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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, 2000
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:
Title of each class Name of each exchange on which 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 $721,831,122 based on the
closing price on the New York Stock Exchange for such shares on March 26,
2001.
As of March 26, 2001, 26,893,857 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 2001 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.................................................... 15
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... 47
Item 8. Financial Statements and Supplementary Data................... 51
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 51
PART III
Item 10. Directors and Executive Officers of the Registrant............ 52
Item 11. Executive Compensation........................................ 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 52
Item 13. Certain Relationships and Related Transactions................ 52
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 53
PART I
ITEM 1. BUSINESS
The Company
Kilroy Realty Corporation (the "Company") owns, operates, develops, and
acquires Class A suburban office and industrial real estate in key suburban
submarkets, primarily in Southern California, that the Company believes have
strategic advantages and strong barriers to entry. 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, 2000, the Company's portfolio of stabilized operating
properties was comprised of 83 office buildings (the "Office Properties") and
78 industrial buildings (the "Industrial Properties," and together with the
Office Properties, the "Properties") which encompassed an aggregate of
approximately 6.6 million and 5.8 million rentable square feet, respectively.
The Properties include 21 properties that the Company developed and then
stabilized during 2000 and 1999 encompassing an aggregate of approximately
809,000 and 1.2 million rentable square feet, respectively. As of December 31,
2000, the Office Properties were approximately 96.2% leased to 302 tenants and
the Industrial Properties were 97.8% leased to 220 tenants. All but ten of the
Properties are located in Southern California.
The Company's stabilized portfolio excludes projects currently under
construction or in pre-development and "lease-up" properties. The Company
defines "lease-up" properties as properties recently developed by the Company
that have not yet reached 95% occupancy. The Company had one lease-up property
at December 31, 2000, encompassing an aggregate of approximately 197,300
rentable square feet, which stabilized on January 15, 2001. As of December 31,
2000, the Company had 11 office properties under construction or committed for
construction which when completed are expected to encompass an aggregate of
approximately 964,400 rentable square feet at a total estimated investment of
approximately $232 million. In addition, as of December 31, 2000, the Company
owned approximately 67 acres of undeveloped land upon which the Company
currently expects to develop an aggregate of approximately 1.3 million
rentable square feet of office space within the next three to four years. All
of the Company's development projects and undeveloped land parcels are located
in Southern California.
The Company owns its interests in all of the 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, 2000, it owned an approximate 87.6%
general partnership interest. The remaining 12.4% 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 137 of the Company's 161 Properties. The remaining properties, other than
six buildings which are owned by the Operating Partnership through KR-Carmel
Partners and KR-Gateway Partners, (together, the "Development LLCs"), in which
the Operating Partnership owned a 50% managing interest at December 31, 2000,
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 of the Finance
Partnership. Unless otherwise indicated, all references to the Company include
the Operating Partnership, the Finance Partnership, the Development LLCs and
all wholly-owned subsidiaries and controlled entities.
As of December 31, 2000 the Operating Partnership owned 100% of the non-
voting preferred stock and a 95% economic interest in Kilroy Services, Inc.
("KSI"), an unconsolidated subsidiary of the Company. All of
1
the voting interest was held by John B. Kilroy, Sr., the Chairman of the
Company's Board of Directors, and John B. Kilroy, Jr., the Company's President
and Chief Executive Officer. Prior to December 31, 2000, the operating results
of the development services business conducted by KSI were accounted for under
the equity method of accounting. On January 1, 2001, KSI was merged into a
newly formed entity, Kilroy Services, LLC ("KSLLC"). In connection with the
merger, the interests held by Messers Kilroy were liquidated and KSLLC became
a wholly owned subsidiary of the Company. KSLLC will be consolidated for
financial reporting purposes beginning January 1, 2001.
Current Year Highlights
The Company continued to successfully attain its primary business objective
of maximizing growth in Funds From Operations, as defined by the National
Association of Real Estate Investment Trusts, ("NAREIT") through accomplishing
the following during the year ended December 31, 2000:
. Execution of lease agreements on approximately 2.0 million rentable
square feet of office and industrial space, including both renewals and
turnovers, at average rental rates 23.7% above 1999 average rental rates
on a basis consistent with generally accepted accounting principles
("GAAP").
. Achievement of 96.9% average occupancy for the Company's stabilized
portfolio for the year ended December 31, 2000. Occupancy was 97.0% at
December 31, 2000.
. Completion of nine office buildings encompassing approximately 1.0
million rentable square feet at a total estimated investment of $203
million. These properties were approximately 98% occupied at December
31, 2000.
. Continued improvement of the quality of the Company's portfolio through
reinvesting approximately $114 million of capital obtained from the sale
of mature, non-strategic assets, into brand new, state-of-the-market
assets that the Company is developing in attractive coastal submarkets
in Southern California.
. Acquisition of approximately 20 acres of undeveloped land and the
initiation of actions to acquire an office complex containing
approximately 366,000 rentable square feet. In January 2001, the Company
completed the acquisition of this office complex and began the
redevelopment of one of the buildings.
. Execution of seven new secured and unsecured debt financings that
provided the Company with approximately $239 million of additional
future borrowing capacity. The Company's total debt as a percentage of
total market capitalization was approximately 41.9% at December 31,
2000.
. Execution of interest rate swap and interest rate cap agreements that
resulted in approximately 82.1% of the Company's total debt being fixed
or capped at December 31, 2000.
