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Share-Based Compensation | 9 Months Ended
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Sep. 30, 2024
Share-Based Payment Arrangement [Abstract] |
Share-Based Compensation | Share-Based Compensation Stockholder Approved Share-Based Incentive Compensation Plan As of September 30, 2024, 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, 2024, approximately 2.6 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 January 21, 2024, John Kilroy retired as the Company's Chief Executive Officer (“CEO”) while remaining Chair and a member of the Board of Directors through May 22, 2024. On January 22, 2024, Angela Aman joined the Company as CEO and a member of the Board of Directors and was granted 101,627 Time-Based Restricted Stock Units (“RSUs”) with a one-year vesting period. On July 30, 2024, the Company’s Board of Directors appointed Jeffrey Kuehling to serve as Executive Vice President, Chief Financial Officer (“CFO”), effective August 19, 2024, and he was granted 20,373 Time-Based RSUs with a 1.4-year vesting period. In connection with Mr. Kuehling’s appointment as CFO, Eliott Trencher no longer serves as the Company’s CFO. Mr. Trencher will continue to serve as the Company’s Executive Vice President, Chief Investment Officer. 2024 Share-Based Compensation Grants In February 2024, the Executive Compensation Committee of the Company’s Board of Directors awarded 501,594 restricted stock units to certain officers of the Company under the 2006 Plan, which included 265,205 RSUs (at the target level of performance) that are subject to time, market, and/or performance-based vesting requirements (the “2024 Performance-Based RSUs”) and 236,389 RSUs that are subject to time-based vesting requirements (the “2024 Time-Based RSUs”). Each RSU granted is entitled to earn dividend equivalents in the form of RSUs that vest upon vesting of the underlying RSU award. 2024 Performance-Based RSU Grant The 2024 Performance-Based RSUs are scheduled to vest at the end of a three year period (consisting of calendar years 2024-2026). A target number of 2024 Performance-Based RSUs were awarded, and the final number of 2024 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 net debt to EBITDA ratio for the three year performance period (the “Net 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 2024 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 2024 Performance-Based RSUs ultimately earned could fluctuate from the target number of 2024 Performance-Based RSUs granted based upon the levels of achievement for the FFO Performance Condition, the Net 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 2024 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 2024 Performance-Based RSUs is recognized on a straight-line basis over the requisite service period for each participant, which is generally the three year service period. During the nine months ended September 30, 2024, we recognized $2.5 million of compensation expense for the 2024 Performance-Based RSUs assuming the 2024 FFO Performance Condition is met at 150% of target level of achievement (175% for our CEO) and the 2024 Net Debt to EBITDA Ratio Performance Condition is met at 100% of the target level of achievement. 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 $2.5 million of compensation expense. Each 2024 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 Net 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 1, 2024
Fair value per share on valuation date (1) | $36.00
Expected share price volatility | 34.0%
Risk-free interest rate | 3.98%
________________________ (1)For one participant, the fair value per share on the valuation date for their 2024 Performance-Based RSUs is $36.43. 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 1, 2024. The fair value of the 2024 Performance-Based RSU grant as of the valuation date noted above, based on a target level of achievement, was $9.5 million. For the three and nine months ended September 30, 2024, 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. 2024 Time-Based RSU Grants The 2024 Time-Based RSUs are scheduled to vest in three equal annual installments beginning on January 5, 2025 through January 5, 2027. Compensation expense for the 2024 Time-Based RSUs is recognized on a straight-line basis over the requisite service period, which is generally the explicit service period. Each 2024 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 2024 Time-Based RSU awards was $8.3 million, which was based on the $35.20 closing share price of the Company’s common stock on the NYSE on the February 1, 2024 grant date. 2023 and 2022 Performance-Based RSUs Consistent with the 2024 Performance-Based RSU grant discussed above, the final number of 2023 and 2022 Performance-Based RSUs that vest will be based upon (1) the FFO Performance Condition that applies to 100% of the Performance-Based RSUs awarded as determined at the end of the first calendar year of the performance measurement period and (2) the Net Debt to EBITDA Ratio Performance Condition that applies to 50% of the award and the Market Condition that applies to the other 50% of the award, both of which are based on the full three-year performance measurement period. The 2023 FFO Performance Condition was achieved at 150% of the target level of achievement. The 2022 FFO Performance Condition was achieved at 150% of the target level of achievement. Compensation cost for the 2023 Performance-Based RSUs for the three and nine months ended September 30, 2024 assumes the 2023 Net Debt to EBITDA Ratio Performance Condition is met at 150% of the target level of achievement. Compensation cost for the 2022 performance-based RSUs for the three and nine months ended September 30, 2024 assumes the 2022 Net Debt to EBITDA Ratio Performance Condition is met at 150% of the target level of achievement. Share-Based Compensation Cost Recorded During the Period The total compensation cost for all share-based compensation programs was $6.7 million and $12.3 million for the three months ended September 30, 2024 and 2023, respectively, and $18.4 million and $33.4 million for the nine months ended September 30, 2024 and 2023, 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 former CEO and former President. Of the total share-based compensation costs, $2.1 million and $5.1 million were capitalized as part of real estate assets for the three and nine months ended September 30, 2024, respectively, and $1.7 million and $5.0 million were capitalized as part of real estate assets for the three and nine months ended September 30, 2023, respectively. As of September 30, 2024, there was approximately $30.3 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, 2024, 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 1.7 years. The remaining compensation cost related to these nonvested RSU awards had been recognized in periods prior to September 30, 2024.

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