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Kilroy Realty Corporation Reports Second Quarter Financial Results

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LOS ANGELES, Jul 25, 2011 (BUSINESS WIRE) -- Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its second quarter ended June 30, 2011, with a net loss available to common stockholders of $317,000, or $0.01 per share, compared to a net loss available to common stockholders of $1.8 million, or $0.04 per share, in the second quarter of 2010. Revenues in the second quarter totaled $92.1 million, up from $72.4 million in the prior year's second quarter. Funds from operations (FFO) for the second quarter ended June 30, 2011 totaled $31.6 million, or $0.52 per share, compared to $21.7 million, or $0.41 per share, in the year-earlier period.

For the first six months of 2011, KRC reported net income available to common stockholders of $717,000, or less than $0.01 per share, compared to $3.1 million, or $0.05 per share, in the first half of 2010. Revenues in the six-month period totaled $180.2 million, up from $139.2 million in the same period of 2010. FFO for the first half of 2011 totaled $61.8 million, or $1.06 per share, compared to $47.5 million, or $0.96 per share, in the first half of 2010.

Results for the second quarter and six months ended June 30, 2010 included a one-time charge of $4.6 million related to the early extinguishment of debt. All per share amounts in this report are presented on a diluted basis.

During the second quarter, KRC acquired four office projects aggregating approximately 1.1 million square feet of rentable space for a total purchase price of approximately $380 million, including the assumption of approximately $30 million of debt. These transactions included the previously announced purchases of The Plaza at Yarrow Bay located in Kirkland, Washington, Key Center located in Bellevue, Washington and 10770 Wateridge Circle located in the Sorrento Mesa submarket of San Diego. Late in the quarter, the company closed on a $32 million acquisition of a 93% occupied, 127,000 square foot office project located in San Rafael, a submarket north of San Francisco in Marin County.

Through the first six months of 2011, KRC completed the acquisition of five office projects, adding approximately 1.2 million square feet to its stabilized portfolio. The aggregate purchase price of these transactions was approximately $413 million.

In addition, KRC is in various stages of negotiations on four additional office acquisitions that would have an aggregate estimated purchase price of approximately $266 million. The acquisitions would include the assumption of approximately $83 million of secured debt. Two of these projects are in Northern California and two are in Southern California. These acquisitions are projected to close in the third and fourth quarter of 2011, subject to customary closing conditions.

KRC signed new and renewing leases during the second quarter on approximately 359,000 square feet of office and industrial space. Occupancy in KRC's stabilized portfolio was 90.2% at the end of the period.

In July, KRC's operating partnership completed a registered public offering of $325 million in aggregate principal of 4.800% senior unsecured notes due 2018, generating net proceeds of approximately $321.4 million. The company used the net proceeds to pay down its revolving credit facility and for general corporate purposes.

"We continue to see increased activity and positive absorption in our targeted West Coast markets," said John B. Kilroy, Jr., KRC's president and chief executive officer. "We remain focused on leasing our stabilized portfolio and building long-term value through a highly selective, disciplined approach to acquiring well-located, high quality assets at economically advantageous prices."

KRC also announced that it has established an "at the market" stock offering program through which it may sell up to an aggregate of $200 million of its common stock. The company intends to use the proceeds from any offering for general corporate purposes, which may include investment opportunities and debt reduction.

KRC management will discuss updated earnings guidance for fiscal 2011 during the company's July 26, 2011 earnings conference call. The call will begin at 10:00 a.m. Pacific time and last approximately one hour. Those interested in listening via the Internet can access the conference call at http://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) 679-8034, reservation #22399044. A replay of the conference call will be available via phone through August 2, 2011 at (888) 286-8010, reservation #14986801, 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 acquisitions and successfully operate properties; 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 County, San Diego, greater Seattle and the San Francisco Bay Area. At June 30, 2011, the company owned 11.5 million rentable square feet of commercial office space and 3.6 million rentable square feet of industrial space. More information is available at http://www.kilroyrealty.com.

KILROY REALTY CORPORATION

SUMMARY QUARTERLY RESULTS

(unaudited, in thousands, except per share data)

Three Months
Ended
June 30, 2011

Three Months
Ended
June 30, 2010

Six Months
Ended
June 30, 2011

Six Months
Ended
June 30, 2010

Revenues $ 92,064 $ 72,416 $ 180,189 $ 139,235
Net (loss) income available to common stockholders $ (317 ) $ (1,783 ) $ 717 $ 3,103
Weighted average common shares outstanding - basic 57,686 50,297 55,009 46,674
Weighted average common shares outstanding - diluted 57,686 50,297 55,385 46,678
Net (loss) income available to common stockholders per share - basic $ (0.01 ) $ (0.04 ) $ 0.00 $ 0.05
Net (loss) income available to common stockholders per share - diluted $ (0.01 ) $ (0.04 ) $ 0.00 $ 0.05
Funds From Operations (1), (2) $ 31,643 $ 21,658 $ 61,770 $ 47,464
Weighted average common shares/units outstanding - basic (3) 60,337 52,884 57,634 49,240
Weighted average common shares/units outstanding - diluted (3) 60,817 52,889 58,010 49,243
Funds From Operations per common share/unit - basic (3) $ 0.52 $ 0.41 $ 1.07 $ 0.96
Funds From Operations per common share/unit - diluted (3) $ 0.52 $ 0.41 $ 1.06 $ 0.96
Common shares outstanding at end of period 58,464 52,296
Common partnership units outstanding at end of period 1,718 1,723
Total common shares and units outstanding at end of period 60,183 54,019
June 30, 2011 June 30, 2010
Stabilized portfolio occupancy rates:
Office 87.9 % 85.7 %
Industrial 97.6 % 83.3 %
Weighted average total 90.2 % 85.1 %
Los Angeles and Ventura Counties 84.0 % 93.3 %
San Diego County 88.4 % 81.5 %
Orange County 96.7 % 81.7 %
San Francisco Bay Area 93.1 % 89.7 %
Greater Seattle 90.4 % --
Weighted average total 90.2 % 85.1 %
Total square feet of stabilized properties owned at end of period:
Office 11,466 10,089
Industrial 3,605 3,654
Total 15,071 13,743
(1) Reconciliation of Net (Loss) 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

