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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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 90245
El Segundo, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 563-5500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
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Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the shares of common stock held by non-
affiliates of the registrant was approximately $523,466,200 based on the
closing price on the New York Stock Exchange for such shares on March 10,
2000.
As of March 10, 2000, 26,173,310 shares of common stock, par value $.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement with respect to its 2000 Annual
Meeting of Stockholders to be filed not later than 120 days after the end of
the registrant's fiscal year are incorporated by reference into Part III
hereof.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 14
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 25
Item 6. Selected Financial Data....................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risks... 46
Item 8. Financial Statements and Supplementary Data................... 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant............ 49
Item 11. Executive Compensation........................................ 49
Item 12. Security Ownership of Certain Beneficial Owners and 49
Management....................................................
Item 13. Certain Relationships and Related Transactions................ 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 50
PART I
ITEM 1. BUSINESS
General
Kilroy Realty Corporation (the "Company") develops, owns, and operates
office and industrial real estate, primarily in Southern California. The
Company, which operates, qualifies, and intends to continue to qualify as a
self-administered and self-managed real estate investment trust ("REIT") for
federal and state income tax purposes, was incorporated in September 1996 and
commenced operations upon the completion of its initial public offering in
January 1997. The Company is the successor to the real estate business of
Kilroy Industries, a California corporation ("KI"), and certain of its
affiliated corporations, partnerships and trusts (collectively, the "Kilroy
Group").
As of December 31, 1999, the Company's portfolio of stabilized operating
properties was comprised of 84 office buildings encompassing approximately 6.1
million rentable square feet (the "Office Properties") and 87 industrial
buildings encompassing approximately 6.5 million rentable square feet (the
"Industrial Properties" and, together with the Office Properties, the
"Properties"). The Company's stabilized portfolio consists of all of the
Company's Office and Industrial Properties, excluding projects recently
developed by the Company that have not yet reached 95% occupancy ("lease-up"
properties) and projects currently under construction or in pre-development.
As of December 31, 1999, the Office Properties were approximately 96.4% leased
to 395 tenants and the Industrial Properties were approximately 96.9% leased
to 258 tenants. As of December 31, 1999, the Company had seven office
buildings under construction which when completed are expected to encompass an
aggregate of approximately 861,500 rentable square feet. The Company did not
have any properties in lease-up at December 31, 1999 since all of the
properties developed and completed by the Company during 1999 and 1998,
encompassing an aggregate of approximately 862,400 and 1.1 million rentable
square feet, respectively, stabilized during 1999. All but 15 of the Company's
properties are located in Southern California. All of the Company's
development projects are located in Southern California.
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., a Delaware limited partnership (the "Finance Partnership").
The Company conducts substantially all of its activities through the Operating
Partnership in which, as of December 31, 1999, it owned an approximate 86.8%
general partnership interest. The remaining 13.2% limited partnership interest
in the Operating Partnership was owned by certain of the Company's executive
officers and directors, certain of their affiliates, and other outside
investors. As the sole general partner of the Operating Partnership, the
Company has control over the management of the Operating Partnership, which
owns 151 of the Company's 171 properties. The remaining properties, other than
two properties which are owned by the Operating Partnership through KR-Carmel
Partners and KR-Gateway Partners, two development LLCs (the "Development
LLCs") in which the Company owned a 50% managing interest at December 31,
1999, are owned by the Finance Partnership. Kilroy Realty Finance, Inc., a
wholly owned subsidiary of the Company is the sole general partner of the
Finance Partnership and owns a 1% general partnership interest. The Operating
Partnership owns the remaining 99% limited partnership interest.
The Company's strategy is to own, develop, acquire, lease and manage Class
A suburban office and industrial real estate properties in select locations in
key suburban submarkets, primarily in Southern California, that the Company
believes have strategic advantages compared to neighboring submarkets.
At December 31, 1999, the Company's ten largest office tenants represented
approximately 25.0% of total annual base rental revenues, defined as
annualized monthly contractual rents from existing tenants at December 31,
1999 determined in accordance with generally accepted accounting principles,
and its ten largest industrial tenants represented approximately 8.7% of total
annual base rental revenues. Of this amount, its largest tenant, Hughes
Electronics Corporation's Space and Communications Company ("Hughes Space and
Communications"), currently leases approximately 405,300 rentable square feet
of office space under five separate leases, representing approximately 6.4% of
the Company's total annual base rental revenues at
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December 31, 1999. The base periods for 95.6% of the Hughes Space and
Communications leases expire in January and July 2004. The base periods for
the remaining Hughes Space and Communications leases expire during the period
from November 2001 through December 2001.
The Company's five largest office tenants, based on annualized base rental
revenues, include: Hughes Space and Communications, a tenant since 1984 which
is engaged in high-technology commercial activities including satellite
development and related applications such as DirecTV; The Boeing Company;
Epson America, Inc.; Epicor Software Corporation; and Intuit, Inc. The
Company's five largest industrial tenants, based on annualized base rental
revenues, include: Mattel, Inc.; Celestica California, Inc.; Natural
Alternatives International, Inc.; OmniPak (d.b.a. Raven Industries); and Mazda
Motor of America, Inc. (See Item 2: Properties--Tenant Information for further
discussion on the Company's tenant base.)
Business and Growth Strategies
Growth Strategies. The Company believes that a number of factors will
enable it to continue to achieve growth in Funds From Operations, as defined
by the National Association of Real Estate Investment Trusts, including: (i)
the opportunity to lease available space at attractive rental rates because of
high demand and frictional vacancy levels in the Southern California
submarkets in which most of the properties are located; (ii) the quality and
location of the properties; (iii) the Company's ability to efficiently manage
its assets as a low cost provider of commercial real estate due to its core
capabilities in all aspects of real estate ownership including property
management, leasing, marketing, financing, accounting, legal, construction
management and new development; (iv) the Company's substantial development
pipeline established over the past several years; and (v) the Company's access
to development and leasing opportunities as a result of its significant
relationship with large Southern California corporate tenants, municipalities
and landowners and the Company's 50-year presence in the Southern California
market. Management believes that the Company is well positioned to capitalize
on existing opportunities because of its extensive experience in certain of
its submarkets, its seasoned management team and its proven ability to
acquire, develop, lease and efficiently manage office and industrial
properties.
Operating Strategies. The Company focuses on enhancing growth in Funds From
Operations, from its properties by: (i) maximizing cash flow from the
properties through active leasing and early renewals, increasing contractual
base rent to current market levels as leases expire and effective property
management; (ii) managing operating expenses through the use of internal
management, leasing, marketing, financing, accounting, legal administration
and construction management functions; (iii) maintaining and developing long-
term relationships with a diverse tenant group; (iv) attracting and retaining
motivated employees by providing financial and other incentives to meet the
Company's operating and financial goals; and (v) continuing to emphasize
capital improvements to enhance the properties' competitive advantages in
their respective markets and improve the efficiency of building systems.
Development Strategies. The Company and its predecessors have developed
office and industrial properties, including high technology facilities,
primarily located in Southern California, for its own portfolio and for third
parties, since 1947. Over the past several years, the Company has established
a substantial development pipeline in its three target market regions, Los
Angeles, Orange and San Diego Counties. The Company's committed and future
development pipeline (including projects held through joint venture
arrangements) can support future development of over 2.8 million rentable
square feet of office space at a total budgeted cost of over $550 million over
the next four to five years. The Company's strategy is to maintain a
disciplined approach to development by focusing on pre-leasing, phasing and
cost control. During 1999 and 1998, the Company completed 17 buildings
encompassing an aggregate of approximately 2.0 million rentable square feet at
an aggregate cost of approximately $171 million. As of December 31, 1999, the
Company had seven office buildings under construction which when completed are
expected to encompass an aggregate of approximately 861,500 rentable square
feet at a total budgeted cost of approximately $174 million.
The Company may engage in the additional development of office and/or
industrial properties, primarily in Southern California, when market
conditions support a favorable risk-adjusted return on such development. The
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Company's activities with third-party owners in Southern California are
expected to give the Company further access to development opportunities.
There can be no assurance, however, that the Company will be able to
successfully develop any of the properties.
Financing Policies. The Company's financing policies and objectives are
determined by the Company's Board of Directors. The Company presently intends
to maintain a conservative ratio of debt to total market capitalization (total
debt of the Company as a percentage of the market value of issued and
outstanding shares of common stock, including interests exchangeable therefor,
plus total debt). This ratio may be increased or decreased without the consent
of the Company's stockholders and the Company's organizational documents do
not limit the amount of indebtedness that the Company may incur. At December
31, 1999, total debt constituted approximately 38.8% of the total market
capitalization of the Company. The Company intends to utilize one or more
sources of capital for future growth, which may include undistributed cash
flow, borrowings under the Company's unsecured credit facility (the "Credit
Facility"), the issuance of debt or equity securities and other bank and/or
institutional borrowings. There can be no assurance, however, that the Company
will be able to obtain capital on terms favorable to the Company.
Government Regulations
Many laws and governmental regulations are applicable to the Company's
properties and changes in these laws and regulations, or their interpretation
by agencies and the courts, occur frequently.
Costs of Compliance with the Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations
must meet federal requirements related to access and use by disabled persons.
Although management believes that its properties substantially comply with
present requirements of the ADA, none of its properties have been audited and
investigations of all of its properties have not been conducted to determine
compliance. The Company may incur additional costs of complying with the ADA.
Additional federal, state and local laws also may require modifications to the
Company's properties, or restrict its ability to renovate the properties.
Management cannot predict the ultimate amount of the cost of compliance with
the ADA or other legislation. If the Company incurs substantial costs to
comply with the ADA and any other legislation, its financial condition,
results of operations, cash flow, quoted per share trading price of its common
stock and ability to pay distributions to stockholders could be adversely
affected.
Environmental Matters
Costs related to government regulation and private
litigation. Environmental laws and regulations hold the Company liable for the
costs of removal or remediation of certain hazardous or toxic substances
released on its properties. These laws could impose liability without regard
to whether the Company is responsible for, or even knew of, the presence of
the hazardous materials. Government investigations and remediation actions may
have substantial costs and the presence of hazardous wastes on a property
could result in personal injury or similar claims by private plaintiffs. For
instance, if asbestos-containing materials and other hazardous or toxic
substances were found on the Company's properties, third parties might seek
recovery from the Company for personal injuries resulting from the existence
of those substances. As of December 31, 1999, 29 of the Company's properties
contained asbestos-containing materials. Various laws also impose liability on
persons who arrange for the disposal or treatment of hazardous or toxic
substances for the cost of removal or remediation of hazardous substances at
the disposal or treatment facility. These laws often impose liability whether
or not the person arranging for the disposal ever owned or operated the
disposal facility. As the owner and operator of its properties, the Company
may be considered to have arranged for the disposal or treatment of hazardous
or toxic substances.
