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Kilroy Realty Corporation Reports Second Quarter Financial Results

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LOS ANGELES--(BUSINESS WIRE)--Jul. 27, 2009-- Kilroy Realty Corporation (NYSE:KRC) today reported financial results for its second quarter ended June 30, 2009 with net income available for common stockholders of $9.1 million, or $0.25 per share, compared to $4.5 million, or $0.14 per share, in the second quarter of 2008. Net income in the second quarter of 2009 included a $2.5 million gain from a property disposition. Revenues from continuing operations in the second quarter totaled $71.1 million, up from $69.5 million in the prior year's second quarter. Funds from operations (FFO) for the period totaled $30.3 million, or $0.79 per share, compared to $25.9 million, or $0.74 per share, in the year-earlier period.

For the first six months of 2009, KRC reported net income available to common stockholders of $16.7 million, or $0.47 per share, compared to $13.3 million, or $0.40 per share, in the first half of 2008. Revenues from continuing operations in the six-month period totaled $143.6 million, up from $140.1 million in the same period of 2008. FFO in the first half of 2009 totaled $59.3 million, or $1.61 per share, compared to $54.9 million, or $1.57 per share, in the first half of 2008.

All per-share amounts in this report are presented on a diluted basis. Financial information for the prior periods has been adjusted for the retroactive application of new accounting guidance adopted by the company effective January 1, 2009.

"During the quarter, we made progress on our two highest priorities – maintaining a strong balance sheet and leasing our vacant and expiring space,” said John B. Kilroy, Jr., the company's president and chief executive officer. “We strengthened our balance sheet with the issuance of just over 10 million shares of common equity, and advanced our leasing goals with the successful execution of approximately 300,000 square feet of new and renewing leases.”

At the end of the second quarter, KRC’s stabilized portfolio totaled 12.3 million square feet and was 85.5% occupied.

On June 3, 2009, KRC completed the sale of 10,062,500 shares of common stock generating aggregate net proceeds of approximately $191.7 million. Proceeds from the offering were used to repay a portion of the borrowings under the company’s unsecured revolving credit facility. The outstanding balance of the unsecured revolving credit facility was $94 million at the end of the second quarter.

In conjunction with the equity offering, the company reduced its quarterly dividend approximately 40% to $0.35 per share, or $1.40 per share on an annual basis.

During the quarter, Accredited Home Lenders ("Accredited") rejected its lease in bankruptcy, and the company drew down the $1.9 million letter of credit it held as credit support under the terms of the lease. The company applied $1.6 million of the letter of credit proceeds against the unbilled deferred rents receivable from Accredited, and reversed $1.6 million of the allowance for bad debts that it had recorded for the Accredited unbilled deferred receivable in prior quarters. The remaining $0.3 million of letter of credit proceeds was applied to rent owed under the Accredited lease prior to the bankruptcy filing. In addition, the company recorded $0.9 million during the quarter related to settlement payments from a prior period lease termination.

The company currently has one completed development project in lease-up, a 51,000 square-foot medical office building located in the company’s Sorrento Gateway development in coastal San Diego County. The property represents a total investment of $23 million, of which about $17 million has been spent to date.

KRC management will discuss updated earnings guidance for fiscal 2009 during the company's July 28, 2009 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) 680-0860, reservation #78543289. A replay of the conference call will be available via phone through August 11, 2009 at (888) 286-8010, reservation #14996732, 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. At June 30, 2009, the company owned 8.7 million rentable square feet of commercial office space and 3.7 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, 2009 June 30, 2008 (1) June 30, 2009 June 30, 2008 (1)
 
Revenues from continuing operations $ 71,050 $ 69,476 $ 143,561 $ 140,125
 
Revenues including discontinued operations $ 71,050 $ 69,828 $ 143,561 $ 140,630
 
Net income available for common stockholders (1) $ 9,117 $ 4,486 $ 16,692 $ 13,271
 
Weighted average common shares outstanding - basic 35,965 32,351 34,405 32,404
Weighted average common shares outstanding - diluted 35,965 32,381 34,431 32,425
 
Net income per share of common stock - basic $ 0.25 $ 0.14 $ 0.48 $ 0.40
Net income per share of common stock - diluted $ 0.25 $ 0.14 $ 0.47 $ 0.40
 
Funds From Operations (2), (3) $ 30,331 $ 25,893 $ 59,290 $ 54,940
 
Weighted average common shares/units outstanding - basic (4) 38,495 34,914 36,875 34,961
Weighted average common shares/units outstanding - diluted (4) 38,495 34,944 36,902 34,982
 
