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Kilroy Realty 10-Q 2017
Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number: 1-12675 (Kilroy Realty Corporation)
Commission File Number: 000-54005 (Kilroy Realty, L.P.)
KILROY REALTY CORPORATION
KILROY REALTY, L.P.
(Exact name of registrant as specified in its charter)
 
 
 
Kilroy Realty Corporation
Maryland
95-4598246
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
Kilroy Realty, L.P.
Delaware
95-4612685
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064
(Address of principal executive offices) (Zip Code)
 
(310) 481-8400
(Registrant's telephone number, including area code)
 
 
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Kilroy Realty Corporation    Yes  þ    No   o
Kilroy Realty, L.P.         Yes  þ    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Kilroy Realty Corporation     Yes  þ    No   o
Kilroy Realty, L.P.         Yes  þ    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Kilroy Realty Corporation
 
 
 
Large accelerated filer     þ
Accelerated filer     o 
Non-accelerated filer     o (Do not check if a smaller reporting company)
Smaller reporting company     o
Emerging growth company    o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
 
 
 
Kilroy Realty, L.P.
 
 
 
Large accelerated filer     o
Accelerated filer     o 
Non-accelerated filer     þ (Do not check if a smaller reporting company)
Smaller reporting company     o
Emerging growth company    o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Kilroy Realty Corporation Yes  o     No   þ
Kilroy Realty, L.P. Yes  o     No   þ
As of October 20, 2017, 98,382,256 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.
 



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2017 of Kilroy Realty Corporation and Kilroy Realty, L.P. Unless stated otherwise or the context otherwise requires, references to “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” mean Kilroy Realty Corporation, a Maryland corporation, and its controlled and consolidated subsidiaries, and references to “Kilroy Realty, L.P.” or the “Operating Partnership” mean Kilroy Realty, L.P., a Delaware limited partnership and its controlled and consolidated subsidiaries.
The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of September 30, 2017, the Company owned an approximate 97.9% common general partnership interest in the Operating Partnership. The remaining approximate 2.1% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of the Company. As the sole general partner of the Operating Partnership, the Company exercises exclusive and complete discretion over the Operating Partnership’s day-to-day management and control and can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings, and cause changes in its line of business, capital structure and distribution policies.
There are a few differences between the Company and the Operating Partnership that are reflected in the disclosures in this Form 10-Q. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the Company and the Operating Partnership operate as an interrelated, consolidated company. The Company is a REIT, the only material asset of which is the partnership interests it holds in the Operating Partnership. As a result, the Company generally does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing certain debt of the Operating Partnership. The Company itself is not directly obligated under any indebtedness, but guarantees some of the debt of the Operating Partnership. The Operating Partnership owns substantially all of the assets of the Company either directly or through its subsidiaries, conducts the operations of the Company’s business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Company, which the Company generally contributes to the Operating Partnership in exchange for units of partnership interest, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness or through the issuance of units of partnership interest.
Noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The common limited partnership interests in the Operating Partnership are accounted for as partners’ capital in the Operating Partnership’s financial statements and, to the extent not held by the Company, as noncontrolling interests in the Company’s financial statements. The Operating Partnership’s financial statements reflect the noncontrolling interest in Kilroy Realty Finance Partnership, L.P., a Delaware limited partnership (the “Finance Partnership”). This noncontrolling interest represents the Company’s 1% indirect general partnership interest in the Finance Partnership, which is directly held by Kilroy Realty Finance, Inc., a wholly owned subsidiary of the Company. The differences between noncontrolling interests, stockholders’ equity and partners’ capital result from the differences in the equity issued by the Company and the Operating Partnership, and in the Operating Partnership’s noncontrolling interest in the Finance Partnership.
We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:
Combined reports better reflect how management and the analyst community view the business as a single operating unit;
Combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
Combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and
Combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
consolidated financial statements;
the following notes to the consolidated financial statements:
Note 7, Stockholders’ Equity of the Company;
Note 8, Partners’ Capital of the Operating Partnership;

i


Note 12, Net Income Available to Common Stockholders Per Share of the Company;
Note 13, Net Income Available to Common Unitholders Per Unit of the Operating Partnership;
Note 14, Supplemental Cash Flow Information of the Company; and
Note 15, Supplemental Cash Flow Information of the Operating Partnership;
“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
—Liquidity and Capital Resources of the Company;” and
—Liquidity and Capital Resources of the Operating Partnership.”
This report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for the Company and the Operating Partnership to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.


