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 ,Texas 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, 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, 2020 and their respective other filings with the 27 --------------------------------------------------------------------------------SEC . 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 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 inthe United States . We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties inGreater Los Angeles ,San Diego County , theSan Francisco Bay Area , thePacific Northwest andAustin, Texas , 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 generally conduct substantially all of our operations through theOperating Partnership . We owned an approximate 99.0%, 99.0%, and 98.3% general partnership interest in theOperating Partnership as ofJune 30, 2021 ,December 31, 2020 andJune 30, 2020 . As ofJune 30, 2021 , all of our properties are held in fee except for the fifteen 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 worked remotely beginning inMarch 2020 . Our employees began transitioning back to the office during the three months endedMarch 31, 2021 and as ofJune 30, 2021 , all of our employees have returned to our offices on a full-time basis. SinceMarch 2020 , we have been 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 hold our occupants' health at the highest level of importance and have taken extensive steps to facilitate safe work environments. We engaged an industrial 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. Our buildings have remained open to tenants and we have begun to see certain tenants returning to the workplace. We have been in communication with tenants regarding return to work protocols and safety measures, which meet or exceed local and state government guidelines. Our properties received the highest level of pandemic preparedness review through a third-party who verified that all recommendedCDC and WHO measures have been successfully implemented, including on-site air, water and germ testing. We implemented a rent relief program for the majority of our retail tenants whereby we deferred rent fromApril 2020 toJune 2021 in exchange for an extension of their current lease term for an equivalent number of months at future rental rates. We are no longer offering rent relief to the majority of our retail tenants and we will evaluate any future retail rent relief requests on a specific case by case basis and only consider those which have a justifiable financial basis. Additionally, the form of relief provided to retail tenants may vary in the future. We did not create a rent relief program for our office tenants. Instead, we evaluate office rent relief requests on a specific case by case basis and only consider those which have a justifiable financial basis. 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 that 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. 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. Not all tenant relief requests will ultimately result in lease amendments and we have not relinquished our contractual rights under our lease agreements where rent concessions have not yet been granted. Our rent collections and rent relief requests to-date may not be indicative of collections, concessions or requests in future periods. 28 -------------------------------------------------------------------------------- For the three months endedJune 30, 2021 , we collected approximately 97% of our gross rent billings, which is consistent with our 2020 collections. 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 endedJune 30, 2021 . 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. Several vaccines for COVID-19 have received emergency use authorization from the FDA and are currently being administered across the country. Despite growing vaccination rates, we believe COVID-19 will continue to impact the normal operations of our tenants. The continued impact of the pandemic on our and our tenants' businesses is largely dependent on efforts to stem the spread of COVID-19, including governmental efforts to distribute vaccines and overall vaccination rates in the areas in which we own properties and/or have development projects. Refer to "Part I, Item IA. Risk Factors" in our annual report on Form 10-K for the year endedDecember 31, 2020 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 and inJune 2021 we expanded intoAustin, Texas through our acquisition of theIndeed Tower , which is in the tenant improvement phase. 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. Consistent with 2020, our development portfolio was largely unaffected by the COVID-19 pandemic during the six months endedJune 30, 2021 ; however, the COVID-19 pandemic, and future restrictions intended to prevent its spread if case rates surge again, 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, and may delay the start of construction on our future development pipeline projects. Refer to "Part I, Item IA. Risk Factors" in our annual report on Form 10-K for the year endedDecember 31, 2020 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. 29 --------------------------------------------------------------------------------
Stabilized Development Projects
During the six months ended
•9455 Towne Centre Drive, University Towne Center,San Diego, California . InMarch 2019 , we commenced construction on this project, which totals approximately 160,444 square feet of office space at a total estimated investment of$95.0 million . The project is 100% leased to a Fortune 50 publicly traded company. We completed construction and commenced revenue recognition during the three months endedMarch 31, 2021 . •12860 El Camino Real (One Paseo -Office Building 1),Del Mar ,San Diego, California . We commenced construction on the office component of this project inDecember 2018 , which encompasses 92,042 square feet of office space at a total estimated investment of$65.0 million . We completed construction on the building inJune 2020 . AtJune 30, 2021 , the building was 100% leased and we had commenced revenue recognition on approximately 82% of the building. •Jardine,Hollywood, California . We commenced construction on the residential component of this project inDecember 2018 , which encompasses 193 residential units at a total estimated investment of$185.0 million . We completed construction and commenced revenue recognition during the three months endedJune 30, 2021 .
In-Process Development Projects - Tenant Improvement
As of
•333 Dexter,South Lake Union ,Seattle, Washington . We commenced construction on this project inJune 2017 . This project encompasses approximately 635,000 square feet of office space at a total estimated investment of$410.0 million and 100% of the project is leased to a Fortune 50 publicly traded company. InJune 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 reach stabilization in the second half of 2022. •One Paseo - Office (Building 2),Del Mar ,San Diego, California . We commenced construction on the office component of this project inDecember 2018 , which encompasses 195,000 square feet of office space at a total estimated investment of$145.0 million . AtJune 30, 2021 , the building was 100% leased. We completed construction inJune 2020 and as of the date of this report, we have commenced revenue recognition on approximately 89% of the project. We currently expect the project to reach stabilization in the third quarter of 2021. •Kilroy Oyster Point (Phase 1),South San Francisco, California . InMarch 2019 , we commenced construction on Phase 1 of this 39-acre life science campus situated on the waterfront inSouth San Francisco . This first phase encompasses approximately 656,000 square feet of office space at a total estimated investment of$570.0 million and is 100% leased to two tenants. We currently expect this project to reach stabilization in the fourth quarter of 2021. •Indeed Tower, Austin CBD,Austin, Texas . We acquired this project upon core/shell completion inJune 2021 . This project encompasses approximately 734,000 square feet of office space at a total estimated investment of$680.0 million and is 57% leased to four tenants with 42% of the space leased to Indeed.com through 2034. We currently expect this project to reach stabilization in the fourth quarter of 2022.
In-Process Development Projects - Under Construction
As of
•2100 Kettner,Little Italy ,San Diego, California . We commenced construction on this project inSeptember 2019 . This project is comprised of approximately 235,000 square feet of office space for a total estimated investment of$140.0 million . We currently expect this project to progress to the tenant improvement phase in the third quarter of 2021. •Kilroy Oyster Point (Phase 2),South San Francisco, California . InJune 2021 , we commenced construction on Phase 2 of this 39-acre life science campus situated on the waterfront inSouth San Francisco . The second phase encompasses approximately 875,000 square feet of office space at a total estimated investment of$940.0 million . 30 --------------------------------------------------------------------------------
In-Process Development Projects - Committed
As of
•9514 Towne Centre Drive, University Towne Center,San Diego, California . We expect to commence construction on this project during the fourth quarter of 2021, which is comprised of approximately 71,000 square feet of office space at a total estimated investment of$60.0 million . This project is currently committed with an executed definitive agreement for 100% of the building.
