UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2019~~March 31, 2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-12675 (Kilroy Realty Corporation)

Commission File Number: 000-54005 (Kilroy Realty, L.P.)

KILROY REALTY CORPORATION

KILROY REALTY, L.P.

(Exact name of registrant as specified in its charter)




Kilroy Realty Corporation	Maryland	95-4598246
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Kilroy Realty, L.P.	Delaware	95-4612685
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

12200 W. Olympic Boulevard, Suite 200, Los Angeles, California, 90064

(Address of principal executive offices) (Zip Code)

(310) 481-8400



(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)



Securities registered pursuant to Section 12(b) of the Act:
Registrant	Title of each class	Name of each exchange on which registered	Ticker Symbol
Kilroy Realty Corporation	Common Stock, $.01 par value	New York Stock Exchange	KRC



Securities registered pursuant to Section 12(g) of the Act:
Registrant	Title of each class
Kilroy Realty, L.P.	Common Units Representing Limited Partnership Interests

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Kilroy Realty Corporation Yes ☑ No ☐

Kilroy Realty, L.P. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Kilroy Realty Corporation Yes ☑ No ☐

Kilroy Realty, L.P. Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Kilroy Realty Corporation

Large accelerated filer ☑ Accelerated filer ☐

Non-accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Kilroy Realty, L.P.

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☑ Smaller reporting company ☐

Emerging growth company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Kilroy Realty Corporation Yes ☐ No ☑

Kilroy Realty, L.P. Yes ☐ No ☑

As of ~~October 18, 2019, 106,011,916~~April 24, 2020, 115,073,347 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended ~~September 30, 2019~~March 31, 2020 of Kilroy Realty Corporation and Kilroy Realty, L.P. Unless stated otherwise or the context otherwise requires, references to “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” mean Kilroy Realty Corporation, a Maryland corporation, and its controlled and consolidated subsidiaries, and references to “Kilroy Realty, L.P.” or the “Operating Partnership” mean Kilroy Realty, L.P., a Delaware limited partnership and its controlled and consolidated subsidiaries.

The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of ~~September 30, 2019,~~March 31, 2020, the Company owned an approximate ~~98.1%~~98.3% common general partnership interest in the Operating Partnership. The remaining approximate ~~1.9%~~1.7% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of the Company. As the sole general partner of the Operating Partnership, the Company exercises exclusive and complete discretion over the Operating Partnership’s day-to-day management and control and can cause it to enter into certain major transactions, including acquisitions, dispositions, and refinancings and cause changes in its line of business, capital structure and distribution policies.

There are a few differences between the Company and the Operating Partnership that are reflected in the disclosures in this Form 10-Q. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the Company and the Operating Partnership operate as an interrelated, consolidated company. The Company is a REIT, the only material asset of which is the partnership interests it holds in the Operating Partnership. As a result, the Company generally does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing certain debt of the Operating Partnership. The Company itself is not directly obligated under any indebtedness, but generally guarantees all of the debt of the Operating Partnership. The Operating Partnership owns substantially all of the assets of the Company either directly or through its subsidiaries, conducts the operations of the Company’s business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Company, which the Company generally contributes to the Operating Partnership in exchange for units of partnership interest, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness or through the issuance of units of partnership interest.

Noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The common limited partnership interests in the Operating Partnership are accounted for as partners’ capital in the Operating Partnership’s financial statements and, to the extent not held by the Company, as noncontrolling interests in the Company’s financial statements. The Operating Partnership’s financial statements reflect the noncontrolling interest in Kilroy Realty Finance Partnership, L.P., a Delaware limited partnership (the “Finance Partnership”). This noncontrolling interest represents the Company’s 1% indirect general partnership interest in the Finance Partnership, which is directly held by Kilroy Realty Finance, Inc., a wholly owned subsidiary of the Company. The differences between stockholders’ equity, partners’ capital and noncontrolling interest result from the differences in the equity issued by the Company and the Operating Partnership, and in the Operating Partnership’s noncontrolling interest in the Finance Partnership.

We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:

Combined reports better reflect how management and the analyst community view the business as a single operating unit;

Combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;

Combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and

Combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:

consolidated financial statements;

the following notes to the consolidated financial statements:


◦	Note 6,4, Stockholders’ Equity of the Company;


◦	Note 8,6, Partners’ Capital of the Operating Partnership;


◦	Note ~~13,~~11, Net Income Available to Common Stockholders Per Share of the Company;


◦	Note ~~14,~~12, Net Income Available to Common Unitholders Per Unit of the Operating Partnership;


◦	Note ~~15,~~13, Supplemental Cash Flow Information of the Company; and


◦	Note ~~16,~~14, Supplemental Cash Flow Information of the Operating Partnership;

“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


◦	—Liquidity and Capital Resources of the Company;” and


◦	—Liquidity and Capital Resources of the Operating Partnership.”

This report also includes separate sections under ~~Part~~“Part I – Financial Information, Item 4. Controls and ~~Procedures~~Procedures” and separate Exhibit 31 and Exhibit 32 certifications for the Company and the Operating Partnership to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

QUARTERLY REPORT FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30, 2019~~MARCH 31, 2020

TABLE OF CONTENTS



		Page
	PART I – FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY CORPORATION	1
	Consolidated Balance Sheets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019	1
	Consolidated Statements of Operations for the Three ~~and Nine~~ Months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	2
	Consolidated Statements of Equity for the Three ~~and Nine~~ Months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	3
	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	54
Item 1.	FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY, L.P.	65
	Consolidated Balance Sheets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019	5
	Consolidated Statements of Operations for the Three Months ended March 31, 2020 and 2019	6
	Consolidated Statements of ~~Operations~~Capital for the Three ~~and Nine~~ Months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	7
	Consolidated Statements of ~~Capital~~Cash Flows for the Three ~~and Nine~~ Months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	8
	~~Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2019 and 2018~~	10
	Notes to Unaudited Consolidated Financial Statements	119
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3126
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	6051
Item 4.	CONTROLS AND PROCEDURES (KILROY REALTY CORPORATION AND KILROY REALTY, L.P.)	6051
	PART II – OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	6152
Item 1A.	RISK FACTORS	6152
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	6154
Item 3.	DEFAULTS UPON SENIOR SECURITIES	6154
Item 4.	MINE SAFETY DISCLOSURES	6154
Item 5.	OTHER INFORMATION	6154
Item 6.	EXHIBITS	6255
SIGNATURES		6356

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY CORPORATION

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except share data)