Business and Growth Strategies
Growth Strategies. The Company believes that a number of factors will
enable it to continue to achieve its objectives of long-term sustainable
growth in net operating income, defined as operating revenues less property
and related expenses (property expenses, real estate taxes and ground leases)
before depreciation, and Funds From Operations, as defined by NAREIT, as well
as maximization of long-term stockholder value 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 Company's
properties; (iii) the Company's existing substantial development pipeline as
established over the past several years; (iv) the Company's access to
development and leasing opportunities as a result of its extensive experience
and significant working relationships with major Southern California corporate
tenants, municipalities and landowners given the Company's over 50-year
presence in the Southern California market; and (v) 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. Management believes that the
Company is well positioned to capitalize on existing opportunities because of
its extensive experience in its submarkets, its seasoned management team and
its proven ability to develop, lease, acquire and efficiently manage office
and industrial properties.
2
Operating Strategies. The Company focuses on enhancing growth in net
operating income and Funds From Operations from its properties by: (i)
maintaining higher than average occupancy rates; (ii) maximizing cash flow
from the properties through active leasing, early renewals, increasing
contractual base rent to current market levels as leases expire and effective
property management; (iii) structuring leases to maximize returns and internal
growth and underwriting leases to manage portfolio credit risk; (iv) managing
operating expenses through the efficient use of internal management, leasing,
marketing, financing, accounting and construction management functions; (v)
maintaining and developing long-term relationships with a diverse tenant
group; (vi) managing the buildings in a way that offers the maximum degree of
utility and operational efficiency to tenants; (vii) continuing to emphasize
capital improvements to enhance the properties' competitive advantages in
their respective markets and improve the efficiency of building systems; and
(viii) attracting and retaining motivated employees by providing financial and
other incentives to meet the Company's operating and financial goals.
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 two target market regions, Los
Angeles and San Diego Counties. The Company's, in-process, committed and
future development pipeline (including projects held through joint venture
arrangements) can support future development of approximately an aggregate of
2.3 million rentable square feet of office space at a total budgeted cost of
approximately $486 million within the next three to four years. The Company's
strategy with respect to development is as follows: (i) reinvest capital from
strategic dispositions of mature, non-strategic assets into new, state-of-the-
market development assets with higher cash flows and rates of return; (ii)
maintain a disciplined approach to development by focusing on pre-leasing,
phasing and cost control; (iii) continue to expand the Company's build-to-suit
program where it develops properties committed to be leased by specific
tenants since such strategy provides for lower risk development; (iv) pursue
redevelopment opportunities in land constrained markets since such efforts
achieve similar returns to new development with reduced entitlement risk and
shorter construction periods; and (v) to be the premier low-cost provider of
two four-story campus style office buildings in Southern California.
During 2000 and 1999, the Company completed an aggregate of 19 buildings
encompassing an aggregate of approximately 1.9 million rentable square feet at
an aggregate cost of approximately $305 million. As of December 31, 2000, the
Company had 11 office buildings under construction or committed for
construction which when completed are expected to encompass an aggregate of
approximately 964,400 rentable square feet at a total estimated investment of
approximately $232 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 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 or that it will have access
to additional development opportunities.
Financing Strategies. The Company's financing policies and objectives are
determined by the Company's Board of Directors. The Company's goal is to limit
its dependence on leverage and 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, 2000, total debt constituted approximately
41.9% of the total market capitalization of the Company. The Company's funding
strategies are as follows: (i) maintain financial flexibility and the ability
to access a variety of capital sources; (ii) maintain a staggered debt
maturity schedule to limit risk exposure to any particular point in the
capital and credit market cycles; (iii) complete financing deals in advance of
the need for capital; and (iv) manage interest rate exposure.
3
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.
Significant Tenants
As of March 22, 2001, the Company's ten largest office tenants represented
approximately 28.9% of total annual base rental revenues, defined as
annualized monthly contractual rents from existing tenants at December 31,
2000 determined on a straight-line basis over the term of the related lease in
accordance with GAAP, and its ten largest industrial tenants represented
approximately 9.3% of total annual base rental revenues. Of this amount, its
largest tenant, The Boeing Company, currently leases an aggregate of
approximately 776,900 rentable square feet of office space under twelve
separate leases, representing approximately 9.2% of the Company's total annual
base rental revenues at December 31, 2000. The base periods for 14.9% of The
Boeing Company leases expire over the next 18 months. The base periods for the
remaining leases for The Boeing Company expire during the period from January
2004 through August 2005.
The Company's five largest office tenants, based on annualized base rental
revenues, include: The Boeing Company; Peregrine Systems, Inc.; Epson America,
Inc.; Epicor Software Corporation; and Intuit, Inc. The Company's five largest
industrial tenants, based on annualized base rental revenues, include:
Celestica California, Inc.; Qwest Communications Corporation; Mattel, Inc.;
Abovenet Communications, Inc.; and OmniPak (d.b.a. Raven Industries); (See
Item 2: Properties--Tenant Information for further discussion on the Company's
tenant base.)
Employees
As of March 22, 2001, the Company, through the Operating Partnership and
KSI employed 143 persons. The Company, the Operating Partnership and KSI
believe that relations with their employees are good.
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 or
release of the hazardous materials. Government investigations and remediation
actions may have substantial costs and the presence of hazardous substances on
a property could result in personal injury or similar claims by private
plaintiffs. For instance, if asbestos-containing materials and other
4
hazardous or toxic substances were found on the Company's properties, third
parties might seek recovery from the Company for personal injuries associated
with the existence of those substances. As of December 31, 2000, 30 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 indemnify the Company for any
related liabilities. As of December 31, 2000, 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 have conducted Phase I or similar environmental site assessments
on all of the Company's properties. The Company generally obtains these
assessments prior to the acquisition of a property and may later update them
as required for subsequent financing of the property or as requested by
tenants. 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 30 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.
5
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 rentable 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 which are generally obtained at the time the properties
are acquired, that all of its properties comply in all material respects with
the current regulations. 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.
