Share-Based and Other Compensation

12 Months Ended

Dec. 31, 2021

Share-based Payment Arrangement [Abstract]

Stockholder Approved Share-Based Incentive Compensation Plan

As of December 31, 2021, we maintained one share-based incentive compensation plan, the Kilroy Realty 2006 Incentive Award Plan, as amended (the “2006 Plan”). The Company has a currently effective registration statement registering 10.7 million shares of our common stock for possible issuance under our 2006 Incentive Award Plan. As of December 31, 2021, approximately 1.4 million shares were available for grant under the 2006 Plan. The calculation of shares available for grant is presented after taking into account a reserve for a sufficient number of shares to cover the vesting and payment of 2006 Plan awards that were outstanding on that date, including performance-based vesting awards at (i) levels actually achieved for the performance conditions (as defined below) for which the performance period has been completed and (ii) at maximum levels for the other performance and market conditions (as defined below) for awards still in a performance period.

The Executive Compensation Committee of the Company’s Board of Directors (the “Executive Compensation Committee”) may grant the following share-based awards to eligible individuals, as provided under the 2006 Plan: incentive stock options, nonqualified stock options, restricted stock (nonvested shares), stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units (“RSUs”), profit interest units, performance bonus awards, performance-based awards and other incentive awards. For each award granted under our share-based incentive compensation programs, the Operating Partnership simultaneously issues to the Company a number of common units equal to the number of shares of common stock ultimately paid by the Company in respect of such awards. The Executive Compensation Committee generally grants awards to certain officers of the Company under the 2006 Plan annually in January and/or February of RSUs that are subject to market and/or performance-based vesting requirements and RSUs that are subject to time-based vesting requirements.

2021, 2020 and 2019 Annual Performance-Based RSU Grants

During each of the three years in the period ended December 31, 2021, the Executive Compensation Committee granted awards to certain officers of the Company under the 2006 Plan that are subject to market and/or performance based vesting requirements (“Performance-Based RSUs”). The Performance-Based RSUs are scheduled to vest at the end of a three year period consisting of calendar years 2021-2023, 2020-2022 and 2019-2021 for the awards granted during the years ended December 31, 2021, 2020, and 2019, respectively. A target number of Performance-Based RSUs were awarded, and the final number of Performance-Based RSUs that vest (which may be more or less than the target number) will be based upon (1) during the first calendar year of the respective awards’ three year performance measurement period, the achievement of pre-set FFO per share goals that applies to 100% of the Performance-Based RSUs awarded (the “FFO Performance Condition”) and (2) a performance measure that applies to 50% of the award based upon a measure of the Company’s average debt to EBITDA ratio for the three year performance period (the “Debt to EBITDA Ratio Performance Condition”) and a market measure that applies to the other 50% of the award based upon the relative ranking of the Company’s total stockholder return for the three year performance period compared to the total stockholder returns of an established comparison group of companies over the same period (the “Market Condition”). The Performance-Based RSUs are also subject to a three year service vesting provision (the “service vesting condition”) and are scheduled to cliff vest on the date the final vesting percentage is determined following the end of the three year performance period under the awards. The 2021 FFO Performance Condition was achieved at 175% of target for one participant and 150% of target for all other participants. The 2020 FFO Performance Condition was achieved at 100% of target for all participants. The number of 2021 and 2020 Performance-Based RSUs ultimately earned could fluctuate from the target number of Performance-Based RSUs granted during 2021 and 2020 based upon the levels of achievement for the Debt to EBITDA Ratio Performance Condition, the Market Condition, and the extent to which the service vesting condition is satisfied. The estimate of the number of Performance-Based RSUs earned is evaluated quarterly during the performance period based on our estimate for each of the performance conditions measured against the applicable goals. The 2019 Performance-Based RSUs completed the performance measurement period and based on the combined results of the 2019 FFO Performance Condition, the Debt to EBITDA Ratio Performance Condition and the Market Condition, the 2019 Performance-Based RSUs achieved at 219% of target for one participant and 175%

of target for the other participants. Compensation expense for the Performance-Based RSU grants are recognized on a straight-line basis over the requisite service period for each participant, which is generally the three year service period, except for one participant whose compensation expense is recognized on an accelerated basis due to clauses that render a portion of the vesting conditions to be non-substantive.

