The following table sets forth our gross interest expense, including debt discounts and deferred financing cost amortization, and capitalized interest, including capitalized debt discounts and deferred financing cost amortization, for the three months endedJune 30, 2020 and 2019: Three Months Ended June 30, Dollar Percentage 2020 2019 Change Change (in thousands) Gross interest expense$ 36,400 $ 32,607 $ 3,793 11.6 % Capitalized interest and deferred financing costs (20,516 ) (20,880 ) 364 (1.7 )% Interest expense$ 15,884 $ 11,727 $ 4,157 35.4 % Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased$3.8 million , or 11.6%, for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 primarily due to an increase in the average outstanding debt balance for the three months endedJune 30, 2020 . Capitalized interest and deferred financing costs decreased$0.4 million , or 1.7%, for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 primarily due to a decrease in the weighted average interest rate during the three months endedJune 30, 2020 . During the three months endedJune 30, 2020 and 2019, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately$2.1 billion and$2.0 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, 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 and to pay dividends and distributions to security holders.
Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships
Net income attributable to noncontrolling interests in consolidated property partnerships increased by$0.2 million or 5.2% for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 primarily due to a new lease at a higher rate at one property held in a property partnership in 2020. The amounts reported for the three months endedJune 30, 2020 and 2019 are comprised of the noncontrolling interest's share of net income for100 First Street Member, LLC ("100First LLC ") and303 Second Street Member, LLC ("303Second LLC ") and the noncontrolling interest's share of net income forRedwood City Partners, LLC ("Redwood LLC "). 42 --------------------------------------------------------------------------------
Comparison of the Six Months Ended
The following table summarizes our Net Operating Income, as defined, for our
total portfolio for the six months ended
Six Months Ended June 30, Dollar Percentage
2020 2019 Change Change
($ in thousands)
Reconciliation of Net Income Available to
Common Stockholders to Net Operating
Income, as defined:
Net Income Available to Common
Stockholders $ 59,435 $ 79,097 $ (19,662 ) (24.9 )%
Net income attributable to noncontrolling
common units of the Operating Partnership 1,072 1,571 (499 ) (31.8 )%
Net income attributable to noncontrolling
interests in consolidated property
partnerships 9,263 8,341 922 11.1 %
Net income $ 69,770 $ 89,009 $ (19,239 ) (21.6 )%
Unallocated expense (income):
General and administrative expenses 57,607 43,198 14,409 33.4 %
Leasing Costs 2,786 4,407 (1,621 ) (36.8 )%
Depreciation and amortization 154,455 134,387 20,068 14.9 %
Interest income and other net investment
loss (gain) 290 (2,444 ) 2,734 (111.9 )%
Interest expense 30,328 22,970 7,358 32.0 %
Gains on sales of depreciable operating
properties - (7,169 ) 7,169 (100.0 )%
Net Operating Income, as defined $ 315,236 $ 284,358 $ 30,878 10.9 %
The following tables summarize our Net Operating Income, as defined, for our
total portfolio for the six months ended
Six Months Ended June 30,
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 $ 368,737 $ 61,390 $ 6,862 $ - $ 436,989 $ 374,153 $ 17,194 $ - $ 5,664 $ 397,011
Other property income 3,102 581 79 - 3,762 4,002 320 - 361 4,683
Total 371,839 61,971 6,941 - 440,751 378,155 17,514 - 6,025 401,694
Property and related expenses:
Property expenses 67,693 8,492 627 - 76,812 72,449 2,671 - 1,565 76,685
Real estate taxes 34,460 8,538 1,058 - 44,056 34,177 1,766 - 622 36,565
Ground leases 4,230 - 417 - 4,647 4,086 - - - 4,086
Total 106,383 17,030 2,102 - 125,515 110,712 4,437 - 2,187 117,336
Net Operating Income,
