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Kilroy Realty Corporation Reports Second Quarter Financial Results

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LOS ANGELES--(BUSINESS WIRE)--July 28, 2008--Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its second quarter ended June 30, 2008 with net income available for common stockholders of $5.6 million, or $0.17 per share, compared to $13.1 million, or $0.40 per share, in the second quarter of 2007. Net income for the second quarter of 2007 included $4.8 million related to gains from property dispositions. Revenues from continuing operations in the second quarter of 2008 totaled $69.6 million, up from $62.2 million in the prior year's second quarter. Funds from operations (FFO) for the period totaled $27.1 million, or $0.78 per share, compared to $26.7 million, or $0.77 per share, in the year-earlier period.

For the first six months of 2008, KRC reported net income available to common stockholders of $15.4 million, or $0.48 per share, compared to $29.6 million, or $0.91 per share, in the first half of 2007. Net income for the six months ended June 30, 2007 included $13.5 million related to gains from property dispositions. Revenues from continuing operations in the six-month period totaled $140.4 million, up from $123.6 million in the same period of 2007. FFO in the first half of 2008 totaled $57.3 million, or $1.65 per share, compared to $52.7 million, or $1.52 per share, in first half of 2007.

Included in the results for the six months ended June 30, 2008 is an increase in the company's provision for bad debts of approximately $3.1 million, or $0.09 per share, related to the company's lease with Favrille, Inc. ("Favrille"). In the second quarter, Favrille notified the company that it will cease its business operations and of its intent to not pay any future rental payments under its lease beyond June 2008. In July 2008, the company and Favrille entered into an agreement to terminate the lease effective August 31, 2008 and the company drew $3.6 million under a letter of credit that was held as credit support under the terms of the lease. The company also held a $0.3 million cash security deposit related to the lease.

All per-share amounts in this report are presented on a diluted basis.

"KRC made solid leasing progress during the quarter although the commercial real estate markets continue to be impacted by persistent economic uncertainty," said John B. Kilroy, Jr., the company's president and chief executive officer. "With the remainder of 2008 likely to bring more of the same, we remain diligently focused on leasing, delivering our under-construction properties, and preserving our strong financial position."

KRC is currently developing four new office buildings located in high-growth submarkets of San Diego County. The four properties encompass approximately 400,000 square feet of rentable space and represent a total estimated investment of approximately $160 million, of which $127 million has been spent to date. They are 73% leased.

The company also has two redevelopment projects underway totaling just under 211,000 square feet of space. These two projects represent a total estimated incremental investment of approximately $27 million, of which $20 million has been spent to date. They are 60% leased or committed.

Updated earnings guidance for 2008 will be discussed by KRC management during the company's July 29, 2008 earnings conference call. The call will begin at 11:00 a.m. Pacific time and last approximately one hour. Those interested in listening via the Internet can access the conference call at www.kilroyrealty.com. Please go to the website 15 minutes before the call and register. It may be necessary to download audio software to hear the conference call. Those interested in listening via telephone can access the conference call at 888-713-4209, reservation #81042415. A replay of the conference call will be available via phone through August 12, 2008 at 888-286-8010, reservation #85680246, or via the Internet at the company's website.

Some of the information presented in this release is forward looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995. Although Kilroy Realty Corporation believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, there can be no assurance that its expectations will be achieved. Certain factors that could cause actual results to differ materially from Kilroy Realty's expectations are set forth as risk factors in the company's Securities and Exchange Commission reports and filings. Included among these factors are changes in general economic conditions, including changes in the economic conditions affecting industries in which its principal tenants compete; Kilroy Realty's ability to timely lease or re-lease space at current or anticipated rents; changes in interest rates; changes in operating costs, including utility costs; future demand for its debt and equity securities; its ability to refinance its debt on reasonable terms at maturity; its ability to complete current and future development projects on schedule and on budget; the demand for office space in markets in which Kilroy Realty has a presence; and risks detailed from time to time in the company's SEC reports, including quarterly reports on Form 10-Q, current reports on Form 8-K and annual reports on Form 10-K. Many of these factors are beyond Kilroy Realty's ability to control or predict. Forward-looking statements are not guarantees of performance. For forward-looking statements herein, Kilroy Realty claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Kilroy Realty Corporation, a member of the S&P Small Cap 600 Index, is a Southern California-based real estate investment trust active in the office and industrial property sectors. For over 60 years, the company has owned, developed, acquired and managed real estate assets primarily in the coastal regions of Los Angeles, Orange and San Diego counties. Kilroy Realty currently has an in-process development and redevelopment pipeline of approximately 600,000 square feet. At June 30, 2008, the company owned 8.1 million rentable square feet of commercial office space and 3.9 million rentable square feet of industrial space. More information is available at www.kilroyrealty.com.