Each Performance-Based RSU represents the right to receive one share of our common stock in the future, subject to, and as modified by, the Company’s level of achievement of the applicable performance and market conditions. The fair values for the awards with market conditions were calculated using a Monte Carlo simulation pricing model based on the assumptions in the table below. The determination of the fair value of the 2021, 2020 and 2019 Performance-Based RSUs takes into consideration the likelihood of achievement of the 2021, 2020 and 2019 Market Condition and the share price on the grant date of the 2021, 2020 and 2019 Performance-Based RSUs, respectively, as discussed above. The following table summarizes the estimated number of RSUs earned for the 2021 and 2020 Performance-Based RSUs and the actual number of RSUs earned for the 2019 Performance-Based RSUs and the assumptions utilized in the Monte Carlo simulation pricing models:


	2021		2020		2019
Service vesting period	February 18, 2021 - January, 2024		January 31, 2020 - January, 2023		February 1, 2019 - January, 2022
Target RSUs granted	172,430		154,267		143,396
Estimated RSUs earned (1)	281,333		188,102		220,151
Fair Value Assumptions:
Valuation date	February 18, 2021		January 31, 2020		February 1, 2019
Fair value on valuation date (in millions)	$10.6		$12.9		$10.2
Fair value per share on valuation date (2)	$63.93		$84.54		$72.57
Expected share price volatility	35.0	%	17.0	%	19.0	%
Risk-free interest rate	0.20	%	1.35	%	2.48	%

_____________________

(1)Estimated RSUs earned for the 2021 Performance-Based RSUs are based on the actual achievement of the 2021 FFO Performance Condition and assumes the target level of achievement for the 2021 Debt to EBITDA Ratio Performance Condition and the target level of achievement of the 2021 Market Condition. Estimated RSUs earned for the 2020 Performance-Based RSUs are based on the actual achievement of the 2020 FFO Performance Condition and assume target level achievement of the 2020 Market Condition and maximum level of achievement of the 2020 Debt to EBITDA Ratio Performance Condition. The 2019 Performance-Based RSUs earned are based on actual performance of the 2019 Performance Conditions and the 2019 Market Condition.

(2)For one participant, the fair value per share on the valuation date for their 2021, 2020, and 2019 Performance-Based RSUs is $66.95, $85.52 and $73.18, respectively.

The computation of expected volatility was based on a blend of the historical volatility of our shares of common stock over a period of twice the remaining performance period as of the grant date and implied volatility data based on the observed pricing of six month publicly-traded options on shares of our common stock. The risk-free interest rate was based on the yield curve on zero-coupon U.S. Treasury STRIP securities in effect at February 18, 2021, January 31, 2020, and February 1, 2019.

December 2018 Market-Based RSU Grant

In connection with entering into an amended employment agreement (the “Amended Employment Agreement”), on December 27, 2018, the Executive Compensation Committee awarded John Kilroy, the Chairman of the Board of Directors and Chief Executive Officer of the Company and the Operating Partnership, 266,130 RSUs (at the target level of performance) that are subject to market-based vesting requirements, providing an additional retention incentive during the term of the agreement and enticing Mr. Kilroy to delay his retirement. In addition to Mr. Kilroy’s award, the Executive Compensation Committee awarded 80,647 RSUs (at the target level of performance), subject to market-based vesting requirements, to certain members of management (together totaling 346,777 target RSUs with Mr. Kilroy’s award, the “December 2018 Market-Based RSUs”). Between 0% and 200% of 75% of the total 346,777 target number of December 2018 Market-Based RSUs became eligible to vest based on the Company’s relative total shareholder return (“TSR”) versus a comparative group of companies that comprised what was previously the SNL US REIT Office Index, over the performance period ended December 31, 2021 (consisting of calendar years 2019 through 2021). This 2019-2021 initial TSR market condition was achieved at 0% for all participants. As a result, none of the initial number of RSUs (the “Initial Number of RSUs”) were earned as

of December 31, 2021 for all participants. Therefore, between 0% and 200% of 100% of the Initial Number of RSUs will be eligible to be earned subject to the Company’s relative TSR for the entire four-year performance period (consisting of calendar years 2019 through 2022). The December 2018 Market-Based RSUs are also subject to service vesting requirements through the scheduled vesting dates.