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, development activities, sources of growth,
planned development and expansion of owned or leased property, capital
requirements, compliance with contractual obligations and federal, state and
local regulations, conditions of properties, environmental findings 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 and 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, 2000, 89.7% of the aggregate square footage of the
Company's stabilized portfolio and 92.2% 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.
Increasing utility costs and power outages in California may have an
adverse effect on the Company's operating results. Uncertainties and problems
associated with the deregulation of the electric industry in California have
resulted in higher utility costs and intermittent service interruptions in
some areas of the state.
6
However, approximately 75% (based on net rentable square footage) of the
Company's current leases require tenants to pay utility costs directly;
therefore, eliminating the Company's exposure. The remaining 25% of the
Company's leases provide that the tenants reimburse the Company for utility
costs in excess of a base year amount.
Although the Company has not experienced any material trends or effects
arising from this regional issue, it is possible that some of its tenants may
not fulfill their lease obligations or reimburse the Company for their share
of any significant utility increases. In addition it is possible that the
Company may not be able to retain or replace its tenants if energy problems in
California continue or worsen. As a result the Company's financial condition,
results of operations, and cash flows may be adversely affected.
The Company's 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; the Company's default under one
mortgage loan with cross default provisions could result in a default on other
indebtedness; and the Company may be unable to complete its development plans
or pursue other development opportunities. If one or more 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 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, 2000, the Company had approximately $724 million
aggregate principal amount of indebtedness, $5.7 million of which is due prior
to December 31, 2001. The Company's total debt represented 41.9% of its total
market capitalization at December 31, 2000.
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, the occupancy rate for the Company's Long Beach
Airport office property portfolio at December 31, 2000 was 94.1%, in
comparison to 90.9%, for the Long Beach Airport office 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 uninsurable losses such as loss from riots or acts of God. Some
of the Company's policies, like those covering losses due to floods, are
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
7
deductions which management believes are commercially reasonable. As of
December 31, 2000, 80 of the Office Properties aggregating 6.1 million square
feet (representing approximately 49.0% of the Company's stabilized portfolio
based on aggregate square footage and approximately 70.4% based on annualized
base rent) were located in areas known to be subject to earthquakes. As of
December 31, 2000, 74 of the Company's Industrial Properties aggregating 5.4
million square feet (representing approximately 43.4% of the Company's
stabilized portfolio based on aggregate square footage and approximately 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. There are several risks associated with property development. The
Company may be unable to obtain construction financing on favorable terms or
may be unable to obtain permanent financing at all or on advantageous terms if
development projects are financed through construction loans. In addition, 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. Also,
the Company may lease the developed properties at below expected rental rates.
For example, during the fourth quarter of 1998, the Company withdrew its
participation from a master planned commercial development prior to the
commencement of construction. Also, during the third quarter of 2000, the
Company delayed commencement of construction on one of its projects by four
months. The project was an assemblage in an urban infill location that
required the relocation of some existing businesses. The Company encountered
delays when one of the existing tenants experienced difficulty in relocating
as a result of the high leasing demand and tight supply constraints in that
sub-market.
If one or more 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.
8
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
1.3 million aggregate rentable square feet of rental space located on these
leased parcels at December 31, 2000. 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 expires
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. Subsequent to December 31, 2000, the Company acquired the fee interest
in the land at 9455 Towne Center Drive in San Diego, California and the ground
lease was terminated.
The Company depends on significant tenants. As of March 22, 2001, the
Company's ten largest office tenants represented approximately 28.9% of total
annualized base rent at December 31, 2000 and its ten largest industrial
tenants represented approximately 9.3% of total annualized base rent at
December 31, 2000. Of this amount, its largest tenant, The Boeing Company,
currently leases approximately 776,900 rentable square feet of office space,
representing approximately 9.2% of the Company's total annual base rental
revenues. See further discussion on the composition of the Company's tenants
by industry at "Item 2--Properties." 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, 2000, the Company derived approximately 96.6% 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 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, the Company may experience losses as
a result of tenants filing for bankruptcy protection in the future.
Subsequent to December 31, 2000, one of the Company's tenants, eToys, Inc.
("eToys"), defaulted under its lease with the Company covering 151,000
rentable square feet of office space. In connection with the execution of the
lease, eToys had provided the Company with $15.0 million in letters of credit,
which were established pursuant to the lease to provide credit support to
eToys lease obligations. In January 2001, the Company exercised its rights
under the lease and the letters of credit and drew down $15.0 million.
Subsequent to the Company drawing the $15.0 million, eToys filed for
protection under Chapter 11 of the federal bankruptcy laws. As discussed in
the preceding paragraph, the Company may experience losses in connection with
the bankruptcy of eToys, including losses resulting from costs, delays and
rental rate decreases the Company may experience in its ability to release the
space, and any losses resulting from the bankruptcy could be material to the
Company's consolidated results from operations.
The Company may be unable to renew leases or re-let space as leases
expire. As of December 31, 2000, leases representing approximately 14.2% and
6.1% of the square footage of the Company's properties will expire
9
in 2001 and 2002, respectively. 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 currently 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. In addition,
the Internal Revenue Code of 1986, as amended, generally imposes a 100%
prohibited transaction tax on profits the Company derives from sales of
properties held primarily for sale to customers in the ordinary course of
business, which could effect the Company's ability to sell 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 repay
indebtedness and to pay distributions to stockholders.
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
limited partnership unitholders, which include the Company because of its
percentage holding of the common limited partnership 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. As of December 31, 2000, limited partners owned approximately 12.4% of
the outstanding interests in the Operating Partnership. 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 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 1,795,572 shares of the Company's common
stock and currently vested options to purchase an aggregate of 433,334 shares
of common stock, representing a total of approximately 8.4%
10
of the total outstanding shares of common stock as of December 31, 2000.
