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Share-Based Compensation | 9 Months Ended
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Sep. 30, 2023
Share-Based Payment Arrangement [Abstract] |
Share-Based Compensation | Share-Based Compensation Stockholder Approved Share-Based Incentive Compensation Plan As of September 30, 2023, 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 12.6 million shares of our common stock for possible issuance under our 2006 Plan. As of September 30, 2023, approximately 2.9 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. Executive Transitions On March 30, 2023, our Chief Executive Officer (“CEO”) announced his retirement effective December 31, 2023. Additionally, as previously disclosed, the Company and our former President entered into a separation agreement in 2022 under which he continued to serve as an officer of the Company until the scheduled expiration date of his employment agreement on March 1, 2023. For our CEO, the vesting of all unvested share-based compensation awards is being accelerated through December 31, 2023 and the final number of any restricted stock units (“RSUs”) subject to market and/or performance-based vesting requirements that vest will be based upon a shortened performance period ending on December 31, 2023. Share-based compensation expense for these awards will be recognized based on our current assumption of the achievement of market and/or performance-based vesting requirements for the shortened performance periods. For our former President, the vesting of all unvested share-based compensation awards was accelerated through March 1, 2023 and the final number of RSUs earned that were subject to market and/or performance-based vesting requirements was based upon the actual achievement of the market and/or performance conditions for a shortened performance period ended on March 1, 2023. For the three and nine months ended September 30, 2023, we recognized $8.0 million and $21.2 million, respectively, of stock compensation expense related to the accelerated vesting of awards for our CEO and former President. 2023 Share-Based Compensation Grants In February 2023, the Executive Compensation Committee of the Company’s Board of Directors awarded 517,066 restricted stock units to certain officers of the Company under the 2006 Plan, which included 300,007 RSUs (at the target level of performance) that are subject to market and/or performance-based vesting requirements (the “2023 Performance-Based RSUs”) and 217,059 RSUs that are subject to time-based vesting requirements (the “2023 Time-Based RSUs”). 2023 Performance-Based RSU Grant The 2023 Performance-Based RSUs are scheduled to vest at the end of a three year period (consisting of calendar years 2023-2025), except for our CEO, whose RSUs are scheduled to vest on his announced retirement date of December, 31, 2023. A target number of 2023 Performance-Based RSUs were awarded, and the final number of 2023 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 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 2023 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 number of 2023 Performance-Based RSUs ultimately earned could fluctuate from the target number of 2023 Performance-Based RSUs granted based upon the levels of achievement for the FFO Performance Condition, 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 2023 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. Compensation expense for the 2023 Performance-Based RSU grant is recognized on a straight-line basis over the requisite service period for each participant, which is generally the three year service period, except for our CEO, whose compensation expense is recognized on an accelerated basis through his announced retirement date of December 31, 2023. During the nine months ended September 30, 2023, we recognized $10.2 million of compensation expense for the 2023 Performance-Based RSU grant assuming the 2023 FFO Performance Condition is met at 150% of the target level of achievement (175% for our CEO) and the 2023 Debt to EBITDA Ratio Performance Condition is met at 100% of the target level of achievement (175% for our CEO). In the event we achieve a lower level of performance or fail to meet the FFO performance condition, we would reverse a portion or all of the $10.2 million of compensation expense. Each 2023 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 value of the portion of the award subject to the Debt to EBITDA Ratio Performance Condition was calculated using the closing price of the Company’s common stock on the valuation date noted below. The fair value of the portion of the award subject to the Market Condition was calculated using a Monte Carlo simulation pricing model based on the assumptions in the table below, which resulted in the following grant date fair value per share.
| Fair Value Assumptions
Valuation date | February 6, 2023
Fair value per share on valuation date (1) | $40.10
Expected share price volatility | 35.0%
Risk-free interest rate | 4.12%
________________________ (1)For one participant, the fair value per share on the valuation date for their 2023 Performance-Based RSUs is $40.43. 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 6, 2023. The fair value of the 2023 Performance-Based RSU grant as of the valuation date noted above, based on a target level of achievement, was $12.0 million. For the three and nine months ended September 30, 2023, we recorded compensation expense based upon the grant date fair value per share for each component multiplied by the estimated number of RSUs to be earned. 2023 Time-Based RSU Grant The 2023 Time-Based RSUs are scheduled to vest in three equal annual installments beginning on January 5, 2024 through January 5, 2026. Compensation expense for the 2023 Time-Based RSUs is recognized on a straight-line basis over the requisite service period, which is generally the explicit service period except for our CEO, whose compensation expense is recognized on an accelerated basis through his announced retirement date of December 31, 2023. Each 2023 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 grant date fair value of the 2023 Time-Based RSU awards was $8.6 million, which was based on the $39.65 closing share price of the Company’s common stock on the NYSE on the February 6, 2023 grant date. 2022 and 2021 Performance-Based RSUs Compensation cost for the 2022 performance-based RSUs for the three and nine months ended September 30, 2023 assumes the 2022 Debt to EBITDA Ratio Performance Condition is met at 150% of the target level of achievement (175% for our CEO). Compensation cost for the 2021 performance-based RSUs for the three and nine months ended September 30, 2023 assumes the 2021 Debt to EBITDA Ratio Performance Condition is met at 150% of the target level of achievement (175% for our CEO). Share-Based Compensation Cost Recorded During the Period The total compensation cost for all share-based compensation programs was $12.3 million and $10.3 million for the three months ended September 30, 2023 and 2022, respectively, and $33.4 million and $26.5 million for the nine months ended September 30, 2023 and 2022, respectively. Share-based compensation costs for the three and nine months ended September 30, 2023 include $8.0 million and $21.2 million, respectively, of accelerated share-based compensation costs for our CEO and former President as discussed above. Of the total share-based compensation costs, $1.7 million and $5.0 million was capitalized as part of the real estate assets for the three and nine months ended September 30, 2023, respectively, and $1.9 million and $5.0 million was capitalized as part of the real estate assets for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, there was approximately $28.5 million of total unrecognized compensation cost related to nonvested RSUs granted under share-based compensation arrangements. Such amount is based in part upon the estimated future outcome of the performance metrics as of September 30, 2023, and the actual compensation cost ultimately recognized could increase or decrease from this estimate based upon actual performance results. These costs are expected to be recognized over a weighted-average period of 1.4 years, which includes the shortened vesting period for our CEO due to his announced retirement on December 31, 2023. The remaining compensation cost related to these nonvested RSU awards had been recognized in periods prior to September 30, 2023.

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