Each December 2018 Market-Based RSU represents the right to receive one share of our common stock in the future, subject to, and as modified by, the Company’s level of achievement of the applicable market conditions. The December 27, 2018 grant date fair value of the December 2018 Market-Based RSUs was $23.8 million. The fair value was calculated using a Monte Carlo simulation pricing model based on the assumptions in the table below. For the years ended December 31, 2020, 2019 and 2018, we recorded compensation expense based upon the $68.66 grant date fair value per share. Compensation expense for the December 2018 Market-Based RSUs is recognized using a graded vesting approach, where 75% of the fair value was recognized on a straight-line basis over the three-year initial performance period through the end of 2021, and the remaining 25% of the fair value will be recognized on a straight-line basis over the four-year final performance period through the end of 2022. The following table summarizes the assumptions utilized in the Monte Carlo simulation pricing models:


						December 2018 Market-Based RSU Award Fair Value Assumptions
Valuation date						December 27, 2018
Fair value per share on valuation date						$68.66
Expected share price volatility						23.0%
Risk-free interest rate						2.4%

The computation of expected volatility was based on a blend of the historical volatility of our shares of common stock over a period of twice the performance period and implied volatility data based on the observed pricing of six month publicly-traded options on shares of our common stock. The risk-free interest rate was based on the yield curve on zero-coupon U.S. Treasury STRIP securities in effect at December 27, 2018.

Summary of Performance and Market-Measure Based RSUs

A summary of our performance and market-measure based RSU activity from January 1, 2021 through December 31, 2021 is presented below:


	Nonvested RSUs			Vested RSUs	Total RSUs
	Amount	Weighted-Average Fair Value Per Share
Outstanding at January 1, 2021	873,709	$	72.06	46,775	920,484
Granted	281,333	57.85		46,430	327,763
Vested	(204,238)	67.55		204,238	—
Settled (1)	—	—		(298,871)	(298,871)
Issuance of dividend equivalents (2)	26,760	66.14		1,431	28,191
Forfeited	(1,100)	68.66		(3)	(1,103)
Outstanding as of December 31, 2021 (3)	976,464	$	68.75	—	976,464

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(1)Represents vested RSUs that were settled in shares of the Company’s common stock. Total shares settled include 141,601 shares that were tendered in accordance with the terms of the 2006 Plan to satisfy minimum statutory tax withholding requirements related to the RSUs settled. We accept the return of RSUs at the current quoted closing share price of the Company’s common stock to satisfy tax obligations.

(2)Represents the issuance of dividend equivalents earned on the underlying RSUs. The dividend equivalents vest based on terms specified under the related RSU award agreement.

(3)Outstanding RSUs as of December 31, 2021 represent the actual achievement of the FFO performance conditions and assumes target levels for the market and other performance conditions. The number of restricted stock units ultimately earned is subject to change based upon actual performance over the three-year vesting period. Dividend equivalents earned will vest along with the underlying award and are also subject to changes based on the number of RSUs ultimately earned for each underlying award.

A summary of our performance and market-measure based RSU activity for the years ended December 31, 2021, 2020 and 2019 is presented below:


	RSUs Granted			RSUs Vested
Years ended December 31,	Non-Vested RSUs Granted (1)	Weighted-Average Fair Value Per Share		Vested RSUs	Total Vest-Date Fair Value (in thousands)
2021	281,333	$	57.85	(252,098)	$	14,299
2020	154,267	85.08		(270,054)	19,471
2019	231,191	71.12		(265,737)	18,703

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(1)Non-vested RSUs granted are based on the actual achievement of the FFO performance conditions and assumes target level achievement for the market and other performance conditions.

Annual 2021, 2020 and 2019 and December 2018 Time-Based RSU Grants

During each of the three years in the period ended December 31, 2021, the Executive Compensation Committee granted awards to certain officers of the Company under the 2006 Plan that are subject to time-based vesting requirements (“Time-Based RSUs”). The annual Time-Based RSUs are scheduled to vest in three equal annual installments over the periods listed below. Additionally, at the time Mr. Kilroy’s Amended Employment Agreement was executed in December 2018, Time-Based RSUs were granted that are scheduled to vest 50% on January 5, 2022 and 50% on January 5, 2023. Compensation expense for the annual 2021, 2020 and 2019 Time-Based RSUs is recognized on a straight-line basis over the requisite service period, which is generally the explicit service period. However, for one participant there is a shorter service period for their 2021 Time-Based RSUs due to clauses that render a portion of the vesting conditions to be non-substantive. Each Time-Based RSU represents the right to receive one share of our common stock in the future, subject to continued employment through the applicable vesting date, unless accelerated upon separation of employment, provided certain conditions are met. The total fair value of the Time-Based RSUs is based on the Company’s closing share price on the NYSE on the respective fair valuation dates as detailed in the table below:


