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Kilroy Realty Corporation Reports Third Quarter Financial Results

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LOS ANGELES--(BUSINESS WIRE)--Oct. 27, 2008--Kilroy Realty Corporation (NYSE:KRC) today reported financial results for its third quarter ended September 30, 2008 with net income available for common stockholders of $13.2 million, or $0.40 per share, compared to $9.0 million, or $0.28 per share, in the third quarter of 2007. Revenues from continuing operations in the third quarter totaled $77.1 million, up from $65.1 million in the prior year's third quarter. Funds from operations (FFO) for the period totaled $34.5 million, or $1.00 per share, compared to $28.2 million, or $0.81 per share, in the year-earlier period.

For the first nine months of 2008, KRC reported net income available for common stockholders of $28.6 million, or $0.88 per share, compared to $38.6 million, or $1.19 per share, in the first nine months of 2007. Revenues from continuing operations in the nine-month period totaled $217.5 million, up from $188.7 million in the same period of 2007. FFO in the first nine months of 2008 totaled $91.8 million, or $2.64 per share, compared to $80.9 million, or $2.33 per share, in first nine months of 2007.

Included in the results for the nine months ended September 30, 2008 is an approximate $4.9 million net lease termination fee related to an early termination agreement the company entered into with Intuit Inc. ("Intuit"). The lease that was terminated encompassed approximately 90,000 rentable square feet of office space. Intuit had an option to early terminate this lease in 2010 and the lease was scheduled to expire in 2014. Also included in the results for the nine months ended September 30, 2008 is approximately $2.7 million of non-cash rental revenue related to the termination of the company's lease with Favrille, Inc. ("Favrille"). In July 2008, the company and Favrille entered into an agreement to terminate this lease effective August 31, 2008. The non-cash rental revenue recognized for the quarter primarily represents the unamortized deferred revenue balance related to tenant-funded tenant improvements for this lease at the lease termination date. All per-share amounts in this report are presented on a diluted basis.

"KRC reported solid financial results for the third quarter, despite the uncertainty about the direction of the economy and the turmoil in global credit markets," said John B. Kilroy, Jr., the company's president and chief executive officer. "We remain focused on the fundamentals of our business, including leasing, delivering our in-process development, and maintaining a strong, flexible financial position."

During the third quarter, KRC added two properties, which are 100% leased, to its stabilized portfolio, a newly developed 146,000 square-foot office building located along the I-15 corridor in San Diego County and a newly redeveloped 107,000 square-foot office building in El Segundo. The two properties represent a total estimated new investment of approximately $66 million.

KRC has three additional properties currently under development, all located in submarkets of San Diego County. The three properties encompass approximately 254,000 square feet of rentable space and represent a total estimated investment of approximately $111 million, of which $90 million has been spent to date. They are 58% leased.

The company also has one redevelopment project underway totaling approximately 104,000 square feet. This project has a total estimated incremental investment of approximately $10 million and is 19% leased.

Updated earnings guidance for 2008 will be discussed by KRC management during the company's October 28, 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) 679-8035, reservation #84755372. A replay of the conference call will be available via phone through November 11, 2008 at (888) 286-8010, reservation #62289237, 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 358,000 square feet. At September 30, 2008, the company owned 8.3 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     Three      Nine      Nine
                                 Months    Months    Months    Months
                                 Ended     Ended     Ended     Ended
                               September September September September
                                30, 2008  30, 2007  30, 2008  30, 2007
                               --------- --------- --------- ---------

 Revenues from continuing
  operations                     $77,100   $65,117 $217,531  $188,731

 Revenues including
  discontinued operations        $77,100   $67,921 $217,730  $196,628

 Net income available for
  common stockholders (1)        $13,176   $ 9,028 $ 28,621  $ 38,601

 Weighted average common
  shares outstanding - basic      32,339    32,373   32,382    32,364
 Weighted average common
  shares outstanding - diluted    32,535    32,502   32,533    32,491

 Net income per share of
  common stock - basic           $  0.41   $  0.28 $   0.88  $   1.19
 Net income per share of
  common stock - diluted         $  0.40   $  0.28 $   0.88  $   1.19

 Funds From Operations (2),
  (3)                            $34,510   $28,212 $ 91,770  $ 80,911

