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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, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-12675
KILROY REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 95-4585158
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OF INCORPORATION OR ORGANIZATION)
2250 EAST IMPERIAL HIGHWAY 90245
EL SEGUNDO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 772-1193
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
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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 $382,734,375 based on the
closing price on the New York Stock Exchange for such shares on
March 21, 1997.
As of March 21, 1997, 14,475,000 shares of common stock, par value $.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 7
Item 3. Legal Proceedings.............................................. 23
Item 4. Submission of Matters to a Vote of Security Holders............ 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 24
Item 6. Selected Financial Data........................................ 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 26
Item 8. Financial Statements and Supplementary Data.................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant............. 31
Item 11. Executive Compensation......................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management. 36
Item 13. Certain Relationships and Related Transactions................. 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K.............................................................. 39
i
PART I
ITEM 1. BUSINESS
GENERAL
Kilroy Realty Corporation (the "Company") was incorporated in September 1996
and commenced operations effective with the completion of its initial public
offering on January 31, 1997. Kilroy Realty Corporation, through (i) its
direct controlling interest in Kilroy Realty, L.P. (the "Operating
Partnership"), (ii) its indirect controlling interest in Kilroy Realty Finance
Partnership, L.P. (the "Finance Partnership") and (iii) its financial interest
in Kilroy Services, Inc. (the "Services Company"), is engaged in the
ownership, acquisition, development, leasing and management of primarily Class
A suburban office and industrial buildings in prime locations, principally in
Southern California. The Company operates as a self-administered and self-
managed real estate company and expects to qualify as a real estate investment
trust ("REIT") for federal and state income tax purposes beginning with the
year ended December 31, 1997. As of December 31, 1996, the Company's portfolio
of properties (including properties owned by the Operating Partnership and the
Finance Partnership) included 14 suburban office buildings (the "Office
Properties") encompassing an aggregate of approximately 2.0 million rentable
square feet, 11 of which are located in Southern California, and 12 industrial
properties (the "Industrial Properties" and, together with the Office
Properties, the "Properties") encompassing an aggregate of approximately 1.3
million rentable square feet, 11 of which are located in Southern California.
The Company's major tenants include, among others, Hughes Electronics
Corporation's Space & Communications Company ("Hughes Space &
Communications"), a tenant since 1984, which is engaged in high-technology
commercial activities including satellite development and related applications
such as DirecTV, and other major tenants such as CompuServe, Inc., Employer's
Health Insurance Co., the Federal Aviation Administration, First Nationwide
Mortgage Corporation, Furon Co., Inc., GTE Directories Sales Corporation,
Great Western Bank, HealthNet, Mattel, Inc., North American Title Company,
Northwest Airlines, Inc., Olympus America, Inc., The Prudential Insurance
Company of America, R.L. Polk & Company, SCAN HealthPlan, Senn-Delaney
Leadership Consulting Group, Inc., Transamerica Financial Services, Inc., 20th
Century Industries and Unihealth. As of December 31, 1996, the Company's ten
largest office tenants and ten largest industrial tenants (based upon annual
base rents as of December 31, 1996) had leased office space from the Company
for an average of six years.
The Company's strategy is to own, develop, acquire, lease and manage Class A
properties in select locations in key suburban submarkets, primarily in
Southern California, that the Company believes have strategic advantages
compared to neighboring submarkets. The Company's Properties that are located
in Los Angeles and Orange Counties are situated in locations which the Company
believes are among the best within key submarkets, offering tenants: (i) lower
business taxes and operating expenses than adjoining submarkets; (ii) access
to highly skilled labor markets; (iii) access to major transportation
facilities such as freeways, airports and the expanded Southern California
light-rail system; (iv) proximity to the Los Angeles-Long Beach port complex,
which presently ranks as the largest commercial port in the United States; and
(v) for tenants with their names on certain Properties, visibility to freeway
and airline travelers.
BACKGROUND AND FORMATION OF THE COMPANY
The Company was formed to continue and expand the real estate business of
Kilroy Industries, a California corporation ("KI"), and certain of its
affiliated corporations, partnerships and trusts (collectively, the "Kilroy
Group"). On January 31, 1997, the Company completed an initial public offering
of 12,500,000 shares of $.01 par value common stock (the "Common Stock"). The
offering price was $23.00 per share resulting in gross proceeds of
$287,500,000. On February 4, 1997, in connection with the offering, the
underwriters exercised an over-allotment option and on February 7, 1997,
pursuant to the terms of such option, the Company issued an additional
1,875,000 shares of Common Stock and received gross proceeds of $43,125,000.
The issuance and sale of the initial 12,500,000 shares of Common Stock and the
additional 1,875,000 shares of Common Stock are collectively referred to as
the "Offering." The aggregate proceeds to the Company of the Offering, net of
underwriters' discount, advisory fees and offering costs, were approximately
$302,500,000.
1
BUSINESS AND GROWTH STRATEGIES
As of December 31, 1996, the Company (through its ownership interests in the
Operating Partnership and the Finance Partnership) owned 14 Office Properties
encompassing an aggregate of approximately 2.0 million rentable square feet
and 12 Industrial Properties encompassing an aggregate of approximately 1.3
million rentable square feet. Eleven of the 14 Office Properties and 11 of the
12 Industrial Properties are located in Southern California. As of
December 31, 1996, the Office Properties were approximately 79.6% leased to
130 tenants and the Industrial Properties were approximately 98.3% leased to
21 tenants.
The Company's ten largest office tenants represented approximately 48.4% of
annual base rent for the year ended December 31, 1996 (giving pro forma effect
to the November 1996 extension of a lease with Hughes Space & Communications
with respect to two of the Office Properties), and its ten largest industrial
tenants represented approximately 15.8% of annual base rent for the same
period. Of this amount, its largest tenant, Hughes Space & Communications,
currently leases approximately 522,400 rentable square feet of office space,
representing approximately 25.7% of the Company's total base rent revenues for
the year ended December 31, 1996. The base periods of the Hughes Space &
Communications leases expire beginning in January 1999. The Company's revenues
and cash available for distribution to stockholders would be
disproportionately and materially adversely affected in the event of
bankruptcy or insolvency of, or a downturn in the business of, or the
nonrenewal of leases by, any of its significant tenants, or the renewal of
such leases on terms less favorable to the Company than their current terms.
The Company believes that a number of factors will enable it to achieve its
business objectives, including: (i) the opportunity to lease available space
at attractive rental rates because of increasing demand and, with respect to
the Office Properties, the present lack of new construction in the Southern
California submarkets in which most of the Properties are located; (ii) the
presence of distressed sellers and inadvertent owners (through foreclosure or
otherwise) of office and industrial properties in the Company's submarkets, as
well as the Company's ability to acquire properties with partnership units of
the Operating Partnership ("Units") (thereby deferring the seller's taxable
gain), all of which create enhanced acquisition opportunities; (iii) the
quality and location of the Properties; (iv) the Company's access to
development opportunities as a result of its predecessors' significant
relationships with large Southern California corporate tenants, municipalities
and landowners and its predecessors' nearly 50-year presence in the Southern
California market; and (v) the limited availability to competitors of capital
for financing development, acquisitions or capital improvements. Management
believes that the Company is well positioned to exploit existing opportunities
because of its extensive experience in its submarkets, its seasoned management
team and its proven ability to develop, lease and efficiently manage office
and industrial properties. In addition, the Company believes that public
ownership and its capital structure provide new opportunities for growth.
Operating Strategies. The Company focuses on enhancing growth in cash flow
per share by: (i) maximizing cash flow from existing Properties through active
leasing, contractual base rent increases and effective property management;
(ii) managing operating expenses through the use of in-house management,
leasing, marketing, financing, accounting, legal, construction management and
data processing functions; (iii) maintaining and developing long-term
relationship with a diverse tenant group; (iv) attracting and retaining
motivated employees by providing financial and other incentives to meet the
Company's operating and financial goals; and (v) continuing to emphasize
capital improvements to enhance the Properties' competitive advantages in
their submarkets.
Acquisition Strategies. The Company seeks to increase its cash flow per
share by acquiring additional quality office and industrial properties,
including properties that: (i) may provide attractive initial yields with
significant potential for growth in cash flow from property operations; (ii)
are strategically located, of high quality and competitive in their respective
submarkets; (iii) are located in the Company's existing submarkets and/or in
other strategic submarkets where the demand for office and industrial space
exceeds available supply; or (iv) have been under-managed or are otherwise
capable of improved performance through intensive management and leasing that
will result in increased occupancy and rental revenues. The Company believes
that the Southern California market is an established and mature real estate
market in which property owners
2
generally have a low tax basis (and, accordingly, the potential for large
taxable gains) in their properties. Management believes that the Company's
extensive experience, capital structure and ability to acquire properties for
Units, and thereby defer a seller's taxable gain, if any, will enhance the
ability of the Company to consummate transactions quickly and to structure
more competitive acquisitions than other real estate companies in the market
which lack its access to capital or the ability to issue Units.
Development Strategies. The Company's interests in certain of its properties
provide it with significant growth opportunities. The Company is the master
ground lessee of, and has sole development rights in, Kilroy Airport Center
Long Beach, a planned four-phase, approximately 53-acre property entitled for
office, research and development, light industrial and other commercial
projects at which the Company owns all five existing Office Properties and
manages all ongoing leasing and development activities. The Company's
predecessors developed Phases I and II in 1987 and 1989/1990, respectively,
encompassing an aggregate of approximately 620,000 rentable square feet of
office space. The Company controls development of the Phase III and IV parcels
and receives rental revenue in connection with such parcels under current
leases expiring in July 2009 and September 1998, respectively, in amounts
sufficient to cover a substantial portion of the predevelopment carrying
costs. Phases III and IV presently are planned to be developed on the
projects' approximately 24 undeveloped acres and are entitled for an aggregate
of approximately 900,000 rentable square feet. Development of each of Phases
III and IV is subject to substantial predevelopment leasing activity and,
therefore, the timing for the commencement of development of Phases III and IV
is uncertain. No assurance can be given that the Company will commence such
development when planned, or that, if commenced, such development will be
completed.