(unaudited, in thousands)

June 30, 2011 December 31, 2010

ASSETS

REAL ESTATE ASSETS:
Land and improvements $ 528,082 $ 491,333
Buildings and improvements 2,820,766 2,435,173
Undeveloped land and construction in progress 303,998 290,365
Total real estate held for investment 3,652,846 3,216,871
Accumulated depreciation and amortization (720,864 ) (672,429 )
Total real estate assets, net 2,931,982 2,544,442
Cash and cash equivalents 25,412 14,840
Restricted cash 1,349 1,461
Marketable securities 5,654 4,902
Current receivables, net 4,732 6,258
Deferred rent receivables, net 97,958 89,052
Deferred leasing costs and acquisition-related intangible assets, net 153,231 131,066
Deferred financing costs, net 18,910 16,447
Prepaid expenses and other assets, net 25,559 8,097
TOTAL ASSETS $ 3,264,787 $ 2,816,565

LIABILITIES, NONCONTROLLING INTEREST AND EQUITY

LIABILITIES:
Secured debt, net $ 475,820 $ 313,009
Exchangeable senior notes, net 303,374 299,964
Unsecured senior notes, net 655,929 655,803
Unsecured line of credit 245,000 159,000
Accounts payable, accrued expenses and other liabilities 66,664 68,525
Accrued distributions 22,563 20,385
Deferred revenue and acquisition-related intangible liabilities, net 90,149 79,322
Rents received in advance and tenant security deposits 28,117 29,189
Total liabilities 1,887,616 1,625,197
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 585 523
Additional paid-in capital 1,433,951 1,211,498
Distributions in excess of earnings (285,916 ) (247,252 )
Total stockholders' equity 1,270,202 1,086,351
Noncontrolling Interest
Common units of the Operating Partnership 33,331 31,379
Total equity 1,303,533 1,117,730
TOTAL LIABILITIES, NONCONTROLLING INTEREST AND EQUITY $ 3,264,787 $ 2,816,565

KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

Three Months
Ended
June 30, 2011

Three Months
Ended
June 30, 2010

Six Months
Ended
June 30, 2011

Six Months
Ended
June 30, 2010

REVENUES:
Rental income $ 83,452 $ 65,038 $ 163,742 $ 125,694
Tenant reimbursements 7,510 6,483 13,932 12,201
Other property income 1,102 895 2,515 1,340
Total revenues 92,064 72,416 180,189 139,235
EXPENSES:
Property expenses 17,583 14,543 35,272 26,563
Real estate taxes 8,413 6,482 16,582 12,518
Provision for bad debts 120 (12 ) 146 14
Ground leases 424 370 763 312
General and administrative expenses 7,440 6,728 14,000 13,823
Acquisition-related expenses 1,194 957 1,666 1,270
Depreciation and amortization 32,248 23,722 61,559 44,660
Total expenses 67,422 52,790 129,988 99,160
OTHER (EXPENSES) INCOME:
Interest income and other net investment gains (losses) 58 (18 ) 242 366
Interest expense (21,228 ) (13,088 ) (42,104 ) (25,044 )
Loss on early extinguishment of debt -- (4,564 ) -- (4,564 )
Total other (expenses) income (21,170 ) (17,670 ) (41,862 ) (29,242 )
NET INCOME 3,472 1,956 8,339 10,833
Net loss (income) attributable to noncontrolling common units of the Operating Partnership 10 60 (24 ) (132 )
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION 3,482 2,016 8,315 10,701
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 (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS $ (317 ) $ (1,783 ) $ 717 $ 3,103
Weighted average common shares outstanding - basic 57,686 50,297 55,009 46,674
Weighted average common shares outstanding - diluted 57,686 50,297 55,385 46,678
Net (loss) income available to common stockholders per share - basic $ (0.01 ) $ (0.04 ) $ 0.00 $ 0.05
Net (loss) income available to common stockholders per share - diluted $ (0.01 ) $ (0.04 ) $ 0.00 $ 0.05

KILROY REALTY CORPORATION FUNDS FROM OPERATIONS

(unaudited, in thousands, except per share data)

Three Months
Ended
June 30, 2011

Three Months
Ended
June 30, 2010

Six Months
Ended
June 30, 2011

Six Months
Ended
June 30, 2010

Net (loss) income available to common stockholders $ (317 ) $ (1,783 ) $ 717 $ 3,103
Adjustments:
Net (loss) income attributable to noncontrolling common units of the Operating Partnership (10 ) (60 ) 24 132
Depreciation and amortization of real estate assets 31,970 23,501 61,029 44,229
Funds From Operations (1) $ 31,643 $ 21,658 $ 61,770 $ 47,464
Weighted average common shares/units outstanding - basic 60,337 52,884 57,634 49,240
Weighted average common shares/units outstanding - diluted 60,817 52,889 58,010 49,243
Funds From Operations per common share/unit - basic (2) $ 0.52 $ 0.41 $ 1.07 $ 0.96
Funds From Operations per common share/unit - diluted (2) $ 0.52 $ 0.41 $ 1.06 $ 0.96
(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