ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. The results of operations discussion is combined for the Company and the Operating Partnership because there are no material differences in the results of operations between the two reporting entities.
Forward-Looking Statements
Statements contained in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts may be forward-looking statements. Forward-looking statements include, among other things, statements or information concerning our plans, objectives, capital resources, portfolio performance, results of operations, projected future occupancy and rental rates, lease expirations, debt maturities, potential investments, strategies such as capital recycling, development and redevelopment activity, projected construction costs, projected construction commencement and completion dates, projected square footage of space that could be constructed on undeveloped land that we own, projected rentable square footage of or number of units in properties under construction or in the development pipeline, anticipated proceeds from capital recycling activity or other dispositions and anticipated dates of those activities or dispositions, projected increases in the value of properties, dispositions, future executive incentive compensation, pending, potential or proposed acquisitions, plans to grow our Net Operating Income and FFO, our ability to re-lease properties at or above current market rates, anticipated market conditions and demographics and other forward-looking financial data, as well as the discussion in “—Factors That May Influence Future Results of Operations,” “—Liquidity and Capital Resource of the Company,” and “—Liquidity and Capital Resources of the Operating Partnership.” Forward-looking statements can be identified by the use of words such as “believes,” “expects,” “projects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” and the negative of these words and phrases and similar expressions that do not relate to historical matters. Forward-looking statements are based on our current expectations, beliefs and assumptions, and are not guarantees of future performance. Forward-looking statements are inherently subject to uncertainties, risks, changes in circumstances, trends and factors that are difficult to predict, many of which are outside of our control. Accordingly, actual performance, results and events may vary materially from those indicated or implied in the forward-looking statements, and you should not rely on the forward-looking statements as predictions of future performance, results or events. Numerous factors could cause actual future performance, results and events to differ materially from those indicated in the forward-looking statements, including, among others: global market and general economic conditions and their effect on our liquidity and financial conditions and those of our tenants; adverse economic or real estate conditions generally, and specifically, in the States of California and Washington; risks associated with our investment in real estate assets, which are illiquid and with trends in the real estate industry; defaults on or non-renewal of leases by tenants; any significant downturn in tenants’ businesses; our ability to re-lease property at or above current market rates; costs to comply with government regulations, including environmental remediation; the availability of cash for distribution and debt service and exposure to risk of default under debt obligations; increases in interest rates and our ability to manage interest rate exposure; the availability of financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue development, redevelopment and acquisition opportunities and refinance existing debt; a decline in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing, and which may result in write-offs or impairment charges; significant competition, which may decrease the occupancy and rental rates of properties; potential losses that may not be covered by insurance; the ability to successfully complete acquisitions and dispositions on announced terms; the ability to successfully operate acquired, developed and redeveloped properties; the ability to successfully complete development and redevelopment projects on schedule and within budgeted amounts; delays or refusals in obtaining all necessary zoning, land use and other required entitlements, governmental permits and authorizations for our development and redevelopment properties; increases in anticipated capital expenditures, tenant improvement and/or leasing costs; defaults on leases for land on which some of our properties are located; adverse changes to, or enactment or implementations of, tax laws or other applicable laws, regulations or legislation, as well as business and consumer reactions to such changes; risks associated with joint venture investments, including our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers; environmental uncertainties and risks related to natural disasters; our ability to maintain our status as a REIT; and uncertainties regarding the impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business and the economy generally. The factors included in this report are not exhaustive and additional factors could adversely affect our business and financial performance. For a discussion of additional factors that could materially adversely affect the Company’s and the Operating Partnership’s business and financial performance, see the discussion below, as well as in “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s and the Operating Partnership’s annual report on Form 10-K for the year ended December 31, 2020 and their respective other filings with the SEC. All
forward-looking statements are based on information that was available and speak only as of the dates on which they were made. We assume no obligation to update any forward-looking statement that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws.
Overview and Background
We are a self-administered REIT active in premier office and mixed-use submarkets along the West Coast. We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties in the coastal regions of Greater Los Angeles, San Diego County, the San Francisco Bay Area and Greater Seattle, which we believe have strategic advantages and strong barriers to entry. We own our interests in all of our real properties through the Operating Partnership and generally conduct substantially all of our operations through the Operating Partnership. We owned an approximate 99.0%, 99.0%, and 98.3% general partnership interest in the Operating Partnership as of March 31, 2021, December 31, 2020 and March 31, 2020. All of our properties are held in fee except for the fourteen office buildings that are held subject to long-term ground leases for the land.
COVID-19 Response
In accordance with local and state government guidance and social distancing recommendations, the majority of our employees worked remotely beginning in March 2020. Our property management teams have returned to our offices on a full-time basis and we have begun transitioning our corporate employees back to our offices on a rotational basis in compliance with local and state government density restrictions. We continue to leverage technology to ensure our teams stay connected and productive, and that our culture remains strong even under these unusual circumstances.
Since March 2020, we have been highly focused on planning for the health and safety of our tenants and employees and preparing our buildings in accordance with the policies, protocols and applicable legal requirements in our regions. We hold our occupants’ health at the highest level of importance and have taken extensive steps to facilitate safe work environments. We engaged an industrial hygienist to assist us in designing new standard operating procedures for our buildings that include, but are not limited to, air filtration, water quality, janitorial products and procedures, social separation and screening during building access and elevator use, the use of personal protective equipment, signage, and management of construction activities. Our buildings have remained open to tenants and we have begun to see certain tenants returning to the workplace. We have been in communication with tenants regarding return to work protocols and safety measures, which meet or exceed local and state government guidelines. Our properties received the highest level of pandemic preparedness review through a third-party who verified that all recommended CDC and WHO measures have been successfully implemented, including on-site air, water and germ testing.
We have implemented a rent relief program for the majority of our retail tenants whereby we deferred rent since April 2020 in exchange for an extension of their current lease term for an equivalent number of months at future rental rates. We expect that we will continue to offer some form of rent relief to the majority of our retail tenants, given that most cannot resume full operations in certain of our markets where strong local and state government restrictions remain. We did not create such a program for our office tenants. We evaluate office rent relief requests on a specific case by case basis and only consider those which have a justifiable financial basis. For residential tenants, deferrals of gross rent billings have been extended in accordance with the applicable local orders, which often require repayment within 12 months if such local ordinances are not extended.
We analyze our total lease receivable balances, tenant creditworthiness, specific industry trends and conditions, and current economic trends and conditions in order to evaluate whether we believe substantially all of the amounts due under a tenant’s lease agreement are deemed probable of collection over the term of the lease. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount that would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination.
Deferrals of gross rent billings that have been extended to office and retail tenants during the period have been formalized by the execution of lease amendments that generally provide for repayment of deferred amounts through an extension of the lease term by an equivalent period of months to the deferral period. Not all tenant relief requests will ultimately result in lease amendments and we have not relinquished our contractual rights under our lease agreements where rent concessions have not
yet been granted. Our rent collections and rent relief requests to-date may not be indicative of collections, concessions or requests in future periods.
For the three months ended March 31, 2021, we collected approximately 96% of our gross rent billings, which is consistent with our 2020 collections. Gross rent billings represents the total contractual base rent (including tenant direct-billed parking) and CAM billings before any COVID-19 related rent concessions for the three months ended March 31, 2021. Excluding rent relief provided to certain tenants, we collected 97% of our gross rent billings for the three months ended March 31, 2021. 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. 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. During the last few months, several vaccines for COVID-19 received emergency use authorization from the FDA and are currently being administered across the country. Despite growing vaccination rates, we believe COVID-19 will continue to impact the normal operations of our tenants. The continued impact of the pandemic on our and our tenants’ businesses is largely dependent on efforts to stem the spread of COVID-19, including governmental efforts to distribute vaccines and overall vaccination rates in the areas in which we own properties and/or have development projects. Refer to “Part I, Item IA. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2020 for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Factors That May Influence Future Results of Operations
Development Program
We believe that a portion of our long-term future growth will continue to come from the completion of our in-process development projects and, subject to market conditions, executing on our future development pipeline, including expanding entitlements. Over the past several years, we increased our focus on development opportunities and expanded our future development pipeline through targeted acquisitions of development opportunities on the West Coast.
We have a proactive planning process by which we continually evaluate the size, timing, costs and scope of our development program and, as necessary, scale activity to reflect the economic conditions and the real estate fundamentals that exist in our submarkets. We expect to execute on our development program with prudence and will be pursuing opportunities with attractive economic returns in strategic locations with proximity to public transportation or transportation access and retail amenities and in markets with strong fundamentals and visible demand. We plan to develop in phases, as appropriate, and we generally favor starting projects with pre-leasing activity.
Consistent with 2020, our development portfolio was largely unaffected by the COVID-19 pandemic during the three months ended March 31, 2021; however, the COVID-19 pandemic, and future restrictions intended to prevent its spread if case rates surge again, may cause delays or increase costs associated with building materials or construction services necessary for construction which could adversely impact our ability to continue or complete construction as planned, on budget or at all for our development projects, and may delay the start of construction on our future development pipeline projects. Refer to “Part I, Item IA. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2020 for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Stabilized Development Projects
During the three months ended March 31, 2021, we completed and added the following project to our stabilized portfolio:
•9455 Towne Centre Drive, University Towne Center, San Diego, California. In March 2019, we commenced construction on this project, which totals approximately 160,444 square feet of office space at a total estimated investment of $95.0 million. The project is 100% leased to a Fortune 50 publicly traded company. We completed construction and commenced revenue recognition during the three months ended March 31, 2021.