                      KILROY REALTY CORPORATION
----------------------------------------------------------------------
                      SUMMARY QUARTERLY RESULTS
----------------------------------------------------------------------
           (unaudited, in thousands, except per share data)


                       Three Months Three Months Six Months Six Months
                          Ended        Ended       Ended      Ended
                        June 30,     June 30,    June 30,   June 30,
                           2008         2007        2008       2007
                       ------------ ------------ ---------- ----------

Revenues from
 continuing
 operations                 $69,629      $62,180  $140,431   $123,614

Revenues including
 discontinued
 operations                 $69,828      $64,630  $140,630   $128,709

Net income available
 for common
 stockholders(1)            $ 5,581      $13,090  $ 15,445   $ 29,572

Weighted average
 common shares
 outstanding - basic         32,351       32,371    32,404     32,360
Weighted average
 common shares
 outstanding -
 diluted                     32,510       32,486    32,532     32,486

Net income per share
 of common stock -
 basic                      $  0.17      $  0.40  $   0.48   $   0.91
Net income per share
 of common stock -
 diluted                    $  0.17      $  0.40  $   0.48   $   0.91

Funds From
 Operations(2), (3)         $27,061      $26,674  $ 57,260   $ 52,698

Weighted average
 common shares/units
 outstanding -
 basic(4)                    34,540       34,619    34,593     34,609
Weighted average
 common shares/units
 outstanding -
 diluted(4)                  34,699       34,734    34,721     34,735

Funds From Operations
 per common
 share/unit -
 basic(4)                   $  0.78      $  0.77  $   1.66   $   1.52
Funds From Operations
 per common
 share/unit -
 diluted(4)                 $  0.78      $  0.77  $   1.65   $   1.52

Common shares
 outstanding at end
 of period                                          32,652     32,707
Common partnership
 units outstanding at
 end of period                                       2,188      2,248
                                                 ---------- ----------
   Total common
    shares and units
    outstanding at
    end of period                                   34,840     34,955


                                                 June 30,   June 30,
                                                    2008       2007
                                                 ---------- ----------
Stabilized portfolio
 occupancy rates:
   Office                                             93.8%      93.6%
   Industrial                                         90.7%      91.0%
                                                 ---------- ----------
   Weighted average
    total                                             92.8%      92.7%

  Los Angeles                                         96.2%      94.2%
  Orange County                                       89.0%      91.0%
  San Diego                                           93.8%      93.9%
  Other                                               93.8%      90.5%
                                                 ---------- ----------
   Weighted average
    total                                             92.8%      92.7%

Total square feet of
 stabilized
 properties owned at
 end of period:
   Office                                            8,089      7,835
   Industrial                                        3,876      3,870
                                                 ---------- ----------
   Total                                            11,965     11,705


(1) Net income after minority interests.

(2) Reconciliation of net income to funds from operations and
 management statement on funds from operations are included after the
 Consolidated Statements of Operations.

(3) Reported amounts are attributable to common stockholders and
 common unitholders.

(4) Calculated based on weighted average shares outstanding assuming
 conversion of all common limited partnership units outstanding.