Funds From Operations per common share/unit - basic (4) $ 0.79 $ 0.74 $ 1.61 $ 1.57
Funds From Operations per common share/unit - diluted (4) $ 0.79 $ 0.74 $ 1.61 $ 1.57
 
Common shares outstanding at end of period 43,149 32,652
Common partnership units outstanding at end of period   1,723     2,188  
Total common shares and units outstanding at end of period 44,872 34,840
 
 
June 30, 2009 June 30, 2008
Stabilized portfolio occupancy rates:
Office 83.5 % 93.8 %
Industrial   90.2 %   90.7 %
Weighted average total 85.5 % 92.8 %
 
Los Angeles 89.6 % 96.2 %
San Diego 80.9 % 93.8 %
Orange County 87.6 % 89.0 %
Other   92.8 %   93.8 %
Weighted average total 85.5 % 92.8 %
 
Total square feet of stabilized properties owned at end of period:
Office 8,651 8,089
Industrial   3,655     3,876  
Total 12,306 11,965
(1)  

Financial information for prior periods has been adjusted for the retroactive application of the following new accounting guidance adopted by the company effective January 1, 2009: FASB Staff Position APB 14-1 "Accounting for Convertible Debt Instruments That May be Settled Upon Conversion (Including Partial Cash Settlement)"; Statement of Financial Accounting Standard No. 160 "Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51"; and FASB Staff Position EITF 03-6-1 "Determining Whether Instruments Granted in Share Based Payment Transactions are Participating Securities."

 
(2) Reconciliation of Net Income Available to Common Stockholders 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 including participating share-based awards and assuming the exchange of all common limited partnership units outstanding.
 
         

KILROY REALTY CORPORATION CONSOLIDATED BALANCE SHEETS

(in thousands)
 
June 30, December 31,
2009

2008 (1)

(unaudited)

ASSETS

REAL ESTATE ASSETS:
Land and improvements $ 335,932 $ 336,874
Buildings and improvements 1,901,647 1,889,833
Undeveloped land and construction in progress   255,235     248,889  
Total real estate held for investment 2,492,814 2,475,596
Accumulated depreciation and amortization   (568,877 )   (532,769 )
Total real estate assets, net 1,923,937 1,942,827
 
Cash and cash equivalents 13,348 9,553
Restricted cash 591 672
Marketable securities 2,801 1,888
Current receivables, net 2,945 5,753
Deferred rent receivables, net 71,355 67,144
Notes receivable 10,753 10,824

Deferred leasing costs and acquisition-related intangibles, net

49,803 53,539
Deferred financing costs, net 5,250 5,883
Prepaid expenses and other assets, net   6,799     4,835  
 
TOTAL ASSETS $ 2,087,582   $ 2,102,918  
 
 

LIABILITIES, NONCONTROLLING INTERESTS AND STOCKHOLDERS' EQUITY

LIABILITIES:
Secured debt $ 300,944 $ 316,456
Exchangeable senior notes, net 434,132 429,892
Unsecured senior notes 144,000 144,000
Unsecured line of credit 94,000 252,000
Accounts payable, accrued expenses and other liabilities 32,365 55,066
Accrued distributions 17,129 21,421
Deferred revenue and acquisition-related liabilities 71,333 76,219
Rents received in advance and tenant security deposits   22,038     19,340  
Total liabilities   1,115,941     1,314,394  
 
NONCONTROLLING INTEREST:
7.45% Series A cumulative redeemable
preferred units of the Operating Partnership 73,638 73,638
 
EQUITY
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 431 331
Additional paid-in capital 901,747 700,122
Distributions in excess of earnings   (155,183 )   (137,052 )
Total stockholders' equity   868,577     684,983  
Noncontrolling Interest
Common units of the Operating Partnership   29,426     29,903  
Total equity   898,003     714,886  
TOTAL LIABILITIES, NONCONTROLLING INTERESTS AND EQUITY $ 2,087,582   $ 2,102,918  
(1)  

Financial information for prior periods has been adjusted for the retroactive application of the following new accounting guidance adopted by the company effective January 1, 2009: FASB Staff Position APB 14-1 "Accounting for Convertible Debt Instruments That May be Settled Upon Conversion (Including Partial Cash Settlement)"; Statement of Financial Accounting Standard No. 160 "Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51"; and FASB Staff Position EITF 03-6-1 "Determining Whether Instruments Granted in Share Based Payment Transactions are Participating Securities."