Use of hazardous materials by some of our tenants. Some of the Company's
tenants routinely handle hazardous substances and wastes on its properties as
part of their routine operations. Environmental laws and regulations subject
these tenants, and potentially the Company, to liability resulting from such
activities. The Company requires its tenants, in their leases, to comply with
these environmental laws and regulations and to
3
indemnify the Company for any related liabilities. As of December 31, 1999,
less than 5% of the Company's tenants routinely handled hazardous substances
and/or wastes on the Company's properties as part of their routine operations.
These tenants were primarily involved in the light industrial and warehouse
business and more specifically the light electronics assembly business.
Management does not believe that these activities by its tenants will have any
material adverse effect on the Company's operations. Furthermore, management
is unaware of any material noncompliance, liability or claim relating to
hazardous or toxic substances or petroleum products in connection with any of
the Company's properties.
Existing conditions at some of our properties. Independent environmental
consultants conducted Phase I or similar environmental site assessments on all
of the Company's properties. Site assessments generally include a historical
review, a public records review, an investigation of the surveyed site and
surrounding properties, and the issuance of a written report. These
assessments do not generally include soil samplings or subsurface
investigations. The Company's site assessments revealed that some of its
properties contain asbestos-containing materials and that historical
operations at or near some of its properties, including the operation of
underground storage tanks, may have caused soil or groundwater contamination.
Prior owners of the affected properties conducted clean-up of contamination in
the soils on the properties and management does not believe that further
clean-up of the soils is required. None of the Company's site assessments
revealed any other environmental liability that management believes would have
a material adverse effect on the Company's business, assets, or results of
operations. Management is not aware of any such condition, liability, or
concern by any other means that would give rise to material environmental
liability. However, the assessments may have failed to reveal all
environmental conditions, liabilities, or compliance concerns; there may be
material environmental conditions, liabilities, or compliance concerns that
arose at a property after the review was completed; future laws, ordinances or
regulations may impose material additional environmental liability; and
current environmental conditions at the Company's properties may be affected
in the future by tenants, third parties, or the condition of land or
operations near its properties (such as the presence of underground storage
tanks). The Company cannot give assurance that the costs of future
environmental compliance will not affect its ability to make distributions to
stockholders.
Environmental insurance coverage limits. The Company carries what
management believes to be sufficient environmental insurance to cover any
potential liability for soil and groundwater contamination at the affected
sites identified in the environmental site assessments. However, management
cannot provide any assurance that the Company's insurance coverage will be
sufficient or that its liability, if any, will not have a material adverse
effect on the Company's financial condition, results of its operations, cash
flow, quoted per share trading price of its common stock and ability to pay
distributions to stockholders.
Other federal, state and local regulations. The Company's properties are
subject to various federal, state and local regulatory requirements, such as
state and local fire and life safety requirements. If the Company failed to
comply with these various requirements, it might incur governmental fines or
private damage awards. Management believes that the Company's properties are
currently in material compliance with all of these regulatory requirements.
However, management does not know whether existing requirements will change or
whether future requirements will require the Company to make significant
unanticipated expenditures that will adversely affect its ability to make
distributions to its stockholders. The City of Los Angeles adopted regulations
relating to the repair of welded steel moment frames located in certain areas
damaged as a result of the January 17, 1994 Northridge earthquake in Southern
California. Currently, these regulations apply to only one of the Company's
properties representing approximately 78,000 square feet. Management believes
that this property complies with these regulations. Management does not know,
however, whether other regulatory agencies will adopt similar regulations or
whether the Company will acquire additional properties which may be subject to
these or similar regulations. Management believes, based in part on
engineering reports, that all of its properties are in good condition.
However, if the Company were required to make significant expenditures under
applicable regulations, its financial condition, results of operations, cash
flow, quoted per share trading price of its common stock and ability to pay
distributions to stockholders could be adversely affected.
4
Employees
As of March 10, 2000, the Company, through the Operating Partnership and
Kilroy Services, Inc., an unconsolidated subsidiary of the Company ("KSI"),
employed 130 persons. Of the Company's total 130 employees, approximately 40
are employed as on-site building employees who provide services for the
Company's properties. The Company, the Operating Partnership and KSI believe
that relations with their employees are good.
Business Risks
This document contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933, as amended (the "1933
Act"), and Section 21E of the Exchange Act of 1934, as amended (the "1934
Act")) pertaining to, among other things, the Company's future results of
operations, cash available for distribution, property acquisitions, lease
renewals, increases in base rent, fee development activities, sources of
growth, planned development and expansion of owned or leased property, capital
requirements, compliance with contractual obligations and general business,
industry and economic conditions applicable to the Company. These statements
are based largely on the Company's current expectations and are subject to a
number of risks uncertainties. Actual results could differ materially from
these forward-looking statements. Factors that can cause actual results to
differ materially include, but are not limited to, those discussed below.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The following factors
should be considered in addition to the other information contained herein in
evaluating the Company and its business:
Most of the Company's properties depend upon the Southern California
economy. As of December 31, 1999, 86.5% of the aggregate square footage of the
Company's stabilized portfolio and 87.9% of the Company's annualized base
rent, excluding expense reimbursements and rental abatements, came from
properties located in Southern California. The Company's ability to make
expected distributions to stockholders depends on its ability to generate
Funds from Operations in excess of scheduled principal payments on debt,
payments on the preferred limited partnership units issued by the Operating
Partnership, and capital expenditure requirements. Events and conditions
applicable to owners and operators of real property that are beyond the
Company's control may decrease funds available for distribution and the value
of the Company's properties. These events include: local oversupply or
reduction in demand of office, industrial or other commercial space; inability
to collect rent from tenants; vacancies or inability to rent spaces on
favorable terms; inability to finance property development and acquisitions on
favorable terms; increased operating costs, including insurance premiums,
utilities, and real estate taxes; costs of complying with changes in
governmental regulations; the relative illiquidity of real estate investments;
changing submarket demographics and property damage resulting from seismic
activity. The geographical concentration of the Company's properties may
expose it to greater economic risks than if it owned properties in several
geographic regions. Any adverse economic or real estate developments in the
Southern California region could adversely impact the Company's financial
condition, results from operations and cash flows.
The Company's significant debt level reduces cash available for
distribution and may expose the Company to the risk of default under its debt
obligations. Payments of principal and interest on borrowings may leave the
Company with insufficient cash resources to operate its properties or to pay
distributions necessary to maintain its REIT qualification. The Company's
level of debt and the limitations imposed by its debt agreements may have
important consequences on the Company, including the following: cash flow may
be insufficient to meet required principal and interest payments; the Company
may be unable to refinance its indebtedness at maturity or the refinancing
terms may be less favorable than the terms of its original indebtedness; the
Company may be forced to dispose of one or more of its properties, possibly on
disadvantageous terms; the Company may default on its obligations and the
lenders or mortgagees may foreclose on the properties that secure the loans
and receive an assignment of rents and leases; and the Company's default under
one mortgage loan with cross default provisions could result in a default on
other indebtedness. If any one of these events were to occur, the Company's
financial position, results of operations, cash flow, quoted per share trading
price of its common stock
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and ability to pay distributions to stockholders could be adversely affected.
In addition, foreclosures could create taxable income without accompanying
cash proceeds, a circumstance which could hinder the Company's ability to meet
the strict REIT distribution requirements imposed by the Internal Revenue Code
of 1986, as amended. As of December 31, 1999, the Company had $554 million
aggregate principal amount of indebtedness, $4.8 million of which is due prior
to December 31, 2000. The Company's total debt represented 38.8% of its total
market capitalization at December 31, 1999.
The Company faces significant competition which may decrease the occupancy
and rental rates of its properties. The Company competes with several
developers, owners and operators of office, industrial and other commercial
real estate, many of which have higher vacancy rates. Substantially all of the
Company's properties are located in areas with similar properties as its
competitors. For instance, occupancy rates in the Company's El Segundo and
Long Beach office property portfolios at December 31, 1999 were 99.0% and
95.6%, respectively, in comparison to 86.4% and 86.5%, respectively, for the
El Segundo and Long Beach office submarkets in total. In addition, the
occupancy rate in the Company's Anaheim industrial property portfolio at
December 31, 1999 was 100.0% in comparison to 94.2% for the Anaheim industrial
property submarket in total. The Company believes that its lower vacancy rates
means that, on average, its competitors have more space currently available
for lease than the Company. As a result, the Company's competitors have an
incentive to decrease rental rates until their available space is leased. If
the Company's competitors offer space at rental rates below current market
rates, the Company may be pressured to reduce its rental rates below those
currently charged in order to retain tenants when its tenant leases expire. As
a result, the Company's financial condition, results of operations and cash
flows may be adversely affected.
Potential losses may not be covered by insurance. The Company carries
comprehensive liability, fire, extended coverage and rental loss insurance
covering all of its properties. Management believes the policy specifications
and insured limits are appropriate given the relative risk of loss, the cost
of the coverage and industry practice. The Company does not carry insurance
for generally uninsured losses such as loss from riots or acts of God. Some of
the Company's policies, like those covering losses due to floods, are insured
subject to limitations involving large deductibles or co-payments and policy
limits. In addition, the Company carries earthquake insurance on properties
located in areas known to be subject to earthquakes in an amount and with
deductions which management believes are commercially reasonable. As of
December 31, 1999, 81 of the Office Properties aggregating 5.6 million square
feet (representing 44.5% of the Company's stabilized portfolio based on
aggregate square footage and 64.4% based on annualized base rent) were located
in areas known to be subject to earthquakes. As of December 31, 1999, 75 of
the Company's Industrial Properties aggregating 5.3 million square feet
(representing 42.0% of the Company's stabilized portfolio based on aggregate
square footage and 23.5% based on annualized base rent) were located in areas
known to be subject to earthquakes. While the Company presently carries
earthquake insurance on these properties, the amount of its earthquake
insurance coverage may not be sufficient to cover losses from earthquakes. In
addition, the Company may discontinue earthquake insurance on some or all of
its properties in the future if the cost of premiums for earthquake insurance
exceeds the value of the coverage discounted for the risk of loss. If the
Company experiences a loss which is uninsured or which exceeds policy limits,
it could lose the capital invested in the damaged properties as well as the
anticipated future revenue from those properties. In addition, if the damaged
properties are subject to recourse indebtedness, the Company would continue to
be liable for the indebtedness, even if the properties were unrepairable.