	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
ASSETS
REAL ESTATE ASSETS:
Land and improvements	$	1,315,448		$	1,160,138		$	1,506,357		$	1,466,166
Buildings and improvements	5,770,226			5,207,984			5,997,523			5,866,477
Undeveloped land and construction in progress	1,892,169			2,058,510			2,318,236			2,296,130
Total real estate assets held for investment	8,977,843			8,426,632			9,822,116			9,628,773
Accumulated depreciation and amortization	(1,505,785		)	(1,391,368		)	(1,622,369		)	(1,561,361		)
Total real estate assets held for investment, net	7,472,058			7,035,264			8,199,747			8,067,412
REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 3)	77,751			—
CASH AND CASH EQUIVALENTS	297,620			51,604
CASH AND CASH EQUIVALENTS (Note 4)							762,134			60,044
RESTRICTED CASH	6,300			119,430			16,300			16,300
MARKETABLE SECURITIES (Note 12)	26,188			21,779
CURRENT RECEIVABLES, NET (Note 1)	34,116			20,176
DEFERRED RENT RECEIVABLES, NET (Note 1)	314,812			267,007
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 1)	202,063			197,574
RIGHT OF USE GROUND LEASE ASSETS (Notes 1 and 11)	83,200			—
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 4)	109,707			52,873
MARKETABLE SECURITIES (Note 10)							19,984			27,098
CURRENT RECEIVABLES, NET							16,534			26,489
DEFERRED RENT RECEIVABLES, NET							352,352			337,937
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET							204,392			212,805
RIGHT OF USE GROUND LEASE ASSETS (Note 9)							96,145			96,348
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 2)							67,559			55,661
TOTAL ASSETS	$	8,623,815		$	7,765,707		$	9,735,147		$	8,900,094
LIABILITIES AND EQUITY
LIABILITIES:
Secured debt, net (Notes 5 and 12)	$	259,027		$	335,531
Unsecured debt, net (Notes 5 and 12)	3,048,209			2,552,070
Unsecured line of credit (Notes 5 and 12)	—			45,000
Secured debt, net (Notes 3 and 10)							$	257,359		$	258,593
Unsecured debt, net (Notes 3, 10 and 15)							3,050,103			3,049,185
Unsecured line of credit (Notes 3 and 10)							380,000			245,000
Accounts payable, accrued expenses and other liabilities	439,081			374,415			417,547			418,848
Ground lease liabilities (Notes 1 and 11)	87,617			—
Accrued dividends and distributions (Note 17)	53,205			47,559
Ground lease liabilities (Note 9)							98,247			98,400
Accrued dividends and distributions (Note 15)							57,620			53,219
Deferred revenue and acquisition-related intangible liabilities, net	134,828			149,646			130,843			139,488
Rents received in advance and tenant security deposits	57,428			60,225			65,913			66,503
Liabilities and deferred revenue of real estate assets held for sale (Note 3)	4,911			—
Total liabilities	4,084,306			3,564,446			4,457,632			4,329,236
COMMITMENTS AND CONTINGENCIES (Note 11)
COMMITMENTS AND CONTINGENCIES (Note 9)
EQUITY:
Stockholders’ Equity (Note 6):
Common stock, $.01 par value, 150,000,000 shares authorized, 106,011,916 and 100,746,988 shares issued and outstanding, respectively	1,060			1,007
Stockholders’ Equity (Note 4):
Common stock, $.01 par value, 150,000,000 shares authorized, 115,067,924 and 106,016,287 shares issued and outstanding, respectively							1,151			1,060
Additional paid-in capital	4,342,296			3,976,953			5,067,181			4,350,917
Distributions in excess of earnings (Note 1)	(78,707		)	(48,053		)
Distributions in excess of earnings							(76,182		)	(58,467		)
Total stockholders’ equity	4,264,649			3,929,907			4,992,150			4,293,510
Noncontrolling Interests (Notes 1 and 7):
Noncontrolling Interests (Notes 1 and 5):
Common units of the Operating Partnership	81,393			78,991			87,655			81,917
Noncontrolling interests in consolidated property partnerships	193,467			192,363			197,710			195,431
Total noncontrolling interests	274,860			271,354			285,365			277,348
Total equity	4,539,509			4,201,261			5,277,515			4,570,858
TOTAL LIABILITIES AND EQUITY	$	8,623,815		$	7,765,707		$	9,735,147		$	8,900,094

~~An increase in total operating revenues of $13.9~~


•	A decrease in rental income of$2.0 million primarily due to:

$5.9 million reduction in revenue during the three months ended March 31, 2020 related to the cumulative impact of transitioning one co-working tenant and one retail tenant to a cash basis of revenue recognition as a result of the COVID-19 pandemic;

$~~8.0~~3.1 million net decrease primarily related to the improved credit quality of a tenant in 2019 for which the Company recorded a bad debt reserve in 2018;

$3.1 million decrease due to an early lease termination fee received in 2019 for a tenant in the San Francisco Bay Area;

$1.5 million decrease in recoveries of recurring expenses related to property taxes, repairs and maintenance, security, janitorial, utilities, parking and various other recurring expenses primarily due to the following:

$1.0 million decrease due to a tenant in the San Francisco Bay Area’s change from a triple net lease to a modified net lease, resulting in payment of expenses directly to vendors;

$0.8 million decrease due to prior year adjustments recorded in 2019 resulting from higher operating expense and property tax adjustments for the 2018 expense year; partially offset by

$0.3 million increase primarily due to higher occupancy at three properties; partially offset by

$9.8 million increase from new leases and renewals at higher rates across all regions; and

$1.8 million increase due to higher occupancy primarily in the San Francisco Bay Area ~~Greater Los Angeles~~ and Greater Seattle regions; partially offset by

~~$4.9 million~~An increase in ~~the tenant reimbursement component~~other property income of ~~rental income primarily due to the following:~~

~~$3.5~~$0.5 million increase due to the adoption of Topic 842 on January 1, 2019, resulting in the gross-up of tenant direct billbacks, which were previously presented net in property expenses. These billbacks are also included in property expenses and have no net impact on net operating income; and

~~$1.3 million increase due to tenant recoveries of the new Proposition C gross receipts tax for San Francisco effective January 1, 2019; and~~

~~$1.1 million increase in parking revenue~~ primarily due to higher ~~monthly tenant~~transient and special event parking ~~revenue~~income at ~~three properties and higher non-tenant~~five properties. We expect daily, special event and transient parking ~~income primarily at three other properties;~~to be impacted while restrictions intended to prevent the spread of COVID-19 are in effect;

~~An increase~~A decrease in property and related expenses of ~~$3.8~~$1.3 million primarily due to the following:

~~$4.4 million increase in property expenses primarily due to the following:~~

$3.5 million increase due to the adoption of Topic 842 on January 1, 2019, resulting in the gross-up of tenant direct billbacks, which were previously presented net in property expenses. These billbacks are also included in operating revenues and have no net impact on net operating income;

~~$1.3 million increase due to the new Proposition C gross receipts tax in the San Francisco Bay Area passed through to tenants which became effective on January 1, 2019; partially offset by~~

4237

$~~0.3~~1.0 million ~~net~~ decrease in property expenses due to a $0.6 million decrease in reimbursable expenses such as janitorial, engineering, repairs and maintenance, and various other recurring expenses partially offset by $0.3 million increase in non-reimbursable expenses due to higher property management costs;

~~$0.4 million increase in property taxes primarily due to the following:~~

~~$0.7 million increase due to higher supplemental taxes for one property in Greater Los Angeles;~~

~~$0.2 million increase in annual property taxes across the portfolio except~~tenant in the ~~Greater Seattle region; partially offset by~~San Francisco Bay Area’s change from a triple net lease to a modified net lease, resulting in payment of expenses directly to vendors;