In-Process Development Projects - Tenant Improvement
As of March 31, 2021, the following projects were in the tenant improvement phase:
•333 Dexter, South Lake Union, Seattle, Washington. We commenced construction on this project in June 2017. This project encompasses approximately 635,000 square feet of office space at a total estimated investment of $410.0 million and 100% of the project is leased to a Fortune 50 publicly traded company. In June 2020, we completed construction and commenced revenue recognition on the first phase of the project, representing approximately 49% of the project. The remaining two phases are currently expected to reach stabilization in the second half of 2022.
•One Paseo (Office), Del Mar, San Diego, California. We commenced construction on the office component of this project in December 2018, which encompasses 285,000 square feet of office space at a total estimated investment of $205.0 million. At March 31, 2021, the office component of the project was 93% leased. We completed construction in June 2020 and as of the date of this report, we have commenced revenue recognition on approximately 87% of the project. We currently expect the project to reach stabilization in the third quarter of 2021.
•Kilroy Oyster Point (Phase 1), South San Francisco, California. In March 2019, we commenced construction on Phase 1 of this 39-acre life science campus situated on the waterfront in South San Francisco. This first phase encompasses approximately 656,000 square feet of office space at a total estimated investment of $570.0 million and is 100% leased to two tenants. We currently expect this project to reach stabilization in the fourth quarter of 2021.
In-Process Development Projects - Under Construction
As of March 31, 2021, we had two projects in our in-process development pipeline that were under construction:
•Jardine, Hollywood, California. We commenced construction on the residential component of this project in December 2018, which encompasses 193 residential units at a total estimated investment of $185.0 million. We completed construction on this project in April 2021.
•2100 Kettner, Little Italy, San Diego, California. We commenced construction on this project in September 2019. This project is comprised of approximately 200,000 square feet of office space for a total estimated investment of $140.0 million.
Future Development Pipeline
As of March 31, 2021, our future development pipeline included six future projects located in Greater Seattle, the San Francisco Bay Area and San Diego County with an aggregate cost basis of approximately $1.1 billion at which we believe we could develop more than 6.0 million rentable square feet for a total estimated investment of approximately $5.0 billion to $7.0 billion, depending on successfully obtaining entitlements and market conditions.
The following table sets forth information about our future development pipeline.
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Future Development Pipeline
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Location
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Approx. Developable Square Feet (1)
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Total Costs
as of 3/31/2021
($ in millions) (2)
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San Diego County
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Santa Fe Summit – Phases 2 and 3
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56 Corridor
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600,000 - 650,000
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$
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81.6
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Kilroy East Village
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East Village
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TBD
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48.9
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9514 Towne Centre Drive
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University Towne Center
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TBD
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6.4
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San Francisco Bay Area
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Kilroy Oyster Point - Phases 2 - 4
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South San Francisco
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1,750,000 - 1,900,000
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367.4
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Flower Mart
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SOMA
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2,300,000
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440.8
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Greater Seattle
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SIX0 - Office & Residential
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Seattle CBD
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TBD
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147.1
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TOTAL:
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$
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1,092.2
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________________________
(1)The developable square feet and scope of projects could change materially from estimated data provided due to one or more of the following: any significant changes in the economy, market conditions, our markets, tenant requirements and demands, construction costs, new supply, regulatory and entitlement processes or project design.
(2)Represents cash paid and costs incurred, including accrued liabilities in accordance with GAAP, as of March 31, 2021.
Fluctuations in our development activities could cause fluctuations in the average development asset balances qualifying for interest and other carrying cost and internal cost capitalization in future periods. During the three months ended March 31, 2021 and 2020, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately $1.7 billion and $2.2 billion, respectively, as it was determined these projects qualified for interest and other carrying cost capitalization under GAAP. In the event of an extended cessation of development activities, such projects may potentially no longer qualify for capitalization of interest or other carrying costs. However, a cessation of development activities caused by events outside of our control, such as those as a result of government restrictions aimed at stopping the spread of COVID-19, would not impact our ability to capitalize interest and other carrying costs. For the three months ended March 31, 2021 and 2020, we capitalized $16.9 million and $21.4 million, respectively, of interest to our qualifying development projects. For the three months ended March 31, 2021 and 2020, we capitalized $5.5 million and $5.1 million, respectively, of internal costs to our qualifying development projects.
Capital Recycling Program. We continuously evaluate opportunities for the potential disposition of non-core properties and undeveloped land in our portfolio or the formation of strategic ventures with the intent of recycling the proceeds generated into capital used to fund new operating and development acquisitions, to finance development and redevelopment expenditures, to repay long-term debt and for other general corporate purposes. As part of this strategy, we attempt to enter into Section 1031 Exchanges and other tax deferred transaction structures, when possible, to defer some or all of the taxable gains on the sales, if any, for federal and state income tax purposes. See the “Liquidity and Capital Resources of the Operating Partnership – Liquidity Sources” section for further discussion of our capital recycling activities.
In connection with our capital recycling strategy, during the three months ended March 31, 2021, we completed the sale of one operating property in San Francisco, California to an unaffiliated third party for gross proceeds of $1.08 billion, or approximately $1,440 per square foot. The timing of any potential future disposition or strategic venture transactions will depend on market conditions and other factors, including but not limited to our capital needs, the availability of financing for potential buyers (which has been and may continue to be constrained for some potential buyers due to the ongoing COVID-19 pandemic’s impact on economic and market conditions, including the financial markets), and our ability to defer some or all of the taxable gains on the sales. We cannot assure that we will dispose of any additional properties, enter into any additional strategic ventures, or that we will be able to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange or be able to use other tax deferred structures in connection with our strategy. See the “Liquidity and Capital Resources of the Operating Partnership – Liquidity Sources” section for further information.
Acquisitions. As part of our growth strategy, which is highly dependent on market conditions and business cycles, among other factors, we continue to evaluate strategic opportunities and remain a disciplined buyer of development and redevelopment opportunities as well as value-add and strategic operating properties. We focus on growth opportunities primarily in West Coast markets populated by knowledge and creative-based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services. Against the backdrop of market volatility, we expect to manage a strong balance sheet, execute on our development program and selectively evaluate opportunities that either add immediate Net Operating Income to our portfolio or play a strategic role in our future growth.
In connection with our growth strategy, we often have one or more potential acquisitions of properties and/or undeveloped land under consideration that are in varying stages of negotiation and due diligence review, or under contract, at any point in time. However, we cannot provide assurance that we will enter into any agreements to acquire properties or undeveloped land, or that the potential acquisitions contemplated by any agreements we may enter into the future will be completed. In addition, acquisitions are subject to various risks and uncertainties and we may be unable to complete an acquisition after making a nonrefundable deposit or incurring acquisition-related costs. Incentive Compensation. Our Executive Compensation Committee determines compensation, including cash bonuses and equity incentives, for our executive officers, as defined in Rule 16 under the Exchange Act. For 2021, the annual cash bonus program was structured to allow the Executive Compensation Committee to evaluate a variety of key quantitative and qualitative metrics at the end of the year and make a determination based on the Company’s and management’s overall performance. Our Executive Compensation Committee also grants equity incentive awards from time to time that include performance-based and/or market-measure based vesting requirements and time-based vesting requirements. As a result, accrued incentive compensation and compensation expense for future awards may be affected by our operating and development performance, financial results, stock price, performance against applicable performance-based vesting goals, market conditions, liquidity measures, forfeitures and other factors. Consequently, we cannot predict the amounts that will be recorded in future periods related to such incentive compensation.
As of March 31, 2021, there was approximately $47.2 million of total unrecognized compensation cost related to outstanding nonvested RSUs issued under share-based compensation arrangements. Those costs are expected to be recognized over a weighted-average period of 1.6 years. The ultimate amount of compensation cost recognized related to outstanding nonvested RSUs issued under share-based compensation arrangements may vary for performance-based RSUs that are still in the performance period based on performance against applicable performance-based vesting goals. The $47.2 million of unrecognized compensation cost does not reflect the future compensation cost for any potential share-based awards that may be issued subsequent to March 31, 2021. For additional information regarding our equity incentive awards, see Note 8 “Share-Based Compensation” to our consolidated financial statements included in this report.
Information on Leases Commenced and Executed
Leasing Activity and Changes in Rental Rates. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties, newly acquired properties with vacant space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Negative trends in one or more of these factors could adversely affect our rental income in future periods. The following tables set forth certain information regarding leasing activity for our stabilized portfolio during the three months ended March 31, 2021.
For Leases Commenced
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1st & 2nd Generation (1)(2)
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2nd Generation (1)(2)
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Number of Leases (3)
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Rentable Square Feet (3)
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Retention Rates (4)
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TI/LC per
Sq. Ft. (5)
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TI/LC per Sq. Ft. / Year
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Changes in
Rents (6)(7)
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Changes in
Cash Rents (8)
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Weighted Average Lease Term (in months)
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New
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Renewal
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New
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Renewal
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Three Months Ended
March 31, 2021
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12
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13
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455,753
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140,700
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41.7
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%
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$
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79.80
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$
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11.13
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56.8
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%
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33.7
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%
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86
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For Leases Executed (9)
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1st & 2nd Generation (1)(2)
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2nd Generation (1)(2)
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Number of Leases (3)
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Rentable Square Feet (3)
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TI/LC per Sq. Ft. (5)
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TI/LC per Sq. Ft. / Year
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Changes in
Rents (6)(7)
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Changes in
Cash Rents (8)
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Weighted Average Lease Term
(in months)
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New
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Renewal
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New
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Renewal
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Three Months Ended
March 31, 2021
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9
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13
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65,410
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140,700
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$
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14.90
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$
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4.83
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15.4
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%
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4.9
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%
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37
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________________________
(1)Includes 100% of consolidated property partnerships.
(2)First generation leasing includes space where we have made capital expenditures that result in additional revenue generated when the space is re-leased. Second generation leasing includes space where we have made capital expenditures to maintain the current market revenue stream.
