EDGAR 10-K Filing

Company CIK: 1493976
Filing Year: 2022
Filename: 1493976_10-K_2022_0001025996-22-000074.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
The Company
Kilroy Realty Corporation (the “Company”) is a self-administered real estate investment trust (“REIT”) active in premier office, life science and mixed-use submarkets in the United States. We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties in Greater Los Angeles, San Diego County, the San Francisco Bay Area, Greater Seattle and Austin, Texas, which we believe have strategic advantages and strong barriers to entry. Class A real estate encompasses attractive and efficient buildings of high quality that are attractive to tenants, are well-designed and constructed with above-average material, workmanship and finishes and are well-maintained and managed. We qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). We own our interests in all of our real estate assets through Kilroy Realty, L.P. (the “Operating Partnership”) and generally conduct substantially all of our operations through the Operating Partnership.
Our stabilized portfolio of operating properties was comprised of the following properties at December 31, 2021:
Number of
Buildings Rentable
Square Feet Number of
Tenants Percentage
Occupied (1)
Percentage Leased
Stabilized Office Properties (2)
120 15,456,528 422 91.9 % 93.9 %
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(1)Represents economic occupancy.
(2)Includes stabilized life science and retail space.
Number of
Properties Number of Units 2021 Average Occupancy
Stabilized Residential Properties 3 1,001 78.0 %
Our stabilized portfolio includes all of our properties with the exception of development properties currently committed for construction, under construction, or in the tenant improvement phase, redevelopment projects under construction, undeveloped land and real estate assets held for sale. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We define properties in the tenant improvement phase as office and life science properties that we are developing or redeveloping where the project has reached cold shell condition and is ready for tenant improvements, which may require additional major base building construction before being placed in service. Projects in the tenant improvement phase are added to our stabilized portfolio once the project reaches the earlier of 95% occupancy or one year from the date of the cessation of major base building construction activities. Costs capitalized to construction in progress for development and redevelopment properties are transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets at the historical cost of the property as the projects or phases of projects are placed in service.
During the year ended December 31, 2021, we added four development projects to our stabilized portfolio consisting of six buildings totaling 1,109,509 square feet of office and life science space in San Diego and South San Francisco, California and 193 residential units in Hollywood, California. We did not have any properties held for sale at December 31, 2021. As of December 31, 2021, the following properties were excluded from our stabilized portfolio.
Number of
Properties/Projects Estimated Rentable
Square Feet (1)
In-process development projects - tenant improvement (2)
3 1,604,000
In-process development projects - under construction 2 946,000
In-process redevelopment projects - under construction (3)
1 96,000
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(1)Estimated rentable square feet upon completion.
(2)Includes the development property acquired in Austin, Texas during the year ended December 31, 2021. Refer to Note 3 “Acquisitions” to our consolidated financial statements included in this report for additional information.
(3)Excludes the two committed redevelopment projects at December 31, 2021, which are included in the stabilized portfolio since construction has not commenced.
Our stabilized portfolio also excludes our future development pipeline, which as of December 31, 2021, was comprised of six future development sites, representing approximately 59 gross acres of undeveloped land.
As of December 31, 2021, all of our properties, development projects and redevelopment projects were owned and all of our business was conducted in the state of California with the exception of nine stabilized office properties, one development project in the tenant improvement phase and one future development project located in the state of Washington and one development project in the tenant improvement phase located in Austin, Texas. All of our properties, development projects and redevelopment projects are 100% owned, excluding four office properties owned by three consolidated property partnerships. Two of the three consolidated property partnerships, 100 First Street Member, LLC (“100 First LLC”) and 303 Second Street Member, LLC (“303 Second LLC”), each owned one office property in San Francisco, California through subsidiary REITs. As of December 31, 2021, the Company owned a 56% common equity interest in both 100 First LLC and 303 Second LLC. The third consolidated property partnership, Redwood City Partners, LLC (“Redwood LLC”), owned two office properties in Redwood City, California. As of December 31, 2021, the Company owned an approximate 93% common equity interest in Redwood LLC. The remaining interests in all three property partnerships were owned by unrelated third parties.
We own our interests in all of our real estate assets through the Operating Partnership and generally conduct substantially all of our operations through the Operating Partnership, of which we owned a 99.0% common general partnership interest as of December 31, 2021. The remaining 1.0% common limited partnership interest in the Operating Partnership as of December 31, 2021 was owned by non-affiliated investors and certain of our executive officers and directors. With the exception of the Operating Partnership and our consolidated property partnerships, all of our subsidiaries are wholly-owned.
Available Information; Website Disclosure; Corporate Governance Documents
Kilroy Realty Corporation was incorporated in the state of Maryland on September 13, 1996 and Kilroy Realty, L.P. was organized in the state of Delaware on October 2, 1996. Our principal executive offices are located at 12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064. Our telephone number at that location is (310) 481-8400. Our website is www.kilroyrealty.com. The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this annual report on Form 10-K or any other report or document we file with or furnish to the SEC. All reports we will file with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. All reports that we will file with the SEC will also be available free of charge on our website at www.kilroyrealty.com as soon as reasonably practicable after we file those materials with, or furnish them to, the SEC.
The following documents relating to corporate governance are also available on our website under “Investors -Overview -Governance Documents” and available in print to any security holder upon request:
•Corporate Governance Guidelines;
•Code of Business Conduct and Ethics;
•Audit Committee Charter;
•Executive Compensation Committee Charter;
•Nominating / Corporate Governance Committee Charter; and
•Corporate Social Responsibility and Sustainability Committee Charter.
You may request copies of any of these documents by writing to:
Attention: Investor Relations
Kilroy Realty Corporation
12200 West Olympic Boulevard, Suite 200
Los Angeles, California 90064
We intend to disclose on our website under “Investors -Overview -Governance Documents” any amendment to, or waiver of, any provisions of our Code of Business Conduct and Ethics applicable to the directors and/or officers of the Company that would otherwise be required to be disclosed under the rules of the Securities and Exchange Commission or the New York Stock Exchange.
Business and Growth Strategies
Growth Strategies. We believe that a number of factors and strategies will enable us to continue to achieve our objectives of long-term sustainable growth in Net Operating Income (defined below) and FFO (defined below) as well as maximization of long-term stockholder value. These factors and strategies include:
•the quality, physical characteristics and operating sustainability of our properties, as well as our geographic presence in technology and life science market clusters;
•our ability to efficiently manage our assets as a low cost provider of commercial real estate through our seasoned management team possessing core capabilities in all aspects of real estate ownership, including property management, leasing, marketing, financing, accounting, legal, and construction and development management;
•our access to development, redevelopment, acquisition and leasing opportunities as a result of our extensive experience and significant working relationships with major West Coast property owners, corporate tenants, municipalities and landowners given our over 70-year presence in the West Coast markets;
•our active development and redevelopment program and our future development pipeline of undeveloped land sites (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Factors That May Influence Future Results of Operations” for additional information pertaining to the Company’s in-process and future development pipeline);
•our capital recycling program (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources of the Operating Partnership” for additional information pertaining to the Company’s capital recycling program and related property and land dispositions);
•our ability to capitalize on inflection points in a real estate cycle to add quality assets to our portfolio at substantial discounts to long-term value, through either acquisition, development or redevelopment. This includes expansion of our product offering into new submarkets, such as Austin, Texas, where we believe operating and fundamental synergies give us a competitive advantage, as well as in life science properties, which are concentrated in our existing markets; and
•our strong financial position that has and will continue to allow us to pursue attractive acquisition and development and redevelopment opportunities.
“Net Operating Income” is defined as consolidated operating revenues (rental income and other property income) less consolidated operating expenses (property expenses, real estate taxes and ground leases). “FFO” is Funds From Operations available to common stockholders and common unitholders calculated in accordance with the 2018 Restated White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). (See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Results of Operations” and “-Non-GAAP Supplemental Financial
Measures: Funds From Operations” for a reconciliation of these measures to generally accepted accounting principles (“GAAP”) net income available to common stockholders.)
Operating Strategies. We focus on enhancing long-term growth in Net Operating Income and FFO from our properties by:
•maximizing cash flow from our properties through active leasing, early renewals and effective property management;
•structuring leases to maximize returns;
•managing portfolio credit risk through effective underwriting, including the use of credit enhancements and interests in collateral to mitigate portfolio credit risk;
•managing operating expenses through the efficient use of internal property management, leasing, marketing, financing, accounting, legal, and construction and development management functions;
•maintaining and developing long-term relationships with a diverse tenant base;
•continuing to effectively manage capital improvements to enhance our properties’ competitive advantages in their respective markets and integrate technology to enhance efficiencies with building management systems, security operation centers and tenant experience solutions to provide a premium experience to our tenant base while reducing operating costs;
•continuing to expand our management team with individuals who have extensive regional and product-type experience and are highly knowledgeable in their respective markets and product types; and
•attracting and retaining motivated employees by providing financial and other incentives to meet our operating and financial goals.
Development and Redevelopment Strategies. We and our predecessors have developed office properties primarily located in California since 1947. As of December 31, 2021, we had three development projects in the tenant improvement phase totaling approximately 1,604,000 square feet of office space and two development projects under construction totaling approximately 946,000 square feet of office and life science space. In addition, we had one redevelopment project under construction totaling approximately 96,000 square feet and two projects committed for life science redevelopment totaling approximately 234,000 square feet. Our future development pipeline was comprised of six potential development sites representing approximately 59 gross acres of undeveloped land on which we believe we have the potential to develop over 5.5 million square feet of office, life science, laboratory, residential and retail space, depending upon economic conditions. Our strategy with respect to development and redevelopment is to:
•own land sites in highly populated, amenity rich locations that are attractive to a broad array of tenants;
•be the premier provider of modern and collaborative office, life science and mixed-use projects on the West Coast and in Austin, Texas with a focus on design and environment;
•maintain a disciplined approach by commencing development when appropriate based on market conditions, focusing on leasing, developing in stages or phasing, and cost control;
•reinvest capital from dispositions of selective assets into new state-of-the-art development and acquisition opportunities with higher cash flow and rates of return or future redevelopment when possible;
•execute on our development projects under construction and future development pipeline, including expanding entitlements; and
•evaluate redevelopment opportunities in supply-constrained markets because such efforts generally achieve similar returns to new development with reduced entitlement risk and shorter construction periods.
We may engage in the additional development or redevelopment of office, life science and mixed-use properties when market conditions support a favorable risk-adjusted return on such development or redevelopment. We expect that our significant working relationships with tenants, municipalities and landowners on the West Coast will give us further access to development and redevelopment opportunities. We cannot ensure that we will be able to successfully develop or redevelop any of our properties or that we will have access to additional development or redevelopment opportunities.
Acquisition Strategies. We believe we are well positioned to acquire properties opportunistically and development and redevelopment opportunities as the result of our extensive experience, strong financial position and ability to access capital and in June 2021 we expanded into Austin, Texas through our acquisition of the Indeed Tower, which is in the tenant improvement phase. We continue to focus on growth opportunities in West Coast and Austin, Texas markets populated by knowledge and creative based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services. Against the backdrop of market volatility, we expect to manage a strong balance sheet, execute on our development program and selectively evaluate opportunities that add immediate Net Operating Income to our portfolio or play a strategic role in our future growth and that:
•provide attractive yields and significant potential for growth in cash flow from property operations;
•present growth opportunities in our existing or other strategic markets; and
•demonstrate the potential for improved performance through intensive management, repositioning, capital investment and leasing that should result in increased occupancy and rental revenues.
Financing Strategies. Our financing policies and objectives are determined by our board of directors. Our goal is to limit our dependence on leverage and maintain a conservative ratio of debt-to-total market capitalization. As of December 31, 2021, our total debt as a percentage of total market capitalization was 34.4%, which was calculated based on the quoted closing price per share of the Company’s common stock of $66.46 on December 31, 2021 (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources of the Company -Capitalization” for additional information). Our financing strategies include:
•maintaining financial flexibility, including a low secured to unsecured debt ratio;
•maximizing our ability to access a variety of both public and private capital sources;
•maintaining a staggered debt maturity schedule in which the maturity dates of our debt are spread over several years to limit risk exposure at any particular point in the capital and credit market cycles;
•completing financing in advance of the need for capital;
•managing interest rate exposure by generally maintaining a greater amount of fixed-rate debt as compared to variable-rate debt; and
•maintaining our credit ratings.
We utilize multiple sources of capital, including borrowings under our unsecured revolving credit facility, proceeds from the issuance of public or private debt or equity securities and other bank and/or institutional borrowings and our capital recycling program, including strategic venture sources. There can be no assurance that we will be able to obtain capital as needed on terms favorable to us or at all. (See the discussion under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Factors That May Influence Future Results of Operations” and “Item 1A. Risk Factors.”)
Sustainability Strategies. Our longstanding leadership in sustainability in real estate is globally recognized, and our commitment to advancing progress toward our sustainability ambitions remains strong. Our vision is a resilient portfolio that minimizes the environmental impact of the development and operation of our buildings while maximizing the health and productivity of our tenants, employees and communities as well as our financial returns. Management and our board of directors, through the Corporate Social Responsibility and Sustainability Committee (the “Committee”) established in April 2018, oversee and advance the Company’s corporate social responsibility and sustainability initiatives. They recognize that community engagement and sustainable operations benefit all of our constituencies and are key to preserving our Company’s value and credibility.
As a result of our commitment to sustainability, we have been ranked first in sustainability performance in North America in the Listed Office category by the Global Real Estate Sustainability Benchmark (“GRESB”) eight times and have also earned the highly competitive GRESB 5 Star designation in each of the last eight years for ranking in the top 20% of respondents worldwide in sustainability performance. We have been recognized with the US EPA ENERGY STAR® Partner of the Year Sustained Excellence Award for the last six years, NAREIT’s Leader in the Light Award in the Listed Office category for the last eight years and NAREIT’s Leader in the Light Most Innovative award in 2018 and 2020. We have also been included on Newsweek’s list of America’s Most Responsible Companies for the past three years. For excellence in creating a diverse, equitable and inclusive culture, we are again listed on the Bloomberg Gender Equality Index, which measures companies on female leadership and talent pipeline, equal pay and gender pay parity, inclusive culture, sexual harassment policies and pro-women brand.
We manage our properties to offer the maximum degree of utility and operational efficiency to our tenants. We offer tenant sustainability programs focused on helping our tenants reduce their energy and water consumption and increase their recycling diversion rates. We incorporate green lease language into 100% of our new leases, and the majority of our leases also include a cost recovery clause for resource-efficiency related capital expenditures, which seek to align tenant and landlord interests on energy, water and waste efficiency. Green leases (also known as aligned leases, high performance leases or energy efficient leases) aim to align the financial and energy incentives of building owners and tenants so they can work together to save money, conserve resources and ensure the efficient operation of buildings. We have won the Institute for Market Transformation’s (“IMT’s”) Green Lease Leaders award eight times. Energy consumption, water consumption, and greenhouse gas (“GHG”) emissions data for the periods indicated based on the most recent available information, assured by DNV GL Business Assurance USA, Inc., are as follows:
Energy consumption:
Year (1)
Energy Consumption Data Coverage as % of Total Floor Area (2)
Total Energy Consumed by Floor Area with Data Coverage (MWh) (3)
% of Energy Generated From Renewable Sources (4)
Like-for-Like Change in Energy Consumption of Floor Area with Data Coverage (5)
% of Eligible Portfolio that has Obtained an Energy Rating and is Certified to ENERGY STAR (6)
2020 100 % 257,113 55 % (13) % 76 %
2019 99 % 277,177 18 % (2) % 70 %
2018 98 % 299,510 13 % (2) % 77 %
Water consumption:
Year (1)
Water Withdrawal Data Coverage as a % of Total Floor Area (7)
Total Water Withdrawn by Portfolio (m3) (8)
Like-for-like Change in Water Withdrawn for Floor Area with Data Coverage (5)
2020 100 % 659,051 (31) %
2019 98 % 803,499 (6) %
2018 96 % 980,859 5 %
GHG Emissions:
Year (1)
Scope 1 GHG Data Coverage as a % of Total Floor Area (9)
Scope 1 GHG Emissions (Tonnes CO2) (10)
Like-for-like Change in Scope 1 GHG Emissions Data (5)
2020 100 % 3,000 (11) %
2019 100 % 3,082 6 %
2018 99 % 3,908 (4) %
Year (1)
Scope 2 Location-Based GHG Data Coverage as a % of Total Floor Area (11)
Scope 2 Location-Based GHG Emissions (Tonnes CO2) (12)
Like-for-like Change in Scope 2 Location-Based GHG Emissions Data (5)
2020 100 % 23,122 (21) %
2019 100 % 25,438 (5) %
2018 99 % 33,207 (6) %
Year (1)
Scope 2 Market-Based GHG
Data Coverage as a % of Total Floor
Area (11)
Scope 2 Market-Based GHG Emissions (Tonnes CO2) (12)
Like-for-like Change in Scope 2 Market-Based GHG Emissions Data (5)
2020 100 % - (100) %
2019 100 % 24,718 (8) %
2018 99 % 30,439 (12) %
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(1)Full 2021 calendar year energy, water and GHG emissions data is not available until after March 30, 2022.
(2)Percentage based on gross square footage of portfolio floor area with complete energy consumption data coverage as of the end of the applicable year. Floor area is considered to have complete energy consumption data coverage when energy consumption data (i.e., energy types and amounts consumed) is obtained by the Company for all types of energy consumed in the relevant floor area during the fiscal year, regardless of when such data was obtained.
(3)Energy includes energy purchased from sources external to the Company and its tenants or produced by the Company or its tenants themselves (self-generated) and energy from all sources, including direct fuel usage, purchased electricity, and heating, cooling and steam energy. Total energy consumption based on floor area with complete energy consumption data coverage as of the end of the applicable year.
(4)Renewable sources include renewable energy the Company directly produced and renewable energy the Company purchased if purchased through a renewable power purchase agreement that explicitly includes renewable energy certificates (“RECs”) or Guarantees of Origin (“GOs”), a Green-e Energy Certified utility or supplier program or other green power products that explicitly include RECs or GOs or for which Green-e Energy Certified RECs are paired with grid electricity. Percentage is based total energy consumption during the applicable year.
(5)Data reported on a like-for-like comparison excludes assets that have been acquired or disposed over the past twenty-four months as of the end of the applicable year.
(6)Eligible portfolio represents our office and residential properties that have had 50% or greater occupancy for 12 consecutive months at any point during the applicable year. Percentage is based on rentable square footage of our eligible portfolio that has obtained an energy rating and is certified to ENERGY STAR® as of the end of the applicable year.
(7)Percentage based on gross square footage of portfolio floor area with complete water withdrawal data coverage as of the end of the applicable year. Floor area is considered to have complete water withdrawal data coverage when water withdrawal data (i.e., amounts withdrawn) is obtained by the Company for the relevant floor area during the fiscal year, regardless of when such data was obtained.
(8)Water sources include surface water (including water from wetlands, rivers, lakes and oceans), groundwater, rainwater collected directly and stored by the Company, wastewater obtained from other entities, municipal water supplies or supply from other water utilities. Total water withdrawal based on floor area with complete water withdrawal data coverage as of the end of the applicable year.
(9)Percentage based on gross square footage of portfolio floor area with complete Scope 1 GHG emissions data coverage as of the end of the applicable year. Floor area is considered to have complete Scope 1 GHG emissions data coverage when GHG emission data (i.e., amounts emitted) is obtained by the Company for the relevant floor area during the fiscal year, regardless of when such data was obtained.
(10)Scope 1 emissions represent those produced by consuming onsite natural gas procured by the Company.
(11)Percentage based on gross square footage of portfolio floor area with complete Scope 2 GHG emissions data coverage as of the end of the applicable year. Floor area is considered to have complete Scope 2 GHG emissions data coverage when GHG emission data is obtained by the Company for the relevant floor area during the fiscal year, regardless of when such data was obtained.
(12)Scope 2 emissions represent those produced by consuming onsite electricity procured by the Company.
We build our current development and redevelopment projects to Leadership in Energy and Environmental Design (“LEED”) specifications. All of our office development projects are designed to achieve LEED certification, either LEED Platinum or Gold.
We are actively pursuing LEED certification for approximately 1.0 million square feet of office and life science space of under construction development and redevelopment projects. In addition, an analysis of energy and water performance is included in our standard due diligence process for acquisitions, and reducing energy use year over year is a comprehensive goal of our operational strategy. This is accomplished through systematic energy auditing, mechanical, lighting and other building upgrades, optimizing operations and engaging tenants. During the past few
years, we have significantly enhanced the sustainability profile of our portfolio, ending 2021 with 73% of our properties LEED certified, 76% of our eligible stabilized office properties ENERGY STAR certified and 80% of our eligible stabilized residential properties ENERGY STAR certified (in each case as a percentage of our total or eligible rentable square feet as of December 31, 2021).
We identify climate change as a risk to our Company, its tenants and our other stakeholders, an opportunity for long-term value creation and a key driver in long-term strategic business decisions. These risks and opportunities include transitional risks such as policy, market, technology and reputational concerns, as well as physical risks, and are a focus area for the board of directors and management. Climate-related risks and opportunities are governed by the board of directors through the Committee. In 2018, the Committee endorsed the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) and tasked management with assessing and reporting against climate related risk for the Company. Recognizing the importance of reducing the Company’s greenhouse gas impact on the environment, in 2018 we committed to achieving carbon neutral operations by December 31, 2020, and we achieved this goal. This means that the entirety of our scope 1 and scope 2 emissions is offset through a combination of energy efficiency measures and both onsite and offsite renewables. This exceeds our carbon reduction goals previously validated by Science-Based Targets. Science-Based Targets is a collaboration between the Carbon Disclosure Project, the United Nations Global Compact, the World Resources Institute and the World Wide Fund for Nature, which independently assesses and approves the carbon reduction goals of companies.
Significant Tenants
As of December 31, 2021, our 15 largest tenants in terms of annualized base rental revenues represented approximately 47.4% of our total annualized base rental revenues, defined as annualized monthly contractual rents from existing tenants as of December 31, 2021. Annualized base rental revenue includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense reimbursement revenue.
For further information on our 15 largest tenants and the composition of our tenant base, see “Item 2. Properties -Significant Tenants.”
Competition
We compete with several developers, owners, operators and acquirers of office and life science, undeveloped land and other commercial real estate, including mixed-use and residential real estate, many of which own properties similar to ours in the same submarkets in which our properties are located. For further discussion of the potential impact of competitive conditions on our business, see “Item 1A. Risk Factors.”
Segment and Geographic Financial Information
During 2021 and 2020, we had one reportable segment, our office and life science properties segment. For information about our office property revenues and long-lived assets and other financial information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Results of Operations.”
As of December 31, 2021, all of our properties, development projects and redevelopment projects were owned and all of our business was conducted in the state of California with the exception of nine stabilized office properties, one development project in the tenant improvement phase and one future development project located in the state of Washington and one development project in the tenant improvement phase located in Austin, Texas. As of December 31, 2021, all of our properties, development projects and redevelopment projects were 100% owned, excluding four office properties owned by three consolidated property partnerships.
Human Capital Resources
As of December 31, 2021, we employed 244 people through the Operating Partnership and Kilroy Realty TRS, Inc. We believe that relations with our employees are good.
Our human capital development goals and initiatives are focused on enhancing employee growth, satisfaction and wellness while maintaining a diverse and thriving culture. Several of our human capital development initiatives include the following:
Diversity. We are committed to cultivating a diverse culture of inclusion that makes a positive difference in our employees’ lives and have developed targeted training to improve workplace diversity, equity and inclusion, including mandatory unconscious bias training for all employees. As of December 31, 2021, two of our seven directors (or 29%) were female.
TOTAL WORKFORCE (1)
Gender Diversity
Ethnic Diversity
________________________
(1)As of December 31, 2021.
Training and Education. We support the continual development of our employees through various training and education programs throughout their tenure at the Company, from onboarding to skill building to leadership development. We also conduct annual performance and career development reviews for all employees, and employee satisfaction surveys where we provide a summary of the feedback received by employees and actions taken in response to such feedback to our workforce.
Employee Health. The physical and mental health and wellness of our employees is of central importance to our culture. We evaluate our group health and ancillary benefits annually to ensure our benefits package is robust and conduct an annual wellness and satisfaction survey to help us better tailor our employee health and wellness programs.
Strong Communities and Healthy Planet. We are deeply aware that our buildings are part of the larger community and that we thrive when the communities around us thrive. We are proud to make these communities better places to live and work through our volunteerism and philanthropy initiatives.
Competitive Benefits and Compensation. Our compensation program is designed to, among other things, attract, retain and incentivize talented and experienced individuals in the highly competitive West Coast and Austin, Texas employment and commercial real estate markets. We use a mix of competitive salaries and other benefits to attract and retain these individuals.
Environmental Regulations and Potential Liabilities
Government Regulations Relating to the Environment. Many laws and governmental regulations relating to the environment are applicable to our properties, and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently and may adversely affect us.
Existing conditions at some of our properties. Independent environmental consultants have conducted Phase I or similar environmental site assessments on all of our properties. We generally obtain these assessments prior to the acquisition of a property and may later update them as required for subsequent financing of the property, if a property is slated for disposition, or as requested by a tenant. Consultants are required to perform Phase I assessments to American Society for Testing and Materials standards then-existing for Phase I site assessments and typically include a historical review, a public records review, a visual inspection of the surveyed site, and the issuance of a written report. These assessments do not generally include any soil or groundwater sampling or subsurface investigations; however, if a Phase I does recommend that soil or groundwater samples be taken or other subsurface investigations take place, we generally perform such recommended actions. Depending on the age of the property, the Phase I may have included an assessment of asbestos-containing materials or a separate hazardous materials survey may have been conducted. For properties where asbestos-containing materials were identified or suspected, an operations and maintenance plan was generally prepared and implemented.
Historical operations at or near some of our properties, including the presence of underground or above ground storage tanks, various sites uses that involved hazardous substances, the landfilling of hazardous substances and solid waste, and migration of contamination from other sites, may have caused soil or groundwater contamination. In some instances, (i) the prior owners of the affected properties conducted remediation of known contamination in the soils on our properties, (ii) we are required to conduct further environmental clean-up and environmental closure activities at certain properties, or (iii) residual contamination could pose environmental, health, and safety risks if not appropriately addressed. We may need to investigate or remediate contaminated soil, soil gas, landfill gas, and groundwater, and we may also need to conduct landfill closure and post-closure activities, including, for example, the implementation of groundwater and methane monitoring systems and impervious cover, and the costs of such work could exceed projected or budgeted amounts. To protect the health and safety of site occupants and others, we may be required to implement and operate safeguards, including, for example, vapor intrusion mitigation systems and building protection systems to address methane. We may need to modify our methods of construction or face increased construction costs as a result of environmental conditions, and we may face obligations under agreements with governmental authorities with respect to the management of such environmental conditions. If releases from our sites migrate offsite, or if our site redevelopment activities cause or contribute to a migration of hazardous substances, neighbors or others could make claims against us, such as for property damage, personal injury, or cost recovery.
As of December 31, 2021, we had accrued environmental remediation liabilities of approximately $75.2 million recorded on our consolidated balance sheets in connection with certain of our in-process and future development projects. The accrued environmental remediation liabilities represent the remaining costs we estimate we will incur prior to and during the development process at various development acquisition sites. These estimates, which we developed with the assistance of third party experts, consist primarily of the removal of contaminated soil, treatment of contaminated groundwater in connection with dewatering efforts, performing environmental closure activities, constructing remedial systems and other related costs that are necessary when we develop new buildings at these sites. It is possible that we could incur additional environmental remediation costs in connection with these development projects. However, potential additional environmental costs cannot be reasonably estimated at this time and certain changes in estimates could occur as the site conditions, final project timing, design elements, actual soil conditions and other aspects of the projects, which may depend upon municipal and other approvals beyond the control of the Company, are determined. See Note 18 “Commitments and Contingencies” to our consolidated financial statements included in this report for additional information.
Other than the accrued environmental liabilities recorded in connection with certain of our development projects, we are not aware of any such condition, liability, or concern by any other means that would give rise to material environmental liabilities. However, our assessments may have failed to reveal all environmental conditions, liabilities, or compliance concerns; there may be material environmental conditions, liabilities, or compliance concerns that arose at a property after the review was completed; future laws, ordinances, or regulations
may impose material additional environmental liability; and environmental conditions at our properties may be affected in the future by tenants, third parties, or the condition of land or operations near our properties, such as the presence of underground storage tanks or migrating plumes. We cannot be certain that costs of future environmental compliance will not have an adverse effect on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Use of hazardous materials by some of our tenants. Some of our tenants handle hazardous substances and wastes on our properties as part of their routine operations. Environmental laws and regulations may subject these tenants, and potentially us, to liability resulting from such activities. We generally require our tenants in their leases to comply with these environmental laws and regulations and to indemnify us for liabilities arising out of or related to their operations and any non-compliance with environmental laws. As of December 31, 2021, other than routine cleaning materials and chemicals used in routine office operations, approximately 2-3% of our tenants handled hazardous substances and/or wastes on approximately 1-2% of the aggregate square footage of our properties as part of their business operations. These tenants are primarily involved in the life sciences business. The hazardous substances and wastes are primarily comprised of diesel fuel for emergency generators and small quantities of lab and light manufacturing chemicals including, but not limited to, alcohol, ammonia, carbon dioxide, cryogenic gases, dichlorophenol, methane, naturalyte acid, nitrogen, nitrous oxide, and oxygen which are routinely used by life science companies. We are not aware of any material noncompliance, liability, or claim relating to hazardous or toxic substances or petroleum products in connection with any of our properties, and management does not believe that on-going activities by our tenants will have a material adverse effect on our operations.
Costs related to government regulation and private litigation over environmental matters. Under applicable environmental laws and regulations, we may be liable for the costs of removal, remediation, or disposal of certain hazardous or toxic substances present or released on our properties. These laws could impose liability without regard to whether we are otherwise responsible for, or even knew of, the presence or release of the hazardous materials. Government investigations and remediation actions may have substantial costs, and the presence or release of hazardous substances on a property could result in governmental clean-up actions, personal injury actions, or similar claims by private plaintiffs.