Future Development Pipeline
As ofJune 30, 2021 , our future development pipeline included six 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 5.5 million rentable square feet for a total estimated investment of approximately$5.0 billion to$7.0 billion , depending on successfully obtaining entitlements and market conditions. The following table sets forth information about our future development pipeline. Total Costs as of 6/30/2021 Approx. Developable ($ in millions) Future Development Pipeline Location Square Feet (1) (2) San Diego County Santa Fe Summit - Phases 2 and 3 56 Corridor 600,000 - 650,000$ 83.3 2045 Pacific Highway Little Italy 275,000 47.4 Kilroy East Village East Village TBD 59.7San Francisco Bay Area Kilroy Oyster Point - Phases 3 and 4 South San Francisco 875,000 - 1,000,000 211.6 Flower Mart SOMA 2,300,000 448.0 Greater Seattle SIX0 - Office & Residential Seattle CBD TBD 148.8 TOTAL:$ 998.8
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(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 ofJune 30, 2021 . 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, 2021 , we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately$1.8 billion , as it was determined these projects qualified for interest and other carrying cost capitalization under GAAP. 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. 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, 2021 , we capitalized$18.1 million and$35.0 million , respectively, of interest to our qualifying development projects. 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, 2021 , we capitalized$4.9 million and$10.4 million , respectively, of internal costs 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 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 31 -------------------------------------------------------------------------------- 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. In connection with our capital recycling strategy, during the six months endedJune 30, 2021 , we completed the sale of one operating property inSan Francisco, California to an unaffiliated third party for gross proceeds of$1.08 billion , or approximately$1,440 per square foot. A portion of the proceeds from the sale were used to fund the acquisition of two development properties totaling$622.2 million . 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. During the six months endedJune 30, 2021 , we acquired two development properties in two transactions for a total cash purchase price of$622.2 million . 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 and strategic operating properties. We focus on growth opportunities primarily in 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 we believe have the potential to 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 2021, 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, forfeitures and other factors. Consequently, we cannot predict the amounts that will be recorded in future periods related to such incentive compensation. As ofJune 30, 2021 , there was approximately$41.8 million of total unrecognized compensation cost related to outstanding nonvested RSUs issued under share-based compensation arrangements. Those costs are expected to be recognized over a weighted-average period of 1.5 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$41.8 million of unrecognized compensation cost does not reflect the future compensation cost for any potential share-based awards that may be issued subsequent toJune 30, 2021 . For additional information regarding our equity incentive awards, see Note 9 "Share-Based Compensation" to our consolidated financial statements included in this report. 32 --------------------------------------------------------------------------------
Information on Leases Commenced and Executed
Leasing Activity and Changes in Rental Rates. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties, newly acquired properties with vacant space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Negative trends in one or more of these factors could adversely affect our rental income in future periods. The following tables set forth certain information regarding leasing activity for our stabilized portfolio during the three and six months endedJune 30, 2021 . For Leases Commenced 1st & 2nd Generation (1)(2) 2nd Generation (1)(2) Weighted Number of Leases (3) Rentable Square Feet (3) Changes in Average Retention Rates TI/LC per TI/LC per Sq. Changes in Cash Rents Lease Term (in New Renewal New Renewal (4) Sq. Ft. (5) Ft. / Year Rents (6)(7) (8) months) Three Months EndedJune 30, 2021 10 8 138,543 65,571 39.1 %$ 61.73 $ 10.43 45.2 % 24.0 % 71 Six Months EndedJune 30, 2021 22 21 594,296 206,271 40.8 %$ 74.24 $ 11.00 54.2 % 31.5 % 81 For Leases Executed (9) 1st & 2nd Generation (1)(2) 2nd Generation (1)(2) Number of Leases (3) Rentable Square Feet (3) TI/LC per Weighted Average TI/LC per Sq. Ft. Sq. Ft. / Changes in Changes in Lease Term New Renewal New Renewal (5) Year Rents (6)(7) Cash Rents (8) (in months) Three Months EndedJune 30, 2021 10 8 131,933 65,571$ 48.06 $ 9.01 25.6 % 8.7 % 64 Six Months EndedJune 30, 2021 19 21 198,592 206,271$ 30.48 $ 7.32 20.1 % 6.7 % 50
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(1)Includes 100% of consolidated property partnerships. (2)First generation leasing includes space where we have made capital expenditures that result in additional revenue generated when the space is re-leased. Second generation leasing includes space where we have made capital expenditures to maintain the current market revenue stream. (3)Represents leasing activity for leases that commenced or were signed during the period, including first and second generation space, net of month-to-month leases. Excludes leasing on new construction. (4)Calculated as the percentage of space either renewed or expanded into by existing tenants or subtenants at lease expiration. (5)Tenant improvements and leasing commissions per square foot exclude tenant-funded tenant improvements. (6)Calculated as the change between GAAP rents for new/renewed leases and the expiring GAAP rents for the same space. Excludes leases for which the space was vacant longer than one year or vacant when the property was acquired. (7)Excludes commenced and executed leases of approximately 55,098 and 16,136 rentable square feet, respectively, for the three months endedJune 30, 2021 and commenced and executed leases of approximately 222,835 and 61,638 rentable square feet, respectively, for the six months endedJune 30, 2021 , for which the space was vacant longer than one year or being leased for the first time. Space vacant for more than one year is excluded from our change in rents calculations to provide a more meaningful market comparison. (8)Calculated as the change between stated rents for new/renewed leases and the expiring stated rents for the same space. Excludes leases for which the space was vacant longer than one year or vacant when the property was acquired. (9)During the three months endedJune 30, 2021 , 10 new leases totaling 137,438 rentable square feet were signed but not commenced as ofJune 30, 2021 . During the six months endedJune 30, 2021 , 12 new leases totaling 149,577 rentable square feet were signed but not commenced as ofJune 30, 2021 . Our rental rates and occupancy are impacted by general economic conditions, including the pace of regional economic growth and access to capital. 