Financing Policies. The Company's financing policies and objectives are
determined by the Company's Board of Directors. The Company presently intends
to limit the 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)
to approximately 50%. However, such objectives may be altered 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.
Upon completion of the Offering, total debt constituted approximately 19.7% of
the total market capitalization of the Company. In addition, upon completion
of the Offering, the Company had working capital cash reserves of
approximately $117.8 million. The Company intends to utilize one or more
sources of capital for future acquisitions, including development and capital
improvements, which may include undistributed cash flow, borrowings under the
proposed credit facility, the Company's approximately $117.8 million of
working capital cash reserves, 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 for any such
acquisitions, developments or improvements on terms favorable to the Company.
DISTRIBUTION POLICY
The Company presently intends to make regular quarterly distributions to
holders of its Common Stock at an annualized rate of $1.55 per share. The
schedule of such distributions is to be set by the Board of Directors of the
Company. Units in the Operating Partnership and shares of Common Stock will
receive equal distributions. The Board of Directors may vary the percentage of
cash available for distribution which is distributed if the actual results of
operations, economic conditions or other factors differ from the assumptions
used in the Company's estimates.
GOVERNMENT REGULATIONS
Many laws and governmental regulations are applicable to the Properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Costs of Compliance with Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation, effective beginning in 1992, are required to meet certain
federal requirements related to access and use by disabled persons. Compliance
with the ADA might require removal of structural barriers to handicapped
access in certain public areas where such removal is
3
"readily achievable." Noncompliance with the ADA could result in the
imposition of fines or an award of damages to private litigants. The impact of
application of the ADA to the Company's properties, including the extent and
timing of required renovations, is uncertain. If required changes involve a
greater amount of expenditures that the Company currently anticipates, the
Company's ability to make expected distributions to stockholders could be
adversely affected.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose liability without regard to whether the
owner was responsible for, or even knew of, the presence of such hazardous or
toxic substances. The costs of investigation, removal or remediation of such
substances may be substantial and, the presence of such substances may
adversely affect the owner's ability to rent or sell the property or to borrow
using such property as collateral. In addition, the presence of such
substances may expose it to liability resulting from any release or exposure
of such substances. Persons who arrange for the disposal or treatment of
hazardous or toxic substances at another location may also be liable for the
costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Certain environmental laws impose liability for release of asbestos-
containing materials into the air, and third parties may also seek recovery
from owners or operators of real properties for personal injury associated
with asbestos-containing materials and other hazardous or toxic substances. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be considered an owner or
operator of such properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and, therefore, potentially liable
for removal or remediation costs, as well as certain other related costs,
including governmental penalties and injuries to persons and property.
The Company believes that the Properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. The Company has
not been notified by any governmental authority, and is not otherwise aware,
of any material noncompliance, liability or claim relating to hazardous or
toxic substances or petroleum products in connection with any of its present
properties.
In connection with the Offering, all of the Properties were subject to Phase
I or similar environmental assessments by independent environmental
consultants in connection with the formation of the Company. Phase I
assessments are intended to discover information regarding, and to evaluate
the environmental condition of, the surveyed property and surrounding
properties. Phase I assessments generally include an historical review, a
public records review, an investigation of the surveyed site and surrounding
properties, and preparation and issuance of a written report, but did not
include soil sampling or subsurface investigations. In connection with the
preparation of the Phase I environmental survey with respect to Kilroy Long
Beach Phase I, interviews of certain individuals formerly employed at the site
documented in a historical site assessment survey revealed the site's possible
prior use as a Nike missile storage facility. Further investigation performed
by the Company's environmental consultants and by the Company did not reveal
any additional information with respect to such use of the site. The Company's
investigation included whether the site might have been used previously for
the storage of missiles containing nuclear warheads, and did not reveal any
facts that would indicate that the prior use of the site would result in a
material risk of environmental liability. Consequently, the Company does not
believe that this site constitutes a risk of a liability that would have a
material adverse effect on the Company's financial condition or results of
operations taken as a whole. In connection with the preparation of the Phase I
environmental survey with respect to the Industrial Property located at
12752-12822 Monarch Street, soil sampling revealed trace elements of
contamination with cleaning solvents. However, based on the level of
contamination noted in the environmental survey, management does not believe
that such contamination will have a material adverse effect on the Company's
financial condition or results of operations, taken as a whole. None of the
Company's environmental assessments of the other Properties has revealed any
environmental liability that the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability.
4
Nonetheless, it is possible that the Company's assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware. Moreover, there can be no assurance that (i)
future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company. If
compliance with the various laws and regulations, now existing or hereafter
adopted, exceeds the Company's budgets for such items, the Company's ability
to make expected distributions to stockholders could be adversely affected.
EMPLOYEES
As of March 21, 1997, the Company (primarily through the Operating
Partnership and the Services Company) employed approximately 49 persons. The
Company, the Operating Partnership and the Services Company employ
substantially all of the professional employees of the Kilroy Group that were
engaged in asset management and administration. As of March 21, 1997, the
Operating Partnership employed approximately 18 on-site building employees who
provided services for the Properties. The Company, the Operating Partnership
and the Services Company believe that relations with their employees are good.
BUSINESS RISKS
This document contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933, as amended (the "Act"))
pertaining to, among other things, the Company's future results of operations,
cash available for distribution, property acquisitions, lease renewals,
increases in base rent, fee development activities, sources of growth, planned
development and expansion of owned or leased property, capital requirements,
compliance with contractual obligations and general business, industry and
economic conditions applicable to the Company. These statements are based
largely on the Company's current expectations and are subject to a number of
risks 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:
. limitations on the Company's ability to withdraw as general partner of
the Operating Partnership, to transfer or assign its interest in the
Operating Partnership without the consent of at least 60% of the Units
and without meeting certain criteria with respect to the consideration
to be received by the limited partners of the Operating Partnership who
were members of the Kilroy Group (the "Continuing Investors"), or to
dissolve the Operating Partnership or sell the Office Property located
at 2260 E. Imperial Highway, El Segundo, California, at Kilroy Airport
Center at El Segundo without the consent of more than 50% of the Units
held by limited partners (excluding Units held by the Company), which
may in each case result in the Company taking action that is not in the
best interest of all stockholders;
. taxation of the Company as a corporation if it fails to qualify as a
REIT for federal income tax purposes, the Company's liability for
certain federal, state and local income taxes in such event and the
resulting decrease in cash available for distribution;
. the inability of the Company to control the operations of the Services
Company, which could result in decisions that do not reflect the
Company's interest because the Company does not control the election of
directors or the selection of officers of the Services Company;
. a portion of the Company's anticipated cash flow may be generated from
development activities, which are partially dependent on the
availability of development opportunities, and are subject to the risks
inherent in development as well as general economic conditions and
limitations on such activities imposed by the requirements to qualify
and maintain status as a REIT, which in turn may negatively impact the
Company's ability to make distributions;
. geographic concentration of 22 of the 26 Properties in Southern
California, creating a dependence on demand for office, industrial and
retail space in such market and increasing the risk that the Company
will be materially adversely affected by general economic conditions in
a single market;
5
. the Company's results of operations are dependent on certain key
tenants, particularly Hughes Space & Communications, which accounted for
approximately 25.7% of the Company's total base rental revenues for the
year ending December 31, 1996, thereby increasing the potential negative
impact to the Company of downturns in the business of, or its
relationship with, such tenants. The base periods of the Hughes Space &
Communications' leases expire beginning in January 1999;
. the possibility that acquisitions of office or industrial properties
will fail to be consummated, or that any such acquired properties will
fail to perform in accordance with management's expectations, including
the possibility that estimates of the costs of improvements to bring an
acquired property up to standards established for the market position
intended for that property may prove inaccurate;
. the distribution requirements for REITs under federal income tax laws
may limit the Company's ability to finance future acquisitions,
developments and expansions without additional debt or equity financing
and may limit cash available for distribution;
. real estate investment considerations such as the effect of economic and
other conditions on real estate values, the general lack of liquidity of
investments in real estate, the ability of tenants to pay rents, the
possibility that leases may not be renewed or will be renewed on terms
less favorable to the Company, the possibility of uninsured losses,
including losses associated with earthquakes, the ability of the
Properties to generate sufficient cash flow to meet operating expenses,
including debt service, and competition in seeking properties for
acquisition and in seeking tenants, which, individually or in the
aggregate, may negatively impact the Company's ability to make
distributions;
. risks associated with debt financing, including the potential inability
to refinance mortgage indebtedness upon maturity and the potential
increase in the level of indebtedness incurred by the Company since its
organizational documents do not limit the amount of indebtedness which
the Company may incur, which may adversely affect the ability of the
Company to repay debt, particularly in the event of a downturn in the
Company's business;
. potential antitakeover effects of provisions generally limiting the
actual or constructive ownership by any one person or entity of Common
Stock to 7.0% of the outstanding shares, a classified board of directors
and other charter and statutory provisions and provisions in the
Operating Partnership's partnership agreement that may have the effect
of inhibiting a change of control of the Company or making it more
difficult to effect a change in management or limiting the opportunity
for stockholders to receive a premium over the market price for the
Common Stock;
. dependence on key personnel;
. the Company's cash available for distribution may be less than the
Company expects and may decrease in future periods from expected levels,
materially adversely affecting the Company's ability to make the
expected annual distributions of $1.55 per share during the 12-month
period following consummation of the Offering or to sustain such
distribution rate in the future;
. the Company's historical operating losses for financial reporting
purposes;
. the ability of the Company to incur more debt, thereby increasing its
debt service, which could adversely affect the Company's cash flow;
. the potential liability of the Company for environmental matters and the
costs of compliance with certain governmental regulations, which may
negatively impact the Company's financial condition, results of
operations and cash available for distribution;
. potential adverse effects on the value of the shares of Common Stock of
fluctuations in interest rates or equity markets, which may negatively
impact the price at which shares of Common Stock may be resold and may
limit the Company's ability to raise additional equity to finance future
development; and
. the possible issuance of additional shares of Common Stock, including
2,652,374 shares of Common Stock issuable upon exchange of presently
outstanding Units, which may adversely affect the market price of the
shares of Common Stock or result in dilution on a per share basis of
cash available for distribution.