Potential environmental liabilities may exceed our environmental insurance coverage limits, transactional indemnities or holdbacks. We carry what we believe to be commercially reasonable environmental insurance. Our environmental insurance policies are subject to various terms, conditions and exclusions. Similarly, in connection with some transactions we obtain environmental indemnities and holdbacks that may not be honored by the indemnitors, may be less than the resulting liabilities or may otherwise fail to address the liabilities adequately. Therefore, we cannot provide any assurance that our insurance coverage or transactional indemnities will be sufficient or that our liability, if any, will not have a material adverse effect on our financial condition, results of operations, cash flows, quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Litigation
On April 5, 2021, DIRECTV, LLC’s successor-in-interest filed suit in Los Angeles Superior Court against a subsidiary of the Company, seeking a declaratory judgment that the tenant properly exercised a contraction option as to approximately 200,000 rentable square feet of space out of a total of 684,411 rentable square feet leased by it at the properties located at 2240, 2250 and 2260 East Imperial Highway, El Segundo, California. The Company believes tenant did not validly exercise its termination option and therefore all such space remains subject to the terms of the lease through the September 30, 2027 scheduled lease expiration date. The Company intends to vigorously defend the litigation.
SUMMARY RISK FACTORS
The following section sets forth a summary of material factors that may adversely affect our business and operations. For a more extensive discussion of these factors, see “1A. Risk Factors” contained in this report.
•The ongoing COVID-19 pandemic, and restrictions intended to prevent its spread, could adversely impact our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
•Global market, economic and geopolitical conditions may adversely affect our business, results of operations, liquidity and financial condition and those of our tenants.
•All of our properties are located in California, greater Seattle, Washington and Austin, Texas and we may therefore be susceptible to adverse economic conditions and regulations, as well as natural disasters, in those areas.
•Our performance and the market value of our securities are subject to risks associated with our investments in real estate assets and with trends in the real estate industry.
•We depend upon significant tenants, and the loss of a significant tenant could adversely affect our financial condition, results of operations, ability to borrow funds and cash flows.
•Downturns in tenants’ businesses may reduce our revenues and cash flows.
•A large percentage of our tenants operate in a concentrated group of industries and downturns in these industries could adversely affect our financial condition, results of operations and cash flows.
•We may be unable to renew leases or re-lease available space.
•We are subject to governmental regulations that may affect the development, redevelopment and use of our properties.
•We may not be able to meet our debt service obligations.
•The covenants in the agreements governing the Operating Partnership’s unsecured revolving credit facility, unsecured term loan facility and note purchase agreements may limit our ability to make distributions to the holders of our common stock.
•A downgrade in our credit ratings could materially adversely affect our business and financial condition.
•We face significant competition, which may decrease the occupancy and rental rates of our properties.
•In order to maintain the quality of our properties and successfully compete against other properties, we must periodically spend money to maintain, repair and renovate our properties, which reduces our cash flows.
•Potential casualty losses, such as earthquake losses, may adversely affect our financial condition, results of operations and cash flows.
•We may be unable to complete acquisitions and successfully operate acquired properties.
•There are significant risks associated with property acquisition, development and redevelopment.
•Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial condition, and disputes between us and our co-venturers and could expose us to potential liabilities and losses.
•We own certain properties subject to ground leases and other restrictive agreements that limit our uses of the properties, restrict our ability to sell or otherwise transfer the properties and expose us to the loss of the properties if such agreements are breached by us, terminated or not renewed.
•We may invest in securities related to real estate, which could adversely affect our ability to pay dividends and distributions to our security holders.
•We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (IT) networks and related systems.
•An increase in interest rates could increase our interest costs on variable rate debt and new debt and could adversely affect our ability to refinance existing debt, conduct development, redevelopment and acquisition activity and recycle capital.
•The actual density of our undeveloped land holdings and/or any particular land parcel may not be consistent with our potential density estimates.
•Loss of our key personnel could harm our operations and financial performance and adversely affect the quoted trading price of our securities.
•Our growth depends on external sources of capital that are outside of our control and the inability to obtain capital on terms that are acceptable to us, or at all, could adversely affect our financial condition and results of operations.
•The Chairman of our board of directors and Chief Executive Officer has substantial influence over our affairs.
•Loss of the Company’s REIT status would have significant adverse consequences to us and the value of the Company’s common stock.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
The following section sets forth material factors that may adversely affect our business and operations. The following factors, as well as the factors discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Factors That May Influence Future Results of Operations” and other information contained in this report, should be considered in evaluating us and our business.
Risks Related to our Business and Operations
The ongoing COVID-19 pandemic, and restrictions intended to prevent its spread, could adversely impact our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders. The ongoing COVID-19 pandemic which continues to evolve, and restrictions intended to prevent its spread, have impacted the markets in which we conduct our business and where our tenants are located. All the states where we own properties and/or have development projects (i.e., California, Washington and Texas) initially reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, “shelter in place” rules, stay-at-home orders, density limitations, social distancing measures, restrictions on types of business that may continue to operate and/or restrictions on types of construction projects that may continue. Although most state governments and other authorities have lifted or reduced restrictions, they and others may reinstitute these measures in the future, or impose new, more restrictive measures, if the risks, or the perception of the risks, related to the COVID-19 pandemic worsen at any time, including as a result of the spread of new variants of the virus. If such restrictions remain in place for an extended period of time, we may experience reductions in rents from our tenants. Furthermore, although in certain cases, exceptions are available for essential retail, research and laboratory activities, essential building services, such as cleaning and maintenance, and certain essential construction projects, there can be no assurance that such exceptions will enable us to avoid adverse impacts on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders. For instance,
some of the activities of our parking, retail space and co-working tenants are not covered by the exceptions listed above and have been directly disrupted by the COVID-19 pandemic and restrictions intended to prevent its spread and their businesses, and accordingly their ability to make rental payments when due, could be adversely affected by decreased consumer confidence or longer-term changes in consumer demand as a result of the COVID-19 pandemic.
Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent, as well as working with certain tenants who have requested rent deferrals (particularly those occupying retail space), we can provide no assurance that such efforts or our efforts in future periods will be successful.
In addition, as a result of the spread of new variants of the virus, we may be required to continue to comply with “social distancing” at our properties and development projects and we may be subject to certain conditions, including requiring contractors to develop COVID-19 control, mitigation, and recovery plans and satisfy certain requirements before work can continue or commence, which may increase costs, perhaps substantially. We expect to comply with any state or local requirements. Our development projects could in the future be affected by moratoriums on construction. To the extent any city issues a moratorium, we may be subject to such a moratorium unless the applicable state or city grants an exclusion for these projects because certain of our development projects may qualify as essential construction projects.
The ongoing COVID-19 pandemic, including the spread of new variants of the virus and restrictions intended to prevent its spread, could have significant adverse impacts on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders in a variety of ways that are difficult to predict. Such adverse impacts could depend on, among other factors:
•the financial condition of our tenants - many of which are in the technology, media, healthcare, life sciences, entertainment and professional services industries - and their ability or willingness to pay rent in full on a timely basis;
•state, local, federal and industry-initiated efforts that may adversely affect landlords, including us, and their ability to collect rent and/or enforce remedies for the failure to pay rent;
•our need to defer or forgive rent and restructure leases with our tenants and our ability to do so on favorable terms or at all;
•significant job losses in the industries of our tenants, which may decrease demand for our office and retail space, causing market rental rates and property values to be negatively impacted;
•our ability to stabilize or lease-up our development projects, renew leases or re-lease available space in our proprieties on favorable terms or at all, including as a result of a general decrease in demand for our office and retail space, deterioration in the economic and market conditions in the markets in which we own properties or due to restrictions intended to prevent the spread of COVID-19 that frustrate our leasing activities;
•a severe and prolonged disruption and instability in the global financial markets, including the debt and equity capital markets, all of which have already experienced and may continue to experience significant volatility, or deterioration in credit and financing conditions, may affect our or our tenants’ ability to access capital necessary to fund our respective business operations or replace or renew maturing liabilities on a timely basis, on attractive terms or at all and may adversely affect the valuation of financial assets and liabilities, any of which could affect our and our tenants’ ability to meet liquidity and capital expenditure requirements;
•a refusal or failure of one or more lenders under our revolving credit facility to fund their respective financing commitments to us may affect our ability to access capital necessary to fund our business operations and to meet our liquidity and capital expenditure requirements;
•the ability of potential buyers of properties identified for potential future capital recycling transactions to obtain debt financing, which has been and may continue to be constrained for some potential buyers;
•a reduction in the values of our properties that could result in impairments or limit our ability to dispose of them at attractive prices or obtain debt financing secured by our properties;
•complete or partial shutdowns of one or more of our tenants’ manufacturing facilities or distribution centers, temporary or long-term disruptions in our tenants’ supply chains from local, national and international suppliers or delays in the delivery of products, services or other materials necessary for our tenants’ operations, which could force our tenants to reduce, delay or eliminate offerings of their products and services, reduce or eliminate their revenues and liquidity and/or result in their bankruptcy or insolvency;
•our ability to avoid delays, including as a result of disruptions in supply chains, or cost increases associated with building materials or construction services necessary for construction that could adversely impact our ability to continue or complete construction as planned, on budget or at all;
•our and our tenants’ ability to manage our respective businesses to the extent our and their management or personnel are impacted in significant numbers by the COVID-19 pandemic and are not willing, available or allowed to conduct work; and
•our and our tenants’ ability to ensure business continuity in the event our continuity of operations plan is not effective or improperly implemented or deployed during the COVID-19 pandemic.
The ongoing COVID-19 pandemic, including the spread of new variants and restrictions intended to prevent its spread, and the current financial, economic and capital markets environment and future developments in these and other areas present material risks and uncertainties with respect to our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders and could also have a material adverse effect on the market value of our securities. Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks set forth in this “Risk Factors” section.
Global market, economic and geopolitical conditions may adversely affect our business, results of operations, liquidity and financial condition and those of our tenants. Our business may be adversely affected by global market, economic and geopolitical conditions, including general global economic and political uncertainty and dislocations in the credit markets. If these conditions become more volatile or worsen, our and our tenant’s business, results of operations, liquidity and financial condition and those of our tenants may be adversely affected as a result of the following consequences, among others:
•the financial condition of our tenants, many of which are technology; life science and healthcare; finance, insurance and real estate; media and professional business and other service firms, may be adversely affected, which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or for other reasons;
•significant job losses in the financial and professional services industries may occur, which may decrease demand for our office space, causing market rental rates and property values to be negatively impacted;
•our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from our acquisition and development activities and increase our future interest expense;
•reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; and
•one or more lenders under the Operating Partnership’s unsecured revolving credit facility could refuse to fund their financing commitment to us or could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all.
All of our properties are located in California, greater Seattle, Washington and Austin, Texas and we may therefore be susceptible to adverse economic conditions and regulations, as well as natural disasters, in those areas. Because all of our properties are concentrated in California, greater Seattle, Washington and Austin, Texas, we may be exposed to greater economic risks than if we owned a more geographically dispersed portfolio. Further, within California, our properties are concentrated in Greater Los Angeles, San Diego County and the San Francisco Bay Area, exposing us to risks associated with those specific areas. We are susceptible to adverse developments in the economic and regulatory environments of California and greater Seattle (such as periods of economic slowdown or recession, business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation and other factors), as well as adverse weather conditions and natural disasters that occur in those areas (such as earthquakes, wind, landslides, droughts, fires, floods and other events). For example, many of our assets are in zones that have been impacted by drought and, as such, face the risk of increased water costs and potential fines and/or penalties for high consumption. In addition, California is also regarded as more litigious and more highly regulated and taxed than many other states, which may reduce demand for office space in California.
Any adverse developments in the economy or real estate market in California and the surrounding region, or in greater Seattle or Austin, Texas or any decrease in demand for office space resulting from the California or greater Seattle or Austin, Texas regulatory or business environment could impact our ability to generate revenues sufficient to meet our operating expenses or other obligations, which would adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
Our performance and the market value of our securities are subject to risks associated with our investments in real estate assets and with trends in the real estate industry. Our economic performance and the value of our real estate assets and, consequently the market value of the Company’s securities, are subject to the risk that our properties may not generate revenues sufficient to meet our operating expenses or other obligations. A deficiency of this nature would adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
Events and conditions applicable to owners and operators of real estate that are beyond our control and could impact our economic performance and the value of our real estate assets may include:
•local oversupply or reduction in demand for office, mixed-use or other commercial space, which may result in decreasing rental rates and greater concessions to tenants;
•inability to collect rent from tenants;
•vacancies or inability to rent space on favorable terms or at all;
•inability to finance property development and acquisitions on favorable terms or at all;
•increased operating costs, including insurance premiums, utilities and real estate taxes;
•costs of complying with changes in governmental regulations;
•the relative illiquidity of real estate investments;
•declines in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing;
•changing submarket demographics;
•changes in space utilization by our tenants due to technology, economic conditions and business culture;
•the development of harmful mold or other airborne toxins or contaminants that could damage our properties or expose us to third-party liabilities; and
•property damage resulting from seismic activity or other natural disasters.
We depend upon significant tenants, and the loss of a significant tenant could adversely affect our financial condition, results of operations, ability to borrow funds and cash flows. As of December 31, 2021, our 15 largest tenants represented approximately 47.4% of total annualized base rental revenues. See further discussion on the composition of our tenants by industry and our largest tenants under “Item 2. Properties -Significant Tenants.”
Our financial condition, results of operations, ability to borrow funds and cash flows would be adversely affected if any of our significant tenants fails to renew its lease(s), renew its lease(s) on terms less favorable to us, or becomes bankrupt or insolvent or otherwise unable to satisfy its lease obligations.
Downturns in tenants’ businesses may reduce our revenues and cash flows. For the year ended December 31, 2021, we derived approximately 99.4% of our revenues from rental income. A tenant may experience a downturn in its business, which may weaken its financial condition and result in its failure to make timely rental payments or result in defaults under our leases. In the event of default by a tenant, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.
The bankruptcy or insolvency of a major tenant also may adversely affect the income produced by our properties. If any tenant becomes a debtor in a case under federal bankruptcy law, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might permit the tenant to reject and terminate its lease with us. Our claim against the tenant for unpaid and future rent could be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. Therefore, our claim for unpaid rent would likely not be paid in full. Any losses resulting from the bankruptcy of any of our existing tenants could adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
A large percentage of our tenants operate in a concentrated group of industries and downturns in these industries could adversely affect our financial condition, results of operations and cash flows. As of December 31, 2021, as a percentage of our annualized base rental revenue for the stabilized portfolio, 56% of our tenants operated in the technology industry, 17% in the life science and health care industries, 10% in the media industry, 7% in the finance, insurance and real estate industries, 4% in the professional, business and other services industries and 6% in other industries. As we continue our development and potential acquisition activities in markets populated by knowledge and creative based tenants in the technology and media industries, our tenant mix could become more concentrated, further exposing us to risks associated with those industries. For a further discussion of the composition of our tenants by industry, see “Item 2. Properties -Significant Tenants.” An economic downturn in any of these industries, or in any industry in which a significant number of our tenants currently or may in the future operate, could negatively impact the financial condition of such tenants and cause them to fail to make timely rental payments or default on lease obligations, fail to renew their leases or renew their leases on terms less favorable to us, become bankrupt or insolvent, or otherwise become unable to satisfy their obligations to us. As a result, a downturn in an industry in which a significant number of our tenants operate could adversely affect our financial conditions, result of operations and cash flows.
We may be unable to renew leases or re-lease available space. Most of our income is derived from the rent earned from our tenants. We had office space representing approximately 8.1% of the total square footage of our stabilized office properties that was not occupied as of December 31, 2021. In addition, leases representing approximately 5.8% and 11.1% of the leased rentable square footage of our properties are scheduled to expire in 2022 and 2023, respectively. Of the leases scheduled to expire in 2022 and 2023, 27% and 1% of the rentable square footage scheduled to expire was re-leased, respectively, as of December 31, 2021. Above market rental rates on some of our properties may force us to renew or re-lease expiring leases at rates below current lease rates. We cannot provide any assurance that leases will be renewed, available space will be re-leased or that our rental rates
will be equal to or above the current rental rates. If the average rental rates for our properties decrease, existing tenants do not renew their leases, or available space is not re-leased, our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders could be adversely affected. For additional information on our scheduled lease expirations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Factors That May Influence Future Results of Operations.”
We are subject to governmental regulations that may affect the development, redevelopment and use of our properties. Our properties are subject to regulation under federal laws, such as the Americans with Disabilities Act of 1990 (the “ADA”), pursuant to which all public accommodations must meet federal requirements related to access and use by disabled persons, and state and local laws addressing earthquake, fire and life safety requirements. Although we believe that our properties substantially comply with requirements under applicable governmental regulations, none of our properties have been audited or investigated for compliance by any regulatory agency. If we were not in compliance with material provisions of the ADA or other regulations affecting our properties, we might be required to take remedial action, which could include making modifications or renovations to our properties. Federal, state, or local governments may also enact future laws and regulations that could require us to make significant modifications or renovations to our properties. If we were to incur substantial costs to comply with the ADA or any other regulations, our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders could be adversely affected.
Our properties are subject to land use rules and regulations that govern our development, redevelopment and use of our properties, such as Title 24 of the California Code of Regulations (“Title 24”), which prescribes building energy efficiency standards for residential and nonresidential buildings in the State of California. If we were not in compliance with material provisions of Title 24 or other regulations affecting our properties, we might be required to take remedial action, which could include making modifications or renovations to our properties. Changes in the existing land use rules and regulations and approval process that restrict or delay our ability to develop, redevelop or use our properties (such as potential restrictions on the use and/or density of new developments, water use and other uses and activities) or that prescribe additional standards could have an adverse effect on our financial position, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
We face significant competition, which may decrease the occupancy and rental rates of our properties. We compete with several developers, owners and operators of office, undeveloped land and other commercial real estate, including mixed-use and residential real estate, many of which own properties similar to ours in the same submarkets in which our properties are located but which have lower occupancy rates than our properties. Therefore, our competitors have an incentive to decrease rental rates until their available space is leased. If our competitors offer space at rental rates below the rates currently charged by us for comparable space, we may be pressured to reduce our rental rates below those currently charged in order to retain tenants when our tenant leases expire. As a result, our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders may be adversely affected.
In order to maintain the quality of our properties and successfully compete against other properties, we must periodically spend money to maintain, repair and renovate our properties, which reduces our cash flows. If our properties are not as attractive to current and prospective tenants in terms of rent, services, condition or location as properties owned by our competitors, we could lose tenants or suffer lower rental rates. As a result, we may from time to time be required to make significant capital expenditures to maintain the competitiveness of our properties. There can be no assurances that any such expenditure would result in higher occupancy or higher rental rates, or deter existing tenants from relocating to properties owned by our competitors.
Potential casualty losses, such as earthquake losses, may adversely affect our financial condition, results of operations and cash flows. We carry comprehensive liability, fire, extended coverage, rental loss, and terrorism insurance covering all of our properties. Management believes the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for generally uninsurable losses such as loss from riots or acts of God. In addition, all of our West Coast properties
are located in earthquake-prone areas. We carry earthquake insurance on our properties in an amount and with deductibles that management believes are commercially reasonable. However, the amount of our earthquake insurance coverage may not be sufficient to cover losses from earthquakes. We may also discontinue earthquake insurance on some or all of our properties in the future if the cost of premiums for earthquake insurance exceeds the value of the coverage discounted for the risk of loss. If we experience a loss that is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. Further, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if the properties were irreparable.
We may not be able to rebuild our existing properties to their existing specifications if we experience a substantial or comprehensive loss of such properties. In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications. Further, reconstruction or improvement of such property could potentially require significant upgrades to meet zoning and building code requirements or be subject to environmental and other legal restrictions.
Our business is subject to risks associated with climate change and our sustainability strategies. Climate change could trigger extreme weather and changes in precipitation, temperature, and air quality, all of which may result in physical damage to, or a decrease in demand for, our properties located in the areas affected by these conditions. Should the impact of climate change be severe or occur for lengthy periods of time, our financial condition or results of operations would be adversely affected.
Recognizing the importance of climate change and reducing our greenhouse gas impact on the environment, as part of our sustainability strategies, we achieved carbon neutral operations in 2020 per the commitment we made in 2018. This means that the entirety of our scope 1 and scope 2 emissions are now offset through a combination of energy efficiency measures and both onsite and offsite renewables. Scope 1 emissions represent those produced by onsite natural gas consumption procured by us, and Scope 2 emissions represent those produced by onsite electricity consumption procured by us. Our own efforts to reduce our greenhouse gas impact on the environment and/or comply with changes in federal and state laws and regulations on climate change could result in significant capital expenditures to improve the energy efficiency of our existing properties or properties we may acquire. Changes to such law and regulations could also result in increased operating costs at our properties (for example, through increased utility costs). Moreover, if we are unable to maintain carbon neutral operations or comply with laws and regulations on climate change, our reputation among our tenants and investors may be damaged and we may incur fines and/or penalties.
Our properties are located in West Coast markets of the United States and in Austin, Texas. To the extent that climate change impacts changes in weather patterns, our markets could experience increases in extreme weather and rising sea levels. For example, many of our assets are in zones that have been impacted by drought and, as such, face the risk of increased water costs and potential fines and/or penalties for high consumption. We endeavor to understand these risks through the use of climate change modeling analysis. We mitigate risks uncovered through this analysis through, for example, comprehensive, proactive water reduction efforts throughout our portfolio, including domestic fixture upgrades, cooling tower optimizations, a comprehensive leak detection program and irrigation systems retrofits. We also incorporate green lease language into 100% of our new leases, and the majority of our leases also include a cost recovery clause for resource-efficiency related capital expenditures, which aim to align our and our tenant’s interests on energy, water and waste efficiency. In addition, we are building our current development projects to LEED specifications, and all of our office development projects are now designed to achieve LEED certification, either LEED Platinum or Gold. However, there can be no assurances that we will successfully mitigate the risk of increased water costs and potential fines and/or penalties for high consumption or that we will be able to fully recoup any capital expenditures we incur in connection with our green leases. Moreover, there can be no assurance that our development projects will be able to achieve the anticipated LEED certifications or that any of our sustainability strategies will result in reduced operating costs, higher occupancy or higher rental rates or deter our existing tenants from relocating to properties owned by our competitors. Over time, these conditions could result in declining demand for space at our properties or in our inability to operate the buildings as currently intended or at all. Climate change may also have indirect effects on our business by increasing the cost of, or decreasing the availability of, property insurance on terms we find acceptable or at all, or by increasing the cost of energy or water. There can be no assurance that climate change will not have a material adverse effect on our properties, operations or business.
We are subject to environmental and health and safety laws and regulations, and any costs to comply with, or liabilities arising under, such laws and regulations could be material. As an owner, operator, manager, acquirer and developer of real properties, we are subject to environmental and health and safety laws and regulations. Certain of these laws and regulations impose joint and several liability, without regard to fault, for investigation and clean-up costs on current and former owners and operators of real property and persons who have disposed of or released hazardous substances into the environment. At some of our properties, there are asbestos-containing materials, or tenants routinely handle hazardous substances as part of their operations. In addition, historical operations and conditions, including the presence of underground storage tanks, various site uses that involved hazardous substances, the landfilling of hazardous substances and solid waste, and migration of contamination from other sites, have caused soil or groundwater contamination at or near some of our properties. Although we believe that the prior owners of the affected properties or other persons may have conducted remediation of known contamination at many of these properties, not all such contamination has been remediated, further clean-up or environmental closure activities at certain of these properties is or may be required, and residual contamination could pose environmental, health, and safety risks if not appropriately addressed. We may need to investigate or remediate contaminated soil, soil gas, landfill gas, and groundwater, and we may also need to conduct landfill closure and post-closure activities, including, for example, the implementation of groundwater and methane monitoring systems and impervious cover, and the costs of such work could exceed projected or budgeted amounts. To protect the health and safety of site occupants and others, we may be required to implement and operate safeguards, including, for example, vapor intrusion mitigation systems and building protection systems to address methane. We may need to modify our methods of construction or face increased construction costs as a result of environmental conditions, and we may face obligations under agreements with governmental authorities with respect to the management of such environmental conditions. If releases from our sites migrate offsite, or if our site redevelopment activities cause or contribute to a migration of hazardous substances, neighbors or others could make claims against us, such as for property damage, personal injury, cost recovery, or natural resources damage. As of December 31, 2021, we had accrued environmental remediation liabilities of approximately $75.2 million recorded on our consolidated balance sheets in connection with certain of our in-process and future development projects. The accrued environmental remediation liabilities represent the costs we estimate we will incur when we commence development at various development acquisition sites. These estimates, which we developed with the assistance of third party experts, consist primarily of the removal of contaminated soil, performing environmental closure activities, construction remedial systems, and other related costs since we are required to dispose of any existing contaminated soil, and sometimes perform other environmental closure or remedial activities, when we develop new office properties at these sites. It is possible that we could incur additional environmental remediation costs in connection with future development projects. However, potential additional environmental costs cannot be reasonably estimated at this time and certain changes in estimates could occur as the site conditions, final project timing, design elements, actual soil conditions and other aspects of the projects, which may depend upon municipal and other approvals beyond the control of the Company, are determined. Unknown or unremediated contamination or compliance with existing or new environmental or health and safety laws and regulations could require us to incur costs or liabilities that could be material. See “Item 1. Business -Environmental Regulations and Potential Liabilities” and Note 18 “Commitments and Contingencies” to our consolidated financial statements included in this report.
We may be unable to complete acquisitions and successfully operate acquired properties. We continually evaluate the market of available properties and may continue to acquire office or mixed-use properties and undeveloped land when strategic opportunities exist. Our ability to acquire properties on favorable terms and successfully operate them is subject to various risks, including the following:
•we may potentially be unable to acquire a desired property because of competition from other real estate investors with significant capital, including both publicly traded and private REITs, institutional investment funds and other real estate investors;
•even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price;
•even if we enter into agreements for the acquisition of a desired property, we may be unable to complete such acquisitions because they remain subject to customary conditions to closing, including the completion of due diligence investigations to management’s satisfaction;
•we may be unable to finance acquisitions on favorable terms or at all;
•we may spend more than budgeted amounts in operating costs or to make necessary improvements or renovations to acquired properties;
•we may lease acquired properties at economic lease terms different than projected;
•we may acquire properties that are subject to liabilities for which we may have limited or no recourse; and
•we may be unable to complete an acquisition after making a nonrefundable deposit and incurring certain other acquisition-related costs.
If we cannot finance property acquisitions on favorable terms or operate acquired properties to meet financial expectations, our financial condition, results of operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders could be adversely affected.
There are significant risks associated with property acquisition, development and redevelopment. We may be unable to successfully complete and operate acquired, developed and redeveloped properties, and it is possible that:
•we may be unable to lease acquired, developed or redeveloped properties on lease terms projected at the time of acquisition, development or redevelopment or within budgeted timeframes;
•the operating expenses at acquired, developed or redeveloped properties may be greater than projected at the time of acquisition, development or redevelopment, resulting in our investment being less profitable than we expected;
•we may not commence or complete development or redevelopment properties on schedule or within budgeted amounts or at all;
•we may not be able to develop or redevelop the estimated square footage and other features of our development and redevelopment properties;
•we may suspend development or redevelopment projects after construction has begun due to changes in economic conditions or other factors, and this may result in the write-off of costs, payment of additional costs or increases in overall costs when the development or redevelopment project is restarted;
•we may expend funds on and devote management’s time to acquisition, development or redevelopment properties that we may not complete and as a result we may lose deposits or fail to recover expenses already incurred;
•we may encounter delays or refusals in obtaining all necessary zoning, land use, and other required entitlements, and building, occupancy, and other required governmental permits and authorizations;
•we may encounter delays or unforeseen cost increases associated with building materials or construction services resulting from trade tensions, disruptions, tariffs, duties or restrictions or an outbreak of an epidemic or pandemic;
•we may encounter delays, refusals, unforeseen cost increases and other impairments resulting from third-party litigation; and
•we may fail to obtain the financial results expected from properties we acquire, develop or redevelop.
If one or more of these events were to occur in connection with our acquired properties, undeveloped land, or development or redevelopment properties under construction, we could be required to recognize an impairment loss.
These events could also have an adverse impact on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
While we historically have acquired, developed and redeveloped office properties in California markets, over the past few years we have acquired properties in greater Seattle, where we currently have nine stabilized office properties, one development project in the tenant improvement phase and one future development project, and on June 22, 2021, we completed the acquisition of a development project in the tenant improvement phase in Austin, Texas. We may in the future acquire, develop or redevelop properties for other uses and expand our business to other geographic regions where we expect the development or acquisition of property to result in favorable risk-adjusted returns on our investment. Presently, we do not possess the same level of familiarity with Austin and other markets outside of California, which could adversely affect our ability to acquire, develop or redevelop properties, or to achieve expected performance and amplify our exposure to the other risks notes above.
We face risks associated with the development of mixed-use commercial properties. We are currently developing, and in the future may develop, properties either alone or through joint ventures that are known as “mixed-use” developments. This means that in addition to the development of office space, the project may also include space for residential, retail or other commercial purposes. Generally, we have less experience developing and managing non-office/life science real estate. As a result, if a development project includes non-office/life science space, we may develop that space ourselves or seek to partner with a third-party developer with more experience. If we do not partner with such a developer, or if we choose to develop the space ourselves, we would be exposed to specific risks associated with the development and ownership of non-office/life science real estate. In addition, if we elect to participate in the development through a joint venture, we may be exposed to the risks associated with the failure of the other party to complete the development as expected, which could require that we identify another joint venture partner and/or complete the project ourselves (including providing any necessary financing). In the case of residential properties, these risks include competition for prospective tenants from other operators whose properties may be perceived to offer a better location or better amenities or whose rent may be perceived as a better value given the quality, location and amenities that the tenant seeks. With residential properties, we will also compete against apartments, condominiums and single-family homes that are for sale or rent. Because we have less experience with residential properties, we retain third parties to manage these properties. As such, we are dependent on these third parties and their key personnel to provide services to us, and we may not find a suitable replacement if the management agreement is terminated, or if key personnel leave or otherwise become unavailable to us.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers' financial condition, and disputes between us and our co-venturers and could expose us to potential liabilities and losses. In addition to the 100 First LLC and 303 Second LLC strategic ventures and the Redwood City Partners, LLC venture, we may continue to co-invest in the future with third parties through partnerships, joint ventures or other entities, or through acquiring non-controlling interests in, or sharing responsibility for, managing the affairs of a property, partnership, joint venture or other entity, which may subject us to risks that may not be present with other methods of ownership, including the following:
•we would not be able to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity, which would allow for impasses on decisions that could restrict our ability to sell or transfer our interests in such entity or such entity’s ability to transfer or sell its assets;
•partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions, which could delay construction or development of a property or increase our financial commitment to the partnership or joint venture;
•partners or co-venturers may pursue economic or other business interests, policies or objectives that are competitive or inconsistent with ours;
•if we become a limited partner or non-managing member in any partnership or limited liability company, and such entity takes or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity;
•disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business; and
•we may, in certain circumstances, be liable for the actions of our third-party partners or co-venturers.