as defined $ 265,456 $ 44,941 $ 4,839 $ - $ 315,236 $ 267,443 $ 13,077 $ - $ 3,838 $ 284,358
43
--------------------------------------------------------------------------------
Six Months
Ended
Same Store Development Acquisition Disposition Total
Dollar Percent Dollar Percent
Dollar Change Percent Change Change Change Change Change Dollar Change Percent Change Dollar Change Percent Change
($ in thousands)
Operating revenues:
Rental income $ (5,416 ) (1.4 )% $ 44,196 257.0 % $ 6,862 100.0 % $ (5,664 ) (100.0 )% $ 39,978 10.1 %
Other property
income (900 ) (22.5 )% 261 81.6 % 79 100.0 % (361 ) (100.0 )% (921 ) (19.7 )%
Total (6,316 ) (1.7 )% 44,457 253.8 % 6,941 100.0 % (6,025 ) (100.0 )% 39,057 9.7 %
Property and
related expenses:
Property expenses (4,756 ) (6.6 )% 5,821 217.9 % 627 100.0 % (1,565 ) (100.0 )% 127 0.2 %
Real estate taxes 283 0.8 % 6,772 383.5 % 1,058 100.0 % (622 ) (100.0 )% 7,491 20.5 %
Ground leases 144 3.5 % - - % 417 100.0 % - - % 561 13.7 %
Total (4,329 ) (3.9 )% 12,593 283.8 % 2,102 100.0 % (2,187 ) (100.0 )% 8,179 7.0 %
Net Operating
Income,
as defined $ (1,987 ) (0.7 )% $ 31,864 243.7 % $ 4,839 100.0 % $ (3,838 ) (100.0 )% $ 30,878 10.9 %
Net Operating Income increased
• A decrease of
primarily resulting from:
• A decrease in rental income of
•$8.6 million of reversals of revenue related to the
creditworthiness
of certain tenants primarily as a result of the COVID-19 pandemic;
• $4.2 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;
• $6.2 million decrease primarily due to an early lease termination
fee received in 2019 for a tenant in the San Francisco Bay Area ;
• $0.9 million decrease due to lower parking income resulting from a
reduction in the number of monthly parking spaces rented as a result
of COVID-19 stay-at-home orders;
• $3.1 million decrease in the tenant reimbursement component of
rental income due to the following:
• $2.5 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, and new
tenants with 2020 base years; and
• $0.6 million decrease due to abatements provided to tenants and
lower operating expenses as a result of the COVID-19 pandemic;
partially offset by
• $17.6 million increase from new leases and renewals athigher rates
at various properties across the portfolio;
• A decrease in other property income of $0.9 million primarily due to
lower transient and special event parking income at a number of
properties in the San Francisco Bay Area , Greater Seattle and Greater
Los Angeles regions. 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:
•
44
--------------------------------------------------------------------------------•$4.4 million decrease in reimbursable expenses such as utilities, parking, janitorial, security, and various other recurring expenses due to several tenants implementing work from home policies due to the COVID-19 pandemic. We anticipate lower reimbursable property expenses and corresponding tenant recoveries as a result of lower usage of our buildings by tenants in while restrictions intended to prevent the spread of COVID-19 are in effect; •$0.4 million decrease primarily due to insurance
reimbursements
received in 2020 for expenses incurred in 2019;
• An increase of
• An increase of
partially offset by
• A decrease of
Other Expenses and Income
General and Administrative Expenses
General and administrative expenses increased$14.4 million , or 33.4%, for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 primarily due to the following:
• An increase of
announced departure of an executive officer and the departure of certain
other employees; partially offset by
• A decrease of $3.4 million due to lower compensation accruals and other
related cost-cutting measures as a result of COVID-19; and
• 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 gain (loss) in the consolidated statements of operations.
Leasing Costs
Leasing costs decreased by$1.6 million or 36.8%, for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 primarily due to a higher level of leasing activity during the six months endedJune 30, 2019 and changes in personnel.