6
ITEM 2. PROPERTIES
GENERAL
The Company (through the Operating Partnership and the Finance Partnership)
owns 14 Office Properties encompassing an aggregate of approximately 2.0
million rentable square feet and 12 Industrial Properties encompassing an
aggregate of approximately 1.3 million rentable square feet. Eleven of the 14
of the Office Properties as well as 11 of the 12 Industrial Properties are
located in Southern California suburban submarkets (including a complex of
three Office Properties located adjacent to the Los Angeles International
Airport, presently the nation's second largest air cargo port, and a complex
of five Office Properties located adjacent to the Long Beach Municipal
Airport). The Company also owns three Office Properties located adjacent to
the Seattle-Tacoma International Airport in the State of Washington, and one
Industrial Property located in Phoenix, Arizona. As of December 31, 1996, the
Office Properties were approximately 79.6% leased to 130 tenants and the
Industrial Properties were approximately 98.3% leased to 21 tenants. The
Company (through its predecessor entities) has developed, managed and leased
all but two of the 14 Office Properties and all but five of the 12 Industrial
Properties. The Company believes that all of its Properties are well-
maintained and, based on recent engineering reports, do not require
significant capital improvements.
In addition to the Office and Industrial Properties, the Company has
development rights with respect to approximately 24 acres of developable land
(net of acreage required for streets), located in Southern California. The
Company also has the option to purchase three office properties and 18 acres
of undeveloped land currently beneficially owned and controlled by John B.
Kilroy, Sr. and John B. Kilroy, Jr. All of these properties are managed by the
Company.
In general, the Office Properties are leased to tenants on a full service
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"). The tenant pays its pro rata share of
increases in expenses above the Base Year or Expense Stop. All leases for the
Industrial Properties are written on a triple net basis, with tenants paying
their proportionate share of real estate taxes, operating costs and utility
costs.
7
THE OFFICE AND INDUSTRIAL PROPERTIES
The following table sets forth certain information relating to each of the
Properties as of December 31, 1996, unless indicated otherwise. This table
gives pro forma effect to (i) the November 1996 extension of one of the leases
with Hughes Space & Communications with respect to two of the Office
Properties located at Kilroy Airport Center at El Segundo as if such lease
renewal had occurred on January 1, 1996 and (ii) acquisition of the Properties
acquired upon consummation of the Offering as if such acquisitions had
occurred on January 1, 1996. The Company (through the Operating Partnership
and the Finance Partnership) owns a 100% interest in all of the Office and
Industrial Properties other than the five Office Properties located at Kilroy
Airport Center Long Beach and the three Office Properties located at the
SeaTac Office Center, each of which are held subject to ground leases expiring
in 2035 and 2064 (assuming the exercise of the Company's options to extend
such lease), respectively.
PERCENTAGE PERCENTAGE EFFECTIVE
NET LEASED AS 1996 1996 OF 1996 AVERAGE BASE RENT
YEAR RENTABLE OF BASE RENT EFFECTIVE TOTAL BASE RENT SQ. FT. PER SQ. FT.
PROPERTY LOCATION BUILT SQUARE FEET 12/31/96 (1) ($000)(2) RENT ($000)(3) RENT ($)(4) ($)(5)
----------------- ----- ----------- ------------ --------- -------------- ---------- ------------ -----------
Office
Properties:
Kilroy Airport
Center at
El Segundo
2250 E. Imperial 1983 291,187 86.5% 4,736 4,467 12.0% 18.81 17.75
Highway(7).....
2260 E. Imperial 1983 291,187 100.0% 7,160 6,545 18.0% 24.59 22.48
Highway(8).....
2240 E. Imperial 1983 118,933 100.0% 1,130 1,121 2.9% 9.50 9.43
Highway
El Segundo,
California(9)...
Kilroy Airport
Center Long
Beach
3900 Kilroy 1987 126,840 94.0% 2,282 2,092 5.8% 19.14 17.55
Airport Way....
3880 Kilroy 1987 98,243 100.0% 1,296 1,022 3.3% 13.19 10.40
Airport Way....
3760 Kilroy 1989 165,278 72.2% 3,805 3,117 9.6% 31.88 26.11
Airport Way....
3780 Kilroy 1989 219,745 93.8% 4,590 3,980 11.5% 22.26 19.31
Airport Way....
3750 Kilroy
Airport Way
Long Beach, 1989 10,457 100.0% 75 28 0.2% 7.21 2.66
California.....
SeaTac Office
Center
18000 Pacific 1974 207,092 60.7% 1,810 1,610 4.6% 14.41 12.81
Highway........
17930 Pacific 1980 210,899 0.0% -- -- 0.0% -- --
Highway........
17900 Pacific
Highway
Seattle, 1980 113,605 87.7% 1,356 1,209 3.4% 13.6 12.12
Washington.....
La Palma
Business Center
4175 E. La Palma
Avenue
Anaheim, 1985 42,790 93.2% 557 536 1.4% 13.97 13.45
California.....
2829 Townsgate
Road
Thousand Oaks, 1990 81,158 100.0% 1,888 1,760 4.8% 23.26 21.69
California.....
185 S. Douglas
Street
El Segundo, 1978 60,000 100.0% 1,313 898 3.3% 21.89 14.96
California(10).
--------- ----- ------ ------ ----
Subtotal/Weighted 2,037,414 79.6% 31,998 28,385 80.8% 19.76 17.53
Average
Industrial
Properties:
2031 E. Mariposa
Avenue
El Segundo, 1954 192,053 100.0% 1,556 1,296 3.9% 8.10 6.75
California......
340 E. La Palma
Avenue
Anaheim, 1966 153,320 100.0% 941 838 2.4% 6.14 5.47
California.....
260 E. El
Segundo
Boulevard
El Segundo, 1979 113,820 100.0% 553 510 1.4% 4.86 4.48
California(11).
265 E. El
Segundo
Boulevard
El Segundo, 1978 76,570 100.0% 554 493 1.4% 7.23 6.44
California.....
1000 E. Ball
Road
Anaheim, 1956 100,000 100.0% 639 519 1.6% 6.39 5.19
California(12).
TENANTS LEASING 10% OR MORE
OF NET RENTABLE SQUARE FEET PER
PROPERTY LOCATION PROPERTY AS OF 12/31/96(6)
----------------- -------------------------------
Office
Properties:
Kilroy Airport
Center at
El Segundo
2250 E. Imperial Hughes Space & Communications (42.5%)
Highway(7).....
2260 E. Imperial Hughes Space & Communications (100%)
Highway(8).....
2240 E. Imperial Hughes Space & Communications (94.6%)
Highway
El Segundo,
California(9)...
Kilroy Airport
Center Long
Beach
3900 Kilroy McDonnell Douglas Corporation (50.9%),
Airport Way.... Olympus America, Inc. (18.6%)
3880 Kilroy Devry, Inc. (100.0%)
Airport Way....
3760 Kilroy R.L. Polk & Co. (9.8%)
Airport Way....
3780 Kilroy SCAN HealthPlan (20.4%),
Airport Way.... Zelda Fay Walls (12.7%)
3750 Kilroy
Airport Way
Long Beach, Oasis Cafe (37.1%),
California..... Keywanfar & Baroukhim (16.1%),
SR Impressions (15.0%)
SeaTac Office
Center
18000 Pacific Principal Mutual (8.8%),
Highway........ Lynden (8.8%),
Rayonier (8.0%)
17930 Pacific --
Highway........
17900 Pacific
Highway
Seattle, Northwest Airlines (24.9%),
Washington..... City of Sea Tac (17.2%)
La Palma
Business Center
4175 E. La Palma
Avenue
Anaheim, Peryam & Kroll (26.7%),
California..... DMV/VPI Insurance Group (26.5%),
Midcom Corporation (15.5%)
2829 Townsgate
Road
Thousand Oaks, Worldcom, Inc. (34.2%),
California..... Data Select Systems, Inc. (13.0%),
Pepperdine University (12.7%),
Anheuser Busch, Inc. (12.0%)
185 S. Douglas
Street
El Segundo, Northwest Airlines, Inc. (100%)
California(10).
Subtotal/Weighted
Average
Industrial
Properties:
2031 E. Mariposa
Avenue
El Segundo, Mattel, Inc. (100%)
California......
340 E. La Palma
Avenue
Anaheim, Furon Co., Inc. (59.2%),
California..... Dovatron (40.8%)
260 E. El
Segundo
Boulevard
El Segundo, Ace Medical Co. (100%)
California(11).
265 E. El
Segundo
Boulevard
El Segundo, MSAS Cargo Intl., Inc. (100%)
California.....
1000 E. Ball
Road
Anaheim, Allen-Bradley Company (100%)
California(12).