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 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.
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 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.
11
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 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 and declared a
distribution of one preferred share purchase right for each outstanding share
of common stock. 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 (90%
beginning January 1, 2001), excluding capital gains. In addition, legislation,
new regulations, administrative interpretations or court decisions may
adversely affect the
12
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 has been or 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. To qualify as a REIT,
the Company generally must distribute to its stockholders at least 95% (90%
beginning January 1, 2001) of its net taxable income each year, excluding
capital gains, and the Company is subject to regular corporate income taxes to
the extent that it distributes less than 100% of its net taxable income each
year. In addition, the Company will be subject to a 4% nondeductible excise
tax on the amount, if any, by which certain 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. 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. 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 (90% beginning
January 1, 2001), 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
development 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.
13
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 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, 2000, 26,475,470 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: 3,748,545 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; 2,704,930 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 26,475,470 shares of
common stock presently outstanding, all but 195,000 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.
14
ITEM 2. PROPERTIES
General
As of December 31, 2000, the Company's portfolio of stabilized operating
properties was comprised of 83 Office Properties and 78 Industrial Properties
which encompassed an aggregate of approximately 6.6 million and 5.8 million
rentable square feet, respectively. The Properties include 21 properties that
the Company developed and then stabilized during 2000 and 1999 encompassing an
aggregate of approximately 809,000 and 1.2 million rentable square feet,
respectively. As of December 31, 2000, the Office Properties were
approximately 96.2% leased to 302 tenants and the Industrial Properties were
97.8% leased to 220 tenants. All but ten of the Properties are located in
Southern California.
The Company's stabilized portfolio excludes projects currently under
construction or in pre-development and "lease-up" properties. The Company
defines "lease-up" properties as properties recently developed by the Company
that have not yet reached 95% occupancy. The Company had one lease-up property
at December 31, 2000, encompassing an aggregate of 197,300 rentable square
feet, which stabilized on January 15, 2001. As of December 31, 2000, the
Company had 11 office properties under construction or committed for
construction which when completed are expected to encompass an aggregate of
approximately 964,400 rentable square feet at a total estimated investment of
approximately $232 million. 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, 2000, the Company
managed all of its 83 Office Properties and 76 of its 78 Industrial Properties
through internal property managers.
15
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, 2000. 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 six
office buildings located at 3579 Valley Center Drive, 5005/5010 Wateridge
Vista Drive and 4955 Directors Place in which the Company owns a 50% interest
through the Development LLCs, and the six office buildings located at Kilroy
Airport Center, Long Beach, three office buildings located at the SeaTac
Office Center, and one office building 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, and 2043 (assuming
the exercise of the Company's options to extend such leases), respectively.
Subsequent to December 31, 2000, the Company acquired the fee interest in the
land at 9455 Towne Center Drive in San Diego, California and the ground lease
was terminated.
Average
Net Percentage Annual Base Base Rent
No. of Year Built/ Rentable Leased at Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/00(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% 2,705 9.79
4880 Santa Rosa Road
Camarillo,
California(7).......... 1 1998 41,131 100.0% 720 17.51
Kilroy Airport Center,
El Segundo
2250 E. Imperial
Highway(5)............. 1 1983 291,187 96.0% 5,163 17.73
2260 E. Imperial
Highway(6)............ 1 1983 291,187 100.0% 7,448 25.58
2240 E. Imperial
Highway(8)............ 1 1983 118,933 100.0% 1,877 15.78
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% 1,255 28.74
Kilroy Airport Center,
Long Beach
3900 Kilroy Airport
Way.................... 1 1987 126,840 97.3% 2,805 22.12
3880 Kilroy Airport
Way................... 1 1987 98,243 100.0% 1,326 13.49
3760 Kilroy Airport
Way................... 1 1989 165,279 80.0% 3,231 19.55
3780 Kilroy Airport
Way................... 1 1989 219,743 96.4% 5,691 25.90
3750 Kilroy Airport
Way................... 1 1989 10,592 100.0% 147 13.85
3840 Kilroy Airport
Way................... 1 1999 136,026 100.0% 3,520 25.87
Long Beach, California
12312 W. Olympic Blvd.
Los Angeles,
California(7)......... 1 1950/1998 78,000 100.0% 1,613 20.68
2100 Colorado Avenue
Santa Monica,
California(7).......... 3 1992 94,844 100.0% 2,891 30.48
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 97.9% 2,200 24.91
501 Santa Monica Blvd.
Santa Monica,
California............ 1 1974 70,089 96.3% 1,774 25.30
2829 Townsgate Road
Thousand Oaks,
California............. 1 1990 81,158 100.0% 2,029 25.01
23600-23610 Telo Avenue
Torrance,
California(9).......... 2 1984 79,967 87.2% 887 11.09
24025 Park Sorrento
Calabasas, California.. 1 2000 102,264 96.8% 2,920 28.55
12200 W. Olympic Blvd.
Los Angeles,
California(7)......... 1 2000 151,000 100.0% 5,033 33.33
--- ---------- --------
Subtotal/Weighted
Average--
Los Angeles County..... 29 2,759,362 97.3% 59,558 21.58
--- ---------- --------
16
Average
Net Percentage Annual Base Base Rent
No. of Year Built/ Rentable Leased at Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/00(1) ($000's)(2) ($)(3)
- ----------------- --------- ----------- ----------- ----------- ----------- -----------