Depreciation and Amortization
Depreciation and amortization increased
• An increase of
• An increase of
• An increase of
partially offset by
• A decrease of
45
--------------------------------------------------------------------------------Interest Expense
The following table sets forth our gross interest expense, including debt discounts/premiums and deferred financing cost amortization, and capitalized interest, including capitalized debt discounts/premiums and deferred financing cost amortization for the six months endedJune 30, 2020 and 2019: Six Months Ended June 30, Dollar Percentage 2020 2019 Change Change (in thousands) Gross interest expense$ 72,262 $ 63,287 $ 8,975 14.2 % Capitalized interest and deferred financing costs (41,934 ) (40,317 ) (1,617 ) 4.0 % Interest expense$ 30,328 $ 22,970 $ 7,358 32.0 % Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased$9.0 million or 14.2% for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 primarily due to an increase in our average debt balance for the six months endedJune 30, 2020 . Capitalized interest and deferred financing costs increased$1.6 million or 4.0%, for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 primarily due to an increase in the average development asset balances qualifying for interest capitalization for the six months endedJune 30, 2020 . During the six months endedJune 30, 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.
Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships
Net income attributable to noncontrolling interests in consolidated property partnerships increased$0.9 million or 11.1% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 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 six months endedJune 30, 2020 and 2019 are comprised of the noncontrolling interests' share of net income for100 First Street Member, LLC ("100First LLC "),303 Second Street Member ("303Second LLC ") andRedwood City Partners, LLC ("Redwood LLC "). 46 --------------------------------------------------------------------------------
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 six months endedJune 30, 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.
COVID-19 Liquidity Highlights
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 ofJuly 28, 2020 , we had approximately$560.0 million in cash and cash equivalents, with an additional$750.0 million available under our unsecured revolving credit facility, as a result of settling various forward equity sale agreements and the completion of a private placement of$350.0 million in unsecured senior notes during the six months endedJune 30, 2020 . We believe that this available liquidity makes us well positioned to navigate uncertainty resulting from the COVID-19 pandemic. In addition, as discussed above, the Company is a well-known seasoned issuer and has historically been able to raise capital on a timely basis in the public markets, as well as the private markets, as demonstrated by the completion of a private placement inApril 2020 . Any future financings, however, will depend on market conditions for capital raises and for the investment of any proceeds and there can be no assurances that we will successfully obtain such financings.
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. 47 -------------------------------------------------------------------------------- The Company intends to continue to make, but has not committed to make, regular quarterly cash distributions to common stockholders, and through theOperating Partnership , to 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. 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. OnMay 19, 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 onJune 30, 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 onJune 30, 2020 , including those owned by the Company. The total cash quarterly dividends and distributions paid onJuly 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.
48
--------------------------------------------------------------------------------Capitalization
As ofJune 30, 2020 , our total debt as a percentage of total market capitalization was 34.9%, which was calculated based on the closing price per share of the Company's common stock of$58.70 onJune 30, 2020 as shown in the following table: Aggregate Principal Amount or % of Total Shares/Units at $ Value Market June 30, 2020 Equivalent Capitalization ($ in thousands) Debt: (1)(2) Unsecured Term Loan Facility$ 150,000 1.4 % Unsecured Senior Notes due 2023 300,000 2.8 % Unsecured Senior Notes due 2024 425,000 4.0 % Unsecured Senior Notes due 2025 400,000 3.8 % Unsecured Senior Notes Series A & B due 2026 250,000 2.4 % Unsecured Senior Notes due 2028 400,000 3.8 % Unsecured Senior Notes due 2029 400,000 3.8 % Unsecured Senior Notes Series A & B due 2027 & 250,000 2.4 %
2029
Unsecured Senior Notes due 2030 500,000 4.8 % Unsecured Senior Notes due 2031 350,000 3.3 % Secured debt 256,958 2.4 % Total debt$ 3,681,958 34.9 % Equity and Noncontrolling Interests in theOperating Partnership : (3) Common limited partnership units outstanding (4) 1,934,586$ 113,560 1.1 % Shares of common stock outstanding 115,176,538 6,760,863 64.0 % Total Equity and Noncontrolling Interests in the$ 6,874,423 65.1 %Operating Partnership Total Market Capitalization$ 10,556,381 100.0 %
________________________
(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.