ii


KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017
TABLE OF CONTENTS
 
 
 
 
Page
 
 
PART I – FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
  
 
  
 
  
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
  
Item 3.
 
Item 4.
 
 
 
PART II – OTHER INFORMATION
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 




PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY CORPORATION

KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
September 30, 2017
 
December 31, 2016
ASSETS
(unaudited)
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements
$
1,076,172

 
$
1,108,971

Buildings and improvements
4,871,667

 
4,938,250

Undeveloped land and construction in progress
1,292,017

 
1,013,533

Total real estate assets held for investment
7,239,856

 
7,060,754

Accumulated depreciation and amortization
(1,216,358
)
 
(1,139,853
)
Total real estate assets held for investment, net
6,023,498

 
5,920,901

REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET

 
9,417

CASH AND CASH EQUIVALENTS
64,954

 
193,418

RESTRICTED CASH (Note 2)
179,276

 
56,711

MARKETABLE SECURITIES (Note 11)
18,851

 
14,773

CURRENT RECEIVABLES, NET (Note 3)
18,626

 
13,460

DEFERRED RENT RECEIVABLES, NET (Note 3)
238,959

 
218,977

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET
185,420

 
208,368

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 4)
108,715

 
70,608

TOTAL ASSETS
$
6,838,299

 
$
6,706,633

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured debt, net (Notes 5 and 11)
$
465,828

 
$
472,772

Unsecured debt, net (Notes 5 and 11)
1,909,381

 
1,847,351

Unsecured line of credit (Notes 5 and 11)
60,000

 

Accounts payable, accrued expenses and other liabilities
271,405

 
202,391

Accrued dividends and distributions (Note 16)
43,324

 
222,306

Deferred revenue and acquisition-related intangible liabilities, net
145,556

 
150,360

Rents received in advance and tenant security deposits
46,925

 
52,080

Liabilities of real estate assets held for sale

 
56

Total liabilities
2,942,419

 
2,947,316

COMMITMENTS AND CONTINGENCIES (Note 10)

 

EQUITY:
 
 
 
Stockholders’ Equity (Note 7):
 
 
 
Preferred stock, $.01 par value, 30,000,000 shares authorized:
 
 
 
6.875% Series G Cumulative Redeemable Preferred stock, $.01 par value, no shares issued and outstanding at 9/30/2017, and 4,000,000 shares authorized, issued and outstanding ($100,000 liquidation preference) at 12/31/2016

 
96,155

6.375% Series H Cumulative Redeemable Preferred stock, $.01 par value, no shares issued and outstanding at 9/30/2017, and 4,000,000 shares authorized, issued and outstanding ($100,000 liquidation preference) at 12/31/2016

 
96,256

Common stock, $.01 par value, 150,000,000 shares authorized, 98,382,256 and 93,219,439 shares issued and outstanding, respectively
984

 
932

Additional paid-in capital
3,797,546

 
3,457,649

Distributions in excess of earnings
(108,667
)
 
(107,997
)
Total stockholders’ equity
3,689,863

 
3,542,995

Noncontrolling Interests:
 
 
 
Common units of the Operating Partnership (Note 6)
77,911

 
85,590

Noncontrolling interests in consolidated property partnerships (Note 1)
128,106

 
130,732

Total noncontrolling interests
206,017

 
216,322

Total equity
3,895,880

 
3,759,317

TOTAL LIABILITIES AND EQUITY
$
6,838,299

 
$
6,706,633

See accompanying notes to consolidated financial statements.