Orange County
La Palma Business Center
4175 E. La Palma Avenue
Anaheim, California.... 1 1985 42,790 96.6% $ 782 $18.28
8101 Kaiser Blvd.
Anaheim, California.... 1 1988 60,177 100.0% 1,313 21.81
Anaheim Corporate Center
Anaheim,
California(10)......... 4 1985 158,785 97.1% 2,071 13.04
1240 & 1250 Lakeview
Avenue
Anaheim, California.... 2 1987 78,903 96.0% 987 12.51
601 Valencia Avenue,
Brea, California(7).... 1 1982 60,891 100.0% 801 13.15
111 Pacifica
Irvine, California..... 1 1991 67,381 61.0% 1,070 15.88
9451 Toledo Way
Irvine, California(7).. 1 1984 27,200 100.0% 442 16.25
2501 Pullman/1700 E.
Carnegie
Santa Ana, California.. 2 1969/1988 129,766 -- -- --
--- ---------- --------
Subtotal/Weighted
Average--
Orange County.......... 13 625,893 73.6% 7,466 11.93
--- ---------- --------
San Diego County
5770 Armada Drive
Carlsbad,
California(7).......... 1 1998 81,712 100.0% 1,077 13.17
2231 Rutherford
Carlsbad, California... 1 1998 39,000 100.0% 598 15.32
6215/6220 Greenwich
Drive
San Diego,
California(11)......... 2 1996 212,214 100.0% 3,353 15.80
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% 1,199 9.22
6290 Sequence Drive
San Diego,
California(7).......... 2 1997 152,415 100.0% 2,084 13.68
6340 & 6350 Sequence
Drive
San Diego,
California(7).......... 2 1998 199,000 100.0% 2,952 14.83
15378 Avenue of Science
San Diego,
California(7).......... 1 1984 68,910 100.0% 625 9.06
Pacific Corporate Center
San Diego,
California(12)......... 7 1995 411,339 100.0% 5,407 13.14
3990 Ruffin Road
San Diego, California.. 1 1998 45,634 100.0% 665 14.57
9455 Towne Center Drive
San Diego,
California(7).......... 1 1998 45,195 100.0% 610 13.50
12225-12235 El Camino
Real
San Diego,
California(13)......... 2 1998 115,513 100.0% 2,251 19.49
4690 Executive Drive
San Diego,
California(7).......... 1 1999 50,929 100.0% 957 18.80
12348 High Bluff Drive
San Diego,
California(14)......... 1 1999 40,274 100.0% 1,175 29.19
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% 3,351 19.40
3579 Valley Center Drive
San Diego,
California(14)......... 3 1999 294,122 100.0% 9,240 31.42
Carmel Mountain
Technology Center
San Diego, California.. 2 2000 103,000 100.0% 2,782 27.01
4955 Directors Place
San Diego,
California(7).......... 1 2000 76,246 100.0% 2,652 34.78
12390 El Camino Real
San Diego,
California(7).......... 1 2000 72,332 100.0% 1,596 22.07
--- ---------- --------
Subtotal/Weighted
Average--
San Diego County....... 35 2,529,613 100.0% 45,973 18.17
--- ---------- --------
17
Average
Net Percentage Annual Base Base Rent
No. of Year Built/ Rentable Leased at Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/00(1) ($000's)(2) ($)(3)
- ----------------- --------- ----------- ----------- ----------- ----------- -----------
Other
4351 Latham Avenue
Riverside, California.. 1 1990 21,357 100.0% $ 369 $17.30
4361 Latham Avenue
Riverside,
California(15)......... 1 1992 30,581 92.9% 540 17.67
3750 University Avenue
Riverside, California.. 1 1982 124,986 91.3% 2,603 20.83
SeaTac Office Center
18000 Pacific Highway.. 1 1974 209,978 100.0% 3,359 16.00
17930 Pacific Highway.. 1 1980/1997 211,213 100.0% 2,172 10.28
17900 Pacific Highway.. 1 1980 111,460 100.0% 2,088 18.73
--- ---------- --------
Seattle, Washington
Subtotal/Weighted
Average--
Other.................. 6 709,575 98.2% 11,131 15.69
--- ---------- --------
TOTAL/WEIGHTED AVERAGE
OFFICE PROPERTIES...... 83 6,624,443 96.2% $124,128 $18.74
--- ---------- --------
Industrial Properties:
