Kilroy Realty - 10-Q quarterly report FY

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland		95-4598246
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

 

 

 

 

 

          As of November 12, 2001, 27,426,071 shares of common stock, par value $.01 per share, were outstanding.

 

 

 

 

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PART I—FINANCIAL INFORMATION
Item 1.		FINANCIAL STATEMENTS (unaudited)
		Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000			3
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000			4
		Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2001			5
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000			6
		Notes to Consolidated Financial Statements			7
Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			15
Item 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			31
PART II—OTHER INFORMATION
Item 1.		LEGAL PROCEEDINGS			32
Item 2.		CHANGES IN SECURITIES			32
Item 3.		DEFAULTS UPON SENIOR SECURITIES			32
Item 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			32
Item 5.		OTHER INFORMATION			32
Item 6.		EXHIBITS AND REPORTS ON FORM 8-K			32
SIGNATURES					33

 

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		September 30, 2001					December 31, 2000
ASSETS
INVESTMENT IN REAL ESTATE (Notes 2 and 9):
Land and improvements			$   274,569					$   266,444
Buildings and improvements			1,136,946					1,054,995
Undeveloped land and construction in progress, net			170,122					162,633
Investment in unconsolidated real estate								12,405
Total investment in real estate			1,581,637					1,496,477
Accumulated depreciation and amortization			(232,029	)				(205,332	)
Investment in real estate, net			1,349,608					1,291,145
CASH AND CASH EQUIVALENTS			10,718					17,600
RESTRICTED CASH (Note 2)			25,800					35,014
TENANT RECEIVABLES, NET			32,236					32,521
NOTE RECEIVABLE FROM RELATED PARTY (Note 2)								33,274
DEFERRED FINANCING AND LEASING COSTS, NET			37,470					39,674
PREPAID EXPENSES AND OTHER ASSETS			4,890					7,941
TOTAL ASSETS			$1,460,722					$1,457,169
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Secured debt (Note 3)			$   437,688					$   432,688
Unsecured line of credit (Note 3)			185,000					191,000
Unsecured term facility			100,000					100,000
Accounts payable, accrued expenses and other liabilities (Note 4)			48,336					33,911
Accrued distributions (Note 9)			14,634					13,601
Rents received in advance and tenant security deposits			14,643					17,810
Total liabilities			800,301					789,010
COMMITMENTS AND CONTINGENCIES
MINORITY INTERESTS (Note 5):
8.075% Series A Cumulative Redeemable Preferred unitholders			73,716					73,716
9.375% Series C Cumulative Redeemable Preferred unitholders			34,464					34,464
9.250% Series D Cumulative Redeemable Preferred unitholders			44,321					44,321
Common unitholders of the Operating Partnership			49,573					62,485
Minority interests in Development LLCs			14,164					11,748
Total minority interests			216,238					226,734
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 26,200,000 shares authorized, none issued and outstanding
8.075% Series A Cumulative Redeemable Preferred stock, $.01 par value,            1,700,000 shares authorized, none issued and outstanding
Series B Junior Participating Preferred stock, $.01 par value,            400,000 shares authorized, none issued and outstanding
9.375% Series C Cumulative Redeemable Preferred stock, $.01 par value,            700,000 shares authorized, none issued and outstanding
9.250% Series D Cumulative Redeemable Preferred stock, $.01 par value,            1,000,000 shares authorized, none issued and outstanding
Common stock, $.01 par value, 150,000,000 shares authorized,            27,426,071 and 26,475,470 shares issued and outstanding, respectively			274					265
Additional paid-in capital			478,986					460,390
Distributions in excess of earnings			(27,623	)				(19,230	)
Accumulated other comprehensive loss			(7,454	)
Total stockholders’ equity			444,183					441,425
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			$1,460,722					$1,457,169

 

See accompanying notes to consolidated financial statements.

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		Three Months Ended September 30,						Nine Months Ended September 30,
		2001			2000			2001			2000
REVENUES (Note 7):
Rental income		$          44,992			$          40,555			$       135,400			$       117,627
Tenant reimbursements		5,901			4,748			17,591			14,036
Interest income		170			1,706			883			3,008
Other income (Note 6)		383			240			6,173			1,684
Total revenues		51,446			47,249			160,047			136,355
EXPENSES:
Property expenses		7,911			6,217			22,254			17,749
Real estate taxes		4,106			3,523			12,480			9,959
General and administrative expenses		2,949			2,890			9,337			8,077
Ground leases		379			423			1,146			1,211
Interest expense		10,657			10,024			32,060			27,800
Depreciation and amortization		12,680			9,941			38,634			28,909
Total expenses		38,682			33,018			115,911			93,705
INCOME FROM OPERATIONS BEFORE NET GAINS      ON DISPOSITIONS OF OPERATING PROPERTIES,      MINORITY INTERESTS AND CUMULATIVE      EFFECT OF CHANGE IN ACCOUNTING      PRINCIPLE		12,764			14,231			44,136			42,650
NET GAINS ON DISPOSITIONS OF OPERATING      PROPERTIES		2,468			7,288			4,007			11,256
INCOME BEFORE MINORITY INTERESTS AND      CUMULATIVE EFFECT OF CHANGE IN      ACCOUNTING PRINCIPLE		15,232			21,519			48,143			53,906
MINORITY INTERESTS:
Distributions on Cumulative Redeemable Preferred                units		(3,375	)		(3,375	)		(10,125	)		(10,125	)
Minority interest in earnings of Operating Partnership		(1,027	)		(2,227	)		(3,668	)		(5,442	)
Minority interest in earnings of Development LLCs		(1,547	)		(238	)		(2,152	)		(279	)
Total minority interests		(5,949	)		(5,840	)		(15,945	)		(15,846	)
NET INCOME BEFORE CUMULATIVE EFFECT OF      CHANGE IN ACCOUNTING PRINCIPLE		9,283			15,679			32,198			38,060
CUMULATIVE EFFECT OF CHANGE IN      ACCOUNTING PRINCIPLE (Note 1)								(1,392	)
NET INCOME		$             9,283			$          15,679			$          30,806			$          38,060
Net income per common share—basic (Note 8)		$                0.34			$                0.59			$                1.14			$                1.43
Net income per common share—diluted (Note 8)		$                0.34			$                0.59			$                1.13			$                1.42
Weighted average shares outstanding—basic (Note 8)		27,359,343			26,455,400			27,079,702			26,646,871
Weighted average shares outstanding—diluted (Note 8)		27,586,503			26,696,985			27,314,967			26,757,751

 

 

See accompanying notes to consolidated financial statements.