1


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
Rental income
$
159,954

 
$
146,539

 
$
475,527

 
$
423,947

Tenant reimbursements
19,665

 
16,406

 
58,228

 
43,948

Other property income
1,915

 
5,403

 
7,685

 
6,032

Total revenues
181,534

 
168,348

 
541,440

 
473,927

EXPENSES
 
 
 
 
 
 
 
Property expenses
33,070

 
30,050

 
97,615

 
85,236

Real estate taxes
16,371

 
14,501

 
50,878

 
39,378

Provision for bad debts
1,036

 

 
2,743

 

Ground leases
1,562

 
909

 
4,751

 
2,506

General and administrative expenses
14,514

 
13,533

 
43,750

 
40,949

Acquisition-related expenses (Note 1)

 
188

 

 
964

Depreciation and amortization
62,567

 
56,666

 
185,737

 
160,452

Total expenses
129,120

 
115,847

 
385,474

 
329,485

OTHER (EXPENSES) INCOME
 
 
 
 
 
 
 
Interest income and other net investment gains (Note 11)
1,526

 
538

 
3,629

 
1,120

Interest expense (Note 5)
(16,151
)
 
(14,976
)
 
(51,476
)
 
(41,189
)
Total other (expenses) income
(14,625
)
 
(14,438
)
 
(47,847
)
 
(40,069
)
INCOME FROM OPERATIONS BEFORE GAINS (LOSS) ON SALES OF REAL ESTATE
37,789

 
38,063

 
108,119

 
104,373

Net gain (loss) on sale of land (Note 2)
449

 

 
449

 
(295
)
Gains on sales of depreciable operating properties (Note 2)
37,250

 
18,312

 
39,507

 
164,302

NET INCOME
75,488

 
56,375

 
148,075

 
268,380

Net income attributable to noncontrolling common units of the Operating Partnership (Note 6)
(1,394
)
 
(1,453
)
 
(2,633
)
 
(5,892
)
Net income attributable to noncontrolling interests in consolidated property partnerships
(2,984
)
 
(1,027
)
 
(9,359
)
 
(1,438
)
Total income attributable to noncontrolling interests
(4,378
)
 
(2,480
)
 
(11,992
)
 
(7,330
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
71,110

 
53,895

 
136,083

 
261,050

Preferred dividends
(808
)
 
(3,313
)
 
(5,774
)
 
(9,938
)
Original issuance costs of redeemed preferred stock and preferred units
(Note 7)
(3,744
)
 

 
(7,589
)
 

Total preferred dividends
(4,552
)
 
(3,313
)
 
(13,363
)
 
(9,938
)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
66,558

 
$
50,582

 
$
122,720

 
$
251,112

Net income available to common stockholders per share – basic (Note 12)
$
0.67

 
$
0.54

 
$
1.24

 
$
2.71

Net income available to common stockholders per share – diluted (Note 12)
$
0.67

 
$
0.54

 
$
1.23

 
$
2.69

Weighted average common shares outstanding – basic (Note 12)
98,352,139

 
92,227,016

 
98,008,780

 
92,220,522

Weighted average common shares outstanding – diluted (Note 12)
98,911,612

 
92,920,406

 
98,591,048

 
92,831,538

Dividends declared per common share
$
0.425

 
$
0.375

 
$
1.225

 
$
1.100














See accompanying notes to consolidated financial statements.

2


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited; in thousands, except share and per share/unit data)
 
 
 
Common Stock
 
Total
Stock-
holders’
Equity
 
Noncontrolling Interests
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained Earnings / (Distributions
in Excess of
Earnings)
 
BALANCE AS OF DECEMBER 31, 2015
$
192,411

 
92,258,690

 
$
923

 
$
3,047,894

 
$
(70,262
)
 
$
3,170,966

 
$
63,620

 
$
3,234,586

Net income
 
 
 
 
 
 
 
 
261,050

 
261,050

 
7,330

 
268,380

Issuance of share-based compensation awards
 
 
 
 
 
 
1,339

 
 
 
1,339

 
 
 
1,339

Non-cash amortization of share-based compensation
 
 
 