Los Angeles County
Walnut Park Business
Center
Diamond Bar,
California............. 3 1987 165,420 99.5% 1,318 7.97
2031 E. Mariposa Avenue
El Segundo,
California............. 1 1954 192,053 100.0% 2,023 10.53
2260 E. El Segundo Blvd.
El Segundo,
California............ 1 1979 113,820 100.0% 1,467 12.89
2265 E. El Segundo Blvd.
El Segundo,
California............ 1 1978 76,570 100.0% 556 7.27
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 99.8% 5,452 9.84
--- ---------- --------
Orange County
3340 E. La Palma Avenue
Anaheim, California.... 1 1966 153,320 40.8% 410 2.68
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% 313 5.43
4155 E. La Palma Avenue
Anaheim,
California(16)......... 1 1985 74,618 100.0% 764 10.24
4123 E. La Palma Avenue
Anaheim,
California(16)......... 1 1985 69,472 100.0% 518 7.46
5325 East Hunter Avenue
Anaheim, California.... 1 1983 109,449 100.0% 609 5.57
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% 879 6.10
5115 E. La Palma Avenue
Anaheim, California.... 1 1967/1998 286,139 100.0% 1,453 5.08
1250 N. Tustin Avenue
Anaheim, California.... 1 1984 84,185 100.0% 754 8.95
Anaheim Tech Center
Anaheim, California.... 5 1999 593,992 100.0% 3,844 6.47
3250 East Carpenter
Anaheim, California.... 1 1998 41,225 100.0% 271 6.57
Brea Industrial Complex
Brea, California(17)... 7 1981 276,278 97.8% 1,762 6.38
Brea Industrial--Lambert
Road
Brea, California(16)... 2 1999 178,811 100.0% 1,264 7.07
1675 MacArthur
Costa Mesa,
California............. 1 1986 50,842 100.0% 515 10.13
18
Average
Net Percentage Annual Base Base Rent
No. of Year Built/ Rentable Leased at Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/00(1) ($000's)(2) ($)(3)
- ----------------- --------- ----------- ----------- ----------- ----------- -----------
892/909 Towne Center
Drive
Foothill Ranch,
California............. 1 1998 303,533 100.0% $ 2,499 $ 8.23
12681/12691 Pala Drive
Garden Grove,
California............. 1 1970 84,700 100.0% 582 6.87
Garden Grove Industrial
Complex
Garden Grove,
California(18)......... 6 1971 275,971 100.0% 1,706 6.18
12752-12822 Monarch
Street
Garden Grove,
California............. 1 1970 277,037 100.0% 1,068 3.85
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% 370 5.76
17150 Von Karman
Irvine, California..... 1 1977 157,458 100.0% 1,087 6.90
184-220 Technology Drive
Irvine, California..... 10 1990 157,499 92.4% 1,864 11.84
9401 Toledo Way
Irvine, California..... 1 1984 244,800 100.0% 2,417 9.87
2055 S.E. Main Street
Irvine,
California(19)......... 1 1973 47,583 100.0% 373 7.83
13645-13885 Alton
Parkway
Irvine,
California(20)......... 9 1989 143,117 88.2% 1,139 7.95
1951 E. Carnegie
Santa Ana, California.. 1 1981 100,000 100.0% 802 8.02
14831 Franklin Avenue
Tustin,
California(19)......... 1 1978 36,256 100.0% 250 6.91
2911 Dow Avenue
Tustin, California..... 1 1998 54,720 100.0% 361 6.60
--- ---------- --------
Subtotal/Weighted
Average--
Orange County.......... 62 4,393,537 97.1% 29,775 6.78
--- ---------- --------
San Diego County
6828 Nancy Ridge Drive
San Diego, California.. 1 1982 39,669 100.0% 385 9.70
--- ---------- --------
Subtotal/Weighted
Average--
San Diego County....... 1 39,669 100.0% 385 9.70
--- ---------- --------
Other
41093 County Center
Drive
Temecula, California... 1 1997 77,582 100.0% 546 7.04
1840 Aerojet Way
Las Vegas, Nevada...... 1 1993 102,948 100.0% 505 4.91
1900 Aerojet Way
Las Vegas, Nevada...... 1 1995 106,717 100.0% 514 4.82
795 Trademark Drive
Reno, Nevada........... 1 1998 75,257 100.0% 809 10.75
5115 N. 27th Avenue
Phoenix, Arizona(21)... 1 1962 130,877 100.0% 649 4.96
199/201 North Sunrise
Avenue
Roseville,
California(22)(23)..... 2 1981 162,203 100.0% 1,618 9.97
3735 Imperial Highway
Stockton, California... 1 1996 164,540 100.0% 1,180 7.17
--- ---------- --------
Subtotal/Weighted
Average--
Other.................. 8 820,124 100.0% 5,821 7.10
--- ---------- --------
TOTAL/WEIGHTED AVERAGE
INDUSTRIAL PROPERTIES.. 78 5,807,555 97.8% $ 41,433 $ 7.13
--- ---------- ----- --------
TOTAL/WEIGHTED AVERAGE
ALL PROPERTIES......... 161 12,431,998 97.0% $165,561 $13.32
=== ========== ===== ========
(footnotes on next page)
19
- --------
(1) Based on all leases at the respective properties in effect as of December
31, 2000.
(2) Calculated as base rent for the year ended December 31, 2000, 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, 2000.
(4) The four properties at 5151-5155 Camino Ruiz were built between 1982 and
1985.
(5) For this property, leases with The Boeing Company 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 The Boeing Company is written on a
modified full service gross basis under which The Boeing Company 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 The Boeing Company 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 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.
(11) This property includes an expansion building with 71,000 rentable square
feet developed by the Company in 2000.
(12) 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.
(13) For this property, a lease for 60,840 rentable square feet is written on
a triple net basis.
(14) For this property, the leases are written on a modified full service
gross basis, with the tenants responsible for paying utilities directly.
(15) 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.
(16) The leases for these industrial properties are written on a modified
triple net basis, with the tenants responsible for estimated allocated
common area expenses.
(17) The seven properties at the Brea Industrial Complex were built between
1981 and 1988.
(18) The six properties at the Garden Grove Industrial Complex were built
between 1971 and 1985.
(19) For this property, the lease is written on a full service gross basis.
(20) 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.
(21) 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.
(22) 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.
(23) This two-building property was managed by third-party property managers
at December 31, 2000.
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,
2000. The table also sets forth projects committed for future development at
December 31, 2000. The Company owns a 100% interest in all of the development
projects other than Peregrine Systems Corporate Center--Building 3 and
Sorrento Gateway--Lot 4 in which the Company owns a 50% managing interest
through one of the Development LLCs. The Company had one lease-up property at
December 31, 2000, encompassing an aggregate of approximately 197,300 rentable
square feet, which stabilized on January 15, 2001. The remaining eight
development properties completed by the Company during 2000, encompassing an
aggregate of approximately 809,000 rentable square feet, were stabilized at
December 31, 2000. All of the development projects under construction and
committed for development at December 31, 2000 were office projects.