(footnotes on next page)
8
PERCENTAGE PERCENTAGE EFFECTIVE
NET LEASED AS 1996 1996 OF 1996 AVERAGE BASE RENT
YEAR RENTABLE OF BASE RENT EFFECTIVE TOTAL BASE RENT SQ. FT. PER SQ. FT.
PROPERTY LOCATION BUILT SQUARE FEET 12/31/96(1) ($000)(2) RENT ($000)(3) RENT ($)(4) ($)(5)
----------------- ----- ----------- ----------- --------- -------------- ---------- ------------ -----------
1230 S. Lewis
Street
Anaheim, 1982 57,730 100.0% 303 284 0.8% 5.25 4.92
California.....
12681/12691 Pala
Drive
Garden Grove, 1970 84,700 82.6% 476 454 1.2% 6.81 6.48
California.....
2270 E. El
Segundo
Boulevard
El Segundo, 1975 7,500 0.0% -- -- -- -- --
California.....
5115 N. 27th
Avenue
Phoenix, 1962 130,877 100.0% 640 612 1.6% 4.89 4.68
Arizona(13)....
12752-12822
Monarch Street
Garden Grove, 1970 277,037 100.0% 943 899 2.4% 3.40 3.24
California(14).
4155 E. La Palma
Avenue
Anaheim, 1985 74,618 100.0% 544 490 1.4% 7.28 6.56
California(14).
4125 La Palma
Avenue
Anaheim, 1985 69,472 100.0% 466 443 1.1% 7.17 6.83
California(14).
--------- ----- ------ ------ -----
Subtotal/Weighted
Average 1,337,697 98.3% 7,615 6,838 19.2% 5.81 5.22
--------- ----- ------ ------ -----
Office &
Industrial--All
Properties 3,375,111 87.0% 39,612 35,223 100.0% 13.52 12.02
========= ===== ====== ====== =====
TENANTS LEASING 10% OR MORE
OF NET RENTABLE SQUARE FEET PER
PROPERTY LOCATION PROPERTY AS OF 12/31/96(6)
----------------- -------------------------------
1230 S. Lewis
Street
Anaheim, Extron Electronics (100%)
California.....
12681/12691 Pala
Drive
Garden Grove, Rank Video Services America, Inc. (82.6%)
California.....
2270 E. El
Segundo
Boulevard
El Segundo, --
California.....
5115 N. 27th
Avenue
Phoenix, Festival Markets, Inc. (100%)
Arizona(13)....
12752-12822
Monarch Street
Garden Grove, Cannon Equipment (60%),
California(14). Vanco (16.4%)
4155 E. La Palma
Avenue
Anaheim, Bond Technologies (29.6%),
California(14). NovaCare Orthotics (24.0%),
Specialty Restaurants Corp. (21.7%)
4125 La Palma
Avenue
Anaheim, Household Finance Corporation (59%),
California(14). CSTS (34%)
Subtotal/Weighted
Average
Office &
Industrial--All
Properties
- -------
(1) Based on all leases at the respective Properties in effect as of December
31, 1996.
(2) Total base rent for the year ended December 31, 1996, determined in
accordance with generally accepted accounting principles ("GAAP"). All
leases at the Industrial Properties are written on a triple net basis.
Unless otherwise indicated, all 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 or Expense Stop.
(3) Aggregate base rent received over their respective terms from all leases
in effect at December 31, 1996 minus all tenant improvements, leasing
commissions and other concessions for all such leases, divided by the
terms in months for such leases, multiplied by 12.
(4) Base rent for the year ended December 31, 1996 divided by net rentable
square feet leased at December 31, 1996.
(5) Effective rent at December 31, 1996 divided by net rentable square feet
leased at December 31, 1996.
(6) Excludes office space leased by the Company.
(7) For this Property, a lease with Hughes Space & Communications, for
approximately 96,000 rentable square feet, and with 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.
(8) For this Property, the lease with Hughes Space & Communications is
written on a modified full service gross basis under which Hughes Space &
Communications pays for all utilities and other internal maintenance
costs with respect to the leased space and, in addition, pays its pro
rata share of real estate taxes, insurance, and certain other expenses
including common area expenses.
(9) For this Property, leases with Hughes Space & Communications for
approximately 101,000 rentable square feet are written on a full service
gross basis except that there is no Expense Stop.
(10) For this Property, the lease is written on a triple net basis.
(11) This Industrial Property was vacant until April 1996. The tenant began
paying rent in mid-October 1996 at an annual rate of $4.40 per rentable
square foot.
(12) The tenant subleased this Industrial Property on May 15, 1996 to RGB
Systems, Inc. (doing business as Extron Electronics), the tenant of the
Property located at 1230 S. Lewis Street, Anaheim, California, which is
adjacent to this Property. The sublease is at an amount less than the
current lease rate, and the tenant is paying the difference between the
current lease rate and the sublease rate. The lease and the sublease
terminate in April 1998. Extron Electronics has executed a lease for this
space from May 1998 through April 2005 at the current lease rate. Extron
Electronics continues to occupy the space located at 1230 S. Lewis
Street.
(13) 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.
(14) The leases for this Industrial Property are written on a modified triple
net basis, with the tenants responsible for estimated allocated common
area expenses.
9
OFFICE PROPERTIES
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Office Properties which
were managed by the Company as of December 31, 1996 (i.e., all of the Office
Properties other than the Office Property located at 2829 Townsgate Road,
Thousand Oaks, California (the "Thousand Oaks Office Property") and the Office
Property located at 4175 E. La Palma Avenue, Anaheim, California (the "La
Palma Business Center Office Property") which were acquired concurrently upon
consummation of the Offering), since January 1, 1992 (based upon an average of
all lease transactions during the respective periods):
YEAR ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
Number of lease transactions
during period(l)................. 27 19 36 27 47
Net rentable square feet leased
during period(l)................. 221,946 127,126 354,018 105,544 487,309
Base rent ($)(2).................. 21.41 19.32 18.89 19.31 18.76
Tenant improvements ($)(3)........ 9.04 6.82 15.01 7.30 9.71
Leasing commissions ($)(4)........ 1.37 2.18 2.66 3.03 2.44
Other concessions ($)(5).......... -- -- -- -- --
Effective rent ($)(6)............. 18.65 17.72 16.97 17.30 16.53
Expense Stop ($)(7)............... 6.05 6.15 6.77 6.77 6.02
Effective equivalent triple net
rent ($)(8)...................... 12.43 11.57 10.20 10.53 10.52
Occupancy rate at end of period... 74.8% 76.1% 75.8% 75.6% 78.42%
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period, divided by the total net
rentable square feet leased under all lease transactions during the
period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount.
(8) Equals effective rent minus Expense Stop.
10
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Thousand Oaks Office
Property since January 1, 1992 (based upon an average of all lease
transactions during the respective periods):
YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
Number of lease transactions during
period(l)........................... -- 1 1 9 1
Net rentable square feet leased
during period(l).................... -- 1,437 2,745 76,266 2,745
Base rent ($)(2)..................... -- 25.01 23.40 23.09 24.00
Tenant improvements ($)(3)........... -- 16.25 -- 5.04 --
Leasing commissions ($)(4)........... -- -- -- 4.90 --
Other concessions ($)(5)............. -- -- -- -- --
Effective rent ($)(6)................ -- 22.73 23.40 21.42 24.00
Expense Stop ($)(7).................. -- 6.45 6.16 6.49 6.16
Effective equivalent triple net rent
($)(8).............................. -- 16.28 17.24 14.93 17.84
Occupancy rate at end of period(9)... NA NA NA 100.0% 100.0%
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period, divided by the total net
rentable square feet leased under all lease transactions during the
period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount. Expense Stop for 1996 is
estimated.
(8) Equals effective rent minus Expense Stop.
(9) Occupancy data is not available for the years ended December 31, 1992,
1993 and 1994.
11
The following table sets forth certain information (on per net rentable
square foot basis) regarding leasing activity at the La Palma Business Center
Office Property since January 1, 1992 (based upon an average of all lease
transactions during the respective periods):
YEAR ENDED DECEMBER 31,
----------------------------------------
1992 1993 1994 1995 1996
------ ------- ------- ------- -------
Number of lease transactions during
period(1)........................... NA -- 1 1 3
Net rentable square feet leased
during period(1).................... NA -- 3,348 2,038 6,008
Base rent ($)(2)..................... NA -- 19.36 16.48 13.64
Tenant improvements ($)(3)........... NA -- -- 9.69 0.61
Leasing commissions ($)(4)........... NA -- -- 2.06 0.00
Other concessions ($)(5)............. NA -- -- -- --
Effective rent ($)(6)................ NA -- 19.36 14.17 13.18
Expense Stop ($)(7).................. NA -- 5.45 5.45 5.45
Effective equivalent triple net rent
($)(8).............................. NA -- 13.91 8.72 7.73
Occupancy rate at end of period(9)... NA NA 92.6% 93.2% 93.2%
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period, divided by the total rentable
square feet leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount.
(8) Equals effective rent minus Expense Stop.
(9) Occupancy data is not available for the years ended December 31, 1992 and
1993.
Significant Office Properties
2240 E. Imperial Highway, El Segundo. Because the book value of the Office
Property located at 2240 E. Imperial Highway at Kilroy Airport Center at El
Segundo is in excess of 10% of the Company's total assets as of December 31,
1996, additional information regarding this Property is presented below. The
information presented below gives pro forma effect to the November 1996
extension of the tenant lease with Hughes Space & Communications with respect
to this Office Property as if such lease renewal had occurred on January 1,
1996.