	2021 Time-Based RSU Grant		2020 Time-Based RSU Grant		2019 Time-Based RSU Grant		December 2018 Time-Based RSU Grant
Service vesting period	January & February 2021 - January 5, 2024		January 31, 2020 - January 5, 2023		February 1, 2019 - January 5, 2022		December 27, 2018 - January 5, 2023
RSUs granted	160,277		109,359		144,982		298,384
Fair value on valuation date (in millions)	$	9.1	$	9.0	$	10.1	$	18.5
Weighted average fair value per share	$	57.07	$	82.57	$	69.89	$	62.00
Date of valuation	January 29, February 18, 2021		January 31, 2020		February 1, 2019		December 27, 2018

Summary of Time-Based RSUs

A summary of our time-based RSU activity from January 1, 2021 through December 31, 2021 is presented below:


	Nonvested RSUs			Vested RSUs	Total RSUs
	Amount	Weighted Average Fair Value Per Share
Outstanding at January 1, 2021	494,365	$	67.97	1,096,886	1,591,251
Granted	172,181	57.83		—	172,181
Vested	(118,704)	71.05		118,704	—
Settled (1)	—	—		(486,941)	(486,941)
Issuance of dividend equivalents (2)	15,587	67.18		26,134	41,721

Forfeited	(23,700)	67.99		—	(23,700)
Canceled (3)	—	—		(1,710)	(1,710)
Outstanding as of December 31, 2021	539,729	$	64.03	753,073	1,292,802

____________________

(1)Represents vested RSUs that were settled in shares of the Company’s common stock. Total shares settled include 219,683 shares that were tendered in accordance with the terms of the 2006 Plan to satisfy minimum statutory tax withholding requirements related to the RSUs settled. We accept the return of RSUs at the current quoted closing share price of the Company’s common stock to satisfy tax obligations.

(2)Represents the issuance of dividend equivalents earned on the underlying RSUs. The dividend equivalents vest based on terms specified under the related RSU award agreement.

(3)For shares vested but not yet settled, we accept the return of RSUs at the current quoted closing share price of the Company’s common stock to satisfy minimum statutory tax-withholding requirements related to either the settlement or vesting of RSUs in accordance with the terms of the 2006 Plan.

A summary of our time-based RSU activity for the years ended December 31, 2021, 2020 and 2019 is presented below:


	RSUs Granted			RSUs Vested
Year ended December 31,	Non-Vested RSUs Issued	Weighted-Average Grant Date Fair Value Per Share		Vested RSUs	Total Vest-Date Fair Value (1) (in thousands)
2021	172,181	$	57.83	(144,838)	$	8,605
2020	120,769	79.74		(208,608)	15,066
2019	153,005	70.31		(182,219)	12,227

____________________

(1) Total fair value of RSUs vested was calculated based on the quoted closing share price of the Company’s common stock on the NYSE on the day of vesting. Excludes the issuance of dividend equivalents earned on the underlying RSUs. The dividend equivalents vest based on terms specified under the related RSU award agreement.

Share-Based Compensation Cost Recorded During the Period

The total compensation cost for all share-based compensation programs was $41.0 million, $37.6 million and $32.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. Share-based compensation costs for the year ended December 31, 2020 include $4.5 million of accelerated share-based compensation costs related to severance packages, including for the departure of an executive officer. Of the total share-based compensation costs, $7.2 million, $7.4 million and $5.8 million was capitalized as part of real estate assets for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, there was approximately $23.6 million of total unrecognized compensation cost related to nonvested incentive awards granted under share-based compensation arrangements that is expected to be recognized over a weighted-average period of 1.6 years. The remaining compensation cost related to these nonvested incentive awards had been recognized in periods prior to December 31, 2021. The $23.6 million of unrecognized compensation costs does not reflect the future compensation cost related to share-based awards that were granted subsequent to December 31, 2021.

Severance Compensation

For the year ended December 31, 2020, compensation costs included in general and administrative expenses on our consolidated statements of operations include $14.1 million of cash severance costs related to the departure of an executive officer, in addition to the accelerated share-based compensation costs noted in the paragraph above.