$0.5 million decrease in reimbursable property ~~taxes~~expenses including janitorial, utilities, engineering, parking, and various other recurring expenses due to several tenants implementing work from home policies due to the ~~adoption~~COVID-19 pandemic. Reimbursable property expenses may fluctuate in future periods depending upon restrictions and social distancing requirements intended to prevent the spread of ~~Topic 842 on January 1, 2019 which resulted in property taxes related to properties where the Company is the lessee under a ground lease to be presented in ground lease expense;~~COVID-19 and how long they remain effective;

$0.5 million increase in ground leases primarily due to the adoption of Topic 842 on January 1, 2019, which resulted in property taxes related to properties where the Company is the lessee under a ground lease to be presented in ground lease expense; partially offset by


•	An increase in Net Operating Income of $14.8 millionattributable to the Development Properties;

$1.5 million decrease in provision for bad debts due to a provision recorded in 2018 related primarily to one tenant. The provision for bad debts was included in operating expenses prior to the adoption of ASC 842 on January 1, 2019;


•	An increase in Net Operating Income of $2.7 millionattributable to the Acquisition Properties; and

~~An increase in Net Operating Income of $14.2 million attributable to the Development Properties;~~

~~An increase in Net Operating Income of $3.4 million attributable to the Acquisition Properties; and~~

~~A decrease in Net Operating Income of $6.6~~


•	A decrease in Net Operating Income of$1.8 million attributable to the Disposition Properties.

We are continuing to monitor the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on occupancy, rental rates and rent collections. As of the date of this report, across all property types, we have collected approximately 96% of our April 2020 contractual rent billings, including from all of our top 15 tenants and excluding a rent relief program with certain retail tenants. Adjusted for the retail rent relief program, we have collected 93% of contractual rent billings. We have not yet observed any notable or significant changes in occupancy or rental rates. 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. Refer to “Part II – Other Information, 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.

Other Expenses and Income

General and Administrative Expenses

General and administrative expenses ~~increased~~decreased by approximately ~~$3.3~~$4.3 million, or 18.6%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to:

A decrease of $2.7 million related to the mark-to-market adjustment of the Company’s deferred compensation plan and the resultant impact of reducing compensation expense, which is offset by the losses on the underlying marketable securities which are included in interest income and other net investment (loss) gain in the consolidated statements of operations; and

A decrease of $1.8 million in compensation related expenses.

Leasing Costs

Leasing costs decreased by $0.3 million or 17.1%, for the three months ended ~~September 30, 2019~~March 31, 2020 compared to the three months ended ~~September 30, 2018~~March 31, 2019 primarily ~~related~~due to ~~severance and other compensation and benefit related costs.~~

~~Leasing Costs~~

~~Effective January 1, 2019, the Company adopted Topic 842 and expensed $1.2 million~~a higher level of ~~indirect~~ leasing ~~costs~~activity during the three months ended ~~September 30, 2019. Amounts~~March 31, 2019 and changes in ~~prior periods were capitalized under previous accounting guidance.~~personnel.

Depreciation and Amortization

Depreciation and amortization increased ~~$6.5~~$8.2 million, or ~~10.4%~~12.5%, for the three months ended ~~September 30, 2019~~March 31, 2020 compared to the three months ended ~~September 30, 2018~~March 31, 2019 primarily due to the following:

~~An increase~~A decrease of ~~$2.4~~$3.8 million attributable to the Same Store Properties;

An increase of ~~$4.5~~$10.5 million attributable to the Development Properties; and

An increase of ~~$2.9~~$2.7 million attributable to the Acquisition Properties; partially offset by

A decrease of ~~$3.3~~$1.2 million attributable to the Disposition ~~& Held for Sale~~ Properties.

Interest Expense

The following table sets forth our gross interest expense, including debt discounts/premiums and deferred financing cost amortization, and capitalized interest, including capitalized debt discounts/premiums and deferred financing cost amortization, for the three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018~~2019:


	Three Months Ended September 30,											Three Months Ended March 31,
	2019			2018			Dollar Change			Percentage Change		2020			2019			Dollar Change			Percentage Change
	(in thousands)											(in thousands)
Gross interest expense	$	32,220		$	30,231		$	1,989		6.6	%	$	35,862		$	30,680		$	5,182		16.9	%
Capitalized interest and deferred financing costs	(20,585		)	(19,156		)	(1,429		)	7.5	%	(21,418		)	(19,437		)	(1,981		)	10.2	%
Interest expense	$	11,635		$	11,075		$	560		5.1	%	$	14,444		$	11,243		$	3,201		28.5	%

Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased ~~$2.0~~$5.2 million, or ~~6.6%~~16.9%,for the three months ended ~~September 30, 2019~~March 31, 2020 as compared to the three months ended ~~September 30, 2018~~March 31, 2019 primarily due to an increase in ~~our~~the average outstanding debt balance for the three months ended ~~September 30, 2019.~~March 31, 2020.

Capitalized interest and deferred financing costs increased ~~$1.4~~$2.0 million, or ~~7.5%~~10.2%, for the three months ended ~~September 30, 2019~~March 31, 2020 compared to the three months ended ~~September 30, 2018~~March 31, 2019 primarily due to an increase in the average development asset balances qualifying for interest capitalization during the three months ended ~~September 30, 2019.~~March 31, 2020. During the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately ~~$2.0~~$2.2 billion and ~~$1.8~~$1.9 billion, respectively. In the event of an extended cessation of development 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, we believe 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. Refer to “Part II – Other Information, 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.

Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships

Net income attributable to noncontrolling interests in consolidated property partnerships increased by ~~$0.4~~$0.7 million or ~~11.8%~~16.8% for the three months ended ~~September 30, 2019~~March 31, 2020 compared to the three months ended ~~September 30, 2018~~March 31, 2019 primarily due to a new lease at a higher ~~occupancy~~rate at one property held in a property partnership in ~~2019.~~ 2020.The amounts reported for the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ are comprised of the noncontrolling ~~interests’~~interest's share of net income for 100 First Street 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 City Partners, LLC (“Redwood LLC”).

~~Comparison of the Nine Months Ended September 30, 2019 to the Nine Months Ended September 30, 2018~~

~~The following table summarizes our Net Operating Income, as defined, for our total portfolio for the nine months ended September 30, 2019 and~~ ~~2018~~.

Nine Months Ended September 30,
Dollar
Change

Percentage
Change
2019 2018
($ in thousands)
Reconciliation of Net Income Available to Common Stockholders to Net Operating Income, as defined:
Net Income Available to Common Stockholders $ 122,943
$ 98,195
$ 24,748
25.2 %
Net income attributable to noncontrolling common units of the Operating Partnership 2,423
2,008
415
20.7 %
Net income attributable to noncontrolling interests in consolidated property partnerships 11,941
10,833
1,108
10.2 %
Net income $ 137,307
$ 111,036
$ 26,271
23.7 %
Unallocated expense (income):
General and administrative expenses 65,774
56,599
9,175
16.2 %
Leasing Costs 5,599
—
5,599
100.0 %
Depreciation and amortization 203,617
189,421
14,196
7.5 %
Interest income and other net investment gains (3,205 ) (1,147 ) (2,058 ) 179.4 %
Interest expense 34,605
37,285
(2,680 ) (7.2 )%
Gains on sales of depreciable operating properties (7,169 ) —
(7,169 ) (100.0 )%
Net Operating Income, as defined $ 436,528
$ 393,194
$ 43,334
11.0 %

~~The following tables summarize our Net Operating Income, as defined, for our total portfolio for the nine months ended~~ ~~September 30, 2019~~ ~~and~~ ~~2018~~.