 Weighted average common
  shares/units outstanding -
  basic (4)                       34,470    34,621   34,552    34,614
 Weighted average common
  shares/units outstanding -
  diluted (4)                     34,666    34,749   34,703    34,740

 Funds From Operations per
  common share/unit - basic
  (4)                            $  1.00   $  0.81 $   2.66  $   2.34
 Funds From Operations per
  common share/unit - diluted
  (4)                            $  1.00   $  0.81 $   2.64  $   2.33

 Common shares outstanding at
  end of period                                      33,087    32,707
 Common partnership units
  outstanding at end of period                        1,754     2,248
                                                   --------- ---------
     Total common shares and
      units outstanding at end
      of period                                      34,841    34,955


                                                   September September
                                                    30, 2008  30, 2007
                                                   --------- ---------
 Stabilized portfolio
  occupancy rates:
     Office                                            89.5%     93.4%
     Industrial                                        93.4%     91.0%
                                                   --------- ---------
       Weighted average total                          90.7%     92.6%

     Los Angeles                                       91.7%     96.3%
     Orange County                                     91.7%     91.1%
     San Diego                                         89.0%     91.4%
     Other                                             94.2%     93.2%
                                                   --------- ---------
       Weighted average total                          90.7%     92.6%

 Total square feet of
  stabilized properties owned
  at end of period:
     Office                                           8,343     8,620
     Industrial                                       3,876     3,870
                                                   --------- ---------
       Total                                         12,219    12,490


 (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)



                                               September    December
                                                   30,         31,
                                                  2008        2007
                                               ----------- -----------
                                               (unaudited)
 ASSETS
 ----------------------------------------
 REAL ESTATE ASSETS:
    Land and improvements                      $  334,634  $  324,779
    Buildings and improvements                  1,861,769   1,719,700
    Undeveloped land and construction in
     progress                                     257,135     324,077
                                               ----------- -----------
   Total real estate held for investment        2,453,538   2,368,556
  Accumulated depreciation and amortization      (514,712)   (463,932)
                                               ----------- -----------
   Total real estate assets, net                1,938,826   1,904,624

 Cash and cash equivalents                         10,055      11,732
 Restricted cash                                    1,503         546
 Marketable securities                              2,243         707
 Current receivables, net                           4,658       4,891
 Deferred rent receivables, net                    64,444      67,283
 Notes receivable                                  10,870      10,970
 Deferred leasing costs and acquisition
  related intangibles, net                         54,044      54,418
 Deferred financing costs, net                      6,731       8,492
 Prepaid expenses and other assets, net             6,124       5,057
                                               ----------- -----------

   TOTAL ASSETS                                $2,099,498  $2,068,720
                                               =========== ===========



 LIABILITIES & STOCKHOLDERS' EQUITY
 -------------------------------------------
 LIABILITIES:
  Secured debt                                 $  317,878  $  395,912
  Exchangeable senior notes, net                  456,780     456,090
  Unsecured senior notes                          144,000     144,000
  Unsecured line of credit                        237,000     111,000
  Accounts payable, accrued expenses and
   other liabilities                               58,938      58,249
  Accrued distributions                            21,422      20,610
  Deferred revenue and acquisition-related
   liabilities                                     75,012      59,187
  Rents received in advance and tenant
   security deposits                               18,785      18,433
                                               ----------- -----------
   Total liabilities                            1,329,815   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        29,125      38,309
                                               ----------- -----------
   Total minority interests                       102,763     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                                        331         328
  Additional paid-in capital                      661,019     658,894
  Distributions in excess of earnings            (116,012)    (87,512)
                                               ----------- -----------
   Total stockholders' equity                     666,920     693,292
                                               ----------- -----------

   TOTAL LIABILITIES & STOCKHOLDERS' EQUITY    $2,099,498  $2,068,720
                                               =========== ===========
   KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------
           (unaudited, in thousands, except per share data)

                                Three     Three      Nine      Nine
                                 Months    Months    Months    Months
                                 Ended     Ended     Ended     Ended
                               September September September September
                                30, 2008  30, 2007  30, 2008  30, 2007
                               --------- --------- --------- ---------