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		Number of Shares			Common Stock				Additional Paid-in Capital					Distributions in Excess of Earnings					Accumulated Other Comp. Loss					Total
BALANCE AT DECEMBER 31, 2000		26,475,470				$265				$460,390					$(19,230	)				$				$441,425
Exchange of common units of the Operating            Partnership (Note 5)		687,591				7				13,652														13,659
Exercise of stock options		270,190				2				5,028														5,030
Non-cash amortization of restricted stock grants										1,643														1,643
Repurchase of common stock		(7,180	)							(228	)													(228	)
Adjustment for minority interest										(1,499	)													(1,499	)
Dividends declared ($1.44 per share)															(39,199	)								(39,199	)
Net income															30,806									30,806
Other comprehensive loss (Notes 1 and 4)																				(7,454	)			(7,454	)
BALANCE AT SEPTEMBER 30, 2001		27,426,071				$274				$478,986					$(27,623	)				$(7,454	)			$444,183

 

 

 

 

 

See accompanying notes to consolidated financial statements.

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		Nine Months Ended September 30,
		2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$  30,806			$    38,060
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		38,634			28,909
Cumulative effect of change in accounting principle		1,392
Provision for uncollectable tenant receivables and deferred rent		2,542			2,636
Minority interest in earnings of Operating Partnership and Development LLCs		5,820			5,721
Non-cash amortization of restricted stock grants		1,643			744
Net gains on dispositions of operating properties		(4,007	)		(11,256	)
Other		(130	)		(284	)
Changes in assets and liabilities:
Tenant receivables		(3,138	)		(7,610	)
Deferred leasing costs		(2,506	)		(1,739	)
Prepaid expenses and other assets		20			(4,430	)
Accounts payable, accrued expenses and other liabilities		7,439			11,920
Rents received in advance and tenant security deposits		(3,167	)		(3,514	)
Accrued distributions to Cumulative Redeemable Preferred unitholders					299
Net cash provided by operating activities		75,348			59,456
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for operating properties		(9,244	)		(8,509	)
Expenditures for undeveloped land and construction in progress		(79,388	)		(128,401	)
Cash paid to acquire note receivable					(45,278	)
Net proceeds received from dispositions of operating properties		44,832			110,642
Net advances to unconsolidated subsidiary					470
Net cash used in investing activities		(43,800	)		(71,076	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on unsecured line of credit		(6,000	)		(42,000	)
Proceeds from secured debt		17,243			163,961
Principal payments on secured debt (Note 3)		(21,368	)		(10,421	)
Financing costs		(129	)		(3,932	)
Share repurchase program					(41,270	)
Proceeds from exercise of stock options		5,030
Decrease (increase) in restricted cash (Note 2)		9,214			(28,870	)
Net contributions from minority interests in Development LLCs		263			1,396
Distributions paid to common stockholders and common unitholders		(42,683	)		(40,559	)
Net cash used in financing activities		(38,430	)		(1,695	)
Net decrease in cash and cash equivalents		(6,882	)		(13,315	)
Cash and cash equivalents, beginning of period		17,600			26,116
Cash and cash equivalents, end of period		$  10,718			$    12,801
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized interest		$  28,794			$    26,441
Distributions paid to Cumulative Redeemable Preferred unitholders		$  10,125			$      9,827
NON-CASH TRANSACTIONS:
Accrual of distributions payable (Note 9)		$  14,634			$    13,591
Note receivable repaid in connection with property acquisition (Note 2)		$  33,274
Issuance of secured note payable in connection with undeveloped land acquisition (Note 2)		$    9,125			$      8,500

 

See accompanying notes to consolidated financial statements.

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          Kilroy Realty Corporation (the ‘‘Company’’) develops, owns, and operates office and industrial real estate, primarily in Southern California. The Company operates as a self-administered real estate investment trust (‘‘REIT’’). As of September 30, 2001, the Company’s stabilized portfolio of operating properties consisted of 86 office buildings (the ‘‘Office Properties’’) and 71 industrial buildings (the ‘‘Industrial Properties’’), which encompassed an aggregate of approximately 7.1 million and 5.3 million rentable square feet, respectively, and was approximately 94.8% occupied. The Company’s stabilized portfolio of operating properties consists of all of the Company’s Office Properties and Industrial Properties excluding properties recently developed by the Company that have not yet reached 95.0% occupancy (‘‘lease-up’’ properties) and projects currently under construction, renovation or in pre-development. As of September 30, 2001, the Company had four office properties encompassing an aggregate of approximately 345,800 rentable square feet which were in the lease-up phase. Lease-up properties are included in land and improvements and building and improvements on the consolidated balance sheets upon building shell completion. In addition, as of September 30, 2001, the Company had six office properties under construction or committed for construction and one property under renovation which when completed are expected to encompass an aggregate of approximately 617,700 and 78,000 rentable square feet, respectively.

 

          The Company owns its interests in all of its properties through Kilroy Realty, L.P. (the ‘‘Operating Partnership’’) and Kilroy Realty Finance Partnership, L.P. (the ‘‘Finance Partnership’’) and conducts substantially all of its operations through the Operating Partnership. The Company owned a 90.0% general partnership interest in the Operating Partnership as of September 30, 2001. The Operating Partnership owns a 50% interest in two limited liability companies (the ‘‘Development LLCs’’) which were formed to develop two multi-phased office projects in San Diego, California. The Allen Group, a group of affiliated real estate development and investment companies based in San Diego, California, is the other 50% member of the Development LLCs. The Development LLCs are consolidated for financial reporting purposes since the Company controls all significant development and operating decisions.

 

          On January 1, 2001, Kilroy Services, Inc. (‘‘KSI’’) was merged into a newly formed entity, Kilroy Services, LLC (‘‘KSLLC’’). The Company historically accounted for the operating results of the development services business conducted by KSI under the equity method of accounting. Prior to the merger, John B. Kilroy, Sr., the Chairman of the Company’s Board of Directors, and John B. Kilroy, Jr., the Company’s President and Chief Executive Officer, owned 100% of the voting interest of KSI, and the Operating Partnership owned 100% of the non-voting preferred stock representing a 95% economic interest in KSI. In connection with the merger, Messrs. Kilroy received $8,000 in cash for their economic interest and KSLLC became a wholly-owned subsidiary of the Company. As a result, KSLLC was consolidated for financial reporting purposes beginning January 1, 2001. Unless otherwise indicated, all references to the Company include the Operating Partnership, the Finance Partnership, KSLLC, the Development LLC’s, and all wholly-owned subsidiaries and controlled entities.

 

 

          The accompanying interim financial statements have been prepared by the Company’s management in accordance with generally accepted accounting principles (‘‘GAAP’’) and in conjunction with the rules and regulations of the Securities and Exchange Commission (‘‘SEC’’). Certain information and footnote disclosures

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required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP in the United States of America for complete financial statements. In the opinion of management, the interim financial statements presented herein reflect all adjustments of a normal and recurring nature which are considered necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. Certain prior year amounts have been reclassified to conform to the current period’s presentation.

 

 

          As part of the Company’s overall interest rate risk management strategy, the Company uses derivative instruments, including interest rate swaps and caps, to hedge exposures to interest rate risk on its debt. The Company does not enter into any derivative instruments for speculative purposes. On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (‘‘SFAS’’) 133, ‘‘Accounting for Derivative Instruments and Hedging Activities,’’ as amended by SFAS 138, ‘‘Accounting for Certain Derivative Instruments and Certain Hedging Activities’’ (collectively, ‘‘SFAS 133’’). SFAS 133 establishes accounting and reporting standards for derivative instruments. Specifically, SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet at fair value. Additionally, any of the adjustments to fair value will affect either shareholders’ equity or net income depending on the nature of the hedge and whether the derivative instrument qualifies as a hedge for accounting purposes. The Company determines fair value based upon available market information at each balance sheet date using standard valuation techniques such as discounted cash flow analysis and option pricing models.

 

          Prior to the adoption of SFAS 133, the Company applied deferral accounting for all derivative financial instruments that were designated as hedges. Amounts paid or received under these agreements were recognized as adjustments to interest expense. The initial premiums on cap agreements were amortized over the life of the agreement using the straight-line method.

 

          On January 1, 2001, in connection with the adoption of SFAS 133, the Company recorded a $1.4 million cumulative effect of change in accounting principle to record an existing cap agreement at fair market value. The Company also recorded a $2.0 million non-cash charge to other comprehensive loss to record the Company’s swap on the balance sheet at fair market value.

 

          In June 2001, the Financial Accounting Standards Board issued two new pronouncements: SFAS 141, ‘‘Business Combinations’’ (‘‘SFAS 141’’), and SFAS 142, ‘‘Goodwill and Other Intangible Assets’’ (‘‘SFAS 142’’). These statements make significant changes to the accounting for business combinations, goodwill, and intangible assets. Among other provisions, SFAS 141 prohibits the use of the pooling-of-interests method, requiring all business combinations initiated after September 30, 2001 to be accounted for using the purchase method of accounting. SFAS 142 discontinues the practice of amortizing goodwill and other intangible assets and requires a periodic review process for impairment. SFAS 142 is effective for fiscal periods beginning after December 15, 2001. Management does not expect that the adoption of these statements will have a material effect on the Company’s results of operations or financial condition.

 

          In October 2001, the Financial Accounting Standards Board issued SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 addresses financial accounting and

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reporting for the disposal of long-lived assets and supercedes FAS 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” FAS 144 becomes effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Management does not expect that the adoption of this statement will have a material effect on the Company’s results of operations or financial condition.

 

 

 

          In June 2001, the Company acquired 9.8 acres of undeveloped land in San Diego, California from an unaffiliated third party for $15.1 million, consisting of a cash payment of $6.0 million and the issuance of a $9.1 million non-interest bearing mortgage note payable to the seller. The note is secured by the undeveloped land and is due on or before December 6, 2001. The note may be prepaid at any time, in whole or in part, without penalty or premium.

 

          In January 2001, the Company acquired the fee interest in a parcel of land at 9455 Town Center Drive, San Diego for $3.1 million. The Company had previously leased this land from the city of San Diego. This land is the site of one of the Company’s Office Properties.

 

 

          In January 2001, the Company purchased a 75% tenancy-in-common interest in a three-building office complex located in El Segundo, California for $33.4 million in cash. The complex, which encompasses an aggregate of approximately 366,000 rentable square feet, is comprised of two office buildings and a parking structure. One of the office buildings is 100% leased to The Boeing Company. The Company is currently redeveloping the second office building.

 

          The Company partially funded the acquisition with $28.4 million in proceeds from property dispositions that were held for use in tax-deferred property exchanges and included in restricted cash at December 31, 2000. The remaining $5.0 million was funded with borrowings under the Company’s unsecured line of credit. The interest was purchased from entities owned by John B. Kilroy, Sr., the Company’s Chairman of the Board of Directors, John B. Kilroy, Jr. the Company’s President and Chief Executive Officer, and certain other Kilroy family members. Concurrent with the purchase of the 75% interest, the outstanding note receivable from related party and related accrued interest balances were paid to the Company.

 

          As a result of the acquisition, the Company now owns a 100% interest in the complex. The initial 25% tenancy-in-common interest was acquired by a wholly-owned subsidiary of the Company in October 2000 and was recorded as an investment in unconsolidated real estate on the consolidated balance sheet as of December 31, 2000.