 
 
 
19,303

 
 
 
19,303

 
 
 
19,303

Exercise of stock options
 
 
51,000

 
 
 
2,173

 
 
 
2,173

 
 
 
2,173

Repurchase of common stock, stock options and restricted stock units
 
 
(110,528
)
 
(1
)
 
(6,873
)
 
 
 
(6,874
)
 
 
 
(6,874
)
Settlement of restricted stock units for shares of common stock
 
 
72,130

 
1

 
(1
)
 
 
 

 
 
 

Issuance of common units in connection with acquisition
 
 
 
 
 
 
 
 
 
 
 
 
48,033

 
48,033

Exchange of common units of the Operating Partnership
 
 
1,200

 
 
 
39

 
 
 
39

 
(39
)
 

Initial contribution from noncontrolling interest in consolidated property partnership, net of transaction costs
 
 
 
 
 
 
113,022

 
 
 
113,022

 
78,654

 
191,676

Distributions to noncontrolling interests in consolidated property partnerships
 
 
 
 
 
 
 
 
 
 
 
 
(1,139
)
 
(1,139
)
Adjustment for noncontrolling interest
 
 
 
 
 
 
14,822

 
 
 
14,822

 
(14,822
)
 

Preferred dividends
 
 
 
 
 
 
 
 
(9,938
)
 
(9,938
)
 
 
 
(9,938
)
Dividends declared per common share and common unit ($1.10 per share/unit)
 
 
 
 
 
 
 
 
(102,743
)
 
(102,743
)
 
(2,894
)
 
(105,637
)
BALANCE AS OF SEPTEMBER 30, 2016
$
192,411

 
92,272,492

 
$
923

 
$
3,191,718

 
$
78,107

 
$
3,463,159

 
$
178,743

 
$
3,641,902

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Total
Stock-
holders’
Equity
 
Noncontrolling Interests
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
BALANCE AS OF DECEMBER 31, 2016
$
192,411

 
93,219,439

 
$
932

 
$
3,457,649

 
$
(107,997
)
 
$
3,542,995

 
$
216,322

 
$
3,759,317

Net income
 
 
 
 
 
 
 
 
136,083

 
136,083

 
11,992

 
148,075

Redemption of Series G and H Preferred stock (Note 7)
(192,411
)
 
 
 
 
 
 
 
(7,589
)
 
(200,000
)
 
 
 
(200,000
)
Issuance of common stock (Note 7)
 
 
4,427,500

 
44

 
308,768

 
 
 
308,812

 
 
 
308,812

Issuance of share-based compensation awards
 
 

 
 
 
5,291

 
 
 
5,291

 
 
 
5,291

Non-cash amortization of share-based compensation
 
 
 
 
 
 
19,013

 
 
 
19,013

 
 
 
19,013

Exercise of stock options (Note 9)
 
 
282,000

 
4

 
12,047

 
 
 
12,051

 
 
 
12,051

Settlement of restricted stock units for shares of common stock
 
 
317,848

 
3

 
(3
)
 
 
 

 
 
 

Repurchase of common stock, stock options and restricted stock units
 
 
(168,881
)
 
(2
)
 
(12,984
)
 
 
 
(12,986
)
 
 
 
(12,986
)
Exchange of common units of the Operating Partnership
 
 
304,350

 
3

 
10,936

 
 
 
10,939

 
(10,939
)
 

Contributions from noncontrolling interests in consolidated property partnerships
 
 
 
 
 
 
 
 
 
 

 
250

 
250

Distributions to noncontrolling interests in consolidated property partnerships
 
 
 
 
 
 
 
 
 
 

 
(12,234
)
 
(12,234
)
Adjustment for noncontrolling interest
 
 
 
 
 
 
(3,171
)
 
 
 
(3,171
)
 
3,171

 

Preferred dividends
 
 
 
 
 
 
 
 
(5,774
)
 
(5,774
)
 
 
 
(5,774
)
Dividends declared per common share and common unit ($1.225 per share/unit)
 
 
 
 
 
 
 
 
(123,390
)
 
(123,390
)
 
(2,545
)
 
(125,935
)
BALANCE AS OF SEPTEMBER 30, 2017
$

 
98,382,256

 
$
984

 
$
3,797,546

 
$
(108,667
)
 
$
3,689,863

 
$
206,017

 
$
3,895,880


See accompanying notes to consolidated financial statements.