 REVENUES:
  Rental income                 $64,546   $58,596  $188,337  $167,547
  Tenant reimbursements           7,269     6,392    23,148    18,002
  Other property income           5,285       129     6,046     3,182
                               --------- --------- --------- ---------
      Total revenues             77,100    65,117   217,531   188,731
                               --------- --------- --------- ---------

 EXPENSES:
  Property expenses              12,824    11,481    36,185    32,051
  Real estate taxes               5,827     5,182    16,149    14,402
  Provision for bad debts             9      (111)    3,668      (310)
  Ground leases                     431       398     1,226     1,190
  General and administrative
   expenses                       9,627     8,719    28,050    27,227
  Interest expense                9,727     9,009    28,888    26,737
  Depreciation and
   amortization                  20,661    18,334    62,063    52,556
                               --------- --------- --------- ---------
      Total expenses             59,106    53,012   176,229   153,853
                               --------- --------- --------- ---------

 OTHER INCOME (LOSS):
  Interest and other
   investment income (loss)        (149)      305       192     1,295
                               --------- --------- --------- ---------

 Income from continuing
  operations before minority
  interests                      17,845    12,410    41,494    36,173

 Minority interests:
  Distributions on Cumulative
   Redeemable Preferred units    (1,397)   (1,397)   (4,191)   (4,191)
  Minority interest in
   earnings of Operating
   Partnership attributable to
   continuing operations           (870)     (557)   (1,882)   (1,601)
                               --------- --------- --------- ---------
      Total minority interests   (2,267)   (1,954)   (6,073)   (5,792)
                               --------- --------- --------- ---------

 Income from continuing
  operations                     15,578    10,456    35,421    30,381

 Discontinued operations:
  Revenues from discontinued
   operations                         -     2,804       199     7,897
  Expenses from discontinued
   operations                         -    (1,763)        -    (4,873)
  Net gain on dispositions of
   discontinued operations            -         -       234    13,474
  Minority interest in
   earnings of Operating
   Partnership attributable to
   discontinued operations            -       (67)      (27)   (1,072)
                               --------- --------- --------- ---------
      Total income from
       discontinued operations        -       974       406    15,426
                               --------- --------- --------- ---------

 Net income                      15,578    11,430    35,827    45,807

 Preferred dividends             (2,402)   (2,402)   (7,206)   (7,206)
                               --------- --------- --------- ---------

 Net income available for
  common stockholders           $13,176   $ 9,028  $ 28,621  $ 38,601
                               ========= ========= ========= =========

 Weighted average shares
  outstanding - basic            32,339    32,373    32,382    32,364
 Weighted average shares
  outstanding - diluted          32,535    32,502    32,533    32,491

 Net income per common share -
  basic                         $  0.41   $  0.28  $   0.88  $   1.19
                               ========= ========= ========= =========
 Net income per common share -
  diluted                       $  0.40   $  0.28  $   0.88  $   1.19
                               ========= ========= ========= =========
            KILROY REALTY CORPORATION FUNDS FROM OPERATIONS
 ---------------------------------------------------------------------
           (unaudited, in thousands, except per share data)

                                Three     Three      Nine      Nine
                                 Months    Months    Months    Months
                                 Ended     Ended     Ended     Ended
                               September September September September
                                30, 2008  30, 2007  30, 2008  30, 2007
                               --------- --------- --------- ---------

 Net income available for
  common stockholders            $13,176   $ 9,028  $28,621  $ 38,601

  Adjustments:
      Minority interest in
       earnings of Operating
       Partnership                   870       624    1,909     2,673
      Depreciation and
       amortization of real
       estate assets              20,464    18,560   61,474    53,111
      Net gain on dispositions
       of discontinued
       operations                      -         -     (234)  (13,474)
                               --------- --------- --------- ---------
 Funds From Operations (1),
  (2)                            $34,510   $28,212  $91,770  $ 80,911
                               ========= ========= ========= =========

 Weighted average common
  shares/units outstanding -
  basic                           34,470    34,621   34,552    34,614
 Weighted average common
  shares/units outstanding -
  diluted                         34,666    34,749   34,703    34,740

 Funds From Operations per
  common share/unit - basic      $  1.00   $  0.81  $  2.66  $   2.34
                               ========= ========= ========= =========
 Funds From Operations per
  common share/unit - diluted    $  1.00   $  0.81  $  2.64  $   2.33
                               ========= ========= ========= =========


  (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.

      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 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