Percentage
Projected Leased or
Estimated Total Square Feet under LOI at
Stabilization Estimated upon December 31,
Project Name/Submarket Date(1) Investment(2) Completion 2000(3)
---------------------- ---------------- ------------- ----------- ------------
(in thousands)
Development Projects
Under Construction:
Calabasas Park Centre--
Phase II/Calabasas,
CA..................... 1st Quarter 2002 $ 19,656 98,706 67%
Calabasas Park Centre--
Phase III/Calabasas,
CA..................... 1st Quarter 2002 2,381 11,744 0%
Innovation Corporate
Center--Lot 8/San
Diego, CA.............. 2nd Quarter 2002 8,358 48,833 50%
Innovation Corporate
Center--Lot 12/San
Diego, CA.............. 2nd Quarter 2002 11,510 70,617 0%
Pacific Technology
Center/San Diego, CA... 2nd Quarter 2001 12,001 67,995 100%
Peregrine Systems
Corporate Ctr--Bldg.
3(4)/ Del Mar, CA...... 2nd Quarter 2002 27,209 129,752 100%
Sorrento Rim Business
Park II/San Diego, CA.. 2nd Quarter 2001 25,055 102,875 100%
Westside Media Center--
Phase III/West LA, CA.. 1st Quarter 2003 53,457 151,000 0%
-------- -------
Total Development
Projects Under
Construction......... 159,627 681,522 57%
-------- -------
Committed Development:
Brobeck, Phleger &
Harrison Expansion/Del
Mar, CA................ 2nd Quarter 2002 22,880 89,168 100%
Imperial &
Sepulveda(5)/El
Segundo, CA............ 4th Quarter 2002 34,397 133,678 0%
Sorrento Gateway--Lot
4(4)/San Diego, CA..... 1st Quarter 2002 15,485 60,060 100%
-------- -------
Total Committed
Development.......... 72,762 282,906 53%
-------- -------
Total In-Process and
Committed Development
Projects............. $232,389 964,428 56%
======== =======
- --------
(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, 2000.
(3) Represents executed leases and signed letters of intent to lease
calculated on a square footage basis at December 31, 2000.
(4) Project is being developed by a Development LLC in which the Company holds
a 50% managing interest. The estimated investment figure includes the
capital required to purchase the remaining 50% interest in the project.
(5) The Company owned a 25% tenancy-in-common interest in this project at
December 31, 2000 and acquired the remaining 75% tenancy-in-common
interest on January 9, 2001.
21
Tenant Information
The following table sets forth information as to the Company's ten largest
office and industrial tenants as of March 22, 2001 based upon annualized
rental revenues for the year ended December 31, 2000.
Percentage
of Total
Annual Base Base Lease
Rental Rental Initial Lease Expiration
Tenant Name Revenues(1) Revenues Date(2) Date
----------- -------------- ---------- -------------- -------------
(in thousands)
Office Properties(3):
The Boeing Company...... $15,693 9.2% August 1984 Various(4)
Peregrine Systems,
Inc. .................. 9,193 5.4 October 1999 Various(5)
Epson America, Inc...... 4,239 2.5 October 1999 Various(6)
Epicor Software
Corporation............ 3,351 2.0 September 1999 August 2009
Intuit, Inc. ........... 3,128 1.8 November 1997 April 2007
Unisys Corporation...... 2,797 1.6 March 1997 April 2001
Sony Music
Entertainment, Inc. ... 2,796 1.6 June 1997 December 2008
SCAN Health Plan........ 3,186 1.9 February 1996 February 2009
Diversa Corporation..... 2,652 1.6 November 2000 November 2015
Northwest Airlines,
Inc. .................. 2,289 1.3 Various(7) Various(7)
------- ----
Total Office
Properties........... $49,324 28.9%
======= ====
Industrial Properties:
Celestica California,
Inc. .................. $ 2,576 1.5% May 1998 May 2008
Qwest Communications
Corporation............ 2,416 1.4 November 2000 October 2015
Mattel, Inc. ........... 2,023 1.2 May 1990 October 2005
AboveNet Communications,
Inc. .................. 1,494 0.9 March 2000 August 2015
OmniPak................. 1,453 0.9 August 1998 July 2008
Targus, Inc. ........... 1,451 0.9 December 1998 Various(8)
Kraft Foods, Inc. ...... 1,173 0.7 February 1996 February 2006
Packard Hughes
Interconnect........... 1,087 0.6 January 1996 January 2001
Southern Plastic Mold,
Inc. .................. 1,057 0.6 September 1997 Various(9)
Extron Electronics...... 953 0.6 February 1995 Various(10)
------- ----
Total Industrial
Properties........... $15,683 9.3%
======= ====
- --------
(1) Determined on a straight-line basis over the term of the related lease
in accordance with GAAP.
(2) Represents date of first relationship between tenant and the Company or
the Company's predecessor, the Kilroy Group.
(3) Subsequent to December 31, 2000, one of the Company's tenants, eToys,
Inc. ("eToys"), defaulted on its lease and declared bankruptcy. In
January 2001, the Company drew $15.0 million under letters of credit
that the Company held as credit support under the terms of the lease.
The eToys lease for 151,000 rentable square feet would have represented
approximately $5.6 million or 3.3% of the Company's annual base rental
revenues at December 31, 2000 had eToys not defaulted on their lease
subsequent to year end.
(4) Boeing Commercial Airplane Group lease at Sea Tac Office Center expires
in December 2004. The Boeing Company leases at Kilroy Airport Center
Long Beach of 49,988, 43,636, 6,814, 26,620, 24,536, 11,100, 8,404 and
15,547 net rentable square feet expire January 2002, August 2005,
January 2001, December 2001 (26,620 and 24,536), June 2005, August 2005,
and September 2005, respectively. Boeing Satellite Systems, Inc. leases
of 286,151 and 100,978 net rentable square feet expire July 2004 and
January 2004, respectively; and a lease of 7,515 expires November 2001,
respectively.
(5) Peregrine Systems, Inc. leases of 52,375, 129,680 and 112,067 net
rentable square feet expire September 2010, April 2012 and July 2011,
respectively.