(2) As of
revolving credit facility.
(3) Value based on closing price per share of our common stock of
(4) Includes common units of the
does not include noncontrolling interests in consolidated property
partnerships.
49--------------------------------------------------------------------------------
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.
50--------------------------------------------------------------------------------
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
June 30, 2020 December 31, 2019
(in thousands)
Outstanding borrowings $ - $ 245,000
Remaining borrowing capacity 750,000 505,000
Total borrowing capacity (1)
1.16 % 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
June 30, 2020 December 31, 2019
(in thousands)
Outstanding borrowings $ 150,000 $ 150,000
Remaining borrowing capacity - -
Total borrowing capacity (1) $ 150,000 $ 150,000
Interest rate (2) 1.28 % 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.
51-------------------------------------------------------------------------------- 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 (which has been and may continue to be constrained for some potential buyers due to the ongoing COVID-19 pandemic's impact on economic and market conditions, including the financial markets), 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. In the event we are unable to complete dispositions as planned, we may raise capital through other sources of liquidity including our available unsecured revolving credit facility or the public or private issuance of unsecured debt.
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. InMarch 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 six months endedJune 30, 2020 . Since commencement of our current at-the-market program, we have completed sales of 3,594,576 shares of common stock throughJune 30, 2020 . As ofJune 30, 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 or six months endedJune 30, 2020 . The following table sets forth information regarding settlements of forward equity sale agreements under our at-the-market offering program for the six months endedJune 30, 2020 : Six Months EndedJune 30, 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.
52
--------------------------------------------------------------------------------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. During the six months endedJune 30, 2020 , the Company's stock price ranged from$49.01 to$88.28 , an 80% swing, as a result of COVID-19 and the resultant impact on the capital markets and economy. If current conditions continue for an extended period of time, capital raising could be more challenging than under conditions prior to COVID-19. 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.
Unsecured and Secured Debt
The aggregate principal amount of the unsecured and secured debt of the
Aggregate Principal
Amount Outstanding
(in thousands)
Unsecured Term Loan Facility (1) $ 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
Unsecured Senior Notes due 2031
350,000
Secured Debt
256,958
Total Unsecured and Secured Debt
3,681,958
Less: Unamortized Net Discounts and Deferred Financing Costs (2) (26,740 ) Total Debt, Net $ 3,655,218 ________________________
(1) As of
revolving credit facility.
(2) 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.
Unsecured Senior Notes - Private Placement
OnApril 28, 2020 , theOperating Partnership entered into a Note Purchase Agreement in connection with the issuance and sale of$350.0 million principal amount of theOperating Partnership's 4.27% Senior Notes dueJanuary 31, 2031 (the "Notes"), pursuant to a private placement. The Notes mature on their due date, unless earlier redeemed or prepaid pursuant to the terms of the Note Purchase Agreement. Interest on the Notes is payable semi-annually in arrears onApril 18 andOctober 18 of each year beginningOctober 18, 2020 .
Debt Composition
The composition of theOperating Partnership's aggregate debt balances between secured and unsecured and fixed-rate and variable-rate debt as ofJune 30, 2020 andDecember 31, 2019 was as follows: 53 -------------------------------------------------------------------------------- Percentage of Total Debt (1)
Weighted Average Interest Rate (1)
June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019
Secured vs. unsecured:
Unsecured 93.0 % 92.8 % 3.8 % 3.8 %
Secured 7.0 % 7.2 % 3.9 % 3.9 %
Variable-rate vs. fixed-rate:
Variable-rate 4.1 % 11.0 % 1.3 % 2.8 %
Fixed-rate (2) 95.9 % 89.0 % 3.9 % 3.9 %
Stated rate (2) 3.8 % 3.8 %
GAAP effective rate (3) 3.9 % 3.8 %
GAAP effective rate including debt
issuance costs 4.0 % 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.
