-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FmLmM2INQUWYXWjXwku+T4zRV5+jzAGJWlxmihvQhl7QDRKQuSU+bKQoFSbReTaZ 9zVxcMR2X73TDrIGkwUyzQ== 0000898430-01-500592.txt : 20010516 0000898430-01-500592.hdr.sgml : 20010516 ACCESSION NUMBER: 0000898430-01-500592 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KILROY REALTY CORP CENTRAL INDEX KEY: 0001025996 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 954598246 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12675 FILM NUMBER: 1636279 BUSINESS ADDRESS: STREET 1: 2250 E IMPERIAL HWY STREET 2: C/O KILROY INDUSTRIES CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3105635500 MAIL ADDRESS: STREET 1: C/O KILROY INDUSTRIES STREET 2: 2250 E IMPERIAL HIGHWAY #1200 CITY: EL SEGUNDO STATE: CA ZIP: 90245 10-Q 1 d10q.txt FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-12675 KILROY REALTY CORPORATION (Exact name of registrant as specified in its charter) Maryland 95-4598246 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number)
2250 East Imperial Highway, Suite 1200, El Segundo, California 90245 (Address of principal executive offices) (310) 563-5500 (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. Yes [X] No [_] As of May 14, 2001, 27,190,206 shares of common stock, par value $.01 per share, were outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- KILROY REALTY CORPORATION QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2001 TABLE OF CONTENTS
Page ---- PART I--FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS (unaudited) Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000....................................................... 3 Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2000.................................. 4 Consolidated Statement of Stockholders' Equity for the Three Months Ended March 31, 2001.................................... 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000.................................. 6 Notes to Consolidated Financial Statements..................... 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................... 13 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 24 PART II--OTHER INFORMATION Item 1. LEGAL PROCEEDINGS.............................................. 28 Item 2. CHANGES IN SECURITIES.......................................... 28 Item 3. DEFAULTS UPON SENIOR SECURITIES................................ 28 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 28 Item 5. OTHER INFORMATION.............................................. 28 Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 28 SIGNATURES.............................................................. 29
2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KILROY REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited, in thousands, except share data)
March 31, December 31, 2001 2000 ---------- ------------ ASSETS ------ INVESTMENT IN REAL ESTATE (Note 2): Land and improvements................................ $ 272,013 $ 266,444 Buildings and improvements........................... 1,106,079 1,054,995 Undeveloped land and construction in progress, net... 181,674 162,633 Investment in unconsolidated real estate............. 12,405 ---------- ---------- Total investment in real estate.................... 1,559,766 1,496,477 Accumulated depreciation and amortization............ (215,176) (205,332) ---------- ---------- Investment in real estate, net..................... 1,344,590 1,291,145 CASH AND CASH EQUIVALENTS............................. 19,669 17,600 RESTRICTED CASH (Note 2).............................. 6,662 35,014 TENANT RECEIVABLES, NET............................... 28,695 32,521 NOTE RECEIVABLE FROM RELATED PARTY (Note 2)........... 33,274 DEFERRED FINANCING AND LEASING COSTS, NET............. 35,633 39,674 PREPAID EXPENSES AND OTHER ASSETS..................... 9,226 7,941 ---------- ---------- TOTAL ASSETS....................................... $1,444,475 $1,457,169 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES: Secured debt......................................... $ 440,541 $ 432,688 Unsecured line of credit (Note 3).................... 162,000 191,000 Unsecured term facility.............................. 100,000 100,000 Accounts payable and accrued expenses (Note 4)....... 39,752 33,911 Accrued distributions (Note 9)....................... 14,523 13,601 Rents received in advance, tenant security deposits and deferred revenue (Note 5)....................... 30,909 17,810 ---------- ---------- Total liabilities.................................. $ 787,725 $ 789,010 ---------- ---------- COMMITMENTS AND CONTINGENCIES MINORITY INTERESTS (Note 6): 8.075% Series A Cumulative Redeemable Preferred unitholders......................................... 73,716 73,716 9.375% Series C Cumulative Redeemable Preferred unitholders......................................... 34,464 34,464 9.250% Series D Cumulative Redeemable Preferred unitholders......................................... 44,321 44,321 Common unitholders of the Operating Partnership...... 53,440 62,485 Minority interests in Development LLCs............... 11,707 11,748 ---------- ---------- Total minority interests........................... 217,648 226,734 ---------- ---------- STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 26,200,000 shares authorized, none issued and outstanding............. 8.075% Series A Cumulative Redeemable Preferred stock, $.01 par value, 1,700,000 shares authorized, none issued and outstanding......................................... Series B Junior Participating Preferred stock, $.01 par value, 400,000 shares authorized, none issued and outstanding......................................... 9.375% Series C Cumulative Redeemable Preferred stock, $.01 par value, 700,000 shares authorized, none issued and outstanding......................................... 9.250% Series D Cumulative Redeemable Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued and outstanding......................................... Common stock, $.01 par value, 150,000,000 shares authorized, 26,974,526 and 26,475,470 shares issued and outstanding, respectively........................... 270 265 Additional paid-in capital........................... 470,077 460,390 Distributions in excess of earnings.................. (25,751) (19,230) Accumulated other comprehensive loss................. (5,494) ---------- ---------- Total stockholders' equity......................... 439,102 441,425 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $1,444,475 $1,457,169 ========== ==========
See accompanying notes to consolidated financial statements. 3 KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except share and per share data)
Three Months Ended March 31, ---------------------- 2001 2000 ---------- ---------- REVENUES (Note 7): Rental income........................................ $ 44,379 $ 37,702 Tenant reimbursements................................ 5,520 4,694 Interest income...................................... 436 294 Other income......................................... 32 1,081 ---------- ---------- Total revenues..................................... 50,367 43,771 ---------- ---------- EXPENSES: Property expenses.................................... 6,895 5,458 Real estate taxes.................................... 3,635 3,387 General and administrative expenses.................. 3,354 2,632 Ground leases........................................ 392 389 Interest expense..................................... 10,791 7,828 Depreciation and amortization........................ 13,433 9,323 ---------- ---------- Total expenses..................................... 38,500 29,017 ---------- ---------- INCOME FROM OPERATIONS BEFORE NET GAINS (LOSSES) ON DISPOSITIONS OF OPERATING PROPERTIES, MINORITY INTERESTS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................................. 11,867 14,754 NET GAINS (LOSSES) ON DISPOSITIONS OF OPERATING PROPERTIES............................................ 305 (305) ---------- ---------- INCOME BEFORE MINORITY INTERESTS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE..................... 12,172 14,449 ---------- ---------- MINORITY INTERESTS: Distributions on Cumulative Redeemable Preferred units............................................... (3,375) (3,375) Minority interest in earnings of Operating Partnership......................................... (845) (1,372) Minority interest in earnings of Development LLCs.... (134) (124) ---------- ---------- Total minority interests........................... (4,354) (4,871) ---------- ---------- NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................................. 7,818 9,578 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 1).............................................. (1,392) ---------- ---------- NET INCOME............................................. $ 6,426 $ 9,578 ========== ========== Net income per common share--basic (Note 8)............ $ 0.24 $ 0.35 ========== ========== Net income per common share--diluted (Note 8).......... $ 0.24 $ 0.35 ========== ========== Weighted average shares outstanding--basic (Note 8).... 26,713,078 27,228,497 ========== ========== Weighted average shares outstanding--diluted (Note 8).. 26,971,289 27,228,887 ========== ==========
See accompanying notes to consolidated financial statements. 4 KILROY REALTY CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited in thousands, except share and per share data)
Additional Distributions Accumulated Number of Common Paid-in in Excess of Other Comp. Shares Stock Capital Earnings Loss Total ---------- ------ ---------- ------------- ----------- -------- BALANCE AT DECEMBER 31, 2000................... 26,475,470 $265 $460,390 $(19,230) $ $441,425 Conversion of common units of the Operating Partnership (Note 6)............. 466,236 5 11,451 11,456 Exercise of stock options.............. 40,000 907 907 Non-cash amortization of restricted stock grants............... 548 548 Repurchase of common stock................ (7,180) (202) (202) Adjustment for minority interest.... (3,017) (3,017) Dividends declared ($1.92 per share).... (12,947) (12,947) Net income............ 6,426 6,426 Other comprehensive loss (Notes 1 and 4)................... (5,494) (5,494) ---------- ---- -------- -------- ------- -------- BALANCE AT MARCH 31, 2001................... 26,974,526 $270 $470,077 $(25,751) $(5,494) $439,102 ========== ==== ======== ======== ======= ========