Nine Months Ended September 30,
2019 2018
Same Store Develop-ment Acquisi-tion Disposi-tion & Held for Sale Total Same Store Develop-ment Acquisi-tion Disposi-tion & Held for Sale Total
(in thousands)
Operating revenues:
Rental income $ 544,300
$ 36,683
$ 20,839
$ 7,510
$ 609,332
$ 458,013
$ —
$ 4,496
$ 27,165
$ 489,674
Tenant reimbursements —
—
—
—
—
54,751
—
911
4,809
60,471
Other property income 6,707
697
—
483
7,887
6,078
—
—
233
6,311
Total 551,007
37,380
20,839
7,993
617,219
518,842
—
5,407
32,207
556,456
Property and related expenses:
Property expenses 107,765
5,968
2,087
2,173
117,993
91,806
242
387
6,966
99,401
Real estate taxes 48,950
4,412
2,287
914
56,563
47,745
598
751
3,327
52,421
Provision for bad debts —
—
—
—
—
6,550
—
—
164
6,714
Ground leases 6,135
—
—
—
6,135
4,726
—
—
—
4,726
Total 162,850
10,380
4,374
3,087
180,691
150,827
840
1,138
10,457
163,262
Net Operating Income,
as defined
$ 388,157
$ 27,000
$ 16,465
$ 4,906
$ 436,528
$ 368,015
$ (840 ) $ 4,269
$ 21,750
$ 393,194

Nine Months Ended September 30, 2019 as compared to the Nine Months Ended September 30, 2018
Same Store Development Acquisition Disposition & Held for Sale 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 $ 86,287
18.8 % $ 36,683
100.0 % $ 16,343
363.5 % $ (19,655 ) (72.4 )% $ 119,658
24.4 %
Tenant reimbursements (54,751 ) (100.0 )% —
— % (911 ) (100.0 )% (4,809 ) (100.0 )% (60,471 ) (100.0 )%
Other property income 629
10.3 % 697
100.0 % —
— % 250
107.3 % 1,576
25.0 %
Total 32,165
6.2 % 37,380
100.0 % 15,432
285.4 % (24,214 ) (75.2 )% 60,763
10.9 %
Property and related expenses:
Property expenses 15,959
17.4 % 5,726
NM*
1,700
439.3 % (4,793 ) (68.8 )% 18,592
18.7 %
Real estate taxes 1,205
2.5 % 3,814
637.8 % 1,536
204.5 % (2,413 ) (72.5 )% 4,142
7.9 %
Provision for bad debts (6,550 ) (100.0 )% —
— % —
— % (164 ) (100.0 )% (6,714 ) (100.0 )%
Ground leases 1,409
29.8 % —
— % —
— % —
— % 1,409
29.8 %
Total 12,023
8.0 % 9,540
NM*
3,236
284.4 % (7,370 ) (70.5 )% 17,429
10.7 %
Net Operating Income,
as defined
$ 20,142
5.5 % $ 27,840
NM*
$ 12,196
285.7 % $ (16,844 ) (77.4 )% $ 43,334
11.0 %

~~________________________~~


*	~~Percentage not meaningful.~~

The Company adopted Topic 842 on January 1, 2019 which resulted in rental revenues, tenant reimbursements, provision for/recoveries of bad debts, and lease termination fees being presented as one single component in rental income. The presentation changes required by Topic 842 were adopted prospectively with no restatement of previously reported periods required.

~~Net Operating Income increased $43.3 million, or 11.0%, for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 primarily resulting from:~~

~~An increase of $20.1 million attributable to the Same Store Properties primarily resulting from:~~

~~An increase in total operating revenues of $32.2 million primarily due to:~~

~~$11.9 million increase from new leases and renewals at higher rates primarily in the San Francisco Bay Area and Greater Los Angeles regions;~~

~~$15.7 million increase in the tenant reimbursement component of rental income due to the following:~~

$9.0 million increase due to the adoption of Topic 842 on January 1, 2019, resulting in the gross-up of tenant direct billbacks, which were previously presented net in property expenses. These billbacks are also included in property expenses and have no net impact on net operating income;

~~$4.0 million increase due to tenant recoveries of the new Proposition C gross receipts tax for San Francisco effective January 1, 2019;~~

~~$1.5 million increase due to higher recoveries of recurring expenses related to property taxes, security, repairs and maintenance, and various other recurring expenses at certain properties;~~

$0.9 million increase due to new triple net tenants in the Greater Seattle region which replaced prior year base year tenants, offset by a decrease due to one tenant in the San Francisco Bay Area paying for expenses directly; and

~~$0.3 million increase due to lower abated tenant reimbursements and various other adjustments;~~

$2.9 million net increase primarily due to a $4.2 million reversal of provision for bad debts related to the improved credit quality of a tenant for which the Company recorded a bad debt reserve in 2018, partially offset by $1.3 million of provision for bad debts recorded for other tenants during the nine months ended September 30, 2019. The provision for bad debts is included in rental income beginning January 1, 2019 in connection with the adoption of ASC 842; and

~~$1.6 million increase due to higher parking income resulting from higher tenant parking primarily at five properties;~~

~~An increase in property and related expenses of $12.0 million primarily due to the following:~~

~~$16.0 million increase in property expenses primarily due to the following:~~

$9.0 million increase due to the adoption of Topic 842 on January 1, 2019, resulting in the gross-up of tenant direct billbacks, which were previously presented net in property expenses. These billbacks are also included in operating revenues and have no net impact on net operating income;

~~$4.0 million increase due to the new Proposition C gross receipts tax in San Francisco passed through to tenants which became effective on January 1, 2019; and~~

$2.0 million increase in reimbursable expenses such as utilities, security, contract services, repairs and maintenance, and various other recurring expenses and a $0.5 million increase in non-reimbursable expenses primarily due to higher property management costs;

~~$1.2 million increase in real estate taxes primarily comprised of:~~

~~$1.8 million increase due to higher supplemental taxes assessed in 2019 for the 2016 to 2019 tax years at two properties in the Greater Los Angeles area; and~~

~~$0.5 million increase due to regular annual increases at various properties across the portfolio; partially offset by~~

$1.4 million decrease due to the adoption of Topic 842 on January 1, 2019, which resulted in property taxes related to our four ground leases where the Company is the lessee to be presented in ground lease expense;

$1.4 million increase in ground leases primarily due to the adoption of Topic 842 on January 1, 2019, which resulted in property taxes related to properties where the Company is the lessee under a ground lease to be presented in ground lease expense; partially offset by

$6.6 million decrease in provision for bad debts due to 2018 reserves primarily related to one tenant. The provision for bad debts was included in operating expenses prior to the adoption of ASC 842 on January 1, 2019;

~~An increase of $27.8 million attributable to the Development Properties; and~~

~~An increase of $12.2 million attributable to the Acquisition Properties; partially offset by~~

~~A decrease of $16.8 million attributable to the Disposition & Held for Sale Properties.~~

~~Other Expenses and Income~~

~~General and Administrative Expenses~~

General and administrative expenses increased $9.2 million, or 16.2%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to the following:

~~An increase of approximately $9.1 million primarily related to severance and other compensation and benefit related costs;~~

~~An increase of $1.9 million attributable to compensation expense related to the mark-to-market adjustment for the Company’s deferred compensation plan; partially offset by~~

~~A net decrease of $1.8 million due to lower legal costs incurred in 2019 compared to 2018, partially offset by an increase in other general and administrative expenses.~~

~~Leasing Costs~~

Effective January 1, 2019, the Company adopted Topic 842 and expensed $5.6 million of indirect leasing costs during the nine months ended September 30, 2019. Amounts in prior periods were capitalized under previous accounting guidance.

~~Depreciation and Amortization~~

~~Depreciation and amortization increased $14.2 million, or 7.5%, for the nine months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to the following:~~

~~An increase of $5.3 million attributable to the Same Store Properties;~~

~~An increase of $8.3 million attributable to the Development Properties; and~~

~~An increase of $9.4 million attributable to the Acquisition Properties; partially offset by~~

~~A decrease of $8.8 million attributable to the Disposition & Held for Sale Properties.~~

~~Interest Expense~~

The following table sets forth our gross interest expense, including debt discounts/premiums and deferred financing cost amortization, and capitalized interest, including capitalized debt discounts/premiums and deferred financing cost amortization for the nine months ended September 30, 2019 and 2018:

Nine Months Ended September 30,
2019 2018
Dollar
Change

Percentage
Change
(in thousands)
Gross interest expense $ 95,507
$ 85,834
$ 9,673
11.3 %
Capitalized interest and deferred financing costs (60,902 ) (48,549 ) (12,353 ) 25.4 %
Interest expense $ 34,605
$ 37,285
$ (2,680 ) (7.2 )%

Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased $9.7 million or 11.3% for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 due to an increase in our average debt balance for the nine months ended September 30, 2019.

Capitalized interest and deferred financing costs increased $12.4 million or 25.4%, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to an increase in the average development asset balances qualifying for interest capitalization for the nine months ended September 30, 2019. During the nine months ended September 30, 2019 and 2018, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately $1.9 billion and $1.5 billion, respectively.

~~Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships~~

Net income attributable to noncontrolling interests in consolidated property partnerships increased $1.1 million or 10.2% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to higher occupancy at one property held in a property partnership in 2019. The amounts reported for the nine months ended September 30, 2019 and 2018 are comprised of the noncontrolling interests’ share of net income for 100 First Street Member, LLC (“100 First LLC”), 303 Second Street Member (“303 Second LLC”) and Redwood City Partners, LLC (“Redwood LLC”).

4839

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 ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 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 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.

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, common unitholders from the Operating Partnership’s cash flow from operating activities. All such distributions are at the discretion of the Board of Directors. 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 ~~sufficient~~appropriate to do so throughout ~~2019.~~2020. In addition, in the event the Company is unable to identify and complete the acquisition of suitable replacement properties to effect Section 1031 Exchanges or is unable to successfully complete Section 1031 Exchanges to defer some or all of the taxable gains related to property dispositions as a result of the COVID-19 pandemic or any other reason, the Company may elect 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 ~~September 11, 2019,~~February 12, 2020, the Board of Directors declared a regular quarterly cash dividend of $0.485. The regular quarterly cash dividend is payable to stockholders of record on ~~September 30, 2019~~March 31, 2020 and a corresponding cash distribution of $0.485 per Operating Partnership unit is payable to holders of the Operating Partnership’s common limited partnership interests of record on ~~September 30, 2019,~~March 31, 2020, including those owned by the Company. The total cash quarterly dividends and distributions paid on ~~October 16, 2019~~April 15, 2020 were ~~$52.4~~$56.8 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 ~~September 30, 2019,~~March 31, 2020, our total debt as a percentage of total market capitalization was ~~28.4%~~33.2%, which was calculated based on the closing price per share of the Company’s common stock of ~~$77.89~~$63.70 on ~~September 30, 2019~~March 31, 2020 as shown in the following table:


	Shares/Units at September 30, 2019	Aggregate Principal Amount or $ Value Equivalent		% of Total Market Capitalization		Shares/Units at March 31, 2020	Aggregate Principal Amount or $ Value Equivalent		% of Total Market Capitalization
	($ in thousands)					($ in thousands)
Debt:⁽²⁾⁽¹⁾
Unsecured Line of Credit							$	380,000	3.4	%
Unsecured Term Loan Facility		$	150,000	1.3	%		150,000		1.3	%
Unsecured Senior Notes due 2023		300,000		2.6	%		300,000		2.7	%
Unsecured Senior Notes due 2024		425,000		3.6	%		425,000		3.8	%
Unsecured Senior Notes due 2025		400,000		3.4	%		400,000		3.6	%
Unsecured Senior Notes Series A & B due 2026		250,000		2.1	%		250,000		2.2	%
Unsecured Senior Notes due 2028		400,000		3.4	%		400,000		3.6	%
Unsecured Senior Notes due 2029		400,000		3.4	%		400,000		3.6	%
Unsecured Senior Notes Series A & B due 2027 & 2029		250,000		2.1	%		250,000		2.2	%
Unsecured Senior Notes due 2030		500,000		4.3	%		500,000		4.5	%
Secured debt		259,967		2.2	%		258,236		2.3	%
Total debt		$	3,334,967	28.4	%		$	3,713,236	33.2	%
Equity and Noncontrolling Interest in the Operating Partnership: ⁽³⁾
Common limited partnership units outstanding ⁽⁴⁾	2,023,287	$	157,594	1.3	%
Common shares outstanding ⁽⁵⁾	106,011,916	8,257,268		70.3	%
Total equity and noncontrolling interest in the Operating Partnership		$	8,414,862	71.6	%
Equity and Noncontrolling Interests in the Operating Partnership: ⁽²⁾
Common limited partnership units outstanding ⁽³⁾						2,021,287	$	128,756	1.2	%
Shares of common stock outstanding						115,067,924	7,329,827		65.6	%
Total Equity and Noncontrolling Interests in the Operating Partnership							$	7,458,583	66.8	%
Total Market Capitalization		$	11,749,829	100.0	%		$	11,171,819	100.0	%

________________________

(1)

Represents gross aggregate principal amount due at maturity before the effect of the following at ~~September 30, 2019~~March 31, 2020: ~~$21.1~~$19.5 million of unamortized deferred financing costs on the unsecured term loan facility, unsecured senior notes, and secured debt and ~~$6.7~~$6.2 million of unamortized discounts for the unsecured senior notes. Excludes $350.0 million of 4.27% unsecured senior notes due 2031 the Operating Partnership issued on April 28, 2020 in connection with a private placement offering.


(2)	~~As of~~ ~~September 30, 2019, there was no outstanding balance on the unsecured revolving credit facility.~~


~~(3)~~	Value based on closing price per share of our common stock of ~~$77.89~~$63.70 as of ~~September 30, 2019.~~March 31, 2020.


~~(4)~~(3)	Includes common units of the Operating Partnership not owned by the Company; does not include noncontrolling interests in consolidated property partnerships.


~~(5)~~	~~Shares of common stock outstanding exclude 1,201,204 shares of common stock sold under forward equity sale agreements that remain to be settled as of~~ ~~September 30, 2019~~.