(3)Represents leasing activity for leases that commenced or were signed during the period, including first and second generation space, net of month-to-month leases. Excludes leasing on new construction.
(4)Calculated as the percentage of space either renewed or expanded into by existing tenants or subtenants at lease expiration.
(5)Tenant improvements and leasing commissions per square foot exclude tenant-funded tenant improvements.
(6)Calculated as the change between GAAP rents for new/renewed leases and the expiring GAAP rents for the same space. Excludes leases for which the space was vacant longer than one year or vacant when the property was acquired.
(7)Excludes commenced and executed leases of approximately 167,737 and 1,866 rentable square feet, respectively, for the three months ended March 31, 2021, for which the space was vacant longer than one year or being leased for the first time. Space vacant for more than one year is excluded from our change in rents calculations to provide a more meaningful market comparison.
(8)Calculated as the change between stated rents for new/renewed leases and the expiring stated rents for the same space. Excludes leases for which the space was vacant longer than one year or vacant when the property was acquired.
(9)During the three months ended March 31, 2021, 6 new leases totaling 55,795 rentable square feet were signed but not commenced as of March 31, 2021.
Our rental rates and occupancy are impacted by general economic conditions, including the pace of regional economic growth, access to capital, and potentially the current COVID-19 pandemic and restrictions intended to prevent its spread. Therefore, we cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current market rates. In addition, due to the low level of recent transaction volume as a result of the COVID-19 pandemic, we are currently unable to provide meaningful information on the weighted average cash rental rates for our total stabilized portfolio compared to current market rates at March 31, 2021. In addition, it is possible that the COVID-19 pandemic may have an adverse impact on our ability to renew leases or re-lease available space in our properties on favorable terms or at all in the future, including as a result of a deterioration in the economic and market conditions due to restrictions intended to prevent the spread of COVID-19. As these restrictions began to be lifted during the three months ended March 31, 2021, we saw an increase in prospective tenant tours and inquiries. While we do not believe that our development leasing and ability to renew leases scheduled to expire has been significantly impacted by the COVID-19 pandemic, we do believe that the impact of the restrictions and social distancing guidelines and the economic uncertainty caused by the COVID-19 pandemic has impacted the timing and volume of leasing and may continue to do so in the future. Additionally, decreased demand, increased competition (including sublease space available from our tenants) and other negative trends or unforeseeable events that impair our ability to timely renew or re-lease space could have further negative effects on our future financial condition, results of operations, and cash flows.
Scheduled Lease Expirations. The following tables set forth certain information regarding our lease expirations for our stabilized portfolio for the remainder of 2021 and the next five years and by region for the remainder of 2021 and in 2022.
Lease Expirations (1)
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Year of Lease Expiration
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Number of
Expiring
Leases
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Total Square Feet
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% of Total Leased Sq. Ft.
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Annualized Base Rent (2)(3)
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% of Total Annualized Base Rent (2)
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Annualized Base Rent per Sq. Ft. (2)
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(in thousands)
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Remainder of 2021 (4)
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49
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457,807
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3.6
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%
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$
|
20,688
|
|
|
3.1
|
%
|
|
$
|
45.19
|
|
2022 (4)
|
|
74
|
|
|
811,278
|
|
|
6.4
|
%
|
|
34,299
|
|
|
5.1
|
%
|
|
42.28
|
|
2023
|
|
78
|
|
|
1,203,098
|
|
|
9.5
|
%
|
|
63,926
|
|
|
9.5
|
%
|
|
53.13
|
|
2024
|
|
58
|
|
|
944,681
|
|
|
7.5
|
%
|
|
45,640
|
|
|
6.8
|
%
|
|
48.31
|
|
2025
|
|
54
|
|
|
735,835
|
|
|
5.8
|
%
|
|
36,545
|
|
|
5.4
|
%
|
|
49.66
|
|
2026
|
|
40
|
|
|
1,663,226
|
|
|
13.1
|
%
|
|
76,411
|
|
|
11.3
|
%
|
|
45.94
|
|
Total
|
|
353
|
|
|
5,815,925
|
|
|
45.9
|
%
|
|
$
|
277,509
|
|
|
41.2
|
%
|
|
$
|
47.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Region
|
|
# of
Expiring Leases
|
|
Total
Square Feet
|
|
% of Total
Leased Sq. Ft.
|
|
Annualized
Base Rent (2)(3)
|
|
% of Total
Annualized
Base Rent (2)
|
|
Annualized Rent
per Sq. Ft. (2)
|
2021 (4)
|
|
Greater Los Angeles
|
|
30
|
|
|
178,787
|
|
|
1.4
|
%
|
|
$
|
7,212
|
|
|
1.1
|
%
|
|
$
|
40.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Diego County
|
|
10
|
|
|
47,573
|
|
|
0.4
|
%
|
|
1,858
|
|
|
0.3
|
%
|
|
39.06
|
|
|
San Francisco Bay Area
|
|
7
|
|
|
227,480
|
|
|
1.8
|
%
|
|
11,466
|
|
|
1.7
|
%
|
|
50.40
|
|
|
Greater Seattle
|
|
2
|
|
|
3,967
|
|
|
—
|
%
|
|
152
|
|
|
—
|
%
|
|
38.32
|
|
|
Total
|
|
49
|
|
|
457,807
|
|
|
3.6
|
%
|
|
$
|
20,688
|
|
|
3.1
|
%
|
|
$
|
45.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 (4)
|
|
Greater Los Angeles
|
|
53
|
|
|
490,605
|
|
|
3.9
|
%
|
|
$
|
21,473
|
|
|
3.2
|
%
|
|
$
|
43.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Diego County
|
|
8
|
|
|
205,700
|
|
|
1.6
|
%
|
|
7,212
|
|
|
1.0
|
%
|
|
35.06
|
|
|
San Francisco Bay Area
|
|
5
|
|
|
50,108
|
|
|
0.4
|
%
|
|
3,180
|
|
|
0.5
|
%
|
|
63.46
|
|
|
Greater Seattle
|
|
8
|
|
|
64,865
|
|
|
0.5
|
%
|
|
2,434
|
|
|
0.4
|
%
|
|
37.52
|
|
|
Total
|
|
74
|
|
|
811,278
|
|
|
6.4
|
%
|
|
$
|
34,299
|
|
|
5.1
|
%
|
|
$
|
42.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________
(1)For leases that have been renewed early with existing tenants, the expiration date and annualized base rent information presented takes into consideration the renewed lease terms. Excludes leases not commenced as of March 31, 2021, space leased under month-to-month leases, storage leases, vacant space and future lease renewal options not executed as of March 31, 2021.
(2)Annualized base rent includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense reimbursement revenue. Additionally, the underlying leases contain various expense structures including full service gross, modified gross and triple net. Percentages represent percentage of total portfolio annualized contractual base rental revenue. For additional information on tenant improvement and leasing commission costs incurred by the Company for the current reporting period, please see further discussion under the caption “Information on Leases Commenced and Executed.”
(3)Includes 100% of annualized base rent of consolidated property partnerships.
(4)Adjusting for leases executed as of March 31, 2021 but not yet commenced, the 2021 and 2022 expirations would be reduced by 78,759 and 41,379 square feet, respectively.
In addition to the 1.2 million rentable square feet, or 8.5%, of currently available space in our stabilized portfolio, leases representing approximately 3.6% and 6.4% of the occupied square footage of our stabilized portfolio are scheduled to expire during the remainder of 2021 and in 2022, respectively. The leases scheduled to expire during the remainder of 2021 and in 2022 represent approximately 1.3 million rentable square feet or 8.2% of our total annualized base rental revenue. Adjusting for leases executed as of March 31, 2021 but not yet commenced, the remaining 2021 and 2022 expirations would be 379,048 and 769,899 square feet, respectively.
Sublease Space. Of our leased space as of March 31, 2021, approximately 1,537,862 rentable square feet, or 10.9% of the square footage in our stabilized portfolio, was available for sublease, primarily in the San Francisco Bay Area and Greater Seattle regions. Of the 10.9% of available sublease space in our stabilized portfolio as of March 31, 2021, approximately 7.7% was vacant space, and the remaining 3.2% was occupied. Of the approximately 1,537,862 rentable square feet available for sublease as of March 31, 2021, approximately 11,450 rentable square feet representing 4 leases are scheduled to expire in 2021, and approximately 64,670 rentable square feet representing 11 leases are scheduled to expire in 2022.
Stabilized Portfolio Information
As of March 31, 2021, our stabilized portfolio was comprised of 117 office properties encompassing an aggregate of approximately 14.0 million rentable square feet and 808 residential units. Our stabilized portfolio includes all of our properties with the exception of development and redevelopment properties currently committed for construction, under construction, or in the tenant improvement phase, undeveloped land and real estate assets held for sale. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We define properties in the tenant improvement phase as office and life science properties that we are developing or redeveloping where the project has reached cold shell condition and is ready for tenant improvements, which may require additional major base building construction before being placed in service. Projects in the tenant improvement phase are added to our stabilized portfolio once the project reaches the earlier of 95% occupancy or one year from the date of the cessation of major base building construction activities. Costs capitalized to construction in progress for development and redevelopment properties are transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets as the historical cost of the property as the projects or phases of projects are placed in service.
We did not have any redevelopment or held for sale properties at March 31, 2021. Our stabilized portfolio also excludes our future development pipeline, which as of March 31, 2021 was comprised of six potential development sites, representing approximately 63 gross acres of undeveloped land on which we believe we have the potential to develop more than 6.0 million rentable square feet, depending upon economic conditions.