        KILROY REALTY CORPORATION CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------
                            (in thousands)



                                               June 30,   December 31,
                                                 2008         2007
                                              ----------- ------------
                                              (unaudited)
 ASSETS
 --------------------------------------
 REAL ESTATE ASSETS:
   Land and improvements                        $324,779     $324,779
   Buildings and improvements                  1,739,874    1,719,700
   Undeveloped land and construction in
    progress                                     365,106      324,077
                                              ----------- ------------
   Total real estate held for investment       2,429,759    2,368,556
  Accumulated depreciation and
   amortization                                 (497,697)    (463,932)
                                              ----------- ------------
   Total real estate assets, net               1,932,062    1,904,624

 Cash and cash equivalents                         4,367       11,732
 Restricted cash                                     756          546
 Marketable securities                             2,406          707
 Current receivables, net                          3,843        4,891
 Deferred rent receivables, net                   66,554       67,283
 Notes receivable                                 10,904       10,970
 Deferred leasing costs and acquisition
  related intangibles, net                        52,282       54,418
 Deferred financing costs, net                     7,341        8,492
 Prepaid expenses and other assets, net            7,210        5,057
                                              ----------- ------------

   TOTAL ASSETS                               $2,087,725   $2,068,720
                                              =========== ============



 LIABILITIES & STOCKHOLDERS' EQUITY
 -----------------------------------------
 LIABILITIES:
  Secured debt                                  $392,511     $395,912
  Exchangeable senior notes, net                 456,550      456,090
  Unsecured senior notes                         144,000      144,000
  Unsecured line of credit                       159,000      111,000
  Accounts payable, accrued expenses and
   other liabilities                              44,893       58,249
  Accrued distributions                           21,422       20,610
  Deferred revenue and acquisition-related
   liabilities                                    75,421       59,187
  Rents received in advance and tenant
   security deposits                              20,386       18,433
                                              ----------- ------------
   Total liabilities                           1,314,183    1,263,481
                                              ----------- ------------

 MINORITY INTERESTS:
  7.45% Series A Cumulative Redeemable
   Preferred units of the Operating
   Partnership                                    73,638       73,638
  Common units of the Operating
   Partnership                                    36,608       38,309
                                              ----------- ------------
   Total minority interests                      110,246      111,947
                                              ----------- ------------


 STOCKHOLDERS' EQUITY:
  7.80% Series E Cumulative Redeemable
   Preferred stock                                38,425       38,425
  7.50% Series F Cumulative Redeemable
   Preferred stock                                83,157       83,157
  Common stock                                       327          328
  Additional paid-in capital                     651,386      658,894
  Distributions in excess of earnings           (109,999)     (87,512)
                                              ----------- ------------
   Total stockholders' equity                    663,296      693,292
                                              ----------- ------------

   TOTAL LIABILITIES & STOCKHOLDERS' EQUITY   $2,087,725   $2,068,720
                                              =========== ============
   KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------
           (unaudited, in thousands, except per share data)

                       Three Months Three Months Six Months Six Months
                          Ended        Ended       Ended      Ended
                        June 30,     June 30,    June 30,   June 30,
                           2008         2007        2008       2007
                       ------------ ------------ ---------- ----------

REVENUES:
 Rental income             $61,486      $54,518   $123,791   $108,951
 Tenant reimbursements       7,686        5,712     15,879     11,610
 Other property income         457        1,950        761      3,053
                       ------------ ------------ ---------- ----------
   Total revenues           69,629       62,180    140,431    123,614
                       ------------ ------------ ---------- ----------

EXPENSES:
 Property expenses          11,873       10,604     23,361     20,570
 Real estate taxes           4,843        4,668     10,322      9,220
 Provision for bad
  debts                      3,204          (26)     3,659       (199)
 Ground leases                 400          389        795        792
 General and
  administrative
  expenses                   9,187        9,460     18,423     18,508
 Interest expense            9,448        8,072     19,161     17,728
 Depreciation and
  amortization              21,536       17,378     41,402     34,223
                       ------------ ------------ ---------- ----------
   Total expenses           60,491       50,545    117,123    100,842
                       ------------ ------------ ---------- ----------

OTHER INCOME:
 Interest and other
  investment income            184          371        341        990
                       ------------ ------------ ---------- ----------

Income from continuing
 operations before
 minority interests          9,322       12,006     23,649     23,762