See accompanying notes to consolidated financial statements. 5 KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands)
Three Months Ended March 31, -------------------- 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.............................................. $ 6,426 $ 9,578 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 13,433 9,323 Cumulative effect of change in accounting principle..... 1,392 Provision for uncollectable tenant receivables and deferred rent.......................................... 1,336 482 Minority interest in earnings of Operating Partnership and Development LLCs................................... 979 1,496 Non-cash amortization of restricted stock grants........ 548 102 Net (gains) losses on dispositions of operating properties............................................. (305) 305 Other................................................... (77) (192) Changes in assets and liabilities: Tenant receivables..................................... 1,372 (3,164) Deferred leasing costs................................. (106) (1,716) Prepaid expenses and other assets...................... (4,316) (1,638) Accounts payable and accrued expenses.................. 289 687 Rents received in advance, tenant security deposits and deferred revenue (Note 5)......................... 14,217 (1,204) Accrued distributions to Cumulative Redeemable Preferred unitholders................................. 300 --------- --------- Net cash provided by operating activities............. 35,188 14,359 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for operating properties................... (4,778) (1,484) Expenditures for undeveloped land and construction in progress............................................... (25,819) (39,218) Net proceeds received from dispositions of operating properties............................................. 3,220 3,350 Net advances to unconsolidated subsidiary............... (1,154) --------- --------- Net cash used in investing activities................. (27,377) (38,506) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings on unsecured line of credit................................................. (29,000) 64,500 Proceeds from secured debt.............................. 9,282 Principal payments on secured debt...................... (1,429) (1,174) Financing costs......................................... (78) (2,088) Share repurchase program................................ (41,267) Proceeds from exercise of stock options................. 907 Decrease in restricted cash (Note 2).................... 28,352 1,275 Distribution paid to minority interests in Development LLCs................................................... (175) (457) Distributions paid to common stockholders and common unitholders............................................ (13,601) (13,457) --------- --------- Net cash (used in) provided by financing activities... (5,742) 7,332 --------- --------- Net increase (decrease) in cash and cash equivalents..... 2,069 (16,815) Cash and cash equivalents, beginning of period........... 17,600 26,116 --------- --------- Cash and cash equivalents, end of period................. $ 19,669 $ 9,301 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of capitalized interest..... $ 8,810 $ 7,218 ========= ========= Distributions paid to Cumulative Redeemable Preferred unitholders............................................ $ 3,375 $ 3,077 ========= ========= NON-CASH TRANSACTIONS: Accrual of distributions payable (Note 9)............... $ 14,523 $ 13,513 ========= ========= Note receivable repaid in connection with property acquisition (Note 2)................................... $ 33,274 ========= Issuance of secured note payable in connection with undeveloped land acquisition........................... $ 8,500 =========
See accompanying notes to consolidated financial statements. 6 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended March 31, 2001 and 2000 (Unaudited) 1. Organization and Basis of Presentation Organization Kilroy Realty Corporation (the "Company") develops, owns, and operates office and industrial real estate, primarily in Southern California. The Company operates as a self-administered real estate investment trust ("REIT"). As of March 31, 2001, the Company's stabilized portfolio of operating properties consisted of 85 office buildings (the "Office Properties") and 77 industrial buildings (the "Industrial Properties"), which encompassed an aggregate of approximately 7.1 million and 5.8 million rentable square feet, respectively, and was approximately 96.6% occupied. The Company's stabilized portfolio of operating properties consists of all of the Company's Office and Industrial Properties excluding properties recently developed by the Company that have not yet reached 95.0% occupancy ("lease-up" properties) and projects currently under construction or in pre-development. As of March 31, 2001, the Company had two office properties encompassing an aggregate of approximately 110,500 rentable square feet which were in the lease-up phase. Lease-up properties are included in land and improvements and building and improvements on the consolidated balance sheets upon building shell completion. In addition, as of March 31, 2001, the Company had ten office properties under construction or committed for construction which when completed are expected to encompass an aggregate of approximately 920,900 rentable square feet. The Company owns its interests in all of its properties through Kilroy Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance Partnership, L.P. (the "Finance Partnership") and conducts substantially all of its operations through the Operating Partnership. The Company owned an 89.2% general partnership interest in the Operating Partnership as of March 31, 2001. The Operating Partnership owns a 50% interest in two limited liability companies (the "Development LLCs") which were formed to develop two multi-phased office projects in San Diego, California. The Allen Group, a group of affiliated real estate development and investment companies based in San Diego, California, is the other 50% joint venture partner. The Development LLCs are consolidated for financial reporting purposes since the Company controls all significant development and operating decisions. On January 1, 2001, Kilroy Services, Inc. ("KSI") was merged into a newly formed entity, Kilroy Services, LLC ("KSLLC"). The Company historically accounted for the operating results of the development services business conducted by KSI under the equity method of accounting. Prior to the merger, John B. Kilroy, Sr., the Chairman of the Company's Board of Directors, and John B. Kilroy, Jr., the Company's President and Chief Executive Officer, owned 100% of the voting interest of KSI and the Operating Partnership owned 100% of the non-voting preferred stock and a 95% economic interest in KSI. In connection with the merger, Messers Kilroy received $8,000 in cash for their economic interest and KSLLC became a wholly-owned subsidiary of the Company. As a result, KSLLC was consolidated for financial reporting purposes beginning January 1, 2001. Unless otherwise indicated, all references to the Company include the Operating Partnership, the Finance Partnership, KSLLC, the Development LLC's, and all wholly-owned subsidiaries and controlled entities. Basis of Presentation The accompanying interim financial statements have been prepared by the Company's management in accordance with generally accepted accounting principles ("GAAP") and in conjunction with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP in the United States of America for complete financial statements. In the opinion of management, the 7 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) interim financial statements presented herein reflect all adjustments of a normal and recurring nature which are considered necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Certain prior year amounts have been reclassified to conform to the current period's presentation. New Accounting Pronouncement As part of the Company's overall interest rate risk management strategy, the Company uses derivative instruments, including interest rate swaps and caps, to hedge exposures to interest rate risk on its variable-rate debt. The Company does not enter into any derivative instruments for speculative purposes. On January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (collectively, "SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments. Specifically, SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet at fair value. Additionally, any of the adjustments to fair value will affect either shareholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes. The Company determines fair value based upon available market information at each balance sheet date using standard valuation techniques such as discounted cash flow analysis and option pricing models. Prior to the adoption of SFAS 133, the Company applied deferral accounting for all derivative financial instruments that were designated as hedges. Amounts paid or received under these agreements were recognized as adjustments to interest expense. The initial premiums on cap agreements were amortized over the life of the agreement using the straight-line method. On January 1, 2001, in connection with the adoption of SFAS 133, the Company recorded a $1.4 million cumulative effect of change in accounting principle to record an existing cap agreement at fair market value. The Company also recorded a $2.0 million non-cash charge to other comprehensive loss to record the Company's swap on the balance sheet at fair market value. 