The Company may be unable to successfully complete and operate developed
properties. Property development involves the following significant risks: the
Company may be unable to obtain construction financing on favorable terms; the
Company may be unable to obtain permanent financing at all or on advantageous
terms if development projects are financed through construction loans; the
Company may not complete development projects on schedule or within budgeted
amounts; the Company may encounter delays or refusals in obtaining all
necessary zoning, land use, building, occupancy, and other required
governmental permits and authorizations; the Company may expend funds on and
devote management's time to projects which the Company may not complete; and
the Company may lease the developed properties at below expected rental
6
rates. For example, one of the Company's development projects was completed
three months later than initially projected, resulting in a corresponding
delay in the commencement of leasing activity at the particular property. The
delay was attributable to bad weather conditions which inhibited construction
during the "El Nino" climate condition which ran from 1997 through 1998. In
addition, during the fourth quarter of 1998, the Company withdrew its
participation from a master planned commercial development prior to the
commencement of construction. If any one of these events were to occur in
connection with projects currently under development, the Company's financial
position, results of operations, cash flow, quoted per share trading price of
its common stock and ability to pay distributions to stockholders could be
adversely affected. While the Company primarily develops office and industrial
properties in Southern California markets, it may in the future develop
properties for retail or other use and expand its business to other geographic
regions where it expects the development of property to result in favorable
risk-adjusted returns on its investment. Presently, the Company does not
possess the same level of familiarity with development of other property types
or outside markets which could adversely affect its ability to develop
properties or to achieve expected performance.
The Company may be unable to complete acquisitions and successfully operate
acquired properties. The Company may acquire office and industrial properties
when strategic opportunities exist. The Company's ability to acquire
properties on favorable terms and successfully operate them is subject to the
following risks: the potential inability to acquire a desired property because
of competition from other real estate investors with significant capital,
including both publicly traded REITs and institutional investment funds; even
if the Company enters into agreements for the acquisition of office and
industrial properties, these agreements are subject to customary conditions to
closing, including completion of due diligence investigations to management's
satisfaction; the Company may be unable to finance the acquisition on
favorable terms; the Company may spend more than budgeted amounts to make
necessary improvements or renovations to acquired properties; and the Company
may lease the acquired properties at below expected rental rates. If the
Company cannot finance property acquisitions on favorable terms or operate
acquired properties to meet financial expectations, its financial position,
results of operations, cash flow, quoted per share trading price of its common
stock and ability to pay distributions to stockholders could be adversely
affected.
The Company could default on leases for land on which some of its
properties are located. The Company owns ten office buildings located on
various parcels, each of which the Company leases on a long-term basis. If the
Company defaults under the terms of any particular lease, it may lose the
property subject to the lease. The Company may not be able to renegotiate a
new lease on favorable terms, if at all, upon expiration of the lease and all
of its options. The loss of these properties or an increase of rental expense
would have an adverse effect on the Company's financial position, results of
operations, cash flow, quoted per share trading price of its common stock and
ability to pay distributions to stockholders. The Company has approximately
1.5 million aggregate rentable square feet of rental space located on these
leased parcels. The leases for the land under the SeaTac Office Center,
including renewal options, expire in 2062. The lease for the land under
9455 Towne Center in San Diego expires in October 2043. The primary lease for
the land under 12312 West Olympic Boulevard in Santa Monica expire in January
2065 with a smaller secondary lease expiring in September 2011. The leases for
the land under the Kilroy Airport Center, Long Beach expire in 2035.
The Company depends on significant tenants. At December 31, 1999, the
Company's ten largest office tenants represented approximately 25.0% of total
annual base rental revenues and its ten largest industrial tenants represented
approximately 8.7% of total annual base rental revenues. Of this amount, its
largest tenant, Hughes Space and Communications, currently leases
approximately 405,300 rentable square feet of office space, representing
approximately 6.4% of the Company's total annual base rental revenues. The
Company's revenue and cash available for distribution to stockholders would be
disproportionately and materially adversely affected if any of its significant
tenants were to become bankrupt or insolvent, or suffer a downturn in their
business, or fail to renew their leases at all or on terms less favorable to
the Company than their current terms.
Downturns in tenants' businesses may reduce the Company's cash flow. As of
December 31, 1999, the Company derived 98.0% of its revenues from rental
income and tenant reimbursements. A tenant may experience a downturn in its
business, which may weaken its financial condition and result in its failure
to make timely
7
rental payments. In the event of default by a tenant, the Company may
experience delays in enforcing its rights as landlord and may incur
substantial costs in protecting its investment. The bankruptcy or insolvency
of a major tenant also may adversely affect the income produced by the
Company's properties. If any tenant becomes a debtor in a case under the
Bankruptcy Code, the Company cannot evict the tenant solely because of the
bankruptcy. On the other hand, the bankruptcy court might authorize the tenant
to reject and terminate its lease. The Company's claim against the tenant for
unpaid, future rent would be subject to a statutory cap that might be
substantially less than the remaining rent actually owed under the lease. Even
so, the Company's claim for unpaid rent would likely not be paid in full. This
shortfall could adversely affect the Company's cash flow and its ability to
make distributions to stockholders. Although the Company has not experienced
material losses from tenant bankruptcies, its tenants could file for
bankruptcy protection in the future.
The Company may be unable to renew leases or re-let space as leases
expire. As of December 31, 1999, leases representing 11.2% and 14.2% of the
square footage of the Company's properties will expire in 2000 and 2001. Above
market rental rates on some of the Company's properties may force it to renew
or re-lease some expiring leases at lower rates. While the Company believes
that the average rental rates for most of its properties are below quoted
market rates in each of its submarkets, the Company cannot give any assurance
that leases will be renewed or that its properties will be re-leased at rental
rates equal to or above the current rental rates. If the rental rates for the
Company's properties decrease, existing tenants do not renew their leases, or
the Company does not re-lease a significant portion of its available space,
its financial position, results of operations, cash flow, quoted per share
trading price of its common stock and ability to pay distributions to its
stockholders would be adversely affected.
Real estate assets are illiquid and the Company may not be able to sell its
properties when it desires. The Company's investments in its properties are
relatively illiquid which limits the Company's ability to sell its properties
quickly in response to changes in economic or other conditions. Limitations in
the Internal Revenue Code and related Treasury Regulations applicable to REITs
may also limit the Company's ability to sell its properties. These
restrictions on the Company' ability to sell its properties could have an
adverse effect on its financial position, results from operations, cash flow,
quoted per share trading price of its common stock and ability to pay
distributions to stockholders.
KSI is subject to tax liabilities on net income which reduces the Company's
cash flow. KSI is subject to federal and state income tax on its taxable
income at regular corporate rates. Any federal, state or local income taxes
that KSI must pay will reduce the cash available for distribution to the
Operating Partnership and, ultimately, to the Company's stockholders.
The Company cannot depend upon distributions from KSI because its business
is not controlled by the Company. The Company has set up the following
structure to comply with the REIT asset tests that restrict its ability to own
shares of other corporations: the Operating Partnership owns 100% of the non-
voting preferred stock of KSI, representing approximately 95.0% of its
economic value; and John B. Kilroy, Sr. and John B. Kilroy, Jr., the Company's
Chairman of the Board of Directors and President and Chief Executive Officer,
respectively, own all of the outstanding voting common stock of KSI,
representing approximately 5.0% of its economic value. The Company receives
substantially all of the economic benefit derived from KSI's business by
virtue of the dividends that the Company receives from its investment in the
preferred stock. However, the Company cannot influence KSI's operations, elect
its directors, appoint its officers, or require its Board of Directors to
declare and pay a cash dividend on the nonvoting preferred stock owned by the
Operating Partnership. As a result, KSI may make decisions or pursue business
policies which could have an adverse effect on the Company's financial
position, results of operations, cash flow, quoted per share trading price of
its common stock and ability to pay distributions to stockholders.
KSI may be adversely affected by the Company's REIT status. Changes in the
requirements for REIT qualification may in the future limit the Company's
ability to receive increased distributions from the fee development operations
and related services offered by KSI.
8
Common limited partners of the Operating Partnership have limited approval
rights which may prevent the Company from completing a change of control
transaction which may be in the best interests of stockholders. The Company
may not withdraw from the Operating Partnership or transfer its general
partnership interest or admit another general partner without the approval of
a majority of the common limited partnership unitholders except in the case of
a "termination transaction" which requires the approval of 60% of the common
unitholders, including the Company, because of the common units it holds in
its capacity as general partner. The right of common limited partners to vote
on these transactions could limit the Company's ability to complete a change
of control transaction that might otherwise be in the best interest of its
stockholders.
Limited partners of the Operating Partnership must approve the dissolution
of the Operating Partnership and the disposition of properties they
contributed. For as long as limited partners own at least 5% of all of the
common units of the Operating Partnership, the Company must obtain the
approval of limited partners holding a majority of the common units before it
may dissolve the partnership or sell the property located at
2260 East Imperial Highway at Kilroy Airport Center in El Segundo prior to
January 31, 2004. In addition, the Company may not sell 11 of its properties
prior to October 31, 2002 without the consent of the limited partners that
contributed the properties to the Operating Partnership, except in connection
with the sale or transfer of all or substantially all of its assets or those
of the Operating Partnership or in connection with a transaction which does
not cause the limited partners that contributed the property to recognize
taxable income. In addition, the Operating Partnership agreed to use
commercially reasonable efforts to minimize the tax consequences to common
limited partners resulting from the repayment, refinancing, replacement or
restructuring of debt, or any sale, exchange or other disposition of any of
its other assets. The exercise of one or more of these approval rights by the
limited partners could delay or prevent the Company from completing a
transaction which may be in the best interest of its stockholders.
The Company's Chairman of the Board of Directors and its President and Chief
Executive Officer each have potential conflicts of interest with the Company.