5041

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 and term loan facility;

Proceeds from our capital recycling program, including the disposition of ~~less strategic or core~~ 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 ~~and preferred~~ 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.

As of the date of this report, we have no material debt maturities prior to July 2022, at which time our revolving credit facility and term loan mature. As a result of settling various forward equity sale agreements during the three months ended March 31, 2020, as well as the completion of a private placement offering of $350.0 million in unsecured senior notes on April 28, 2020, we had approximately $1.0 billion in cash and cash equivalents as of April 28, 2020, with an additional $370.0 million available under our unsecured revolving credit facility. We believe that this available liquidity makes us well positioned to navigate macroeconomic uncertainty resulting from the COVID-19 pandemic.

5142

Liquidity Sources

Unsecured Revolving Credit Facility and Term Loan Facility

The following table summarizes the balance and terms of our unsecured revolving credit facility as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(in thousands)						(in thousands)
Outstanding borrowings	$	—		$	45,000		$	380,000		$	245,000
Remaining borrowing capacity	750,000			705,000			370,000			505,000
Total borrowing capacity ⁽¹⁾	$	750,000		$	750,000		$	750,000		$	750,000
Interest rate ⁽²⁾	3.02		%	3.48		%	1.85		%	2.76		%
Facility fee-annual rate ⁽³⁾	0.200%						0.200%
Maturity date	July 2022						July 2022

________________________


(1)	We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional $600.0 million under an accordion feature under the terms of the unsecured revolving credit facility and unsecured term loan facility.


(2)	Our unsecured revolving credit facility interest rate was calculated based the contractual rate of LIBOR plus 1.000% as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

(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 ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018, $3.7~~2019, $3.1 million and ~~$4.7~~$3.4 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.~~debt to supplement cash balances given uncertainties and volatility in market conditions.

The following table summarizes the balance and terms of our unsecured term loan facility as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(in thousands)						(in thousands)
Outstanding borrowings	$	150,000		$	150,000		$	150,000		$	150,000
Remaining borrowing capacity	—			—			—			—
Total borrowing capacity ⁽¹⁾	$	150,000		$	150,000		$	150,000		$	150,000
Interest rate ⁽²⁾	3.13		%	3.49		%	2.03		%	2.85		%
Undrawn facility fee-annual rate ⁽³⁾	0.200%						0.200%
Maturity date	July 2022						July 2022

________________________



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
REVENUES (Note 1)
Rental income	$	212,321		$	162,288		$	609,332		$	489,674
Tenant reimbursements	—			21,754			—			60,471
Other property income	3,204			2,520			7,887			6,311
Total revenues	215,525			186,562			617,219			556,456
EXPENSES
Property expenses (Note 1)	41,308			35,163			117,993			99,401
Real estate taxes	19,998			17,462			56,563			52,421
Provision for bad debts (Note 1)	—			1,338			—			6,714
Ground leases (Notes 1 and 11)	2,049			1,579			6,135			4,726
General and administrative expenses	22,576			19,277			65,774			56,599
Leasing costs (Note 1)	1,192			—			5,599			—
Depreciation and amortization	69,230			62,700			203,617			189,421
Total expenses	156,353			137,519			455,681			409,282
OTHER (EXPENSES) INCOME
Interest income and other net investment gain (Note 12)	761			342			3,205			1,147
Interest expense (Note 5)	(11,635		)	(11,075		)	(34,605		)	(37,285		)
Gains on sales of depreciable operating properties (Note 3)	—			—			7,169			—
Total other (expenses) income	(10,874		)	(10,733		)	(24,231		)	(36,138		)
NET INCOME	48,298			38,310			137,307			111,036
Net income attributable to noncontrolling common units of the Operating Partnership	(852		)	(691		)	(2,423		)	(2,008		)
Net income attributable to noncontrolling interests in consolidated property partnerships	(3,600		)	(3,219		)	(11,941		)	(10,833		)
Total income attributable to noncontrolling interests	(4,452		)	(3,910		)	(14,364		)	(12,841		)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	43,846		$	34,400		$	122,943		$	98,195
Net income available to common stockholders per share – basic (Note 13)	$	0.41		$	0.34		$	1.19		$	0.97
Net income available to common stockholders per share – diluted (Note 13)	$	0.41		$	0.33		$	1.18		$	0.97
Weighted average common shares outstanding – basic (Note 13)	104,841,176			100,676,778			102,252,739			99,711,312
Weighted average common shares outstanding – diluted (Note 13)	105,359,904			101,228,334			102,872,436			100,208,645



	Three Months Ended March 31,
	2020			2019
REVENUES
Rental income (Note 8)	$	218,633		$	199,382
Other property income	2,695			1,820
Total revenues	221,328			201,202
EXPENSES
Property expenses	38,983			38,149
Real estate taxes	22,202			18,639
Ground leases (Note 9)	2,317			1,972
General and administrative expenses (Notes 7 and 10)	19,010			23,341
Leasing costs	1,456			1,757
Depreciation and amortization	74,370			66,135
Total expenses	158,338			149,993
OTHER (EXPENSES) INCOME
Interest income and other net investment (loss) gain (Note 10)	(3,128		)	1,828
Interest expense (Note 3)	(14,444		)	(11,243		)
Total other (expenses) income	(17,572		)	(9,415		)
NET INCOME	45,418			41,794
Net income attributable to noncontrolling common units of the Operating Partnership	(705		)	(700		)
Net income attributable to noncontrolling interests in consolidated property partnerships	(4,896		)	(4,191		)
Total income attributable to noncontrolling interests	(5,601		)	(4,891		)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	39,817		$	36,903
Net income available to common stockholders per share – basic (Note 11)	$	0.37		$	0.36
Net income available to common stockholders per share – diluted (Note 11)	$	0.37		$	0.36
Weighted average common shares outstanding – basic (Note 11)	106,875,234			100,901,390
Weighted average common shares outstanding – diluted (Note 11)	107,389,575			101,443,179