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 the low level of recent transaction volume as a result of the COVID-19 pandemic, 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, 2021 . As restrictions intended to prevent the spread of COVID-19 began to be lifted during the six months endedJune 30, 2021 , we saw an increase in prospective tenant tours and inquiries. While we do not believe that our development leasing and ability to renew leases scheduled to expire has been significantly impacted by the COVID-19 pandemic, we do believe that the impact of the restrictions and social distancing guidelines and the economic uncertainty caused by the COVID-19 pandemic has impacted the timing and volume of leasing and may continue to do so in the future, particularly if case rates surge again. Additionally, decreased demand, increased competition (including sublease space available from our tenants) 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. 33 -------------------------------------------------------------------------------- Scheduled Lease Expirations. The following tables set forth certain information regarding our lease expirations for our stabilized portfolio for the remainder of 2021 and the next five years and by region for the remainder of 2021 and in 2022. Lease Expirations (1) Number of Annualized % of Total Annualized Base Expiring % of Total Base Rent Annualized Base Rent per Sq. Ft. Year of Lease Expiration Leases Total Square Feet Leased Sq. Ft. (2)(3) Rent (2) (2) (in thousands) Remainder of 2021 (4) 33 333,304 2.6 %$ 14,887 2.2 % $ 44.66 2022 (4) 72 768,814 6.0 % 31,827 4.7 % 41.40 2023 76 1,196,717 9.4 % 63,640 9.3 % 53.18 2024 63 989,196 7.7 % 48,365 7.1 % 48.89 2025 56 773,736 6.0 % 38,943 5.7 % 50.33 2026 43 1,717,490 13.4 % 78,698 11.5 % 45.82 Total 343 5,779,257 45.1 %$ 276,360 40.5 % $ 47.82 % of Total # of Total % of Total Annualized Annualized Annualized Rent Year Region Expiring Leases Square Feet Leased Sq. Ft. Base Rent (2)(3) Base Rent (2) per Sq. Ft. (2)Greater Los Angeles 23 143,422 1.1 % $ 5,902 0.9 % $ 41.15 2021 (4)San Diego County 3 11,967 0.1 % 415 0.1 % 34.68San Francisco Bay Area 6 176,643 1.4 % 8,512 1.2 % 48.19Greater Seattle 1 1,272 - % 58 - % 45.60 Total 33 333,304 2.6 % $ 14,887 2.2 % $ 44.66Greater Los Angeles 53 473,871 3.7 % $ 19,973 2.9 % $ 42.15 2022 (4)San Diego County 10 214,463 1.7 % 7,617 1.1 % 35.52San Francisco Bay Area 5 50,108 0.4 % 3,180 0.5 % 63.46Greater Seattle 4 30,372 0.2 % 1,057 0.2 % 34.80 Total 72 768,814 6.0 % $ 31,827 4.7 % $ 41.40
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(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 ofJune 30, 2021 , space leased under month-to-month leases, storage leases, vacant space and future lease renewal options not executed as ofJune 30, 2021 . (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. (4)Adjusting for leases executed as ofJune 30, 2021 but not yet commenced, the 2021 and 2022 expirations would be reduced by 78,759 and 50,343 square feet, respectively. In addition to the 1.2 million rentable square feet, or 8.2%, of currently available space in our stabilized portfolio, leases representing approximately 2.6% and 6.0% of the occupied square footage of our stabilized portfolio are scheduled to expire during the remainder of 2021 and in 2022, respectively. The leases scheduled to expire during the remainder of 2021 and in 2022 represent approximately 1.1 million rentable square feet or 6.9% of our total annualized base rental revenue. Adjusting for leases executed as ofJune 30, 2021 but not yet commenced, the remaining 2021 and 2022 expirations would be 254,545 and 718,471 square feet, respectively. Sublease Space. Of our leased space as ofJune 30, 2021 , approximately 1,459,413 rentable square feet, or 10.3% of the square footage in our stabilized portfolio, was available for sublease, primarily in theSan Francisco Bay Area region. Of the 10.3% of available sublease space in our stabilized portfolio as ofJune 30, 2021 , approximately 7.4% was vacant space, and the remaining 2.9% was occupied. Of the approximately 1,459,413 rentable square feet available for sublease as ofJune 30, 2021 , approximately 12,146 rentable square feet representing 4 leases are scheduled to expire in 2021, and approximately 50,465 rentable square feet representing 8 leases are scheduled to expire in 2022. 34 --------------------------------------------------------------------------------
Stabilized Portfolio Information
As ofJune 30, 2021 , our stabilized portfolio was comprised of 118 office properties encompassing an aggregate of approximately 14.2 million rentable square feet and 1,001 residential units. 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 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 and life science 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 or phases of projects are placed in service. We did not have any redevelopment or held for sale properties atJune 30, 2021 . Our stabilized portfolio also excludes our future development pipeline, which as ofJune 30, 2021 was comprised of six potential development sites, representing approximately 59 gross acres of undeveloped land on which we believe we have the potential to develop more than 5.5 million rentable square feet, depending upon economic conditions. As ofJune 30, 2021 , the following properties were excluded from our stabilized portfolio: Number of Estimated Rentable Properties/Projects Square Feet (1) In-process development projects - tenant improvement (2) 4 2,220,000 In-process development projects - under construction 2 1,110,000
________________________
(1)Estimated rentable square feet upon completion. (2)Includes the development property acquired inAustin, Texas during the three months endedJune 30, 2021 . Refer to Note 2 "Acquisitions" to our consolidated financial statements included in this report for additional information. The following table reconciles the changes in the rentable square feet in our stabilized office portfolio of operating properties fromJune 30, 2020 toJune 30, 2021 : Number of Rentable Buildings Square Feet Total as of June 30, 2020 114 14,327,872 Completed development properties placed in-service 6 613,874 Dispositions (2) (837,517) Remeasurement - 47,445 Total as of June 30, 2021 (1) 118
14,151,674
________________________
(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 Occupancy at (1)
Region Buildings Rentable Square Feet 6/30/2021 3/31/2021 12/31/2020
Greater Los Angeles 55 4,409,591 86.7 % 87.5 % 88.1 %
San Diego County 24 2,410,303 91.0 % 87.4 % 85.2 %
San Francisco Bay Area 31 5,527,722 94.7 % 94.3 % 94.5 %
Greater Seattle 8 1,804,058 96.5 % 97.8 % 94.7 %
Total Stabilized Office Portfolio 118 14,151,674 91.8 % 91.5 % 91.2 %
35--------------------------------------------------------------------------------
Average Occupancy
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Stabilized Office Portfolio (1) 91.7 % 92.8 % 91.6 % 93.2 %
Same Store Portfolio (2) 91.4 % 92.4 % 91.1 % 93.0 %
Residential Portfolio (3) 71.9 % 85.0 % 70.6 % 89.3 %
________________________
(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. Represents physical and economic occupancy. (2)Occupancy percentages reported are based on office properties owned and stabilized as ofJanuary 1, 2020 and still owned and stabilized as ofJune 30, 2021 and exclude our residential portfolio. See discussion under "Results of Operations" for additional information. (3)Our residential portfolio consists of our 200-unit residential tower and 193-unit Jardine project inHollywood, California and 608 residential units at our One Paseo mixed-use project inDel Mar, California .