The Company's Chairman of the Board of Directors and its President and
Chief Executive Officer each are engaged in competitive real estate
activities. The Company owns four office buildings and four industrial
buildings in the El Segundo submarket. John B. Kilroy, Sr. and John B. Kilroy,
Jr., the Company's Chairman of the Board of Directors and President and Chief
Executive Officer, respectively, own controlling interests in partnerships
which own a complex of three office buildings in the same submarket. The
Operating partnership manages the complex pursuant to a management agreement
on market terms. Policies adopted by the Company's Board of Directors to
minimize this conflict, including the requirement that John B. Kilroy, Sr. and
John B. Kilroy, Jr. enter into non-competition agreements with the Company,
may not eliminate their influence over transactions involving these competing
properties.
The Company's Chairman of the Board of Directors and its President and
Chief Executive Officer each have substantial influence over the Company's
affairs. John B. Kilroy, Sr. and John B. Kilroy, Jr., the Company's Chairman
of the Board of Directors and President and Chief Executive Officer,
respectively, together hold two of the six seats on the Company's Board of
Directors. They also beneficially own common limited partnership units
exchangeable for an aggregate of 2,158,639 shares of the Company's common
stock and currently vested options to purchase an aggregate of 350,000 shares
of common stock, representing a total of approximately 9.02% of the total
outstanding shares of common stock as of December 31, 1999. Pursuant to the
Company's charter no other stockholder may own, actually or constructively,
more than 7.0% of the Company's common stock. The Board of Directors has
already waived the ownership limits with respect to John B. Kilroy, Sr.,
John B., Kilroy, Jr., members of their families and some affiliated entities.
Consequently, Messrs. Kilroy have substantial influence on the Company and
could exercise their influence in a manner that is not in the best interest of
the Company's stockholders. Also, they may, in the future, have a substantial
influence on the outcome of any matters submitted to the Company's
stockholders for approval.
9
There are limits on the ownership of the Company's capital stock which
limit the opportunities for a change of control at a premium to existing
stockholders. Provisions of the Maryland General Corporation Law, the
Company's charter, the Company's bylaws, and the Operating Partnership's
partnership agreement may delay, defer, or prevent a change in control over
the Company or the removal of existing management. Any of these actions might
prevent the stockholders from receiving a premium for their shares of stock
over the then prevailing market prices.
The Internal Revenue Code sets forth stringent ownership limits on the
Company as a result of its decision to be taxed as a REIT, including: no more
than 50% in value of the Company's capital stock may be owned, actually or
constructively, by five or fewer individuals, including some entities, during
the last half of a taxable year; subject to exceptions, the Company's common
stock shares must be held by a minimum of 100 persons for at least 335 days of
a 12-month taxable year, or a proportionate part of a short taxable year; and
if the Company, or any entity which owns 10% or more of its capital stock,
actually or constructively owns 10% or more of one of the Company's tenants,
or a tenant of any partnership in which the Company is a partner, then any
rents that the Company receives from that tenant in question will not be
qualifying income for purposes of the Internal Revenue Code's REIT gross
income tests regardless of whether the Company receives the rents directly or
through a partnership.
The Company's charter establishes clear ownership limits to protect its
REIT status. No single stockholder may own, either actually or constructively,
more than 7.0% of the Company's common stock outstanding. Similarly, no single
holder of the Company's Series A Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock may actually or constructively own any class or
series of its preferred stock, so that their total capital stock ownership
would exceed 7.0% by value of the Company's total capital stock, and no single
holder of Series B Preferred Stock, if issued, may actually or constructively
own more than 7.0% of the Company's Series B Preferred Stock.
The Board of Directors may waive the ownership limits if it is satisfied
that the excess ownership would not jeopardize the Company's REIT status and
if it believes that the waiver would be in the Company's best interests. The
Board of Directors has already waived the ownership limits with respect to
John B. Kilroy, Sr., John B. Kilroy, Jr., members of their families and some
affiliated entities. These named individuals and entities may own either
actually or constructively, in the aggregate, up to 21% of the outstanding
common stock.
If anyone acquires shares in excess of any ownership limits, the transfer
to the transferee will be void with respect to these excess shares; the excess
shares will be automatically transferred from the transferee or owner to a
trust for the benefit of a qualified charitable organization, the purported
transferee or owner will have no right to vote those excess shares, and the
purported transferee or owner will have no right to receive dividends or other
distributions from these excess shares.
The Company's charter contains provisions that may delay, defer, or prevent a
change of control transaction.
The Company's Board of Directors is divided into classes that serve
staggered terms. The Company's Board of Directors is divided into three
classes with staggered terms. The staggered terms for directors may reduce the
possibility of a tender offer or an attempt to complete a change of control
transaction even if a tender offer or a change in control was in the Company's
stockholders' interest.
The Company could issue preferred stock without stockholder approval. The
Company's charter authorizes its Board of Directors to issue up to 30,000,000
shares of preferred stock, including convertible preferred stock, without
stockholder approval. The Board of Directors may establish the preferences,
rights and other terms, including the right to vote and the right to convert
into common stock any shares issued. The issuance of preferred stock could
delay or prevent a tender offer or a change of control even if a tender offer
or a change of control was in the Company's stockholders' interest. The
Operating Partnership has issued 1,500,000 Series A Cumulative Redeemable
Preferred units which in the future may be exchanged one-for-one into shares
of 8.075% Series A Cumulative Redeemable Preferred stock, 700,000 Series C
Cumulative Redeemable Preferred units
10
which in the future may be exchanged one for one into shares of 9.375% Series
C Cumulative Redeemable Preferred stock, and 900,000 Series D Cumulative
Redeemable Preferred units which in the future may be exchanged one for one
into shares of 9.250% Series D Cumulative Redeemable Preferred stock. In
addition, the Company has designated and authorized the issuance of up to
400,000 shares of Series B Junior Participating Preferred stock. However, no
shares of preferred stock of any series are currently issued or outstanding.
The Company has a stockholders' rights plan. In October 1998, the Company's
Board of Directors adopted a stockholders' rights plan. The rights have anti-
takeover effects and would cause substantial dilution to a person or group
that attempts to acquire the Company on terms that the Company's Board of
Directors does not approve. The Company may redeem the shares for $.01 per
right, prior to the time that a person or group has acquired beneficial
ownership of 15% or more of its common stock. Therefore, the rights should not
interfere with any merger or business combination approved by the Company's
Board of Directors.
The staggered terms for directors, the future issuance of additional common
or preferred stock and the Company's stockholders rights plan may: delay or
prevent a change of control, even if a change of control might be beneficial
to the Company's stockholders; deter tender offers that may be beneficial to
the Company's stockholders; or limit stockholders' opportunity to receive a
potential premium for their shares if an investor attempted to gain shares
beyond the Company's ownership limits or otherwise to effect a change of
control.
Loss of the Company's REIT status would have significant adverse
consequences to it and the value of the Company's stock. The Company currently
operates and has operated since 1997 in a manner that is intended to allow it
to qualify as a REIT for federal income tax purposes under the Internal
Revenue Code. If the Company were to lose its REIT status, it would face
serious tax consequences that would substantially reduce the funds available
for distribution to stockholders for each of the years involved because: the
Company would not be allowed a deduction for distributions to stockholders in
computing its taxable income and would be subject to federal income tax at
regular corporate rates; the Company could be subject to the federal
alternative minimum tax and possibly increased state and local taxes; and
unless entitled to relief under statutory provisions, the Company could not
elect to be subject to tax as a REIT for four taxable years following the year
during which it was disqualified. In addition, if the Company fails to qualify
as a REIT, it will not be required to make distributions to stockholders and
all distributions to stockholders will be subject to tax as ordinary income to
the extent of the Company's current and accumulated earnings and profits. As a
result of all these factors, the Company's failure to qualify as a REIT also
could impair its ability to expand its business and raise capital, and would
adversely affect the value of the Company's common stock.
Qualification as a REIT involves the application of highly technical and
complex Internal Revenue Code provisions for which there are only limited
judicial and administrative interpretations. The complexity of these
provisions and of the applicable treasury regulations that have been
promulgated under the Internal Revenue Code is greater in the case of a REIT
that holds its assets through a partnership. The determination of various
factual matters and circumstances not entirely within the Company's control
may affect its ability to qualify as a REIT. For example, in order to qualify
as a REIT, at least 95% of the Company's gross income in any year must be
derived from qualifying sources. Also, the Company must make distributions to
stockholders aggregating annually at least 95% of its net taxable income,
excluding capital gains. In addition, legislation, new regulations,
administrative interpretations or court decisions may adversely affect the
Company's investors or the Company's ability to qualify as a REIT for tax
purposes. Although management believes that the Company is organized and
operates in a manner so as to qualify as a REIT, no assurance can be given
that the Company will continue to be organized or be able to operate in a
manner so as to qualify or remain qualified as a REIT for tax purposes.
To maintain its REIT status, the Company may be forced to borrow funds on a
short-term basis during unfavorable market conditions. In order to maintain
its REIT status, the Company may need to borrow funds on a short-term basis to
meet the REIT distribution requirements even if the then prevailing market
conditions are not favorable for these borrowings. To qualify as a REIT, the
Company generally must distribute to its stockholders at least 95% of the
Company's net taxable income each year, excluding capital gains. In addition,
the Company will be subject to a 4% nondeductible excise tax on the amount, if
any, by which certain
11
distributions paid in any calendar year are less than the sum of 85% of its
ordinary income, 95% of its capital gain net income and 100% of its
undistributed income from prior years. These short-term borrowing needs could
result from differences in timing between the actual receipt of income and
inclusion of income for federal income tax purposes, or the effect of non-
deductible capital expenditures, the creation of reserves or required debt or
amortization payments.
The Company's growth depends on external sources of capital which are
outside of the Company's control. The Company is required under the Internal
Revenue Code to distribute at least 95% of its taxable income, determined
without regard to the dividends-paid deduction and excluding any net capital
gain. Because of this distribution requirement, it may not be able to fund
future capital needs, including any necessary acquisition financing, from
operating cash flow. Consequently, management relies on third-party sources of
capital to fund the Company's capital needs. The Company may not be able to
obtain the financing on favorable terms or at all. Any additional debt the
Company incurs will increase its leverage. Access to third-party sources of
capital depends, in part, on: general market conditions; the market's
perception of the Company's growth potential; the Company's current and
expected future earnings; the Company's cash distributions; and the market
price per share of the Company's common stock. If the Company cannot obtain
capital from third-party sources, it may not be able to acquire properties
when strategic opportunities exist or make the cash distributions to
stockholders necessary to maintain its qualification as a REIT.
The Company's Board of Directors may change investment and financing policies
without stockholder approval and become more highly leveraged which may
increase the Company's risk of default under its debt obligations.