The Office Property located at 2240 E. Imperial Highway had an occupancy
rate of 100.0% for each of the years ended December 31, 1992 through 1996. As
of December 31, 1996, Hughes Space & Communications occupied approximately
94.6% of the Property's net rentable square feet under two leases. The current
lease term under this lease expires on January 31, 1999, subject to a five-
year option to renew at fair market value, but not less that $15.84 per annum
per net rentable square foot, on a triple net basis. Hughes Space &
Communications also leases 11,556 rentable square feet (along with the 96,133
rentable square feet located at 2250 E. Imperial Highway) under a second lease
which expires October 31, 2001, at an annualized triple net base rental rate
of $14.04 and, for the first year of the lease term, the tenant's allocable
share of operating costs shall not exceed $7.32 per rentable square foot. The
lease also is subject to a five-year option to renew at fair market value,
adjusted bi-annually for Consumer Price Index ("CPI") adjusted increases in
base rent. The total annual rental income per net rentable square foot for the
years ended December 31, 1992 through December 31, 1996 was $24.42, $25.22,
$17.15, $11.83 and $11.70, respectively.
12
The following table sets forth for such Property for the ten years beginning
with 1997 (i) the number of tenants whose leases will expire, (ii) the total
net rentable square feet covered by such leases, (iii) the percentage of total
leased net rentable square feet represented by such leases, (iv) the annual
base rent represented by such leases and (v) the average annual rent per net
rentable square foot represented by such leases.
PERCENTAGE OF AVERAGE ANNUAL
TOTAL LEASED RENT PER NET
NET RENTABLE NET RENTABLE RENTABLE
SQUARE FOOTAGE SQUARE FEET ANNUAL BASE SQUARE FOOT
NUMBER OF SUBJECT TO REPRESENTED RENT UNDER REPRESENTED
LEASES EXPIRING BY EXPIRING EXPIRING BY EXPIRING
YEAR OF LEASE EXPIRATION EXPIRING LEASES LEASES LEASES(1) LEASES
- ------------------------ --------- -------------- ------------- ----------- --------------
1997.................... 0 -- -- -- --
1998.................... 0 -- -- -- --
1999.................... 1(2) 100,978 86.4% $1,085,716 $10.75
2000.................... 0 --
2001.................... 2(3) 15,898 13.6 196,670 $12.37
2002.................... 0 -- -- -- --
2003.................... 0 -- -- -- --
2004.................... 0 -- -- -- --
2005.................... 0 -- -- -- --
2006 and beyond......... 0 -- -- -- --
--- ------- ----- ----------
Totals................ 3 116,876(4) 100.0% $1,282,386 $10.97
=== ======= ===== ==========
- --------
(1) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before December 31, 1996.
(2) The terms of this lease are described in the text preceding this table.
(3) The terms of a lease representing 11,556 rentable square feet are
described in the text preceding this table.
(4) The aggregate square footage reflected in each of the respective leases
differs from the actual aggregate square footage for this Property of
118,933 as shown on the table under the caption "The Office and Industrial
Properties." Subsequent to the execution of the leases, the Property was
remeasured at a larger aggregate number of square feet than is reflected
in the executed leases.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $2.3 million (net of accumulated
depreciation and reductions in depreciable basis), and was fully depreciated.
For the year ended December 31, 1996, the estimated average depreciation rate
for this Property under the modified accelerated cost recovery system was
4.3%. For the 12-month period ending December 31, 1996, the Company was
assessed property taxes on this Property at an effective annual rate of
approximately 1.0%. Property taxes on this Property for the 12-month period
ending December 31, 1996 totaled approximately $128,411. Management does not
believe that any capital improvements made during 1997, if any, should result
in an increase in annual property taxes.
2250 E. Imperial Highway, El Segundo. Because the gross revenues for the
Office Property located at 2250 E. Imperial Highway at Kilroy Airport Center
at El Segundo for the year ended December 31, 1996 were in excess of 10% of
the aggregate gross revenues for all of the Properties, additional information
regarding this Property is presented below. The information presented below
gives pro forma effect to the November 1996 extension of the tenant lease with
Hughes Space & Communications with respect to this Office Property as if such
lease renewal had occurred on January 1, 1996.
The Office Property located at 2250 E. Imperial Highway had an occupancy
rate of 82.5%, 77.8%, 79.8%, 80.9% and 86.45% for each of the years ended
December 31, 1992 through 1996, respectively. As of December 31, 1996, Hughes
Space & Communications occupied 46.0% of the Property's net rentable square
feet. The Property's other tenants include companies engaged in the
communications, technology, transportation and healthcare industries. Hughes
Space & Communications commenced occupancy of 96,133 rentable square
13
feet on November 1, 1986 and has entered into an agreement to renew this space
(along with the 11,556 square feet located at 2240 E. Imperial Highway)
through October 31, 2001, at a triple net annual base rental rate of $14.04
per square foot and, for the first year of the lease term, the tenant's
allocable share of operating costs shall not exceed $7.32 per rentable square
foot. The lease also is subject to a five-year option to renew at fair market
value, adjusted bi-annually for CPI increases in base rent. The total annual
rental income per net rentable square foot for the years ended December 31,
1992 through December 31, 1996 was $18.73, $19.62, $18.89, $18.86 and $18.74,
respectively. The following table sets forth for such Property for each of the
ten years beginning with 1997 (i) the number of tenants whose leases will
expire, (ii) the total net rentable square feet covered by such leases, (iii)
the percentage of total leased net rentable square feet represented by such
leases, (iv) the annual base rent represented by such leases and (v) the
average annual rent per net rentable square foot represented by such leases.
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET ANNUAL BASE NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED RENT UNDER SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(1) LEASES(2) EXPIRING LEASES
- ------------------------ --------- --------------- ------------- ----------- ---------------
1997.................... 3 4,385 1.64% $ 83,025 $18.93
1998.................... 7 24,530 9.15 493,447 $20.12
1999.................... 6 39,865 14.87 854,336 $21.43
2000.................... 2 18,201 0.79 302,853 $16.64
2001.................... 6 141,173 52.66 2,059,680 $14.59
2002.................... 1 18,517 6.90 456,220 $24.64
2003.................... 0 -- -- -- --
2004.................... 2 21,418 7.99 485,244 $22.66
2005.................... 0 -- -- -- --
2006 and beyond......... 0 -- -- -- --
--- ------- ------ ----------
Totals................ 27 268,089 100.00% $4,734,805 $17.66
=== ======= ====== ==========
- --------
(1) Excludes all space vacant as of December 31, 1996 unless a lease for a
replacement tenant had been dated on or before December 31, 1996.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before December 31, 1996. Certain leases became effective subsequent
to December 31, 1996.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $3.5 million (net of accumulated
depreciation and reductions in depreciable basis). The Property is depreciated
using the modified accelerated cost recovery system straight-line method,
based on an estimated useful life ranging from 31 1/2 years to 39 years,
depending upon the date of certain capitalized improvements to the Property.
For the year ended December 31, 1996, the estimated average depreciation rate
for this Property under the modified accelerated cost recovery system was
5.2%. For the 12-month period ending December 31, 1996, the Company was
assessed property taxes on this Property at an effective annual rate of
approximately 1.0%. Property taxes on this Property for the 12-month period
ending December 31, 1996 totaled approximately $237,532. Management does not
believe that any capital improvements made during 1997, if any, should result
in an increase in annual property taxes.
2260 E. Imperial Highway, El Segundo. Because the 1996 gross revenues for
the Office Property located at 2260 E. Imperial Highway at Kilroy Airport
Center at El Segundo were in excess of 10% of the aggregate gross revenues for
all of the Properties for the year ended December 31, 1996, additional
information regarding this Property is presented below.
The Office Property located at 2260 E. Imperial Highway had an occupancy
rate of 100.0% for each of the years ended December 31, 1992 through 1996. As
of December 31, 1996, Hughes Space & Communications
14
occupied 100.0% of the Property's net rentable square feet. This lease runs
through July 31, 2004 with CPI adjusted increases in base rent every two
years. The next CPI adjustment is scheduled to occur on August 1, 1998 and
provides for an increase in base rent to the extent that such CPI adjustment
exceeds a minimum floor of 1.86% compounded annually. The remaining CPI
adjustments scheduled for August 1, 2000 and August 1, 2002, respectively,
provide for similar increases to the extent that the CPI adjustment exceeds a
minimum floor of 3% compounded annually. The total annual rental income per
net rentable square foot was $26.16, $26.66, $24.59, $24.59 and $25.00 for the
years ended December 31, 1992 through December 31, 1996, respectively. The
following table sets forth for such Property for each of the ten years
beginning with 1997 (i) the number of tenants whose leases will expire, (ii)
the total net rentable square feet covered by such leases, (iii) the
percentage of total leased net rentable square feet represented by such
leases, (iv) the annual base rent represented by such leases and (v) the
average annual rent per net rentable square foot represented by such leases.
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET ANNUAL BASE NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED RENT UNDER SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES LEASES(1) EXPIRING LEASES
- ------------------------ --------- --------------- ------------- ----------- ---------------
1997.................... 0 -- -- -- --
1998.................... 0 -- -- -- --
1999.................... 0 -- -- -- --
2000.................... 0 -- -- -- --
2001.................... 0 -- -- -- --
2002.................... 0 -- -- -- --
2003.................... 0 -- -- -- --
2004.................... 1(2) 286,151 100.0% $7,160,207 $25.02
2005.................... 0 -- -- -- --
2006 and beyond......... 0 -- -- -- --
--- ------- ----- ----------
Totals................ 1 286,151(3) 100.0% $7,160,207 $25.02
=== ======= ===== ==========
- --------
(1) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before December 31, 1996.
(2) The terms of this lease are described in the text preceding this table.