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          During the nine months ended September 30, 2001, the Company sold the following properties:

 

Property Type		Location		Month of Disposition		No. of Buildings				Rentable Square Feet		Sale Price ($ in millions)
Industrial		San Diego, CA		February			1			39,700			$   3.3
Industrial		Roseville, CA		April			2			162,200			15.4
Office		Camarillo, CA		August			1			41,100			6.6
Industrial		Las Vegas, NV		August			1			106,700			5.0
Industrial		Reno, NV		September			1			75,300			7.3
Industrial		Temecula, CA		September			1			77,600			5.4
Industrial		Las Vegas, NV		September			1			102,900			5.1
Total							8			605,500			$ 48.1

 

          The Company recorded a gain of approximately $4.0 million in connection with the sales of these properties. As of September 30, 2001, restricted cash included $19.4 million in proceeds received from property dispositions that are held at a Qualified Intermediary for future use in tax-deferred exchanges. The Company generally uses disposition sales proceeds to fund development expenditures.

 

 

          During the nine months ended September 30, 2001, the Company completed the following development projects which have been added to the Company’s stabilized portfolio:

 

Property Type		Location		Stabilization Date		No. of Buildings				Rentable Square Feet		Stabilized Occupancy
Office		San Diego, CA		Q2 2001			1			68,000			100%
Office		San Diego, CA		Q2 2001			1			102,900			100%
Office		Calabasas, CA		Q3 2001			1			11,800			100%
Total							3			182,700

 

          At September 30, 2001, the Company had the following four office properties in the lease-up phase:

 

Property Type		Location		Completion Date				No. of Buildings				Rentable Square Feet		Percentage Committed(1)					Estimated Stabilization Date(2)
Office		Calabasas, CA			Q1 2001				1			98,700			66	%				Q1 2002
Office		San Diego, CA			Q2 2001				1			46,700			65	%				Q2 2002
Office		San Diego, CA			Q2 2001				1			70,600			0	%				Q2 2002
Office		Del Mar, CA			Q2 2001				1			129,800			100	%(3)				Q4 2001
Total									4			345,800

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          As of September 30, 2001, the Company had borrowings of $185 million outstanding under its revolving unsecured line of credit (the ‘‘Credit Facility’’) and availability of approximately $159 million. The Credit Facility bears interest at an annual rate of LIBOR plus a spread of between 1.13% and 1.75% (4.93% at September 30, 2001), depending upon the Company’s leverage ratio at the time of borrowing. The Company expects to use the Credit Facility to fund development expenditures, to fund potential undeveloped land acquisitions and for general corporate purposes.

 

          In June 2001, the Company repaid the $16.8 million principal balance of an existing construction loan which had an annual interest rate of LIBOR plus 1.75% and a stated maturity of October 2002. The payment was made in conjunction with a tax-deferred property exchange and was primarily funded with the $15.4 million in proceeds from the disposition of the industrial property in Roseville, California (see Note 2).

 

          In November 2001, one of the Development LLCs obtained a construction loan with a total commitment of $9.8 million. The construction loan bears interest at an annual rate of LIBOR plus 3.00% and matures in May 2003, with the option to extend for up to two six-month periods. The proceeds from the construction loan are being used to finance the development costs of an office building in San Diego, California that encompasses an aggregate of approximately 60,700 rentable square feet. The construction loan is secured by a first deed of trust on the project.

 

          Total interest capitalized for the three months ended September 30, 2001 and 2000 was $3.1 million and $4.3 million, respectively. Total interest capitalized for the nine months ended September 30, 2001 and 2000 was $9.8 million and $13.5 million, respectively.

 

 

          The Company is exposed to the effect of interest rate changes in the normal course of business. The Company mitigates these risks by following established risk management policies and procedures which include the periodic use of derivatives. The Company’s primary strategy in entering into derivative contracts is to minimize the volatility that changes in interest rates could have on its future cash flows. The Company generally employs derivative instruments that are designated as cash flow hedges, typically interest rate swaps and caps, to effectively convert a portion of its variable-rate debt to fixed-rate debt. The Company does not enter into derivative instruments for speculative purposes.

 

 

          For interest rate swap agreements, the Company receives variable interest rate payments and pays fixed interest rate payments, thereby creating the equivalent of fixed rate debt. For interest rate cap agreements the Company effectively limits its interest expense to a certain specified rate on a portion of its variable rate debt. These agreements are reflected at fair value in the Company’s consolidated balance sheet and the related gains or losses on these contracts are deferred in stockholders’ equity as a component of accumulated other comprehensive income or loss. To the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the interest payments being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in earnings. For the nine months ended September 30, 2001, the Company did not record any gains or losses attributable to cash flow hedge ineffectiveness since the terms of the Company’s swap contracts and debt obligations are effectively matched.

 

          As of September 30, 2001, the Company had two interest rate swap agreements to receive variable rates of interest (LIBOR) and pay fixed rates of interest (weighted average rate of 6.21%) on an aggregate notional

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amount of $300 million, $150 million which expires in February 2002 and $150 million which expires in November 2002. The Company, through one of the Development LLC’s, also had one interest rate cap agreement at September 30, 2001 with a LIBOR based cap rate of 8.50% and a notional amount of $57.0 million which expires in April 2002. Each of these instruments have been designated as cash flow hedges. As of September 30, 2001, the Company had a derivative liability of $7.5 million, which is included in other liabilities in the consolidated balance sheet. During the twelve-month period ending September 30, 2002, the Company estimates that it will record approximately $7.0 million of interest expense related to these instruments.

 

          In January 2001, the Company terminated an interest rate cap agreement which had a LIBOR based cap rate of 6.50% and a notional amount of $150 million.

 

 

          Minority interests represent the preferred limited partnership interests in the Operating Partnership, the common limited partnership interests in the Operating Partnership not owned by the Company, and interests held by The Allen Group in the Development LLCs. The Company owned a 90.0% general partnership interest in the Operating Partnership as of September 30, 2001.

 

          During the nine months ended September 30, 2001, 687,591 common units of the Operating Partnership were exchanged into shares of the Company’s common stock on a one-for-one basis. Of these 687,591 common limited partnership units, 410,849 common limited partnership units were owned by a partnership affiliated with The Allen Group. In addition, 47,500 of the 687,591 common limited partnership units were owned by Kilroy Industries, an entity owned by John B. Kilroy, Sr., the Chairman of the Company’s Board of Directors, and John B. Kilroy, Jr., the Company’s President and Chief Executive Officer. Neither the Company nor the Operating Partnership received any proceeds from the issuance of the common stock to the identified common unitholders.