As of March 31, 2021, the following properties were excluded from our stabilized portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Properties/Projects
|
|
Estimated Rentable
Square Feet (1)
|
|
|
|
|
|
|
|
|
In-process development projects - tenant improvement
|
3
|
|
1,576,000
|
|
In-process development projects - under construction (2)
|
2
|
|
200,000
|
|
|
|
|
|
________________________
(1)Estimated rentable square feet upon completion.
(2)In addition to the estimated office and life science rentable square feet noted above, development projects under construction also include 193 residential units.
The following table reconciles the changes in the rentable square feet in our stabilized office portfolio of operating properties from March 31, 2020 to March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Buildings
|
|
Rentable
Square Feet
|
Total as of March 31, 2020
|
114
|
|
|
14,323,572
|
|
|
|
|
|
Completed development properties placed in-service
|
5
|
|
|
521,832
|
|
Dispositions
|
(2)
|
|
|
(837,517)
|
|
Remeasurement
|
—
|
|
|
41,698
|
|
Total as of March 31, 2021 (1)
|
117
|
|
|
14,049,585
|
|
________________________
(1)Includes four properties owned by consolidated property partnerships (see Note 1 “Organization, Ownership and Basis of Presentation” to our consolidated financial statements included in this report for additional information).
Occupancy Information
The following table sets forth certain information regarding our stabilized portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Region
|
|
Number of
Buildings
|
|
Rentable Square Feet
|
|
Occupancy at (1)
|
|
3/31/2021
|
|
12/31/2020
|
|
9/30/2020
|
Greater Los Angeles
|
|
55
|
|
|
4,403,815
|
|
|
87.5
|
%
|
|
88.1
|
%
|
|
90.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
San Diego County
|
|
23
|
|
|
2,316,258
|
|
|
87.4
|
%
|
|
85.2
|
%
|
|
86.7
|
%
|
San Francisco Bay Area
|
|
31
|
|
|
5,527,722
|
|
|
94.3
|
%
|
|
94.5
|
%
|
|
94.2
|
%
|
Greater Seattle
|
|
8
|
|
|
1,801,790
|
|
|
97.8
|
%
|
|
94.7
|
%
|
|
94.7
|
%
|
Total Stabilized Office Portfolio
|
|
117
|
|
|
14,049,585
|
|
|
91.5
|
%
|
|
91.2
|
%
|
|
92.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Occupancy
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
Stabilized Office Portfolio (1)
|
91.5
|
%
|
|
93.7
|
%
|
|
|
|
|
Same Store Portfolio (2)
|
90.8
|
%
|
|
93.5
|
%
|
|
|
|
|
Residential Portfolio (3)
|
69.1
|
%
|
|
93.5
|
%
|
|
|
|
|
________________________
(1)Occupancy percentages reported are based on our stabilized office portfolio as of the end of the period presented and exclude occupancy percentages of properties held for sale. Represents physical and economic occupancy.
(2)Occupancy percentages reported are based on office properties owned and stabilized as of January 1, 2020 and still owned and stabilized as of March 31, 2021 and exclude our residential portfolio. See discussion under “Results of Operations” for additional information.
(3)Our residential portfolio consists of our 200-unit residential tower located in Hollywood, California and 608 residential units at our One Paseo mixed-use project in Del Mar, California.
Significant Tenants
The following table sets forth information about our 15 largest tenants based upon annualized base rental revenues, as defined below, as of March 31, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant Name
|
|
Region
|
|
Annualized Base Rental Revenue (1) (2)
|
|
Rentable Square Feet
|
|
Percentage of Total Annualized Base Rental Revenue
|
|
Percentage of Total Rentable Square Feet
|
|
Year(s) of Lease Expiration
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
GM Cruise, LLC
|
|
San Francisco Bay Area
|
|
$
|
36,337
|
|
|
374,618
|
|
|
5.3
|
%
|
|
2.6
|
%
|
|
2031
|
LinkedIn Corporation / Microsoft Corporation
|
|
San Francisco Bay Area
|
|
29,752
|
|
|
663,460
|
|
|
4.3
|
%
|
|
4.6
|
%
|
|
2024 / 2026
|
Adobe Systems, Inc.
|
|
San Francisco Bay Area / Greater Seattle
|
|
27,897
|
|
|
513,111
|
|
|
4.0
|
%
|
|
3.6
|
%
|
|
2027 / 2031
|
salesforce.com, inc.
|
|
San Francisco Bay Area
|
|
24,076
|
|
|
451,763
|
|
|
3.5
|
%
|
|
3.1
|
%
|
|
2031 / 2032
|
DIRECTV, LLC (3)
|
|
Greater Los Angeles
|
|
23,152
|
|
|
684,411
|
|
|
3.4
|
%
|
|
4.8
|
%
|
|
2027
|
Fortune 50 Publicly-Traded Company
|
|
Greater Seattle / San Diego County
|
|
23,060
|
|
|
472,427
|
|
|
3.3
|
%
|
|
3.3
|
%
|
|
2032 / 2033
|
Box, Inc.
|
|
San Francisco Bay Area
|
|
22,441
|
|
|
372,673
|
|
|
3.3
|
%
|
|
2.6
|
%
|
|
2021 / 2028
|
Okta, Inc.
|
|
San Francisco Bay Area
|
|
22,387
|
|
|
273,371
|
|
|
3.2
|
%
|
|
1.9
|
%
|
|
2028
|
Netflix, Inc.
|
|
Greater Los Angeles
|
|
21,959
|
|
|
362,868
|
|
|
3.2
|
%
|
|
2.5
|
%
|
|
2021 / 2032
|
DoorDash, Inc.
|
|
San Francisco Bay Area
|
|
18,650
|
|
|
184,968
|
|
|
2.7
|
%
|
|
1.3
|
%
|
|
2032
|
Synopsys, Inc.
|
|
San Francisco Bay Area
|
|
15,492
|
|
|
342,891
|
|
|
2.2
|
%
|
|
2.4
|
%
|
|
2030
|
Riot Games, Inc.
|
|
Greater Los Angeles
|
|
15,152
|
|
|
243,051
|
|
|
2.2
|
%
|
|
1.7
|
%
|
|
2023 / 2024
|
Amazon.com
|
|
Greater Seattle
|
|
14,760
|
|
|
348,880
|
|
|
2.1
|
%
|
|
2.4
|
%
|
|
2023 / 2030
|
Viacom International, Inc.
|
|
Greater Los Angeles
|
|
13,718
|
|
|
211,343
|
|
|
2.0
|
%
|
|
1.5
|
%
|
|
2028
|
Nektar Therapeutics, Inc.
|
|
San Francisco Bay Area
|
|
12,297
|
|
|
135,350
|
|
|
1.8
|
%
|
|
0.9
|
%
|
|
2030
|
Total
|
|
|
|
$
|
321,130
|
|
|
5,635,185
|
|
|
46.5
|
%
|
|
39.2
|
%
|
|
|
________________________
(1)Annualized base rental revenue includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases, and expense reimbursement revenue. Excludes month-to-month leases and vacant space as of March 31, 2021.
(2)Includes 100% of the annualized base rental revenues of consolidated property partnerships.
(3)On April 5, 2021, DIRECTV, LLC’s successor-in-interest (“DIRECTV”) filed suit in Los Angeles Superior Court against a subsidiary of the Company, claiming that DIRECTV properly exercised its contraction rights as to certain space leased by DIRECTV at the property located at 2250 East Imperial Highway, El Segundo, California. The Company strongly disagrees with the contentions made by DIRECTV and will vigorously defend the litigation.
Results of Operations
Net Operating Income
Management internally evaluates the operating performance and financial results of our stabilized portfolio based on Net Operating Income. We define “Net Operating Income” as consolidated operating revenues (rental income and other property income) less consolidated operating expenses (property expenses, real estate taxes and ground leases).
Net Operating Income is considered by management to be an important and appropriate supplemental performance measure to net income because we believe it helps both investors and management to understand the core operations of our properties excluding corporate and financing-related costs and non-cash depreciation and amortization. Net Operating Income is an unlevered operating performance metric of our properties and allows for a useful comparison of the operating performance of individual assets or groups of assets. This measure thereby provides an operating perspective not immediately apparent from GAAP income from operations or net income. In addition, Net Operating Income is considered by many in the real estate industry to be a useful starting point for determining the value of a real estate asset or group of assets. Other real estate companies may use different methodologies for calculating Net Operating Income, and accordingly, our presentation of Net Operating Income may not be comparable to other real estate companies. Because of the exclusion of the items shown in the reconciliation below, Net Operating Income should only be used as a supplemental measure of our financial performance and not as an alternative to GAAP income from operations or net income.
Management further evaluates Net Operating Income by evaluating the performance from the following property groups:
•Same Store Properties – includes the consolidated results of all of the office properties that were owned and included in our stabilized portfolio for two comparable reporting periods, i.e., owned and included in our stabilized portfolio as of January 1, 2020 and still owned and included in the stabilized portfolio as of March 31, 2021, including our residential tower in Hollywood, California;
•Development Properties – includes the results generated by certain of our in-process development projects, expenses for certain of our future development project and the results generated by the following stabilized development properties:
◦One office development project that was added to the stabilized portfolio in the first quarter of 2020;
◦One retail development project that was added to the stabilized portfolio in the first quarter of 2020;
◦One office development project that was added to the stabilized portfolio in the fourth quarter of 2020;
◦One office development project that was added to the stabilized portfolio in the first quarter of 2021; and
◦608 residential units at our One Paseo mixed-use project in Del Mar, California that were added to the stabilized portfolio in the third quarter of 2020; and
•Disposition Properties– includes the results of one property disposed of in the fourth quarter of 2020 and one property disposed of in the first quarter of 2021.