3


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
 
Nine Months Ended September 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
148,075

 
$
268,380

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of real estate assets and leasing costs
181,875

 
157,587

Depreciation of non-real estate furniture, fixtures and equipment
3,862

 
2,865

Increase in provision for bad debts
2,743

 

Non-cash amortization of share-based compensation awards
13,617

 
15,263

Non-cash amortization of deferred financing costs and debt discounts and premiums
2,398

 
2,020

Non-cash amortization of net below market rents
(6,026
)
 
(5,128
)
Gains on sales of depreciable operating properties (Note 2)
(39,507
)
 
(164,302
)
(Gain) loss on sale of land (Note 2)
(449
)
 
295

Non-cash amortization of deferred revenue related to tenant-funded tenant improvements
(12,394
)
 
(9,700
)
Straight-line rents
(25,537
)
 
(22,856
)
Net change in other operating assets
(16,970
)
 
(7,263
)
Net change in other operating liabilities
24,855

 
15,444

Net cash provided by operating activities
276,542

 
252,605

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for development properties and undeveloped land
(270,839
)
 
(222,719
)
Expenditures for operating properties and other capital assets
(61,875
)
 
(81,688
)
Net proceeds received from dispositions (Note 2)
182,492

 
325,031

(Increase) decrease in acquisition-related deposits
(30,490
)
 
1,902

Expenditures for acquisition of operating properties

 
(55,415
)
Expenditures for acquisition of undeveloped land

 
(33,513
)
Increase in note receivable

 
(1,000
)
Net cash used in investing activities
(180,712
)
 
(67,402
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of common stock (Note 7)
308,812

 

Redemption of Series G and H Preferred stock (Note 7)
(200,000
)
 

Proceeds from the issuance of unsecured debt (Note 5)
250,000

 

Repayments of unsecured debt (Note 5)
(189,000
)
 

Borrowings on unsecured revolving credit facility
70,000

 
305,000

Repayments on unsecured revolving credit facility
(10,000
)
 
(305,000
)
Principal payments on secured debt
(5,740
)
 
(7,254
)
Financing costs
(7,480
)
 
(1,485
)
Repurchase of common stock and restricted stock units
(12,986
)
 
(6,874
)
Proceeds from exercise of stock options
12,051

 
2,173

Contributions from noncontrolling interests in consolidated property partnerships
250

 
191,676

Distributions to noncontrolling interests in consolidated property partnerships
(12,234
)
 
(1,139
)
Dividends and distributions paid to common stockholders and common unitholders
(297,993
)
 
(101,542
)
Dividends and distributions paid to preferred stockholders and preferred unitholders (Note 7)
(7,409
)
 
(9,938
)
Net cash (used in) provided by financing activities
(101,729
)
 
65,617

Net (decrease) increase in cash and cash equivalents and restricted cash
(5,899
)
 
250,820

Cash and cash equivalents and restricted cash, beginning of period
250,129

 
57,204

Cash and cash equivalents and restricted cash, end of period
$
244,230

 
$
308,024







See accompanying notes to consolidated financial statements.

4





ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY, L.P.