 

 

          In January 2001, one of the Company’s tenants, eToys, Inc. (‘‘eToys’’) defaulted on its lease and, thereafter, declared bankruptcy on March 7, 2001. Prior to the eToys’ bankruptcy filing, the Company drew $15.0 million under two letters of credit which were held as credit support under the terms of the lease and as security for the related tenant improvements and leasing commissions. In May 2001, the United States Bankruptcy Court for the District of Delaware approved a stipulation rejecting the eToys’ lease. The Company recorded a net lease termination fee of $5.4 million representing the $15.0 million of letter of credit proceeds offset by $9.6 million of accounts receivable and other costs and obligations associated with the lease.

 

          Upon the execution of the stipulation, the Company obtained possession of approximately 128,000 of the total 151,000 rentable square feet leased to eToys. eToys continued to occupy the remaining 23,000 rentable square feet through August 15, 2001 and had paid rent on this space based on the terms in the stipulation.

 

 

          The Company’s reportable segments consist of the two types of commercial real estate properties for which management internally evaluates operating performance and financial results: Office Properties and Industrial Properties. The Company also has certain corporate level activities including legal, accounting, finance, and management information systems which are not considered separate operating segments.

12

 

          The Company evaluates the performance of its segments based upon net operating income. Net operating income is defined as operating revenues (rental income, tenant reimbursements and other income) less property and related expenses (property expenses, real estate taxes and ground leases) and does not include interest income and expense, depreciation and amortization and corporate general and administrative expenses. All operating revenues are comprised of amounts received from third-party tenants.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2001			2000			2001			2000
		(in thousands)
Revenues and Expenses:
Office Properties:
Operating revenues		$  39,921			$  33,603			$  125,054			$  94,562
Property and related expenses		10,797			8,183			31,004			23,150
Net operating income, as defined		29,124			25,420			94,050			71,412
Industrial Properties:
Operating revenues		11,355			11,940			34,110			38,785
Property and related expenses		1,599			1,980			4,876			5,769
Net operating income, as defined		9,756			9,960			29,234			33,016
Total Reportable Segments:
Operating revenues		51,276			45,543			159,164			133,347
Property and related expenses		12,396			10,163			35,880			28,919
Net operating income, as defined		38,880			35,380			123,284			104,428
Reconciliation to Consolidated Net Income:
Total net operating income, as defined, for reportable                segments		38,880			35,380			123,284			104,428
Other unallocated revenues:
Interest income		170			1,706			883			3,008
Other unallocated expenses:
General and administrative expenses		2,949			2,890			9,337			8,077
Interest expense		10,657			10,024			32,060			27,800
Depreciation and amortization		12,680			9,941			38,634			28,909
Income from operations		12,764			14,231			44,136			42,650
Net gains on dispositions of operating properties		2,468			7,288			4,007			11,256
Minority interests		(5,949	)		(5,840	)		(15,945	)		(15,846	)
Cumulative effect of change in accounting principle								(1,392	)
Net income		$    9,283			$  15,679			$    30,806			$  38,060

 

 

          Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding for the period plus the number of common shares issuable assuming the exercise of all dilutive securities. The Company does not consider common units of the Operating Partnership to be dilutive since the exchange of common units into common stock is on a one-for-one

13

basis and would not have any effect on diluted earnings per share. The following table reconciles the numerator and denominator of the basic and diluted per-share computations for net income.

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2001		2000		2001			2000
		(in thousands, except share and per share amounts)
Numerator:
Net income before cumulative effect of change in                accounting principle		$            9,283		$         15,679		$         32,198			$         38,060
Cumulative effect of change in accounting principle						(1,392	)
Net income—numerator for basic and diluted                earnings per share		$            9,283		$         15,679		$         30,806			$         38,060
Denominator:
Basic weighted average shares outstanding		27,359,343		26,455,400		27,079,702			26,646,871
Effect of dilutive securities—stock options		227,160		241,585		235,265			110,880
Diluted weighted average shares and common share                equivalents outstanding		27,586,503		26,696,985		27,314,967			26,757,751
Basic earnings per share:
Net income before cumulative effect of change in                accounting principle		$               0.34		$               0.59		$               1.19			$               1.43
Cumulative effect of change in accounting principle						(0.05	)
Net income		$               0.34		$               0.59		$               1.14			$               1.43
Diluted earnings per share:
Net income before cumulative effect of change in                accounting principle		$               0.34		$               0.59		$               1.18			$               1.42
Cumulative effect of change in accounting principle						(0.05	)
Net income		$               0.34		$               0.59		$               1.13			$               1.42

 

          At September 30, 2001, Company employees and directors held options to purchase 13,000 shares of the Company’s common stock that were antidilutive to the diluted earnings per share computation. These options could become dilutive in future periods if the average market price of the Company’s common stock exceeds the exercise price of the outstanding options.

 

 

          On October 17, 2001, aggregate distributions of $14.6 million were paid to common stockholders and common unitholders of record on September 28, 2001.

 

          On October 25, 2001, the Company sold ten industrial buildings encompassing approximately 157,500 aggregate rentable square feet to an unaffiliated third party. The buildings, which are located in Irvine, California, were sold for an aggregate sales price of approximately $19.0 million in cash.

 

          On November 13, 2001, one of the Development LLCs obtained a $9.8 million construction loan (see Note 3).

14

 

 

          The following discussion relates to the consolidated financial statements of the Company and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Statements contained in this ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Some of the enclosed information presented is forward-looking in nature, including information concerning development timing and investment amounts. Although the information is based on the Company’s current expectations, actual results could vary from expectations stated here. Numerous factors will affect the Company’s actual results, some of which are beyond its control. These include the timing and strength of regional economic growth, the strength of commercial and industrial real estate markets, competitive market conditions, future interest rate levels and capital market conditions. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report. The Company assumes no obligation to update publicly any forward-looking information, whether as a result of new information, future events or otherwise, except to the extent the Company is required to do so in connection with its ongoing requirements under Federal securities laws to disclose material information. For a discussion of important risks related to the Company’s business, and an investment in its securities, including risks that could cause actual results and events to differ materially from results and events referred to in the forward-looking information, see the discussion under the caption ‘‘Business Risks’’ in the Company’s annual report on Form 10-K for the year ended December 31, 2000 and under the caption “Industry Trends and Other Factors Influencing Future Results of Operations” within this report. In light of these risks, uncertainties and assumptions, the forward-looking events contained herein might not occur.