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, 2021 . Percentage of Annualized Base Total Annualized Percentage of Rental Revenue (1) Base RentalTotal Rentable Square TenantName Region (2) Rentable Square Feet Revenue Feet Year(s) of Lease Expiration (in thousands) GM Cruise, LLC San Francisco Bay Area $ 36,337 374,618 5.2 % 2.6 % 2031LinkedIn Corporation / Microsoft Corporation San Francisco Bay Area 29,752 663,460 4.3 % 4.6 % 2024 / 2026 San Francisco Bay Area Adobe Systems, Inc. / Greater Seattle 27,897 513,111 4.0 % 3.5 % 2027 / 2031 salesforce.com, inc. San Francisco Bay Area 24,076 451,763 3.4 % 3.1 % 2031 / 2032 DIRECTV, LLC (3) Greater Los Angeles 23,152 684,411 3.3 % 4.7 % 2027 Fortune 50 Publicly-Traded Greater Seattle / San Company Diego County 23,059 472,427 3.3 % 3.3 % 2032 / 2033 Box, Inc. San Francisco Bay Area 22,441 372,673 3.2 % 2.6 % 2021 / 2028 Okta, Inc. San Francisco Bay Area 22,387 273,371 3.2 % 1.9 % 2028 Netflix, Inc. Greater Los Angeles 21,943 362,868 3.1 % 2.5 % 2021 / 2032 DoorDash, Inc. San Francisco Bay Area 18,650 184,968 2.7 % 1.3 % 2032 Amazon.comGreater Seattle 16,923 405,278 2.4 % 2.8 % 2023 / 2029 / 2030 Synopsys, Inc. San Francisco Bay Area 15,492 342,891 2.2 % 2.4 % 2030 Riot Games, Inc. Greater Los Angeles 15,152 243,051 2.2 % 1.7 % 2023 / 2024 Neurocrine Biosciences, Inc. San Diego County 13,914 254,578 2.0 % 1.8 % 2024 / 2031 Viacom International, Inc. Greater Los Angeles 13,718 211,343 2.0 % 1.5 % 2028 Total $ 324,893 5,810,811 46.5 % 40.3 %
________________________
(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 ofJune 30, 2021 . (2)Includes 100% of the annualized base rental revenues of consolidated property partnerships. (3)OnApril 5, 2021 ,DIRECTV, LLC's successor-in-interest ("DIRECTV") filed suit inLos Angeles Superior Court against a subsidiary of the Company, claiming that DIRECTV properly exercised its contraction rights as to certain space leased by DIRECTV at the property located at2250 East Imperial Highway ,El Segundo, California . The Company strongly disagrees with the contentions made by DIRECTV and will vigorously defend the litigation. 36
--------------------------------------------------------------------------------
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:
•Same Store Properties - includes the consolidated results of all of the 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 ofJanuary 1, 2020 and still owned and included in the stabilized portfolio as ofJune 30, 2021 , including our 200-unit residential tower inHollywood, California ; •Development Properties - includes the results generated by certain of our in-process development projects, expenses for certain of our future development project and the results generated by the following stabilized development properties: •One retail development project that was added to the stabilized portfolio in the first quarter of 2020; •One office development project that was added to the stabilized portfolio in the fourth quarter of 2020; •One office development project that was added to the stabilized portfolio in the first quarter of 2021 •One office building that was added to the stabilized portfolio in the second quarter of 2021; •608 residential units at our One Paseo mixed-use project inDel Mar, California that were added to the stabilized portfolio in the third quarter of 2020; and •193 residential units at our Jardine project inHollywood, California that were added to the stabilized portfolio in the second quarter of 2021; and
•Disposition Properties- includes the results of one property disposed of in the fourth quarter of 2020 and one property disposed of in the first quarter of 2021.
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 111 13,441,929
Stabilized Development Properties (1) 7 709,745
Total Stabilized Portfolio 118 14,151,674
________________________(1)Excludes development projects in the tenant improvement phase, our in-process development projects and future development projects.
37
--------------------------------------------------------------------------------
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
2021 2020 Change Change
($ in thousands)
Reconciliation of Net Income Available to Common
Stockholders to Net Operating Income, as defined:
Net Income Available to Common Stockholders $ 35,839 $ 19,618 $ 16,221 82.7 %
Net income attributable to noncontrolling common units
of the
354 367 (13) (3.5) %
Net income attributable to noncontrolling interests in consolidated property partnerships
6,687 4,367 2,320 53.1 %
Net income $ 42,880 $ 24,352 $ 18,528 76.1 %
Unallocated expense (income):
General and administrative expenses 24,507 38,597 (14,090) (36.5) %
Leasing costs 883 1,330 (447) (33.6) %
Depreciation and amortization 73,589 80,085 (6,496) (8.1) %
Interest income and other net investment (gain) loss (1,337) (2,838) 1,501 (52.9) %
Interest expense 21,390 15,884 5,506 34.7 %
Gain on sale of depreciable operating property (543) - (543) 100.0 %
Net Operating Income, as defined $ 161,369 $ 157,410 $ 3,959 2.5 %
The following tables summarize our Net Operating Income, as defined, for our
total portfolio for the three months ended
Three Months Ended June 30,
2021 2020
Same Store Develop-ment Disposition Total Same Store Develop-ment Disposition Total
(in thousands)
Operating revenues:
Rental income $ 201,009 $ 24,284 $ (820) $ 224,473 $ 191,136 $ 4,956 $ 22,264 $ 218,356
Other property income 1,249 256 5 1,510 919 132 16 1,067
Total 202,258 24,540 (815) 225,983 192,055 5,088 22,280 219,423
Property and related expenses:
Property expenses 36,141 4,260 81 40,482 34,065 1,257 2,507 37,829
Real estate taxes 18,927 4,094 (912) 22,109 17,978 1,065 2,811 21,854
Ground leases 1,985 38 - 2,023 2,330 - - 2,330
Total 57,053 8,392 (831) 64,614 54,373 2,322 5,318 62,013
Net Operating Income,
as defined $ 145,205 $ 16,148 $ 16 $ 161,369 $ 137,682 $ 2,766 $ 16,962 $ 157,410
38
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Three Months Ended
Same Store Development Disposition Total
Percent Percent Dollar Percent
Dollar Change Change Dollar Change Change Dollar Change Percent Change Change Change
($ in thousands)
Operating revenues:
Rental income $ 9,873 5.2 % $ 19,328 390.0 % $ (23,084) (103.7) % $ 6,117 2.8 %
Other property income 330 35.9 % 124 93.9 % (11) (68.8) % 443 41.5 %
Total 10,203 5.3 % 19,452 382.3 % (23,095) (103.7) % 6,560 3.0 %
Property and related
expenses:
Property expenses 2,076 6.1 % 3,003 238.9 % (2,426) (96.8) % 2,653 7.0 %
Real estate taxes 949 5.3 % 3,029 284.4 % (3,723) (132.4) % 255 1.2 %
Ground leases (345) (14.8) % 38 100.0 % - - % (307) (13.2) %
Total 2,680 4.9 % 6,070 261.4 % (6,149) (115.6) % 2,601 4.2 %
Net Operating Income, as
defined $ 7,523 5.5 % $ 13,382 483.8 % $ (16,946) (99.9) % $ 3,959 2.5 %
Net Operating Income increased
•An increase in Net Operating Income of
•An increase in total operating revenues of
•$6.2 million increase due to lower charges against rental income in 2021
related to tenant creditworthiness considerations primarily as a result of
COVID-19, predominantly for retail tenants, of which
•A net$1.9 million increase resulting from a$2.7 million increase from new leases and renewals at higher rates primarily in theSan Francisco Bay Area andSan Diego County regions, offset by a$0.8 million decrease due to lower occupancy primarily in theGreater Los Angeles region;
•$1.7 million increase in the tenant reimbursement component of rental income related to:
•$1.9 million increase primarily due to higher reimbursable operating expenses;
•$0.4 million increase due to higher occupancy primarily related to two tenants; partially offset by
•$0.6 million decrease due to a property tax exemption related to one tenant; and
•$0.4 million increase due to a termination fee received in 2021 related to one tenant;