	Common Stock											Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity			Common Stock											Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity
	Number of Shares		Common Stock			Additional Paid-in Capital			Distributions in Excess of Earnings												Number of Shares		Common Stock			Additional Paid-in Capital			Distributions in Excess of Earnings
BALANCE AS OF DECEMBER 31, 2018	100,746,988		$	1,007		$	3,976,953		$	(48,053	)	$	3,929,907		$	271,354		$	4,201,261
BALANCE AS OF DECEMBER 31, 2019																					106,016,287		$	1,060		$	4,350,917		$	(58,467	)	$	4,293,510		$	277,348		$	4,570,858
Net income									36,903			36,903			4,891			41,794											39,817			39,817			5,601			45,418
Opening adjustment to Distributions in Excess of Earnings upon adoption of ASC 842 (Note 1)									(3,146		)	(3,146		)				(3,146		)
Issuance of common stock (Note 4)																					8,897,110		89			721,705						721,794						721,794
Issuance of share-based compensation awards						2,210						2,210						2,210								1,720						1,720						1,720
Non-cash amortization of share-based compensation (Note 9)						8,817						8,817						8,817
Non-cash amortization of share-based compensation (Note 7)																										8,653						8,653						8,653
Settlement of restricted stock units for shares of common stock	393,240		4			(4		)				—						—			269,972		3			(3		)				—						—
Repurchase of common stock, stock options and restricted stock units	(175,204	)	(1		)	(12,129		)				(12,130		)				(12,130		)	(117,445	)	(1		)	(9,798		)				(9,799		)				(9,799		)
Exchange of common units of the Operating Partnership	2,000		—			78						78			(78		)	—			2,000		—			81						81			(81		)	—
Distributions to noncontrolling interests in consolidated property partnerships												—			(6,309		)	(6,309		)												—			(2,617		)	(2,617		)
Adjustment for noncontrolling interest						279						279			(279		)	—								(6,094		)				(6,094		)	6,094			—
Dividends declared per common share and common unit ($0.455 per share/unit)									(48,394		)	(48,394		)	(921		)	(49,315		)
BALANCE AS OF MARCH 31, 2019	100,967,024		1,010			3,976,204			(62,690		)	3,914,524			268,658			4,183,182
Net income									42,194			42,194			5,021			47,215
Issuance of share-based compensation awards						820						820						820
Non-cash amortization of share-based compensation (Note 9)						8,732						8,732						8,732
Exercise of stock options	1,500		—			64						64						64
Settlement of restricted stock units for shares of common stock	16,270		—			—						—						—
Repurchase and cancellation of common stock, stock options, and restricted stock units	(12,759	)	—			(793		)				(793		)				(793		)
Distributions to noncontrolling interests in consolidated property partnerships												—			(1,487		)	(1,487		)
Adjustment for noncontrolling interest						(160		)				(160		)	160			—
Dividends declared per common share and common unit ($0.485 per share/unit)									(49,849		)	(49,849		)	(981		)	(50,830		)									(57,532		)	(57,532		)	(980		)	(58,512		)
BALANCE AS OF JUNE 30, 2019	100,972,035		1,010			3,984,867			(70,345		)	3,915,532			271,371			4,186,903
Net income									43,846			43,846			4,452			48,298
Issuance of common stock (Note 6)	5,000,000		50			353,854						353,904						353,904
Issuance of share-based compensation awards						839						839						839
Non-cash amortization of share-based compensation (Note 9)						6,808						6,808						6,808
Exercise of stock options	15,000		—			639						639						639
Settlement of restricted stock units for shares of common stock	46,149		1			(1		)				—						—
Repurchase and cancellation of common stock, stock options, and restricted stock units	(21,268	)	(1		)	(1,651		)				(1,652		)				(1,652		)
Distributions to noncontrolling interests in consolidated property partnerships												—			(3,041		)	(3,041		)
Adjustment for noncontrolling interest						(3,059		)				(3,059		)	3,059			—
Dividends declared per common share and common unit ($0.485 per share/unit)									(52,208		)	(52,208		)	(981		)	(53,189		)
BALANCE AS OF SEPTEMBER 30, 2019	106,011,916		$	1,060		$	4,342,296		$	(78,707	)	$	4,264,649		$	274,860		$	4,539,509
BALANCE AS OF MARCH 31, 2020																					115,067,924		$	1,151		$	5,067,181		$	(76,182	)	$	4,992,150		$	285,365		$	5,277,515



	Common Stock											Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity
	Number of Shares		Common Stock			Additional Paid-in Capital			Distributions in Excess of Earnings			Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity
BALANCE AS OF DECEMBER 31, 2018	100,746,988		$	1,007		$	3,976,953		$	(48,053	)	$	3,929,907		$	271,354		$	4,201,261
Net income									36,903			36,903			4,891			41,794
Opening adjustment to Distributions in Excess of Earnings upon adoption of ASC 842									(3,146		)	(3,146		)				(3,146		)
Issuance of share-based compensation awards						2,210						2,210						2,210
Non-cash amortization of share-based compensation						8,817						8,817						8,817
Settlement of restricted stock units for shares of common stock	393,240		4			(4		)				—						—
Repurchase of common stock, stock options and restricted stock units	(175,204	)	(1		)	(12,129		)				(12,130		)				(12,130		)
Exchange of common units of the Operating Partnership	2,000		—			78						78			(78		)	—
Distributions to noncontrolling interests in consolidated property partnerships												—			(6,309		)	(6,309		)
Adjustment for noncontrolling interest						279						279			(279		)	—
Dividends declared per common share and common unit ($0.455 per share/unit)									(48,394		)	(48,394		)	(921		)	(49,315		)
BALANCE AS OF MARCH 31, 2019	100,967,024		$	1,010		$	3,976,204		$	(62,690	)	$	3,914,524		$	268,658		$	4,183,182



	Common Stock											Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity
	Number of Shares		Common Stock			Additional Paid-in Capital			Distributions in Excess of Earnings
BALANCE AS OF DECEMBER 31, 2017	98,620,333		$	986		$	3,822,492		$	(122,685	)	$	3,700,793		$	259,523		$	3,960,316
Net income									36,246			36,246			4,725			40,971
Issuance of share-based compensation awards						1,864						1,864						1,864
Non-cash amortization of share-based compensation						5,094						5,094						5,094
Settlement of restricted stock units for shares of common stock	405,067		4			(4		)				—						—
Repurchase of common stock, stock options and restricted stock units	(192,195	)	(2		)	(13,640		)				(13,642		)				(13,642		)
Exchange of common units of the Operating Partnership	6,503		—			244						244			(244		)	—
Distributions to noncontrolling interests in consolidated property partnerships												—			(2,177		)	(2,177		)
Adjustment for noncontrolling interest						335						335			(335		)	—
Dividends declared per common share and common unit ($0.425 per share/unit)									(44,075		)	(44,075		)	(879		)	(44,954		)
BALANCE AS OF MARCH 31, 2018	98,839,708		988			3,816,385			(130,514		)	3,686,859			260,613			3,947,472
Net income									27,549			27,549			4,206			31,755
Issuance of common stock	1,719,195		17			124,130						124,147						124,147
Issuance of share-based compensation awards						589						589						589
Non-cash amortization of share-based compensation						11,503						11,503						11,503
Exercise of stock options	1,000		—			41						41						41
Exchange of common units of the Operating Partnership	—		1			—						1			(1		)	—
Distributions to noncontrolling interests in consolidated property partnerships												—			(4,288		)	(4,288		)
Adjustment for noncontrolling interest						(1,359		)				(1,359		)	1,359			—
Dividends declared per common share and common unit ($0.455 per share/unit)									(46,403		)	(46,403		)	(943		)	(47,346		)
BALANCE AS OF JUNE 30, 2018	100,559,903		1,006			3,951,289			(149,368		)	3,802,927			260,946			4,063,873
Net income									34,400			34,400			3,910			38,310
Issuance of common stock	98,000		1			6,596						6,597						6,597
Issuance of share-based compensation awards						845						845						845
Non-cash amortization of share-based compensation						8,081						8,081						8,081
Settlement of restricted stock units for shares of common stock	83,287											—						—
Repurchase of common stock, stock options and restricted stock units	(39,605	)				(2,911		)				(2,911		)				(2,911		)
Exchange of common units of the Operating Partnership	45,403					1,717						1,717			(1,717		)	—
Contributions from noncontrolling interests in consolidated property partnerships												—			8,273			8,273
Distributions to noncontrolling interests in consolidated property partnerships												—			(541		)	(541		)
Adjustment for noncontrolling interest						(212		)				(212		)	212			—
Dividends declared per common share and common unit ($0.455 per share/unit)									(46,686		)	(46,686		)	(922		)	(47,608		)
BALANCE AS OF SEPTEMBER 30, 2018	100,746,988		$	1,007		$	3,965,405		$	(161,654	)	$	3,804,758		$	270,161		$	4,074,919