 

 

          Kilroy Realty Corporation (the ‘‘Company’’) develops, owns, and operates office and industrial real estate, primarily in Southern California. The Company operates as a self-administered real estate investment trust (‘‘REIT’’). The Company owns its interests in all of its properties through Kilroy Realty, L.P. (the ‘‘Operating Partnership’’) and Kilroy Realty Finance Partnership, L.P. and conducts substantially all of its operations through the Operating Partnership. The Company owned a 90.0% general partnership interest in the Operating Partnership as of September 30, 2001.

 

 

          Our future results of operations may be impacted by factors outside of our control, including the following:

 

 

          Periods of economic slowdown or recession in the United States and in other countries, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases, which would adversely affect our financial condition and results of operations.

 

 

          The State of California continues to address issues related to the supply of electricity and natural gas. Over the past year, shortages of electricity have resulted in increased costs for consumers and certain interruptions in service. Increased consumer costs and consumer perception that the State is not able to effectively manage its energy needs may reduce demand for leased space in California office and industrial properties. A significant reduction in demand for office and industrial space would adversely affect our future financial condition and results of operations.

15

 

 

          Future terrorist attacks in the United States, such as the attacks that occurred in New York and Washington, D.C., on September 11, 2001, the recent mailings of letters containing anthrax spores and other acts of terrorism or war, may result in declining economic activity, which could harm the demand for and the value of our properties. In addition, as a result of such attacks locational factors, such as proximity to major airports, may decrease the demand for and the value of our office and industrial properties. A decrease in demand would make it difficult for us to renew or release our properties at lease rates equal to or above historical rates. Terrorist activities also could directly impact the value of our properties through damage, destruction or loss, and the availability of insurance for such acts may be less, or cost more, which would adversely affect our financial condition. To the extent that our tenants are impacted by future attacks, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases.

 

          These types of events also may adversely affect the markets in which our securities trade. These acts may cause further erosion of business and consumer confidence and spending and may result in increased volatility in national and international financial markets and economies. Any one of these events may cause a decline in the demand for real estate, delay the time in which our new or renovated properties reach stable occupancy, increase our operating expenses due to increased physical security for our properties and limit our access to capital or increase our cost of raising capital.

 

 

          A significant part of the Company’s revenue growth for each of the three- and nine-month periods ended September 30, 2001 was attributable to its recently completed development projects. During the nine months ended September 30, 2001, the Company completed the development of three office buildings encompassing an aggregate of approximately 182,700 rentable square feet that were added to the Company’s stabilized portfolio of operating properties. During the year ended December 31, 2000, the Company completed the development of nine office buildings encompassing an aggregate of approximately 1.0 million rentable square feet, all of which were included in the Company’s stabilized portfolio of operating properties at September 30, 2001. The Company’s stabilized portfolio of operating properties consists of all of the Company’s office and industrial properties, excluding properties recently developed by the Company that have not yet reached 95.0% occupancy (‘‘lease-up’’ properties) and projects currently under construction, renovation or in pre-development. At September 30, 2001, the Company had four office buildings encompassing an aggregate of approximately 345,800 rentable square feet in the lease-up phase which were completed during the nine months ended September 30, 2001 and one renovation property encompassing approximately 78,000 rentable square feet. The Company’s development pipeline at September 30, 2001 included six office projects under construction or committed for construction which are expected to be completed and stabilized over the next two years and encompass an aggregate of approximately 617,700 rentable square feet. In addition, the Company has an aggregate of approximately 1.3 million rentable square feet of presently planned future office development projects.

 

          During the nine months ended September 30, 2001, the Company acquired a 75% tenancy-in-common interest in a three-building office complex encompassing an aggregate of approximately 366,000 rentable square feet. The initial 25% tenancy-in-common interest was acquired by a wholly-owned subsidiary of the Company in October 2000 and was recorded as an investment in unconsolidated real estate on the consolidated balance sheet as of December 31, 2000. As a result, the Company now owns a 100% interest in the complex (see Note 2 to the consolidated financial statements.) The Company did not acquire any additional operating properties during the year ended December 31, 2000 or the nine months ended September 30, 2001. During the nine months ended September 30, 2001, the Company disposed of one office building and seven industrial buildings encompassing an aggregate of approximately 41,100 and 564,400 rentable square feet, respectively, for aggregate proceeds of $48.1 million. During the year ended December 31, 2000, the Company disposed of nine office and nine industrial buildings encompassing an aggregate of approximately 286,700 and 669,800 rentable square feet, respectively, for aggregate proceeds of $113.6 million.

16

 

          As a result of the property acquired and the development projects completed and added to the Company’s stabilized portfolio of operating properties subsequent to September 30, 2000, net of the effect of properties disposed of subsequent to September 30, 2000 and the one renovation project taken out of service during the quarter ended September 30, 2001, rentable square footage in the Company’s portfolio of stabilized properties increased by an aggregate of approximately 272,000 rentable square feet, or 2.2%, to 12.4 million rentable square feet at September 30, 2001 compared to 12.1 million rentable square feet at September 30, 2000. As of September 30, 2001, the Company’s stabilized portfolio was comprised of 86 office properties (the ‘‘Office Properties’’) encompassing an aggregate of approximately 7.1 million rentable square feet and 71 industrial properties (the ‘‘Industrial Properties’’) encompassing an aggregate of approximately 5.3 million rentable square feet. The stabilized portfolio occupancy rate at September 30, 2001 was 94.8%, with the Office Properties and Industrial Properties 93.2% and 97.1% occupied, respectively.