We own certain properties subject to ground leases and other restrictive agreements that limit our uses of the properties, restrict our ability to sell or otherwise transfer the properties and expose us to the loss of the properties if such agreements are breached by us, terminated or not renewed. As of December 31, 2021, we owned fourteen office buildings, one of which is a 734,000 square foot development project in the tenant improvement phase, located on various land parcels and in various regions, which we lease individually on a long-term basis. As of December 31, 2021, we had approximately 1.6 million aggregate rentable square feet, or 10.1% of our total stabilized portfolio, of rental space located on these leased parcels and we may in the future invest in additional properties that are subject to ground leases or other similar restrictive arrangements. Many of these ground leases and other restrictive agreements impose significant limitations on our uses of the subject property, restrict our ability to sell or otherwise transfer our interests in the property or restrict our leasing of the property. These restrictions may limit our ability to timely sell or exchange the properties, impair the properties’ value or negatively impact our ability to find suitable tenants for the properties. In addition, if we default under the terms of any particular lease, we may lose the ownership rights to the property subject to the lease. Upon expiration of a lease, we may not be able to renegotiate a new lease on favorable terms, if at all. The loss of the ownership rights to these properties or an increase of rental expense could have an adverse effect on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
Real estate assets are illiquid, and we may not be able to sell our properties when we desire. Our investments in our properties are relatively illiquid, limiting our ability to sell our properties quickly in response to changes in economic or other conditions. In addition, the Code generally imposes a 100% prohibited transaction tax on the Company on profits derived from sales of properties held primarily for sale to customers in the ordinary course of business, which effectively limits our ability to sell properties other than on a selected basis. These restrictions on our ability to sell our properties could have an adverse effect on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
We may invest in securities related to real estate, which could adversely affect our ability to pay dividends and distributions to our security holders. We may purchase securities issued by entities that own real estate and may, in the future, also invest in mortgages. In general, investments in mortgages are subject to several risks, including:
•borrowers may fail to make debt service payments or pay the principal when due;
•the value of the mortgaged property may be less than the principal amount of the mortgage note securing the property; and
•interest rates payable on the mortgages may be lower than our cost for the funds used to acquire these mortgages.
Owning these securities may not entitle us to control the ownership, operation and management of the underlying real estate. In addition, we may have no control over the distributions with respect to these securities, which could adversely affect our ability to pay dividends and distributions to our security holders.
We face risks associated with short-term liquid investments. From time to time, we have significant cash balances that we invest in a variety of short-term investments that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. These investments may include (either directly or indirectly):
•direct obligations issued by the U.S. Treasury;
•obligations issued or guaranteed by the U.S. government or its agencies;
•taxable municipal securities;
•obligations (including certificates of deposits) of banks and thrifts;
•commercial paper and other instruments consisting of short-term U.S. dollar denominated obligations issued by corporations and banks;
•repurchase agreements collateralized by corporate and asset-backed obligations;
•both registered and unregistered money market funds; and
•other highly rated short-term securities.
Investments in these securities and funds are not insured against loss of principal. Under certain circumstances we may be required to redeem all or part of our investment, and our right to redeem some or all of our investment may be delayed or suspended. In addition, there is no guarantee that our investments in these securities or funds will be redeemable at par value. A decline in the value of our investment or a delay or suspension of our right to redeem may have a material adverse effect on our results of operations or financial condition.
Our property taxes could increase due to reassessment or property tax rate changes. We are required to pay state and local taxes on our properties. In addition, the real property taxes on our properties may increase as our properties are reassessed by taxing authorities or as property tax rates change. For example, under a current California law commonly referred to as “Proposition 13,” property tax reassessment generally occurs as a result of a “change in ownership” of a property, as specifically defined for purposes of those rules. Because the property taxing authorities may not determine whether there has been a “change in ownership” or the actual reassessed value of a property for a period of time after a transaction has occurred, we may not know the impact of a potential reassessment for a considerable amount of time following a particular transaction or construction of a new property. Therefore, the amount of property taxes we are required to pay could increase substantially from the property taxes we currently pay or have paid in the past, including on a retroactive basis. In addition, from time to time voters and lawmakers have announced initiatives to repeal or amend Proposition 13 to eliminate its application to commercial property and/or introduce split tax roll legislation. Such initiatives, if successful, would increase the assessed value and/or tax rates applicable to commercial property in California, including our properties. An increase in the assessed value of our properties or our property tax rates could adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting. The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting that may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, or otherwise adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (IT) networks and related systems. We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign
governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems), and, in some cases, may be critical to the operations of certain of our tenants.
The Audit Committee of our Board of Directors oversees our risk management processes related to cybersecurity. It meets no less frequently than annually with our IT personnel and senior management to discuss recent trends in cyber risks and our strategy to defend our IT networks, business and building systems and information against cyber attacks and intrusions. Under the oversight of the Audit Committee, we implemented our cybersecurity standards and overall program by reference to the National Institute of Standards and Technology (“NIST”) Cyber Security Framework. As part of our overall cybersecurity program:
•we have implemented a continuous improvement methodology including, but not limited to, ongoing enhancements to processes and controls, quarterly control reviews, annual policy reviews, annual penetration tests and annual investments in our security infrastructure;
•we annually assess our cybersecurity program against the NIST framework and periodically engage an outside consulting firm to conduct the assessment; and
•we conduct regular cybersecurity awareness training exercises for our employees and primary on-site providers, including ongoing phishing simulations to raise awareness of spoofed or manipulated electronic communications and other critical security threats.
However, there can be no assurance that our efforts to maintain the security and integrity of these types of IT networks and related systems will be effective or that attempted security breaches or disruptions would not be successful or damaging. Like other businesses, we have been and expect to continue to be subject to unauthorized access, mishandling or misuse, computer viruses or malware, cyber attacks and other events of varying degrees. Historically, these events have not adversely affected our operations or business and were not individually or in the aggregate material.
However, in the future, events such as these or other significant disruptions involving our IT networks and related systems could, among other things:
•result in unauthorized access to, destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or others, including personally identifiable and account information that could be used to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
•result in unauthorized access to or changes to our financial accounting and reporting systems and related data;
•result in the theft of funds;
•result in our inability to maintain building systems relied on by our tenants;
•require significant management attention and resources to remedy any damage that results;
•subject us to regulatory penalties or claims for breach of contract, damages, credits, penalties or terminations of leases or other agreements; or
•damage our reputation among our tenants and investors.
These events could have an adverse impact on our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
The actual density of our undeveloped land holdings and/or any particular land parcel may not be consistent with our potential density estimates. As of December 31, 2021, we estimate that our six future development sites, representing approximately 59 gross acres of undeveloped land, provide more than 5.5 million square feet of potential density. We caution you not to place undue reliance on the potential density estimates for our undeveloped land holdings and/or any particular land parcel because they are based solely on our estimates, using data currently available to us, and our business plans as of December 31, 2021. The actual density of our undeveloped land holdings and/or any particular land parcel may differ substantially from our estimates based on numerous factors, including our inability to obtain necessary zoning, land use and other required entitlements, as well as building, occupancy and other required governmental permits and authorizations, and changes in the entitlement, permitting and authorization processes that restrict or delay our ability to develop, redevelop or use undeveloped land holdings at anticipated density levels. Moreover, we may strategically choose not to develop, redevelop or use our undeveloped land holdings to their maximum potential density or may be unable to do so as a result of factors beyond our control, including our ability to obtain capital on terms that are acceptable to us, or at all, to fund our development and redevelopment activities. We can provide no assurance that the actual density of our undeveloped land holdings and/or any particular land parcel will be consistent with our potential density estimates. For additional information on our development program, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Factors That May Influence Future Results of Operations.”
Loss of our key personnel could harm our operations and financial performance and adversely affect the quoted trading price of our securities. The leadership and performance of John Kilroy, the Chairman of our board of directors and our Chief Executive Officer, plays a key role in the success of the Company. He is integral to the Company’s success for many reasons, including that he has a strong national and regional reputation in our industry and investment community. In addition, he has significant relationships with investors, lenders, tenants and industry personnel, which benefit the Company.
If workers providing services at our properties were to engage in a strike or other work stoppage or interruption, our business, results of operations, financial condition and liquidity could be materially adversely affected. Although we believe that our relations with our service providers are good, if disputes with our service providers arise or if workers providing services at our properties engage in a strike or other work stoppage or interruption, we could experience a significant disruption of, or inefficiencies in, our operations or at our properties or incur higher labor costs, which could have a material adverse effect on our business, results of operations, financial condition and liquidity.
Risks Related to Our Indebtedness
We may not be able to meet our debt service obligations. As of December 31, 2021, we had approximately $4.1 billion aggregate principal amount of indebtedness, of which $5.6 million in principal payments will be paid during the year ended December 31, 2022. Our total debt at December 31, 2021 represented 34.4% of our total market capitalization (which we define as the aggregate of our long-term debt and the market value of the Company’s common stock and the Operating Partnership’s common units of limited partnership interest, or common units, based on the closing price per share of the Company’s common stock as of that date). For the calculation of our market capitalization and additional information on debt maturities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources of the Company -Capitalization” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources of the Operating Partnership -Liquidity Uses.”
Our ability to make payments on and to refinance our indebtedness and to fund our operations, working capital, and capital expenditures, depends on our ability to generate cash flow in the future. Our cash flow is subject to general economic, industry, financial, competitive, operating, legislative, regulatory, environmental and other factors, many of which are beyond our control.
The instruments and agreements governing some of our outstanding indebtedness (including borrowings under the Operating Partnership’s unsecured revolving credit facility and note purchase agreements) contain provisions that require us to repurchase for cash or repay that indebtedness under specified circumstances or upon the occurrence of specified events (including upon the acquisition by any person or group of more than a specified percentage of the aggregate voting power of all the Company’s issued and outstanding voting stock, upon certain
changes in the composition of a majority of the members of the Company’s board of directors, if the Company or one of its wholly-owned subsidiaries ceases to be the sole general partner of the Operating Partnership or if the Company ceases to own, directly or indirectly, at least 60% of the voting equity interests in the Operating Partnership), and our future debt agreements and debt securities may contain similar provisions or may require that we repay or repurchase or offer to repurchase for cash the applicable indebtedness under specified circumstances or upon the occurrence of specified changes of control of the Company or the Operating Partnership or other events. We may not have sufficient funds to pay our indebtedness when due (including upon any such required repurchase, repayment or offer to repurchase), and we may not be able to arrange for the financing necessary to make those payments or repurchases on favorable terms or at all. In addition, our ability to make required payments on our indebtedness when due (including upon any such required repurchase, repayment or offer to repurchase) may be limited by the terms of other debt instruments or agreements. Our failure to pay amounts due in respect of any of our indebtedness when due would generally constitute an event of default under the instrument governing that indebtedness, which could permit the holders of that indebtedness to require the immediate repayment of that indebtedness in full and, in the case of secured indebtedness, could allow them to sell the collateral securing that indebtedness and use the proceeds to repay that indebtedness. Moreover, any acceleration of or default in respect of any of our indebtedness could, in turn, constitute an event of default under other debt instruments or agreements, thereby resulting in the acceleration and required repayment of that other indebtedness. Any of these events could materially adversely affect our ability to make payments of principal and interest on our indebtedness when due and could prevent us from making those payments altogether.
We cannot assure you that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs, including cash distributions to stockholders necessary to maintain the Company’s REIT qualification. Additionally, if we incur additional indebtedness in connection with future acquisitions or for any other purpose, our debt service obligations could increase.
We may need to refinance all or a portion of our indebtedness on or before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:
•our financial condition, results of operations and market conditions at the time; and
•restrictions in the agreements governing our indebtedness.
As a result, we may not be able to refinance our indebtedness on commercially reasonable terms or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancings or proceeds of asset sales or other sources of cash are not available to us, we may not have sufficient cash to enable us to meet all of our obligations. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity financing, delaying capital expenditures, or entering into strategic acquisitions and alliances. Any of these events or circumstances could have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders. In addition, foreclosures could create taxable income without accompanying cash proceeds, which could require us to borrow or sell assets to raise the funds necessary to pay amounts due on our indebtedness and to meet the REIT distribution requirements discussed below, even if such actions are not on favorable terms.
The covenants in the agreements governing the Operating Partnership’s unsecured revolving credit facility and note purchase agreements may limit our ability to make distributions to the holders of our common stock. The Operating Partnership’s $1.1 billion unsecured revolving credit facility and note purchase agreements contain financial covenants that could limit the amount of distributions payable by us on our common stock and any preferred stock we may issue in the future. We rely on cash distributions we receive from the Operating Partnership to pay distributions on our common stock and any preferred stock we may issue in the future and to satisfy our other cash needs. The agreements governing the unsecured revolving credit facility and the note purchase agreements provide that, if the Operating Partnership fails to pay any principal of, or interest on, any borrowings or other amounts payable under such agreement when due or during any other event of default under such revolving credit facility and the unsecured private placement notes, the Operating Partnership may make only those partnership distributions that result in distributions to us in an amount sufficient to permit us to make distributions to our
stockholders that we reasonably believe are necessary to (a) maintain our qualification as a REIT for federal and state income tax purposes and (b) avoid the payment of federal or state income or excise tax. Any limitation on our ability to make distributions to our stockholders, whether as a result of these provisions in the unsecured revolving credit facility, the note purchase agreements or otherwise, could have a material adverse effect on the market value of our common stock.
A downgrade in our credit ratings could materially adversely affect our business and financial condition. The credit ratings assigned to the Operating Partnership’s debt securities and any preferred stock we may issue in the future could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any rating will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Moreover, these credit ratings do not apply to our common stock and are not recommendations to buy, sell or hold our common stock or any other securities. If any of the credit rating agencies that have rated the Operating Partnership’s debt securities or any preferred stock we may issue in the future downgrades or lowers its credit rating, or if any credit rating agency indicates that it has placed any such rating on a so-called “watch list” for a possible downgrading or lowering or otherwise indicates that its outlook for that rating is negative, it could have a material adverse effect on our costs and availability of capital, which could in turn have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
An increase in interest rates would increase our interest costs on variable rate debt and new debt and could adversely affect our ability to refinance existing debt, conduct development, redevelopment and acquisition activity and recycle capital. As of December 31, 2021, we had a $1.1 billion unsecured revolving credit facility bearing interest at a variable rate on any amount drawn and outstanding. There was no amount outstanding on the revolving credit facility at December 31, 2021. However, we may borrow on the revolving credit facility or incur additional variable rate debt in the future. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. If the Federal Reserve Board increases the federal funds rate, overall interest rates will likely rise. Interest rate increases would increase our interest costs for any variable rate debt and for new debt, which could in turn make the financing of any development, redevelopment and acquisition activity costlier. Rising interest rates could also limit our ability to refinance existing debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to recycle capital and our portfolio promptly in response to changes in economic or other conditions.
We manage a portion of our exposure to interest rate risk by accessing debt with staggered maturities, and we may in the future mitigate this risk through the use of derivative instruments, including interest rate swap agreements or other interest rate hedging agreements, including swaps, caps and floors. While these agreements are intended to lessen the impact of rising interest rates on us, they also expose us to the risks that counter parties may fail to honor their obligations, that we could incur significant costs associated with the settlement of these agreements, that the amount of income we earn from hedging transactions may be limited by federal tax provisions governing REITs, that these agreements may cause us to pay higher interest rates on our debt obligations than would otherwise be the case and that underlying transactions could fail to qualify as highly-effective cash flow hedges under the accounting guidance. As a result, failure to hedge effectively against interest rate risk, if we choose to engage in such activities, could adversely affect our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
Risks Related to Our Organizational Structure
Our growth depends on external sources of capital that are outside of our control and the inability to obtain capital on terms that are acceptable to us, or at all, could adversely affect our financial condition and results of operations. The Company is required under the Code to distribute at least 90% of its taxable income (subject to certain adjustments and excluding any net capital gain), and the Operating Partnership is required to make distributions to the Company to allow the Company to satisfy these REIT distribution requirements. Because of these distribution requirements, the Operating Partnership is required to make distributions to the Company, and we
may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, management relies on third-party sources of capital to fund our capital needs. We may not be able to obtain financing on favorable terms or at all. Any additional debt we incur will increase our leverage. Access to third-party sources of capital depends, in part, on general market conditions and the availability of credit, the market’s perception of our growth potential, our current and expected future earnings, our cash flows and cash distributions and the quoted trading price of our securities. If we cannot obtain capital from third-party sources, our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders may be adversely affected.
Our common limited partners have limited approval rights, which may prevent us from completing a change of control transaction that may be in the best interests of all our security holders. The Company may not withdraw as the Operating Partnership’s general partner or transfer its general partnership interest in the Operating Partnership without the approval of the holders of at least 60% of the units representing common partnership interests, including the common units held by the Company in its capacity as the Operating Partnership’s general partner. In addition, the Company may not engage in a merger, consolidation or other combination or the sale of substantially all of its assets or such similar transaction, without the approval of the holders of 60% of the common units, including the common units held by the Company in its capacity as the Operating Partnership’s general partner. The right of our common limited partners to vote on these transactions could limit our ability to complete a change of control transaction that might otherwise be in the best interest of all our security holders.
In certain circumstances, our limited partners must approve our dissolution and the disposition of properties contributed by the limited partners. If limited partners own at least 5% of all of the Operating Partnership’s partnership interests, we must obtain the approval of limited partners holding a majority of the units representing common limited partnership interests before we may dissolve. As of December 31, 2021, limited partners owned approximately 1.0% of the Operating Partnership’s partnership interests, of which 0.7% was owned by John Kilroy. In addition, we agreed to use commercially reasonable efforts to minimize the tax consequences to certain common limited partners resulting from the repayment, refinancing, replacement, or restructuring of debt, or any sale, exchange, or other disposition of any of our other assets. The exercise of one or more of these approval rights by the limited partners could delay or prevent us from completing a transaction that may be in the best interest of all our security holders.
The Chairman of our board of directors and Chief Executive Officer has substantial influence over our affairs. John Kilroy is the Chairman of our board of directors and our Chief Executive Officer. John Kilroy beneficially owned, as of December 31, 2021, approximately 1.4% of the total outstanding shares of our common stock. The percentage of outstanding shares of common stock beneficially owned includes 372,957 shares of common stock, 530,913 restricted stock units (“RSUs”) that were vested and held by John Kilroy at December 31, 2021, and assumes the exchange into shares of our common stock of the 783,192 common units of the Operating Partnership held by John Kilroy (which may be exchanged for an equal number of shares of our common stock).
Pursuant to the Company’s charter, no stockholder may own, actually or constructively, more than 7.0% (by value or by number of shares, whichever is more restrictive) of our outstanding common stock without obtaining a waiver from the board of directors. In connection with the Company’s initial public offering, the board of directors waived the ownership limits with respect to John Kilroy, members of his family and some of their affiliated entities. These named individuals and entities may own either actually or constructively, in the aggregate, up to 19.6% of our common stock, excluding Operating Partnership units that are exchangeable into shares of our common stock. Consequently, John Kilroy has substantial influence over the Company, and because the Company is the manager of the Operating Partnership, over the Operating Partnership, and could exercise his influence in a manner that is not in the best interest of our stockholders, noteholders or unitholders. Also, John Kilroy may, in the future, have a substantial influence over the outcome of any matters submitted to our stockholders or unitholders for approval.
There are restrictions on the ownership of the Company’s capital stock that limit the opportunities for a change of control at a premium to existing security holders. Provisions of the Maryland General Corporation Law, the Company’s charter and bylaws and the Operating Partnership’s partnership agreement may delay, deter, or prevent a change of control of the Company, or the removal of existing management. Any of these actions might prevent our
security holders from receiving a premium for their shares of common stock or common units over the then-prevailing market price of the shares of our common stock.
In order for the Company to qualify as a REIT under the Code, its stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of the Company’s stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). The Company’s charter contains restrictions on the ownership and transfer of its capital stock that are intended to assist the Company in complying with these requirements and continuing to qualify as a REIT. No single stockholder may own, either actually or constructively, absent a waiver from the board of directors, more than 7.0% (by value or by number of shares, whichever is more restrictive) of the Company’s outstanding common stock.
The constructive ownership rules under the Code are complex and may cause stock owned actually or constructively by a group of related individuals and/or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than the applicable ownership limit of a particular class of the Company’s capital stock could, nevertheless, cause that individual or entity, or another individual or entity, to constructively own stock in excess of, and thereby subject such stock to, the applicable ownership limit.
The board of directors may waive the ownership limits if it is satisfied that the excess ownership would not jeopardize the Company’s REIT status and if it believes that the waiver would be in our best interest. The board of directors has waived the ownership limits with respect to John Kilroy, members of his family and some of their affiliated entities. These named individuals and entities may own either actually or constructively, in the aggregate, up to 19.6% of our outstanding common stock, excluding common units that are exchangeable into shares of common stock.
If anyone acquires shares in excess of any ownership limits without a waiver, the transfer to the transferee will be void with respect to the excess shares, the excess shares will be automatically transferred to a trust for the benefit of a qualified charitable organization, and the purported transferee or owner will have no rights with respect to those excess shares.
The Company’s charter contains provisions that may delay, deter or prevent a change of control transaction. The following provisions of the Company’s charter may delay or prevent a change of control over us, even if a change of control might be beneficial to our security holders, deter tender offers that may be beneficial to our security holders, or limit security holders’ opportunity to receive a potential premium for their shares and/or units if an investor attempted to gain shares beyond the Company’s ownership limits or otherwise to effect a change of control:
•the Company’s charter authorizes the board of directors to issue up to 30,000,000 shares of the Company’s preferred stock, including convertible preferred stock, without stockholder approval. The board of directors may establish the preferences, rights and other terms, including the right to vote and the right to convert into common stock any shares issued. The issuance of preferred stock could delay or prevent a tender offer or a change of control even if a tender offer or a change of control was in our security holders’ interest; and
•the Company’s charter states that any director, or the entire board of directors, may be removed from office at any time, but only for cause and then only by the affirmative vote of the holders of at least two thirds of the votes of the Company’s capital stock entitled to be cast in the election of directors.
The board of directors may change investment and financing policies without stockholder or unitholder approval. Our board of directors determines our major policies, including policies and guidelines relating to our acquisition, development and redevelopment activities, leverage, financing, growth, operations, indebtedness, capitalization and distributions to our security holders. Our board of directors may amend or revise these and other policies and guidelines from time to time without stockholder or unitholder approval. Accordingly, our stockholders and unitholders will have limited control over changes in our policies and those changes could adversely impact our
financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.
We are not limited in our ability to incur debt. Our financing policies and objectives are determined by the board of directors. Our goal is to limit our dependence on leverage and maintain a conservative ratio of debt to total market capitalization. However, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. As of December 31, 2021, we had approximately $4.1 billion aggregate principal amount of indebtedness outstanding, which represented 34.4% of our total market capitalization. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources of the Company -Capitalization” for a calculation of our market capitalization. These ratios may be increased or decreased without the consent of our unitholders or stockholders. Increases in the amount of debt outstanding would result in an increase in our debt service costs, which could adversely affect cash flow and our ability to pay dividends and distributions to our security holders. Higher leverage also increases the risk of default on our obligations and limits our ability to obtain additional financing in the future.
We may issue additional common units and shares of capital stock without unitholder or stockholder approval, as applicable, which may dilute unitholder or stockholder investment. The Company may issue shares of our common stock, preferred stock or other equity or debt securities without stockholder approval, including the issuance of shares to satisfy REIT dividend distribution requirements. Similarly, the Operating Partnership may offer its common or preferred units for contributions of cash or property without approval by our stockholders or the Operating Partnership’s unitholders. Existing security holders have no preemptive rights to acquire any of these securities, and any issuance of equity securities under these circumstances may dilute a unitholder's or stockholder's investment.
Sales of a substantial number of shares of the Company’s securities, or the perception that this could occur, could result in decreasing the quoted trading price per share of the Company’s common stock and of the Operating Partnership’s publicly-traded notes. Management cannot predict whether future issuances of shares of the Company’s common stock, or the availability of shares for resale in the open market will result in decreasing the market price per share of the Company’s common stock. As of December 31, 2021, 116,464,169 shares of the Company’s common stock were issued and outstanding.
As of December 31, 2021, the Company had reserved for future issuance the following shares of common stock: 1,150,574 shares issuable upon the exchange, at the Company’s option, of the Operating Partnership’s common units; approximately 1.4 million shares remained available for grant under our 2006 Incentive Award Plan (see Note 15 “Share-Based and Other Compensation” to our consolidated financial statements included in this report); approximately 1.3 million shares issuable upon settlement of time-based RSUs; and a maximum of 1.7 million shares contingently issuable upon settlement of RSUs subject to the achievement of market and/or performance conditions. The Company has a currently effective registration statement registering 10.7 million shares of our common stock for possible issuance under our 2006 Incentive Award Plan. The Company has a currently effective registration statement registering 1,649,760 shares of our common stock for possible issuance to and resale by certain holders of the Operating Partnership’s common units. That registration statement also registers 94,441 shares of common stock held by John Kilroy for possible resale. Consequently, if and when the shares are issued, they may be freely traded in the public markets.
Risks Related to Taxes and the Company’s Status as a REIT
Loss of the Company’s REIT status would have significant adverse consequences to us and the value of the Company’s common stock. The Company currently operates in a manner that is intended to allow it to qualify as a REIT for federal income tax purposes under the Code. If the Company were to lose its REIT status, the Company would face adverse tax consequences that would substantially reduce the funds available for distribution to its stockholders for each of the years involved because:
•the Company would not be allowed a deduction for dividends paid to its stockholders in computing the Company’s taxable income and would be subject to regular U.S. federal corporate income tax;
•the Company could be subject to increased state and local taxes; and
•unless entitled to relief under statutory provisions, the Company could not elect to be taxed as a REIT for four taxable years following the year during which the Company was disqualified.
In addition, if the Company failed to qualify as a REIT, it would not be required to make distributions to its stockholders. As a result of all these factors, the Company’s failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could adversely affect the value and quoted trading price of the Company’s common stock.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury regulations that have been promulgated under the Code is greater in the case of a REIT that, like the Company, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect the Company’s ability to continue to qualify as a REIT. For example, to qualify as a REIT, at least 95% of the Company’s gross income in any year must be derived from qualifying sources. Also, the Company must make distributions to its stockholders aggregating annually at least 90% of the Company’s net taxable income (subject to certain adjustments and excluding any net capital gains). In addition, legislation, new regulations, administrative interpretations or court decisions may adversely affect the Company’s security holders or the Company’s ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments. Although management believes that we are organized and operate in a manner to permit the Company to continue to qualify as a REIT, we cannot provide assurances that the Company has qualified or will continue to qualify as a REIT for tax purposes. We have not requested and do not plan to request a ruling from the Internal Revenue Service (“IRS”) regarding the Company’s qualification as a REIT.
To maintain the Company’s REIT status, we may be forced to borrow funds during unfavorable market conditions. To qualify as a REIT, the Company generally must distribute to its stockholders at least 90% of the Company’s net taxable income each year (subject to certain adjustments and excluding any net capital gains), and the Company will be subject to regular corporate income taxes to the extent that it distributes less than 100% of its net capital gains or distributes at least 90%, but less than 100%, of its net taxable income each year. In addition, the Company will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions it pays in any calendar year are less than the sum of 85% of its ordinary income, 95% of its net capital gains, and 100% of its undistributed income from prior years. To maintain the Company’s REIT status and avoid the payment of federal income and excise taxes, the Operating Partnership may need to borrow funds and distribute or loan the proceeds to the Company so it can meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from differences in timing between the actual receipt of income and inclusion of income for federal income tax purposes, or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments.
If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable or if we are unable to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax deferred basis. When possible, we dispose of properties in transactions that are intended to qualify as Section 1031 Exchanges. It is possible that the qualification of a transaction as a Section 1031 Exchange could be successfully challenged and determined to be currently taxable or that we may be unable to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange. In such case, our taxable income and the Company’s earnings and profits could increase. This could increase the dividend income to the Company’s stockholders by reducing any return of capital they received. In some circumstances, the Company may be required to pay additional dividends or, in lieu of that, corporate income tax, possibly including interest and penalties. As a result, we may be required to borrow funds in order to pay additional dividends or taxes and the payment of such taxes could cause us to have less cash available to distribute to the Company’s stockholders. In addition, if a Section 1031 Exchange was later determined to be
taxable, we may be required to amend our tax returns for the applicable year in question, including any information reports we sent the Company’s stockholders. Moreover, under the Tax Cuts and Jobs Act (the “2017 Tax Legislation”), for exchanges completed after December 31, 2017, unless the property was disposed of or received in the exchange on or before such date, Section 1031 of the Code permits exchanges of real property only. It is possible that additional legislation could be enacted that could further modify or repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult or not possible for us to dispose of properties on a tax deferred basis.
Dividends payable by REITs, including the Company, generally do not qualify for the reduced tax rates available for some dividends. “Qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates generally are subject to tax at preferential rates. Subject to limited exceptions, dividends payable by REITs are not eligible for these reduced rates and are taxable at ordinary income tax rates. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including the shares of our capital stock. However, non-corporate stockholders, including individuals, generally may deduct up to 20% of dividends from a REIT, other than capital gain dividends and dividends treated as qualified dividend income, for taxable years beginning after December 31, 2017 and before January 1, 2026.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes. A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments. To qualify as a REIT for federal income tax purposes, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amounts it distributes to its stockholders and the ownership of its capital stock. If the Company fails to comply with one or more of the asset tests at the end of any calendar quarter, the Company must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing its REIT qualification and suffering adverse tax consequences. In order to meet these tests, we may be required to forego investments we might otherwise make or to liquidate otherwise attractive investments. Thus, compliance with the REIT requirements may hinder our performance and reduce amounts available for distribution to the Company’s stockholders.
Legislative or regulatory action could adversely affect our stockholders or us. In recent years, numerous legislative, judicial and administrative changes have been made to the federal income tax laws applicable to investments in REITs and similar entities. Additional changes to tax laws are likely to continue to occur in the future, and any such changes may adversely impact the Company’s ability to qualify as a REIT, its tax treatment as a REIT, our ability to comply with contractual obligations or the tax treatment of our stockholders and limited partners. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
General
Our stabilized portfolio of operating properties was comprised of the following properties at December 31, 2021:
Number of
Buildings Rentable
Square Feet Number of
Tenants Percentage
Occupied (1)
Percentage Leased
Stabilized Office Properties (2)
120 15,456,528 422 91.9 % 93.9 %
_______________________
(1)Represents economic occupancy.
(2)Includes stabilized life science and retail space.
Number of
Properties Number of Units 2021 Average Occupancy
Stabilized Residential Properties 3 1,001 78.0 %
Our stabilized portfolio includes all of our properties with the exception of development properties currently committed for construction, under construction or in the tenant improvement phase, redevelopment properties under construction, undeveloped land, and real estate assets held for sale. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We define properties in the tenant improvement phase as office and life science properties that we are developing or redeveloping where the project has reached cold shell condition and is ready for tenant improvements, which may require additional major base building construction before being placed in service. Projects in the tenant improvement phase are added to our stabilized portfolio once the project reaches the earlier of 95% occupancy or one year from the date of the cessation of major base building construction activities. Costs capitalized to construction in progress for development and redevelopment properties are transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets at the historical cost of the property as the projects or phases of projects are placed in service.
During the year ended December 31, 2021, we added four development projects to our stabilized portfolio consisting of six buildings totaling 1,109,509 square feet of office and life science space in San Diego and South San Francisco, California and 193 residential units in Hollywood, California. We did not have any properties held for sale at December 31, 2021. As of December 31, 2021, the following properties were excluded from our stabilized portfolio.
Number of
Properties/Projects Estimated Rentable
Square Feet (1)
In-process development projects - tenant improvement (2)
3 1,604,000
In-process development projects - under construction 2 946,000
In-process redevelopment projects - under construction (3)
1 96,000
________________________
(1)Estimated rentable square feet upon completion.
(2)Includes the development property acquired in Austin, Texas during the year ended December 31, 2021. Refer to Note 3 “Acquisitions” to our consolidated financial statements included in this report for additional information.
(3)Excludes the two committed redevelopment projects at December 31, 2021, which are included in the stabilized portfolio since construction has not commenced.
Our stabilized portfolio also excludes our future development pipeline, which as of December 31, 2021, was comprised of six future development sites, representing approximately 59 gross acres of undeveloped land.
As of December 31, 2021, all of our properties, development projects and redevelopment projects were owned and all of our business was conducted in the state of California with the exception of nine stabilized office properties, one development project in the tenant improvement phase and one future development project located in the state of Washington and one development project in the tenant improvement phase located in Austin, Texas. All
of our properties, development projects and redevelopment projects are 100% owned, excluding four office properties owned by three consolidated property partnerships.
We own our interests in all of our real estate assets through the Operating Partnership. All our properties are held in fee, except for the fourteen office buildings that are held subject to five long-term ground leases for the land (see Note 18 “Commitments and Contingencies” to our consolidated financial statements included in this report for additional information regarding our ground lease obligations).
In general, the office and life science properties are leased to tenants on a full service gross, modified gross or triple net basis. Under a full service gross lease, we are obligated to pay the tenant’s proportionate share of real estate taxes, insurance and operating expenses up to the amount incurred during the tenant’s first year of occupancy (“Base Year”). The tenant pays its pro-rata share of increases in expenses above the Base Year. A modified gross lease is similar to a full service gross lease, except tenants are obligated to pay their proportionate share of certain operating expenses, usually electricity, directly to the service provider. In addition, some office and life science properties, primarily in the Greater Seattle region and certain properties in certain submarkets in the San Francisco Bay Area and Greater Los Angeles, are leased to tenants on a triple net basis, pursuant to which the tenants pay their proportionate share of real estate taxes, operating costs and utility costs. At December 31, 2021, 41% of our properties were leased to tenants on a triple net basis, 27% were leased to tenants on a modified gross basis and 25% of our properties were leased to tenants on a full service gross basis.
We believe that all of our properties are well maintained and do not require significant capital improvements. As of December 31, 2021, we managed all of our office properties through internal property managers.
Office Properties
The following table sets forth certain information relating to each of the stabilized office properties owned as of December 31, 2021.
Property Location No. of
Buildings Year Built/
Renovated Rentable
Square Feet Percentage
Occupied at
12/31/2021 (1)
Annualized
Base Rent
(in $000’s) (2)
Annualized Rent Per Square Foot (2)
Greater Los Angeles
3101-3243 La Cienega Boulevard,
Culver City, California 19 2008-2017 151,908 100.0 % $ 7,414 $ 49.03
2240 East Imperial Highway,
El Segundo, California 1 1983/ 2008 122,870 100.0 % 3,950 32.15
2250 East Imperial Highway,
El Segundo, California 1 1983 298,728 100.0 % 10,206 34.31
2260 East Imperial Highway,
El Segundo, California 1 1983/ 2012 298,728 100.0 % 10,510 35.18
909 North Pacific Coast Highway,
El Segundo, California 1 1972/ 2005 244,880 88.3 % 8,133 38.13
999 North Pacific Coast Highway,
El Segundo, California 1 1962/ 2003 138,389 73.5 % 3,251 33.57
1350 Ivar Avenue,
Los Angeles, California 1 2020 16,448 100.0 % 1,005 61.10
1355 Vine Street,
Los Angeles, California 1 2020 183,129 100.0 % 10,882 59.42
1375 Vine Street,
Los Angeles, California 1 2020 159,236 100.0 % 9,805 61.58
1395 Vine Street,
Los Angeles, California 1 2020 2,575 100.0 % 161 62.65
1500 North El Centro Avenue,
Los Angeles, California 1 2016 113,447 28.8 % 1,967 60.11
1525 North Gower Street,
Los Angeles, California 1 2016 9,610 100.0 % 650 67.61
1575 North Gower Street,
Los Angeles, California 1 2016 264,430 100.0 % 16,141 61.04
6115 West Sunset Boulevard,
Los Angeles, California 1 1938/ 2015 26,238 73.1 % 760 39.62
Property Location No. of
Buildings Year Built/
Renovated Rentable
Square Feet Percentage
Occupied at
12/31/2021 (1)
Annualized
Base Rent
(in $000’s) (2)
Annualized Rent Per Square Foot (2)
6121 West Sunset Boulevard,
Los Angeles, California 1 1938/ 2015 93,418 100.0 % 4,613 49.37
6255 West Sunset Boulevard,
Los Angeles, California 1 1971/ 1999 323,920 87.9 % 13,782 50.54
3750 Kilroy Airport Way,
Long Beach, California 1 1989 10,718 100.0 % 104 30.60
3760 Kilroy Airport Way,
Long Beach, California 1 1989 166,761 95.1 % 5,373 35.04
3780 Kilroy Airport Way,
Long Beach, California 1 1989 221,452 84.6 % 6,320 34.51
3800 Kilroy Airport Way,
Long Beach, California 1 2000 192,476 88.9 % 5,551 32.44
3840 Kilroy Airport Way,
Long Beach, California 1 1999 136,026 - % - -
3880 Kilroy Airport Way,
Long Beach, California 1 1987/ 2013 96,923 100.0 % 2,839 29.29
3900 Kilroy Airport Way,
Long Beach, California 1 1987 130,935 91.5 % 3,655 30.59
8560 West Sunset Boulevard,
West Hollywood, California 1 1963/ 2007 76,359 43.1 % 2,460 76.19
8570 West Sunset Boulevard,
West Hollywood, California 1 2002/ 2007 49,276 92.9 % 3,093 67.55
8580 West Sunset Boulevard,
West Hollywood, California 1 2002/ 2007 6,875 41.0 % - -
8590 West Sunset Boulevard,
West Hollywood, California 1 2002/ 2007 56,750 94.0 % 2,219 41.60
12100 West Olympic Boulevard,
Los Angeles, California 1 2003 152,048 66.0 % 5,581 55.61
12200 West Olympic Boulevard,
Los Angeles, California 1 2000 150,832 90.2 % 6,899 67.98
12233 West Olympic Boulevard,
Los Angeles, California 1 1980/ 2011 151,029 65.8 % 3,307 44.20
12312 West Olympic Boulevard,
Los Angeles, California 1 1950/ 1997 76,644 100.0 % 4,096 53.44
1633 26th Street,
Santa Monica, California 1 1972/ 1997 43,857 69.9 % 1,722 56.19
2100/2110 Colorado Avenue,
Santa Monica, California 3 1992/ 2009 102,864 100.0 % 4,980 48.41
3130 Wilshire Boulevard,
Santa Monica, California 1 1969/ 1998 90,074 84.0 % 4,066 53.74
501 Santa Monica Boulevard,
Santa Monica, California 1 1974 76,803 80.5 % 4,856 78.51
Subtotal/Weighted Average -
Los Angeles and Ventura Counties 55 4,436,656 86.1 % $ 170,351 $ 45.80
San Diego County
12225 El Camino Real,
Del Mar, California 1 1998 58,401 100.0 % $ 2,483 $ 42.52
12235 El Camino Real,
Del Mar, California 1 1998 53,751 100.0 % 2,627 48.87
12390 El Camino Real,
Del Mar, California 1 2000 69,421 100.0 % 4,247 61.18
12770 El Camino Real,
Del Mar, California 1 2016 75,035 100.0 % 4,045 61.50
12780 El Camino Real,
Del Mar, California 1 2013 140,591 100.0 % 7,138 50.77
12790 El Camino Real,
Del Mar, California 1 2013 87,944 100.0 % 4,940 56.18
12830 El Camino Real,
Del Mar, California 1 2020 196,444 89.0 % 12,617 72.18
12860 El Camino Real,
Del Mar, California 1 2020 92,042 100.0 % 6,621 71.93
Property Location No. of
Buildings Year Built/
Renovated Rentable
Square Feet Percentage
Occupied at
12/31/2021 (1)
Annualized
Base Rent
(in $000’s) (2)
Annualized Rent Per Square Foot (2)
12348 High Bluff Drive,
Del Mar, California 1 1999 39,193 83.6 % 1,292 39.44
12400 High Bluff Drive,
Del Mar, California 1 2004 210,732 100.0 % 10,489 49.77
3579 Valley Centre Drive,
Del Mar, California 1 1999 54,960 100.0 % 3,180 57.87
3611 Valley Centre Drive,
Del Mar, California 1 2000 132,425 100.0 % 6,978 54.64
3661 Valley Centre Drive,
Del Mar, California 1 2001 128,364 82.6 % 4,909 53.23
3721 Valley Centre Drive,
Del Mar, California 1 2003 115,193 100.0 % 5,431 47.15
3811 Valley Centre Drive,
Del Mar, California 1 2000 118,912 100.0 % 6,782 57.03
3745 Paseo Place,
Del Mar, California 1 2019 95,871 95.0 % 6,256 70.43
13480 Evening Creek Drive North,
San Diego, California 1 2008 154,157 100.0 % 5,130 35.25
13500 Evening Creek Drive North,
San Diego, California 1 2004 143,749 92.9 % 6,062 45.39
13520 Evening Creek Drive North,
San Diego, California 1 2004 143,654 90.7 % 4,861 39.11
2305 Historic Decatur Road,
Point Loma, California 1 2009 107,456 96.5 % 4,468 43.10
4690 Executive Drive,
UTC, California 1 1999 47,846 67.1 % 1,251 38.98
9455 Towne Centre Drive,
UTC, California 1 2021 160,444 100.0 % 7,822 48.76
Subtotal/Weighted Average -
San Diego County 22 2,426,585 95.9 % $ 119,629 $ 52.39
San Francisco Bay Area
4100 Bohannon Drive,
Menlo Park, California 1 1985 47,379 100.0 % $ 2,640 $ 55.72
4200 Bohannon Drive,
Menlo Park, California 1 1987 45,451 70.8 % 1,751 54.41
4300 Bohannon Drive,
Menlo Park, California 1 1988 63,079 48.7 % 2,296 74.68
4400 Bohannon Drive,
Menlo Park, California 1 1988 48,146 21.3 % 432 60.91
4500 Bohannon Drive,
Menlo Park, California 1 1990 63,078 100.0 % 3,580 56.76
4600 Bohannon Drive,
Menlo Park, California 1 1990 48,147 70.7 % 2,010 59.06
4700 Bohannon Drive,
Menlo Park, California 1 1989 63,078 100.0 % 3,513 55.70
1290-1300 Terra Bella Avenue,
Mountain View, California 1 1961 114,175 48.9 % 2,927 52.43
680 East Middlefield Road,
Mountain View, California 1 2014 171,676 100.0 % 7,763 45.22
690 East Middlefield Road,
Mountain View, California 1 2014 171,215 100.0 % 7,729 45.14
1701 Page Mill Road,
Palo Alto, California 1 2015 128,688 100.0 % 8,461 65.75
3150 Porter Drive,
Palo Alto, California 1 1998 36,886 100.0 % 3,277 88.83
900 Jefferson Avenue,
Redwood City, California 1 2015 228,505 100.0 % 13,670 59.82
900 Middlefield Road,
Redwood City, California 1 2015 118,764 100.0 % 6,983 59.05
100 Hooper Street,
San Francisco, California 1 2018 417,914 100.0 % 24,283 58.11
Property Location No. of
Buildings Year Built/
Renovated Rentable
Square Feet Percentage
Occupied at
12/31/2021 (1)
Annualized
Base Rent
(in $000’s) (2)
Annualized Rent Per Square Foot (2)
100 First Street,
San Francisco, California 1 1988 480,457 92.3 % 29,902 70.76
303 Second Street,
San Francisco, California 1 1988 784,658 79.8 % 54,544 87.40
201 Third Street,
San Francisco, California 1 1983 346,538 79.7 % 19,885 73.90
360 Third Street,
San Francisco, California 1 2013 429,796 88.8 % 27,649 72.59
250 Brannan Street,
San Francisco, California 1 1907/ 2001 100,850 100.0 % 10,323 102.36
301 Brannan Street,
San Francisco, California 1 1909/ 1989 82,834 100.0 % 7,580 91.51
333 Brannan Street,
San Francisco, California 1 2016 185,602 100.0 % 18,138 97.73
345 Brannan Street,
San Francisco, California 1 2015 110,050 99.7 % 10,813 98.55
350 Mission Street,
San Francisco, California 1 2016 455,340 99.7 % 24,076 53.16
345 Oyster Point Boulevard,
South San Francisco, California 1 2001 40,410 100.0 % 2,192 54.24
347 Oyster Point Boulevard,
South San Francisco, California 1 1998 39,780 100.0 % 2,158 54.24
349 Oyster Point Boulevard,
South San Francisco, California 1 1999 65,340 100.0 % 3,868 59.19
350 Oyster Point Boulevard,
South San Francisco, California 1 2021 234,892 100.0 % 18,014 76.69
352 Oyster Point Boulevard,
South San Francisco, California 1 2021 232,215 100.0 % 18,062 77.78
354 Oyster Point Boulevard,
South San Francisco, California 1 2021 193,472 100.0 % 15,048 77.78
505 North Mathilda Avenue,
Sunnyvale, California 1 2014 212,322 100.0 % 9,449 44.50
555 North Mathilda Avenue,
Sunnyvale, California 1 2014 212,322 100.0 % 9,449 44.50
599 North Mathilda Avenue,
Sunnyvale, California 1 2000 76,031 100.0 % 3,610 47.48
605 North Mathilda Avenue,
Sunnyvale, California 1 2014 162,785 100.0 % 7,244 44.50
Subtotal/Weighted Average -
San Francisco 34 6,211,875 92.4 % $ 383,319 $ 67.19
Greater Seattle
601 108th Avenue North East,
Bellevue, Washington 1 2000 490,738 89.1 % $ 16,425 $ 37.99
10900 North East 4th Street,
Bellevue, Washington 1 1983 428,557 98.9 % 17,159 40.62
2001 West 8th Avenue,
Seattle, Washington 1 2009 539,226 100.0 % 23,119 42.87
701 North 34th Street,
Seattle, Washington 1 1998 141,860 100.0 % 5,318 37.49
801 North 34th Street,
Seattle, Washington 1 1998 173,615 100.0 % 5,789 33.34
837 North 34th Street,
Seattle, Washington 1 2008 112,487 100.0 % 4,120 36.62
320 Westlake Avenue North,
Seattle, Washington 1 2007 184,644 95.5 % 7,958 45.11
321 Terry Avenue North,
Seattle, Washington 1 2013 135,755 100.0 % 5,713 42.09
401 Terry Avenue North,
Seattle, Washington 1 2003 174,530 100.0 % 7,008 40.15
Property Location No. of
Buildings Year Built/
Renovated Rentable
Square Feet Percentage
Occupied at
12/31/2021 (1)
Annualized
Base Rent
(in $000’s) (2)
Annualized Rent Per Square Foot (2)
Subtotal/Weighted Average -
Greater Seattle 9 2,381,412 97.2 % $ 92,609 $ 40.12
TOTAL/WEIGHTED AVERAGE 120 15,456,528 91.9 % $ 765,908 $ 54.64
____________________
(1)Based on all leases at the respective properties in effect as of December 31, 2021. Includes month-to-month leases as of December 31, 2021. Represents economic occupancy.
(2)Annualized base rental revenue includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related to tenant-funded tenant improvements, amortization of above/below market rent, amortization for lease incentives due under existing leases and expense reimbursement revenue. Excludes month-to-month leases and vacant space as of December 31, 2021. Includes 100% of annualized base rent of consolidated property partnerships.
Stabilized Development Projects and Completed Residential Development Projects
During the year ended December 31, 2021, the following properties were added to our stabilized portfolio of operating properties:
Construction Period
Stabilized Office / Life Science Development Projects Location Start Date Completion
Date Stabilization Date (1)
Rentable
Square Feet % Occupied (2)
9455 Towne Centre Drive University Towne Center 1Q 2019 1Q 2021 1Q 2021 160,444 100%
12860 El Camino Real
(One Paseo - Office Building 1) Del Mar 4Q 2018 2Q 2020 2Q 2021 92,042 100%
12830 El Camino Real
(One Paseo - Office Building 2) Del Mar 4Q 2018 2Q 2020 3Q 2021 196,444 89%
350 Oyster Point Boulevard
(Kilroy Oyster Point - Phase 1) South San Francisco 1Q 2019 3Q 2021 3Q 2021 234,892 100%
352 and 354 Oyster Point Boulevard (Kilroy Oyster Point - Phase 1) South San Francisco 1Q 2019 4Q 2021 4Q 2021 425,687 100%
TOTAL: 1,109,509 98%
____________________
(1)For office and retail, represents the earlier of anticipated 95% occupancy date or one year from cessation of major base building construction activities.
(2)Represents economic occupancy.
During the year ended December 31, 2021, we completed construction on and added the following residential development project to the stabilized portfolio:
Construction Period
Completed Residential Development Project Location Start Date Completion
Date Number of Units % Leased (1)
Jardine Hollywood 4Q 2018 2Q 2021 193 84%
TOTAL: 193 84%
____________________
(1)The % leased is as of January 27, 2022.
In-Process Development Projects
The following tables set forth certain information relating to our in-process development pipeline as of December 31, 2021.
Location Construction Start Date Estimated Stabilization Date (2)
Estimated Rentable Square Feet Total Project % Leased Total Project % Occupied (3)
TENANT IMPROVEMENT (1)
Office
San Diego County
2100 Kettner Little Italy 3Q 2019 3Q 2022 235,000 -% -%
Greater Seattle
333 Dexter South Lake Union 2Q 2017 3Q 2022 635,000 100% 49%
Austin
Indeed Tower Austin CBD 2Q 2021 1Q 2024 734,000 58% 15%
TOTAL: 1,604,000 66% 26%
____________________
(1)Represents projects that have reached cold shell condition and are ready for tenant improvements, which may require additional major base building construction before being placed in service.
(2)Represents the earlier of anticipated 95% occupancy date or one year from substantial completion of base building components. For multi-phase projects, interest and carry cost capitalization may cease and recommence driven by various factors, including tenant improvement construction and other tenant related timing or project scope. The timing of completion of our projects may be impacted by factors outside of our control, including government restrictions and/or social distancing requirements on construction projects due to the COVID-19 pandemic. As of the date of this report, all of our in-process development projects were under active construction.
(3)Represents economic occupancy.
Construction Start Date Estimated Stabilization Date (1)
Estimated Rentable Square Feet % Leased
UNDER CONSTRUCTION Location
Office / Life Science
San Francisco Bay Area
Kilroy Oyster Point - Phase 2 South San Francisco 2Q 2021 4Q 2024 875,000 -%
San Diego County
9514 Towne Centre Drive University Towne Center 3Q 2021 4Q 2023 71,000 100%
TOTAL: 8%
____________________
(1)Represents the earlier of anticipated 95% occupancy date or one year from substantial completion of base building components. For multi-phase projects, interest and carry cost capitalization may cease and recommence driven by various factors, including tenant improvement construction and other tenant related timing or project scope. The timing of completion of our projects may be impacted by factors outside of our control, including government restrictions and/or social distancing requirements on construction projects due to the COVID-19 pandemic. As of the date of this report, all of our in-process development projects were under active construction.
In-Process and Committed Redevelopment Projects
As of December 31, 2021, we had the following redevelopment project under construction:
Estimated Construction Period (1)
Rentable Square Feet Leased (2)
IN-PROCESS Location Start Date Completion Date
Life Science
San Diego County
12340 El Camino Real Del Mar 4Q 2021 3Q 2022 96,000
TOTAL: 96,000
____________________
(1)Redevelopment will occur in phases based on existing lease expiration dates and timing of the tenant improvement build-out.
(2)Represents the total square footage leased.
As of December 31, 2021, we had two projects that were committed for redevelopment in phases based on existing lease expiration dates and timing of tenant improvement build-outs:
Estimated Construction Period (2)
Rentable Square Feet Leased (3)
COMMITTED (1)
Location Start Date Completion Date
Life Science
San Diego County
12400 High Bluff Drive Del Mar 1Q 2022 3Q 2022 182,000
4690 Executive Drive University Towne Center 2Q 2022 3Q 2023 52,000
TOTAL: 234,000
____________________
(1)Properties committed for redevelopment are in the stabilized portfolio since construction has not commenced.
(2)Redevelopment will occur in phases based on existing lease expiration dates and timing of the tenant improvement build-out.
(3)Represents the total square footage leased.
Future Development Pipeline
The following table sets forth certain information relating to our future development pipeline as of December 31, 2021.
Future Development Pipeline Location Approx. Developable Square Feet (1)
San Diego County
Santa Fe Summit - Phases 2 and 3 56 Corridor 600,000 - 650,000
2045 Pacific Highway Little Italy 275,000
Kilroy East Village East Village TBD
San Francisco Bay Area
Kilroy Oyster Point - Phases 3 and 4 South San Francisco 875,000 - 1,000,000
Flower Mart SOMA 2,300,000
Greater Seattle
SIX0 - Office & Residential Denny Regrade 925,000
____________________
(1)The developable square feet and scope of projects could change materially from estimated data provided due to one or more of the following: any significant changes in the economy, market conditions, our markets, tenant requirements and demands, construction costs, new supply, regulatory and entitlement processes or project design.
Significant Tenants
The following table sets forth information about our 15 largest tenants based upon annualized base rental revenues, as defined below, as of December 31, 2021.
Tenant Name Region Annualized Base Rental Revenue(1)(2)
Percentage of Total Annualized Base Rental Revenue(1)
Lease Expiration Date
(in thousands)
GM Cruise, LLC San Francisco Bay Area $ 36,337 4.7% November 2031
Amazon.com Greater Seattle 33,800 4.3% Various (4)
Stripe, Inc. San Francisco Bay Area 33,110 4.2% June 2034
LinkedIn Corporation / Microsoft Corporation San Francisco Bay Area 29,752 3.8% Various (5)
Adobe Systems, Inc. San Francisco Bay Area / Greater Seattle 27,897 3.6% Various (6)
salesforce.com, inc. San Francisco Bay Area 24,076 3.1% Various (7)
DoorDash, Inc. San Francisco Bay Area 23,842 3.1% January 2032
DIRECTV, LLC (3)
Greater Los Angeles 23,152 3.0% September 2027
Fortune 50 Publicly-Traded Company Greater Seattle /
San Diego County 23,059 3.0% Various (8)
Okta, Inc. San Francisco Bay Area 22,387 2.9% October 2028
Netflix, Inc. Greater Los Angeles 21,943 2.8% Various (9)
Box, Inc. San Francisco Bay Area 20,390 2.6% June 2028
Cytokinetics, Inc. San Francisco Bay Area 18,014 2.3% October 2033
Synopsys, Inc. San Francisco Bay Area 15,492 2.0% August 2030
Riot Games, Inc. Greater Los Angeles 15,213 2.0% Various (10)
Total $ 368,464 47.4%
_____________________
(1)Annualized base rental revenue includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases, and expense reimbursement revenue. Excludes month-to-month leases and vacant space as of December 31, 2021.
(2)Includes 100% of the annualized base rental revenues of consolidated property partnerships.
(3)On April 5, 2021, DIRECTV, LLC’s successor-in-interest (“DIRECTV”) filed suit in Los Angeles Superior Court against a subsidiary of the Company, claiming that DIRECTV properly exercised its contraction rights as to certain space leased by DIRECTV at the property located at 2250 East Imperial Highway, El Segundo, California. The Company strongly disagrees with the contentions made by DIRECTV and will vigorously defend the litigation.
(4)The Amazon.com leases, which contribute $2.4 million, $16.9 million, $2.0 million, and $12.5 million, expire in January 2023, April 2023, September 2029, and February 2030, respectively.
(5)The LinkedIn Corporation / Microsoft Corporation leases, which contribute $3.6 million and $26.2 million, expire in October 2024 and September 2026, respectively.
(6)The Adobe Systems Inc. leases, which contribute $1.1 million $5.8 million and $21.0 million, expire in June 2027, July 2031 and August 2031, respectively.
(7)The salesforce.com, inc. leases, which contribute $0.6 million and $23.5 million, expire in May 2031 and September 2032, respectively.
(8)The Fortune 50 Publicly-Traded Company leases, which contribute $7.8 million and $15.3 million expires in January 2032 and July 2033, respectively.
(9)The Netflix, Inc leases, which contribute $0.1 million and $21.8 million, expire in June 2022 and July 2032, respectively.
(10)The Riot Games leases, which contribute $7.9 million and $7.3 million, expire in November 2023 and November 2024, respectively.
The following pie chart sets forth the composition of our tenant base by industry and as a percentage of our annualized base rental revenue based on the North American Industry Classification System as of December 31, 2021.
Our markets are dynamic and populated with innovative and creative tenants, including but not limited to technology, entertainment and digital media. While technology companies comprise 56% of our office portfolio base rent, technology is a broad concept that encompasses diverse industries including software, social media, hardware, cloud computing, internet media and technology services.
Lease Expirations
The following table sets forth a summary of our office lease expirations for each of the next ten years beginning with 2022, assuming that none of the tenants exercise renewal options or termination rights. See further discussion of our lease expirations under “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Factors that May Influence Future Results of Operations”.
Lease Expirations
Year of Lease Expiration # of Expiring Leases Total Square Feet % of Total Leased Square Feet Annualized Base
Rent (000’s)(1) (2)
% of Total Annualized
Base Rent (1)
Annualized Rent per Square Foot (1)
2022 (3)
59 799,769 5.8 % $ 34,178 4.5 % $ 42.73
2023 (3)
79 1,557,424 11.1 % 79,366 10.4 % 50.96
2024 65 1,039,203 7.4 % 48,581 6.3 % 46.75
2025 60 798,352 5.7 % 39,784 5.2 % 49.83
2026 49 1,829,440 13.1 % 83,856 10.9 % 45.84
2027 (4)
53 1,194,334 8.5 % 47,890 6.2 % 40.10
2028 24 960,330 6.9 % 61,798 8.1 % 64.35
2029 22 889,959 6.4 % 49,349 6.4 % 55.45
2030 35 1,349,636 9.7 % 77,754 10.2 % 57.61
2031 29 1,797,211 12.9 % 120,870 15.8 % 67.25
2032 and beyond 18 1,757,958 12.5 % 122,482 16.0 % 69.67
Total (5)
493 13,973,616 100.0 % $ 765,908 100.0 % $ 54.81
____________________
(1)Annualized base rent includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense reimbursement revenue. Additionally, the underlying leases contain various expense structures including full service gross, modified gross and triple net. Amounts represent percentage of total portfolio annualized contractual base rental revenue.
(2)Includes 100% of annualized based rent of consolidated property partnerships.
(3)Adjusting for leasing transactions executed as of December 31, 2021 but not yet commenced, the 2022 and 2023 expirations would be reduced by 214,542 and 18,728 square feet, respectively.
(4)On April 5, 2021, DIRECTV, LLC’s successor-in-interest (“DIRECTV”) filed suit in Los Angeles Superior Court against a subsidiary of the Company, claiming that DIRECTV properly exercised its contraction rights as to certain space leased by DIRECTV at the property located at 2250 East Imperial Highway, El Segundo, California. The Company strongly disagrees with the contentions made by DIRECTV and will vigorously defend the litigation.
(5)For leases that have been renewed early with existing tenants, the expiration date and annualized base rent information presented takes into consideration the renewed lease terms. Excludes leases not commenced as of December 31, 2021, space leased under month-to-month leases, storage leases, vacant space and future lease renewal options not executed as of December 31, 2021.
Secured Debt
As of December 31, 2021, the Operating Partnership had two outstanding mortgage notes payable which were secured by certain of our properties. Our secured debt represents an aggregate principal indebtedness of approximately $249.0 million. See additional information regarding our secured debt in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Liquidity Sources,” Notes 8 and 9 to our consolidated financial statements and Schedule III-Real Estate and Accumulated Depreciation included in this report. Management believes that, as of December 31, 2021, the value of the properties securing the applicable secured obligations in each case exceeded the principal amount of the outstanding obligation.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
We and our properties are subject to routine litigation incidental to our business. These matters are generally covered by insurance. As of December 31, 2021, we were not a defendant in, and our properties were not subject to, any legal proceedings that we believe, if determined adversely to us, would have a material adverse effect upon our financial condition, results of operations, or cash flows.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR KILROY REALTY CORPORATION’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “KRC.” As of the date this report was filed, there were approximately 96 registered holders of the Company’s common stock. The following table illustrates dividends declared during 2021 and 2020 as reported on the NYSE.