The Company is not limited in its ability to incur debt. The Company's
Board of Directors adopted a policy of limiting indebtedness to approximately
50% of the Company's total market capitalization. Total market capitalization
is the market value of the Company's capital stock, including interests and
units exchangeable for shares of capital stock, plus total debt. However, the
Company's organizational documents do not limit the amount or percentage of
indebtedness, funded or otherwise, that it may incur. The Company's Board of
Directors may alter or eliminate management's current policy on borrowing at
any time without stockholder approval. If this policy changed, the Company
could become more highly leveraged which would result in an increase in its
debt service and which could adversely affect cash flow and the ability to
make expected distributions to stockholders. Higher leverage also increases
the risk of default on the Company's obligations.
The Company may issue additional shares of capital stock without
stockholder approval that may dilute shareholder investment. The Company may
issue shares of its common stock, preferred stock or other equity or debt
securities without stockholder approval. Similarly, the Company may cause the
Operating Partnership to offer its common or preferred units for contributions
of cash or property without approval by the limited partners of the Operating
Partnership or the Company's stockholders. Existing stockholders have no
preemptive rights to acquire any of these securities, and any issuance of
equity securities under these circumstances may dilute a stockholder's
investment.
The Company may invest in securities related to real estate which could
adversely affect its ability to make distributions to stockholders. The
Company may purchase securities issued by entities which own real estate and
may, in the future, also invest in mortgages. In general, investments in
mortgages include several risks, including: borrowers may fail to make debt
service payments or pay the principal when due; the value of the mortgaged
property may be less than the principal amount of the mortgage note securing
the property; and interest rates payable on the mortgages may be lower than
the Company's cost for the funds used to acquire these mortgages. Owning these
securities may not entitle the Company to control the ownership, operation and
management of the underlying real estate. In addition, the Company may have no
control over the distributions with respect to these securities, which could
adversely affect its ability to make distributions to stockholders.
Sales of a substantial number of shares of common stock, or the perception
that this could occur, could result in decreasing the market price per share
for the Company's common stock. Management cannot predict
12
whether future issuances of shares of the Company's common stock or the
availability of shares for resale in the open market will result in decreasing
the market price per share of its common stock.
As of December 31, 1999, 27,808,410 shares of the Company's common stock
were issued and outstanding and the Company had reserved for future issuance
the following shares of common stock: 4,228,702 shares issuable upon the
exchange, at the Company's option, of common units issued in connection with
the formation of the Operating Partnership and in connection with property
acquisitions; 2,900,000 shares issuable under the Company's 1997 Stock Option
and Incentive Plan; and 1,000,000 shares issuable under the Company's Dividend
Reinvestment and Direct Stock Purchase Plan. Of the 27,808,410 shares of
common stock presently outstanding, all but 40,000 shares may be freely traded
in the public market by persons other than the Company's affiliates. In
addition, the Company has filed or has agreed to file registration statements
covering all of the shares of common stock reserved for future issuance.
Consequently, if and when the shares are issued, they may be freely traded in
the public markets.
13
ITEM 2. PROPERTIES
General
As of December 31, 1999, the Company's portfolio of stabilized operating
properties was comprised of 84 Office Properties encompassing approximately
6.1 million rentable square feet and 87 Industrial Properties encompassing
approximately 6.5 million rentable square feet. The Company's stabilized
portfolio consists of all of the Company's Office and Industrial Properties,
excluding projects recently developed by the Company that have not yet reached
95% occupancy ("lease-up" properties) and projects currently under
construction or in pre-development. As of December 31, 1999, the Office
Properties were approximately 96.4% leased to 395 tenants and the Industrial
Properties were approximately 96.9% leased to 258 tenants. All but 15 of the
Company's properties are located in Southern California.
As of December 31, 1999, the Company had seven office buildings under
construction which when completed are expected to encompass an aggregate of
approximately 861,500 rentable square feet. The Company did not have any
properties in lease-up at December 31, 1999 since all of the properties
developed and completed by the Company during 1999 and 1998 stabilized during
1999. All of the Company's development projects are located in Southern
California.
In general, the Office Properties are leased to tenants on a full service
gross basis and the Industrial Properties are leased to tenants on a triple
net basis. Under a full service lease, the landlord is obligated to pay the
tenant's proportionate share of taxes, insurance and operating expenses up to
the amount incurred during the tenant's first year of occupancy ("Base Year")
or a negotiated amount approximating the tenant's pro rata share of real
estate taxes, insurance and operating expenses ("Expense Stop"). The tenant
pays its pro-rata share of increases in expenses above the Base Year or
Expense Stop. Under a triple net lease, tenants pay their proportionate share
of real estate taxes, operating costs and utility costs.
The Company believes that all of its properties are well maintained and,
based on engineering reports obtained within the last five years, do not
require significant capital improvements. As of December 31, 1999, the Company
managed all of its 84 Office Properties and 80 of its 87 Industrial Properties
through internal property managers.
14
The Office and Industrial Properties
The following table sets forth certain information relating to each of the
Office and Industrial Properties owned as of December 31, 1999. The Company
(through the Operating Partnership and the Finance Partnership) owns a 100%
interest in all of the Office and Industrial Properties, except for the three
buildings located at 3579 Valley Center Drive and 5005/5010 Wateridge Vista
Drive in which the Company owns a 50% interest through the Development LLCs,
and the five office properties located at Kilroy Airport Center, Long Beach,
three office properties located at the SeaTac Office Center, one office
property located at 2100 Colorado Blvd. in Santa Monica, California and one
office property located at 9455 Towne Center Drive in San Diego, California,
each of which are held subject to leases for the land on which the properties
are located expiring in 2035, 2062, 2065 and 2043 (assuming the exercise of
the Company's options to extend such leases), respectively.
Average
Year Net Percentage Annual Base Rent
No. of Built/ Rentable Leased at Base Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/99(1) ($000's)(2) ($)(3)
----------------- --------- --------- ----------- ----------- ----------- -----------
Office Properties:
Los Angeles County
26541 Agoura Road
Calabasas, California(7)..... 1 1988 90,878 100.0% $1,955 $21.51
5151-5155 Camino Ruiz
Camarillo, California(7)(4).. 4 1982 276,216 100.0% 2,678 9.69
4880 Santa Rosa Road
Camarillo, California(7)..... 1 1998 41,131 100.0% 732 17.80
Kilroy Airport Center, El
Segundo 2250 E. Imperial
Highway(5)................... 1 1983 291,187 95.9% 4,755 16.33
2260 E. Imperial Highway(6).. 1 1983 291,187 100.0% 7,677 26.37
2240 E. Imperial Highway(8).. 1 1983 118,933 100.0% 1,868 15.71
El Segundo, California
185 S. Douglas Street
El Segundo, California(7).... 1 1978 60,000 100.0% 1,523 25.38
525 N. Brand Blvd.
Glendale, California......... 1 1990 43,647 100.0% 1,254 28.73
Kilroy Airport Center, Long
Beach 3900 Kilroy Airport
Way.......................... 1 1987 126,840 94.4% 2,695 21.24
3880 Kilroy Airport Way...... 1 1987 98,243 100.0% 1,325 13.49
3760 Kilroy Airport Way...... 1 1989 165,279 85.8% 3,428 20.74
3780 Kilroy Airport Way...... 1 1989 219,743 99.5% 5,038 22.93
3760 Kilroy Airport Way...... 1 1989 10,592 100.0% 66 6.24
Phase III-Bldg 8, Long Beach,
Calif....................... 1 1999 136,026 100.0% 3,911 28.76
12312 W. Olympic Blvd.
Los Angeles, California(7)... 1 1950/1998 78,000 100.0% 1,608 20.61
12100-12166 West Olympic Blvd.
Los Angeles, California...... 1 1968 48,356 85.9% 583 12.05
2100 Colorado Avenue
Santa Monica, California(7).. 3 1992 94,844 100.0% 2,791 29.42
1633 26th Street
Santa Monica, California(7).. 1 1972/1997 43,800 100.0% 845 19.30
3130 Wilshire Blvd.
Santa Monica, California..... 1 1969/1998 88,338 100.0% 2,224 25.18
501 Santa Monica Blvd.
Santa Monica, California..... 1 1974 70,089 100.0% 1,689 24.10
2829 Townsgate Road
Thousand Oaks, California.... 1 1990 81,158 100.0% 2,018 24.87
23600-23610 Telo Avenue
Torrance, California(9)...... 2 1984 79,967 80.4% 733 9.17
--- --------- ------
Subtotal/Weighted Average--
Los Angeles County........... 28 2,554,454 97.4% 51,396 20.12
--- --------- ------
15
Average
Year Net Percentage Annual Base Rent
No. of Built/ Rentable Leased at Base Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/99(1) ($000's)(2) ($)(3)
----------------- --------- --------- ----------- ----------- ----------- -----------