 

 

		Three Months Ended September 30,				Dollar Change			Percentage Change
		2001		2000
		(unaudited, dollars in thousands)
Revenues:
Rental income		$  44,992		$  40,555		$  4,437				10.9	%
Tenant reimbursements		5,901		4,748		1,153				24.3
Interest income		170		1,706		(1,536	)			(90.0	)
Other income		383		240		143				59.6
Total revenues		51,446		47,249		4,197				8.9
Expenses:
Property expenses		7,911		6,217		1,694				27.2
Real estate taxes		4,106		3,523		583				16.5
General and administrative expenses		2,949		2,890		59				2.0
Ground leases		379		423		(44	)			(10.4	)
Interest expense		10,657		10,024		633				6.3
Depreciation and amortization		12,680		9,941		2,739				27.6
Total expenses		38,682		33,018		5,664				17.2
Income from operations		$  12,764		$  14,231		$  (1,467	)			(10.3	%)

17

 

 

          Management evaluates the operations of its portfolio based on operating property type. The following tables compare the net operating income, defined as operating revenues (rental income, tenant reimbursements and other income) less property and related expenses (property expenses, real estate taxes and ground leases) before depreciation, for the Office Properties and for the Industrial Properties for the three months ended September 30, 2001 and 2000.

 

 

		Total Office Portfolio										Core Office Portfolio(1)
		2001		2000		Dollar Change			Percentage Change			2001		2000		Dollar Change					Percentage Change
		(dollars in thousands)
Operating revenues:
Rental income		$  35,115		$  29,997		$  5,118			17.1	%		$  25,399		$  24,971			$  428					1.7	%
Tenant reimbursements		4,749		3,423		1,326			38.7			3,848		3,143			705					22.4
Other income		57		183		(126	)		(68.9	)		23		126			(103	)				(81.7	)
Total		39,921		33,603		6,318			18.8			29,270		28,240			1,030					3.6
Property and related     expenses:
Property expenses		7,295		5,241		2,054			39.2			5,259		4,515			744					16.5
Real estate taxes		3,123		2,519		604			24.0			2,233		2,004			229					11.4
Ground leases		379		423		(44	)		(10.4	)		329		362			(33	)				(9.1	)
Total		10,797		8,183		2,614			31.9			7,821		6,881			940					13.7
Net operating income, as     defined		$  29,124		$  25,420		$  3,704			14.6	%		$  21,449		$  21,359			$    90					0.4	%

 

          Total revenues from Office Properties increased $6.3 million, or 18.8% to $39.9 million for the three months ended September 30, 2001 compared to $33.6 million for the three months ended September 30, 2000. Rental income from Office Properties increased $5.1 million, or 17.1% to $35.1 million for the three months ended September 30, 2001 compared to $30.0 million for the three months ended September 30, 2000. Rental income generated by the Core Office Portfolio increased $0.4 million, or 1.7% for the three months ended September 30, 2001 as compared to the three months ended September 30, 2000. This increase was primarily attributable to growth provided by increases in rental rates on renewed and released space in this portfolio. Average occupancy in the Core Office Portfolio decreased 0.6% to 94.2% for the three months ended September 30, 2001 compared to 94.8% for the three months ended September 30, 2000. Of the remaining increase of $4.7 million in rental income from Office Properties, an increase of $4.3 million was generated by the office properties developed by the Company in 2001 and 2000 (the ‘‘Office Development Properties’’), and an increase of $0.4 million was attributable to the office property acquired in 2001, net of the effect of the office properties sold during 2001 and 2000, (the ‘‘Net Office Acquisition’’).

 

          Tenant reimbursements from Office Properties increased $1.3 million, or 38.7% to $4.7 million for the three months ended September 30, 2001 compared to $3.4 million for the three months ended September 30, 2000. An increase of $0.7 million, or 22.4% in tenant reimbursements was generated by the Core Office Portfolio and was primarily due to an increase in utility costs, other property expenses and real estate taxes which were reimbursable by tenants. Of the remaining increase of $0.6 million, an increase of $0.3 million in tenant reimbursements was generated by the Office Development Properties and an increase of $0.3 million was attributable to the Net Office Acquisition. Other income from Office Properties decreased $0.1 million to $57,000 for the three months ended September 30, 2001 compared to $0.2 million for the three months ended September 30, 2000. Other income from Office Properties for both periods consisted primarily of lease termination fees, management fees and tenant late charges.

18

 

          Total expenses from Office Properties increased $2.6 million, or 31.9% to $10.8 million for the three months ended September 30, 2001 compared to $8.2 million for the three months ended September 30, 2000. Property expenses from Office Properties increased $2.1 million, or 39.2% to $7.3 million for the three months ended September 30, 2001 compared to $5.2 million for the three months ended September 30, 2000. An increase of $0.7 million in property expenses was attributable to the Core Office Portfolio and was offset by an increase in tenant reimbursements. This increase was primarily attributable to higher utility costs due to an increase in rates. Of the remaining increase of $1.4 million, an increase of $0.9 million was generated by the Office Development Properties and an increase of $0.5 million was attributable to the Net Office Acquisition. Real estate taxes increased $0.6 million, or 24.0% to $3.1 million for the three months ended September 30, 2001 as compared to $2.5 million for the three months ended September 30, 2000. Real estate taxes for the Core Office Portfolio increased $0.2 million, or 11.4% for the three months ended September 30, 2001 compared to the comparable period in 2000. This increase was primarily due to supplemental real estate taxes paid during the three months ended September 30, 2001 and real estate tax refunds received during the three months ended September 30, 2000. Of the remaining increase of $0.4 million, an increase of $0.3 million was attributable to the Office Development Properties and an increase of $0.1 million was attributable to the Net Office Acquisition. Ground lease expense from Office Properties remained consistent for both periods.

 

          Net operating income, as defined, from Office Properties increased $3.7 million, or 14.6% to $29.1 million for the three months ended September 30, 2001 compared to $25.4 million for the three months ended September 30, 2000. Of this increase, $0.1 million was generated by the Core Office Portfolio and represented a 0.4% increase in net operating income for the Core Office Portfolio. The remaining increase of $3.6 million was generated by an increase of $3.4 million from the Office Development Properties, and an increase of $0.2 million attributable to the Net Office Acquisition.