(3) The square footage reflected in the lease differs from the actual square
footage for this Property of 291,187 as shown on the table under the
caption "The Office and Industrial Properties." Subsequent to the
execution of the lease, the Property was remeasured at a larger aggregate
number of square feet than is reflected in the executed lease.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $2.3 million (net of accumulated
depreciation and reductions in depreciable basis), and was fully depreciated
for federal tax purposes. For the 12-month period ending December 31, 1996,
the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.0%. Property taxes on this Property for the 12-
month period ending December 30, 1996 totaled approximately $273,999.
Management does not believe that any capital improvements made during 1997, if
any, should result in an increase in annual property taxes.
3780 Kilroy Airport Way, Long Beach. Because the book value of the Office
Property located at 3780 Kilroy Airport Way at Kilroy Airport Center Long
Beach is in excess of 10% of the Company's total assets, additional
information regarding this Property is presented below.
The Office Property located at 3780 Kilroy Airport Way had an occupancy rate
of 70.5%, 69.1%, 78.6%, 63.6% and 93.8% for each of the years ended December
31, 1992 through 1996, respectively. As of December 31, 1996, SCAN HealthPlan,
a group health insurer, and Zelda Fay Walls, an operator of executive
15
office suites, occupied approximately 20.4% and 12.7%, respectively, of the
Property's net rentable square feet. The Property's other tenants include
companies engaged in the insurance, healthcare, finance, high technology, law
and accounting industries. Base rent under the SCAN HealthPlan lease is
$941,325 per year. The lease expires on May 31, 2006, subject to two
successive five-year options to renew. Effective February 1, 1997, annual base
rent under the Zelda Fay Walls lease is $672,000, and the term of the lease
has been extended to 2007, subject to a five-year option to renew. The total
annual rental income per net rentable square foot for the years ended December
31, 1992 through 1996 was $17.53, $19.76, $20.54, $18.55 and $21.12,
respectively. The following table sets forth for such Property for each of the
ten years beginning with 1997 (i) the number of tenants whose leases will
expire, (ii) the total net rentable square feet covered by such leases, (iii)
the percentage of total leased net rentable square feet represented by such
leases, (iv) the annual base rent represented by such leases and (v) the
average annual rent per net rentable square foot represented by such leases.
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE ANNUAL RENT PER
NET RENTABLE SQUARE FEET BASE RENT NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED UNDER SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(1) LEASES(2) EXPIRING LEASES
- ------------------------ --------- --------------- ------------- ---------- ---------------
1997.................... 4 22,469 11.23% $ 532,872 $23.72
1998.................... 2 3,439 1.72 79,219 $23.04
1999.................... 2 4,339 2.17 89,709 $20.68
2000.................... 8 76,907 38.44 1,877,678 $24.41
2001.................... 5 28,251 14.12 638,222 $22.59
2002.................... -- -- -- -- --
2003.................... 1 9,439 4.72 209,299 $22.17
2004.................... 1 3,922 1.96 85,656 $21.84
2005.................... -- -- -- -- --
2006 and beyond......... 2 51,290 25.64 1,077,090 $21.00
--- ------- ------ ----------
Totals................ 25 200,056 100.00% $4,589,745 $22.94
=== ======= ====== ==========
- --------
(1) Excludes all space vacant as of December 31, 1996 unless a lease for a
replacement tenant has been dated on or before December 31, 1996.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before December 31, 1996. Certain leases became effective subsequent
to December 31, 1996.
The Company's tax basis in the Property for federal income tax purposes was
$10.4 million (net of accumulated depreciation) as of December 31, 1996. The
Property is depreciated using the modified accelerated cost recovery system
straight-line method, based on an estimated useful life ranging from 31 1/2
years to 39 years, depending upon the date of certain capitalized improvements
to the Property. For the year ended December 31, 1996, the estimated average
depreciation rate for this Property under the modified accelerated cost
recovery system was 3.5%. For the 12-month period ending December 31, 1996,
the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.2%. Property taxes on this Property for the 12-
month period year ending December 30, 1996 totaled $154,202. Management does
not believe that any capital improvements made during 1997, if any, should
result in an increase in annual property taxes.
16
INDUSTRIAL PROPERTIES
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Industrial Properties
(other than the Industrial Properties at the La Palma Business Center which
were acquired upon consummation of the Offering and the Industrial Property
located at 12752-12822 Monarch Street, Garden Grove, California, which was
acquired by KI on behalf of the Company prior to consummation of the Offering)
since January 1, 1992 (based upon an average of all lease transactions during
the respective periods):
YEAR ENDED DECEMBER 31,
--------------------------------------------
1992 1993 1994 1995 1996
-------- ------- ------- ------- -------
Number of lease transactions
during period(1)................ 1 1 1 2 1
Net rentable square feet leased
during period(1)................ 100,000 70,000 76,570 171,550 62,574
Base rent ($)(2)................. 6.39 6.81 7.23 4.99 6.36
Tenant improvements ($)(3)....... 5.87 0.14 4.49 2.00 2.56
Leasing commissions ($)(4)....... 1.37 1.49 3.49 1.84 1.63
Other concessions ($)(5)......... -- -- -- -- --
Effective rent ($)(6)............ 5.19 6.48 6.44 4.63 5.52
Expense Stop ($)(7).............. -- -- -- -- --
Effective equivalent triple net
rent ($)(8)..................... 5.19 6.48 6.44 4.63 5.52
Occupancy rate at end of period.. 86.0% 77.6% 79.7% 98.4% 97.6%
- --------
(1) Includes only industrial tenants with lease terms of 12 months or longer.
(2) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period, divided by the total rentable
square feet leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Leases for all Industrial Properties are written on a triple net basis,
providing for each tenant to be responsible, in addition to base rent, for
its proportionate share of real estate taxes, operating costs, utility
costs and other expenses without regard to a base year.
(8) Equals effective rent minus Expense Stop.
17
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the La Palma Business Center
and Monarch Street Industrial Properties since January 1, 1992 (based upon an
average of all lease transactions during the respective periods):
YEAR ENDED DECEMBER 31,
-----------------------------------------
1992 1993 1994 1995 1996
------ ------- ------- ------- --------
Number of lease transactions during
period(1).......................... NA 2 -- 4 5
Net rentable square feet leased
during period(1)................... NA 63,094 -- 229,952 107,381
Base rent ($)(2).................... NA 7.37 -- 3.66 4.72
Tenant improvements ($)(3).......... NA 2.65 -- 0.61 0.75
Leasing commissions ($)(4).......... NA 3.61 -- 0.55 1.25
Other concessions ($)(5)............ NA -- -- -- --
Effective rent ($)(6)............... NA 7.37 -- 3.48 4.34
Expense Stop ($)(7)................. NA -- -- -- --
Effective equivalent triple net rent
($)(8)............................. NA 7.37 -- 3.48 4.34
Occupancy rate at end of period(9).. NA NA 51.2% 78.7% 100.0%
- --------
(1) Includes only industrial tenants with lease terms of 12 months or longer.
(2) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period, divided by the total rentable
square feet leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over the respective lease term from
all lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Leases for all Industrial Properties are written on a triple net basis,
providing for each tenant to be responsible, in addition to base rent, for
its proportionate share of real estate taxes, operating costs, utility
costs and other expenses without regard to a base year.
(8) Equals effective rent minus Expense Stop.
(9) Occupancy data is not available for the years ended December 31, 1992 and
1993.
18
TENANT INFORMATION
The Company's tenants include significant corporate and other commercial
enterprises representing a range of industries including, among others,
satellite communications, manufacturing, entertainment, banking, insurance,
telecommunications, health care, computer software, finance, engineering,
technology, legal and accounting. The following table sets forth information
as to the Company's largest tenants based upon annualized rental revenues for
the year ended December 31, 1996:
PERCENTAGE OF
COMPANY'S
TENANT ANNUAL TOTAL BASE LEASE
BASE RENTAL RENTAL INITIAL LEASE EXPIRATION
REVENUES(2) REVENUES DATE(3) DATE
------------- ------------- -------------- --------------
OFFICE TENANTS(1):
Hughes Aircraft
Corporation's Space &
Communications
Company(4)............. $10,170,792 25.68% August 1984 January 1999
McDonnell Douglas
Corporation(5)......... 2,041,519 5.15 February 1992 January 2002
Northwest Airlines:
El Segundo............ 1,313,418 3.32 August 1978 February 2001
Seattle............... 622,317 1.57 May 1980 April 2005
Devry, Inc. ............ 1,296,270 3.27 November 1994 October 2009
SCAN HealthPlan(6)...... 941,325 2.38 February 1996 May 2006
Zelda Fay Walls(7)...... 823,896 2.08 August 1989 August 2000
Worldcom, Inc. ......... 674,592 1.70 January 1995 December 1999
The Walls Group......... 456,220 1.16 October 1991 September 2002
Olympus America, Inc. .. 443,375 1.11 September 1993 December 1998
SITA.................... 378,359 0.96 June 1984 May 1999
----------- -----
Total................... $19,162,083 48.38%
=========== =====
INDUSTRIAL TENANTS(1):
Mattel, Inc. ........... $ 1,556,321 3.93% May 1990 October 2000
Festival Markets........ 640,348 1.62 May 1991 May 2001
Allen-Bradley/Rockwell.. 639,432 1.61 May 1992 April 1998
Cannon Equipment........ 592,548 1.50 August 1995 July 2003
MSAS Cargo International
Inc. .................. 553,934 1.40 September 1994 August 2004
Ace Medical............. 553,300 1.40 April 1995 April 2006
Furon, Inc. ............ 543,180 1.37 February 1990 July 2005
Rank Video Services..... 476,358 1.20 October 1984 May 1998
Dovatron................ 397,971 1.00 December 1996 November 2001
Household Finance
Corporation............ 319,199 0.81 June 1993 November 2003
----------- -----
Total................... $ 6,273,591 15.84%
=========== =====
- --------
(1) Table excludes the lease with Key Bank of Washington (total annual base
rent of $667,587) which expired on December 31, 1996.