2021 Per Share Common
Stock Dividends
Declared
First quarter $ 0.5000
Second quarter 0.5000
Third quarter 0.5200
Fourth quarter 0.5200
2020 Per Share Common
Stock Dividends
Declared
First quarter $ 0.4850
Second quarter 0.4850
Third quarter 0.5000
Fourth quarter
0.5000
The Company pays distributions to common stockholders quarterly each January, April, July and October, at the discretion of the board of directors. Distribution amounts depend on our FFO, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the board of directors deems relevant.
The table below reflects our purchases of equity securities during the three month period leading up to December 31, 2021.
Period Total Number of Shares (or Units) Purchased (1)
Average Price Paid per Share (or Units) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) that May Yet be Purchased Under the Plans or Programs
October 1 - October 31, 2021 - $ - - $ -
November 1 - November 30, 2021 - - - -
December 1 - December 31, 2021 168 63.03 - -
Total 168 $ 63.03 - $ -
_______________________
(1)Represents shares of common stock remitted to the Company to satisfy tax withholding obligations in connection with the distribution of, or the vesting and distribution of, restricted stock units or restricted stock in shares of common stock. The value of such shares of common stock remitted to the Company was based on the closing price of the Company’s common stock on the applicable withholding date.
MARKET FOR KILROY REALTY, L.P.’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for the Operating Partnership’s common units. As of the date this report was filed, there were 18 holders of record of common units (including through the Company’s general partnership interest).
The following table reports the distributions per common unit declared during the years ended December 31, 2021 and 2020.
2021 Per Unit Common
Unit Distribution
Declared
First quarter $ 0.5000
Second quarter 0.5000
Third quarter 0.5200
Fourth quarter 0.5200
2020 Per Unit Common
Unit Distribution
Declared
First quarter $ 0.4850
Second quarter 0.4850
Third quarter 0.5000
Fourth quarter 0.5000
The Operating Partnership did not redeem any common units for shares of the Company’s common stock in 2021. During 2020, the Operating Partnership redeemed 872,713 common units for the same number of shares of the Company’s common stock.
PERFORMANCE GRAPH
The following line graph compares the change in cumulative stockholder return on shares of the Company’s common stock to the cumulative total return of the FTSE NAREIT All Equity REIT Index, the Standard & Poor’s 500 Stock Index, and the Bloomberg Office REIT Index for the five-year period ended December 31, 2021. We include an additional index, the Bloomberg Office REIT Index, to the performance graph since management believes it provides additional information to investors about our performance relative to a more specific peer group. The Bloomberg Office REIT Index is a published and widely recognized index that comprises 23 office equity REITs, including us. The graph assumes the investment of $100 in us and each of the indices on December 31, 2016 and, as required by the SEC, the reinvestment of all distributions. The return shown on the graph is not necessarily indicative of future performance.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. The results of operations discussion is combined for the Company and the Operating Partnership because there are no material differences in the results of operations between the two reporting entities.
Forward-Looking Statements
Statements contained in this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts may be forward-looking statements. Forward-looking statements include, among other things, statements or information concerning our plans, objectives, capital resources, portfolio performance, results of operations, projected future occupancy and rental rates, lease expirations, debt maturities, potential investments, strategies such as capital recycling, development and redevelopment activity, projected construction costs, projected construction commencement and completion dates, projected square footage of space that could be constructed on undeveloped land that we own, projected rentable square footage of or number of units in properties under construction or in the development pipeline, anticipated proceeds from capital recycling activity or other dispositions and anticipated dates of those activities or dispositions, projected increases in the value of properties, dispositions, future executive incentive compensation, pending, potential or proposed acquisitions, plans to grow our Net Operating Income and FFO, our ability to re-lease properties at or above current market rates, anticipated market conditions and demographics and other forward-looking financial data, as well as the discussion in “-Factors That May Influence Future Results of Operations,” “-Liquidity and Capital Resource of the Company,” and “-Liquidity and Capital Resources of the Operating Partnership.” Forward-looking statements can be identified by the use of words such as “believes,” “expects,” “projects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” and the negative of these words and phrases and similar expressions that do not relate to historical matters. Forward-looking statements are based on our current expectations, beliefs and assumptions, and are not guarantees of future performance. Forward-looking statements are inherently subject to uncertainties, risks, changes in circumstances, trends and factors that are difficult to predict, many of which are outside of our control. Accordingly, actual performance, results and events may vary materially from those indicated or implied in the forward-looking statements, and you should not rely on the forward-looking statements as predictions of future performance, results or events. Numerous factors could cause actual future performance, results and events to differ materially from those indicated in the forward-looking statements, including, among others:
•global market and general economic conditions and their effect on our liquidity and financial conditions and those of our tenants;
•adverse economic or real estate conditions generally, and specifically, in the States of California, Texas and Washington;
•risks associated with our investment in real estate assets, which are illiquid and with trends in the real estate industry;
•defaults on or non-renewal of leases by tenants;
•any significant downturn in tenants’ businesses;
•our ability to re-lease property at or above current market rates;
•costs to comply with government regulations, including environmental remediations;
•the availability of cash for distribution and debt service and exposure to risk of default under debt obligations;
•increases in interest rates and our ability to manage interest rate exposure;
•the availability of financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue development, redevelopment and acquisition opportunities and refinance existing debt;
•a decline in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing, and which may result in write-offs or impairment charges;
•significant competition, which may decrease the occupancy and rental rates of properties;
•potential losses that may not be covered by insurance;
•the ability to successfully complete acquisitions and dispositions on announced terms;
•the ability to successfully operate acquired, developed and redeveloped properties;
•the ability to successfully complete development and redevelopment projects on schedule and within budgeted amounts;
•delays or refusals in obtaining all necessary zoning, land use and other required entitlements, governmental permits and authorizations for our development and redevelopment properties;
•increases in anticipated capital expenditures, tenant improvement and/or leasing costs;
•defaults on leases for land on which some of our properties are located;
•adverse changes to, or enactment or implementations of, tax laws or other applicable laws, regulations or legislation, as well as business and consumer reactions to such changes;
•risks associated with joint venture investments, including our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers;
•environmental uncertainties and risks related to natural disasters;
•our ability to maintain our status as a REIT; and
•uncertainties regarding the impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business and the economy generally.
The factors included in this report are not exhaustive and additional factors could adversely affect our business and financial performance. For a discussion of additional factors that could materially adversely affect the Company’s and the Operating Partnership’s business and financial performance, see the discussion below as well as “Item 1A. Risk Factors,” and in our other filings with the SEC. All forward-looking statements are based on information that was available and speak only as of the dates on which they were made. We assume no obligation to update any forward-looking statement that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws.
Company Overview
We are a self-administered REIT active in premier office, life science and mixed-use submarkets in the United States. We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties in Greater Los Angeles, San Diego County, the San Francisco Bay Area, Greater Seattle and Austin, Texas, which we believe have strategic advantages and strong barriers to entry. We own our interests in all of our real properties through the Operating Partnership and generally conduct substantially all of our operations through the Operating Partnership. We owned an approximate 99.0% general partnership interest in the Operating Partnership as of both December 31, 2021 and 2020. All of our properties are held in fee except for the fourteen office buildings that are held subject to long-term ground leases for the land (see Note 18 “Commitments and Contingencies” to our consolidated financial statements included in this report for additional information regarding our ground lease obligations).
2021 Operating and Development Highlights
Throughout 2021, we remained steadfast to our core principles of creating value for our shareholders through development, executing leases, recycling capital into higher growth projects, all while maintaining a strong balance sheet and elevating our leadership position in ESG.
Development. We continued to execute on our development program during 2021. We added four completed development projects to our stabilized portfolio totaling 1.1 million rentable square feet of office and life science space and 193 residential units, had one development project progress from the under construction phase to the tenant improvement phase and acquired two development properties in two transactions for approximately $622.2 million. See “-Factors that May Influence Future Operations” for additional information regarding our development program.
Capital Recycling Program. We have continued to utilize our capital recycling program to provide additional capital to finance development expenditures, fund potential acquisitions, repay long-term debt and for other general corporate purposes. Our general strategy, depending on market conditions, is to target the disposition of non-core properties or those that have limited upside for us and redeploy the capital into acquisitions and/or development projects where we can create additional value to generate higher returns (see “-Factors that May Influence Future Operations” for additional information). In connection with this strategy, during 2021, we generated gross sales proceeds of approximately $1.12 billion through the sale of three office buildings. The taxable gain from the $1.08 billion disposition of one of these office buildings was deferred through a Section 1031 Exchange.
Leasing. During 2021, we executed new and renewal leases totaling 1.2 million square feet within our stabilized portfolio with an increase in GAAP rents of 20.8% and an increase in cash rents of 7.0%. Our stabilized office portfolio was 91.9% occupied and 93.9% leased as of December 31, 2021.
2021 Financing Highlights
In 2021, we issued $450.0 million in new debt at a stated interest rate of 2.65% and amended and restated the terms of our unsecured revolving credit facility, increasing the borrowing capacity from $750.0 million to $1.1 billion and reducing borrowing costs. We used a portion of the proceeds from the issuance of the new debt to early redeem the $300.0 million of 3.80% unsecured senior notes that were scheduled to mature on January 15, 2023. Refer to our 2021 Financing Highlights in “-Liquidity and Capital Resources of the Operating Partnership” for a list of financing transactions completed in 2021 and Note 9, “Secured and Unsecured Debt of the Operating Partnership” to our consolidated financial statements included in this report for additional information regarding our debt and capital market activity.
COVID-19 Response
Since March 2020, we have been highly focused on planning for the health and safety of our tenants and employees and preparing our buildings in accordance with the policies, protocols and applicable legal requirements in our regions. We hold our occupants’ health at the highest level of importance and have taken extensive steps to facilitate safe work environments. We engaged an industrial hygienist to assist us in designing new standard operating procedures for our buildings that include, but are not limited to, air filtration, water quality, janitorial products and procedures, social separation and screening during building access and elevator use, the use of personal protective equipment, signage, and management of construction activities. Our buildings have remained open to tenants throughout the pandemic and we have continued to see tenants returning to the workplace throughout 2021. We have been in communication with tenants regarding return to work protocols and safety measures, which meet or exceed local and state government guidelines. Our properties received the highest level of pandemic preparedness review through a third-party who verified that all recommended CDC and WHO measures have been successfully implemented, including on-site air, water and germ testing. Our employees began transitioning back to the office during the three months ended March 31, 2021 and by June 30, 2021, all of our employees had returned to our offices on a full-time basis.
We implemented a rent relief program for the majority of our retail tenants whereby we deferred rent from April 2020 to June 2021 in exchange for an extension of their current lease term for an equivalent number of months at future contractual rental rates. We are no longer offering rent relief to the majority of our retail tenants and we will evaluate any future retail rent relief requests on a specific case-by-case basis and only consider those which have a justifiable financial basis. Additionally, the form of relief provided to retail tenants may vary in the future. We did not create a rent relief program for our office tenants. Instead, we evaluate office rent relief requests on a specific case-by-case basis and only consider those which have a justifiable financial basis.
We analyze our total lease receivable balances, tenant creditworthiness, specific industry trends and conditions, and current economic trends and conditions in order to evaluate whether we believe substantially all of the amounts due under a tenant’s lease agreement are deemed probable of collection over the term of the lease. Refer to our accounting policy for uncollectible lease receivables and allowances for tenant and deferred rent receivables in “- Critical Accounting Policies and Estimates” for additional information.
Deferrals of gross rent billings that have been extended to office and retail tenants during the period have been formalized by the execution of lease amendments that generally provide for repayment of deferred amounts through an extension of the lease term by an equivalent period of months to the deferral period. Not all tenant relief requests will ultimately result in lease amendments and we have not relinquished our contractual rights under our lease agreements where rent concessions have not yet been granted. Our rent collections and rent relief requests to-date may not be indicative of collections, concessions or requests in future periods.
For the year ended December 31, 2021, our collections of gross rent billings were consistent with our 2020 collections. Gross rent billings represents the total contractual base rent (including tenant direct-billed parking) and CAM billings before any COVID-19 related rent concessions. We are continuing to monitor the potential impact of the COVID-19 pandemic, including the spread of new variants of the virus and restrictions intended to prevent its spread, including on occupancy, rental rates and rent collections. Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent for such period, as well as working with certain tenants who have requested rent deferrals, we can provide no assurance that such efforts or our efforts in future periods will be successful, particularly in the event that the COVID-19 pandemic, and restrictions intended to prevent its spread, continue for a prolonged period. With growing vaccination rates, we have seen increases in physical occupancy at our properties, although recovery could be hindered by persistent or resurgent infection rates, including as a result of the spread of new variants of the virus. Refer to “Part I, Item IA. Risk Factors” included in this report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting periods.
Certain accounting policies are considered to be critical accounting policies. Critical accounting policies are those policies that require our management team to make significant estimates and/or assumptions about matters that are uncertain at the time the estimates and/or assumptions are made or where we are required to make significant judgments and assumptions with respect to the practical application of accounting principles in our business operations. Critical accounting policies are by definition those policies that are material to our financial statements and for which the impact of changes in estimates, assumptions, and judgments could have a material impact to our financial statements.
The following critical accounting policies discussion reflects what we believe are the most significant estimates, assumptions, and judgments used in the preparation of our consolidated financial statements. This discussion of our critical accounting policies is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates, assumptions, and judgments. For further discussion of our significant accounting policies, see Note 2 “Basis of Presentation and Significant Accounting Policies” to our consolidated financial statements included in this report.
Revenue Recognition
Rental revenue for office, life science and retail operating properties is our principal source of revenue. We recognize revenue from base rent (fixed lease payments), additional rent (variable lease payments, which consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs), parking and other lease-related revenue once all of the following criteria are met: (i) the agreement has been fully executed and delivered, (ii) services have been rendered, (iii) the amount is fixed or determinable and (iv) payment has been received or the collectability of the amount due is probable. Minimum annual rental revenues are recognized in rental revenues on a straight-line basis over the non-cancellable term of the related lease.
Base Rent
The timing of when we commence rental revenue recognition for office, life science and retail properties depends largely on our conclusion as to whether we are or the tenant is the owner for accounting purposes of tenant improvements at the leased property. When we conclude that we are the owner of tenant improvements for accounting purposes, we record the cost to construct the tenant improvements as an asset and commence rental revenue recognition when the tenant takes possession of or controls the finished space, which is generally when tenant improvements being recorded as our assets are substantially complete. In certain instances, when we conclude that the tenant is the owner of certain tenant improvements for accounting purposes, rental revenue recognition begins when the tenant takes possession or controls the physical use of the leased space, which may occur in phases or for an entire building or project. The determination of who owns the tenant improvements is made on a lease-by-lease basis and has a significant effect on the timing of commencement of revenue recognition.
The determination of whether we are or the tenant is the owner of tenant improvements for accounting purposes is subject to significant judgment. In making that determination, we consider numerous factors and perform a detailed evaluation of each individual lease. No one factor is determinative in reaching a conclusion. The factors we evaluate include but are not limited to the following:
•whether the lease agreement requires landlord approval of how the tenant improvement allowance is spent prior to installation of the tenant improvements;
•whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what the tenant improvement allowance was spent on prior to payment by the landlord for such tenant improvements;
•whether the tenant improvements are unique to the tenant or reusable by other tenants;
•whether the tenant is permitted to alter or remove the tenant improvements without the consent of the landlord or without compensating the landlord for any lost utility or diminution in fair value; and
•whether the ownership of the tenant improvements remains with the landlord or remains with the tenant at the end of the lease term.
When we conclude that we are the owner of tenant improvements for accounting purposes using the factors discussed above, we record the cost to construct the tenant improvements, including costs paid for or reimbursed by the tenants, as our capital asset. During the years ended December 31, 2021, 2020, and 2019, we capitalized $37.3 million, $15.5 million, and $12.0 million, respectively, of tenant-funded tenant improvements. The amount of tenant-funded tenant improvements recorded in any given year varies based upon the mix of specific leases executed and/or commenced during the reporting period. For these tenant-funded tenant improvements, we record the amount funded by or reimbursed by tenants as deferred revenue, which is amortized and recognized as rental income on a straight-line basis over the term of the related lease beginning upon substantial completion of the leased premises. The determination of who owns the tenant improvements has a significant impact on the amount of non-cash rental revenue that we record related to the amortization of deferred revenue for tenant-funded tenant improvements. For the years ended December 31, 2021, 2020, and 2019, we recognized $16.5 million, $22.5 million and $19.2 million, respectively, of non-cash rental revenue related to the amortization of deferred revenue recorded in connection with tenant-funded tenant improvements.
When we conclude that the tenant is the owner of certain tenant improvements for accounting purposes, we record our contribution towards those tenant-owned improvements as a lease incentive, which is included in deferred leasing costs and acquisition-related intangible assets, net on our consolidated balance sheets and amortized as a reduction to rental revenue on a straight-line basis over the term of the related lease.
For residential properties, we commence revenue recognition upon lease commencement. Residential rental revenue is recognized on a straight-line basis over the term of the related lease, net of any concessions.
When a lease is amended, which may occur from time to time, we need to determine whether (1) an additional right of use not included in the original lease is being granted as a result of the modification, and (2) there is an increase in the lease payments that is commensurate with the standalone price for the additional right of use. If both of those conditions are met, the amendment is accounted for as a separate lease contract. If either of those conditions are not met, the amendment is accounted for as a lease modification . Most of our lease amendments are accounted for as a modification of our operating leases which will likely require us to reassess both the lease term and fixed lease payments, including considering any prepaid or deferred rent receivables relating to the original lease, as a part of the lease payments for the modified lease.
Termination options in some of our leases allow the tenant to terminate the lease, in part or in whole, prior to the end of the lease term under certain circumstances. Termination options require advance notification from the tenant and payment of a termination fee that reimburses us for a portion of the remaining rent under the original lease term and the net book value of lease inception costs such as commissions, tenant improvements and lease incentives. Termination fee income, included in rental income, is recognized on a straight-line basis from the date of the executed termination agreement through lease expiration when the amount of the fee is determinable and collectability of the fee is probable. This fee income is reduced on a straight-line basis by any deferred rent receivable related to the lease.
Additional Rent - Reimbursements from Tenants
Additional rent, consisting of amounts due from tenants for common area maintenance, real estate taxes, and other recoverable costs, are recognized in rental income in the period the recoverable costs are incurred. Additional rent where we pay the associated costs directly to third-party vendors and are reimbursed by our tenants are recognized and recorded on a gross basis, with the corresponding expense recognized in property expenses or real estate taxes.
Calculating additional rent requires an in-depth analysis of the complex terms of each underlying lease. Examples of judgments and estimates used when determining the amounts recoverable include:
•estimating the final expenses, net of accruals, that are recoverable;
•estimating the fixed and variable components of operating expenses for each building;
•conforming recoverable expense pools to those used in establishing the base year or base allowance for the applicable underlying lease; and
•concluding whether an expense or capital expenditure is recoverable pursuant to the terms of the underlying lease.
During the year, we accrue estimated additional rent in the period in which the recoverable costs are incurred based on our best estimate of the amounts to be recovered. Throughout the year, we perform analyses to properly match additional rent with reimbursable costs incurred to date. Additionally, during the fourth quarter of each year, we perform preliminary reconciliations and if a change in estimate is warranted, accrue additional rent or refunds. Subsequent to year end, we perform final detailed reconciliations and analyses on a lease-by-lease basis and bill or refund each tenant for any cumulative annual adjustments in the first and second quarters of each year for the previous year’s activity. Our historical experience for the years ended December 31, 2020 and 2019 has been that our final reconciliation and billing process resulted in final amounts that approximated the total annual additional rent recognized.
Uncollectible Lease Receivables and Allowances for Tenant and Deferred Rent Receivables
Current tenant receivables consist primarily of amounts due for contractual lease payments and reimbursements of common area maintenance expenses, property taxes, and other costs recoverable from tenants. Deferred rent receivables represent the amount by which the cumulative straight-line rental revenue recorded to date exceeds cash rents billed to date under the lease agreement.
We carry our current and deferred rent receivables net of allowances for amounts that may not be collected. These allowances are increased or decreased through rental income, and our determination of the adequacy of the Company’s allowances for tenant receivables includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. Such assessment involves using a methodology that incorporates a specific identification analysis and an aging analysis, considering the current economic and business environment, including factors such as the age and nature of the receivables, the payment history and financial condition of the tenant, our assessment of the tenant’s ability to meet its lease obligations, and the status of negotiations of any disputes with the tenant. This determination requires significant judgment and estimates about matters that are uncertain at the time the estimates are made, including the creditworthiness of specific tenants, specific industry trends and conditions, and general economic trends and conditions. Since these factors are beyond our control, actual results can differ from our estimates, and such differences could be material. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term, and for some tenants may include an offsetting partial allowance for uncollectible accounts related to current tenant and deferred rent receivables that exhibit a certain level of collection risk based on the results of the assessment described above. For leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, including deferred revenue, with any tenant and deferred rent receivable balances charged as a direct write-
off against rental income in the period of the change in the collectability determination. If the collectability determination subsequently changes to being probable of collection for leases for which revenue is recorded based on cash received from the tenant, we resume recognizing revenue, including deferred revenue, on a straight-line basis and recognize incremental revenue related to the reinstatement of cumulative deferred rent receivable and deferred revenue balances, as if revenue had been recorded on a straight-line basis since the inception of the lease.
For the years ended December 31, 2021 and 2020, we recorded a net reduction to rental revenues for direct write-offs associated with transitioning certain tenants to a cash basis of reporting and an allowance for uncollectible accounts for both current tenant receivables and deferred rent receivables of approximately 0.3% and 2.1% of total revenues, respectively. These amounts were primarily as a result of tenant creditworthiness considerations arising from the COVID-19 pandemic, and a small portion of the 2020 amounts was restored in 2021 based on changes in collectability assessments. Additional amounts may potentially be restored in future periods as circumstances warrant consistent with our accounting policies. For the year ended December 31, 2019, we recorded an increase to rental revenues for recoveries of prior year provision for bad debts, net of an allowance for uncollectible accounts for both current tenant receivables and deferred rent receivables, of approximately 0.3% of revenues. In the event our estimates were not accurate and we had to change our allowances by 1% of revenue from continuing operations, the potential impact to our net income available to common stockholders would be approximately $9.6 million, $9.0 million and $8.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Acquisitions
Acquisitions of operating properties and development and redevelopment opportunities generally do not meet the definition of a business and are accounted for as asset acquisitions, as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. For these asset acquisitions, we record the acquired tangible and intangible assets and assumed liabilities based on each asset’s and liability’s relative fair value at the acquisition date of the total purchase price plus any capitalized acquisition costs.
We assess and consider fair value based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates that we deem appropriate. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land and improvements, buildings and improvements, construction in progress and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market operating leases and ground leases, acquired in-place lease values and tenant relationships, if any.
The fair value of land and improvements is derived from comparable sales of land and improvements within the same submarket and/or region. The fair value of buildings and improvements, tenant improvements and leasing costs considers the value of the property as if it was vacant as well as current replacement costs and other relevant market rate information.
The fair value of the above-market or below-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) management’s estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease for above-market operating leases and the initial non-cancellable term plus the term of any below-market fixed rate renewal options, if applicable, for below-market operating leases. The amounts recorded for above-market operating leases are included in deferred leasing costs and acquisition-related intangible assets, net on the balance sheet and are amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable leases. The amounts recorded for below-market operating leases are included in deferred revenue and acquisition-related liabilities, net on the balance sheet and are amortized on a straight-line basis as an increase to rental income over the remaining term of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. Our below-market operating leases generally do not include fixed rate or below-market renewal options. If a lease were to be terminated or if termination were
determined to be likely prior to its contractual expiration (for example resulting from bankruptcy), amortization of the related above-market or below-market lease intangible would be accelerated.
The fair value of acquired in-place leases is derived based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors we consider in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand at market rates. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses. The amount recorded for acquired in-place leases is included in deferred leasing costs and acquisition-related intangible assets, net on the balance sheet and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases. If a lease were to be terminated or if termination were determined to be likely prior to its contractual expiration (for example resulting from bankruptcy), amortization of the related unamortized in-place lease intangible would be accelerated.
The determination of the fair value of any debt assumed in connection with a property acquisition is estimated by discounting the future cash flows using interest rates available for the issuance of debt with similar terms and remaining maturities.
The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of acquisitions requires us to make significant judgments and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of our acquisition related assets and liabilities and the related depreciation and amortization expense recorded for such assets and liabilities. In addition, because the value of above and below market leases are amortized as either a reduction or increase to rental income, respectively, our judgments for these intangibles could have a significant impact on our reported rental revenues and results of operations.
Transaction costs associated with our acquisitions, including costs incurred during negotiation, are capitalized as part of the purchase price of the acquisition. During the years ended December 31, 2021, 2020 and 2019, we capitalized $1.3 million, $0.3 million, and $1.6 million, respectively, of acquisition costs.
Evaluation of Asset Impairment
We evaluate our real estate assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a given asset may not be recoverable. We evaluate our real estate assets for impairment on a property-by-property basis. Indicators we use to determine whether an impairment evaluation is necessary include:
•low occupancy levels, forecasted low occupancy levels or near term lease expirations at a specific property;
•current period operating or cash flow losses combined with a historical pattern or future projection of potential continued operating or cash flow losses at a specific property;
•deterioration in rental rates for a specific property as evidenced by sudden significant rental rate decreases or continuous rental rate decreases over numerous quarters, which could signal a continued decrease in future cash flow for that property;
•deterioration of a given rental submarket as evidenced by significant increases in market vacancy and/or negative absorption rates or continuous increases in market vacancy and/or negative absorption rates over numerous quarters, which could signal a decrease in future cash flow for properties within that submarket;
•significant increases in property sales yields, continuous increases in property sales yields over several quarters, or recent property sales at a loss within a given submarket, each of which could signal a decrease in the market value of properties;
•significant change in strategy or use of a specific property or any other event that could result in a decreased holding period, including classifying a property as held for sale, or significant development delay;
•evidence of material physical damage to the property; and
•default by a significant tenant when any of the other indicators above are present.
When we evaluate for potential impairment our real estate assets to be held and used, we first evaluate whether there are any indicators of impairment. If any impairment indicators are present for a specific real estate asset, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the real estate asset to the real estate asset’s estimated undiscounted future cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair value of the real estate asset is less than the net carrying value of the real estate asset. Our impairment loss calculation compares the net carrying amount of the real estate asset to the real estate asset’s estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals. We recognize an impairment loss if the amount of the asset’s net carrying amount exceeds the asset’s estimated fair value. If we recognize an impairment loss, the estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis would be depreciated (amortized) over the remaining useful life of that asset. If a real estate asset is designated as real estate held for sale, it is carried at the lower of the net carrying value or estimated fair value less costs to sell, and depreciation ceases.
Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flow and property fair values, including determining our estimated holding period and selecting the discount or capitalization rate that reflects the risk inherent in future cash flow. Estimating projected cash flow is highly subjective as it requires assumptions related to future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, and occupancy levels. We are also required to make a number of assumptions relating to future economic and market events and prospective operating trends. Determining the appropriate capitalization rate also requires significant judgment and is typically based on many factors including the prevailing rate for the market or submarket, as well as the quality and location of the properties. Further, capitalization rates can fluctuate resulting from a variety of factors in the overall economy or within regional markets. If the actual net cash flow or actual market capitalization rates significantly differ from our estimates, the impairment evaluation for an individual asset could be materially affected.
For each property where such an indicator occurred and/or for properties within a given submarket where such an indicator occurred, we completed an impairment evaluation. After completing this process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period were in excess of carrying value and, therefore, we did not record any impairment losses for these properties for the years ended December 31, 2021, 2020 and 2019.
Cost Capitalization and Depreciation
We capitalize costs associated with development and redevelopment activities, capital improvements, and tenant improvements, including internal compensation costs. For the years ended December 31, 2021, 2020 and 2019, we capitalized $20.7 million, $21.8 million and $25.6 million, respectively, of internal costs to our qualifying development and redevelopment projects. In addition, for development and redevelopment projects, we also capitalize the following costs during periods in which activities necessary to prepare the project for its intended use are in progress: interest costs based on the weighted average interest rate of our outstanding indebtedness for the period, real estate taxes and insurance.
Amounts capitalized are depreciated or amortized over estimated useful lives determined by management. We depreciate buildings and improvements based on the estimated useful life of the asset, and we amortize tenant improvements over the shorter of the estimated useful life or estimated remaining life of the related lease. All capitalized costs are depreciated or amortized using the straight-line method.
Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment. Expenditures that meet one or more of the following criteria generally qualify for capitalization:
•provide benefit in future periods;
•extend the useful life of the asset beyond our original estimates; and
•increase the quality of the asset beyond our original estimates.
Our historical experience has demonstrated that we have not had material write-offs of assets and that our depreciation and amortization estimates have been reasonable and appropriate.
Share-Based Incentive Compensation Accounting
At December 31, 2021, the Company had one share-based incentive compensation plan, the Kilroy Realty 2006 Incentive Award Plan, which is described more fully in Note 15 “Share-Based and Other Compensation” to our consolidated financial statements included in this report. The Executive Compensation Committee determines compensation for executive officers, as defined in Rule 16 under the Exchange Act. Compensation cost for all share-based awards, including options, requires an estimate of fair value on the grant date and compensation cost is recognized on a straight-line basis over the service vesting period, which represents the requisite service period. The grant date fair value for compensation programs that contain market conditions, like modifiers based on total stockholder return (a “market condition”), are performed using complex pricing valuation models that require the input of assumptions, including judgments to estimate expected stock price volatility, expected life, and forfeiture rate. Specifically, the grant date fair value of share-based compensation programs that include market conditions are calculated using a Monte Carlo simulation pricing model and the grant date fair value of stock option grants are calculated using the Black-Scholes valuation model. Additionally, certain of our market condition share-based compensation programs also contain pre-defined financial performance conditions, including FFO per share and debt to EBITDA ratio goals which can impact the number of restricted stock units ultimately earned. This variability relating to the level of the performance condition achieved requires management’s judgment and estimates, which impacts compensation cost recognized for these awards during the performance period. As of December 31, 2021, the performance condition for certain of our outstanding market condition share-based compensation programs has been met and compensation cost for these awards is no longer variable. For these awards, although the number of restricted stock units ultimately earned remains variable subject to the ultimate achievement level of the market condition, compensation cost is no longer variable for these awards as the market condition was already taken into consideration as part of the grant date fair value calculation. As of December 31, 2021, there are certain outstanding share-based compensation awards where the achievement of the performance condition is yet unknown as the award is still within its performance measurement period. For these awards, compensation cost and the number of restricted stock units ultimately earned remains variable and compensation cost for these awards is recorded based the estimated level of achievement of the performance conditions through the requisite service period. Changes to compensation cost resulting from changes in the estimated level of achievement of the performance conditions are recorded as cumulative adjustments in the period the change in the estimated level of achievement of the performance conditions is determined.