 
           

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, 2009 June 30, 2008 (1) June 30, 2009 June 30, 2008 (1)
 
REVENUES:
Rental income $ 62,598 $ 61,345 $ 125,662 $ 123,509
Tenant reimbursements 7,403 7,674 15,055 15,855
Other property income   1,049     457     2,844     761  
Total revenues   71,050     69,476     143,561     140,125  
 
EXPENSES:
Property expenses 12,582 11,871 24,912 23,357
Real estate taxes 6,143 4,832 12,272 10,300
Provision for bad debts (1,272 ) 3,204 152 3,659
Ground leases 432 400 829 795
General and administrative expenses 7,308 9,187 14,361 18,423
Interest expense 11,897 10,616 24,115 21,481
Depreciation and amortization   23,470     21,521     44,640     41,372  
Total expenses   60,560     61,631     121,281     119,387  
 
OTHER INCOME:
Interest income and other net investment gains   503     184     573     341  
 
INCOME FROM CONTINUING OPERATIONS 10,993 8,029 22,853 21,079
 
DISCONTINUED OPERATIONS
Revenues from discontinued operations - 352 - 505
Expenses from discontinued operations (135 ) (28 ) (224 ) (56 )
Net gain on dispositions of discontinued operations   2,485     234     2,485     234  
Total income from discontinued operations   2,350     558     2,261     683  
 
NET INCOME 13,343 8,587 25,114 21,762
 
Net income attributable to noncontrolling common units of the
Operating Partnership   (427 )   (302 )   (824 )   (893 )
 
NET INCOME ATTRIBUTABLE TO THE COMPANY 12,916 8,285 24,290 20,869
 
PREFERRED DISTRIBUTIONS AND DIVIDENDS:
Distributions on noncontrolling cumulative redeemable
preferred units of the Operating Partnership (1,397 ) (1,397 ) (2,794 ) (2,794 )
Preferred dividends   (2,402 )   (2,402 )   (4,804 )   (4,804 )
Total preferred distributions and dividends

 

(3,799 )   (3,799 )   (7,598 )   (7,598 )
 
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 9,117   $ 4,486   $ 16,692   $ 13,271  
 
Weighted average common shares outstanding - basic 35,965 32,351 34,405 32,404
Weighted average common shares outstanding - diluted 35,965 32,381 34,431 32,425
 
Net income available to common stockholders per share - basic $ 0.25   $ 0.14   $ 0.48   $ 0.40  
Net income available to common stockholders per share - diluted $ 0.25   $ 0.14   $ 0.47   $ 0.40  
(1)  

Financial information for prior periods has been adjusted for the retroactive application of the following new accounting guidance adopted by the company effective January 1, 2009: FASB Staff Position APB 14-1 "Accounting for Convertible Debt Instruments That May be Settled Upon Conversion (Including Partial Cash Settlement)"; Statement of Financial Accounting Standard No. 160 "Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51"; and FASB Staff Position EITF 03-6-1 "Determining Whether Instruments Granted in Share Based Payment Transactions are Participating Securities."

 
         

KILROY REALTY CORPORATION FUNDS FROM OPERATIONS

(unaudited, in thousands, except per share data)
 
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2009

June 30, 2008 (1)

June 30, 2009

June 30, 2008 (1)

 
Net income available for common stockholders $ 9,117 $ 4,486 $ 16,692 $ 13,271
 
Adjustments:
Net income attributable to noncontrolling common units of

the Operating Partnership

427 302 824 893
Depreciation and amortization of real estate assets 23,272 21,339 44,259 41,010
Net gain on dispositions of discontinued operations   (2,485 )   (234 )   (2,485 )   (234 )
Funds From Operations (1), (2) $ 30,331   $ 25,893   $ 59,290   $ 54,940  
 
Weighted average common shares/units outstanding - basic 38,495 34,914 36,875 34,961
Weighted average common shares/units outstanding - diluted 38,495 34,944 36,902 34,982
 

Funds From Operations per common share/unit - basic (3)

$ 0.79   $ 0.74   $ 1.61   $ 1.57  
Funds From Operations per common share/unit - diluted (3) $ 0.79   $ 0.74   $ 1.61   $ 1.57  
(1)  

Financial information for prior periods has been adjusted for the retroactive application of the following new accounting guidance adopted by the company effective January 1, 2009: FASB Staff Position APB 14-1 "Accounting for Convertible Debt Instruments That May be Settled Upon Conversion (Including Partial Cash Settlement)"; Statement of Financial Accounting Standard No. 160 "Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51"; and FASB Staff Position EITF 03-6-1 "Determining Whether Instruments Granted in Share Based Payment Transactions are Participating Securities."

 
(2) 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 the company's 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 the company's 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 alone to be insufficient. 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.
 
(3) Reported amounts are attributable to common stockholders and common unitholders.

Source: Kilroy Realty Corporation

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