 

 

		Total Industrial Portfolio											Core Industrial Portfolio(1)
		2001		2000		Dollar Change		Percentage Change					2001		2000		Dollar Change					Percentage Change
		(dollars in thousands)
Operating revenues:
Rental income		$  9,877		$10,558		$(681)			(6.5	)%			$  9,400		$  9,094			$306					3.4	%
Tenant reimbursements		1,152		1,325		(173)			(13.1	)			1,107		1,199			(92	)				(7.7	)
Other income		326		57		269			471.9				21		30			(9	)				(30.0	)
Total		11,355		11,940		(585)			(4.9	)			10,528		10,323			205					2.0
Property and related expenses:
Property expenses		616		976		(360)			(36.9	)			604		508			96					18.9
Real estate taxes		983		1,004		(21)			(2.1	)			942		855			87					10.2
Total		1,599		1,980		(381)			(19.2	)			1,546		1,363			183					13.4
Net operating income, as defined		$  9,756		$  9,960		$(204)			(2.0	)%			$  8,982		$  8,960			$  22					0.2	%

 

          Total revenues from Industrial Properties decreased $0.6 million, or 4.9% to $11.4 million for the three months ended September 30, 2001 compared to $12.0 million for the three months ended September 30, 2000. Rental income from Industrial Properties decreased $0.7 million, or 6.5% to $9.9 million for the three months ended September 30, 2001 compared to $10.6 million for the three months ended September 30, 2000. Rental income generated by the Core Industrial Portfolio increased $0.3 million, or 3.4% for the three months ended September 30, 2001 as compared to the three months ended September 30, 2000. This increase was primarily attributable to an increase in rental rates on renewed and released space in this portfolio. Average occupancy in the Core Industrial Portfolio decreased 1.5% to 97.0% for the three months ended September 30, 2001 compared to 98.5% for the three months ended September 30, 2000. The $0.3 million increase in rental income generated by the Core Industrial Portfolio was offset by a decrease of $1.0 million in rental income attributable to the 16 industrial buildings sold during 2001 and 2000 (the ‘‘Industrial Dispositions’’).

19

 

          Tenant reimbursements from Industrial Properties decreased $0.2 million, or 13.1% to $1.1 million for the three months ended September 30, 2001 compared to $1.3 million for three months ended September 30, 2000. This decrease was attributable to a $0.1 million decrease in tenant reimbursements attributable to the Core Industrial Portfolio and a $0.1 million decrease in tenant reimbursements for the Industrial Dispositions. The decrease in the Core Industrial Portfolio was due to a decrease in average occupancy. Other income from Industrial Properties increased $0.3 million, or 471.9% to $0.3 million for the three months ended September 30, 2001 compared to $57,000 for the three months ended September 30, 2000. Other income from Industrial Properties for both periods consisted primarily of lease termination fees, tenant late charges and other one-time income.

 

          Total expenses from Industrial Properties decreased $0.4 million, or 19.2% to $1.6 million for the three months ended September 30, 2001 compared to $2.0 million for the three months ended September 30, 2000. Property expenses from Industrial Properties decreased $0.4 million, or 36.9% to $0.6 million for the three months ended September 30, 2001 compared to $1.0 million for the three months ended September 30, 2000. An increase of $0.1 million in property expenses for the Core Industrial Portfolio was offset by a decrease of $0.5 million attributable to the Industrial Dispositions. The increase in the Core Industrial Portfolio was primarily due to higher utility costs due to an increase in rates. Real estate taxes remained consistent for the three months ended September 30, 2001 compared to the three months ended September 30, 2000. Real estate taxes for the Core Industrial Portfolio increased $0.1 million, or 10.2% for the three months ended September 30, 2001 compared to the same period in 2000. This $0.1 million increase was offset by a decrease of $0.1 million attributable to the Industrial Dispositions.

 

          Net operating income, as defined, from Industrial Properties decreased $0.2 million, or 2.0% to $9.8 million for the three months ended September 30, 2001 compared to $10.0 million for the three months ended September 30, 2000. Net operating income for the Core Industrial Portfolio increased $22,000, or 0.2% for the three months ended September 30, 2001 compared to the same period in 2000, offset by a decrease of $0.2 million attributable to the Industrial Dispositions.

 

 

          Interest income decreased $1.5 million, or 90.0% to $0.2 million for the three months ended September 30, 2001 compared to $1.7 million for the three months ended September 30, 2000. The decrease was primarily due to a $1.2 million decrease of interest earned on the note receivable from related party in 2000. This note was acquired in May 2000 and repaid in January 2001.

 

          General and administrative expenses remained consistent for the three months ended September 30, 2001 and 2000.

 

          Interest expense increased $0.6 million, or 6.3% to $10.6 million for the three months ended September 30, 2001 compared to $10.0 million for the three months ended September 30, 2000 due to a net increase in aggregate indebtedness. The Company’s weighted average annual interest rate decreased approximately 1.14% to 7.03% at September 30, 2001 as compared to 8.17% at September 30, 2000.

 

          Depreciation and amortization increased $2.7 million, or 27.6% to $12.7 million for the three months ended September 30, 2001 compared to $10.0 million for the three months ended September 30, 2000. The increase was due primarily to depreciation on development properties completed and added to the Company’s stabilized portfolio of operating properties subsequent to September 30, 2000, net of the effect of properties disposed of by the Company subsequent to September 30, 2000.

20

 

 

		Nine Months Ended September 30,				Dollar Change			Percentage Change
		2001		2000
		(unaudited, dollars in thousands)
Revenues:
Rental income		$135,400		$117,627		$17,773			15.1	%
Tenant reimbursements		17,591		14,036		3,555			25.3
Interest income		883		3,008		(2,125	)		(70.6	)
Other income		6,173		1,684		4,489			266.6
Total revenues		160,047		136,355		23,692			17.4
Expenses:
Property expenses		22,254		17,749		4,505			25.4
Real estate taxes		12,480		9,959		2,521			25.3
General and administrative expenses		9,337		8,077		1,260			15.6
Ground leases		1,146		1,211		(65	)		(5.4	)
Interest expense		32,060		27,800		4,260			15.3
Depreciation and amortization		38,634		28,909		9,725			33.6
Total expenses		115,911		93,705		22,206			23.7
Income from operations		$  44,136		$  42,650		$  1,486			3.5	%