•An increase in property and related expenses of
•$1.4 million increase in property expenses including repairs and maintenance,
engineering, utilities, security, parking, and various other recurring expenses
as tenants begin returning to the office;
•$0.9 million increase in real estate taxes due to refunds received in 2020
related to a lower assessment on one property and higher annual property taxes
across the portfolio; partially offset by a property tax exemption related to
one tenant;
•$0.7 million increase due to insurance refunds received in 2020 related to
non-recurring expenses and increases in various other non-recurring expenses;
partially offset by
39
--------------------------------------------------------------------------------•$0.3 million decrease in ground lease expense due to lower property taxes for one ground lease and lower percentage rent for two ground leases;
•An increase in Net Operating Income of
•A decrease in Net Operating Income of
Other Expenses and Income
General and Administrative Expenses
General and administrative expenses decreased by approximately$14.1 million , or 36.5%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily due to the following: •A decrease of$14.5 million in compensation related expenses, primarily due to severance costs in 2020 related to the departure of an executive officer and certain other employees; and •A decrease of$0.9 million related to the mark-to-market adjustment for the Company's deferred compensation plan, which is offset by gains on the underlying marketable securities included in interest income and other net investment gains in the consolidated statements of operations; partially offset by
•An increase of
Leasing Costs
Leasing costs decreased by$0.4 million or 33.6%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily due to changes in personnel.
Depreciation and Amortization
Depreciation and amortization decreased
•A decrease of
•A decrease of
•An increase of
Interest Expense
The following table sets forth our gross interest expense, including debt discounts and deferred financing cost amortization, and capitalized interest, including capitalized debt discounts and deferred financing cost amortization, for the three months endedJune 30, 2021 and 2020: Three Months Ended June 30, Dollar Percentage 2021 2020 Change Change (in thousands) Gross interest expense$ 39,463 $ 36,400 $ 3,063 8.4 % Capitalized interest and deferred financing costs (18,073) (20,516) 2,443 (11.9) % Interest expense$ 21,390 $ 15,884 $ 5,506 34.7 % Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased$3.1 million , or 8.4%, for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 primarily due to an increase in the average outstanding debt balance for the three months endedJune 30, 2021 . 40 -------------------------------------------------------------------------------- Capitalized interest and deferred financing costs decreased$2.4 million , or 11.9%, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily due to a decrease in the average development asset balances qualifying for interest capitalization during the three months endedJune 30, 2021 . During the three months endedJune 30, 2021 and 2020, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately$1.8 billion and$2.1 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 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.
Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships
Net income attributable to noncontrolling interests in consolidated property partnerships increased$2.3 million or 53.1% or the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily due to new leases at higher rates at two properties held in two property partnerships. The amounts reported for the three months endedJune 30, 2021 and 2020 are comprised of the noncontrolling interest's share of net income for100 First Street Member, LLC ("100First LLC ") and303 Second Street Member, LLC ("303Second LLC ") and the noncontrolling interest's share of net income forRedwood City Partners, LLC ("Redwood LLC "). 41 --------------------------------------------------------------------------------
Comparison of the Six Months Ended
The following table summarizes our Net Operating Income, as defined, for our
total portfolio for the six months ended
Six Months Ended June 30, Dollar Percentage
2021 2020 Change Change
($ in thousands)
Reconciliation of Net Income Available to Common
Stockholders to Net Operating Income, as defined:
Net Income Available to Common Stockholders $ 533,470 $ 59,435 $ 474,035 797.6 %
Net income attributable to noncontrolling common units
of the
5,240 1,072 4,168 388.8 %
Net income attributable to noncontrolling interests in consolidated property partnerships
11,581 9,263 2,318 25.0 %
Net income $ 550,291 $ 69,770 $ 480,521 688.7 %
Unallocated expense (income):
General and administrative expenses 46,492 57,607 (11,115) (19.3) %
Leasing Costs 1,575 2,786 (1,211) (43.5) %
Depreciation and amortization 149,521 154,455 (4,934) (3.2) %
Interest income and other net investment gain (2,710) 290 (3,000) (1,034.5) %
Interest expense 43,724 30,328 13,396 44.2 %
Gains on sales of depreciable operating properties (457,831) - (457,831) (100.0) %
Net Operating Income, as defined $ 331,062 $ 315,236 $ 15,826 5.0 %
The following tables summarize our Net Operating Income, as defined, for our
total portfolio for the six months ended
Six Months Ended June 30,
2021 2020
Same Store Develop-ment Disposition Total Same Store Develop-ment Disposition Total
(in thousands)
Operating revenues:
Rental income $ 393,778 $ 46,118 $ 19,233 $ 459,129 $ 387,406 $ 8,372 $ 41,211 $ 436,989
Other property income 2,013 470 17 2,500 3,183 282 297 3,762
Total 395,791 46,588 19,250 461,629 390,589 8,654 41,508 440,751
Property and related expenses:
Property expenses 69,861 7,350 2,130 79,341 70,276 2,472 4,064 76,812
Real estate taxes 37,749 7,788 1,838 47,375 36,784 1,973 5,299 44,056
Ground leases 3,813 38 - 3,851 4,647 - - 4,647
Total 111,423 15,176 3,968 130,567 111,707 4,445 9,363 125,515
Net Operating Income,
as defined $ 284,368 $ 31,412 $ 15,282 $ 331,062 $ 278,882 $ 4,209 $ 32,145 $ 315,236
42
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Six Months Ended June
30, 2021 as compared to the Six Months Ended
Same Store Development Disposition Total
Dollar Percent Percent Percent Percent
Change Change Dollar Change Change Dollar Change Change Dollar Change Change
($ in thousands)Operating revenues: Rental income$ 6,372 1.6 %$ 37,746 450.9 %$ (21,978) (53.3) %$ 22,140 5.1 % Other property income (1,170) (36.8) % 188 66.7 % (280) (94.3) % (1,262) (33.5) % Total 5,202 1.3 % 37,934 438.3 % (22,258) (53.6) % 20,878 4.7 % Property and related expenses: Property expenses (415) (0.6) % 4,878 197.3 % (1,934) (47.6) % 2,529 3.3 % Real estate taxes 965 2.6 % 5,815 294.7 % (3,461) (65.3) % 3,319 7.5 % Ground leases (834) (17.9) % 38 100.0 % - - % (796) (17.1) % Total (284) (0.3) % 10,731 241.4 % (5,395) (57.6) % 5,052 4.0 % Net Operating Income, as defined$ 5,486 2.0 %$ 27,203 646.3 %$ (16,863) (52.5) %$ 15,826 5.0 %
Net Operating Income increased
•An increase of
•An increase in total operating revenues of
•$7.9 million increase primarily due to lower charges against rental income related to tenant creditworthiness considerations primarily as a result of the COVID-19 pandemic; •$0.8 million increase in the tenant reimbursements component of rental income due to higher operating expenses, higher occupancy, and base year adjustments for certain properties, partially offset by a property tax exemption for one tenant and abatements related to one tenant; and
•$0.4 million increase due to early lease termination fees received in 2021 primarily related to one tenant; partially offset by