KILROY REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
 
 
September 30, 2017
 
December 31, 2016
ASSETS 
(unaudited)
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements
$
1,076,172

 
$
1,108,971

Buildings and improvements
4,871,667

 
4,938,250

Undeveloped land and construction in progress
1,292,017

 
1,013,533

Total real estate assets held for investment
7,239,856

 
7,060,754

Accumulated depreciation and amortization
(1,216,358
)
 
(1,139,853
)
Total real estate assets held for investment, net
6,023,498

 
5,920,901

REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET

 
9,417

CASH AND CASH EQUIVALENTS
64,954

 
193,418

RESTRICTED CASH (Note 2)
179,276

 
56,711

MARKETABLE SECURITIES (Note 11)
18,851

 
14,773

CURRENT RECEIVABLES, NET (Note 3)
18,626

 
13,460

DEFERRED RENT RECEIVABLES, NET (Note 3)
238,959

 
218,977

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET
185,420

 
208,368

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 4)
108,715

 
70,608

TOTAL ASSETS
$
6,838,299

 
$
6,706,633

LIABILITIES AND CAPITAL
 
 
 
LIABILITIES:
 
 
 
Secured debt, net (Notes 5 and 11)
$
465,828

 
$
472,772

Unsecured debt, net (Notes 5 and 11)
1,909,381

 
1,847,351

Unsecured line of credit (Notes 5 and 11)
60,000

 

Accounts payable, accrued expenses and other liabilities
271,405

 
202,391

Accrued distributions (Note 16)
43,324

 
222,306

Deferred revenue and acquisition-related intangible liabilities, net
145,556

 
150,360

Rents received in advance and tenant security deposits
46,925

 
52,080

Liabilities of real estate assets held for sale

 
56

Total liabilities
2,942,419

 
2,947,316

COMMITMENTS AND CONTINGENCIES (Note 10)

 

CAPITAL:
 
 
 
Partners’ Capital (Note 8):
 
 
 
6.875% Series G Cumulative Redeemable Preferred units, no units issued and outstanding at 9/30/2017, 4,000,000 units issued and outstanding ($100,000 liquidation preference) at 12/31/2016

 
96,155

6.375% Series H Cumulative Redeemable Preferred units, no units issued and outstanding at 9/30/2017, 4,000,000 units issued and outstanding ($100,000 liquidation preference) at 12/31/2016

 
96,256

Common units, 98,382,256 and 93,219,439 held by the general partner and 2,077,193 and 2,381,543
held by common limited partners issued and outstanding, respectively
3,763,078


3,431,768

Total partners’ capital
3,763,078

 
3,624,179

Noncontrolling interests in consolidated property partnerships and subsidiaries (Note 1)
132,802


135,138

Total capital
3,895,880


3,759,317

TOTAL LIABILITIES AND CAPITAL
$
6,838,299


$
6,706,633







See accompanying notes to consolidated financial statements.

5


KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except unit and per unit data)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
Rental income
$
159,954

 
$
146,539

 
$
475,527

 
$
423,947

Tenant reimbursements
19,665

 
16,406

 
58,228

 
43,948

Other property income
1,915

 
5,403

 
7,685

 
6,032

Total revenues
181,534

 
168,348

 
541,440

 
473,927

EXPENSES
 
 
 
 
 
 
 
Property expenses
33,070

 
30,050

 
97,615

 
85,236

Real estate taxes
16,371

 
14,501

 
50,878

 
39,378

Provision for bad debts
1,036

 

 
2,743

 

Ground leases
1,562

 
909

 
4,751

 
2,506

General and administrative expenses
14,514

 
13,533

 
43,750

 
40,949

Acquisition-related expenses (Note 1)

 
188

 

 
964

Depreciation and amortization
62,567

 
56,666

 
185,737

 
160,452

Total expenses
129,120

 
115,847

 
385,474

 
329,485

OTHER (EXPENSES) INCOME
 
 
 
 
 
 
 
Interest income and other net investment gains (Note 11)
1,526

 
538

 
3,629

 
1,120

Interest expense (Note 5)
(16,151
)
 
(14,976
)
 
(51,476
)
 
(41,189
)
Total other (expenses) income
(14,625
)
 
(14,438
)
 
(47,847
)
 
(40,069
)
INCOME FROM OPERATIONS BEFORE GAINS (LOSS) ON SALES OF REAL ESTATE
37,789

 
38,063

 
108,119

 
104,373

Net gain (loss) on sale of land (Note 2)
449

 