Minority interests:
 Distributions on
  Cumulative Redeemable
  Preferred units           (1,397)      (1,397)    (2,794)    (2,794)
 Minority interest in
  earnings of Operating
  Partnership
  attributable to
  continuing operations       (348)        (531)    (1,012)    (1,044)
                       ------------ ------------ ---------- ----------
   Total minority
    interests               (1,745)      (1,928)    (3,806)    (3,838)
                       ------------ ------------ ---------- ----------

Income from continuing
 operations                  7,577       10,078     19,843     19,924

Discontinued
 operations:
 Revenues from
  discontinued
  operations                   199        2,450        199      5,095
 Expenses from
  discontinued
  operations                             (1,509)               (3,112)
 Net gain on
  dispositions of
  discontinued
  operations                   234        4,848        234     13,474
 Minority interest in
  earnings of Operating
  Partnership
  attributable to
  discontinued
  operations                   (27)        (375)       (27)    (1,005)
                       ------------ ------------ ---------- ----------
   Total income from
    discontinued
    operations                 406        5,414        406     14,452
                       ------------ ------------ ---------- ----------

Net income                   7,983       15,492     20,249     34,376

Preferred dividends         (2,402)      (2,402)    (4,804)    (4,804)
                       ------------ ------------ ---------- ----------

Net income available
 for common
 stockholders              $ 5,581      $13,090   $ 15,445   $ 29,572
                       ============ ============ ========== ==========

Weighted average shares
 outstanding - basic        32,351       32,371     32,404     32,360
Weighted average shares
 outstanding - diluted      32,510       32,486     32,532     32,486

Net income per common
 share - basic             $  0.17      $  0.40   $   0.48   $   0.91
                       ============ ============ ========== ==========
Net income per common
 share - diluted           $  0.17      $  0.40   $   0.48   $   0.91
                       ============ ============ ========== ==========


           KILROY REALTY CORPORATION FUNDS FROM OPERATIONS
----------------------------------------------------------------------
           (unaudited, in thousands, except per share data)

                                Three     Three      Six       Six
                                Months    Months    Months     Months
                                Ended     Ended     Ended      Ended
                               June 30,  June 30,  June 30,  June 30,
                                 2008      2007      2008       2007
                               --------  --------  --------  ---------

Net income available for
 common stockholders           $ 5,581   $13,090   $15,445   $ 29,572

  Adjustments:
    Minority interest in
     earnings of Operating
     Partnership                   375       906     1,039      2,049
    Depreciation and
     amortization of real
     estate assets              21,339    17,526    41,010     34,551
    Net gain on dispositions
     of discontinued
     operations                   (234)   (4,848)     (234)   (13,474)
                               --------  --------  --------  ---------
Funds From Operations(1), (2)  $27,061   $26,674   $57,260   $ 52,698
                               ========  ========  ========  =========

Weighted average common
 shares/units outstanding -
 basic                          34,540    34,619    34,593     34,609
Weighted average common
 shares/units outstanding -
 diluted                        34,699    34,734    34,721     34,735

Funds From Operations per
 common share/unit - basic     $  0.78   $  0.77   $  1.66   $   1.52
                               ========  ========  ========  =========
Funds From Operations per
 common share/unit - diluted   $  0.78   $  0.77   $  1.65   $   1.52
                               ========  ========  ========  =========


(1) The Company calculates FFO in accordance with the 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, and gains and
 losses from sales of depreciable operating property, 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.

Management believes that FFO is a useful supplemental measure of the
 Company's 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, the Company's FFO may not be
 comparable to all other REITs.

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 to be insufficient by themselves. Because
 FFO excludes depreciation and amortization of real estate assets,
 Management believes that FFO along with the required GAAP
 presentations provides a more complete measurement of the Company's
 performance relative to its 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 the
 Company's operating performance since 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 the Company's properties, which are significant
 economic costs and could materially impact the Company's results from
 operations.

(2) Reported amounts are attributable to common stockholders and
 common unitholders.

CONTACT: Kilroy Realty Corporation
Richard E. Moran Jr.
Executive Vice President
and Chief Financial Officer
310-481-8483
or
Tyler H. Rose
Senior Vice President
and Treasurer
310-481-8484

SOURCE: Kilroy Realty Corporation