•$3.6 million decrease due to lower parking income, of which$2.4 million relates to a reduction in the number of monthly parking spaces rented as a result of COVID-19 stay-at-home orders and$1.2 million relates to lower transient and special event parking income at a number of properties in theSan Francisco Bay Area ,Greater Seattle andGreater 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; and
•$0.2 million decrease primarily due to lower occupancy in the
•$0.4 million decrease in property expenses primarily due to a decrease in reimbursable expenses such as utilities, parking, and janitorial, partially offset by an increase in various non-recurring expenses; and
•$0.8 million decrease in ground rent due to reductions in property taxes related to two ground lease land parcels and lower percentage rent; partially offset by
•$1.0 million increase in real estate taxes due to an increase in annual taxes across the portfolio, refunds received in 2020 related to a reduced assessed value for one property, partially offset by a property tax exemption related to one property;
•An increase of
•A decrease of
43
--------------------------------------------------------------------------------Other Expenses and Income
General and Administrative Expenses
General and administrative expenses decreased$11.1 million , or 19.3%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily due to the following: •A decrease of$12.6 million in compensation related expenses, primarily due to severance costs related to the departure of an executive officer and certain other employees in 2020; partially offset by •An increase of$1.5 million related to the mark-to-market adjustment for the Company's deferred compensation plan, which is offset by gains on the underlying marketable securities included in interest income and other net investment gains in the consolidated statements of operations.
Leasing Costs
Leasing costs decreased by$1.2 million or 43.5%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily due to changes in personnel and a lower level of leasing activity during the six months endedJune 30, 2021 .
Depreciation and Amortization
Depreciation and amortization decreased
•A decrease of
•A decrease of
•An increase of
Interest Expense
The following table sets forth our gross interest expense, including debt discounts and deferred financing cost amortization, and capitalized interest, including capitalized debt discounts and deferred financing cost amortization for the six months endedJune 30, 2021 and 2020: Six Months Ended June 30, Dollar Percentage 2021 2020 Change Change (in thousands) Gross interest expense$ 78,705 $ 72,262 $ 6,443 8.9 % Capitalized interest and deferred financing costs (34,981) (41,934) 6,953 (16.6) % Interest expense$ 43,724 $ 30,328 $ 13,396 44.2 % Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased$6.4 million or 8.9% for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 primarily due to an increase in our average debt balance for the six months endedJune 30, 2021 . 44 -------------------------------------------------------------------------------- Capitalized interest and deferred financing costs decreased$7.0 million or 16.6%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily due to a decrease in the average development asset balances qualifying for interest capitalization for the six months endedJune 30, 2021 . During the six months endedJune 30, 2021 and 2020, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately$1.8 billion and$2.2 billion , respectively.
Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships
Net income attributable to noncontrolling interests in consolidated property partnerships increased$2.3 million or 25.0% for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily due to new leases at higher rates at two properties held in two property partnerships. The amounts reported for the six months endedJune 30, 2021 and 2020 are comprised of the noncontrolling interest's share of net income for100 First Street Member, LLC ("100First LLC "),303 Second Street Member ("303Second LLC ") andRedwood City Partners, LLC ("Redwood LLC "). 45 --------------------------------------------------------------------------------
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, 2021 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. Liquidity Highlights As ofJune 30, 2021 , we had approximately$519.3 million in cash and cash equivalents and approximately$450.5 million of restricted cash, of which$431.5 million is remaining from the operating property disposition completed during the six months endedJune 30, 2021 and may be released from the qualified intermediary at our direction, should we choose not to complete a Section 1031 Exchange. As of the date of this report, we had$1.1 billion available under our unsecured revolving credit facility and our next material debt maturity occurs inJanuary 2023 . We believe that our available liquidity demonstrates a strong balance sheet and makes us well positioned to navigate any additional future uncertainties. In addition, 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. Any future financings, however, will depend on market conditions for both capital raises and the investment of such proceeds, and there can be no assurances that we will successfully obtain such financings. 46 --------------------------------------------------------------------------------
Distribution Requirements
The Company is required to distribute 90% of its taxable income (subject to certain adjustments and excluding net capital gains) on an annual basis to maintain qualification as a REIT for federal income tax purposes and is required to pay income tax at regular corporate rates to the extent it distributes less than 100% of its taxable income (including capital gains). As a result of these distribution requirements, theOperating Partnership cannot rely on retained earnings to fund its on-going operations to the same extent as other companies whose parent companies are not REITs. In addition, the Company may be required to use borrowings under theOperating Partnership's revolving credit facility, if necessary, to meet REIT distribution requirements and maintain its REIT status. The Company may also need to continue to raise capital in the equity markets to fund theOperating Partnership's working capital needs, as well as potential developments of new or existing properties or acquisitions. The Company intends to continue to make, but has not committed to make, regular quarterly cash distributions to common stockholders, and through theOperating Partnership , 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 2021. In addition, in the event the Company is unable to identify and complete the acquisition of suitable replacement properties to effect Section 1031 Exchanges to defer some or all of the taxable gains related to the disposition completed during the six months endedJune 30, 2021 for gross proceeds of$1.08 billion or any future dispositions (or in the event additional legislation is enacted that further modifies or repeals laws with respect to Section 1031 Exchanges), the Company may be required 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 20, 2021 , the Board of Directors declared a regular quarterly cash dividend of$0.50 per share of common stock. The regular quarterly cash dividend is payable to stockholders of record onJune 30, 2021 and a corresponding cash distribution of$0.50 perOperating Partnership unit is payable to holders of theOperating Partnership's common limited partnership interests of record onJune 30, 2021 , including those owned by the Company. The total cash quarterly dividends and distributions paid onJuly 14, 2021 were$58.8 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.
