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Kilroy Realty Corporation Reports Third Quarter Financial Results

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LOS ANGELES, Oct 25, 2010 (BUSINESS WIRE) --

Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its third quarter ended September 30, 2010 with a net loss available to common stockholders of $126,000, or $0.01 per share, compared to net income available to common stockholders of $8.1 million, or $0.17 per share, in the third quarter of 2009. Revenues from continuing operations in the third quarter totaled $79.8 million, up from $68.5 million in the prior year's third quarter. Funds from operations (FFO) for the period totaled $29.7 million, or $0.54 per share, compared to $30.2 million, or $0.66 per share, in the year-earlier period.

For the first nine months of 2010, KRC reported net income available to common stockholders of $3.0 million, or $0.04 per share, compared to $24.8 million, or $0.64 per share, in the first nine months of 2009. Revenues from continuing operations in the nine-month period totaled $219.0 million up from $212.1 million in the same period of 2009. FFO for the first nine months of 2010 totaled $77.2 million, or $1.51 per share, compared to $89.5 million, or $2.25 per share, in the first nine months of 2009.

FFO for the third quarter and nine months ended September 30, 2009 includes a one-time gain of $3.1 million, or $0.07 per share, from the early extinguishment of debt and FFO for the nine months ended September 30, 2010 includes a one-time charge of $4.6 million, or $0.09 per share, from the early extinguishment of debt. In addition, net income amounts for the nine months ended September 30, 2009 include a $2.5 million, or $0.06 per share, gain from a property disposition. All per share amounts in this report are presented on a diluted basis.

During the third quarter, KRC signed new and renewing leases on approximately 460,000 square feet of office and industrial space. At September 30, 2010, the company's stabilized portfolio totaled 13.5 million square feet and was 86.4% occupied, up from 82.8% at December 31, 2009.

"We continue to make good progress on increasing our occupancy," said John B. Kilroy, Jr., KRC's president and chief executive officer. "We are also seeing opportunities to acquire high quality assets at discounts to replacement cost and are pursuing these opportunities in a disciplined and financially conservative manner."

KRC management will discuss updated earnings guidance for fiscal 2010 during the company's October 26, 2010 earnings conference call. The call will begin at 9:00 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) 713-4216, reservation # 69248809. A replay of the conference call will be available via phone through November 9, 2010 at (888) 286-8010, reservation # 23483723, 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 real estate investment trust active in the office and industrial property sectors of California. For over 60 years, the company has owned, developed, acquired and managed real estate assets primarily in the coastal regions of Los Angeles, Orange County, San Diego and the San Francisco Bay Area. At September 30, 2010, the company owned 9.8 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 Ended
September 30, 2010

Three Months Ended
September 30, 2009

Nine Months Ended
September 30, 2010

Nine Months Ended
September 30, 2009

Revenues $ 79,804 $ 68,494 $ 219,039 $ 212,055
Net (loss) income available to common stockholders $ (126 ) $ 8,111 $ 2,977 $ 24,803
Weighted average common shares outstanding - basic 52,274 42,935 48,562 37,279
Weighted average common shares outstanding - diluted 52,274 42,935 48,565 37,297
Net (loss) income available to common stockholders per share - basic $ (0.01 ) $ 0.17 $ 0.04 $ 0.64
Net (loss) income available to common stockholders per share - diluted $ (0.01 ) $ 0.17 $ 0.04 $ 0.64
Funds From Operations (1), (2) $ 29,690 $ 30,190 $ 77,154 $ 89,480
Weighted average common shares/units outstanding - basic (3) 54,778 45,493 51,106 39,779
Weighted average common shares/units outstanding - diluted (3) 54,782 45,494 51,109 39,797
Funds From Operations per common share/unit - basic (3) $ 0.54 $ 0.66 $ 1.51 $ 2.25
Funds From Operations per common share/unit - diluted (3) $ 0.54 $ 0.66 $ 1.51 $ 2.25
Common shares outstanding at end of period 52,350 43,149
Common partnership units outstanding at end of period 1,723 1,723
Total common shares and units outstanding at end of period 54,073 44,872
September 30, 2010 September 30, 2009
Stabilized portfolio occupancy rates:
Office 84.8 % 81.6 %
Industrial 90.6 % 84.6 %
Weighted average total 86.4 % 82.5 %
Los Angeles and Ventura Counties 90.2 % 89.4 %
San Diego 82.2 % 78.2 %
Orange County 88.3 % 81.4 %
San Francisco 89.4 % --
Weighted average total 86.4 % 82.5 %
Total square feet of stabilized properties owned at end of period:
Office 9,810 8,658
Industrial 3,654 3,654
Total 13,464 12,312
(1) 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.
(2) Reported amounts are attributable to common stockholders and common unitholders.
(3) 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)

September 30,
2010

December 31,
2009

ASSETS

REAL ESTATE ASSETS:
Land and improvements $ 432,289 $ 335,932
Buildings and improvements 2,245,618 1,920,543
Undeveloped land and construction in progress 286,522 263,608
Total real estate held for investment 2,964,429 2,520,083
Accumulated depreciation and amortization (652,675 ) (605,976 )
Total real estate assets, net 2,311,754 1,914,107
Cash and cash equivalents 8,313 9,883
Restricted cash 3,265 2,059
Marketable securities 4,481 3,452
Current receivables, net 4,055 3,236
Deferred rent receivables, net 83,563 74,392
Note receivable -- 10,679
Deferred leasing costs and acquisition-related intangible assets, net 96,691 51,832
Deferred financing costs, net 14,574 8,334
Prepaid expenses and other assets, net 8,988 6,307
TOTAL ASSETS $ 2,535,684 $ 2,084,281