2. Acquisitions, Dispositions and Completed Development Projects Acquisition of Land In January 2001, the Company acquired the fee interest in a parcel of land at 9455 Town Center Drive, San Diego for $3.1 million. The Company had previously leased this land from the city of San Diego. This land is the site of one of the Company's Office Properties. Related Party Acquisition In January 2001, the Operating Partnership purchased a 75% tenancy-in- common interest in a three building office complex located in El Segundo, California for $33.4 million in cash. The complex, which encompasses an aggregate of approximately 366,000 rentable square feet, is comprised of two office buildings and a parking structure. One of the office buildings is 100% leased by Hughes Space & Communications Company. The Company is currently redeveloping the second office building. The Company partially funded the acquisition with $28.4 million in proceeds from property dispositions that were held as restricted cash for the use in tax-deferred property exchanges and included in 8 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) restricted cash at December 31, 2000. The remaining $5.0 million was funded with borrowings under the Company's unsecured line of credit. The interests were purchased from entities owned by John B. Kilroy, Sr., the Company's Chairman of the Board of Directors, John B. Kilroy, Jr. the Company's President and Chief Executive Officer, and certain other Kilroy family members. Concurrent with the purchase of the 75% interest, the outstanding note receivable from related party and accrued interest balances were paid to the Company. As a result of the acquisition, the Company owned a 100% interest in the complex at March 31, 2001. The initial 25% tenancy-in-common interest was acquired by a wholly owned subsidiary of the Company in October 2000 and was recorded as an investment in unconsolidated real estate on the consolidated balance sheet as of December 31, 2000. Dispositions In February 2001, the Company sold one industrial building to an unaffiliated third party for an aggregate sales price of approximately $3.3 million in cash. The building, which encompasses approximately 39,700 rentable square feet, is located in San Diego, California. The Company recorded a gain of approximately $0.3 million in connection with the sale. The Company used the sales proceeds to fund development expenditures. Completed Development Projects At March 31, 2001, the Company had the following two office properties in lease-up:
Percentage Leased or Under Letter of Estimated Rentable Square Intent at Stabilization Property Type Location Completion Date # of Buildings Feet March 31, 2001 Date(1) - ------------- ------------- --------------- -------------- --------------- ------------------ ------------- Office.................. Calabasas, CA Q1 2001 1 98,700 49% Q1 2002 Office.................. Calabasas, CA Q1 2001 1 11,800 100% Q3 2001 --- ------- Total .................. 2 110,500 54% === =======
- -------- (1) Based on Management's estimation of the earlier of the stabilized occupancy (95%) or one year from the date of substantial completion. 3. Unsecured Line of Credit As of March 31, 2001, the Company had borrowings of $162 million outstanding under its revolving unsecured line of credit (the "Credit Facility") and availability of approximately $154 million. The Credit Facility bears interest at an annual rate between LIBOR plus 1.13% and LIBOR plus 1.75% (6.69% at March 31, 2001), depending upon the Company's leverage ratio at the time of borrowing. The Company expects to use the Credit Facility to finance development expenditures, to fund potential undeveloped land acquisitions and for general corporate purposes. Total interest capitalized for the three months ended March 31, 2001 and 2000 was $3.3 million and $4.0 million, respectively. 4. Derivative Financial Instruments and Interest Rate Risk Management The Company is exposed to the effect of interest rate changes in the normal course of business. The Company mitigates these risks by following established risk management policies and procedures which includes the periodic use of derivatives. The Company's primary strategy in entering into derivative contracts is to 9 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) minimize the variability that changes in interest rates could have on its future cash flows. The Company generally employs derivative instruments that are designated as cash flow hedges, typically interest rate swaps and caps, to effectively convert a portion of its variable rate debt to fixed rate debt. The Company does not enter into derivative instruments for speculative purposes. Interest Rate Swaps and Caps For interest rate swap agreements, the Company receives variable interest rate payments and pays fixed interest rate payments, thereby creating the equivalent of fixed rate debt. For interest rate cap agreements the Company effectively limits its interest expense to a certain specified rate on a portion of its variable rate debt. These agreements are reflected at fair value in the Company's consolidated balance sheet and the related gains or losses on these contracts are deferred in stockholders' equity as a component of accumulated other comprehensive income or loss. To the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the interest payments being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in earnings. For the three months ended March 31, 2001, the Company did not record any gains or losses attributable to cash flow hedge ineffectiveness since the terms of the Company's swap contracts and debt obligations are effectively matched. As of March 31, 2001, the Company had two interest rate swap agreements to receive variable-rates of interest (LIBOR) and pay fixed-rates of interest (weighted average rate of 6.21%) on an aggregate notional amount of $300 million, $150 million which expires in February 2002 and $150 million which expires in November 2002. The Company, through one of the Development LLC's, also had one interest rate cap agreement with a LIBOR based cap rate of 8.50% and a notional amount of $48.1 million at March 31, 2001. The agreement had an initial notional amount of $21.1 million that increases to $57.0 million through August 2001, and then remains at $57.0 million until expiration in April 2002. Each of these instruments have been designated as cash flow hedges. As of March 31, 2001, the Company has a derivative liability of $5.5 million, which is included in accounts payable and accrued expenses in the consolidated balance sheet. During the next twelve months, the Company estimates that it will record approximately $4.7 million of interest expense related to these instruments. In January 2001, the Company terminated an interest rate cap agreement which had a LIBOR based cap rate of 6.50% and a notional amount of $150 million. 5. Deferred Revenue In January 2001, one of the Company's tenants, eToys, Inc., defaulted on its lease and as a result, the Company drew $15.0 million under two letters of credit which were held as credit support under the terms of the lease and as security for the related tenant improvements and leasing commissions. 6. Minority Interests Minority interests represent the preferred limited partnership interests in the Operating Partnership, the common limited partnership interests in the Operating Partnership not owned by the Company, and interests held by The Allen Group in the Development LLCs. The Company owned an 89.2% general partnership interest in the Operating Partnership as of March 31, 2001. During the three months ended March 31, 2001, 466,236 common units of the Operating Partnership were exchanged into shares of the Company's common stock on a one-for-one basis. Of these 466,236 common limited partnership units, 242,669 common limited partnership units were owned by a partnership affiliated with The Allen Group. Neither the Company nor the Operating Partnership received any proceeds from the issuance of the common stock to the identified common unitholders. 10 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Segment Disclosure The Company's reportable segments consist of the two types of commercial real estate properties for which management internally evaluates operating performance and financial results: Office Properties and Industrial Properties. The Company also has certain corporate level activities including legal, accounting, finance, and management information systems which are not considered separate operating segments. The Company evaluates the performance of its segments based upon net operating income. Net operating income is defined as operating revenues (rental income, tenant reimbursements and other income) less property and related expenses (property expenses, real estate taxes and ground leases) and does not include interest income and expense, depreciation and amortization and corporate general and administrative expenses. All operating revenues are comprised of amounts received from third-party tenants.
Three Months Ended March 31, -------------------- 2001 2000 --------- --------- (in thousands) Revenues and Expenses: Office Properties: Operating revenues..................................... $ 38,356 $ 29,874 Property and related expenses.......................... 9,086 7,117 --------- --------- Net operating income, as defined....................... 29,270 22,757 --------- --------- Industrial Properties: Operating revenues..................................... 11,575 13,603 Property and related expenses.......................... 1,836 2,117 --------- --------- Net operating income, as defined....................... 9,739 11,486 --------- --------- Total Reportable Segments: Operating revenues..................................... 49,931 43,477 Property and related expenses.......................... 10,922 9,234 --------- --------- Net operating income, as defined....................... 39,009 34,243 --------- --------- Reconciliation to Consolidated Net Income: Total net operating income, as defined, for reportable segments.............................................. 39,009 34,243 Other unallocated revenues: Interest income...................................... 436 294 Other unallocated expenses: General and administrative expenses.................. 3,354 2,632 Interest expense..................................... 10,791 7,828 Depreciation and amortization........................ 13,433 9,323 --------- --------- Income from operations................................. 11,867 14,754 Net gains (losses) on dispositions of operating properties............................................ 305 (305) Minority interests..................................... (4,354) (4,871) Cumulative effect of change in accounting principle.... (1,392) --------- --------- Net income............................................. $ 6,426 $ 9,578 ========= =========
11 KILROY REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding for the period plus the number of common shares issuable assuming the exercise of all dilutive securities. The Company does not consider common units of the Operating Partnership to be dilutive since the exchange of common units into common stock is on a one-for-one basis and would not have any effect on diluted earnings per share. The following table reconciles the numerator and denominator of the basic and diluted per-share computations for net income.
Three Months Ended March 31, ------------------------ 2001 2000 ----------- ----------- Numerator: Net income before cumulative effect of change in accounting principle............................... $ 7,818 $ 9,578 Cumulative effect of change in accounting principle.......................................... (1,392) ----------- ----------- Net income--numerator for basic and diluted earnings per share.......................................... $ 6,426 $ 9,578 =========== =========== Denominator: Basic weighted average shares outstanding........... 26,713,078 27,228,497 Effect of dilutive securities--stock options........ 258,211 390 ----------- ----------- Diluted weighted average shares and common share equivalents outstanding............................ 26,971,289 27,228,887 =========== =========== Basic and diluted earnings per share: Net income before cumulative effect of change in accounting principle............................... $ 0.29 $ 0.35 Cumulative effect of change in accounting principle.......................................... (0.05) ----------- ----------- Net income.......................................... $ 0.24 $ 0.35 =========== ===========
At March 31, 2001, Company employees and directors held options to purchase 88,000 shares of the Company's common stock that were antidilutive to the diluted earnings per share computation. These options could become dilutive in future periods if the average market price of the Company's common stock exceeds the exercise price of the outstanding options. 9. Subsequent Events On April 16, 2001, aggregate distributions of $14.5 million were paid to common stockholders and common unitholders of record on March 31, 2001. On April 24, 2001, the Company sold two industrial buildings encompassing an aggregate of approximately 162,200 rentable square feet to an unaffiliated third party. The buildings, which are located in Roseville, CA, were sold for an aggregate sales price of $15.4 million in cash. In January 2001, one of the Company's tenants, eToys, defaulted on its lease and declared bankruptcy. Subsequently, the Company drew $15.0 million under two letters of credit which were held as credit support under the terms of the lease and as security for the related tenant improvements and leasing commissions. On May 2, 2001, the United States Bankruptcy Court for the District of Delaware approved a stipulation under which the eToys lease was terminated. Upon the execution of the stipulation, the Company obtained possession of approximately 128,000 of the total 151,000 rentable square feet leased to eToys and will have the right to obtain possession of the remaining 23,000 rentable square feet by May 31, 2001. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion relates to the consolidated financial statements of the Company and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Some of the enclosed information presented is forward-looking in nature, including information concerning development timing and investment amounts. Although the information is based on the Company's current expectations, actual results could vary from expectations stated here. Numerous factors will affect the Company's actual results, some of which are beyond its control. These include the timing and strength of regional economic growth, the strength of commercial and industrial real estate markets, competitive market conditions, future interest rate levels and capital market conditions. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report. The Company assumes no obligation to update publicly any forward-looking information, whether as a result of new information, future events or otherwise. For a discussion of important risks related to the Company's business, and an investment in its securities, including risks that could cause actual results and events to differ materially from results and events referred to in the forward-looking information, see the discussion under the caption "Business Risks" in the Company's annual report on Form 10-K for the year ended December 31, 2000. In light of these risks, uncertainties and assumptions, the forward-looking events contained herein might not occur. Overview and Background Kilroy Realty Corporation (the "Company") develops, owns, and operates office and industrial real estate, primarily in Southern California. The Company operates as a self-administered real estate investment trust ("REIT"). The Company owns its interests in all of its properties through Kilroy Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance Partnership, L.P. and conducts substantially all of its operations through the Operating Partnership. The Company owned an 89.2% general partnership interest in the Operating Partnership as of March 31, 2001. Results of Operations The Company continues to capitalize on its development program which at March 31, 2001 consisted of an aggregate of approximately 1.0 million rentable square feet of in-process and committed office development projects and an aggregate of approximately 1.2 million rentable square feet of future office development projects. The Company's stabilized portfolio of operating properties consists of all of the Company's office and industrial properties excluding properties recently developed by the Company that have not yet reached 95.0% occupancy ("lease-up" properties) and projects currently under construction or in pre-development. During the year ended December 31, 2000 the Company completed the development of nine office buildings encompassing an aggregate of approximately 1.0 million rentable square feet. All of these completed development properties were included in the Company's portfolio of stabilized operating properties at March 31, 2001. At March 31, 2001, the Company had two office buildings encompassing an aggregate of approximately 110,500 rentable square feet in the lease-up phase and seven office projects under construction which when completed are expected to encompass an aggregate of approximately 702,700 rentable square feet. During the three months ended March 31, 2001, the Company acquired a 75% tenancy-in-common interest in a three building office complex encompassing an aggregate of approximately 366,000 rentable square feet. As a result of the acquisition, the Company owned a 100% interest in the complex at March 31, 2001. The initial 25% tenancy-in-common interest was acquired by a wholly- owned subsidiary of the Company in October 2000 and was recorded as an investment in unconsolidated real estate on the consolidated balance sheet as of December 31, 2000. The Company did not acquire any other operating properties during the year ended December 31, 2000. During the three months ended March 31, 2001, the Company disposed of one 13 industrial building encompassing an aggregate of approximately 39,700 rentable square feet, for an aggregate sales price of $3.3 million. During the year ended December 31, 2000, the Company disposed of nine office and nine industrial buildings encompassing an aggregate of approximately 286,700 and 669,800 rentable square feet, respectively, for an aggregate sales price of $113.6 million. As a result of the property acquired and the projects developed by the Company subsequent to March 31, 2000, net of the effect of properties disposed of subsequent to March 31, 2000, rentable square footage in the Company's portfolio of stabilized properties increased by an aggregate of approximately 175,000 rentable square feet, or 1.4%, to 12.8 million rentable square feet at March 31, 2001 compared to 12.6 million rentable square feet at March 31, 2000. As of March 31, 2001, the Company's stabilized portfolio was comprised of 85 office properties (the "Office Properties") encompassing an aggregate of approximately 7.1 million rentable square feet and 77 industrial properties (the "Industrial Properties") encompassing an aggregate of approximately 5.8 million rentable square feet. The stabilized portfolio occupancy rate at March 31, 2001 was 96.6%, with the Office and Industrial Properties 95.7% and 97.7% occupied, respectively. Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Three Months Ended March 31, --------------- Dollar Percentage 2001 2000 Change Change ------- ------- ------- ---------- (unaudited, dollars in thousands) Revenues: Rental income............................. $44,379 $37,702 $ 6,677 17.7% Tenant reimbursements..................... 5,520 4,694 826 17.6 Interest income........................... 436 294 142 48.3 Other income.............................. 32 1,081 (1,049) (97.0) ------- ------- ------- Total revenues.......................... 50,367 43,771 6,596 15.1 ------- ------- ------- Expenses: Property expenses......................... 6,895 5,458 1,437 26.3 Real estate taxes......................... 3,635 3,387 248 7.3 General and administrative expenses....... 3,354 2,632 722 27.4 Ground leases............................. 392 389 3 0.8 Interest expense.......................... 10,791 7,828 2,963 37.9 Depreciation and amortization............. 13,433 9,323 4,110 44.1 ------- ------- ------- Total expenses.......................... 38,500 29,017 9,483 32.7 ------- ------- ------- Income from operations...................... $11,867 $14,754 $(2,887) (19.6)% ======= ======= =======
14 Rental Operations Management evaluates the operations of its portfolio based on operating property type. The following tables compare the net operating income, defined as operating revenues (rental income, tenant reimbursements and other income) less property and related expenses (property expenses, real estate taxes and ground leases) before depreciation, for the Office and Industrial Properties for the three months ended March 31, 2001 and 2000. Office Properties
Total Office Portfolio Core Office Portfolio(1) ---------------------------------- --------------------------------- Dollar Percentage Dollar Percentage 2001 2000 Change Change 2001 2000 Change Change ------- ------- ------ ---------- ------- ------- ------ ---------- Operating revenues: Rental income......... $34,096 $26,578 $7,518 28.3% $26,017 $25,655 $362 1.4% Tenant reimbursement.. 4,234 3,162 1,072 33.9 3,334 3,071 263 8.6 Other income.......... 26 134 (108) (80.6) 48 127 (79) (62.2) ------- ------- ------ ------- ------- ---- Total............... 38,356 29,874 8,482 28.4 29,399 28,853 546 1.9 ------- ------- ------ ------- ------- ---- Property and related expenses: Property expenses..... 6,075 4,499 1,576 35.0 4,490 4,245 245 5.8 Real estate taxes..... 2,619 2,229 390 17.5 2,038 2,114 (76) (3.6) Ground leases......... 392 389 3 0.8 332 380 (48) (12.6) ------- ------- ------ ------- ------- ---- Total............... 9,086 7,117 1,969 27.7 6,860 6,739 121 1.8 ------- ------- ------ ------- ------- ---- Net operating income, as defined................ $29,270 $22,757 $6,513 28.6% $22,539 $22,114 $425 1.9% ======= ======= ====== ======= ======= ====
- -------- (1) Stabilized office properties owned at January 1, 2000 and still owned at March 31, 2001. Total revenues from Office Properties increased $8.5 million, or 28.4% to $38.4 million for the three months ended March 31, 2001 compared to $29.9 million for the three months ended March 31, 2000. Rental income from Office Properties increased $7.5 million, or 28.3% to $34.1 million for the three months ended March 31, 2001 compared to $26.6 million for the three months ended March 31, 2000. Rental income generated by the Core Office Portfolio increased $0.4 million, or 1.4% for the three months ended March 31, 2001 as compared to the three months ended March 31, 2000. This increase was primarily attributable to growth provided by increases in rental rates on renewed and released space in this portfolio. Average occupancy in the Core Office Portfolio decreased 1.5% to 95.1% for the three months ended March 31, 2001 compared to 96.6% for the three months ended March 31, 2000. Of the remaining increase of $7.1 million in rental income from Office Properties, an increase of $8.0 million was generated by the office properties developed by the Company in 2000 (the "Office Development Properties"), offset by a decrease of $0.9 million in rental income attributed to the nine office buildings sold during 2000, (the "Office Dispositions"). Tenant reimbursements from Office Properties increased $1.1 million, or 33.9% to $4.2 million for the three months ended March 31, 2001 compared to $3.1 million for the three months ended March 31, 2000. An increase of $0.3 million, or 8.6% in tenant reimbursements was generated by the Core Office Portfolio and was primarily due to an increase in property expenses which were reimbursable by tenants. Of the remaining increase of $0.8 million, an increase of $0.9 million in tenant reimbursements was generated by the Office Development Properties offset by a decrease of $0.1 million generated by the Office Dispositions. Other income from Office Properties decreased $0.1 million or 80.6% to $26,000 for the three months ended March 31, 2001 compared to $0.1 million for the three months ended March 31, 2000. Other income from Office Properties for both periods consisted primarily of lease termination fees, management fees and tenant late charges. Total expenses from Office Properties increased $2.0 million, or 27.7% to $9.1 million for the three months ended March 31, 2001 compared to $7.1 million for the three months ended March 31, 2000. Property expenses from Office Properties increased $1.6 million, or 35.0% to $6.1 million for the three months ended March 31, 15 2001 compared to $4.5 million for the three months ended March 31, 2000. An increase of $0.2 million in property expenses was attributable to the Core Office Portfolio. This increase was primarily attributable to $140,000 of estimated repairs at the SeaTac office center due to damage resulting from the Seattle earthquake. Of the remaining increase of $1.4 million, an increase of $1.6 million generated by the Office Development Properties was offset by a decrease of $0.2 million generated by Office Dispositions. Real estate taxes increased $0.4 million, or 17.5% to $2.6 million for the three months ended March 31, 2001 as compared to $2.2 million for the three months ended March 31, 2000. An increase of $0.6 million attributable to the Office Development Properties was offset by a decrease of $0.1 million from the Office Dispositions. Real estate taxes for the Core Office Portfolio decreased $0.1 million, or 3.6% for the three months ended March 31, 2001 compared to the comparable period in 2000. This decrease was primarily due to the effect of prior year real estate taxes which were successfully appealed by the Company in 2001. Ground lease expense from Office Properties remained constant for both periods. Net operating income, as defined, from Office Properties increased $6.5 million, or 28.6% to $29.3 million for the three months ended March 31, 2001 compared to $22.8 million for the three months ended March 31, 2000. Of this increase, $0.4 million was generated by the Core Office Portfolio and represented a 1.9% increase in net operating income for the Core Office Portfolio. Excluding the effect of the $140,000 one-time repair costs due to damage resulting from the Seattle earthquake included in the first quarter 2001 results, net operating income for the Core Office Portfolio increased 2.6%. The remaining increase of $6.1 million was generated by an increase of $6.7 million from the Office Development Properties, offset by a $0.6 million decrease generated by the Office Dispositions. Industrial Properties
Total Industrial Portfolio Core Industrial Portfolio(1) ----------------------------------- ---------------------------------- Dollar Percentage Dollar Percentage 2001 2000 Change Change 2001 2000 Change Change ------- ------- ------- ---------- ------- ------- ------ ---------- Operating revenues: Rental income......... $10,283 $11,124 $ (841) (7.6)% $10,228 $ 9,175 $1,053 11.5% Tenant reimbursements....... 1,286 1,532 (246) (16.1) 1,268 1,251 17 1.4 Other income.......... 6 947 (941) (99.4) 5 946 (941) (99.5) ------- ------- ------- ------- ------- ------ Total............... 11,575 13,603 (2,028) (14.9) 11,501 11,372 129 1.1 ------- ------- ------- ------- ------- ------ Property and related expenses: Property expenses..... 820 959 (139) (14.5) 808 766 42 5.5 Real estate taxes..... 1,016 1,158 (142) (12.3) 1,011 960 51 5.3 ------- ------- ------- ------- ------- ------ Total............... 1,836 2,117 (281) (13.3) 1,819 1,726 93 5.4 ------- ------- ------- ------- ------- ------ Net operating income, as defined................ $ 9,739 $11,486 $(1,747) (15.2)% $ 9,682 $9,646 $ 36 0.4% ======= ======= ======= ======= ======= ======
- -------- (1) Stabilized industrial properties owned at January 1, 2000 and still owned at March 31, 2001. Total revenues from Industrial Properties decreased $2.0 million, or 14.9% to $11.6 million for the three months ended March 31, 2001 compared to $13.6 million for the three months ended March 31, 2000. Rental income from Industrial Properties decreased $0.8 million, or 7.6% to $10.3 million for the three months ended March 31, 2001 compared to $11.1 million for the three months ended March 31, 2000. Rental income generated by the Core Industrial Portfolio increased $1.1 million, or 11.5% for the three months ended March 31, 2001 as compared to the three months ended March 31, 2000. This increase was primarily attributable to an increase in rental rates on renewed and released space in this portfolio. In addition, rental income for the three months ended March 31, 2000 included a $0.4 million write-off of the deferred rent receivable balance for a tenant that terminated its lease. Average occupancy in the Core Industrial Portfolio increased 0.3% to 97.9% for the three months ended March 31, 2001 compared to 97.6% for the three months ended March 31, 2000. The $1.1 million increase in rental income generated by the Core Industrial Portfolio was offset by a decrease of $1.9 million in 16 rental income attributable to the ten industrial buildings sold during 2000 and 2001 (the "Industrial Dispositions"). Tenant reimbursements from Industrial Properties decreased $0.2 million, or 16.1% to $1.3 million for the three months ended March 31, 2001 compared to $1.5 million for three months ended March 31, 2000. This decrease was attributable to a $0.2 million decrease in tenant reimbursements generated by the Industrial Dispositions. Tenant reimbursements for the Core Industrial Portfolio remained consistent for the three months ended March 31, 2001 compared to the comparable period in 2000. Other income from Industrial Properties decreased $0.9 million, or 99.4% to $6,000 for the three months ended March 31, 2001 compared to $0.9 million for the three months ended March 31, 2000. Other income from Industrial Properties for the three months ended March 31, 2000 was comprised primarily of a $0.9 million lease termination fee from a building in El Segundo, California. Net of the $0.4 million write-off of the deferred rent receivable balance discussed above, the Company recognized a net lease termination fee of $0.5 million on this transaction. Total expenses from Industrial Properties decreased $0.3 million, or 13.3% to $1.8 million for the three months ended March 31, 2001 compared to $2.1 million for the three months ended March 31, 2000. Property expenses from Industrial Properties decreased by $0.1 million, or 14.5% to $0.8 million for the three months ended March 31, 2001 compared to $0.9 million for the three months ended March 31, 2000. The decrease was attributable to a $0.1 million decrease in property expenses generated by the Industrial Dispositions. Property expenses for the Core Industrial Portfolio remained consistent for the three months ended March 31, 2001 compared to the comparable period in 2000. Real estate taxes decreased by $0.1 million for the three months ended March 31, 2001 compared to the three months ended March 31, 2000. Real estate taxes for the Core Industrial Portfolio increased $0.1 million, or 5.3% for the three months ended March 31, 2001 compared to the same period in 2000. This $0.1 million increase was offset by a decrease of $0.2 million from the Industrial Dispositions. Net operating income, as defined, from Industrial Properties decreased $1.8 million, or 15.2% to $9.7 million for the three months ended March 31, 2001 compared to $11.5 million for the three months ended March 31, 2000. Net operating income for the Core Industrial Portfolio increased $36,000, or 0.4% for the three months ended March 31, 2001 compared to the same period in 2000. Excluding the effect of the $0.5 million net lease termination fee included in the first quarter 2000 results, net operating income for the Core Industrial Portfolio increased 5.9%. The decrease of $1.8 million in net operating income was due to the Industrial Dispositions. Non-Property Related Income and Expenses Interest income increased $0.1 million, or 48.3% to $0.4 million for the three months ended March 31, 2001 compared to $0.3 million for the three months ended March 31, 2000. The increase was due primarily to interest earned on restricted cash held for deferred tax property exchanges at the beginning of 2001. General and administrative expenses increased $0.7 million, or 27.4% to $3.3 million for the three months ended March 31, 2001 compared to $2.6 million for the three months ended March 31, 2000. This increase was primarily due to higher salaries and benefits. Interest expense increased $3.0 million, or 37.9% to $10.8 million for the three months ended March 31, 2001 compared to $7.8 million for the three months ended March 31, 2000, primarily due to a net increase in aggregate indebtedness. The Company's weighted average annual interest rate decreased approximately 0.4% to 7.6% at March 31, 2001 as compared to 8.0% at March 31, 2000. Depreciation and amortization increased $4.1 million, or 44.1% to $13.4 million for the three months ended March 31, 2001 compared to $9.3 million for the three months ended March 31, 2000. The increase was due primarily to depreciation on properties developed and stabilized by the Company subsequent to March 31, 2000 net of the effect of properties disposed of subsequent to March 31, 2000. 17 Liquidity and Capital Resources The Company has a $400 million unsecured revolving credit facility (the "Credit Facility") which bears interest at an annual rate between LIBOR plus 1.13% and LIBOR plus 1.75% (6.69% at March 31, 2001), depending upon the Company's leverage ratio at the time of borrowing, and matures in November 2002. As of March 31, 2001, the Company had borrowings of $162 million outstanding under the Credit Facility and availability of approximately $154 million. The Company uses the Credit Facility to finance development expenditures, to fund potential undeveloped land acquisitions and for general corporate purposes. The Company has a $100.0 million unsecured debt facility, which matures in September 2002 with two one-year extension options, requires monthly interest- only payments based upon an annual interest rate between LIBOR plus 1.13% and LIBOR plus 1.75% (6.69% at March 31, 2001), and prices based upon the same pricing tiers and leverage ratio as the Credit Facility. The same pool of unencumbered assets is used to determine availability for the Credit Facility and the $100.0 million unsecured debt facility. The following table sets forth the composition of the Company's secured debt at March 31, 2001 and December 31, 2000:
March 31, December 31, 2001 2000 --------- ------------ (in thousands) Mortgage note payable, due April 2009, fixed interest at 7.20%, monthly principal and interest payments............... $ 92,077 $ 92,465 Mortgage note payable, due October 2003, interest at LIBOR plus 1.75%, (7.11% and 8.32% at March 31, 2001 and December 31, 2000, respectively), monthly interest-only payments(a)........................................... 83,213 83,213 Mortgage note payable, due February 2022, fixed interest at 8.35%, monthly principal and interest payments(b)............ 79,149 79,495 Construction loan payable, due April 2002, interest between LIBOR plus 2.00% and LIBOR plus 2.70%, (7.49% and 8.86% at March 31, 2001 and December 31, 2000, respectively)(a)(c)(d)................................ 52,887 50,068 Mortgage note payable, due May 2017, fixed interest at 7.15%, monthly principal and interest payments............... 28,316 28,549 Mortgage note payable, due June 2004, interest at LIBOR plus 1.75%, (7.03% and 8.49% at March 31, 2001 and December 31, 2000, respectively), monthly principal and interest payments(a)........................................... 21,823 21,890 Mortgage loan payable, due November 2014, fixed interest at 8.13%, monthly principle and interest payments............... 12,804 12,844 Mortgage note payable, due December 2005, fixed interest at 8.45%, monthly principal and interest payments............... 12,405 12,523 Construction loan payable, due November 2002, interest at LIBOR plus 3.00% (8.26% and 9.73% at March 31, 2001 and December 31, 2000, respectively)(a)(d)............ 11,724 11,367 Mortgage note payable, due November 2014, fixed interest at 8.43%, monthly principal and interest payments............... 10,476 10,578 Construction loan payable, due October 2002, interest at LIBOR plus 1.75% (7.09% and 8.37% at March 31, 2001 and December 31, 2000, respectively)(a)(e)............ 13,697 9,399 Mortgage note payable, due December 2003, fixed interest at 10.00%, monthly interest accrued through December 31, 2000, no interest accrues thereafter........................... 8,410 8,500 Mortgage note payable, due October 2013, fixed interest at 8.21%, monthly principal and interest payments............... 6,991 7,070 Construction loan payable, due April 2002, interest at LIBOR plus 1.75% (6.85% and 9.10% at March 31, 2001 and December 31, 2000, respectively)(a)(d)............ 6,569 4,727 -------- -------- $440,541 $432,688 ======== ========
- -------- (a) The variable interest rates stated as of March 31, 2001 and December 31, 2000 are based on the last repricing date during the respective periods. The repricing rates may not be equal to LIBOR at March 31, 2001 and December 31, 2000. 18 (b) Beginning February 2005, the mortgage note is subject to increases in the effective annual interest rate to the greater of 10.35% or the sum of the interest rate for U.S. Treasury Securities maturing 15 years from the reset date plus 2.00%. (c) The Company, through one of the Development LLCs, has an interest rate cap agreement with a LIBOR based cap rate of 8.50% to effectively limit interest expense on the this variable rate construction loan during periods of increasing interest rates. The agreement had an initial notional amount of $21.1 million that increases to $57.0 million during the period from May 2000 through August 2001, and then remains at $57.0 million until expiration in April 2002. The notional amount of the interest rate cap agreement was approximately $48.1 and $42.0 million at March 31, 2001 and December 31, 2000, respectively. (d) This loan contains options to extend the maturity for up to two six-month periods. (e) This loan contains an option to extend the maturity twelve months. The following table sets forth certain information with respect to the maturities and scheduled principal repayments of the Company's secured debt and unsecured term facility at March 31, 2001, assuming the exercise of available debt extension options:
Year Ending Dollars ----------- -------------- (in thousands) Remaining 2001.............................................. $ 4,302 2002........................................................ 6,148 2003........................................................ 183,145 2004........................................................ 127,719 2005........................................................ 16,965 Thereafter.................................................. 202,262 -------- Total..................................................... $540,541 ========
The following table sets forth certain information with respect to the Company's aggregate debt composition at March 31, 2001 and December 31, 2000:
Percentage of Total Weighted Average Debt Interest Rate ---------------------- ---------------------- March 31, December 31, March 31, December 31, 2001 2000 2001 2000 --------- ------------ --------- ------------ Secured vs. unsecured: Secured..................... 62.7% 59.8% 7.4% 8.2% Unsecured................... 37.3% 40.2% 7.8% 8.3% Fixed rate vs. variable rate: Fixed rate (1)(2)(5)........ 78.4% 55.6% 7.6% 8.1% Variable rate (3)(4)........ 21.6% 44.4% 7.2% 8.4%
- -------- (1) At March 31, 2001 and December 31, 2000, the Company had an interest rate swap agreement to fix LIBOR on $150 million of its floating rate debt at 6.95% that expires in February 2002. (2) In January 2001, the Company entered into an interest rate swap agreement to fix LIBOR on $150 million of its floating rate debt starting in January 2001 and expiring in November 2002. (3) At December 31, 2000, the Company had an interest rate cap agreement to cap LIBOR on $150 million of its floating rate debt at 6.50%. The Company terminated this cap agreement in January 2001. (4) At March 31, 2001, one of the Development LLCs had an interest-rate cap agreement to cap LIBOR on its floating rate construction debt at 8.50%. The notional amount of the cap increases over the life of the agreement as the balance of the related construction loan increases. At March 31, 2001 and December 31, 2000, the notional amount of the interest rate cap was approximately $48.1 million and $42.0 million, respectively. (5) The percentage of fixed rate debt to total debt at March 31, 2001 and December 31, 2000 does not take into consideration the portion of floating rate debt capped by the Company's interest-rate cap agreements. Including the effects of the interest-rate cap agreements, the Company had fixed or capped approximately 85.2% and 82.1% of its total outstanding debt at March 31, 2001 and December 31, 2000, respectively. 19 As of May 14, 2001, the Company had an aggregate of $313 million of equity securities available for issuance under a registration statement. Capital Expenditures As of March 31, 2001, the Company had an aggregate of approximately 1.0 million rentable square feet of office space that was either in lease-up, under construction or committed for construction at a total budgeted cost of approximately $250 million. The Company has spent an aggregate of approximately $134 million on these projects as of March 31, 2001. The Company intends to finance $9 million of the remaining $116 million of presently budgeted development costs, with proceeds from construction loans obtained in 2000. The Company intends to finance the remaining $107 million of budgeted development costs with additional construction loan financing, proceeds from the Company's dispositions program, borrowings under the Credit Facility and from working capital. In connection with an agreement signed with The Allen Group in October 1997, the Company has agreed to purchase one office property encompassing approximately 128,000 rentable square feet, subject to the property meeting certain occupancy thresholds and other tenancy requirements. The purchase price for this property will be determined at the time of acquisition based on the net operating income at the time of acquisition. The Company expects that in the event that this acquisition does occur, it would be financed with borrowings under the Credit Facility and the issuance of common limited partnership units of the Operating Partnership. The Company believes that it will have sufficient capital resources to satisfy its obligations and planned capital expenditures for the next twelve months. The Company expects to meet its long-term liquidity requirements including possible future development and undeveloped land acquisitions, through retained cash flow, long-term secured and unsecured borrowings, proceeds from the Company's dispositions program, or the issuance of common or preferred units of the Operating Partnership. Building and Lease Information The following tables set forth certain information regarding the Company's Office and Industrial Properties at March 31, 2001: Occupancy by Segment Type
Square Feet Number of ----------------------------------------- Region Buildings Total Leased Available Occupancy ------ --------- ---------- ---------- --------- --------- Office Properties: Los Angeles.............. 31 3,199,985 3,091,586 108,399 96.6% Orange County............ 13 624,866 444,856 180,010 71.2 San Diego................ 35 2,529,613 2,529,613 100.0 Other.................... 6 709,575 696,550 13,025 98.2 --- ---------- ---------- ------- 85 7,064,039 6,762,605 301,434 95.7 --- ---------- ---------- ------- Industrial Properties: Los Angeles.............. 7 554,490 553,904 586 99.9 Orange County............ 62 4,393,537 4,263,032 130,505 97.0 Other.................... 8 820,124 820,124 100.0 --- ---------- ---------- ------- 77 5,768,151 5,637,060 131,091 97.7 --- ---------- ---------- ------- Total Portfolio.......... 162 12,832,190 12,399,665 432,525 96.6% === ========== ========== =======
20 Lease Expirations by Segment Type
Percentage Total of Total Square Leased Annual Base Footage Square Feet Rent Under Number of of Represented Expiring Expiring Expiring by Expiring Leases Year of Lease Expiration Leases(1) Leases Leases(2) (in 000's)(3) ------------------------ --------- --------- ----------- ------------- Office Properties: Remaining 2001............... 50 654,785 10.6% $ 9,318 2002......................... 59 472,594 7.6 8,756 2003......................... 53 365,557 5.9 7,463 2004......................... 50 771,081 12.4 17,313 2005......................... 52 919,251 14.8 16,890 2006......................... 29 573,446 9.3 13,604 --- --------- ---- -------- 293 3,756,714 60.6 73,344 --- --------- ---- -------- Industrial Properties: Remaining 2001............... 59 576,754 10.3 4,084 2002......................... 54 323,788 5.8 3,019 2003......................... 48 760,939 13.6 5,455 2004......................... 17 542,795 9.7 3,917 2005......................... 15 746,635 13.3 5,676 2006......................... 8 621,390 11.1 4,930 --- --------- ---- -------- 201 3,572,301 63.8 27,081 --- --------- ---- -------- Total Portfolio.............. 494 7,329,015 57.1% $100,425 === ========= ========
- -------- (1) Represents the total number of tenants. Some tenants have multiple leases. Excludes leases for amenity, retail, parking and month-to-month tenants. (2) Based on total leased square footage for the respective portfolios as of March 31, 2001. (3) Determined based upon aggregate base rent to be received over the term, divided by the term in months, multiplied by 12, including all leases executed on or before April 1, 2001. Leasing Activity by Segment Type For the Three Months Ended March 31, 2001
Weighted Number of Average Leases(1) Square Feet(1) Change in Lease Term ----------- ----------------- Change In Cash Retention (in New Renewal New Renewal(2) Rents(2) Rents(3) Rate(4) months) --- ------- ------ ---------- --------- --------- --------- ---------- Office Properties....... 6 8 36,318 86,555 23.0% 16.8% 36.1% 34 Industrial Properties... 7 8 23,930 169,268 63.8% 40.2% 88.5% 55 --- --- ------ ------- ---- ---- ---- --- Total Portfolio......... 13 16 60,248 255,823 47.2% 30.7% 59.3% 47 === === ====== ======= ==== ==== ==== ===
- -------- (1) Includes first and second generation space, net of month-to-month leases. Excludes leasing on new construction. First generation space is defined as the space first leased by the Company. (2) Calculated as the change between GAAP rents for new/renewed leases and the expiring GAAP rents for the same space. (3) Calculated as the change between stated rents for new/renewed leases and the expiring stated rents for the same space. (4) Calculated as the percentage of space either renewed or expanded into by existing tenants at lease expiration. 21 Historical Cash Flows The principal sources of funding for development, acquisitions, and capital expenditures are the Credit Facility, cash flow from operating activities, secured and unsecured debt financing and proceeds from the Company's dispositions. The Company's net cash provided by operating activities increased $20.8 million, or 144.4% to $35.2 million for the three months ended March 31, 2001 compared to $14.4 million for the three months ended March 31, 2000. This increase was primarily attributable to $15.0 million the Company drew under letters of credit that the Company held as credit support under the terms of the lease and as security for the related tenant improvements and leasing commissions after one of its tenants defaulted on its lease in January 2001. The increase is also due to timing differences in payments of accounts payable at the end of each comparable period. Net cash used in investing activities decreased $11.1 million, or 28.8% to $27.4 million for the three months ended March 31, 2000 compared to $38.5 million for the three months ended March 31, 2000. Cash used in investing activities for the three months ended March 31, 2001 consisted primarily of the acquisition of the fee interest in the land at the site of one of it Office Properties for $3.1 million, expenditures for construction in progress of $25.7 million, and $1.1 million in additional tenant improvements and capital expenditures offset by $3.2 million in net proceeds received from the sale of one industrial building. Cash used in investing activities for the three months ended March 31, 2000 consisted primarily of the purchase of 17 acres of undeveloped land for $11.3 million (net of an $8.5 million mortgage note payable issued in connection with the acquisition), expenditures for construction in progress of $36.4 million, and $1.5 million in additional tenant improvements and capital expenditures offset by $3.4 million in net proceeds received from the sale of two office buildings. Net cash used in financing activities decreased $13.0 million, or 178.3% to $5.7 million net cash used by financing activities for the three months ended March 31, 2001 compared to $7.3 million net cash provided by financing activities for the three months ended March 31, 2000. Cash used by financing activities for the three months ended March 31, 2001 consisted primarily of $29.0 million in repayments to the Credit Facility and $13.6 million in distributions paid to common stockholders and common unitholders, partially offset by a $28.3 decrease in restricted cash used in a tax deferred property exchange and $9.3 million of additional funding drawn under the Company's existing construction loans. Cash provided by financing activities for the three months ended March 31, 2000 consisted primarily of $64.5 million in borrowings under the Credit Facility, partially offset by $13.5 million in distributions paid to common stockholders and common unitholders, $0.5 million in distributions paid to the minority interests in the Development LLCs, and $41.3 million paid for the Company's stock repurchase program. Funds from Operations Industry analysts generally consider Funds From Operations, as defined by NAREIT, an alternative measure of performance for an equity REIT. Funds From Operations is defined by NAREIT to mean net income (loss) before minority interests of common unitholders (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. The Company considers Funds From Operations an appropriate measure of performance of an equity REIT because it is predicated on cash flow analyses. The Company believes that in order to facilitate a clear understanding of the historical operating results of the Company, Funds From Operations should be examined in conjunction with net income as presented in the financial statements included elsewhere in this report. The Company computes Funds From Operations in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper as clarified by the November 2000 NAREIT National Policy Bulletin which became effective on January 1, 2000 which may differ from the methodologies used by other equity REITs and, accordingly, may not be comparable to Funds From Operations published by such other REITs. Funds From Operations should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of the properties' financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of the properties' liquidity, nor is it indicative of funds available to fund the properties' cash needs, including the Company's ability to pay dividends or make distributions. 22 The following table presents the Company's Funds From Operations for the three months ended March 31, 2001 and 2000.
Three Months Ended March 31, ---------------- 2001 2000 ------- ------- (in thousands) Net income................................................ $ 6,426 $ 9,578 Adjustments: Minority interest in earnings of Operating Partnership.......................................... 845 1,372 Depreciation and amortization......................... 12,970 9,323 Net (gains) losses on dispositions of operating properties........................................... (305) 305 Cumulative effect of change in accounting principle... 1,392 Non-cash amortization of restricted stock grants...... 548 102 ------- ------- Funds From Operations..................................... $21,876 $20,680 ======= =======
Inflation The majority of the Company's tenant leases require tenants to pay most operating expenses, including real estate taxes, utilities, insurance, and increases in common area maintenance expenses, which reduce the Company's exposure to increases in costs and operating expenses resulting from inflation. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Changes in Primary Risk Exposures Information about the Company's changes in primary risk exposures from December 31, 2000 to March 31, 2001, is incorporated herein by reference from "Item 2: Management Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Tabular Presentation of Market Risk The tabular presentations below provide information about the Company's interest rate sensitive financial and derivative instruments as of March 31, 2001 and 2000. All of the Company's interest rate sensitive financial and derivative instruments are designated as held for purposes other than trading. Presentation at March 31, 2001 For the Credit Facility, the table presents the assumption that the outstanding principal balance at March 31, 2001 will be paid upon the Credit Facility's maturity in November 2002. The table also presents the expected maximum contractual weighted average interest rate index for outstanding Credit Facility borrowings through 2002. For variable rate secured debt and unsecured term debt, the table presents the assumption that all available debt extension options will either be exercised or extended and that the outstanding principal balance at March 31, 2001 will be paid upon the extended debt maturities. The table also presents the contractual weighted average interest rate index for outstanding variable rate mortgage debt borrowings through 2004. For fixed rate secured debt, the table presents the assumption that the outstanding principal balance at March 31, 2001 will be paid according to scheduled principal payments and that the Company will not prepay any of the outstanding principal balance. The table also presents the related contractual weighted-average interest rate at March 31, 2001 for outstanding fixed rate mortgage debt borrowings through 2005 and thereafter. For the Series A, Series C, and Series D Cumulative Redeemable Preferred units (the "Series A, Series C and Series D Preferred units") the table reflects the assumption that the Company is not contractually obligated to repay the outstanding balance of the Series A, Series C, and Series D Preferred units since the Series A, Series C and Series D Preferred units will either remain outstanding or be converted into shares of the Company's 8.075% Series A, 9.375% Series C, and 9.25% Series D Cumulative Redeemable Preferred stock, respectively, in 2008, 2008, and 2009, respectively when the Series A, Series C and Series D Preferred units become exchangeable at the option of the majority of the holders. The table also presents the related weighted-average interest rate at March 31, 2001 for outstanding Series A, C and D Preferred units through the exchange date. The same interest rates will apply when the Series A, C and D Preferred units are exchanged into the respective Cumulative Redeemable Preferred stock. 24 For the interest rate cap agreement, the table presents the notional amount, cap rate and the related interest rate index upon which the cap rate is based, by contractual maturity date. For the interest rate swap agreements, the table presents the aggregate notional amount, average contractual fixed pay rate, and related interest rate index upon which the floating receive rate is based, by contractual maturity date. Notional amounts are used solely to calculate the contractual cash flow to be received under the contract and do not reflect outstanding principal balances at March 31, 2001. Interest Rate Risk Analysis--Tabular Presentation Financial Assets and Liabilities Outstanding Principal by Expected Maturity Date March 31, 2001 (dollars in millions)
Maturity Date Fair Value at ------------------------------------------------ March 31, 2001 2002 2003 2004 2005 Thereafter Total 2001 ----- ------ ------ ------ ----- ---------- ------ ------ Liabilities: Unsecured line of credit: Variable rate......... $162.0 $162.0 $162.0 Average interest rate LIBOR LIBOR index................ +1.50% +1.50% Secured debt and unsecured term debt: Variable rate......... $ 0.2 $ 0.3 $168.5 $120.9 $289.9 $289.9 Average interest rate LIBOR LIBOR LIBOR LIBOR index................ +1.79% +1.79% +1.79% +1.79% Fixed rate............ $ 4.1 $ 5.8 $ 14.7 $ 6.8 $17.0 $202.2 $250.6 $257.8 Average interest rate................. 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% Series A, C and D Preferred units: Fixed rate............ $142.1 Average interest rate................. 8.71% 8.71% 8.71% 8.71% 8.71% 8.71%
Interest Rate Risk Analysis--Tabular Presentation Financial Derivative Instruments Notional Amounts by Contractual Maturity March 31, 2001 (dollars in millions)
Maturity Date Fair Value at ---------------------------------------- March 31, 2001 2002 2003 2004 2005 Thereafter Total 2001 ----- ------ ---- ---- ---- ---------- ------ ------ Interest Rate Derivatives Used to Hedge Variable Rate Debt: Interest rate swap agreements: Notional amount......... $300.0 $300.0 $ (5.5) Fixed pay interest rate................... 6.21% Floating receive interest rate index.... LIBOR Interest rate cap agreement: Notional amount......... $ 57.0 $ 57.0 $ -- Cap rate ............... 8.50% 8.50% Forward rate index...... LIBOR LIBOR
25 Presentation at March 31, 2000 For the unsecured line of credit, the table presents that the outstanding principal balance at March 31, 2000 will be paid upon the Credit Facility's maturity in November 2002. The table also presents the maximum interest rate index for outstanding Credit Facility borrowings from 2000 through 2002. For variable rate secured debt, the table presents the assumption that the outstanding principal balance at March 31, 2000 will be paid according to scheduled principal payments. The table also presents the contractual weighted average interest rate index for outstanding variable rate mortgage debt borrowings from 2000 through 2003. For fixed rate secured debt, the table presents the assumption that the outstanding principal balance at March 31, 2000 will be paid according to scheduled principal payments and that the Company will not prepay any of the outstanding principal balance. The table also presents the related weighted- average interest rate at March 31, 2000 for outstanding fixed rate mortgage debt borrowings from 2000 through 2004 and thereafter. For the Series A, C and D Preferred units the table presents the same assumptions as discussed for the presentation at March 31, 2001. For interest rate cap agreements, the table presents notional amounts, cap rates and the related interest rate index upon which cap rates are based, by contractual maturity date. For the interest rate swap agreements, the table presents the notional amount, maximum contractual fixed pay rate, and related interest rate index upon which the floating receive rate is based, by contractual maturity date. Notional amounts are used solely to calculate the contractual cash flow to be received under the contract and do not reflect outstanding principal balances at March 31, 2000. Interest Rate Sensitivity Analysis Financial Assets and Liabilities Outstanding Principal by Expected Maturity Date March 31, 2000 (dollars in millions)
Maturity Date Fair Value at --------------------------------------------- March 31, 2000 2001 2002 2003 2004 Thereafter Total 2000 ----- ----- ------ ----- ---- ---------- ------ ------ Liabilities: Line of credit: Variable rate......... $292.5 $292.5 $292.5 Average interest rate LIBOR LIBOR LIBOR index................ +1.50% +1.50% +1.50% Secured debt: Variable rate......... $90.0 $ 90.0 $ 90.0 Average interest rate LIBOR LIBOR LIBOR LIBOR index................ +1.75% +1.75% +1.75% +1.75% Fixed rate............ $ 3.7 $ 5.2 $ 5.6 $14.6 $6.6 $207.1 $242.8 $240.5 Average interest rate................. 7.82% 7.82% 7.82% 7.82% 7.82% 7.82% Series A and C Preferred units: Fixed rate............ $142.1 Average interest rate................. 8.71% 8.71% 8.71% 8.71% 8.71% 8.71%
26 Interest Rate Sensitivity Analysis Financial Derivative Instruments Notional Amounts by Contractual Maturity March 31, 2000 (dollars in millions)
Maturity Date Fair Value at ----------------------------------------- March 31, 2000 2001 2002 2003 2004 Thereafter Total 2000 ------ ---- ------ ---- ---- ---------- ------ ------------- Interest Rate Derivatives Used to Hedge the Line of Credit: Interest rate cap agreement: Notional amount....... $150.0 $150.0 $300.0 $ 1.5 Cap rate.............. 6.50% 6.50% Forward rate index.... LIBOR LIBOR Interest rate swap agreement: Notional amount....... $150.0 $150.0 $(0.1) Fixed pay rate........ 8.45% Floating receive interest rate index.. LIBOR
27 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During the three months ended March 31, 2001, no legal proceedings were initiated against or on behalf of the Company, which if determined adversely to the Company, would have a material adverse effect upon the financial condition, results of operations and cash flows of the Company. ITEM 2. CHANGES IN SECURITIES During the three months ended March 31, 2001, common unitholders of the Operating Partnership exchanged 466,236 common limited partnership units for shares of the Company's common stock on a one-for-one basis. The 466,236 common shares issued in connection with the exchange were registered on four registration statements declared effective by the SEC during 1999 and 2000. The common units that were redeemed in connection with the exchange were previously issued in reliance upon an exemption from registration provided by Regulation D under the Securities Act as a transaction by an issuer not involving a public offering. ITEM 3. DEFAULTS UPON SENIOR SECURITIES--None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--None ITEM 5. OTHER INFORMATION--None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit Number Description ------- ----------- None
- -------- (b) Reports on Form 8-K The Company filed the Current Report on Form 8-K (No. 1-12673), dated February 1, 2001 in connection with its fourth quarter 2000 earnings release. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 14, 2001. Kilroy Realty Corporation /s/ John B. Kilroy, Jr. By: _________________________________ John B. Kilroy, Jr. President and Chief Executive Officer (Principal Executive Officer) /s/ Richard E. Moran Jr. By: _________________________________ Richard E. Moran Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Ann Marie Whitney By: _________________________________ Ann Marie Whitney Senior Vice President and Controller (Principal Accounting Officer) 29 -----END PRIVACY-ENHANCED MESSAGE-----