Orange County
Pacific Park Plaza
Aliso Viejo, California(10).. 5 1992 134,667 91.8% $1,857 $13.79
La Palma Business Center
4175 E. La Palma Avenue
Anaheim, California.......... 1 1985 42,790 96.6% 766 17.89
8101 Kaiser Blvd.
Anaheim, California.......... 1 1988 60,177 92.2% 1,253 20.82
Anaheim Corporate Center
Anaheim, California(11)...... 4 1985 159,222 80.8% 1,700 10.68
1240 & 1250 Lakeview Avenue
Anaheim, California.......... 2 1987 78,903 94.7% 922 11.69
601 Valencia Avenue,
Brea, California(7).......... 1 1982 60,891 100.0% 784 12.87
1501-1561 East Orangethorpe
Avenue Fullerton,
California(12)............... 4 1985 151,975 90.5% 1,489 9.79
111 Pacifica
Irvine, California........... 1 1991 67,401 99.9% 1,913 28.39
9451 Toledo Way
Irvine, California(13)....... 1 1984 27,200 0.0%
2501 Pullman/1700 E. Carnegie
Santa Ana, California(14).... 2 1969/1988 124,921 72.6% 1,448 11.60
--- --------- ------
Subtotal/Weighted Average--
Orange County................ 22 908,147 85.9% 12,132 13.36
--- --------- ------
San Diego County
5770 Armada Drive
Carlsbad, California(7)...... 1 1998 81,712 100.0% 1,074 13.14
2231 Rutherford
Carlsbad, California......... 1 1998 40,772 95.7% 592 14.52
6215/6220 Greenwich Drive
San Diego, California(15).... 2 1996 212,214 100.0% 3,891 18.34
6055 Lusk Avenue
San Diego, California(7)..... 1 1997 93,000 100.0% 1,149 12.35
6260 Sequence Drive
San Diego, California(7)..... 1 1997 130,000 100.0% 1,192 9.17
6290 Sequence Drive
San Diego, California(7)..... 1 1997 90,000 100.0% 894 9.94
6340 & 6350 Sequence Drive
San Diego, California(7)..... 2 1998 200,000 100.0% 2,936 14.68
15378 Avenue of Science
San Diego, California(7)..... 1 1984 68,910 100.0% 631 9.16
Pacific Corporate Center
San Diego, California(16).... 7 1995 411,402 96.0% 4,861 11.81
3990 Ruffin Road
San Diego, California........ 1 1998 45,634 100.0% 663 14.53
9455 Towne Center Drive
San Diego, California(7)..... 1 1998 45,195 100.0% 589 13.04
12225-12235 El Camino Real
San Diego, California(17).... 2 1998 115,513 100.0% 2,368 20.50
4690 Executive Drive
San Diego, California(7)..... 1 1999 50,929 100.0% 955 18.76
12348 High Bluff Drive
San Diego, California(18).... 1 1999 39,336 100.0% 997 25.33
9785/9791 Towne Center Drive
San Diego, California(7)..... 2 1999 126,000 100.0% 2,250 17.86
5005/5010 Wateridge Vista
Drive
San Diego, California(7)..... 2 1999 172,778 100.0% 3,367 19.49
3579 Valley Center Drive
San Diego, California(18).... 1 1999 52,375 100.0% 1,617 30.87
--- --------- ------
Subtotal/Weighted Average--
San Diego County............. 28 1,975,770 99.1% 30,026 15.20
--- --------- ------
16
Average
Year Net Percentage Annual Base Rent
No. of Built/ Rentable Leased at Base Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/99(1) ($000's)(2) ($)(3)
----------------- --------- --------- ----------- ----------- ----------- -----------
Other
4351 Latham Avenue
Riverside, California...... 1 1990 21,356 100.0% $ 368 $17.22
4361 Latham Avenue
Riverside, California(19).. 1 1992 30,842 92.5% 516 16.72
3750 University Avenue
Riverside, California...... 1 1982 124,986 96.1% 2,707 21.66
SeaTac Office Center
18000 Pacific Highway...... 1 1974 209,904 100.0% 3,194 15.22
17930 Pacific Highway...... 1 1980/1997 211,139 100.0% 2,172 10.29
17900 Pacific Highway
Seattle, Washington........ 1 1980 111,387 100.0% 2,034 18.26
--- --------- --------
Subtotal/Weighted Average--
Other...................... 6 709,614 99.0% 10,991 15.49
--- --------- --------
TOTAL/WEIGHTED AVERAGE
OFFICE PROPERTIES.......... 84 6,147,985 96.4% $104,545 $17.00
--- --------- --------
Industrial Properties:
Los Angeles County
Walnut Park Business Center
Diamond Bar, California.... 3 1987 165,420 97.4% 1,193 7.21
2031 E. Mariposa Avenue
El Segundo, California..... 1 1954 192,053 100.0% 1,840 9.58
2260 E. El Segundo Blvd.
El Segundo, California..... 1 1979 113,820 100.0% 555 4.87
2265 E. El Segundo Blvd.
El Segundo, California..... 1 1978 76,570 100.0% 555 7.24
2270 E. El Segundo Blvd.
El Segundo, California..... 1 1975 6,362 100.0% 88 13.80
--- --------- --------
Subtotal/Weighted Average--
Los Angeles County......... 7 554,225 99.2% 4,231 7.63
--- --------- --------
Orange County
3340 E. La Palma Avenue
Anaheim, California........ 1 1966 153,320 100.0% 1,064 6.94
1000 E. Ball Road
Anaheim, California........ 1 1956 100,000 100.0% 639 6.39
1230 S. Lewis Road
Anaheim, California........ 1 1982 57,730 100.0% 291 5.04
4155 E. La Palma Avenue
Anaheim, California(20).... 1 1985 74,618 100.0% 861 11.53
4125 E. La Palma Avenue
Anaheim, California(20).... 1 1985 69,472 100.0% 519 7.46
5325 East Hunter Avenue
Anaheim, California........ 1 1983 109,449 100.0% 606 5.54
3130-3150 Miraloma
Anaheim, California........ 1 1970 144,000 100.0% 687 4.77
3125 E. Coronado Street
Anaheim, California........ 1 1970 144,000 100.0% 774 5.37
5115 E. La Palma Avenue
Anaheim, California........ 1 1967/1999 286,139 100.0% 1,453 5.08
1250 N. Tustin Avenue
Anaheim, California........ 1 1984 84,185 100.0% 751 8.93
Anaheim Tech Center
Anaheim, California........ 5 1999 593,992 100.0% 3,391 5.71
3250 East Carpenter
Anaheim, California........ 1 1998 41,225 100.0% 242 5.88
Brea Industrial Complex
Brea, California(21)....... 7 1981 276,278 92.8% 1,605 5.81
Brea Industrial--Lambert
Road Brea, California(20).. 2 1999 178,811 100.0% 1,190 6.66
1675 MacArthur
Costa Mesa, California..... 1 1986 50,842 100.0% 512 10.07
17
Average
Year Net Percentage Annual Base Rent
No. of Built/ Rentable Leased at Base Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/99(1) ($000's)(2) ($)(3)
----------------- --------- --------- ----------- ----------- ----------- -----------
Dimension Business Park
El Toro, California(22)......... 2 1990 45,257 100.0% 494 $10.92
892/909 Towne Center Drive
Foothill Ranch, California...... 1 1998 303,327 58.9% 1,561 5.15
12681/12691 Pala Drive
Garden Grove, California........ 1 1970 84,700 100.0% 580 6.85
Garden Grove Industrial Complex
Garden Grove, California(23).... 6 1971 275,971 100.0% 1,708 6.19
12752-12822 Monarch Street
Garden Grove, California........ 1 1970 277,037 100.0% 1,068 3.86
7421 Orangewood Avenue
Garden Grove, California........ 1 1981 82,602 100.0% 575 6.96
12400 Industry Street
Garden Grove, California........ 1 1972 64,200 100.0% 369 5.74
Giltspur Building
Garden Grove, California........ 1 1974 110,220 100.0% 777 7.05
17150 Von Karman
Irvine, California.............. 1 1977 157,458 100.0% 1,139 7.24
184-220 Technology Drive
Irvine, California.............. 10 1990 157,499 93.2% 1,719 10.92
9401 Toledo Way
Irvine, California.............. 1 1984 244,800 100.0% 1,355 5.53
2055 S.E. Main Street
Irvine, California(24).......... 1 1973 47,583 100.0% 371 7.81
13645-13885 Alton Parkway
Irvine, California(25).......... 9 1989 143,117 95.6% 1,203 8.41
1951 E. Carnegie
Santa Ana, California........... 1 1981 100,000 100.0% 734 7.34
14831 Franklin Avenue
Tustin, California(24).......... 1 1978 36,256 100.0% 226 6.25
2911 Dow Avenue
Tustin, California.............. 1 1998 54,720 100.0% 361 6.60
--- ---------- --------
Subtotal/Weighted Average--
Orange County................... 65 4,548,808 96.4% 28,825 6.34
--- ---------- --------
San Diego County
5759 Fleet Street
Carlsbad, California............ 1 1998 82,923 100.0% 1,504 18.14
6828 Nancy Ridge Drive
San Diego, California........... 1 1982 39,669 100.0% 385 9.70
41093 Country Center Drive
San Diego, California........... 1 1997 77,582 100.0% 546 7.04
--- ---------- --------
Subtotal/Weighted Average--
San Diego County................ 3 200,174 100.0% 2,435 12.17
--- ---------- --------
Other
1840 Aerojet Way
Las Vegas, Nevada............... 1 1993 102,948 100.0% 514 4.91
1900 Aerojet Way
Las Vegas, Nevada............... 1 1995 106,717 100.0% 505 4.82
795 Trademark Drive
Reno, Nevada.................... 1 1998 75,257 100.0% 809 10.75
5115 N. 27th Avenue
Phoenix, Arizona(26)............ 1 1962 130,877 100.0% 649 4.96
199/201 North Sunrise Avenue
Roseville, California(27)(28)... 2 1981 162,203 100.0% 1,612 9.94
1961 Concourse Drive
San Jose, California(28)........ 1 1984 110,132 70.7% 837 7.60
1710 Fortune Drive
San Jose, California(28)........ 1 1983 86,000 100.0% 1,244 14.46
2010-2040 Fortune Drive
San Jose, California(28)........ 3 1998 235,251 100.0% 3,447 14.65
3735 Imperial Highway
Stockton, California....... 1 1996 164,540 100.0% 1,180 7.17
--- ---------- --------
Subtotal/Weighted Average--
Other...................... 12 1,173,925 97.2% 10,797 9.2
--- ---------- --------
TOTAL/WEIGHTED AVERAGE
INDUSTRIAL PROPERTIES........... 87 6,477,132 96.9% $ 46,288 $ 7.15
--- ---------- ----- --------
TOTAL/WEIGHTED AVERAGE ALL
PROPERTIES...................... 171 12,625,117 96.7% $150,833 $11.95
=== ========== ===== ========
(footnotes continued on next page)
18
- --------
(1) Based on all leases at the respective properties in effect as of December
31, 1999.
(2) Calculated as base rent for the year ended December 31, 1999, determined
in accordance with generally accepted accounting principles ("GAAP"), and
annualized to reflect a twelve-month period. Unless otherwise indicated,
leases at the Industrial Properties are written on a triple net basis and
leases at the Office Properties are written on a full service gross basis,
with the landlord obligated to pay the tenant's proportionate share of
taxes, insurance and operating expenses up to the amount incurred during
the tenant's first year of occupancy ("Base Year") or a negotiated amount
approximating the tenant's pro rata share of real estate taxes, insurance
and operating expenses ("Expense Stop"). Each tenant pays its pro rata
share of increases in expenses above the Base Year of Expense Stop.
(3) Calculated as Annual Base Rent divided by net rentable square feet leased
at December 31, 1999.
(4) The four properties at 5151-5155 Camino Ruiz were built between 1982 and
1985.
(5) For this property, leases with Hughes Space and Communications for
approximately 96,000 rentable square feet and SDRC Software Products
Marketing Division, Inc. for approximately 6,800 rentable square feet are
written on a full service gross basis, except that there is no Expense
Stop.