 
449

 
(295
)
Gains on sales of depreciable operating properties (Note 2)
37,250

 
18,312

 
39,507

 
164,302

NET INCOME
75,488

 
56,375

 
148,075

 
268,380

Net income attributable to noncontrolling interests in consolidated property partnerships and subsidiaries
(3,086
)
 
(1,121
)
 
(9,648
)
 
(1,703
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.
72,402

 
55,254

 
138,427

 
266,677

Preferred distributions
(808
)
 
(3,313
)
 
(5,774
)
 
(9,938
)
Original issuance costs of redeemed preferred units (Note 8)
(3,744
)
 

 
(7,589
)
 

Total preferred distributions
(4,552
)
 
(3,313
)
 
(13,363
)
 
(9,938
)
NET INCOME AVAILABLE TO COMMON UNITHOLDERS
$
67,850

 
$
51,941

 
$
125,064

 
$
256,739

Net income available to common unitholders per unit – basic (Note 13)
$
0.67

 
$
0.54

 
$
1.23

 
$
2.70

Net income available to common unitholders per unit – diluted (Note 13)
$
0.67

 
$
0.54

 
$
1.23

 
$
2.68

Weighted average common units outstanding – basic (Note 13)
100,429,332

 
94,858,292

 
100,160,595

 
94,630,183

Weighted average common units outstanding – diluted (Note 13)
100,988,805

 
95,551,682

 
100,742,863

 
95,241,199

Dividends declared per common unit
$
0.425

 
$
0.375

 
$
1.225

 
$
1.100

















See accompanying notes to consolidated financial statements.

6


KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(Unaudited; in thousands, except unit and per unit data)
 
 
Partners’ Capital
 
Total
Partners’ 
Capital
 
Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries
 
 
 
Preferred
Units
 
Number of
Common
Units
 
Common
Units
 
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2015
$
192,411

 
94,023,465

 
$
3,031,609

 
$
3,224,020

 
$
10,566

 
$
3,234,586

Net income
 
 
 
 
266,677

 
266,677

 
1,703

 
268,380

Issuance of common units in connection with acquisition
 
 
867,701

 
48,033

 
48,033

 
 
 
48,033

Issuance of share-based compensation awards
 
 
 
 
1,339

 
1,339

 
 
 
1,339

Non-cash amortization of share-based compensation
 
 
 
 
19,303

 
19,303

 
 
 
19,303

Exercise of stock options
 
 
51,000

 
2,173

 
2,173

 
 
 
2,173

Repurchase of common units, stock options and restricted stock units
 
 
(110,528
)
 
(6,874
)
 
(6,874
)
 
 
 
(6,874
)
Settlement of restricted stock units
 
 
72,130

 

 

 
 
 

Initial contribution from noncontrolling interest in consolidated property partnership, net of transaction costs
 
 
 
 
113,022

 
113,022

 
78,654

 
191,676

Distributions to noncontrolling interests in consolidated
property partnerships
 
 
 
 
 
 
 
 
(1,139
)
 
(1,139
)
Preferred distributions
 
 
 
 
(9,938
)
 
(9,938
)
 
 
 
(9,938
)
Distributions declared per common unit ($1.10 per unit)
 
 
 
 
(105,637
)
 
(105,637
)
 
 
 
(105,637
)
BALANCE AS OF SEPTEMBER 30, 2016
$
192,411

 
94,903,768

 
$
3,359,707

 
$
3,552,118

 
$
89,784

 
$
3,641,902

 
 
 
 
 
 
 
 
 
 
 
 




 
Partners’ Capital
 
Total
Partners’ 
Capital
 
Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries
 
 
 
Preferred
Units
 
Number of
Common
Units
 
Common
Units
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2016
$
192,411

 
95,600,982

 
$
3,431,768

 
$
3,624,179

 
$
135,138

 
$
3,759,317

Net income
 
 
 
 
138,427

 
138,427

 
9,648

 
148,075

Redemption of Series G and H Preferred units (Note 8)
(192,411
)
 
 
 
(7,589
)
 
(200,000
)
 
 
 
(200,000
)
Issuance of common units (Note 8)
 