(2) Determined in accordance with GAAP.
(3) Represents date of first relationship between tenant and the Kilroy Group.
(4) Includes Hughes Space & Communications leases at Kilroy Airport Center at
El Segundo of (i) 96,133 and 11,556 net rentable square feet which expire
in October 2001, (ii) 286,151 net rentable square feet which expires in
July 2004, (iii) 100,978 net rentable space square feet which expires in
January 1999 and (iv) 9,387, 7,515, 5,158 and 5,559 net rentable square
feet which expires in October 2001, November 2001, October 1999 and
November 1999, respectively.
(footnotes continued on next page)
19
Tenant annual base rental revenue for Hughes Space & Communications gives pro
forma effect to the November 1996 extension of the tenant lease with
respect to 96,133 rentable square feet of office space located at
2250 E. Imperial Highway (along with 11,556 rentable square feet located at
2240 E. Imperial Highway) as if such lease renewal had occurred on
January 1, 1996.
(5) Includes McDonnell Douglas Corporation leases at Kilroy Airport Center
Long Beach of 64,530 and 47,457 net rentable square feet which expire
January 2002 and December 1999, respectively.
(6) Tenant executed leases during 1995 representing approximately 44,825
square feet effective on February 15, 1996. Base rental revenue figure
included on a contract basis.
(7) The term of this lease was extended to 2007 and, effective February 1,
1997, annual base rent under this lease is currently $672,000.
LEASE EXPIRATIONS
The following table sets out a schedule of the lease expirations for the
Office Properties for each of the ten years beginning with 1997, assuming that
none of the tenants exercises renewal options or termination rights:
AVERAGE ANNUAL
PERCENTAGE RENT PER NET
OF TOTAL LEASED RENTABLE
NET RENTABLE SQUARE FEET ANNUAL BASE SQUARE FOOT
NUMBER OF AREA SUBJECT TO REPRESENTED BY RENT UNDER REPRESENTED BY
EXPIRING EXPIRING EXPIRING EXPIRING EXPIRING
YEAR OF LEASE EXPIRATION LEASES(1) LEASES (SQ. FT.) LEASES(2) LEASES(000)(3) LEASES(4)
- ------------------------ --------- ---------------- --------------- -------------- --------------
1997.................... 16 61,854 3.82% $ 1,226 $19.82
1998.................... 22 87,986 5.43 2,003 $22.75
1999.................... 32 319,256 19.72 5,557 $17.41
2000.................... 26 158,306 9.78 3,438 $21.72
2001(4)................. 25 330,578 20.42 5,697 $17.23
2002.................... 3 95,286 5.88 1,826 $19.17
2003.................... 3 17,574 1.09 346 $19.72
2004.................... 4 311,491 19.24 7,731 $24.82
2005.................... 4 52,983 3.27 1,099 $20.75
2006 and beyond......... 6 183,748 11.35 3,075 $16.73
--- --------- ------ -------
Totals.................. 140 1,619,062 100.00% $31,998 $19.76
=== ========= ====== =======
- --------
(1) Includes office tenants only. Excludes leases for amenity, retail, parking
and month-to-month office tenants. Some tenants have multiple leases.
(2) Excludes all space vacant as of December 31, 1996 unless a lease for a
replacement tenant had been dated on or before January 1, 1997.
(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 dated
on or before January 1, 1997. Certain leases became effective subsequent
to January 1, 1997.
(4) Includes Hughes Space & Communications leases of 96,133 and 11,556 net
rentable square feet at Kilroy Airport Center at El Segundo. These leases
expire in October 2001 and are at a triple net base rental rate of $14.04
per square foot.
20
The following table sets out a schedule of the lease expirations for the
Industrial Properties for each of the ten years beginning with 1997, assuming
that none of the tenants exercises renewal options or termination rights:
AVERAGE ANNUAL
PERCENTAGE OF RENT PER NET
TOTAL LEASED RENTABLE
NET RENTABLE SQUARE FEET ANNUAL BASE SQUARE FOOT
NUMBER OF AREA SUBJECT TO REPRESENTED RENT UNDER REPRESENTED BY
EXPIRING EXPIRING BY EXPIRING EXPIRING EXPIRING
YEAR OF LEASE EXPIRATION LEASES LEASES (SQ. FT.) LEASES(1) LEASES(000)(2) LEASES
- ------------------------ --------- ---------------- ------------- -------------- --------------
1997.................... 0 -- -- -- --
1998.................... 1 70,000 5.34% $ 476 $6.81
1999.................... 1 22,888 1.75 78 $3.41
2000.................... 3 210,464 16.05 1,670 $7.93
2001.................... 5 252,241 19.24 1,316 $5.22
2002.................... 0 -- -- -- --
2003.................... 4 252,966 19.30 1,204 $4.76
2004.................... 1 76,570 5.84 554 $7.23
2005.................... 3 248,476 18.95 1,486 $5.98
2006 and beyond......... 3 177,311 13.53 831 $4.69
--- --------- ------ ------
Totals................ 21 1,310,916 100.00% $7,615 $5.81
=== ========= ====== ======
- --------
(1) Excludes all space vacant as of December 31, 1996 unless a lease for a
replacement tenant had been dated on or before January 1, 1997.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before January 1, 1997.
OCCUPANCY AND RENTAL INFORMATION
The following table sets forth the average percentage leased and average
annual base rent per leased square foot for the Properties for the past four
years:
AVERAGE ANNUAL
AVERAGE BASE RENT
PERCENTAGE PER RENTABLE
YEAR LEASED(1) SQUARE FOOT(2)
---- ---------- --------------
OFFICE:
1996............................................ 78.3% $20.06
1995............................................ 77.0% $19.42
1994............................................ 70.9%(3) $20.35(3)
1993............................................ 76.1%(3) $21.87(3)
INDUSTRIAL:
1996............................................ 95.3% $ 5.97
1995............................................ 81.5% $ 6.52
1994............................................ 78.7%(3) $ 6.71(3)
1993............................................ 81.8%(3) $ 6.73(3)
- --------
(1) Average of beginning and end-of-year aggregate percentage leased.
(2) Total base rent for the year, determined in accordance with GAAP, divided
by the average of the beginning and end-of-year aggregate rentable square
feet leased.
(3) Excludes data from the Thousand Oaks Office Property and the La Palma
Business Center which were acquired in connection with the Offering and
the Industrial Property located at 12752-12822 Monarch Street, Garden
Grove, California which was acquired by KI on behalf of the Company prior
to consummation of the Offering.
21
MORTGAGE INDEBTEDNESS
All of the mortgage indebtedness outstanding as of December 31, 1996 secured
by the Properties was repaid or refinanced by the Company concurrent with the
consummation of the Offering. The following table presents the balances of
mortgage indebtedness secured by Properties of the Kilroy Group owned as of
December 31, 1996. Such mortgages had, at December 31, 1996, a weighted
average interest rate of approximately 8.74% and a weighted average remaining
term to maturity of approximately 3.14 years.
PRINCIPAL
AMOUNT
OUTSTANDING
PROPERTY (IN THOUSANDS)
-------- --------------
............................................................... $ 94,095
Kilroy Airport Center at El Segundo
2250 E. Imperial Highway
2260 E. Imperial Highway
2240 E. Imperial Highway
El Segundo, California
............................................................... 56,254
Kilroy Airport Center Long Beach
3760 Kilroy Airport Way
3780 Kilroy Airport Way
3750 Kilroy Airport Way
Long Beach, California
............................................................... 20,162
SeaTac Office Center
18000 Pacific Highway
17930 Pacific Highway
17900 Pacific Highway
Seattle, Washington
2031 E. Mariposa Avenue(1)...................................... 12,000
El Segundo, California
2260 E. El Segundo Boulevard
El Segundo, California
2265 E. El Segundo Boulevard
El Segundo, California
185 S. Douglas Street
El Segundo, California
2270 E. El Segundo Boulevard
El Segundo, California
............................................................... 21,525(2)
1000 E. Ball Road(1)
Anaheim, California
1230 S. Lewis Street(1)
Anaheim, California
............................................................... 5,447
12681/12691 Pala Drive.......................................... 3,257
Garden Grove, California
5115 N. 27th Avenue............................................. 3,000
Phoenix, Arizona
3332 E. La Palma Avenue......................................... 7,557
Anaheim, California
--------
$223,297
========
- --------
(1) This Property was also subject to a second mortgage securing the
indebtedness referenced in note (2) below which was repaid with the net
proceeds of the Offering.
(2) This indebtedness was also secured by a second mortgage on the Properties
located at 1000 E. Ball Road, Anaheim, California, 1230 S. Lewis Street,
Anaheim, California and 2031 E. Mariposa Avenue, El Segundo, California.
Concurrent with the consummation of the Offering on January 31, 1997, the
Company entered into mortgage agreements for an aggregate of $96.0 million of
indebtedness secured by certain of the Company's Properties. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
22
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of the Properties is subject to any material
litigation nor, to the Company's knowledge, is any material litigation
threatened against any of them, other than routine litigation arising in the
ordinary course of business, which is expected to be covered by liability
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company was organized in September 1996 and commenced operations on
January 31, 1997. No matters were submitted to a vote of stockholders during
the fourth quarter of the year ended December 31, 1996.
23
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." Because the Company's
Common Stock commenced trading on the NYSE on January 28, 1997, no sales
prices for the Company's Common Stock are available for periods prior to that
date. On March 21, 1997, the reported closing sale price on the NYSE was
$26.6250 per share and there were approximately 28 holders of record of Common
Stock.