47
--------------------------------------------------------------------------------Capitalization
As ofJune 30, 2021 , our total debt as a percentage of total market capitalization was 32.5%, which was calculated based on the closing price per share of the Company's common stock of$69.64 onJune 30, 2021 as shown in the following table: Aggregate Principal Amount or % of Total Shares/Units at $ Value Market June 30, 2021 Equivalent Capitalization ($ in thousands) Debt: (1)(2) Unsecured Senior Notes due 2023$ 300,000 2.5 % Unsecured Senior Notes due 2024 425,000 3.5 % Unsecured Senior Notes due 2025 400,000 3.3 % Unsecured Senior Notes Series A & B due 2026 250,000 2.0 % Unsecured Senior Notes due 2028 400,000 3.3 % Unsecured Senior Notes due 2029 400,000 3.3 % Unsecured Senior Notes Series A & B due 2027 & 2029 250,000 2.0 % Unsecured Senior Notes due 2030 500,000 4.1 % Unsecured Senior Notes due 2031 350,000 2.9 % Unsecured Senior Notes due 2032 425,000 3.5 % Secured debt 251,720 2.1 % Total debt$ 3,951,720 32.5 %
Equity and Noncontrolling Interests in the
1,150,574 $ 80,126 0.7 %
Shares of common stock outstanding 116,454,210 8,109,871 66.8 %
Total Equity and Noncontrolling Interests in the $ 8,189,997 67.5 %
Operating Partnership
Total Market Capitalization $ 12,141,717 100.0 %
________________________
(1) Represents gross aggregate principal amount due at maturity before the
effect of the following at June 30, 2021 : $20.8 million of unamortized deferred
financing costs on the unsecured senior notes and secured debt and $7.7 million
of unamortized discounts for the unsecured senior notes.
(2) As of June 30, 2021 , there was no outstanding balance on the unsecured
revolving credit facility.
(3) Value based on closing price per share of our common stock of $69.64 as of
June 30, 2021 .
(4) Includes common units of the Operating Partnership not owned by the
Company; does not include noncontrolling interests in consolidated property
partnerships.
48--------------------------------------------------------------------------------
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 theOperating Partnership's unsecured revolving credit 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, although there can be no assurance in this regard.
49
--------------------------------------------------------------------------------Liquidity Sources
Unsecured Revolving Credit Facility
InApril 2021 , theOperating Partnership amended and restated the terms of its unsecured revolving credit facility. The amendment and restatement increased the size of the unsecured revolving credit facility from$750.0 million to$1.1 billion , reduced the borrowing costs, extended the maturity date of the unsecured revolving credit facility toJuly 2025 , with two six-month extension options, and added a sustainability-linked pricing component whereby the interest rate is lowered by 0.01% if certain sustainability performance targets are met. The LIBOR replacement provisions of the unsecured revolving credit facility permit the use of rates based on the secured overnight financing rate ("SOFR") administered by theFederal Reserve Bank of New York .
The following table summarizes the balance and terms of our unsecured revolving
credit facility as of
June 30, 2021 December 31, 2020
(in thousands)
Outstanding borrowings $ - $ -
Remaining borrowing capacity 1,100,000 750,000
Total borrowing capacity (1) $ 1,100,000 $ 750,000
Interest rate (2) 1.00 % 1.14 %
Facility fee-annual rate (3) 0.200%
Maturity date July 2025 July 2022
________________________
(1)We may elect to borrow, subject to bank approval and obtaining commitments
for any additional borrowing capacity, up to an additional $500.0 million and
$600.0 million as of June 30, 2021 and December 31, 2020 , respectively, under an
accordion feature under the terms of the unsecured revolving credit facility.
(2)Our unsecured revolving credit facility interest rate was calculated based on
the contractual rate of LIBOR plus 0.900% and LIBOR plus 1.000% as of June 30,
2021 and December 31, 2020 , respectively.
(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 June 30, 2021 and December 31, 2020 , $8.3
million and $2.1 million of unamortized deferred financing costs, respectively,
which are included in prepaid expenses and other assets, net on our consolidated
balance sheets, remained to be amortized through the respective maturity dates
presented 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.
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.
In connection with our capital recycling strategy, during the six months ended
June 30, 2021 , we completed the sale of one operating property in San Francisco,
California to an unaffiliated third party for gross proceeds of $1.08 billion ,
or approximately $1,440 per square foot. During the three months ended June 30,
2021 , a portion of the proceeds from the sale were used to fund two development
acquisitions totaling $622.2 million and as of June 30, 2021 , $431.5 million of
the proceeds from the sale are still temporarily being held by a qualified
intermediary, at our direction, for the purpose of facilitating a Section 1031
Exchange. 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.
50
--------------------------------------------------------------------------------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. The Company did not have any outstanding forward equity sale agreements to be settled atJune 30, 2021 . Since commencement of our current at-the-market program, we have completed sales of 3,594,576 shares of common stock throughJune 30, 2021 . As ofJune 30, 2021 , 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 sales of common stock under the program during the six months endedJune 30, 2021 .
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. Capital raising could be more challenging under current market conditions than those prior to COVID-19, particularly if case rates surge again. 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. 51 --------------------------------------------------------------------------------
Unsecured and Secured Debt
The aggregate principal amount of the unsecured and secured debt of the
Aggregate Principal
Amount Outstanding
(in thousands)
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
Unsecured Senior Notes due 2032
425,000
Secured Debt
251,720
Total Unsecured and Secured Debt (1)
3,951,720
Less: Unamortized Net Discounts and Deferred Financing Costs (2) (28,568) Total Debt, Net $ 3,923,152 ________________________ (1)As ofJune 30, 2021 , there was no outstanding balance on the unsecured revolving credit facility. (2)Includes$20.8 million of unamortized deferred financing costs on the unsecured senior notes and secured debt and$7.7 million of unamortized discounts for the unsecured senior notes. 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.