The following table sets forth certain information regarding the property groups within our stabilized office portfolio as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
# of Buildings
|
|
Rentable
Square Feet
|
Same Store Properties
|
|
111
|
|
13,431,882
|
|
Stabilized Development Properties (1)
|
|
6
|
|
|
617,703
|
|
|
|
|
|
|
Total Stabilized Portfolio
|
|
117
|
|
14,049,585
|
|
________________________
(1)Excludes development projects in the tenant improvement phase, our in-process development projects and future development projects.
Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020
The following table summarizes our Net Operating Income, as defined, for our total portfolio for the three months ended March 31, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Dollar
Change
|
|
Percentage
Change
|
|
2021
|
|
2020
|
|
|
($ in thousands)
|
Reconciliation of Net Income Available to Common Stockholders to Net Operating Income, as defined:
|
|
|
|
|
|
|
|
Net Income Available to Common Stockholders
|
$
|
497,631
|
|
|
$
|
39,817
|
|
|
$
|
457,814
|
|
|
1,149.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling common units of the Operating Partnership
|
4,886
|
|
|
705
|
|
|
4,181
|
|
|
593.0
|
%
|
Net income attributable to noncontrolling interests in consolidated property partnerships
|
4,894
|
|
|
4,896
|
|
|
(2)
|
|
|
—
|
%
|
Net income
|
$
|
507,411
|
|
|
$
|
45,418
|
|
|
$
|
461,993
|
|
|
1,017.2
|
%
|
Unallocated expense (income):
|
|
|
|
|
|
|
|
General and administrative expenses
|
21,985
|
|
|
19,010
|
|
|
2,975
|
|
|
15.6
|
%
|
Leasing costs
|
692
|
|
|
1,456
|
|
|
(764)
|
|
|
(52.5)
|
%
|
Depreciation and amortization
|
75,932
|
|
|
74,370
|
|
|
1,562
|
|
|
2.1
|
%
|
Interest income and other net investment (gain) loss
|
(1,373)
|
|
|
3,128
|
|
|
(4,501)
|
|
|
(143.9)
|
%
|
Interest expense
|
22,334
|
|
|
14,444
|
|
|
7,890
|
|
|
54.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of depreciable operating property
|
(457,288)
|
|
|
—
|
|
|
(457,288)
|
|
|
100.0
|
%
|
Net Operating Income, as defined
|
$
|
169,693
|
|
|
$
|
157,826
|
|
|
$
|
11,867
|
|
|
7.5
|
%
|
The following tables summarize our Net Operating Income, as defined, for our total portfolio for the three months ended March 31, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2021
|
|
2020
|
|
Same Store
|
|
Develop-ment
|
|
|
|
Disposition
|
|
Total
|
|
Same Store
|
|
Develop-ment
|
|
|
|
Disposition
|
|
Total
|
|
(in thousands)
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
$
|
192,769
|
|
|
$
|
21,834
|
|
|
|
|
$
|
20,053
|
|
|
$
|
234,656
|
|
|
$
|
196,270
|
|
|
$
|
3,416
|
|
|
|
|
$
|
18,947
|
|
|
$
|
218,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other property income
|
765
|
|
|
213
|
|
|
|
|
12
|
|
|
990
|
|
|
2,263
|
|
|
149
|
|
|
|
|
283
|
|
|
2,695
|
|
Total
|
193,534
|
|
|
22,047
|
|
|
|
|
20,065
|
|
|
235,646
|
|
|
198,533
|
|
|
3,565
|
|
|
|
|
19,230
|
|
|
221,328
|
|
Property and related expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses
|
33,720
|
|
|
3,090
|
|
|
|
|
2,049
|
|
|
38,859
|
|
|
36,211
|
|
|
1,215
|
|
|
|
|
1,557
|
|
|
38,983
|
|
Real estate taxes
|
18,822
|
|
|
3,694
|
|
|
|
|
2,750
|
|
|
25,266
|
|
|
18,806
|
|
|
908
|
|
|
|
|
2,488
|
|
|
22,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ground leases
|
1,828
|
|
|
—
|
|
|
|
|
—
|
|
|
1,828
|
|
|
2,317
|
|
|
—
|
|
|
|
|
—
|
|
|
2,317
|
|
Total
|
54,370
|
|
|
6,784
|
|
|
|
|
4,799
|
|
|
65,953
|
|
|
57,334
|
|
|
2,123
|
|
|
|
|
4,045
|
|
|
63,502
|
|
Net Operating Income, as defined
|
$
|
139,164
|
|
|
$
|
15,263
|
|
|
|
|
$
|
15,266
|
|
|
$
|
169,693
|
|
|
$
|
141,199
|
|
|
$
|
1,442
|
|
|
|
|
$
|
15,185
|
|
|
$
|
157,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021 as compared to the Three Months Ended March 31, 2020
|
|
Same Store
|
|
Development
|
|
|
|
Disposition
|
|
Total
|
|
Dollar Change
|
|
Percent Change
|
|
Dollar Change
|
|
Percent Change
|
|
|
|
|
|
Dollar Change
|
|
Percent Change
|
|
Dollar Change
|
|
Percent Change
|
|
($ in thousands)
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
$
|
(3,501)
|
|
|
(1.8)
|
%
|
|
$
|
18,418
|
|
|
539.2
|
%
|
|
|
|
|
|
$
|
1,106
|
|
|
5.8
|
%
|
|
$
|
16,023
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other property income
|
(1,498)
|
|
|
(66.2)
|
%
|
|
64
|
|
|
43.0
|
%
|
|
|
|
|
|
(271)
|
|
|
(95.8)
|
%
|
|
(1,705)
|
|
|
(63.3)
|
%
|
Total
|
(4,999)
|
|
|
(2.5)
|
%
|
|
18,482
|
|
|
518.4
|
%
|
|
|
|
|
|
835
|
|
|
4.3
|
%
|
|
14,318
|
|
|
6.5
|
%
|
Property and related expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property expenses
|
(2,491)
|
|
|
(6.9)
|
%
|
|
1,875
|
|
|
154.3
|
%
|
|
|
|
|
|
492
|
|
|
31.6
|
%
|
|
(124)
|
|
|
(0.3)
|
%
|
Real estate taxes
|
16
|
|
|
0.1
|
%
|
|
2,786
|
|
|
306.8
|
%
|
|
|
|
|
|
262
|
|
|
10.5
|
%
|
|
3,064
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ground leases
|
(489)
|
|
|
(21.1)
|
%
|
|
—
|
|
|
—
|
%
|
|
|
|
|
|
—
|
|
|
—
|
%
|
|
(489)
|
|
|
(21.1)
|
%
|
Total
|
(2,964)
|
|
|
(5.2)
|
%
|
|
4,661
|
|
|
219.5
|
%
|
|
|
|
|
|
754
|
|
|
18.6
|
%
|
|
2,451
|
|
|
3.9
|
%
|
Net Operating Income, as defined
|
$
|
(2,035)
|
|
|
(1.4)
|
%
|
|
$
|
13,821
|
|
|
958.5
|
%
|
|
|
|
|
|
$
|
81
|
|
|
0.5
|
%
|
|
$
|
11,867
|
|
|
7.5
|
%
|
Net Operating Income increased $11.9 million, or 7.5%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 resulting from:
•A decrease in Net Operating Income of $2.0 million attributable to the Same Store Properties, which was driven by the following activity:
•A decrease in total operating revenues of $5.0 million primarily due to:
•A net $2.2 million decrease resulting from a $4.5 million decrease due to lower occupancy primarily in the Greater Los Angeles and San Diego County regions partially offset by a $2.3 million increase from new leases and renewals at higher rates primarily in the San Francisco Bay Area and San Diego County regions;
•$7.9 million decrease related to the impact of COVID-19, comprised of:
•$3.7 million decrease due to tenants on a cash basis of revenue recognition and abatements provided to tenants;
•$3.5 million decrease due to lower parking income, of which $2.0 million relates to a reduction in the number of monthly parking spaces rented as a result of COVID-19 stay-at-home orders and $1.5 million relates to lower transient and special event parking income at a number of properties. We expect daily, special event and transient parking to be impacted while restrictions intended to prevent the spread of COVID-19 remain in effect; and
•$0.7 million decrease primarily due to lower reimbursable operating expenses resulting from COVID-19 stay-at-home orders; and
•$0.5 million decrease in the tenant reimbursement component of rental income related to a property tax exemption for one tenant; partially offset by
•$5.6 million increase primarily due to a reduction in revenue during the three months ended March 31, 2020 related to the cumulative impact of transitioning one co-working tenant to a cash basis of revenue recognition; partially offset by
•A decrease in property and related expenses of $3.0 million primarily due to the following:
•$2.5 million decrease in property expenses including janitorial, utilities, parking, and various other recurring expenses as a result of several tenants implementing work from home policies due to the COVID-19 pandemic. We anticipate lower reimbursable property expenses and corresponding tenant recoveries as a result of lower usage of our buildings by tenants while restrictions intended to prevent the spread of COVID-19 are in effect; and
•$0.5 million decrease in ground lease expense due to a reassessment of land value at one ground lease and lower property taxes for one ground lease; offset by
•An increase in Net Operating Income of $13.8 million attributable to the Development Properties; and
•An increase in Net Operating Income of $0.1 million attributable to the Disposition Properties.
Other Expenses and Income
General and Administrative Expenses
General and administrative expenses increased by approximately $3.0 million, or 15.6%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to an increase of $2.4 million related to the market-to-market adjustment for the Company’s deferred compensation plan, which is offset by gains on the underlying marketable securities included in interest income and other net investment gains in the consolidated statements of operations. Additionally, a $1.9 million increase in compensation related expenses primarily attributable to the timing of stock compensation amortization was partially offset by a $1.3 million reduction in professional service fees and general office expenses.