	Partners’ Capital					Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries
	Number of Common Units		Common Units						Total Capital
BALANCE AS OF DECEMBER 31, 2019	108,039,574		$	4,369,758		$	201,100		$	4,570,858
Net income			40,389			5,029			45,418
Issuance of common units (Note 4)	8,897,110		721,794						721,794
Issuance of share-based compensation awards			1,720						1,720
Non-cash amortization of share-based compensation (Note 7)			8,653						8,653
Settlement of restricted stock units	269,972		—						—
Repurchase of common units, stock options and restricted stock units	(117,445	)	(9,799		)				(9,799		)
Distributions to noncontrolling interests in consolidated property partnerships						(2,617		)	(2,617		)
Distributions declared per common unit ($0.485 per unit)			(58,512		)				(58,512		)
BALANCE AS OF MARCH 31, 2020	117,089,211		$	5,074,003		$	203,512		$	5,277,515



	Number of Buildings	Rentable Square Feet	Number of Tenants	Percentage Occupied		Percentage Leased
Stabilized Office Properties	93	13,322,212	438	92.1	%	97.3	%



	Number of Buildings	Number of Units	2019 Average Occupancy
Stabilized Residential Property	1	200	78.5	%



	Number of Buildings	Number of Units	2020 Average Occupancy
Stabilized Residential Property	1	200	93.5	%



	Number of Properties/Projects	Estimated Rentable Square Feet ⁽¹⁾ / Units
Properties held for sale ⁽²⁾	1	271,556
Completed residential development project ⁽³⁾	1	237 units
In-process development projects - tenant improvement⁽⁴⁾	2	846,000
In-process development projects - under construction ⁽⁵⁾	6	2,295,000


(2)	~~See Note 3 “Dispositions and Real Estate Held for Sale” for additional information.~~


~~(3)~~	~~Represents our recently completed residential units that are not yet stabilized.~~


~~(5)~~	In addition to the estimated office and life science rentable square feet noted above, development projects under construction also include ~~564~~339 residential units.


(3)	Represents recently completed residential phases at our mixed-use development in San Diego, California that are not yet stabilized.



	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
	(in thousands)
Fixed lease payments	$	181,851	$	526,678
Variable lease payments	30,470		82,654
Total rental income	$	212,321	$	609,332


(1)	During the three months ended March 31, 2020, the balance of the note receivable was written-off and the note receivable was placed on non-accrual status. As of December 31, 2019 the note receivable is shown net of a valuation allowance of approximately $3.6 million.



Property	Date of Acquisition	Submarket	Type	Purchase Price (in millions) ⁽¹⁾
1335 Broadway & 901 Park Boulevard, San Diego, CA	August 19, 2019	East Village	Land	$	40.0



Property	Month of Disposition	Number of Buildings	Rentable Square Feet	Sales Price (in millions) ⁽¹⁾
2829 Townsgate Road, Thousand Oaks, CA	May	1	84,098	$	18.3


~~(1)~~	~~Represents gross sales price before the impact of broker commissions and closing costs.~~



Property	Submarket	Property Type	Number of Buildings	Rentable Square Feet
2211 Michelson Drive, Irvine, CA	Orange County	Office	1	271,556


~~(1)~~	~~Excludes amounts related to properties held for sale as of September 30, 2019.~~


~~(2)~~	~~Notes receivable are shown net of a valuation allowance of approximately$3.6 million and $2.9 million as of September 30, 2019 and December 31, 2018, respectively.~~


~~(3)~~	~~Includes $50.0 million of non-refundable acquisition deposits related to an acquisition which closed on October 15, 2019. Refer to Note 17 “Subsequent Events” for additional information.~~


(1)	As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018, $0.7~~2019, $0.6 million and ~~$0.9~~$0.7 million of unamortized deferred financing costs, respectively, remained to be amortized through the maturity date of our unsecured term loan facility.


(2)	Our unsecured term loan facility interest rate was calculated based on the contractual rate of LIBOR plus 1.100% as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~


~~(3)~~	~~Prior to borrowing the full capacity of our unsecured term loan facility, the undrawn facility fee was calculated based on any unused borrowing capacity and was paid on a quarterly basis.~~2019.


Year	(in thousands)		(in thousands)
Remaining 2019	$	465
2020	5,137
Remaining 2020			$	3,871
2021	5,342		5,342
2022	155,554		535,554
2023	305,775		305,775
2024	431,006		431,006
2025			406,245
Thereafter	2,431,688		2,025,443
Total aggregate principal value ⁽¹⁾	$	3,334,967	$	3,713,236


(1)	Includes gross principal balance of outstanding debt before the effect of the following at ~~September 30, 2019~~March 31, 2020: ~~$21.1~~$19.5 million of unamortized deferred financing costs for the unsecured term loan facility, unsecured senior notes and secured debt and ~~$6.7~~$6.2 million of unamortized discounts for the unsecured senior notes.



	Three Months Ended March 31, 2020
	(in millions, except share and per share data)
Shares of common stock settled during the period	3,147,110
Weighted average price per share of common stock	$	80.08
Aggregate gross proceeds	$	252.0
Aggregate net proceeds after selling commissions	$	247.3


	September 30, 2019		December 31, 2018		September 30, 2018		March 31, 2020		December 31, 2019		March 31, 2019
Company owned common units in the Operating Partnership	106,011,916		100,746,988		100,746,988		115,067,924		106,016,287		100,967,024
Company owned general partnership interest	98.1	%	98.0	%	98.0	%	98.3	%	98.1	%	98.0	%
Noncontrolling common units of the Operating Partnership	2,023,287		2,025,287		2,025,287		2,021,287		2,023,287		2,023,287
Ownership interest of noncontrolling interest	1.9	%	2.0	%	2.0	%	1.7	%	1.9	%	2.0	%



	Fair Value Assumptions
Valuation date	~~February 1, 2019~~January 31, 2020
Expected share price volatility	~~19.0%~~17.0%
Risk-free interest rate	~~2.48%~~1.35%
Fair value per share on valuation date⁽¹⁾	~~72.57~~84.54


(1)	Using the same Monte Carlo methodology and assumptions, the grant date fair value of one participant’s 2020 Performance-Based RSU grants was calculated as $85.52 per share.


(1)	Represents adjustments to rental income related to our assessment of the collectibility of amounts due under leases with our tenants. For the three months ended March 31, 2020, includes a reduction in revenue of $6.5 million related to the cumulative impact of transitioning one co-working tenant and two retail tenants to a cash basis of revenue recognition as a result of the COVID-19 pandemic.



Year Ending	(in thousands)
Remaining 2019	$	145,027
2020	665,314
2021	703,649
2022	735,969
2023	717,898
2024	681,026
Thereafter	3,607,437
Total ⁽¹⁾	$	7,256,320


~~(1)~~	~~Excludes residential leases and leases with a term of one year or less.~~