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, 2021 andDecember 31, 2020 was as follows: Percentage of Total Debt (1) Weighted Average
Interest Rate (1)
June 30, 2021 (2) December 31, 2020 June 30, 2021 (2) December 31, 2020
Secured vs. unsecured:
Unsecured 93.6 % 93.6 % 3.8 % 3.8 %
Secured 6.4 % 6.4 % 3.9 % 3.9 %
Variable-rate vs. fixed-rate:
Variable-rate - % - % - % - %
Fixed-rate (3) 100.0 % 100.0 % 3.8 % 3.8 %
Stated rate (3) 3.8 % 3.8 %
GAAP effective rate (4) 3.8 % 3.8 %
GAAP effective rate including debt issuance
costs 4.0 % 4.0 %
________________________
(1) As of the end of the period presented.
(2) As of June 30, 2021 , there was no outstanding balance on the unsecured
revolving credit facility.
(3) Excludes the impact of the amortization of any debt discounts/premiums and
deferred financing costs.
(4) Includes the impact of the amortization of any debt discounts/premiums,
excluding deferred financing costs.
52
--------------------------------------------------------------------------------Liquidity Uses
Contractual Obligations
Refer to our 2020 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, 2021 . Other Liquidity Uses Development As ofJune 30, 2021 , we had two development projects under construction. These projects have a total estimated investment of approximately$1.1 billion of which we have incurred approximately$271.0 million , net of retention, and committed an additional$809.0 million as ofJune 30, 2021 , of which$36.0 million is currently expected to be spent through the end of 2021. In addition, as ofJune 30, 2021 , we had four development projects in the tenant improvement phase. These projects have a total estimated investment of approximately$1.8 billion , of which we have incurred approximately$1.5 billion , net of retention, and committed an additional$305.0 million as ofJune 30, 2021 , of which$102.0 million is currently expected to be spent through the end of 2021. We also had four stabilized development projects with a total estimated investment of$645.0 million , of which$64.0 million remains to be spent as ofJune 30, 2021 , and is expected to be spent through the end of 2021. Furthermore, we currently believe we may spend up to$25.0 million on committed and future development pipeline projects that we may commence construction on throughout the remainder of 2021. The ultimate timing of these expenditures may fluctuate given construction progress and leasing status of the projects, or as a result of events outside our control, such as delays or increased costs as a result of the COVID-19 pandemic. 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. We cannot provide assurance that development projects will be completed on the terms, for the amounts or on the timelines currently contemplated, or at all.
Debt Maturities
We believe our conservative leverage, staggered debt maturities and recent unsecured line of credit amendment 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. Our next debt maturity occurs inJanuary 2023 .
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 and strategic operating properties, dependent on market conditions and business cycles, among other factors. We focus on growth opportunities primarily in markets populated by knowledge and creative based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services. We expect that 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, although there can be no assurance in this regard. 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, 2021 , 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 53 --------------------------------------------------------------------------------
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. While the COVID-19 pandemic and restrictions intended to prevent its spread remain in effect, there may be a continued lower level of leasing activity when compared to levels prior to the COVID-19 pandemic.
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, on capital and credit markets and our tenants (refer to "Part I, Item IA. Risk Factors" in our annual report on Form 10-K for the year endedDecember 31, 2020 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
In addition to the factors noted above, theOperating 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 theOperating Partnership's credit ratings are downgraded, we may incur higher borrowing costs and may experience difficulty in obtaining additional financing or refinancing existing indebtedness.
Debt Covenants
The unsecured revolving credit facility, 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 Facility and Private Placement Notes (as defined in the applicable Actual Performance Credit Agreements): Covenant Level as of June 30, 2021 Total debt to total asset value less than 60% 28% Fixed charge coverage ratio greater than 1.5x 3.0x Unsecured debt ratio greater than 1.67x 3.23x Unencumbered asset pool debt service coverage greater than 1.75x 3.55x Unsecured Senior Notes due 2023, 2024, 2025, 2028, 2029, 2030 and 2032 (as defined in the applicable Indentures): Total debt to total asset value less than 60% 35% Interest coverage greater than 1.5x 7.2x Secured debt to total asset value less than 40% 2% Unencumbered asset pool value to unsecured debt greater than 150% 321%The Operating Partnership was in compliance with all of its debt covenants as ofJune 30, 2021 . Our current expectation is that theOperating Partnership will continue to meet the requirements of its debt covenants in both the short and long term. 54 -------------------------------------------------------------------------------- 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, 2021 as compared to the six months endedJune 30, 2020 is as follows: Six Months Ended June 30, Dollar Percentage 2021 2020 Change Change ($ in thousands) Net cash provided by operating activities$ 216,466 $ 224,022 $ (7,556) (3.4) %
Net cash provided by (used in) investing activities 95,302 (374,341)
469,643 125.5 %
Net cash (used in) provided by financing activities (165,134) 695,287
(860,421) (123.8) %
Net increase in cash and cash equivalents $ 146,634 $ 544,968 $ (398,334) (73.1) %
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 decreased by$7.6 million , or 3.4%, for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 primarily as a result of net changes in other operating assets related to the timing of expenditures. See additional information under the caption "-Results of Operations."
Investing Activities
Our cash flows from investing activities is generally used to fund development and operating property acquisitions, expenditures for development projects, and recurring and nonrecurring capital expenditures for our operating properties, net of proceeds received from dispositions of real estate assets. During the six months endedJune 30, 2021 we had net cash provided by investing activities of$95.3 million compared to net cash used in investing activities of$374.3 million for the six months endedJune 30, 2020 due to$1.0 billion of net proceeds received from one operating property disposition completed during the six months endedJune 30, 2021 , partially offset by$586.9 million of expenditures for acquisitions of development properties and undeveloped land completed during the six months endedJune 30, 2021 .
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. During the six months endedJune 30, 2021 we had net cash used in financing activities of$165.1 million compared to net cash provided by financing activities of$695.3 million for the six months endedJune 30, 2020 primarily as a result of net proceeds from the issuance of common stock and proceeds from the issuance of unsecured debt generated during the six months endedJune 30, 2020 , partially offset by net repayments on the unsecured revolving credit facility during the six months endedJune 30, 2020 . 55 --------------------------------------------------------------------------------
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
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