LIABILITIES, NONCONTROLLING INTEREST AND EQUITY

LIABILITIES:
Secured debt, net $ 315,150 $ 294,574
Exchangeable senior notes, net 298,295 436,442
Unsecured senior notes, net 330,941 144,000
Unsecured line of credit 205,000 97,000
Accounts payable, accrued expenses and other liabilities 66,814 52,533
Accrued distributions 20,383 17,136
Deferred revenue and acquisition-related intangible liabilities, net 68,251 66,890
Rents received in advance and tenant security deposits 23,776 18,230
Total liabilities 1,328,610 1,126,805
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 523 431
Additional paid-in capital 1,209,673 913,657
Distributions in excess of earnings (230,215 ) (180,722 )
Total stockholders' equity 1,101,563 854,948
Noncontrolling Interest
Common units of the Operating Partnership 31,873 28,890
Total equity 1,133,436 883,838
TOTAL LIABILITIES, NONCONTROLLING INTEREST AND EQUITY $ 2,535,684 $ 2,084,281

KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

Three Months Ended
September 30, 2010

Three Months Ended
September 30, 2009

Nine Months Ended
September 30, 2010

Nine Months Ended
September 30, 2009

REVENUES:
Rental income $ 72,608 $ 61,297 $ 198,302 $ 186,959
Tenant reimbursements 6,211 6,843 18,412 21,898
Other property income 985 354 2,325 3,198

Total revenues

79,804 68,494 219,039 212,055
EXPENSES:
Property expenses 15,845 12,699 42,408 37,611
Real estate taxes 7,614 5,988 20,132 18,260
Provision for bad debts (857 ) 243 (843 ) 395
Ground leases 336 398 648 1,227
General and administrative expenses 7,273 7,662 21,096 22,023
Acquisition-related expenses 354 -- 1,624 --
Depreciation and amortization 30,054 21,968 74,714 66,608
Total expenses 60,619 48,958 159,779 146,124
OTHER (EXPENSES) INCOME:
Interest income and other net investment gains 337 501 703 1,074
Interest expense (15,853 ) (10,926 ) (40,897 ) (35,041 )
Gain (loss) on early extinguishment of debt -- 3,119 (4,564 ) 3,119
Total other (expenses) income (15,516 ) (7,306 ) (44,758 ) (30,848 )
INCOME FROM CONTINUING OPERATIONS 3,669 12,230 14,502 35,083
DISCONTINUED OPERATIONS
Loss from discontinued operations -- -- -- (224 )
Net gain on dispositions of discontinued operations -- -- -- 2,485
Total income from discontinued operations -- -- -- 2,261
NET INCOME 3,669 12,230 14,502 37,344
Net loss (income) attributable to noncontrolling common units of the Operating Partnership 4 (320 ) (128 ) (1,144 )
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION 3,673 11,910 14,374 36,200
PREFERRED DISTRIBUTIONS AND DIVIDENDS:
Distributions on noncontrolling cumulative redeemable preferred units of the Operating Partnership (1,397 ) (1,397 ) (4,191 ) (4,191 )
Preferred dividends (2,402 ) (2,402 ) (7,206 ) (7,206 )

Total preferred distributions and dividends

(3,799 ) (3,799 ) (11,397 ) (11,397 )
NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS $ (126 ) $ 8,111 $ 2,977 $ 24,803
Weighted average common shares outstanding - basic 52,274 42,935 48,562 37,279
Weighted average common shares outstanding - diluted 52,274 42,935 48,565 37,297
Net (loss) income available to common stockholders per share - basic $ (0.01 ) $ 0.17 $ 0.04 $ 0.64
Net (loss) income available to common stockholders per share - diluted $ (0.01 ) $ 0.17 $ 0.04 $ 0.64

KILROY REALTY CORPORATION FUNDS FROM OPERATIONS

(unaudited, in thousands, except per share data)

Three Months Ended
September 30, 2010

Three Months Ended
September 30, 2009

Nine Months Ended
September 30, 2010

Nine Months Ended
September 30, 2009

Net (loss) income available to common stockholders $ (126 ) $ 8,111 $ 2,977 $ 24,803
Adjustments:
Net (loss) income attributable to noncontrolling common units of the Operating Partnership (4 ) 320 128 1,144
Depreciation and amortization of real estate assets 29,820 21,759 74,049 66,018
Net gain on dispositions of discontinued operations -- -- -- (2,485 )
Funds From Operations (1) $ 29,690 $ 30,190 $ 77,154 $ 89,480
Weighted average common shares/units outstanding - basic 54,778 45,493 51,106 39,779
Weighted average common shares/units outstanding - diluted 54,782 45,494 51,109 39,797
Funds From Operations per common share/unit - basic (2) $ 0.54 $ 0.66 $ 1.51 $ 2.25
Funds From Operations per common share/unit - diluted (2) $ 0.54 $ 0.66 $ 1.51 $ 2.25
(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 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.
(2) Reported amounts are attributable to common stockholders and common unitholders.

SOURCE: Kilroy Realty Corporation

Kilroy Realty Corporation
Tyler H. Rose
Executive Vice President
and Chief Financial Officer
(310) 481-8484
or
Michelle Ngo
Vice President
and Treasurer
(310) 481-8581