For the years ended December 31, 2021, 2020, and 2019 we recorded approximately $26.2 million, $23.4 million, and $18.1 million, respectively, of compensation cost related to programs that were subject to such valuation models. If the valuation of the grant date fair value for such programs changed by 10%, the potential impact to our net income available to common stockholders would be approximately $2.3 million, $2.0 million, and $1.6 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Factors That May Influence Future Results of Operations
Development and Redevelopment Programs
We believe that a portion of our long-term future growth will continue to come from the completion of our in-process development and redevelopment projects and, subject to market conditions, executing on our future development pipeline, including expanding entitlements. Over the past several years, we increased our focus on development and redevelopment opportunities and expanded our future development pipeline through targeted acquisitions of development opportunities on the West Coast and in June 2021, into Austin, Texas with our acquisition of Indeed Tower, which is in the tenant improvement phase.
We have a proactive planning process by which we continually evaluate the size, timing, costs and scope of our development and redevelopment programs and, as necessary, scale activity to reflect the economic conditions and the real estate fundamentals that exist in our submarkets. We expect to execute on our development and redevelopment programs with prudence and will be pursuing opportunities with attractive economic returns in strategic locations with proximity to public transportation or transportation access and retail amenities and in markets with strong fundamentals and visible demand. We plan to develop in phases, as appropriate, and we generally favor starting projects with pre-leasing activity.
Consistent with 2020, our development activities were largely unaffected by the COVID-19 pandemic during the year ended December 31, 2021; however, the COVID-19 pandemic, and future restrictions intended to prevent its spread if case rates surge again, as a result of the spread of new variants or otherwise, may cause delays or increase costs associated with building materials or construction services necessary for construction which could adversely impact our ability to continue or complete construction as planned, on budget or at all for our development projects, and may delay the start of construction on our future development pipeline projects. Refer to “Part I , Item IA. Risk Factors” included in this report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Stabilized Development Projects
During the year ended December 31, 2021, we completed and added the following projects to our stabilized portfolio:
•9455 Towne Centre Drive, University Towne Center, San Diego, California. In March 2019, we commenced construction on this project which totals 160,444 square feet of office space at a total estimated investment of $95.0 million. The project is 100% leased to a global technology company. We completed construction and commenced revenue recognition during the three months ended March 31, 2021.
•12860 El Camino Real (One Paseo - Office Building 1) - Del Mar, San Diego, California. We commenced construction on the office component of this project in December 2018. We completed construction on this building, which encompasses 92,042 square feet of office space at a total estimated investment of $65.0 million in June 2020. At December 31, 2021, the building was 100% occupied.
•12830 El Camino Real (One Paseo - Office Building 2), Del Mar San Diego, California. We commenced construction on the office component of this project in December 2018. We completed construction on this building, which encompasses 196,444 square feet of office space at a total estimated investment of $145.0 million in June 2020. At December 31, 2021, the building was 100% leased and we had commenced revenue recognition on approximately 89% of the project.
•350, 352 and 354 Oyster Point Boulevard (Kilroy Oyster Point - Phase 1), South San Francisco, California. In March 2019, we commenced construction on Phase I of this 39-acre life science campus situated on the waterfront in South San Francisco. 350 Oyster Point Boulevard encompasses 234,892 square feet of office
space at a total estimated investment of $215.0 million and is 100% leased to one tenant. We completed construction on 350 Oyster Point Boulevard during September 2021 and commenced revenue recognition on October 1, 2021. 352 and 354 Oyster Point Boulevard encompass 425,687 square feet of office space at a total estimated investment of $355.0 million and are 100% leased to one tenant. We completed construction on 352 and 354 Oyster Point Boulevard during October 2021 and commenced revenue recognition on November 1, 2021.
•Jardine, Hollywood, California. We commenced construction on this residential project, which encompasses 193 residential units at a total estimated investment of $185.0 million, in December 2018. We completed construction and commenced revenue recognition during the three months ended June 30, 2021. As of January 27, 2022, the project was 84% leased.
In-Process Development Projects - Tenant Improvement
As of December 31, 2021, the following projects were in the tenant improvement phase:
•2100 Kettner, Little Italy, San Diego, California. We commenced construction on this project in September 2019. This project is comprised of approximately 235,000 square feet of office space for a total estimated investment of $140.0 million. We currently expect this project to reach stabilization in the third quarter of 2022.
•333 Dexter, South Lake Union, Seattle, Washington. We commenced construction on this project in June 2017. This project encompasses approximately 635,000 square feet of office space at a total estimated investment of $410.0 million and 100% of the project is leased to a global technology company. In June 2020, we completed construction and commenced revenue recognition on the first phase of the project, representing approximately 49% of the project. The remaining two phases are currently expected to reach stabilization in the second half of 2022.
•Indeed Tower, Austin CBD, Austin, Texas. We acquired this project upon core/shell completion in June 2021. This project encompasses approximately 734,000 square feet of office space at a total estimated investment of $690.0 million and is 58% leased to four tenants with 42% of the space leased to Indeed.com through 2034. We currently expect this project to reach stabilization in the first quarter of 2024.
In-Process Development Projects - Under Construction
As of December 31, 2021, we had two projects in our in-process development pipeline that were under construction:
•Kilroy Oyster Point (Phase 2), South San Francisco, California. In June 2021, we commenced construction on Phase 2 of this 39-acre life science campus situated on the waterfront in South San Francisco. The second phase encompasses approximately 875,000 square feet of office space across three buildings at a total estimated investment of $940.0 million.
•9514 Towne Centre Drive, University Towne Center, San Diego, California. In September 2021, we commenced construction on this project, which is comprised of 71,000 square feet of office space at a total estimated investment of $60.0 million. The building is 100% leased.
In-Process Redevelopment
As of December 31, 2021, we had one redevelopment project that was under construction:
•12340 El Camino Real, Del Mar, San Diego, California. During the three months ended December 31, 2021, we began the phased redevelopment of this property, comprised of approximately 96,000 square feet, for life science use. We expect to complete redevelopment of the project in the third quarter of 2022 with total estimated redevelopment costs of $40.0 million, inclusive of the depreciated basis of the building. The project is 100% leased to a life science tenant and will have phased commencement dates during 2022.
Committed Redevelopment
As of December 31, 2021, we had two projects that were committed for redevelopment in phases based on existing lease expiration dates and timing of tenant improvement build-outs:
•12400 High Bluff Drive, Del Mar, San Diego, California. We executed a lease with a life science tenant for 182,000 square feet of this property, of which we plan to redevelop approximately 144,000 square feet, beginning in the first quarter of 2022. We expect to complete redevelopment of the project in the third quarter of 2022 with total estimated redevelopment costs of $50.0 million, inclusive of 66% of the depreciated basis of the building.
•4690 Executive Drive, University Towne Center, San Diego, California. We plan to redevelop this property, comprised of approximately 52,000 square feet, in phases, beginning in the second quarter of 2022 for life science use. We expect to complete redevelopment of the project in the third quarter of 2023 with total estimated redevelopment costs of $25.0 million, inclusive of the depreciated basis of the building. The project is 100% leased to a life science tenant.
Future Development Pipeline
As of December 31, 2021, our future development pipeline included six future projects located in Greater Seattle, the San Francisco Bay Area and San Diego County with an aggregate cost basis of approximately $1.0 billion, at which we believe we could develop more than 5.5 million rentable square feet for a total estimated investment of approximately $5.0 billion to $7.0 billion, depending on successfully obtaining entitlements and market conditions.
The following table sets forth information about our future development pipeline.
Future Development Pipeline Location Approx. Developable Square Feet (1)
Total Costs
as of 12/31/2021
($ in millions)(2)
San Diego County
Santa Fe Summit - Phases 2 and 3 56 Corridor 600,000 - 650,000 $ 87.8
2045 Pacific Highway Little Italy 275,000 48.7
Kilroy East Village East Village TBD 61.8
San Francisco Bay Area
Kilroy Oyster Point - Phases 3 and 4 South San Francisco 875,000 - 1,000,000 203.6
Flower Mart SOMA 2,300,000 460.8
Greater Seattle
SIX0 - Office & Residential Denny Regrade 925,000 155.2
TOTAL: $ 1,017.9
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(1)The developable square feet and scope of projects could change materially from estimated data provided due to one or more of the following: any significant changes in the economy, market conditions, our markets, tenant requirements and demands, construction costs, new supply, regulatory and entitlement processes or project design.
(2)Represents cash paid and costs incurred, including accrued liabilities in accordance with GAAP, as of December 31, 2021.
Fluctuations in our development activities could cause fluctuations in the average development asset balances qualifying for interest and other carrying cost and internal cost capitalization in future periods. During the years ended December 31, 2021 and 2020, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately $2.0 billion, as it was determined these projects qualified for interest and other carrying cost capitalization under GAAP. In the event of an extended cessation of development activities, such projects may potentially no longer qualify for capitalization of interest or other carrying costs. However, a cessation of development activities caused by events outside of our control, such as those as a result of government restrictions aimed at stopping the spread of COVID-19, would not impact our ability to capitalize interest and other carrying costs. For the years ended December 31, 2021 and 2020, we capitalized $80.2 million and $79.6 million, respectively, of interest to our qualifying development and redevelopment projects. For the years ended December 31, 2021 and 2020, we capitalized $20.7 million and $21.8 million, respectively, of internal costs to our qualifying redevelopment and development projects.
Capital Recycling Program
We continuously evaluate opportunities for the potential disposition of non-core properties and undeveloped land in our portfolio or the formation of strategic ventures with the intent of recycling the proceeds generated into capital used to fund new operating and development acquisitions, to finance development and redevelopment expenditures, to repay long-term debt and for other general corporate purposes. As part of this strategy, we attempt to enter into Section 1031 Exchanges and other tax deferred transaction structures, when possible, to defer some or all of the taxable gains on the sales, if any, for federal and state income tax purposes. See the “Liquidity and Capital Resources of the Operating Partnership - Liquidity Sources” section for further discussion of our capital recycling activities.
In connection with our capital recycling strategy, during 2021, we completed the sale of three office properties to unaffiliated third parties for total gross sales proceeds of $1.12 billion through the sale of three office buildings. The taxable gain from the $1.08 billion disposition of one of these office buildings was deferred through a Section 1031 Exchange. During 2020, we completed the sale of one office property to unaffiliated third parties for total gross sales proceeds of $75.9 million.
The timing of any potential future disposition or strategic venture transactions will depend on market conditions and other factors, including but not limited to our capital needs, the availability of financing for potential buyers (which has been and may continue to be constrained for some potential buyers due to the ongoing COVID-19 pandemic’s impact on economic and market conditions, including the financial markets), and our ability to defer some or all of the taxable gains on the sales. We cannot assure that we will dispose of any additional properties, enter into any additional strategic ventures, or that we will be able to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange or be able to use other tax deferred structures in connection with our strategy. See the “Liquidity and Capital Resources of the Operating Partnership - Liquidity Sources” section for further information.
Acquisitions
As part of our growth strategy, which is highly dependent on market conditions and business cycles, among other factors, we continue to evaluate strategic opportunities and remain a disciplined buyer of development and redevelopment opportunities as well as value-add and strategic operating properties and land. We focus on growth opportunities primarily in markets populated by knowledge and creative-based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services. Against the backdrop of market volatility, we expect to manage a strong balance sheet, execute on our development and redevelopment programs and selectively evaluate opportunities that we believe have the potential to either add immediate Net Operating Income to our portfolio or play a strategic role in our future growth.
During the year ended December 31, 2021, we acquired one operating property, the land underlying a historical ground lease and two development properties in four transactions for a total cash purchase price of $1.16 billion. We did not acquire any operating or development properties during the year ended December 31, 2020. We generally finance our acquisitions through proceeds from the issuance of debt and equity securities, borrowings
under our unsecured revolving credit facility, proceeds from our capital recycling program, the assumption of existing debt and cash flows from operations.
In connection with our growth strategy, we often have one or more potential acquisitions of properties and/or undeveloped land under consideration that are in varying stages of negotiation and due diligence review, or under contract, at any point in time. However, we cannot provide assurance that we will enter into any agreements to acquire properties, or undeveloped land, or that the potential acquisitions contemplated by any agreements we may enter into in the future will be completed. In addition, acquisitions are subject to various risks and uncertainties and we may be unable to complete an acquisition after making a nonrefundable deposit or incurring acquisition-related costs.
Incentive Compensation
Our Executive Compensation Committee determines compensation, including cash bonuses and equity incentives, for our executive officers, as defined in Rule 16 under the Exchange Act. For 2021, the annual cash bonus program was structured to allow the Executive Compensation Committee to evaluate a variety of key quantitative and qualitative metrics at the end of the year and make a determination based on the Company’s and management’s overall performance. Our Executive Compensation Committee also grants equity incentive awards from time to time that include performance-based and/or market-measure based vesting requirements and time-based vesting requirements. As a result, accrued incentive compensation and compensation expense for future awards may be affected by our operating and development performance, financial results, stock price, performance against applicable performance-based vesting goals, market conditions, liquidity measures, and other factors. Consequently, we cannot predict the amounts that will be recorded in future periods related to such incentive compensation.
As of December 31, 2021, there was approximately $23.6 million of total unrecognized compensation cost related to outstanding nonvested RSUs issued under share-based compensation arrangements. Those costs are expected to be recognized over a weighted-average period of 1.6 years. The ultimate amount of compensation cost recognized related to outstanding nonvested RSUs issued under share-based compensation arrangements may vary for performance-based RSUs that are still in the performance period based on performance against applicable performance-based vesting goals. The $23.6 million of unrecognized compensation cost does not reflect the future compensation cost for any potential share-based awards that may be issued subsequent to December 31, 2021. Share-based compensation expense for potential future awards could be affected by our operating and development performance, financial results, stock price, performance against applicable performance-based vesting goals, market conditions and other factors. For additional information regarding our equity incentive awards, see Note 15 “Share-Based and Other Compensation” to our consolidated financial statements included in this report.
Information on Leases Commenced and Executed
Leasing Activity and Changes in Rental Rates. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties, newly acquired properties with vacant space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Negative trends in one or more of these factors could adversely affect our rental income in future periods. The following tables set forth certain information regarding leasing activity for our stabilized portfolio during the year ended December 31, 2021.
For Leases Commenced
1st & 2nd Generation (1)(2)
2nd Generation (1)(2)
Number of
Leases (3)
Rentable
Square Feet (3)
Retention Rates (4)
TI/LC per
Sq. Ft. (5)
TI/LC per
Sq. Ft. / Year Changes in
Rents (6)(7)
Changes in
Cash Rents (8)
Weighted Average Lease Term (in months)
New Renewal New Renewal
Year Ended December 31, 2021 52 43 1,503,377 407,988 37.5 % $ 57.44 $ 8.73 48.4 % 28.6 % 79
For Leases Executed (9)
1st & 2nd Generation (1)(2)
2nd Generation (1)(2)
Number of Leases (3)
Rentable Square Feet (3)
TI/LC per Sq. Ft. (5)
TI/LC Per Sq. Ft. / Year Changes in
Rents (6)(7)
Changes in
Cash Rents (8)
Weighted Average Lease Term
(in months)
New Renewal New Renewal
Year Ended December 31, 2021 52 43 768,624 407,988 $ 38.15 $ 7.89 20.8 % 7.0 % 58
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(1)Includes 100% of consolidated property partnerships.
(2)First generation leasing includes space where we have made capital expenditures that result in additional revenue generated when the space is re-leased. Second generation leasing includes space where we have made capital expenditures to maintain the current market revenue stream.
(3)Represents leasing activity for leases that commenced or were signed during the period, including first and second generation space, net of month-to-month leases. Excludes leasing on new construction.
(4)Calculated as the percentage of space either renewed or expanded into by existing tenants or subtenants at lease expiration.
(5)Tenant improvements and leasing commissions per square foot exclude tenant-funded tenant improvements.
(6)Calculated as the change between GAAP rents for new/renewed leases and the expiring GAAP rents for the same space. Excludes leases for which the space was vacant longer than one year or vacant when the property was acquired.
(7)Excludes commenced and executed leases of approximately 972,706 and 528,897 rentable square feet, respectively, for the year ended December 31, 2021, for which the space was vacant longer than one year or being leased for the first time. Space vacant for more than one year is excluded from our change in rents calculations to provide a more meaningful market comparison.
(8)Calculated as the change between stated rents for new/renewed leases and the expiring stated rents for the same space. Excludes leases for which the space was vacant longer than one year or vacant when the property was acquired.
(9)For the year ended December 31, 2021, 20 new leases totaling 565,035 rentable square feet were signed but not commenced as of December 31, 2021.
Our rental rates and occupancy are impacted by general economic conditions, including the pace of regional economic growth and access to capital. Therefore, we cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current market rates. In addition, although we believe the weighted average cash rental rates for our stabilized portfolio are generally below current market rates in many of our markets, we are currently unable to provide further comparative information at December 31, 2021 due to the relatively low level of recent transaction volume in our markets as a result of the COVID-19 pandemic.
As restrictions intended to prevent the spread of COVID-19 began to be lifted during the year ended December 31, 2021, we started to see an increase in prospective tenant tours and inquiries and leasing activity compared to 2020 levels. While we do not believe that our development leasing and ability to renew leases scheduled to expire has been significantly impacted by the COVID-19 pandemic, we do believe that the impact of the restrictions and social distancing guidelines and the economic uncertainty caused by the COVID-19 pandemic has impacted the timing and volume of leasing and may continue to do so in the future, particularly if case rates surge again, as a result of the spread of new variants or otherwise. Additionally, decreased demand, increased competition (including sublease space available from our tenants) and other negative trends or unforeseeable events that impair our ability
to timely renew or re-lease space could have further negative effects on our future financial condition, results of operations, and cash flows.
Scheduled Lease Expirations. The following tables set forth certain information regarding our lease expirations for our stabilized portfolio for the next five years and by region for the next two years.
Lease Expirations (1)
Year of Lease Expiration Number of
Expiring
Leases Total Square Feet % of Total Leased Sq. Ft. Annualized Base Rent (2)(3)
% of Total Annualized Base Rent (2)
Annualized Base Rent per Sq. Ft. (2)
2022 (4)
59 799,769 5.8 % $ 34,178 4.5 % $ 42.73
2023 (4)
79 1,557,424 11.1 % 79,366 10.4 % 50.96
2024 65 1,039,203 7.4 % 48,581 6.3 % 46.75
2025 60 798,352 5.7 % 39,784 5.2 % 49.83
2026 49 1,829,440 13.1 % 83,856 10.9 % 45.84
Total 312 6,024,188 43.1 % $ 285,765 37.3 % $ 47.44
Year
Region # of
Expiring Leases Total
Square Feet % of Total
Leased Sq. Ft. Annualized
Base Rent (2)(3)
% of Total
Annualized
Base Rent (2)
Annualized Rent
per Sq. Ft. (2)
2022 (4)
Greater Los Angeles 41 339,881 2.4 % $ 14,753 1.9 % $ 43.41
San Diego County 9 336,792 2.5 % 13,965 1.9 % 41.46
San Francisco Bay Area 5 50,166 0.4 % 3,180 0.4 % 63.39
Greater Seattle 4 72,930 0.5 % 2,280 0.3 % 31.26
Total 59 799,769 5.8 % $ 34,178 4.5 % $ 42.73
2023 (4)
Greater Los Angeles 44 436,497 3.1 % $ 23,625 3.1 % $ 54.12
San Diego County 10 193,842 1.4 % 8,342 1.1 % 43.04
San Francisco Bay Area 16 437,588 3.1 % 26,784 3.5 % 61.21
Greater Seattle 9 489,497 3.5 % 20,615 2.7 % 42.11
Total 79 1,557,424 11.1 % $ 79,366 10.4 % $ 50.96
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(1) For leases that have been renewed early with existing tenants, the expiration date and annualized base rent information presented takes into consideration the renewed lease terms. Excludes leases not commenced as of December 31, 2021, space leased under month-to-month leases, storage leases, vacant space and future lease renewal options not executed as of December 31, 2021.
(2) Annualized base rent includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases, and expense reimbursement revenue. Additionally, the underlying leases contain various expense structures including full service gross, modified gross and triple net. Percentages represent percentage of total portfolio annualized contractual base rental revenue. For additional information on tenant improvement and leasing commission costs incurred by the Company for the current reporting period, please see further discussion under the caption “Information on Leases Commenced and Executed.”
(3) Includes 100% of annualized base rent of consolidated property partnerships.
(4) Adjusting for leases executed as of December 31, 2021 but not yet commenced, the 2022 and 2023 expirations would be reduced by 214,542 and 18,728 square feet, respectively.
In addition to the 1.3 million rentable square feet, or 8.1%, of currently available space in our stabilized portfolio, leases representing approximately 5.8% and 11.1% of the occupied square footage of our stabilized portfolio are scheduled to expire during 2022 and 2023, respectively. The leases scheduled to expire in 2022 and 2023 represent approximately 2.4 million rentable square feet, or 14.9%, of our total annualized base rental revenue. Adjusting for leases executed as of December 31, 2021 but not yet commenced, the remaining 2022 and 2023 expirations would be 585,227 and 1,538,696 square feet, respectively.
Sublease Space. Of our leased space as of December 31, 2021, approximately 1.4 million rentable square feet, or 8.8% of the square footage in our stabilized portfolio, was available for sublease, primarily in the San Francisco Bay Area region. Of the 8.8% of available sublease space in our stabilized portfolio as of December 31, 2021, approximately 6.4% was vacant space, and the remaining 2.4% was occupied. Of the approximately 1.4 million rentable square feet available for sublease as of December 31, 2021, approximately 45,231 rentable square feet representing six leases are scheduled to expire in 2022, and approximately 45,321 rentable square feet representing four leases are scheduled to expire in 2023.
Stabilized Portfolio Information
As of December 31, 2021, our stabilized portfolio was comprised of 120 office and life science properties encompassing an aggregate of approximately 15.5 million rentable square feet and 1,001 residential units. Our stabilized portfolio includes all of our properties with the exception of development properties currently committed for construction, under construction or in the tenant improvement phase, redevelopment projects under construction, undeveloped land and real estate assets held for sale. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We define properties in the tenant improvement phase as office and life science properties that we are developing or redeveloping where the project has reached cold shell condition and is ready for tenant improvements, which may require additional major base building construction before being placed in service. Projects in the tenant improvement phase are added to our stabilized portfolio once the project reaches the earlier of 95% occupancy or one year from the date of the cessation of major base building construction activities. Costs capitalized to construction in progress for development and redevelopment properties are transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets as the historical cost of the property as the projects or phases of projects are placed in service.
We did not have any properties held for sale at December 31, 2021. Our stabilized portfolio also excludes our future development pipeline, which as of December 31, 2021 was comprised of six potential development sites, representing approximately 59 gross acres of undeveloped land on which we believe we have the potential to develop more than 5.5 million rentable square feet, depending upon economic conditions.
As of December 31, 2021, the following properties were excluded from our stabilized portfolio:
Number of
Properties/Projects Estimated Rentable
Square Feet (1)
In-process development projects - tenant improvement (2)
3 1,604,000
In-process development projects - under construction 2 946,000
In-process redevelopment projects - under construction (3)
1 96,000
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(1)Estimated rentable square feet upon completion.
(2)Includes the development property acquired in Austin, Texas during the year ended December 31, 2021. Refer to Note 3 “Acquisitions” to our consolidated financial statements included in this report for additional information.
(3)Excludes the two committed redevelopment projects at December 31, 2021, which are included in the stabilized portfolio.
The following table reconciles the changes in the rentable square feet in our stabilized office portfolio of operating properties from December 31, 2020 to December 31, 2021:
Number of
Buildings Rentable
Square Feet
Total as of December 31, 2020 117 14,620,166
Acquisitions 1 539,226
Completed development properties placed in-service 6 1,109,509
Properties transferred to redevelopment (1) (89,990)
Dispositions (3) (852,746)
Remeasurement - 130,363
Total as of December 31, 2021 (1)
120 15,456,528
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(1)Includes four properties owned by consolidated property partnerships (see Note 2 “Basis of Presentation and Significant Accounting Policies” to our consolidated financial statements included in this report for additional information).
Occupancy Information
The following table sets forth certain information regarding our stabilized portfolio:
Stabilized Portfolio Occupancy
Region Number of
Buildings Rentable Square Feet Occupancy at (1)
12/31/2021 12/31/2020 12/31/2019
Greater Los Angeles 55 4,436,656 86.1 % 88.1 % 95.2 %
San Diego County 22 2,426,585 95.9 % 85.2 % 89.7 %
San Francisco Bay Area 34 6,211,875 92.4 % 94.5 % 95.0 %
Greater Seattle 9 2,381,412 97.2 % 94.7 % 97.7 %
Total Stabilized Office Portfolio 120 15,456,528 91.9 % 91.2 % 94.6 %
Average Occupancy
Year Ended December 31,
2021 2020
Stabilized Office Portfolio (1)
91.7 % 92.6 %
Same Store Portfolio (2)
91.3 % 92.4 %
Residential Portfolio (3)
78.0 % 72.0 %
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(1) Occupancy percentages reported are based on our stabilized office portfolio as of the end of the period presented and exclude occupancy percentages of properties held for sale. Represents economic occupancy.
(2) Occupancy percentages reported are based on office properties owned and stabilized as of January 1, 2020 and still owned and stabilized as of December 31, 2021. See discussion under “Results of Operations” for additional information.
(3) Our residential portfolio consists of our 200-unit residential tower and 193-unit Jardine project in Hollywood, California and 608 residential units at our One Paseo mixed-use project in Del Mar, California.
Results of Operations
Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020
Net Operating Income
Management internally evaluates the operating performance and financial results of our stabilized portfolio based on Net Operating Income. We define “Net Operating Income” as consolidated operating revenues (rental income and other property income) less consolidated operating expenses (property expenses, real estate taxes and ground leases).
Net Operating Income is considered by management to be an important and appropriate supplemental performance measure to net income because we believe it helps both investors and management to understand the core operations of our properties excluding corporate and financing-related costs and non-cash depreciation and amortization. Net Operating Income is an unlevered operating performance metric of our properties and allows for a useful comparison of the operating performance of individual assets or groups of assets. This measure thereby provides an operating perspective not immediately apparent from GAAP income from operations or net income. In addition, Net Operating Income is considered by many in the real estate industry to be a useful starting point for determining the value of a real estate asset or group of assets. Other real estate companies may use different methodologies for calculating Net Operating Income, and accordingly, our presentation of Net Operating Income may not be comparable to other real estate companies. Because of the exclusion of the items shown in the reconciliation below, Net Operating Income should only be used as a supplemental measure of our financial performance and not as an alternative to GAAP income from operations or net income.
Management further evaluates Net Operating Income by evaluating the performance from the following property groups:
•Same Store Properties - includes the consolidated results of all of the office properties that were owned and included in our stabilized portfolio for two comparable reporting periods, i.e., owned and included in our stabilized portfolio as of January 1, 2020 and still owned and included in the stabilized portfolio as of December 31, 2021, including our 200-unit residential tower in Hollywood, California;
•Development Properties - includes the results generated by certain of our in-process development and redevelopment projects, expenses for certain of our future development projects and the results generated by the following stabilized development properties:
◦One retail development project that was added to the stabilized portfolio in the first quarter of 2020;
◦One office development project that was added to the stabilized portfolio in the fourth quarter of 2020;
◦One office development project that was added to the stabilized portfolio in the first quarter of 2021;
◦One office building that was added to the stabilized portfolio in the second quarter of 2021;
◦Two office buildings that were added to the stabilized portfolio in the third quarter of 2021;
◦Two office buildings that were added to the stabilized portfolio in the fourth quarter of 2021;
◦608 residential units at our One Paseo mixed-use project in Del Mar, California that were added to the stabilized portfolio in the third quarter of 2020; and
◦193 residential units at our Jardine project in Hollywood, California that were added to the stabilized portfolio in the second quarter of 2021.
•Acquisition Properties - includes the results, from the date of acquisition through the periods presented, for the one property acquired in the third quarter of 2021; and
•Disposition Properties - includes the results of the one property disposed of in the fourth quarter of 2020, the one property disposed of in the first quarter of 2021, and the two properties disposed of in the fourth quarter of 2021.
The following table sets forth certain information regarding the property groups within our stabilized office portfolio as of December 31, 2021.
Group # of Buildings Rentable
Square Feet
Same Store Properties 108 13,350,534
Stabilized Development Properties (1)
11 1,566,768
Acquisition Properties 1 539,226
Total Stabilized Portfolio 120 15,456,528
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(1)Excludes development projects in the tenant improvement phase, our in-process development and redevelopment projects and future development projects.
The following table summarizes our Net Operating Income, as defined, for our total portfolio for the years ended December 31, 2021 and 2020.
Year Ended December 31, Dollar
Change Percentage
Change
2021 2020
($ in thousands)
Reconciliation of Net Income Available to Common Stockholders to Net Operating Income, as defined:
Net Income Available to Common Stockholders $ 628,144 $ 187,105 $ 441,039 235.7 %
Net income attributable to noncontrolling common units of the Operating Partnership 6,163 2,869 3,294 114.8
Net income attributable to noncontrolling interests in consolidated property partnerships 24,603 17,319 7,284 42.1
Net income $ 658,910 $ 207,293 $ 451,617 217.9 %
Unallocated expense (income):
General and administrative expenses 92,749 99,264 (6,515) (6.6)
Leasing costs 3,249 4,493 (1,244) (27.7)
Depreciation and amortization 310,043 299,308 10,735 3.6
Interest income and other net investment gain (3,916) (3,424) (492) 14.4
Interest expense 78,555 70,772 7,783 11.0
Loss on early extinguishment of debt 12,246 - 12,246 100.0
Gains on sales of depreciable operating properties (463,128) (35,536) (427,592) 1,203.3
Net Operating Income, as defined $ 688,708 $ 642,170 $ 46,538 7.2 %
The following tables summarize our Net Operating Income, as defined, for our total portfolio for the years ended December 31, 2021 and 2020.