Leasing Costs
Leasing costs decreased by $0.8 million or 52.5%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to changes in personnel and a lower level of leasing activity during the three months ended March 31, 2021.
Depreciation and Amortization
Depreciation and amortization increased $1.6 million, or 2.1%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to the following:
•An increase of $0.4 million attributable to the Same Store Properties; and
•An increase of $5.1 million attributable to the Development Properties; partially offset by
•A decrease of $3.9 million attributable to the Disposition Properties.
Interest Expense
The following table sets forth our gross interest expense, including debt discounts and deferred financing cost amortization, and capitalized interest, including capitalized debt discounts and deferred financing cost amortization, for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2021
|
|
2020
|
|
Dollar
Change
|
|
Percentage
Change
|
|
(in thousands)
|
|
|
|
|
Gross interest expense
|
$
|
39,242
|
|
|
$
|
35,862
|
|
|
$
|
3,380
|
|
|
9.4
|
%
|
Capitalized interest and deferred financing costs
|
(16,908)
|
|
|
(21,418)
|
|
|
4,510
|
|
|
(21.1)
|
%
|
Interest expense
|
$
|
22,334
|
|
|
$
|
14,444
|
|
|
$
|
7,890
|
|
|
54.6
|
%
|
Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased $3.4 million, or 9.4%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 primarily due to an increase in the average outstanding debt balance for the three months ended March 31, 2021.
Capitalized interest and deferred financing costs decreased $4.5 million, or 21.1%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to a decrease in the average aggregate cost basis during the three months ended March 31, 2021. During the three months ended March 31, 2021 and 2020, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately $1.7 billion and $2.2 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, 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 I, Item IA. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2020 for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.
Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships
Net income attributable to noncontrolling interests in consolidated property partnerships remained consistent for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The amounts reported for the three months ended March 31, 2021 and 2020 are comprised of the noncontrolling 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”).
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 three months ended March 31, 2021 were sufficient to cover the Company’s payment of cash dividends to its stockholders. However, there can be no assurance that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distributions to the Company. The unavailability of capital could adversely affect the Operating Partnership’s ability to make distributions to the Company, which would in turn, adversely affect the Company’s ability to pay cash dividends to its stockholders.
The Company is a well-known seasoned issuer and the Company and the Operating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred stock, common stock, depositary shares, warrants and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and the Operating Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. When the Company receives proceeds from the sales of its preferred or common stock, it generally contributes the net proceeds from those sales to the Operating Partnership in exchange for corresponding preferred or common partnership units of the Operating Partnership. The Operating Partnership may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under its unsecured revolving credit facility, to develop new or existing properties, to make acquisitions of properties or portfolios of properties, or for general corporate purposes.
As the sole general partner with control of the Operating Partnership, the Company consolidates the Operating Partnership for financial reporting purposes, and the Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities and the revenues and expenses of the Company and the Operating Partnership are substantially the same on their respective financial statements. The section entitled “Liquidity and Capital Resources of the Operating Partnership” should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a consolidated basis and how the Company is operated as a whole.
Liquidity Highlights
As of March 31, 2021, we had approximately $657.8 million in cash and cash equivalents and approximately $1.0 billion of restricted cash, which may be released from the qualified intermediary at our direction, should we choose not to complete a Section 1031 Exchange, as a result of the operating property disposition completed during the three months ended March 31, 2021. As of the date of this report, we had $1.1 billion available under our recently amended unsecured revolving credit facility and our next material debt maturity occurs in January 2023. We believe that our available liquidity demonstrates a strong balance sheet and makes us well positioned to navigate any additional future uncertainty resulting from the COVID-19 pandemic. In addition, the Company is a well-known seasoned issuer and has historically been able to raise capital on a timely basis in the public markets, as well as the private markets. Any future financings, however, will depend on market conditions for both capital raises and the investment of such proceeds, and there can be no assurances that we will successfully obtain such financings.
Distribution Requirements
The Company is required to distribute 90% of its taxable income (subject to certain adjustments and excluding net capital gains) on an annual basis to maintain qualification as a REIT for federal income tax purposes and is required to pay income tax at regular corporate rates to the extent it distributes less than 100% of its taxable income (including capital gains). As a result of these distribution requirements, the Operating Partnership cannot rely on retained earnings to fund its on-going operations to the same extent as other companies whose parent companies are not REITs. In addition, the Company may be required to use borrowings under the Operating Partnership’s revolving credit facility, if necessary, to meet REIT distribution requirements and maintain its REIT status. The Company may also need to continue to raise capital in the equity markets to fund the Operating Partnership’s working capital needs, as well as potential developments of new or existing properties or acquisitions.
The Company intends to continue to make, but has not committed to make, regular quarterly cash distributions to common stockholders, and through the Operating Partnership, to common unitholders from the Operating Partnership’s cash flow from operating activities. All such distributions are at the discretion of the Board of Directors. As the Company intends to maintain distributions at a level sufficient to meet the REIT distribution requirements and minimize its obligation to pay income and excise taxes, it will continue to evaluate whether the current levels of distribution are appropriate to do so throughout 2021. In addition, in the event the Company is unable to identify and complete the acquisition of suitable replacement properties to effect Section 1031 Exchanges to defer some or all of the taxable gains related to the disposition completed during the three months ended March 31, 2021 for gross proceeds of $1.08 billion or any future dispositions (or in the event additional legislation is enacted that further modifies or repeals laws with respect to Section 1031 Exchanges), the Company may be required to distribute a special dividend to its common stockholders and common unitholders in order to minimize or eliminate income taxes on such gains. The Company considers market factors and its performance in addition to REIT requirements in determining its distribution levels. Amounts accumulated for distribution to stockholders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which is consistent with the Company’s intention to maintain its qualification as a REIT. Such investments may include, for example, obligations of the Government National Mortgage Association, other governmental agency securities, certificates of deposit, and interest-bearing bank deposits.
On February 8, 2021, the Board of Directors declared a regular quarterly cash dividend of $0.50 per share of common stock. The regular quarterly cash dividend is payable to stockholders of record on March 31, 2021 and a corresponding cash distribution of $0.50 per Operating Partnership unit is payable to holders of the Operating Partnership’s common limited partnership interests of record on March 31, 2021, including those owned by the Company. The total cash quarterly dividends and distributions paid on April 14, 2021 were $58.8 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 March 31, 2021, our total debt as a percentage of total market capitalization was 33.8%, which was calculated based on the closing price per share of the Company’s common stock of $65.63 on March 31, 2021 as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares/Units at
March 31, 2021
|
|
Aggregate
Principal
Amount or
$ Value
Equivalent
|
|
% of Total
Market
Capitalization
|
|
($ in thousands)
|
Debt: (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Senior Notes due 2023
|
|
|
$
|
300,000
|
|
|
2.6
|
%
|
Unsecured Senior Notes due 2024
|
|
|
425,000
|
|
|
3.6
|
%
|
Unsecured Senior Notes due 2025
|
|
|
400,000
|
|
|
3.4
|
%
|
Unsecured Senior Notes Series A & B due 2026
|
|
|
250,000
|
|
|
2.1
|
%
|
Unsecured Senior Notes due 2028
|
|
|
400,000
|
|
|
3.4
|
%
|
Unsecured Senior Notes due 2029
|
|
|
400,000
|
|
|
3.4
|
%
|
Unsecured Senior Notes Series A & B due 2027 & 2029
|
|
|
250,000
|
|
|
2.1
|
%
|
Unsecured Senior Notes due 2030
|
|
|
500,000
|
|
|
4.3
|
%
|
Unsecured Senior Notes due 2031
|
|
|
350,000
|
|
|
3.0
|
%
|
Unsecured Senior Notes due 2032
|
|
|
425,000
|
|
|
3.6
|
%
|
Secured debt
|
|
|
253,049
|
|
|
2.3
|
%
|
Total debt
|
|
|
$
|
3,953,049
|
|
|
33.8
|
%
|
Equity and Noncontrolling Interests in the Operating Partnership: (3)
|
|
|
|
|
|
Common limited partnership units outstanding (4)
|
1,150,574
|
|
$
|
75,512
|
|
|
0.7
|
%
|
Shares of common stock outstanding
|
116,450,370
|
|
7,642,638
|
|
|
65.5
|
%
|
Total Equity and Noncontrolling Interests in the Operating Partnership
|
|
|
$
|
7,718,150
|
|
|
66.2
|
%
|
Total Market Capitalization
|
|
|
$
|
11,671,199
|
|
|
100.0
|
%
|
________________________
(1) Represents gross aggregate principal amount due at maturity before the effect of the following at March 31, 2021: $21.7 million of unamortized deferred financing costs on the unsecured senior notes and secured debt and $8.0 million of unamortized discounts for the unsecured senior notes.
(2) As of March 31, 2021, there was no outstanding balance on the unsecured revolving credit facility.
(3) Value based on closing price per share of our common stock of $65.63 as of March 31, 2021.
(4) Includes common units of the Operating Partnership not owned by the Company; does not include noncontrolling interests in consolidated property partnerships.
Liquidity and Capital Resources of the Operating Partnership
In this “Liquidity and Capital Resources of the Operating Partnership” section, the terms “we,” “our,” and “us” refer to the Operating Partnership or the Operating Partnership and the Company together, as the context requires.
General
Our primary liquidity sources and uses are as follows:
Liquidity Sources
•Net cash flow from operations;
•Borrowings under the Operating Partnership’s unsecured revolving credit facility;
•Proceeds from our capital recycling program, including the disposition of assets and the formation of strategic ventures;
•Proceeds from additional secured or unsecured debt financings; and
•Proceeds from public or private issuance of debt, equity or preferred equity securities.