 
4,427,500

 
308,812

 
308,812

 
 
 
308,812

Issuance of share-based compensation awards
 
 
 
 
5,291

 
5,291

 
 
 
5,291

Non-cash amortization of share-based compensation
 
 
 
 
19,013

 
19,013

 
 
 
19,013

Exercise of stock options (Note 9)
 
 
282,000

 
12,051

 
12,051

 
 
 
12,051

Settlement of restricted stock units
 
 
317,848

 

 

 
 
 

Repurchase of common units, stock options and restricted stock units
 
 
(168,881
)
 
(12,986
)
 
(12,986
)
 
 
 
(12,986
)
Contributions from noncontrolling interests in consolidated property partnerships
 
 
 
 


 


 
250

 
250

Distributions to noncontrolling interests in consolidated property partnerships
 
 
 
 
 
 


 
(12,234
)
 
(12,234
)
Preferred distributions
 
 
 
 
(5,774
)
 
(5,774
)
 
 
 
(5,774
)
Distributions declared per common unit ($1.225 per unit)
 
 
 
 
(125,935
)
 
(125,935
)
 
 
 
(125,935
)
BALANCE AS OF SEPTEMBER 30, 2017
$

 
100,459,449

 
$
3,763,078

 
$
3,763,078

 
$
132,802

 
$
3,895,880










See accompanying notes to consolidated financial statements.

7


KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)

 
Nine Months Ended September 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
148,075

 
$
268,380

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of real estate assets and leasing costs
181,875

 
157,587

Depreciation of non-real estate furniture, fixtures and equipment
3,862

 
2,865

Increase in provision for bad debts
2,743

 

Non-cash amortization of share-based compensation awards
13,617

 
15,263

Non-cash amortization of deferred financing costs and debt discounts and premiums
2,398

 
2,020

Non-cash amortization of net below market rents
(6,026
)
 
(5,128
)
Gains on sales of depreciable operating properties (Note 2)
(39,507
)
 
(164,302
)
(Gain) loss on sale of land (Note 2)
(449
)
 
295

Non-cash amortization of deferred revenue related to tenant-funded tenant improvements
(12,394
)
 
(9,700
)
Straight-line rents
(25,537
)
 
(22,856
)
Net change in other operating assets
(16,970
)
 
(7,263
)
Net change in other operating liabilities
24,855

 
15,444

Net cash provided by operating activities
276,542

 
252,605

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for development properties and undeveloped land
(270,839
)
 
(222,719
)
Expenditures for operating properties and other capital assets
(61,875
)
 
(81,688
)
Net proceeds received from dispositions (Note 2)
182,492

 
325,031

(Increase) decrease in acquisition-related deposits
(30,490
)
 
1,902

Expenditures for acquisition of operating properties

 
(55,415
)
Expenditures for acquisition of undeveloped land

 
(33,513
)
Increase in note receivable

 
(1,000
)
Net cash used in investing activities
(180,712
)
 
(67,402
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of common units (Note 8)
308,812

 

Redemption of Series G and H Preferred units (Note 8)
(200,000
)
 

Proceeds from the issuance of unsecured debt (Note 5)
250,000

 

Repayments of unsecured debt (Note 5)
(189,000
)
 

Borrowings on unsecured revolving credit facility
70,000

 
305,000

Repayments on unsecured revolving credit facility
(10,000
)
 
(305,000
)
Principal payments on secured debt
(5,740
)
 
(7,254
)
Financing costs
(7,480
)
 
(1,485
)
Repurchase of common units and restricted stock units
(12,986
)
 
(6,874
)
Proceeds from exercise of stock options
12,051

 
2,173

Contributions from noncontrolling interests in consolidated property partnerships
250

 
191,676

Distributions to noncontrolling interests in consolidated property partnerships
(12,234
)
 
(1,139
)
Distributions paid to common unitholders
(297,993
)
 
(101,542
)
Distributions paid to preferred unitholders (Note 8)
(7,409
)
 
(9,938
)
Net cash (used in) provided by financing activities
(101,729
)
 
65,617