(6) For this property, the lease with Hughes Space and Communications is
written on a modified full service gross basis under which Hughes Space
and Communications pays for all utilities and other internal maintenance
costs with respect to the leased space and, in addition, pays its pro rata
share of real estate taxes, insurance, and certain other expenses
including common area expenses.
(7) For this property, the lease is written on a triple net basis.
(8) For this property, leases with Hughes Space and Communications for
approximately 103,000 rentable square feet are written on a full service
gross basis, except that there is no Expense Stop.
(9) For this property, a lease for approximately 41,000 rentable square feet
is written on a modified gross basis, with the tenant paying its share of
taxes and insurance above base year amounts. The leases for the remaining
23,000 rentable square feet are written on a full service gross basis.
(10) For this property, leases for approximately 65,000 rentable square feet
are written on a full service basis, with the tenants paying no expense
reimbursement, leases for approximately 38,000 rentable square feet are
written on a modified full service gross basis, and leases for
approximately 29,000 rentable square feet are written on a triple net
basis.
(11) For this property, leases for approximately 70,500 rentable square feet
are written on a full service gross basis, with the tenants paying no
expense reimbursement, leases for approximately 48,500 rentable square
feet are written on a modified full service gross basis, and leases for
approximately 21,000 rentable square feet are written on a triple net
basis.
(12) For this property, a lease for approximately 21,000 rentable square feet
is written on a modified full service gross basis, and leases for
approximately 11,000 rentable square feet are written on a triple net
basis.
(13) This property was 100% leased to one tenant in January 2000 with
annualized base rent of $375,000.
(14) For this property, a lease for approximately 52,000 rentable square feet
is written on a modified full service gross basis, and a lease for
approximately 39,000 rentable square feet is written on a triple net
basis.
(15) This property includes an expansion building with 71,000 rentable square
feet developed by the Company in 1999.
(16) The leases for this property are written on a modified net basis, with the
tenants responsible for their pro-rata share of common area expenses and
real estate taxes.
(17) For this property, a lease for 60,840 rentable square feet is written on a
triple net basis.
(18) For this property, the leases are written on a modified full service gross
basis, with the tenants responsible for paying utilities directly.
(19) For this property, a lease for 15,728 rentable square feet is written on a
triple net basis, and leases for 15,114 rentable square feet are written
on a modified full service gross basis.
(20) The leases for these industrial properties are written on a modified
triple net basis, with the tenants responsible for estimated allocated
common area expenses.
(21) The seven properties at the Brea Industrial Complex were built between
1981 and 1988.
(22) For this property, leases for approximately 26,000 rentable square feet
are written on a full service basis, with the tenants paying no expense
reimbursement, and leases for approximately 19,000 rentable square feet
are written on a modified full service gross basis.
(23) The six properties at the Garden Grove Industrial Complex were built
between 1971 and 1985.
(footnotes continued on next page)
19
(24) For this property, the lease is written on a full service gross basis.
(25) For this property, leases for approximately 53,000 rentable square feet
are written on a full service gross basis, with the tenants paying no
expense reimbursement, leases for approximately 53,000 rentable square
feet are written on a modified triple net basis with the tenants
responsible for estimated allocated common area expenses.
(26) This industrial property was originally designed for multi-tenant use and
currently is leased to a single tenant and utilized as an indoor multi-
vendor retail marketplace.
(27) For this property, leases for approximately 115,500 rentable square feet
are written on a triple net basis and, leases for approximately 46,500
rentable square feet are written on a full service basis, with the
tenants paying no expense reimbursement.
(28) This property was managed by third-party managers at December 31, 1999.
20
Development Projects
The following table sets forth certain information relating to each of the
development projects that the Company had under construction at December 31,
1999. The Company owns a 100% interest in all of the development projects
other than Peregrine Systems Corporate Center--Buildings 2 and 5 in which the
Company owns a 50% managing interest through a Development LLC. The Company
did not have any projects in lease-up at December 31, 1999 since all of the
properties developed and completed by the Company during 1999 and 1998,
encompassing an aggregate of approximately 2.0 million rentable square feet,
stabilized during 1999. All of the development projects under construction at
December 31, 1999 were office projects.
Projected %
Estimated Total Square Feet Committed at
Stabilization Estimated upon December 31,
Project Name/Submarket Date(1) Investment(2) Completion 1999(3)
---------------------- ------------- -------------- ------------ -------------
(in thousands)
Development Projects in
Lease-up:
None
Development Projects
Under Construction:
Brobeck, Phleger and
Harrison/San Diego..... 1st Quarter 2000 $ 15,548 72,300 100%
Calabasas Park Centre--
Phase I/Los Angeles.... 4th Quarter 2000 17,757 101,600 88%
Carmel Mountain
Technology
Center/San Diego....... 1st Quarter 2001 17,160 103,000 100%
Kilroy Airport Center,
Long Beach--7 Story/Los
Angeles................ 3rd Quarter 2001 31,939 191,800 77%
Peregrine Systems
Corporate Ctr.--
Building 2/San
Diego(4)............... 2nd Quarter 2000 26,334 129,700 100%
Peregrine Systems
Corporate Ctr.--
Building 5/San
Diego(4)............... 3rd Quarter 2000 22,668 112,100 100%
Westside Media Center--
Phase II/Los Angeles... 4th Quarter 2000 42,412 151,000 100%
-------- -------
Total Development
Projects Under
Construction......... $173,818 861,500 93%
======== =======
- --------
(1) Based on management's estimation of the earlier of stabilized occupancy
(95.0%) or one year from the date of substantial completion.
(2) Represents total projected development costs at December 31, 1999.
(3) Represents executed leases and signed letters of intent to lease
calculated on a square footage basis at December 31, 1999.
(4) Represents projects being developed by the Development LLCs in conjunction
with The Allen Group, a group of affiliated real estate and development
companies based in Visalia, California. See separate discussion in Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Expenditures Section for further discussion.
21
Tenant Information
The following table sets forth information as to the Company's ten largest
office and industrial tenants based upon annualized rental revenues for the
year ended December 31, 1999.
Percentage of
Annual Total Base Lease
Base Rental Rental Initial Lease Expiration
Tenant Name Revenues(1) Revenues Date(2) Date
----------- -------------- ------------- ------------- ----------
(in thousands)
Office Properties:
Hughes Aircraft
Corporation's Space and
Communications
Company(3),(4)......... $ 9,630 6.4% August 1984 Various
The Boeing
Company(3),(5)......... 5,742 3.8 February 1992 Various
Epson America, Inc.(6).. 4,211 2.8 October 1999 Various
Epicor Software
Corporation............ 3,016 2.0 September 1999 August 2009
Intuit, Inc. ........... 2,937 2.0 November 1997 June 2004
Sony Music
Entertainment, Inc. ... 2,791 1.9 June 1997 December 2008
Unisys Corporation...... 2,678 1.8 March 1997 April 2001
LPL Holdings............ 2,247 1.5 October 1998 February 2014
Northwest Airlines,
Inc.(7)................ 2,236 1.5 August 1978 Various
Pacific Bell............ 1,994 1.3 December 1998 February 2009
------- ----
Total Office
Properties........... $37,482 25.0%
======= ====
Industrial Properties:
Mattel, Inc. ........... $ 1,840 1.2% May 1990 October 2000
Celestica California,
Inc. .................. 1,561 1.0 May 1998 May 2008
Natural Alternatives
Intl., Inc. ........... 1,504 1.0 October 1998 October 2013
OmniPak................. 1,453 1.0 August 1998 July 2008
Mazda Motor of America,
Inc.................... 1,355 0.9 July 1997 July 2000
Flextronics Intl USA,
Inc. .................. 1,244 0.8 September 1999 August 2006
Kraft Foods, Inc. ...... 1,180 0.8 February 1996 February 2006
Packard Hughes
Interconnect........... 1,094 0.7 May 1997 January 2001
Targus, Inc. ........... 1,043 0.7 December 1998 March 2009
Southern Plastic
Mold(8)................ 952 0.6 August 1992 Various
------- ----
Total Industrial
Properties........... $13,226 8.7%
======= ====
- --------
(1) Determined in accordance with generally accepted accounting principles.
(2) Represents date of first relationship between tenant and the Company or
the Company's predecessor, the Kilroy Group.
(3) In January 2000, The Boeing Company announced the pending acquisition of
Hughes' Space and Communications business and related operations (not
including DirecTV). While the transaction has not yet closed, the combined
entity would have accounted for 10.1% of the Company's total base rental
revenues for the year ended December 31, 1999, and total combined net
rentable square feet of 841,580 at December 31, 1999.
(4) Hughes Space and Communications leases of 286,151 and 100,978 net rentable
square feet expire July 2004 and January 2004, respectively. Leases with
other Hughes-affiliated entities of 7,515, 5,388 and 5,234 net rentable
square feet expire November 2001, December 2001 and December 2001,
respectively.
(5) The Boeing Company leases of 211,139, 49,988, 26,620, 24,356, 14,777, and
6,814 net rentable square feet expire December 2004, January 2002,
December 2000, December 2000, June 2000, and January 2001, respectively.
Boeing North America lease of 113,242 net rentable square feet expires May
2009.
(6) Epson America, Inc. and Epson Seiko leases of 123,737, 26,832 and 3,562
net rentable square feet expire October 2009, October 2009 and October
2002, respectively.
(7) Northwest Airlines leases of 60,000 and 27,861 net rentable square feet
expire in February 2001 and April 2005, respectively.
(8) Southern Plastic Mold leases of 144,000 and 44,000 rentable square feet
expire September 2003 and February 2005, respectively.
22
At December 31, 1999, the Company's tenant base was comprised of the
following industries, broken down by percentage of total portfolio base rent:
manufacturing, 41.9%; services, 23.7%; transportation, communications and
public utilities, 12.9%; finance, insurance and real estate, 10.5%; retail
trade, 4.2%; wholesale trade, 3.2%; government, 2.3%; construction, 1.1%; and
agriculture, forestry and fishing, 0.2%. Following is a list comprised of a
representative sample of 25 of the Company's tenants whose annual base rental
revenues were less than 1.0% of the Company's total annual base revenue at
December 31, 1999:
ACG Green Group, Inc. Hanger Orthopedic Group Premier, Inc.
Advanced Tool Systems LEA Corporation QSC Audio Products, Inc.