Year Ended December 31,
2021 2020
Same
Store Develop-ment Acquisi-tion Disposi-tion Total Same
Store Develop-ment Acquisi-tion Disposi-tion Total
(in thousands)
Operating revenues:
Rental income $ 797,696 $ 118,974 $ 9,908 $ 22,416 $ 948,994 $ 768,864 $ 35,902 $ - $ 87,540 $ 892,306
Other property income 4,856 1,138 40 12 6,046 5,178 576 - 337 6,091
Total 802,552 120,112 9,948 22,428 955,040 774,042 36,478 - 87,877 898,397
Property and related expenses:
Property expenses 140,994 20,249 1,307 3,152 165,702 136,899 8,227 - 9,992 155,118
Real estate taxes 74,865 15,851 840 1,653 93,209 73,605 7,290 - 11,323 92,218
Ground leases 7,390 31 - - 7,421 8,891 - - - 8,891
Total 223,249 36,131 2,147 4,805 266,332 219,395 15,517 - 21,315 256,227
Net Operating Income, as defined $ 579,303 $ 83,981 $ 7,801 $ 17,623 $ 688,708 $ 554,647 $ 20,961 $ - $ 66,562 $ 642,170
Year Ended December 31, 2021 as compared to the Year Ended December 31, 2020
Same Store Development Acquisition Disposition Total
Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change
($ in thousands)
Operating revenues:
Rental income $ 28,832 3.7 % $ 83,072 231.4 % $ 9,908 100.0 % $ (65,124) (74.4) % $ 56,688 6.4 %
Other property income (322) (6.2) % 562 97.6 % 40 100.0 % (325) (96.4) % (45) (0.7) %
Total 28,510 3.7 % 83,634 229.3 % 9,948 100.0 % (65,449) (74.5) % 56,643 6.3 %
Property and related expenses:
Property expenses 4,095 3.0 % 12,022 146.1 % 1,307 100.0 % (6,840) (68.5) % 10,584 6.8 %
Real estate taxes 1,260 1.7 % 8,561 117.4 % 840 100.0 % (9,670) (85.4) % 991 1.1 %
Ground leases (1,501) (16.9) % 31 100.0 % - - % - - % (1,470) (16.5) %
Total 3,854 1.8 % 20,614 132.8 % 2,147 100.0 % (16,510) (77.5) % 10,105 3.9 %
Net Operating Income,
as defined $ 24,656 4.4 % $ 63,020 300.7 % $ 7,801 100.0 % $ (48,939) (73.5) % $ 46,538 7.2 %
Net Operating Income increased $46.5 million, or 7.2%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily resulting from:
•An increase of $24.7 million attributable to the Same Store Properties which was driven by the following activity:
•An increase in total operating revenues of $28.5 million, or 3.7%, primarily due to the following:
•$16.6 million increase related to the impact of COVID-19 in 2020, comprised of:
•$16.5 million increase primarily due to lower charges in 2021 against rental income due to tenant creditworthiness considerations;
•$1.7 million increase from the recognition of deferred rent balances associated with tenants restored from a cash basis of revenue recognition to an accrual basis of revenue recognition in 2021; partially offset by
•$1.6 million decrease due to lower parking income due to a reduction in the number of monthly parking spaces rented across all regions;
•$7.5 million increase primarily due to early lease termination fees received in 2021 for one tenant in San Diego County and one tenant in the San Francisco Bay Area;
•$4.4 million increase in the tenant reimbursement component of rental income primarily related to:
•$2.4 million increase due to higher real estate taxes and other various operating expense increases at properties across all regions; and
•$2.0 million increase due to higher occupancy primarily in the Greater Seattle and San Francisco Bay Area regions; partially offset by
•An increase in property and related expenses of $3.9 million primarily due to an increase in reimbursable expenses such as property taxes, security, window cleaning, repairs & maintenance and various other recurring expenses due to various maintenance and other projects that were postponed from 2020 to 2021, partially offset by lower ground rent expense due to the acquisition of the land underlying a historical ground lease in 2020 and lower property taxes at two ground lease properties.
•An increase of $63.0 million attributable to the Development Properties; and
•An increase of $7.8 million attributable to the Acquisition Properties; partially offset by
•A decrease of $48.9 million attributable to the Disposition Properties.
Other Expenses and Income
General and Administrative Expenses
General and administrative expenses decreased by approximately $6.5 million, or 6.6%, for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to the following:
•A decrease of $4.4 million in compensation related expenses, primarily due to severance costs related to the departure of an executive officer and certain other employees in 2020 offset by increased incentive compensation accruals in 2021 due to the overall performance of the Company; and
•A decrease of $4.8 million due to lower political contributions in 2021; partially offset by
•An increase of $3.0 million primarily due to a settlement payment received in 2020 from a previously disclosed litigation matter, which reduced 2020 legal expenses and additional corporate events and activities in 2021.
Leasing Costs
Leasing costs decreased by $1.2 million, or 27.7%, for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to a reduction of leasing overhead during the year ended December 31, 2021. See the “Factors that May Influence Future Results of Operations - Information on Leases Commenced and Executed” and “Liquidity and Capital Resources of the Operating Partnership - Liquidity Uses” sections for further information.
Depreciation and Amortization
Depreciation and amortization increased by approximately $10.7 million, or 3.6%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to the following:
•An increase of $23.8 million attributable to the Development Properties;
•An increase of $10.9 million attributable to the Acquisition Properties; partially offset by
•A decrease of $15.7 million attributable to the Disposition Properties; and
•A decrease of $8.3 million attributable to the Same Store Properties.
Interest Expense
The following table sets forth our gross interest expense, including debt discounts and deferred financing cost amortization and capitalized interest, including capitalized debt discounts and deferred financing cost amortization for the years ended December 31, 2021 and 2020.
Year Ended December 31, Dollar
Change Percentage
Change
2021 2020
($ in thousands)
Gross interest expense $ 158,756 $ 150,325 $ 8,431 5.6 %
Capitalized interest and deferred financing costs (80,201) (79,553) (648) 0.8
Interest expense $ 78,555 $ 70,772 $ 7,783 11.0 %
Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased $8.4 million, or 5.6%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to an increase in the average outstanding debt balance for the year ended December 31, 2021.
Capitalized interest and deferred financing costs remained generally consistent for the year ended December 31, 2021 compared to the year ended December 31, 2020. During the years ended December 31, 2021 and 2020, we capitalized interest on in-process development and redevelopment projects and future development pipeline projects with an average aggregate cost basis of approximately $2.0 billion. In the event of an extended cessation of development or redevelopment activities to get any of these projects ready for its intended use, such projects could potentially no longer qualify for capitalization of interest or other carrying costs. However, a cessation of development or redevelopment activities caused by events outside of our control, such as those as a result of government restrictions aimed at stopping the spread of COVID-19, would not impact our ability to capitalize interest and other carrying costs. Refer to “Part I, Item IA. Risk Factors” included in this report for additional
information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Loss on Early Extinguishment of Debt
In October 2021, we early redeemed the $300.0 million aggregate principal amount of our outstanding 3.800% unsecured senior notes that were scheduled to mature on January 15, 2023. In connection with the early redemption, we incurred a $12.2 million loss on early extinguishment of debt comprised of a $12.1 million premium paid to the note holders at the redemption date and a $0.1 million write-off of the unamortized discount and unamortized deferred financing costs.
Net income attributable to noncontrolling interests in consolidated property partnerships
Net income attributable to noncontrolling interests in consolidated property partnerships increased $7.3 million, or 42.1%, for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to a new lease at a higher rate at one property held in a property partnership in 2021 and a decrease in charges related to the creditworthiness of certain tenants in 2021. The amounts reported for the years ended December 31, 2021 and 2020 are comprised of the noncontrolling interest’s share of net income for 100 First Member, LLC (“100 First LLC”) and 303 Second Street Member, LLC (“303 Second LLC”) and the noncontrolling interest’s share of net income for Redwood LLC. See Note 11 “Noncontrolling Interests on the Company’s Consolidated Financial Statements” to our consolidated financial statements included in this report for additional information.
Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019
Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Results of Operations” in our Form 10-K for the year ended December 31, 2020 for a discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019.
Liquidity and Capital Resources of the Company
In this “Liquidity and Capital Resources of the Company” section, the term the “Company” refers only to Kilroy Realty Corporation on an unconsolidated basis and excludes the Operating Partnership and all other subsidiaries.
The Company’s business is operated primarily through the Operating Partnership. Distributions from the Operating Partnership are the Company’s primary source of capital. The Company believes the Operating Partnership’s sources of working capital, specifically its cash flow from operations and borrowings available under its unsecured revolving credit facility and funds from its capital recycling program, including strategic ventures, are adequate for it to make its distribution payments to the Company and, in turn, for the Company to make its dividend payments to its common stockholders for the next twelve months. Cash flows from operating activities generated by the Operating Partnership for the year ended December 31, 2021 were sufficient to cover the Company’s payment of cash dividends to its stockholders. However, there can be no assurance that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distributions to the Company. The unavailability of capital could adversely affect the Operating Partnership’s ability to make distributions to the Company, which would in turn, adversely affect the Company’s ability to pay cash dividends to its stockholders.
The Company is a well-known seasoned issuer and the Company and the Operating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred stock, common stock, depositary shares, warrants and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and the Operating Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. When the Company receives proceeds from the sales of its preferred or common stock, it generally contributes the net proceeds from those sales to the Operating Partnership in exchange for corresponding preferred or common partnership units of the Operating Partnership. The Operating Partnership may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under its unsecured revolving credit facility, to develop new or redevelop existing properties, to make acquisitions of properties or portfolios of properties, or for general corporate purposes.
As the sole general partner with control of the Operating Partnership, the Company consolidates the Operating Partnership for financial reporting purposes, and the Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities and the revenues and expenses of the Company and the Operating Partnership are substantially the same on their respective financial statements. The section entitled “Liquidity and Capital Resources of the Operating Partnership” should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a consolidated basis and how the Company is operated as a whole.
Liquidity Highlights
As of December 31, 2021, we had approximately $414.1 million in cash and cash equivalents. As of the date of this report, we had $1.1 billion available under our unsecured revolving credit facility and our next debt maturity occurs in December 2024. We believe that our available liquidity demonstrates a strong balance sheet and makes us well positioned to navigate any additional future uncertainties. In addition, the Company is a well-known seasoned issuer and has historically been able to raise capital on a timely basis in the public markets, as well as the private markets. Any future financings, however, will depend on market conditions for both capital raises and the investment of such proceeds and there can be no assurances that we will successfully obtain such financings.
Distribution Requirements
The Company is required to distribute 90% of its taxable income (subject to certain adjustments and excluding net capital gains) on an annual basis to maintain qualification as a REIT for federal income tax purposes and is required to pay income tax at regular corporate rates to the extent it distributes less than 100% of its taxable income (including capital gains). As a result of these distribution requirements, the Operating Partnership cannot rely on retained earnings to fund its on-going operations to the same extent as other companies whose parent companies are not REITs. In addition, the Company may be required to use borrowings under the Operating Partnership’s revolving credit facility, if necessary, to meet REIT distribution requirements and maintain its REIT status. The Company may also need to continue to raise capital in the equity markets to fund the Operating Partnership’s working capital needs, as well as potential developments of new or existing properties or acquisitions.
The Company intends to continue to make, but has not committed to make, regular quarterly cash distributions to common stockholders, and through the Operating Partnership, to common unitholders from the Operating Partnership’s cash flow from operating activities. All such distributions are at the discretion of the Board of Directors. In 2021, the Company’s distributions exceeded 100% of its taxable income, resulting in a return of capital to its stockholders. As the Company intends to maintain distributions at a level sufficient to meet the REIT distribution requirements and minimize its obligation to pay income and excise taxes, it will continue to evaluate whether the current levels of distribution are appropriate to do so throughout 2022. In addition, in the event the Company is unable to successfully complete Section 1031 Exchanges to defer some or all of the taxable gains related to property dispositions (or in the event additional legislation is enacted that further modifies or repeals laws with respect to Section 1031 Exchanges), the Company may be required to distribute a special dividend to its common stockholders and common unitholders in order to minimize or eliminate income taxes on such gains. The Company considers market factors and its performance in addition to REIT requirements in determining its distribution levels. Amounts accumulated for distribution to stockholders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which is consistent with the Company’s intention to maintain its qualification as a REIT. Such investments may include, for example, obligations of the Government National Mortgage Association, other governmental agency securities, certificates of deposit, and interest-bearing bank deposits.
On December 16, 2021, the Board of Directors declared a regular quarterly cash dividend of $0.52 per share of common stock. The regular quarterly cash dividend is payable to stockholders of record on December 31, 2021 and a corresponding cash distribution of $0.52 per Operating Partnership units is payable to holders of the Operating Partnership’s common limited partnership interests of record on December 31, 2021, including those owned by the Company. The total cash quarterly dividends and distributions paid on January 12, 2022 were $61.2 million.
Debt Covenants
The covenants contained within certain of our unsecured debt obligations generally prohibit the Company from paying dividends during an event of default in excess of an amount which results in distributions to us in an amount sufficient to permit us to pay dividends to our stockholders that we reasonably believe are necessary to (a) maintain our qualification as a REIT for federal and state income tax purposes and (b) avoid the payment of federal or state income or excise tax.
Capitalization
As of December 31, 2021, our total debt as a percentage of total market capitalization was 34.4%, which was calculated based on the closing price per share of the Company’s common stock of $66.46 on December 31, 2021 as shown in the following table:
Shares/Units at
December 31, 2021 Aggregate
Principal
Amount or
$ Value
Equivalent % of Total
Market
Capitalization
($ in thousands)
Debt: (1)(2)
Unsecured Senior Notes due 2024 $ 425,000 3.6 %
Unsecured Senior Notes due 2025 400,000 3.4 %
Unsecured Senior Notes Series A & B due 2026 250,000 2.1 %
Unsecured Senior Notes due 2028 400,000 3.4 %
Unsecured Senior Notes due 2029 400,000 3.4 %
Unsecured Senior Notes Series A & B due 2027 & 2029 250,000 2.1 %
Unsecured Senior Notes due 2030 500,000 4.2 %
Unsecured Senior Notes due 2031 350,000 2.9 %
Unsecured Senior Notes due 2032 425,000 3.6 %
Unsecured Senior Notes due 2033 450,000 3.7 %
Secured debt 249,023 2.0 %
Total debt 4,099,023 34.4 %
Equity and Noncontrolling Interests in the Operating Partnership: (3)
Common limited partnership units outstanding (4)
1,150,574 76,467 0.6 %
Shares of common stock outstanding 116,464,169 7,740,209 65.0 %
Total Equity and Noncontrolling Interests in the Operating Partnership 7,816,676 65.6 %
Total Market Capitalization $ 11,915,699 100.0 %
_____________________
(1)Represents gross aggregate principal amount due at maturity before the effect of the following at December 31, 2021: $22.9 million of unamortized deferred financing costs on the unsecured senior notes and secured debt and $7.4 million of unamortized discounts for the unsecured senior notes.
(2)As of December 31, 2021, there was no outstanding balance on the unsecured revolving credit facility.
(3)Value based on closing price per share of our common stock of $66.46 as of December 31, 2021.
(4)Includes common units of the Operating Partnership not owned by the Company; does not include noncontrolling interests in consolidated property partnerships.
Liquidity and Capital Resources of the Operating Partnership
In this “Liquidity and Capital Resources of the Operating Partnership” section, the terms “we,” “our,” and “us” refer to the Operating Partnership or the Operating Partnership and the Company together, as the context requires.
General
Our primary liquidity sources and uses are as follows:
Liquidity Sources
•Net cash flow from operations;
•Borrowings under the Operating Partnership’s unsecured revolving credit facility;
•Proceeds from our capital recycling program, including the disposition of assets and the formation of strategic ventures;
•Proceeds from additional secured or unsecured debt financings; and
•Proceeds from public or private issuance of debt, equity or preferred equity securities.
Liquidity Uses
•Development and redevelopment costs;
•Operating property or undeveloped land acquisitions;
•Property operating and corporate expenses;
•Capital expenditures, tenant improvement and leasing costs;
•Debt service and principal payments, including debt maturities;
•Distributions to common security holders;
•Repurchases and redemptions of outstanding common stock of the Company; and
•Outstanding debt repurchases, redemptions and repayments.
General Strategy
Our general strategy is to maintain a conservative balance sheet with a strong credit profile and to maintain a capital structure that allows for financial flexibility and diversification of capital resources. We manage our capital structure to reflect a long-term investment approach and utilize multiple sources of capital to meet our long-term capital requirements. We believe that our current projected liquidity requirements for the next twelve-month period, as set forth above under the caption “-Liquidity Uses,” will be satisfied using a combination of the liquidity sources listed above, although there can be no assurance in this regard. We believe our conservative leverage and staggered debt maturities provide us with financial flexibility and enhance our ability to obtain additional sources of liquidity if necessary, and, therefore, we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities, although there can be no assurance in this regard.
2021 Capital and Financing Transactions
We continue to be active in the capital markets and our capital recycling program to finance potential acquisitions and our development activity, as well as our continued desire to extend our debt maturities. This was primarily a result of the following activity:
Capital Recycling Program
•During the year ended December 31, 2021, we completed the sale of three office buildings in two transactions to unaffiliated third parties for gross sales proceeds totaling approximately $1.12 billion.
Capital Markets / Debt Transactions
•In addition to obtaining funding from our capital recycling program during 2021, we successfully completed the following financing and capital raising activities to fund our continued growth. We continued to strengthen our balance sheet and lower our overall cost of capital.
•Amended and restated the terms of our unsecured revolving credit facility to increase the borrowing capacity from $750.0 million to $1.1 billion, reduce the borrowing costs, extend the maturity date to July 2025, with two six-month extension options, and add a sustainability-linked pricing component whereby the interest rate is lowered by 0.01% if certain sustainability performance targets are met;
•Issued $450.0 million aggregate principal amount of 12-year 2.650% green unsecured senior notes due November 2033 in a registered public offering; and
•Completed the early redemption of all $300.0 million of the Company’s 3.800% unsecured senior notes due January 2023, resulting in a $12.2 million loss on early extinguishment of debt.
Liquidity Sources
Unsecured Revolving Credit Facility
In April 2021, the Operating Partnership amended and restated the terms of its unsecured revolving credit facility. The amendment and restatement increased the size of the unsecured revolving credit facility from $750.0 million to $1.1 billion, reduced the borrowing costs, extended the maturity date of the unsecured revolving credit facility to July 2025, with two six-month extension options, and added a sustainability-linked pricing component whereby the interest rate is lowered by 0.01% if certain sustainability performance targets are met. The LIBOR replacement provisions of the unsecured revolving credit facility permit the use of rates based on the secured overnight financing rate (“SOFR”) administered by the Federal Reserve Bank of New York.
The following table summarizes the balance and terms of our unsecured revolving credit facility as of December 31, 2021 and 2020:
December 31, 2021 December 31, 2020
(in thousands)
Outstanding borrowings $ - $ -
Remaining borrowing capacity 1,100,000 750,000
Total borrowing capacity (1)
$ 1,100,000 $ 750,000
Interest rate (2)
1.00 % 1.14 %
Facility fee-annual rate (3)
0.200%
Maturity date July 2025 July 2022
______________________
(1)We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional $500.0 million and $600.0 million as of December 31, 2021 and 2020, respectively, under an accordion feature under the terms of the unsecured revolving credit facility.
(2)Our unsecured revolving credit facility interest rate was calculated based on the contractual rate of LIBOR plus 0.900% and LIBOR plus 1.000% as of December 31, 2021 and 2020, respectively.
(3)Our facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, we incurred debt origination and legal costs. As of December 31, 2021 and 2020, $7.3 million and $2.1 million of unamortized deferred financing costs, respectively, which are included in prepaid expenses and other assets, net on our consolidated balance sheets, remained to be amortized through the maturity date of our unsecured revolving credit facility.
We intend to borrow under the unsecured revolving credit facility as necessary for general corporate purposes, to finance development and redevelopment expenditures, to fund potential acquisitions, and to potentially repay long-term debt to supplement cash balances given uncertainties and volatility in market conditions.
Capital Recycling Program
As discussed in the section “Factors That May Influence Future Results of Operations - Capital Recycling Program,” we continuously evaluate opportunities for the potential disposition of properties and undeveloped land in our portfolio or the formation of strategic ventures with the intent of recycling the proceeds generated from the disposition of less strategic or core assets into capital used to finance development and redevelopment expenditures, to fund new acquisitions, to repay long-term debt and for other general corporate purposes. As part of this strategy, we attempt to enter into Section 1031 Exchanges, when possible, to defer some or all of the taxable gains on the sales, if any, for federal and state income tax purposes.
In connection with our capital recycling strategy, through December 31, 2021, we completed the sale of three properties in two transactions to unaffiliated third parties for gross sales proceeds totaling approximately $1.12 billion through the sale of three office buildings. The taxable gain from the $1.08 billion disposition of one of these office buildings was deferred through a Section 1031 Exchange. The proceeds from the sale were used to fund the acquisition of one operating property, the land underlying a historical ground lease and two development property acquisitions totaling $1.2 billion. During 2020, we completed the sale of one property to an unaffiliated third party for gross sales proceeds totaling approximately $75.9 million. See “-Factors that May Influence Future Operations” and Note 4 “Dispositions” to our consolidated financial statements included in this report for additional information.
We currently anticipate that in 2022 we could raise additional capital through our dispositions program ranging from approximately $200 million to $500 million. However, any potential future disposition transactions and the timing of any potential future capital recycling transactions will depend on market conditions and other factors including but not limited to our capital needs, the availability of financing for potential buyers (which has been and may continue to be constrained for some potential buyers due to the ongoing COVID-19 pandemic’s impact on economic and market conditions, including the financial markets), and our ability to defer some or all of the taxable gains on the sales. In addition, we cannot assure you that we will dispose of any additional properties or that we will be able to identify and complete the acquisitions of suitable replacement properties to effect Section 1031 Exchanges to defer some or all of the taxable gains related to our capital recycling program. In the event we are unable to complete dispositions as planned, we may raise capital through other sources of liquidity including our available unsecured revolving credit facility or the public or private issuance of unsecured debt.
At-The-Market Stock Offering Program
Under our current at-the-market stock offering program, which commenced June 2018, we may offer and sell shares of our common stock with an aggregate gross sales price of up to $500.0 million from time to time in “at-the-market” offerings. In connection with the at-the-market program, the Company may enter into forward equity sale agreements with certain financial institutions acting as forward purchasers whereby, at our discretion, the forward purchasers may borrow and sell shares of our common stock under our at-the-market program (see “Note 13. Stockholders’ Equity of the Company” to our consolidated financial statements included in this report for additional information). The use of a forward equity sale agreement allows the Company to lock in a share price on the sale of shares of our common stock at the time the agreement is executed but defer settling the forward equity sale agreements and receiving the proceeds from the sale of shares until a later date. The Company did not have any outstanding forward equity sale agreements to be settled at December 31, 2021.
Since commencement of our current at-the-market program, we have completed sales of 3,594,576 shares of common stock through December 31, 2021. As of December 31, 2021, we may offer and sell shares of our common stock having an aggregate gross sales price up to approximately $214.2 million under this program. We did not complete any sales under the program during the year ended December 31, 2021.
Shelf Registration Statement
The Company is a well-known seasoned issuer and the Company and the Operating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred stock, common stock, depository shares and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and the Operating Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. Capital raising could be more challenging under current market conditions than those prior to COVID-19, particularly if case rates surge again. When the Company receives proceeds from the sales of its preferred or common stock, it generally contributes the net proceeds from those sales to the Operating Partnership in exchange for corresponding preferred or common partnership units of the Operating Partnership. The Operating Partnership may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under its unsecured revolving credit facility, to develop new or redevelop existing properties, to make acquisitions of properties or portfolios of properties, or for general corporate purposes.
Unsecured Senior Notes - Registered Offering
In October 2021, the Operating Partnership issued $450.0 million aggregate principal amount of 2.650% senior notes due 2033 in a registered public offering. Interest on the notes is payable semi-annually at a rate of 2.650% per annum on May 15 and November 15 each year, commencing on May 15, 2022, and the notes mature on August 15, 2033. The Operating Partnership intends to allocate an amount equal to the net proceeds from the offering to one or more eligible green projects. Pending the allocation of an amount equal to the net proceeds from the offering to eligible green projects, a portion of the net proceeds were used to early redeem the $300.0 million aggregate principal amount of our outstanding 3.800% unsecured senior notes that were scheduled to mature on January 15, 2023, and the remaining portion of the net proceeds may be used to redeem or repay indebtedness and, to the extent not used for such purpose, for other general corporate purposes.
Unsecured and Secured Debt
The aggregate principal amount of the unsecured and secured debt of the Operating Partnership outstanding as of December 31, 2021 was as follows:
Aggregate Principal
Amount Outstanding
(in thousands)
Unsecured Senior Notes due 2024 $ 425,000
Unsecured Senior Notes due 2025 400,000
Unsecured Senior Notes Series A & B due 2026 250,000
Unsecured Senior Notes due 2028 400,000
Unsecured Senior Notes due 2029 400,000
Unsecured Senior Notes Series A & B due 2027 & 2029 250,000
Unsecured Senior Notes due 2030 500,000
Unsecured Senior Notes due 2031 350,000
Unsecured Senior Notes due 2032 425,000
Unsecured Senior Notes due 2033 450,000
Secured Debt 249,023
Total Unsecured and Secured Debt (1)
4,099,023
Less: Unamortized Net Discounts and Deferred Financing Costs (2)
(30,273)
Total Debt, Net $ 4,068,750
________________________
(1)As of December 31, 2021, there was no outstanding balance on the unsecured revolving credit facility.
(2)Includes $22.9 million of unamortized deferred financing costs on the unsecured senior notes and secured debt and $7.4 million of unamortized discounts for the unsecured senior notes. Excludes unamortized deferred financing costs on the unsecured revolving credit facility, which are included in prepaid expenses and other assets, net on our consolidated balance sheets.
Debt Composition
The composition of the Operating Partnership’s aggregate debt balances between secured and unsecured and fixed-rate and variable-rate debt as of December 31, 2021 and 2020 was as follows:
Percentage of Total Debt (1)
Weighted Average Interest Rate(1)
December 31, 2021 (2)
December 31, 2020 December 31, 2021 (2)
December 31, 2020
Secured vs. unsecured:
Unsecured 93.9 % 93.6 % 3.6 % 3.8 %
Secured 6.1 % 6.4 % 3.9 % 3.9 %
Variable-rate vs. fixed-rate:
Variable-rate - % - % - % - %
Fixed-rate (3)
100.0 % 100.0 % 3.7 % 3.8 %
Stated rate (3)
3.7 % 3.8 %
GAAP effective rate (4)
3.7 % 3.8 %
GAAP effective rate including debt issuance costs 3.9 % 4.0 %
________________________
(1)As of the end of the period presented.
(2)As of December 31, 2021 and 2020, there was no outstanding balance on the unsecured revolving credit facility.
(3)Excludes the impact of the amortization of any debt discounts/premiums and deferred financing costs.
(4)Includes the impact of amortization of any debt discounts/premiums, excluding deferred financing costs.
Liquidity Uses
Contractual Obligations
The following table provides information with respect to our contractual obligations as of December 31, 2021. The table: (i) indicates the maturities and scheduled principal repayments of our secured and unsecured debt outstanding as of December 31, 2021; (ii) indicates the scheduled interest payments of our fixed-rate debt as of December 31, 2021; (iii) provides information about the minimum commitments due in connection with our ground lease obligations and other lease and contractual commitments; and (iv) provides estimated development commitments as of December 31, 2021. Note that the table does not reflect our available debt maturity extension options and reflects gross aggregate principal amounts before the effect of unamortized discounts/premiums.
Payment Due by Period
Less than
1 Year
(2022) 2-3 Years
(2023-2024) 4-5 Years
(2025-2026) More than
5 Years
(After 2026) Total
(in thousands)
Principal payments: secured debt (1)
$ 5,554 $ 11,781 $ 157,563 $ 74,125 $ 249,023
Principal payments: unsecured debt (2)
- 425,000 650,000 2,775,000 3,850,000
Interest payments: fixed-rate debt (3)
149,759 298,233 243,514 342,748 1,034,254
Ground lease obligations (4)
6,441 13,027 13,171 373,943 406,582
Lease and other contractual commitments (5)
67,315 - 3,465 - 70,780
Development commitments (6)
358,254 439,000 - - 797,254
Total $ 587,323 $ 1,187,041 $ 1,067,713 $ 3,565,816 $ 6,407,893
_____________________
(1)Represents gross aggregate principal amount before the effect of deferred financing costs of approximately $0.7 million as of December 31, 2021.
(2)Represents gross aggregate principal amount before the effect of the unamortized discount and deferred financing costs of approximately $7.4 million and $22.2 million as of December 31, 2021. As of December 31, 2021, there was no outstanding balance on our unsecured revolving credit facility.
(3)As of December 31, 2021, 100.0% of our debt was contractually fixed. The information in the table above reflects our projected interest rate obligations for these fixed-rate payments based on the contractual interest rates on an accrual basis and scheduled maturity dates.
(4)Reflects minimum lease payments through the contractual lease expiration date before the impact of extension options. See Note 18 “Commitments and Contingencies” to our consolidated financial statements included in this report for further information.
(5)Amounts represent cash commitments under signed leases and contracts for operating properties, excluding tenant-funded tenant improvements, and for other contractual commitments. The timing of these expenditures may fluctuate.
(6)Amounts represent commitments under signed leases for pre-leased development projects and contractual commitments for projects in the tenant improvement phase and under construction as of December 31, 2021. The timing of these expenditures may fluctuate based on the ultimate progress of construction. We may start additional construction in 2022 (see “-Development” for additional information).
Other Liquidity Uses
Development
As of December 31, 2021, we had two development projects under construction. These projects have a total estimated investment of approximately $1.0 billion of which we have incurred approximately $257.0 million, net of retention, and committed an additional $743.0 million as of December 31, 2021. In addition, as of December 31, 2021, we had three development projects in the tenant improvement phase. These projects have a total estimated investment of approximately $1.2 billion, of which we have incurred approximately $1.1 billion, net of retention, and committed an additional $158.0 million as of December 31, 2021 . We also had three stabilized development projects with a total estimated investment of $900.0 million, of which $100.0 million to $110.0 million remains to be spent in 2022. We had one redevelopment project under construction as of December 31, 2021, with total estimated incremental development costs of approximately $33.4 million, of which we have incurred approximately $21.1 million, net of retention, and committed an additional $12.3 million as of December 31, 2021. In addition, as of December 31, 2021, we had two projects committed for redevelopment with total estimated incremental redevelopment costs of $36.8 million, of which we have incurred $4.6 million and committed an additional $32.2 million as of December 31, 2021. Including the commitment information in the table above we currently believe we may spend between $550 million to $650 million on development projects throughout 2022. The ultimate timing of these expenditures may fluctuate given construction progress and leasing status of the projects, or
as a result of events outside our control, such as delays or increased costs as a result of the COVID-19 pandemic. We expect that any material additional development activities will be funded with borrowings under the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program, or strategic venture opportunities. We cannot provide assurance that development projects will be completed on the terms, for the amounts or on the timeliness currently contemplated, or at all.