Concurrently with the consummation of the Offering, the Operating
Partnership issued 2,652,374 Units to the Continuing Investors in
consideration for their contribution to the Operating Partnership of ownership
interests in the Properties. The Continuing Investors may exchange part or all
of their Units for cash, or at the Company's option, shares of Common Stock on
a one-for-one basis. This exchange right may not be exercised prior to January
31, 1999. In connection with the formation of the Company in September 1996,
the Company issued 50 shares of Common Stock to John B. Kilroy, Sr., Chairman
of the Board of Directors, for a cash purchase price of $20.00 per share. Such
issuance was made in reliance upon the exemption from registration available
pursuant to Regulation D under the Act. Such shares were repurchased by the
Company for a cash purchase price of $20.00 per share concurrently with the
consummation of the Offering. There were no other sales of unregistered
securities during the year ended December 31, 1996.
24
ITEM 6. SELECTED FINANCIAL DATA
KILROY GROUP
(IN THOUSANDS, EXCEPT SQUARE FOOTAGE AND OCCUPANCY DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS
DATA:
Rental income......... $ 33,269 $ 32,314 $ 31,220 $ 34,329 $ 32,988
Tenant reimbursements. 3,380 3,002 1,643 4,916 5,076
Parking income........ 1,753 1,582 1,357 1,360 1,286
Development and
management fees...... 698 1,156 919 751 882
Sale of air rights.... -- 4,456 -- -- --
Lease termination
fees................. 76 100 300 5,190 48
Other income.......... -- 298 784 188 221
--------- --------- --------- --------- ---------
Total revenues.... 39,176 42,908 36,223 46,644 40,501
--------- --------- --------- --------- ---------
Property expenses..... 6,788 6,834 6,000 6,391 6,384
Real estate taxes
(refunds)............ 1,301 1,416 (448) 2,984 3,781
General and
administrative
expense.............. 2,383 2,152 2,467 1,113 1,115
Ground lease.......... 768 789 913 941 854
Development expenses.. 650 737 468 581 429
Option buy-out cost... 3,150 -- -- -- --
Interest expense...... 21,853 24,159 25,376 25,805 26,293
Depreciation and
amortization......... 9,111 9,474 9,962 10,905 10,325
--------- --------- --------- --------- ---------
Total expenses.... 46,004 45,561 44,738 48,720 49,181
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item... (6,828) (2,653) (8,515) (2,076) (8,680)
Extinguishment of
debt................. 20,095 15,267 1,847 -- --
--------- --------- --------- --------- ---------
Net income (loss). $ 13,267 $ 12,614 $ (6,668) $ (2,076) $ (8,680)
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Real estate assets,
before accumulated
depreciation and
amortization......... $ 227,337 $ 224,983 $ 223,821 $ 222,056 $ 221,423
Total assets.......... 128,339 132,857 143,251 148,386 161,008
Mortgage and loans.... 223,297 233,857 250,059 248,043 250,792
Total liabilities..... 242,116 254,683 273,585 263,346 263,156
Accumulated deficit... (113,777) (121,826) (130,334) (114,960) (102,148)
OTHER DATA:
Funds from Operations. $ 5,433 $ 2,365 $ 1,447 $ 3,639
Cash flows from:
Operating
activities......... 5,520 10,071 6,607 11,457
Investing
activities......... (2,354) (1,162) (1,765) 2,028
Financing
activities......... (3,166) (8,909) (4,842) (134,858)
Office Properties:
Square footage...... 1,688,383 1,688,383 1,688,383 1,688,383
Occupancy........... 76.0% 72.8% 73.3% 81.0%
Industrial Properties:
Square footage...... 916,570 916,570 916,570 916,570
Occupancy........... 97.6% 98.4% 79.7% 77.6%
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Combined Financial Statements for the Kilroy Group and
notes thereto appearing elsewhere in this report.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues decreased $3.7 million, or 8.7%, for the year ended December
31, 1996 compared to the same period for 1995. Revenues from base rents
increased $1.0 million, or 3.0%, to $33.3 million in 1996 compared to $32.3
million in 1995. Rents from Office Properties increased $0.7 million during
the year ended December 31, 1996 from the comparable period in 1995. Such
increase was due to office space under lease increasing from 1,222,000 net
rentable square feet at December 31, 1995 to 1,284,000 net rentable square
feet at December 31, 1996. The majority of this increase relates to leasing at
Kilroy Airport Center Long Beach. There was no significant change in rent per
net rentable square foot for the year ended 1996 compared to the year ended
1995. Rents from Industrial Properties increased a net $0.3 million during the
year ended December 31, 1996 compared to 1995. The net increase was due to a
lease with a CPI increase and the effect of the 2260 E. El Segundo Boulevard
Building being leased for the entire twelve months ended December 31, 1996.
Tenant reimbursements and parking revenues increased to $3.4 million and $1.8
million, respectively, in 1996 compared to $3.0 million and $1.6 million for
1995. The overall $0.6 million increase is primarily due to increased billable
operating expenses and parking income resulting from new leases. Revenues for
1995 include a gain on the sale of air rights of $4.5 million at Kilroy
Airport Center at El Segundo. See Note 2 to the Combined Financial Statements.
Expenses in the year ended December 31, 1996 increased by $0.4 million, or
1.0%, to $46.0 million compared to $45.6 million in 1995. During the year
ended December 31, 1996, the Company accrued the costs of an option buy-out of
$3.15 million for the cancellation of an option to purchase a 50% equity
interest in Kilroy Airport Center at El Segundo. Interest expense decreased
$2.3 million, or 9.6%, to $21.9 million in 1996 from $24.2 million in 1995,
primarily as a result of the forgiveness and restructuring of certain debt in
1995 and 1996. See Note 4 to the Combined Financial Statements.
Net income was $13.3 million for the year ended December 31, 1996 compared
to $12.6 million for the same period in 1995. The increase of $0.7 million is
due primarily to a decrease in interest expense of $2.3 million, an increase
in extraordinary gains of $4.8 million less the nonrecurring option buy-out
cost of $3.15 million for 1996 and the sale of air rights of $4.5 million in
1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues increased $6.7 million, or 18.5%, for the year ended December
31, 1995 compared to the year ended December 31, 1994. Revenues from base
rents increased $1.1 million, or 3.5%, to $32.3 million in 1995 from $31.2
million in 1994. In 1995, rents from Industrial Properties increased $0.8
million from the year ended December 31, 1994, primarily due to the effect of
12-months' rental for the Property located at 2265 E. El Segundo Boulevard
compared to four-months' rental in 1994. Office square footage and average
rent per net rentable square foot remained relatively unchanged for the year
ended December 31, 1995 compared to the year ended December 31, 1994.
Industrial square footage under lease increased to 902,000 at December 31,
1995 as compared to 730,000 a year earlier. The 2265 E. El Segundo Boulevard
building was leased in April 1995 after being vacant during 1994. The Company
also leased the 1230 S. Lewis Street property in February 1995 at a rate of
$6.11 per net rentable square foot, down from the rate of $6.43 in effect for
the prior year. Tenant reimbursements increased to $3.0 million in 1995 from
$1.6 million in 1994 due principally to the 1994 $1.5 million refund to
tenants for property tax refunds. Parking revenues increased to $1.6 million
in 1995 from $1.4 million in 1994 due to recognition of 12-months' parking
income for Kilroy Airport Center Long Beach in
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1995 compared to two months in 1994, together with increased tenant parking
revenues at Kilroy Airport Center at El Segundo. Revenues for 1995 include a
gain on the sale of air rights of $4.5 million referred to above. Other income
decreased $0.5 million to $0.3 million during 1995 compared to 1994, primarily
as a result of nonrecurring interest income of $0.4 million on the property
tax refunds referred to below.
Expenses in 1995 increased $0.8 million, or 1.8%, to $45.6 million. Property
operating expenses increased $0.8 million, or 13.9%, primarily due to
increased utility costs, increases in employee wages and benefits and a $0.3
million management fee paid to K1 to cover costs of the loan renegotiation at
Kilroy Airport Center at El Segundo. Real estate taxes increased $1.9 million,
to $1.4 million in 1995 from a credit balance of $0.4 million in 1994,
primarily due to the $2.4 million property tax refund recorded by the KI in
1994 and the effect of a reduction in aggregate assessed property values in
1995. General and administrative expenses decreased $0.3 million, or 12.0%, to
$2.2 million in 1995 from $2.5 million in the 1994 period, primarily due to a
$0.3 million penalty for late payment of property taxes in 1994. Interest
expense decreased $1.2 million to $24.2 million in 1995 from $25.4 million in
1994 due to the September 1995 extension of the mortgage on Kilroy Airport
Center at El Segundo at a lower interest rate and the forgiveness of certain
debt, offset in part by the effect of higher interest rates on the variable
rate mortgage secured by Kilroy Airport Center Long Beach. See Note 4 to the
Combined Financial Statements. Ground lease expense decreased $0.1 million to
$0.8 million in 1995, reflecting the effect of 12 months' reduction of ground
rent for Phase III of Kilroy Airport Center Long Beach compared to six months
in 1994. The $0.5 million decrease in depreciation and amortization to
$9.5 million in 1995 results from certain assets becoming fully amortized.
Net income increased $19.3 million to $12.6 million in 1995 compared to a
net loss of $6.7 million in 1994, primarily due to the sale of air rights
discussed above and a $13.4 million increase in gains on extinguishment of
debt to $15.3 million in 1995 compared to $1.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Upon consummation of the Offering and the use of the net proceeds of
approximately $302.5 million therefrom, the Company (i) acquired certain
properties for approximately $58.0 million, (ii) reduced its total
indebtedness by approximately $127.3 million and (iii) established working
capital cash reserves of approximately $117.8 million. The Company is
currently negotiating a $100.0 million credit facility (the "Credit
Facility"). The Credit Facility is expected to be used prim