(6) Epson America, Inc. leases of 162,858 and 3,717 net rentable square feet
expire October 2009 and October 2002, respectively.
(7) Northwest Airlines, Inc. leases of 60,000 and 27,861 net rentable square
feet began on initial lease dates of August 1978 and May 1980 and expire
February 2001 and April 2005, respectively.
(8) Targus, Inc. leases of 200,646 and 65,447 net rentable square feet
expire March 2009 and October 2005, respectively.
(9) Southern Plastic Mold, Inc. leases of 144,000 and 44,000 rentable square
feet expire September 2003 and February 2005, respectively.
(10) Extron Electronics leases of 100,000 and 57,730 net rentable square feet
expire April 2005 and January 2005, respectively.
22
At December 31, 2000, the Company's tenant base was comprised of the
following industries, broken down by percentage of total portfolio base rent:
manufacturing, 34.1%; services, 32.3%; transportation, communications and
public utilities, 11.5%; finance, insurance and real estate, 10.7%; wholesale
trade, 4.6%; retail trade, 3.5%; government, 2.1%; construction, 1.0%; 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, 2000:
Capital Products, Inc. Matrix Rehabilitation, Inc. Pleasant Holidays LLC
Critchfield Mechanical, Inc. Motion City Films Principia Financial Services
Cybermann, Inc. Netsol International, Inc. QTC Management Inc.
EVA Airways Corporation New Zealand Tourism Board Studio Acoustics Inc.
Facilities Protection Systems North Star Network Solutions Systems Technology Associates
Fiberlink Communications, Inc. Nucleus Electronics Corp. Wescom Credit Union
Hemlock Printers (USA), Inc. Pacific Food Services, Inc. Western Global Telecomm
Integrity Dental Technology Penn Mutual Life Insurance Co.
Longstar International, Inc. Perio Support, Inc.
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 2001, 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
Number of to Expiring Represented Expiring Square 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:
2001.................... 68 879,677 14.1% $ 14,734 $16.75
2002.................... 57 407,110 6.5 6,974 17.13
2003.................... 51 271,549 4.4 5,323 19.60
2004.................... 50 772,479 12.4 17,364 22.48
2005.................... 50 915,230 14.7 16,722 18.27
2006.................... 24 530,948 8.5 12,112 22.81
2007.................... 15 630,304 10.1 12,097 19.19
2008.................... 6 313,092 5.0 6,225 19.88
2009.................... 10 772,982 12.4 18,260 23.62
2010 and beyond......... 12 745,127 11.9 26,255 35.24
--- ---------- ----- --------
343 6,238,498 100.0% $136,066 $21.81
--- ---------- --------
Industrial Properties:
2001.................... 74 799,932 14.2% $ 5,674 $ 7.09
2002.................... 50 316,658 5.6 2,929 9.25
2003.................... 40 735,605 13.1 5,158 7.01
2004.................... 15 535,472 9.5 3,825 7.14
2005.................... 15 746,635 13.3 5,586 7.48
2006.................... 6 457,336 8.1 3,249 7.10
2007.................... 3 164,595 2.9 1,397 8.49
2008.................... 5 839,712 14.9 6,268 7.46
2009.................... 9 530,066 9.4 3,996 7.54
2010 and beyond......... 5 503,978 9.0 6,489 12.88
--- ---------- ----- --------
222 5,629,989 100.0% $ 44,571 $ 7.92
--- ---------- --------
Total Portfolio......... 565 11,868,487 100.0% $180,637 $15.22
=== ========== ========
(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, 2000 unless a lease for a replacement tenant had been
executed on or before January 1, 2001.
(3) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases
executed on or before January 1, 2001.
Secured Debt
At December 31, 2000, the Operating Partnership had 14 secured mortgage and
construction loans outstanding, representing aggregate indebtedness of
approximately $433 million, which were secured by certain of the Properties
and development projects (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
financial statements included herewith. Management believes that as of
December 31, 2000, 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, 2000.
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 2000 and 1999
as reported on the NYSE. On March 20, 2001, there were approximately 235
registered holders of the Company's common stock.
Common
Stock
Dividends
2000 High Low Close Declared
- ---- ------ ------ ------ ---------
First quarter.................................... $21.56 $19.44 $21.06 $0.4500
Second quarter................................... 26.50 21.19 25.95 0.4500
Third quarter.................................... 26.94 24.81 26.69 0.4500
Fourth quarter................................... 29.13 25.56 28.06 0.4500
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
The Company pays distributions to common stockholders on or about the 17th
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 2000, the Company issued 481,290 shares of common stock upon the
conversion of 481,290 common limited partnership units of the Operating
Partnership by limited partners. The issuances of the common shares on a one-
for-one basis were made pursuant to the terms set forth in the partnership
agreement of the Operating Partnership. The shares of common stock were issued
in transactions, not requiring registration under federal securities laws
pursuant to Section 4(2) of the Securities Act of 1933.
On October 13, 2000, the Operating Partnership issued 1,133 common limited
partnership units of the Operating Partnership, valued by the Company at
approximately $30,000 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 Kilroy Airport Imperial Co. ("KAICO"), a partnership owned by
John B. Kilroy, Sr., the Company's Chairman of the Board of Directors, John B.
Kilroy, Jr. the Company's President and Chief Executive Officer, and certain
other Kilroy family members, in connection with the acquisition of the 25%
tenancy-in-common interest in the KAICO complex (see Note 13 to the Company's
consolidated financial statements). The common limited partnership 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. These units may be redeemed at the option of the Company for
cash or shares of the Company's common stock.
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 Year Ended 1997 to 1997 to Year Ended
December 31, December 31, December 31, December 31, January 31, December 31,
2000 1999 1998 1997 1997 1996
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