Debt Maturities
We believe our conservative leverage, staggered debt maturities and recent unsecured line of credit facility amendment provide us with financial flexibility and enhance our ability to obtain additional sources of liquidity if necessary, and, therefore, we believe we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities. However, we can provide no assurance that we will have access to the public or private debt or equity markets in the future on favorable terms or at all. Our next debt maturity occurs in December 2024.
Potential Future Acquisitions
During the year ended December 31, 2021, we acquired one operating property, the land underlying a historical ground lease and two development properties in four transactions for a total cash purchase price of $1.16 billion. We did not acquire any operating properties during the year ended December 31, 2020. These transactions were funded through various capital raising activities and liquidity as discussed in “-Liquidity Sources”.
As discussed in the section “-Factors That May Influence Future Results of Operations - Acquisitions,” we continue to evaluate strategic opportunities and remain a disciplined buyer of development and redevelopment opportunities as well as value-add and strategic operating properties, dependent on market conditions and business cycles, among other factors. We focus on growth opportunities primarily in markets populated by knowledge and creative based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services. We expect that any material acquisitions will be funded with borrowings under the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program, the formation of strategic ventures or through the assumption of existing debt, although there can be no assurance in this regard.
Share Repurchases
As of December 31, 2021, 4,935,826 shares remained eligible for repurchase under a share repurchase program approved by the Company’s board of directors in 2016. Under this program, repurchases may be made in open market transactions at prevailing prices or through privately negotiated transactions. We may elect to repurchase shares of our common stock under this program in the future depending upon various factors, including market conditions, the trading price of our common stock and our other uses of capital. This program does not have a termination date, and repurchases may be discontinued at any time. We intend to fund repurchases, if any, primarily with the proceeds from property dispositions.
Potential Future Leasing Costs and Capital Improvements
The amounts we incur for tenant improvements and leasing costs depend on leasing activity in each period. Tenant improvements and leasing costs generally fluctuate in any given period depending on factors such as the type and condition of the property, the term of the lease, the type of the lease, the involvement of external leasing agents and overall market conditions. Capital expenditures may fluctuate in any given period subject to the nature, extent and timing of improvements required to maintain our properties. While the COVID-19 pandemic and restrictions intended to prevent its spread remain in effect, there may be a continued lower level of leasing activity when compared to levels prior to the COVID-19 pandemic, particularly if case rates surge again, as a result of the spread of new variants or otherwise.
For properties within our stabilized portfolio, excluding our development properties, we believe we could spend approximately $120 million to $130 million in capital improvements, tenant improvements and leasing costs in 2022, in addition to the lease and contractual commitments included in our contractual obligations table above. The amount we ultimately spend will depend on leasing activity during 2022.
The following table sets forth our historical actual capital expenditures, and tenant improvements and leasing costs for deals commenced, excluding tenant-funded tenant improvements, for renewed and re-tenanted space within our stabilized portfolio for each of the years ended December 31, 2021, 2020 and 2019 on a per square foot basis.
Year Ended December 31,
2021 2020 2019
Office Properties:(1)
Capital Expenditures:
Capital expenditures per square foot $ 2.31 $ 2.31 $ 1.26
Tenant Improvement and Leasing Costs (2)
Replacement tenant square feet (3)
638,597 375,345 1,228,973
Tenant improvements per square foot commenced $ 64.17 $ 69.26 $ 47.79
Leasing commissions per square foot commenced $ 19.31 $ 18.88 $ 18.89
Total per square foot $ 83.48 $ 88.14 $ 66.68
Renewal tenant square feet 407,988 484,771 797,537
Tenant improvements per square foot commenced $ 7.33 $ 17.35 $ 13.72
Leasing commissions per square foot commenced $ 9.35 $ 10.10 $ 11.84
Total per square foot $ 16.68 $ 27.45 $ 25.56
Total per square foot per year $ 8.73 $ 9.52 $ 6.45
Average remaining lease term (in years) 6.6 5.7 7.8
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(1)Excludes development properties and includes 100% of consolidated property partnerships.
(2)Includes tenants with lease terms of 12 months or longer. Excludes leases for month-to-month and first generation tenants.
(3)Excludes leases for which the space was vacant for longer than one year, or vacant when the property was acquired by the Company.
Capital expenditures per square foot remained consistent in 2021 as compared to 2020. We currently anticipate capital expenditures for 2022 to be consistent with 2021 levels. Replacement tenant improvements and leasing commissions per square foot decreased in 2021 as compared to 2020 primarily due to large leases with long terms commenced in the San Francisco Bay Area and San Diego County regions in 2020. Renewal tenant improvements and leasing commissions per square foot decreased in 2021 as compared to 2020 primarily due to a large lease with a long term renewed in the San Francisco Bay Area in 2020. We currently anticipate tenant improvement and leasing commissions for 2022 to be higher than 2021 levels due to an expected increase in leasing activity as well as the leases executed in prior years; however, ultimate costs incurred will depend upon market conditions in each of our submarkets and actual leasing activity.
Distribution Requirements
For a discussion of our dividend and distribution requirements, see “Liquidity and Capital Resources of the Company -Distribution Requirements.”
Factors That May Influence Future Sources of Capital and Liquidity of the Company and the Operating Partnership
We continue to evaluate sources of financing for our business activities, including borrowings under the unsecured revolving credit facility, issuance of public and private equity securities, unsecured debt and fixed-rate secured mortgage financing, proceeds from the disposition of selective assets through our capital recycling program, and the formation of strategic ventures. However, our ability to obtain new financing or refinance existing borrowings on favorable terms could be impacted by various factors, including the state of the macro economy, the state of the credit and equity markets, significant tenant defaults, a decline in the demand for office properties, a decrease in market rental rates or market values of real estate assets in our submarkets, the amount of our future borrowings and the impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on capital and credit markets and our tenants (refer to “Part I, Item IA. Risk Factors” of this report for additional information). These events could result in the following:
•Decreases in our cash flows from operations, which could create further dependence on the unsecured revolving credit facility;
•An increase in the proportion of variable-rate debt, which could increase our sensitivity to interest rate fluctuations in the future; and
•A decrease in the value of our properties, which could have an adverse effect on the Operating Partnership’s ability to incur additional debt, refinance existing debt at competitive rates, or comply with its existing debt obligations.
In addition to the factors noted above, the Operating Partnership’s credit ratings are subject to ongoing evaluation by credit rating agencies and may be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. In the event that the Operating Partnership’s credit ratings are downgraded, we may incur higher borrowing costs and may experience difficulty in obtaining additional financing or refinancing existing indebtedness.
Debt Covenants
The unsecured revolving credit facility, unsecured term loan facility, unsecured term loan, unsecured senior notes and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Key existing financial covenants and their covenant levels include:
Unsecured Credit Facility and Private Placement Notes (as defined in the applicable Credit Agreements): Covenant Level Actual Performance
as of December 31, 2021
Total debt to total asset value less than 60% 29%
Fixed charge coverage ratio greater than 1.5x 3.4x
Unsecured debt ratio greater than 1.67x 3.23x
Unencumbered asset pool debt service coverage greater than 1.75x 3.89x
Unsecured Senior Notes due 2024, 2025, 2028, 2029, 2030, 2032 and 2033 (as defined in the applicable Indentures):
Total debt to total asset value less than 60% 35%
Interest coverage greater than 1.5x 8.0x
Secured debt to total asset value less than 40% 2%
Unencumbered asset pool value to unsecured debt greater than 150% 328%
The Operating Partnership was in compliance with all of its debt covenants as of December 31, 2021. Our current expectation is that the Operating Partnership will continue to meet the requirements of its debt covenants in both the short and long term. However, in the event of an economic slowdown or continued volatility in the credit markets, there is no certainty that the Operating Partnership will be able to continue to satisfy all the covenant requirements.
Consolidated Historical Cash Flow Summary
The following summary discussion of our consolidated historical cash flow is based on the consolidated statements of cash flows in Item 15. “Exhibits and Financial Statement Schedules” and is not meant to be an all-inclusive discussion of the changes in our cash flow for the periods presented below. Changes in our cash flow include changes in cash and cash equivalents and restricted cash. Our historical cash flow activity for the year ended December 31, 2021 as compared to the year ended December 31, 2020 is as follows:
Year Ended December 31,
2021 2020 Dollar
Change Percentage
Change
($ in thousands)
Net cash provided by operating activities $ 516,403 $ 455,590 $ 60,813 13.3 %
Net cash used in investing activities (747,877) (542,128) (205,749) 38.0 %
Net cash (used in) provided by financing activities (164,573) 833,324 (997,897) (119.7) %
Net (decrease) increase in cash and cash equivalents $ (396,047) $ 746,786 $ (1,142,833) 153.0 %
Operating Activities
Our cash flows from operating activities depends on numerous factors including the occupancy level of our portfolio, the rental rates achieved on our leases, the collectability of rent and recoveries from our tenants, the level of operating expenses, the impact of property acquisitions, completed development projects and related financing activities, and other general and administrative costs. Our net cash provided by operating activities increased by $60.8 million, or 13.3%, for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily as a result of an increase in cash Net Operating Income generated from our Same Store Portfolio and stabilized development properties in our Development portfolio, net changes in other operating liabilities relating to the timing of expenditures and a $17.0 million early lease termination fee that remains to be fully recognized through 2024. See additional information under the caption “-Results of Operations.”
Investing Activities
Our cash flows from investing activities is generally used to fund development and operating property acquisitions, expenditures for development and redevelopment projects, and recurring and nonrecurring capital expenditures for our operating properties, net of proceeds received from dispositions of real estate assets. Our net cash used in investing activities increased by $205.7 million, or 38.0%, for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to acquisitions completed in 2021 and higher expenditures for development properties during the year ended December 31, 2021, partially offset by proceeds received from dispositions during the year ended December 31, 2021.
Financing Activities
Our cash flows from financing activities is principally impacted by our capital raising activities, net of dividends and distributions paid to common and preferred security holders. During the year ended December 31, 2021, we had next cash used in financing activities of $164.6 million compared to net cash provided by financing activities of $833.3 million for the year ended December 31, 2020 primarily as a result of the net proceeds received from the issuance of common stock and proceeds from the issuance of unsecured debt generated during the year ended December 31, 2020, partially offset by net repayments on the unsecured revolving credit facility and the term loan during the year ended December 31, 2020.
Non-GAAP Supplemental Financial Measure: Funds From Operations
We calculate FFO in accordance with the 2018 Restated White Paper on FFO approved by the Board of Governors of NAREIT. The White Paper defines FFO as net income or loss calculated in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains and losses from sales of depreciable real estate and impairment write-downs associated with depreciable real estate, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustment for unconsolidated partnerships and joint ventures. Our calculation of FFO includes the amortization of deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets. We also add back net income attributable to noncontrolling common units of the Operating Partnership because we report FFO attributable to common stockholders and common unitholders.
We believe that FFO is a useful supplemental measure of our operating performance. The exclusion from FFO of gains and losses from the sale of operating real estate assets allows investors and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those operating results between periods. Also, because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons of operating performance to other REITs. However, other REITs may use different methodologies to calculate FFO, and accordingly, our FFO may not be comparable to all other REITs.
Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets, we believe that FFO along with the required GAAP presentations provides a more complete measurement of our performance relative to our competitors and a more appropriate basis on which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide.
However, FFO should not be viewed as an alternative measure of our operating performance because it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs and could materially impact our results from operations.
The following table presents our FFO for the years ended December 31, 2021, 2020, 2019, 2018 and 2017:
Year ended December 31,
2021 2020 2019 2018 2017
(in thousands)
Net income available to common stockholders $ 628,144 $ 187,105 $ 195,443 $ 258,415 $ 151,249
Adjustments:
Net income attributable to noncontrolling common units of the Operating Partnership 6,163 2,869 3,766 5,193 3,223
Net income attributable to noncontrolling interests in consolidated property partnerships 24,603 17,319 16,020 14,318 12,780
Depreciation and amortization of real estate assets 303,799 290,353 268,045 249,882 241,862
Gains on sales of depreciable real estate (463,128) (35,536) (36,802) (142,926) (39,507)
Funds From Operations attributable to noncontrolling interests in consolidated property partnerships (37,267) (28,754) (27,994) (24,391) (22,820)
Funds From Operations (1) (2)
$ 462,314 $ 433,356 $ 418,478 $ 360,491 $ 346,787
____________________
(1)Reported amounts are attributable to common stockholders, common unitholders and restricted stock unitholders.
(2)FFO available to common stockholders and unitholders includes amortization of deferred revenue related to tenant-funded tenant improvements of $16.5 million, $22.5 million, $19.2 million, $18.4 million and $16.8 million for the years ended December 31, 2021, 2020, 2019, 2018 and 2017, respectively.
The following table presents our weighted average shares of common stock and common units outstanding for the years ended December 31, 2021, 2020, 2019, 2018 and 2017:
Year Ended December 31,
2021 2020 2019 2018 2017
Weighted average shares of common stock outstanding 116,429,130 113,241,341 103,200,568 99,972,359 98,113,561
Weighted average common units outstanding 1,150,574 1,854,165 2,023,407 2,052,917 2,133,006
Effect of participating securities - nonvested shares and restricted stock units 769,123 1,137,265 1,118,349 1,142,053 1,196,044
Total basic weighted average shares / units outstanding 118,348,827 116,232,771 106,342,324 103,167,329 101,442,611
Effect of dilutive securities - shares issuable under executed forward equity sale agreements, stock options and contingently issuable shares 519,513 478,281 648,600 510,006 613,770
Total diluted weighted average shares / units outstanding 118,868,340 116,711,052 106,990,924 103,677,335 102,056,381
Inflation
The majority of the Company’s leases require tenants to pay for recoveries and escalation charges based upon the tenant’s proportionate share of, and/or increases in, real estate taxes and certain operating costs, which reduce the Company’s exposure to increases in operating costs resulting from inflation.
New Accounting Pronouncements
For a discussion of new accounting pronouncements see Note 2 “Basis of Presentation and Significant Accounting Policies” to our consolidated financial statements included in this report. We did not adopt any new accounting pronouncements during the year ended December 31, 2021.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk we face is interest rate risk. We seek to mitigate this risk by following established risk management policies and procedures. These policies include maintaining prudent amounts of debt, including a greater amount of fixed-rate debt as compared to variable-rate debt in our portfolio, and may include the periodic use of derivative instruments. As of December 31, 2021 and 2020, we did not have any interest-rate sensitive derivative assets or liabilities. Information about our changes in interest rate risk exposures from December 31, 2020 to December 31, 2021 is incorporated herein by reference from “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources of the Operating Partnership.”
Interest Rate Risk
As of December 31, 2021, 100.0% of our total outstanding debt of $4.1 billion (before the effects of debt discounts and deferred financing costs) bore interest at fixed rates since our only variable-rate debt instrument was our unsecured revolving credit facility which had no outstanding balance at December 31, 2021. All of our interest rate sensitive financial instruments are held for purposes other than trading purposes. In general, interest rate fluctuations applied to our variable-rate debt will impact our future earnings and cash flows. Conversely, interest rate fluctuations applied to our fixed-rate debt will generally not impact our future earnings and cash flows, unless such instruments mature or are otherwise terminated and need to be refinanced. However, interest rate fluctuations will impact the fair value of the fixed-rate debt instruments.
We generally determine the fair value of our secured debt, unsecured debt, and unsecured revolving credit facility by performing discounted cash flow analyses using an appropriate market discount rate. We calculate the market rate by obtaining period-end treasury rates for maturities that correspond to the maturities of our fixed-rate debt and then adding an appropriate credit spread based on information obtained from third-party financial institutions. These credit spreads take into account factors, including but not limited to, our credit profile, the tenure of the debt, amortization period, whether the debt is secured or unsecured, and the loan-to-value ratio of the debt to the collateral, amongst other factors. These calculations are significantly affected by the assumptions used, including the discount rate, credit spreads and estimates of future cash flow. We calculate the market rate of our unsecured revolving credit facility by obtaining the period-end London Interbank Offered Rate (“LIBOR”) and then adding an appropriate credit spread based on our credit ratings, and the amended terms of our unsecured revolving credit facility agreement. The Financial Conduct Authority (the authority that regulates LIBOR) has announced it intends to stop compelling banks to submit rates for the calculation of LIBOR by June 30, 2023. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. The replacement provisions of our unsecured revolving credit facility permit the use of rates based on SOFR.
We determine the fair value of each of our publicly traded unsecured senior notes based on their quoted trading price at the end of the reporting period, if such prices are available. See Note 19 “Fair Value Measurements and Disclosures” and Note 2 “Basis of Presentation and Significant Accounting Policies” in the consolidated financial statements included in this report for additional information on the fair value of our financial assets and liabilities as of December 31, 2021 and December 31, 2020.
At December 31, 2021, there was no outstanding balance on our $1.1 billion unsecured revolving credit facility; however, it was available for borrowing at the following variable rate: LIBOR plus a spread of 0.90% (weighted average interest rate of 1.00%). As of December 31, 2020, there was no outstanding balance on our unsecured revolving credit facility; however, it was available for borrowing at the following variable rate: LIBOR plus a spread of 1.00% (weighted average interest rate of 1.14%).
The total carrying value of our fixed-rate debt was approximately $4.1 billion and $3.9 billion as of December 31, 2021 and 2020, respectively. The total estimated fair value of our fixed-rate debt was approximately $4.4 billion
as of December 31, 2021 and 2020, respectively. For sensitivity purposes, a 100 basis point increase in the discount rate equates to a decrease in the total fair value of our fixed-rate debt of approximately $262.7 million, or 6.0%, as of December 31, 2021. Comparatively, a 100 basis point increase in the discount rate equates to a decrease in the total fair value of our fixed-rate debt of approximately $264.2 million, or 6.0%, as of December 31, 2020.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at Item 15. “Exhibits and Financial Statement Schedules.”

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Kilroy Realty Corporation
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of December 31, 2021, the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of that time, the disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes that occurred during the fourth quarter of the most recent year covered by this report in the Company’s internal control over financial reporting identified in connection with the evaluation referenced above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is supported by written policies and procedures and by an appropriate segregation of responsibilities and duties. The Company has used the criteria set forth in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission to assess our internal control over financial reporting. Based upon this assessment, management concluded that internal control over financial reporting operated effectively as of December 31, 2021.
Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has audited the Company’s financial statements and has issued a report on the effectiveness of the Company’s internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Kilroy Realty Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Kilroy Realty Corporation and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 10, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 10, 2022
Kilroy Realty, L.P.
The Operating Partnership maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Operating Partnership’s reports under the Exchange Act, is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer of its general partner, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), the Operating Partnership carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of its general partner, of the effectiveness of the design and operation of the disclosure controls and procedures as of December 31, 2021, the end of the period covered by this report. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of its general partner concluded, as of that time, the disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes that occurred during the fourth quarter of the most recent year covered by this report in the Operating Partnership’s internal control over financial reporting identified in connection with the evaluation referenced above that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer of the Operating Partnership’s general partner and effected by the board of directors, management, and other personnel of its general partner to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is supported by written policies and procedures and by an appropriate segregation of responsibilities and duties. The Operating Partnership has used the criteria set forth in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission to assess our internal control over financial reporting. Based upon this assessment, management concluded that internal control over financial reporting operated effectively as of December 31, 2021.
Deloitte & Touche LLP, the Operating Partnership’s independent registered public accounting firm, has audited the Operating Partnership’s financial statements and has issued a report on the effectiveness of the Operating Partnership’s internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Kilroy Realty, L.P.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Kilroy Realty, L.P. and subsidiaries (the “Operating Partnership”) as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Operating Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Operating Partnership and our report dated February 10, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Operating Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Operating Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 10, 2022

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
Not applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to be held in May 2022.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to be held in May 2022.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to be held in May 2022.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to be held in May 2022.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to be held in May 2022.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) Financial Statements and Schedules
The following consolidated financial information is included as a separate section of this annual report on Form 10-K:
Report of Independent Registered Public Accounting Firm - Kilroy Realty Corporation
F - 2
Consolidated Balance Sheets as of December 31, 2021 and 2020 - Kilroy Realty Corporation
F - 4
Consolidated Statements of Operations for the Years ended December 31, 2021, 2020 and 2019 - Kilroy Realty Corporation
F - 5
Consolidated Statements of Equity for the Years ended December 31, 2021, 2020 and 2019 - Kilroy Realty Corporation
F - 6
Consolidated Statements of Cash Flows for the Years ended December 31, 2021, 2020 and 2019 - Kilroy Realty Corporation
F - 7
Report of Independent Registered Public Accounting Firm - Kilroy Realty, L.P.
F - 8
Consolidated Balance Sheets as of December 31, 2021 and 2020 - Kilroy Realty, L.P.
F - 10
Consolidated Statements of Operations for the Years ended December 31, 2021, 2020 and 2019 - Kilroy Realty, L.P.
F - 11
Consolidated Statements of Capital for the Years ended December 31, 2021, 2020 and 2019 - Kilroy Realty, L.P.
F - 12
Consolidated Statements of Cash Flows for the Years ended December 31, 2021, 2020 and 2019 - Kilroy Realty, L.P.
F - 13
Notes to Consolidated Financial Statements
F - 14
Schedule II - Valuation and Qualifying Accounts
F - 61
Schedule III - Real Estate and Accumulated Depreciation
F - 62
All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto.
(3) Exhibits
Exhibit
Number Description
3.(i)1 Articles of Amendment and Restatement of Kilroy Realty Corporation (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 21, 2020)
3.(i)2 Certificate of Limited Partnership of Kilroy Realty, L.P. (previously filed by Kilroy Realty, L.P., as an exhibit to the General Form for Registration of Securities on Form 10 as filed with the Securities and Exchange Commission on August 18, 2010)
3.(i)3 Amendment to the Certificate of Limited Partnership of Kilroy Realty, L.P. (previously filed by Kilroy Realty, L.P., as an exhibit to the General Form for Registration of Securities on Form 10 as filed with the Securities and Exchange Commission on August 18, 2010)
3.(i)4 Articles Supplementary reclassifying shares of the Series G Preferred Stock of the Company (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 23, 2017)
3.(i)5 Articles Supplementary reclassifying shares of the Series H Preferred Stock of the Company (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 23, 2017)
3.(ii)1 Seventh Amended and Restated Bylaws of Kilroy Realty Corporation (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 20, 2021)
3.(ii)2 Seventh Amended and Restated Agreement of Limited Partnership of Kilroy Realty, L.P. dated August 15, 2012, as amended (previously filed by Kilroy Realty Corporation on Form 10-Q for the quarter ended June 30, 2014)
4.1 Kilroy Realty Corporation Form of Certificate for Common Stock (previously filed by Kilroy Realty Corporation as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
4.2 Registration Rights Agreement, dated January 31, 1997 (previously filed by Kilroy Realty Corporation as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
4.3 Form of Certificate for Partnership Units of Kilroy Realty, L.P. (previously filed by Kilroy Realty, L.P., as an exhibit to the General Form for Registration of Securities on Form 10 as filed with the Securities and Exchange Commission on August 18, 2010)
4.4 Registration Rights Agreement, dated July 31, 2012 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended June 30, 2012)
4.5 Officers’ Certificate pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “4.25% Senior Notes due 2029,” including the form of 4.25% Senior Notes due 2029 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 6, 2014)
4.6 Officers’ Certificate, dated September 16, 2015, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “4.375% Senior Notes due 2025,” including the form of 4.375% Senior Notes due 2025 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on September 16, 2015)
4.7 Officers’ Certificate, dated December 11, 2017, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “3.450% Senior Notes due 2024,” including the form of 3.450% Senior Notes due 2024 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 11, 2017)
4.8 Officers’ Certificate, dated November 29, 2018, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, as amended and supplemented, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “4.750% Senior Notes due 2028,” including the form of 4.750% Senior Note due 2028 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on November 29, 2018)
4.9 Officers’ Certificate, dated September 17, 2019, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, as amended and supplemented, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “3.050% Senior Notes due 2030,” including the form of 3.050% Senior Note due 2030 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on September 17, 2019)
4.10 Officers’ Certificate, dated August 12, 2020, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, as amended and supplemented, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “2.500% Senior Notes due 2032,” including the form of 2.500% Senior Note due 2032 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 18, 2020)
4.11 Officers’ Certificate, dated October 7, 2021, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, as amended and supplemented, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “2.650% Senior Notes due 2033,” including the form of 2.650% Senior Note due 2033 and the form of related guarantee. (previously filed Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on October 7, 2021)
4.12 The Company is party to agreements in connection with long-term debt obligations, none of which individually exceeds ten percent of the total assets of the Company on a consolidated basis. Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Company agrees to furnish copies of these agreements to the Commission upon request
10.1 Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries (previously filed by Kilroy Realty Corporation as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
10.2† 1997 Stock Option and Incentive Plan of the Registrant and Kilroy Realty, L.P. (previously filed by Kilroy Realty Corporation as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
10.3 License Agreement by and among the Registrant and the other persons named therein (previously filed by Kilroy Realty Corporation as an exhibit to the Registration Statement on Amendment No. 4 to Form S-11 (No. 333-15553))
10.4† Form of Restricted Stock Award Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on February 8, 2007)
10.5† Kilroy Realty Corporation Stock Award Deferral Program (previously filed by Kilroy Realty Corporation as an exhibit to Form 8-K as filed with the Securities and Exchange Commission on January 2, 2008)
10.6† Form of Indemnification Agreement of Kilroy Realty Corporation with certain officers and directors (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-K for the year ended December 31, 2009)
10.7† Kilroy Realty Corporation Form of Stock Option Grant Notice and Stock Option Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on February 24, 2012)
10.8† Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended June 30, 2013)
10.9† Form of Stock Award Deferral Program Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended June 30, 2013)
10.10† Form of Performance-Vest Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2014)
10.11† Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2014)
10.12† Form of Restricted Stock Unit Agreement for Non-Employee Members of the Board of Directors (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2014)
10.13† Form of Performance-Vest Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2015)
10.14† Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2015)
10.15† Form of Restricted Stock Unit Agreement for Non-Employee Members of the Board of Directors (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2015)
10.16† Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and Tyler H. Rose effective as of January 28, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2016)
10.17† Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and Justin W. Smart effective as of January 28, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2016)
10.18† Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and Heidi R. Roth effective as of January 28, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 10-Q for the quarter ended March 31, 2021)
10.19† Kilroy Realty Corporation Director Compensation Policy effective as of April 1, 2018 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2018.
10.20† Employment Agreement, as amended and restated December 27, 2018, by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and John B. Kilroy, Jr. (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 31, 2018)
10.21† Kilroy Realty Corporation 2006 Incentive Award Plan Restricted Stock Unit Agreement by and between Kilroy Realty Corporation and John B. Kilroy, Jr., dated December 27, 2018 (with retirement as to Time-Based RSUs) (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 31, 2018)
10.22† Kilroy Realty Corporation 2006 Incentive Award Plan Restricted Stock Unit Agreement by and between Kilroy Realty Corporation and John B. Kilroy, Jr., dated December 27, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 31, 2018)
10.23† Form of Restricted Stock Unit Agreement for 2006 Incentive Award Plan (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2018)
10.24 Note Purchase Agreement dated September 14, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on September 14, 2016)
10.25 Amendment to Note Purchase Agreement dated May 11, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 14, 2018)
10.26 Form of Time Sharing Agreement of Kilroy Realty, L.P. (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended September 30, 2016)
10.27 Promissory Note, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
10.28 Loan Agreement, dated November 29, 2016, by and between KR WMC, LLC and Massachusetts Mutual Life Insurance Company (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
10.29 Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
10.30 Assignment of Leases and Rents, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
10.31 Recourse Guaranty Agreement, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
10.32 Environmental Indemnification Agreement, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
10.33† Kilroy Realty Corporation 2007 Deferred Compensation Plan, as amended and restated effective January 1, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2016)
10.34 General Partner Guaranty Agreement, dated February 17, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-Q for the quarter ended March 31, 2017)
10.35† Kilroy Realty 2006 Incentive Award Plan (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 21, 2020)
10.36 Second Amended and Restated Credit Agreement dated as of July 24, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-Q for the quarter ended June 30, 2017)
10.37 Second Amended and Restated Guaranty dated as of July 24, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-Q for the quarter ended on June 30, 2017)
10.38 Note Purchase Agreement dated May 11, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 14, 2018)
10.39 Note Purchase Agreement dated April 28, 2020 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on April 30, 2020)
10.40 General Partner Guaranty Agreement dated April 28, 2020 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on April 30, 2020)
10.41 Third Amended and Restated Guaranty dated as of April 20, 2021 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2021)
10.42 Third Amended and Restated Credit Agreement dated as of April 20, 2021 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2021)
10.43 Underwriting Agreement dated as of September 23, 2021(previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on September 24, 2021)
21.1* List of Subsidiaries of Kilroy Realty Corporation
21.2* List of Subsidiaries of Kilroy Realty, L.P.
23.1* Consent of Deloitte & Touche LLP for Kilroy Realty Corporation
23.2* Consent of Deloitte & Touche LLP for Kilroy Realty, L.P.
24.1* Power of Attorney (included on the signature page of this Form 10-K)
31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty Corporation
31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty Corporation
31.3* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty, L.P.
31.4* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty, L.P.
32.1* Section 1350 Certification of Chief Executive Officer of Kilroy Realty Corporation
32.2* Section 1350 Certification of Chief Financial Officer of Kilroy Realty Corporation
32.3* Section 1350 Certification of Chief Executive Officer of Kilroy Realty, L.P.
32.4* Section 1350 Certification of Chief Financial Officer of Kilroy Realty, L.P.
101.1* The following Kilroy Realty Corporation and Kilroy Realty, L.P. financial information for the year ended December 31, 2021, formatted in inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Changes in Equity, (iv) Consolidated Statements of Capital, (v) Consolidated Statements of Cash Flows and (vi) Notes to the Consolidated Financial Statements(1)
104* Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101.1)
* Filed herewith
† Management contract or compensatory plan or arrangement.
(1) Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.