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 six months endedJune 30, 2020 . Other Liquidity Uses Development As ofJune 30, 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$638.7 million and committed an additional$446.0 million as ofJune 30, 2020 , of which$162.0 million is currently expected to be spent through the end of 2020. In addition, as ofJune 30, 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$740.0 million , net of retention, and committed an additional$175.0 million as ofJune 30, 2020 , of which$144.0 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$1.12 billion of which we have incurred approximately$1.11 billion , net of retention, and committed an additional$10.0 million as ofJune 30, 2020 , which is currently expected to be spent through the end of 2020. Furthermore, we currently believe we may spend up to$10.0 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 and to pay dividends and distributions to security holders. Our next debt maturities occur inJuly 2022 and relate to our unsecured revolving credit facility and term loan facility. 54 --------------------------------------------------------------------------------
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 ofJune 30, 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 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. As a result of the COVID-19 pandemic, we believe that for the remainder of 2020, we will likely reduce capital spending as a result of deferring non-essential capital projects at either our or our tenant's election, and that there may be a reduction in leasing activity when compared to the full year of 2019.
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, the
amount of our future borrowings 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). 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;
and
• 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.
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.
55
--------------------------------------------------------------------------------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 June 30, 2020 Total debt to total asset value less than 60% 28% Fixed charge coverage ratio greater than 1.5x 3.4x Unsecured debt ratio greater than 1.67x 3.32x Unencumbered asset pool debt service coverage greater than 1.75x
4.14x
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
9.8x
Secured debt to total asset value less than 40%
2%
Unencumbered asset pool value to unsecured debt greater than 150% 307%The Operating Partnership was in compliance with all of its debt covenants as ofJune 30, 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. In response to the COVID-19 pandemic, we have completed stress testing of our various financial covenants assuming decreases in rental income and determined that 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 six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 is as follows: Six Months Ended June 30, Dollar Percentage 2020 2019 Change Change ($ in thousands)
Net cash provided by operating activities
42,695 10.2 %
Net cash provided by financing activities 695,287 139,057 556,230 400.0 %
Net increase (decrease) in cash and cash
equivalents $ 544,968 $ (112,319 ) $ 657,287 585.2 %
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 $58.4 million ,
or 35.2%, for the six months ended June 30, 2020 compared to the six months
ended June 30, 2019 primarily due to cash rents received during the six months
ended June 30, 2020 from several tenants who had free rent and beneficial
occupancy periods during the six months ended June 30, 2019 . See additional
information under the caption "-Results of Operations."
56
--------------------------------------------------------------------------------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 decreased by$42.7 million or 10.2% for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 primarily due to lower expenditures for development properties and undeveloped land during the six months endedJune 30, 2020 .
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$556.2 million , for the six months endedJune 30, 2020 compared to the six months endedJune 30, 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, as well as the issuance of$350.0 million of 4.27% Senior Notes dueJanuary 31, 2031 during the six months endedJune 30, 2020 , partially offset by higher repayments on our unsecured revolving credit facility during the six months endedJune 30, 2020 .
Off-Balance Sheet Arrangements
As of
57
--------------------------------------------------------------------------------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 and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(inthousands)
Net income available to common stockholders$ 19,618 $ 42,194 $ 59,435 $ 79,097 Adjustments: Net income attributable to noncontrolling common units of the Operating Partnership 367 871 1,072 1,571 Net income attributable to noncontrolling interests in consolidated property partnerships 4,367 4,150 9,263 8,341 Depreciation and amortization of real estate assets 75,981 67,011 148,419 131,982 Gains on sales of depreciable real estate - (7,169 ) - (7,169 ) Funds From Operations attributable to noncontrolling interests in consolidated property partnerships (7,244 ) (7,152 )
(14,927 ) (14,105 )
Funds From Operations (1)(2)
________________________
(1) Reported amounts are attributable to common stockholders, common unitholders
and restricted stock unitholders.
(2) FFO available to common stockholders and unitholders includes amortization of
deferred revenue related to tenant-funded tenant improvements of
and
respectively, and
June 30, 2020 and 2019, respectively. 58
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