Liquidity Uses
•Development and redevelopment costs;
•Operating property or undeveloped land acquisitions;
•Property operating and corporate expenses;
•Capital expenditures, tenant improvement and leasing costs;
•Debt service and principal payments, including debt maturities;
•Distributions to common security holders;
•Repurchases and redemptions of outstanding common stock of the Company; and
•Outstanding debt repurchases, redemptions and repayments.
General Strategy
Our general strategy is to maintain a conservative balance sheet with a strong credit profile and to maintain a capital structure that allows for financial flexibility and diversification of capital resources. We manage our capital structure to reflect a long-term investment approach and utilize multiple sources of capital to meet our long-term capital requirements. We believe that our current projected liquidity requirements for the next twelve-month period, as set forth above under the caption “—Liquidity Uses,” will be satisfied using a combination of the liquidity sources listed above, although there can be no assurance in this regard. We believe our conservative leverage and staggered debt maturities provide us with financial flexibility and enhance our ability to obtain additional sources of liquidity if necessary, and, therefore, we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities.
Liquidity Sources
Unsecured Revolving Credit Facility
The following table summarizes the balance and terms of our unsecured revolving credit facility as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
(in thousands)
|
Outstanding borrowings
|
$
|
—
|
|
|
$
|
—
|
|
Remaining borrowing capacity
|
750,000
|
|
|
750,000
|
|
Total borrowing capacity (1)
|
$
|
750,000
|
|
|
$
|
750,000
|
|
Interest rate (2)
|
1.11
|
%
|
|
1.14
|
%
|
Facility fee-annual rate (3)
|
0.200%
|
Maturity date
|
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.
(2)Our unsecured revolving credit facility interest rate was calculated based the contractual rate of LIBOR plus 1.000% as of March 31, 2021 and December 31, 2020.
(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 March 31, 2021 and December 31, 2020, $1.7 million and $2.1 million of unamortized deferred financing costs, respectively, which are included in prepaid expenses and other assets, net on our consolidated balance sheets, remained to be amortized through the maturity date of our unsecured revolving credit facility.
We intend to borrow under the unsecured revolving credit facility as necessary for general corporate purposes, to finance development and redevelopment expenditures, to fund potential acquisitions and to potentially repay long-term debt to supplement cash balances given uncertainties and volatility in market conditions.
In April 2021, the Operating Partnership amended and restated the terms of its unsecured revolving credit facility. The amendment and restatement increased the size of the unsecured revolving credit facility from $750.0 million to $1.1 billion, reduced the borrowing costs, extended the maturity date of the unsecured revolving credit facility to July 2025, with two six-month extension options, and added a sustainability-linked pricing component whereby the interest rate is lowered by 0.01% if certain sustainability performance targets are met. The LIBOR replacement provisions of the unsecured revolving credit facility permit the use of rates based on the secured overnight financing rate (“SOFR”) administered by the Federal Reserve Bank of New York. The unsecured revolving credit facility was undrawn at closing.
Capital Recycling Program
As discussed in the section “Factors That May Influence Future Results of Operations - Capital Recycling Program,” we continuously evaluate opportunities for the potential disposition of properties and undeveloped land in our portfolio or the formation of strategic ventures with the intent of recycling the proceeds generated from the disposition of less strategic or core assets into capital used to finance development expenditures, to fund new acquisitions, to repay long-term debt and for other general corporate purposes. As part of this strategy, we attempt to enter into Section 1031 Exchanges, when possible, to defer some or all of the taxable gains on the sales, if any, for federal and state income tax purposes.
In connection with our capital recycling strategy, during the three months ended March 31, 2021, we completed the sale of one operating property in San Francisco, California to an unaffiliated third party for gross proceeds of $1.08 billion, or approximately $1,440 per square foot. As of March 31, 2021, the approximately $1.0 billion of net proceeds related to the disposition were temporarily being held by a qualified intermediary, at our direction, for the purpose of facilitating a Section 1031 Exchange. Any potential future disposition transactions and the timing of any potential future capital recycling transactions will depend on market conditions and other factors, including but not limited to our capital needs, the availability of financing for potential buyers (which has been and may continue to be constrained for some potential buyers due to the ongoing COVID-19 pandemic’s impact on economic and market conditions, including the financial markets), and our ability to defer some or all of the taxable gains on the sales. In addition, we cannot assure you that we will dispose of any additional properties, or that we will be able to identify and complete the acquisitions of suitable replacement properties to effect Section 1031 Exchanges to defer some or all of the taxable gains related to our capital recycling program. In the event we are unable to complete dispositions as planned, we may raise capital through other sources of liquidity including our available unsecured revolving credit facility or the public or private issuance of unsecured debt.
At-The-Market Stock Offering Program
Under our current at-the-market stock offering program, which commenced June 2018, we may offer and sell shares of our common stock with an aggregate gross sales price of up to $500.0 million from time to time in “at-the-market” offerings. In connection with the at-the-market program, the Company may enter into forward equity sale agreements with certain financial institutions acting as forward purchasers whereby, at our discretion, the forward purchasers may borrow and sell shares of our common stock under our at-the-market program. The use of a forward equity sale agreement allows the Company to lock in a share price on the sale of shares of our common stock at the time the agreement is executed but defer settling the forward equity sale agreements and receiving the proceeds from the sale of shares until a later date. The Company did not have any outstanding forward equity sale agreements to be settled at March 31, 2021.
Since commencement of our current at-the-market program, we have completed sales of 3,594,576 shares of common stock through March 31, 2021. As of March 31, 2021, we may offer and sell shares of our common stock having an aggregate gross sales price up to approximately $214.2 million under our current at-the-market program. The Company did not complete any sales of common stock under the program during the three months ended March 31, 2021.
Shelf Registration Statement
The Company is a well-known seasoned issuer and the Company and the Operating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred stock, common stock, depository shares and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and the Operating Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. Capital raising could be more challenging under current market conditions than those prior to COVID-19. 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.
Unsecured and Secured Debt
The aggregate principal amount of the unsecured and secured debt of the Operating Partnership outstanding as of March 31, 2021 was as follows:
|
|
|
|
|
|
|
Aggregate Principal
Amount Outstanding
|
|
(in thousands)
|
|
|
|
|
Unsecured Senior Notes due 2023
|
$
|
300,000
|
|
Unsecured Senior Notes due 2024
|
425,000
|
|
Unsecured Senior Notes due 2025
|
400,000
|
|
Unsecured Senior Notes Series A & B due 2026
|
250,000
|
|
Unsecured Senior Notes due 2028
|
400,000
|
|
Unsecured Senior Notes due 2029
|
400,000
|
|
Unsecured Senior Notes Series A & B due 2027 & 2029
|
250,000
|
|
Unsecured Senior Notes due 2030
|
500,000
|
|
Unsecured Senior Notes due 2031
|
350,000
|
|
Unsecured Senior Notes due 2032
|
425,000
|
|
Secured Debt
|
253,049
|
|
Total Unsecured and Secured Debt (1)
|
3,953,049
|
|
Less: Unamortized Net Discounts and Deferred Financing Costs (2)
|
(29,657)
|
|
Total Debt, Net
|
$
|
3,923,392
|
|
________________________
(1)As of March 31, 2021, there was no outstanding balance on the unsecured revolving credit facility.
(2)Includes $21.7 million of unamortized deferred financing costs on the unsecured senior notes and secured debt and $8.0 million of unamortized discounts for the unsecured senior notes. Excludes unamortized deferred financing costs on the unsecured revolving credit facility, which are included in prepaid expenses and other assets, net on our consolidated balance sheets.
Debt Composition
The composition of the Operating Partnership’s aggregate debt balances between secured and unsecured and fixed-rate and variable-rate debt as of March 31, 2021 and December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Debt (1)
|
|
Weighted Average Interest Rate (1)
|
|
March 31, 2021 (2)
|
|
December 31, 2020
|
|
March 31, 2021 (2)
|
|
December 31, 2020
|
Secured vs. unsecured:
|
|
|
|
|
|
|
|
Unsecured
|
93.6
|
%
|
|
93.6
|
%
|
|
3.8
|
%
|
|
3.8
|
%
|
Secured
|
6.4
|
%
|
|
6.4
|
%
|
|
3.9
|
%
|
|
3.9
|
%
|
Variable-rate vs. fixed-rate:
|
|
|
|
|
|
|
|
Variable-rate
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Fixed-rate (3)
|
100.0
|
%
|
|
100.0
|
%
|
|
3.8
|
%
|
|
3.8
|
%
|
Stated rate (3)
|
|
|
|
|
3.8
|
%
|
|
3.8
|
%
|
GAAP effective rate (4)
|
|
|
|
|
3.8
|
%
|
|
3.8
|
%
|
GAAP effective rate including debt issuance costs
|
|
|
|
|
4.0
|
%
|
|
4.0
|
%
|
________________________
(1) As of the end of the period presented.
(2) As of March 31, 2021, there was no outstanding balance on the unsecured revolving credit facility.
(3) Excludes the impact of the amortization of any debt discounts/premiums and deferred financing costs.
(4) Includes the impact of the amortization of any debt discounts/premiums, excluding deferred financing costs.
Liquidity Uses
Contractual Obligations
Refer to our 2020 Annual Report on Form 10-K for a discussion of our contractual obligations. There have been no material changes, outside of the ordinary course of business, to these contractual obligations during the three months ended March 31, 2021.