Affiliated Computer Services, Inc. Medibuy.com, Inc. Raab Karcher Electronics
Alesis Studio Electronics, Inc. MRJ Industries, Inc. Rayonier, Inc.
AMN Healthcare, Inc. National Digital Television Center Ricoh Electronics, Inc.
Applied Micro Circuits Corp. Otis Elevator Company Rosemount Analytical, Inc.
Calbiochem Pacific Parking System, Inc. Troika Network, Inc.
Celebrity Prime Foods Pepperdine University Webhouse, Inc.
Dovatron Manufacturing S. Calif
Lease Expirations
The following table sets forth a summary of the Company's lease expirations
for the Office and Industrial Properties for each of the ten years beginning
with 2000, assuming that none of the tenants exercise renewal options or
termination rights.
Percentage of Average Annual
Net Rentable Total Leased Annual Base Rent Per Net
Area Subject Square Feet Rent Under Rentable Square
Number of to Expiring Represented Expiring Foot
Expiring Leases by Expiring Leases Represented by
Year of Lease Expiration Leases(1) (Sq. Ft.) Leases(2) (000's)(3) Expiring Leases
- ------------------------ --------- ------------ ------------- ----------- ---------------
Office Properties:
2000.................... 89 379,552 6.2% $ 7,050 $18.57
2001.................... 84 1,075,655 17.6 16,454 15.30
2002.................... 66 571,575 9.4 8,882 15.54
2003.................... 39 228,146 3.7 4,339 19.02
2004.................... 51 826,376 13.5 18,697 22.63
2005.................... 22 704,601 11.6 10,064 14.28
2006.................... 13 369,133 6.1 6,994 18.95
2007.................... 10 511,571 8.4 8,948 17.49
2008.................... 8 315,214 5.2 6,277 19.91
2009 and beyond......... 16 1,117,962 18.3 28,989 25.93
--- ---------- ----- --------
398 6,099,785 100.0% $116,694 $19.13
--- ---------- --------
Industrial Properties:
2000.................... 75 980,430 16.2% $ 7,432 $ 7.58
2001.................... 64 651,980 10.8 4,778 7.33
2002.................... 37 222,065 3.7 2,190 9.86
2003.................... 28 754,993 12.5 5,763 7.63
2004.................... 17 591,256 9.8 4,506 7.62
2005.................... 9 420,618 7.0 2,908 6.91
2006.................... 9 693,936 11.5 5,984 8.62
2007.................... 3 164,595 2.7 1,396 8.48
2008.................... 7 859,786 14.2 6,680 7.77
2009 and beyond......... 12 707,345 11.6 5,547 7.84
--- ---------- ----- --------
261 6,047,004 100.0% $ 47,184 $ 7.80
--- ---------- --------
Total Portfolio......... 659 12,146,789 100.0% $163,878 $13.49
=== ========== ========
(footnotes on next page)
23
- --------
(1) Includes tenants only. Excludes leases for amenity, retail, parking and
month-to-month tenants. Some tenants have multiple leases.
(2) Based on total leased square footage for the respective portfolios as of
December 31, 1999 unless a lease for a replacement tenant had been
executed on or before January 1, 2000.
(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 January 1, 2000.
Mortgage Debt
At December 31, 1999, the Operating Partnership had seven mortgage loans
outstanding, representing aggregate indebtedness of approximately $326
million, which were secured by certain of the Office and Industrial Properties
(the "Secured Obligations"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Note 6 to the Company's consolidated and combined financial
statements included herewith. Management believes that as of December 31,
1999, the value of the properties securing the respective Secured Obligations
in each case exceeded the principal amount of the outstanding obligation.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of the Company's properties are presently
subject to any material litigation nor, to the Company's knowledge, is any
material litigation threatened against any of them which if determined
unfavorably to the Company would have a material adverse effect on the
Company's cash flows, financial condition or results of operations. The
Company is party to litigation arising in the ordinary course of business,
none of which if determined unfavorably to the Company is expected to have a
material adverse effect on the Company's cash flows, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the year ended December 31, 1999.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the New York Stock Exchange
("NYSE") on January 28, 1997, under the symbol "KRC." The following table
illustrates the high, low and closing prices by quarter during 1999 and 1998
as reported on the NYSE. On March 10, 2000, there were approximately 230
registered holders of the Company's common stock.
Common
Stock
Dividends
1999 High Low Close Declared
- ---- ------ ------ ------ ---------
First quarter.................................... $23.38 $19.94 $20.50 $0.4200
Second quarter................................... 26.19 19.69 24.38 0.4200
Third quarter.................................... 24.31 20.31 21.13 0.4200
Fourth quarter................................... 22.38 18.00 22.38 0.4200
Common
Stock
Dividends
1998 High Low Close Declared
- ---- ------ ------ ------ ---------
First quarter.................................... $29.25 $26.31 $28.56 $0.4050
Second quarter................................... 28.31 24.69 25.00 0.4050
Third quarter.................................... 25.56 19.00 23.00 0.4050
Fourth quarter................................... 23.38 19.50 23.00 0.4050
The Company pays distributions to common stockholders on or about the 10th
day of each January, April, July and October at the discretion of the Board of
Directors. Distribution amounts depend on the Company's Funds from Operations,
financial condition and capital requirements, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), and such other factors as the Board of Directors
deems relevant.
During fiscal year 1999, the Operating Partnership issued 472,034 common
units of the Operating Partnership, valued by the Company at approximately
$9.9 million based upon the closing share price of the Company's common stock
as reported on the NYSE at the time of the respective transactions, to
entities controlled by Richard S. Allen, a former member of the Company's
Board of Directors, in partial consideration for the contribution of certain
properties and undeveloped land to the Operating Partnership. A former
Executive Vice President of the Company received 245,066 of the total 472,034
common units. The common units become convertible into shares of the Company's
common stock, on a one-for-one basis, one year after issuance date. The common
units were 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.
During the fourth quarter of fiscal year 1999, the Company issued 900,000
9.250% Series D Cumulative Redeemable Preferred units, representing limited
partnership interests in the Operating Partnership with a liquidation value of
$50.00 per unit, in exchange for a gross contribution to the Operating
Partnership of $45.0 million. The Series D Preferred units are exchangeable,
at the option of the majority of the holders, for shares of the Company's
9.250% Series D Cumulative Redeemable Preferred stock, beginning ten years
from the date of issuance, or earlier under certain circumstances. The Series
D Cumulative Redeemable Preferred units were 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.
During 1999, the Company issued 442,200 shares of common stock upon the
conversion of 442,200 common units of the Operating Partnership by limited
partners. The issuance of the common shares on a one-for-one basis was made
pursuant to the terms set forth in the partnership agreement of the Operating
Partnership. The shares of common stock were issued in a transaction not
requiring registration under federal securities laws pursuant to Section 4(2)
of the Securities Act of 1933.
25
ITEM 6. SELECTED FINANCIAL DATA
Kilroy Realty Corporation and the Kilroy Group
(in thousands, except per share, square footage and occupancy data)
Kilroy Realty Corporation Consolidated Kilroy Group Combined
-------------------------------------- -------------------------------------
February 1, January 1,
Year Ended Year Ended 1997 to 1997 to Year Ended Year Ended
December 31, December 31, December 31, January 31, December 31, December 31,
1999 1998 1997 1997 1996 1995
------------ ------------ ------------ ----------- ------------ ------------
Statements of Operations
Data:
Rental income.......... $140,182 $117,338 $56,069 $2,760 $35,022 $33,896
Tenant
reimbursements........ 16,316 14,956 6,751 306 3,752 3,002
Development services... 14 698 1,156
Sale of air rights..... 4,456
Interest income........ 1,175 1,698 3,571
Other income........... 2,027 3,096 889 4 76 398
-------- -------- ------- ------ ------- -------
Total revenues....... 159,700 137,088 67,280 3,084 39,548 42,908
-------- -------- ------- ------ ------- -------
Property expenses...... 20,669 19,281 8,770 579 6,788 6,834
Real estate taxes...... 12,369 10,383 4,199 137 1,673 1,416
General and
administrative
expenses.............. 9,091 7,739 4,949 78 2,383 2,152
Ground leases.......... 1,397 1,223 938 64 768 789
Provision for
potentially
unrecoverable pre-
development costs..... 1,700
Development expenses... 46 650 737
Option buy-out cost ... 3,150
Interest expense....... 26,309 20,568 9,738 1,895 21,853 24,159
Depreciation and
amortization.......... 33,794 26,200 13,236 787 9,111 9,474
-------- -------- ------- ------ ------- -------
Total expenses....... 103,629 87,094 41,830 3,586 46,376 45,561
-------- -------- ------- ------ ------- -------
Income (loss) before
gains on dispositions
of operating
properties, equity in
income of
unconsolidated
subsidiary, minority
interests and
extraordinary gains... 56,071 49,994 25,450 (502) (6,828) (2,653)
Gains on dispositions
of operating
properties............ 46
Equity in income of
unconsolidated
subsidiary............ 17 5 23
-------- -------- ------- ------ ------- -------
Income (loss) before
minority interests
and extraordinary
gains................. 56,134 49,999 25,473 (502) (6,828) (2,653)
Minority interests:
Distributions on
Cumulative
Redeemable Preferred
units............... (9,560) (5,556)
Minority interest in
earnings of
Operating
Partnership......... (6,480) (5,621) (3,413)
Minority interest in
earnings of
Development LLCs.... (199)
-------- -------- ------- ------ ------- -------
Total minority
interests............. (16,239) (11,177) (3,413)
-------- -------- -------
Income (loss) before
extraordinary gains... 39,895 38,822 22,060 (502) (6,828) (2,653)
Extraordinary gains--
extinguishment of
debt.................. 3,204 20,095 15,267
-------- -------- ------- ------ ------- -------
Net income........... $ 39,895 $ 38,822 $22,060 $2,702 $13,267 $12,614
======== ======== ======= ====== ======= =======
Share Data:
Weighted average
shares outstanding--
basic................. 27,701 26,989 18,445
======== ======== =======
Weighted average
shares outstanding--
diluted............... 27,727 27,060 18,539
======== ======== =======
Net income per common
share--basic.......... $ 1.44 $ 1.44 $ 1.20
======== ======== =======
Net income per common
share--diluted........ $ 1.44 $ 1.43 $ 1.19
======== ======== =======
Distributions per
common share.......... $ 1.68 $ 1.62 $ 1.42
======== ======== =======
26
December 31,
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Kilroy Realty Corporation Kilroy Group
Consolidated Combined
-----------