Other Liquidity Uses
Development
As of March 31, 2021, we had two development projects under construction. These projects have a total estimated investment of approximately $325.0 million of which we have incurred approximately $270.0 million, net of retention, and committed an additional $55.0 million as of March 31, 2021, of which $20.0 million is currently expected to be spent through the end of 2021. In addition, as of March 31, 2021, we had three development projects in the tenant improvement phase. These projects have a total estimated investment of approximately $1.2 billion, of which we have incurred approximately $920.0 million, net of retention, and committed an additional $265.0 million as of March 31, 2021, of which $126.0 million is currently expected to be spent through the end of 2021. We also had two stabilized development projects with a total estimated investment of $395.0 million, of which $67.0 million remains to be spent as of March 31, 2021, and is expected to be spent through the end of 2021. Furthermore, we currently believe we may spend up to $100.0 million on future development pipeline projects that we expect we may commence construction on throughout the remainder of 2021. The ultimate timing of these expenditures may fluctuate given construction progress and leasing status of the projects, or as a result of events outside our control, such as delays or increased costs as a result of the COVID-19 pandemic. We expect that any material additional development activities will be funded with borrowings under the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program, or strategic venture opportunities.
Debt Maturities
We believe our conservative leverage, staggered debt maturities and recent unsecured line of credit amendment provide us with financial flexibility and enhance our ability to obtain additional sources of liquidity if necessary, and, therefore, we believe we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities. However, we can provide no assurance that we will have access to the public or private debt or equity markets in the future on favorable terms or at all. Our next debt maturity occurs in January 2023.
Potential Future Acquisitions
As discussed in the section “Factors That May Influence Future Results of Operations - Acquisitions,” we continue to evaluate strategic opportunities and remain a disciplined buyer of development and redevelopment opportunities as well as value-add and strategic operating properties, dependent on market conditions and business cycles, among other factors. We focus on growth opportunities primarily in West Coast markets populated by knowledge and creative based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services. Any material acquisitions will be funded with borrowings under the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program, the formation of strategic ventures or through the assumption of existing debt.
We cannot provide assurance that we will enter into any agreements to acquire properties or undeveloped land, or that the potential acquisitions contemplated by any agreements we may enter into in the future will be completed.
Share Repurchases
As of March 31, 2021, 4,935,826 shares remained eligible for repurchase under a share repurchase program approved by the Company's board of directors in 2016. Under this program, repurchases may be made in open market transactions at prevailing prices or through privately negotiated transactions. We may elect to repurchase shares of our common stock under this program in the future depending upon various factors, including market conditions, the trading price of our common stock and our other uses of capital. This program does not have a termination date and repurchases may be discontinued at any time. We intend to fund repurchases, if any, primarily with the proceeds from property dispositions.
Other Potential Future Liquidity Uses
The amounts we incur for tenant improvements and leasing costs depend on leasing activity in each period. Tenant improvements and leasing costs generally fluctuate in any given period depending on factors such as the type and condition of the property, the term of the lease, the type of the lease, the involvement of external leasing agents, and overall market conditions. Capital expenditures may fluctuate in any given period subject to the nature, extent and timing of improvements required to maintain our properties. While the COVID-19 pandemic and restrictions intended to prevent its spread remain in effect, there may be a continued lower level of leasing activity when compared to levels prior to the COVID-19 pandemic.
Factors That May Influence Future Sources of Capital and Liquidity of the Company and the Operating Partnership
We continue to evaluate sources of financing for our business activities, including borrowings under the unsecured revolving credit facility, issuance of public and private equity securities, unsecured debt and fixed-rate secured mortgage financing, proceeds from the disposition of selective assets through our capital recycling program, and the formation of strategic ventures. However, our ability to obtain new financing or refinance existing borrowings on favorable terms could be impacted by various factors, including the state of the macro economy, the state of the credit and equity markets, significant tenant defaults, a decline in the demand for office properties, a decrease in market rental rates or market values of real estate assets in our submarkets, the amount of our future borrowings and the impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on capital and credit markets and our tenants (refer to “Part I, Item IA. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2020 for additional information). These events could result in the following:
•Decreases in our cash flows from operations, which could create further dependence on the unsecured revolving credit facility;
•An increase in the proportion of variable-rate debt, which could increase our sensitivity to interest rate fluctuations in the future; and
•A decrease in the value of our properties, which could have an adverse effect on the Operating Partnership’s ability to incur additional debt, refinance existing debt at competitive rates, or comply with its existing debt obligations.
In addition to the factors noted above, the Operating Partnership’s credit ratings are subject to ongoing evaluation by credit rating agencies and may be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. In the event that the Operating Partnership’s credit ratings are downgraded, we may incur higher borrowing costs and may experience difficulty in obtaining additional financing or refinancing existing indebtedness.
Debt Covenants
The unsecured revolving credit facility, unsecured term loan facility, unsecured term loan, unsecured senior notes, and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Key existing financial covenants and their covenant levels include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Credit Facility and Private Placement Notes (as defined in the applicable Credit Agreements):
|
|
Covenant Level
|
|
Actual Performance
as of March 31, 2021
|
Total debt to total asset value
|
|
less than 60%
|
|
30%
|
Fixed charge coverage ratio
|
|
greater than 1.5x
|
|
2.9x
|
Unsecured debt ratio
|
|
greater than 1.67x
|
|
3.19x
|
Unencumbered asset pool debt service coverage
|
|
greater than 1.75x
|
|
3.60x
|
|
|
|
|
|
Unsecured Senior Notes due 2023, 2024, 2025, 2028, 2029, 2030 and 2032
(as defined in the applicable Indentures):
|
|
|
|
|
Total debt to total asset value
|
|
less than 60%
|
|
33%
|
Interest coverage
|
|
greater than 1.5x
|
|
7.5x
|
Secured debt to total asset value
|
|
less than 40%
|
|
2%
|
Unencumbered asset pool value to unsecured debt
|
|
greater than 150%
|
|
311%
|
The Operating Partnership was in compliance with all of its debt covenants as of March 31, 2021. Our current expectation is that the Operating Partnership will continue to meet the requirements of its debt covenants in both the short and long term. In response to the COVID-19 pandemic, we have completed stress testing of our various financial covenants assuming decreases in rental income and determined that the Operating Partnership has adequate cushion between actual performance and debt covenant levels. However, in the event of an economic slowdown or continued volatility in the credit markets, there is no certainty that the Operating Partnership will be able to continue to satisfy all the covenant requirements.
Consolidated Historical Cash Flow Summary
The following summary discussion of our consolidated historical cash flow is based on the consolidated statements of cash flows in Item 1. “Financial Statements” and is not meant to be an all-inclusive discussion of the changes in our cash flow for the periods presented below. Changes in our cash flow include changes in cash and cash equivalents and restricted cash. Our historical cash flow activity for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2021
|
|
2020
|
|
Dollar
Change
|
|
Percentage
Change
|
|
($ in thousands)
|
|
|
Net cash provided by operating activities
|
$
|
144,152
|
|
|
$
|
122,940
|
|
|
$
|
21,212
|
|
|
17.3
|
%
|
Net cash provided by (used in) investing activities
|
812,250
|
|
|
(211,412)
|
|
|
1,023,662
|
|
|
484.2
|
%
|
Net cash (used in) provided by financing activities
|
(92,954)
|
|
|
790,562
|
|
|
(883,516)
|
|
|
(111.8)
|
%
|
Net increase in cash and cash equivalents
|
$
|
863,448
|
|
|
$
|
702,090
|
|
|
$
|
161,358
|
|
|
23.0
|
%
|
Operating Activities
Our cash flows from operating activities depends on numerous factors including the occupancy level of our portfolio, the rental rates achieved on our leases, the collectability of rent and recoveries from our tenants, the level of operating expenses, the impact of property acquisitions, completed development projects and related financing activities, and other general and administrative costs. Our net cash provided by operating activities increased by $21.2 million, or 17.3%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily as a result of net changes in other operating assets and liabilities related to the timing of expenditures and net cash flow from operations of development properties that became stabilized subsequent to March 31, 2020. See additional information under the caption “—Results of Operations.”
Investing Activities
Our cash flows from investing activities is generally used to fund development and operating property acquisitions, expenditures for development projects, and recurring and nonrecurring capital expenditures for our operating properties, net of proceeds received from dispositions of real estate assets. During the three months ended March 31, 2021 we had net cash provided by investing activities of $812.3 million compared to net cash used in investing activities of $211.4 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to $1.0 billion of net proceeds received and held by a qualified intermediary from one operating property disposition completed during the three months ended March 31, 2021.
Financing Activities
Our cash flows from financing activities is principally impacted by our capital raising activities, net of dividends and distributions paid to common and preferred security holders. During the three months ended March 31, 2021 we had net cash used in financing activities of $93.0 million compared to net cash provided by financing activities of $790.6 million for the three months ended March 31, 2020 primarily as a result of net proceeds from the issuance of common stock generated during the three months ended March 31, 2020.
Non-GAAP Supplemental Financial Measure: Funds From Operations (“FFO”)
We calculate FFO in accordance with the 2018 Restated White Paper on FFO approved by the Board of Governors of NAREIT. The White Paper defines FFO as net income or loss calculated in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains and losses from sales of depreciable real estate and impairment write-downs associated with depreciable real estate, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustment for unconsolidated partnerships and joint ventures. Our calculation of FFO includes the amortization of deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets. We also add back net income attributable to noncontrolling common units of the Operating Partnership because we report FFO attributable to common stockholders and common unitholders.
We believe that FFO is a useful supplemental measure of our operating performance. The exclusion from FFO of gains and losses from the sale of operating real estate assets allows investors and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those operating results between periods. Also, because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons of operating performance to other REITs. However, other REITs may use different methodologies to calculate FFO, and accordingly, our FFO may not be comparable to all other REITs.
Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets, we believe that FFO along with the required GAAP presentations provides a more complete measurement of our performance relative to our competitors and a more appropriate basis on which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide.
However, FFO should not be viewed as an alternative measure of our operating performance because it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs and could materially impact our results from operations.
The following table presents our FFO for the three months ended March 31, 2021 and 2020: