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Kilroy Realty Corporation Reports Third Quarter Financial Results

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LOS ANGELES, Nov 01, 2011 (BUSINESS WIRE) --

Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its third quarter ended September 30, 2011, with net income available to common stockholders of $10.2 million, or $0.17 per share, compared to a net loss available to common stockholders of $126,000, or $0.01 per share, in the third quarter of 2010. Revenues from continuing operations in the third quarter totaled $97.3 million, up from $79.3 million in the prior year's third quarter. Funds from operations (FFO) for the period totaled $33.9 million, or $0.56 per share, compared to $29.7 million, or $0.54 per share, in the year-earlier period.

For the first nine months of 2011, KRC reported net income available to common stockholders of $10.9 million, or $0.18 per share, compared to $3.0 million, or $0.04 per share, in the first nine months of 2010. Revenues from continuing operations in the nine-month period totaled $276.4 million, up from $217.5 million in the same period of 2010. FFO in the first nine months of 2011 totaled $95.6 million, or $1.62 per share, compared to $77.2 million, or $1.51 per share, in the first nine months of 2010. Net income available to common stockholders for the three and nine months ended September 30, 2011 included a net gain from property dispositions of $12.6 million, or $0.22 per share. Results for the nine months ended September 30, 2010 included a one-time charge of $4.6 million, or $0.09 per share, from the early extinguishment of debt. All per share amounts in this report are presented on a diluted basis.

KRC signed new and renewing leases on approximately 530,000 square feet of office and industrial space during the third quarter, bringing the year to date leasing total to 1.2 million square feet. At September 30, 2011, the company's stabilized portfolio totaled 15.2 million square feet and was 92.8% occupied.

During the third quarter, KRC acquired a 311,545 square foot, 12-story office building located at 201 Third Street in the South of Market district of San Francisco for approximately $103.3 million. The property is currently 90% occupied. The company also sold a two-building R&D/office facility located in the Sorrento Mesa submarket of San Diego. The 90,558 square foot complex was sold for approximately $24 million, resulting in a net gain of $12.6 million.

Through the first nine months of 2011, KRC has completed the acquisition of six office projects, consisting of 9 buildings, adding just under 1.5 million square feet to its stabilized portfolio. The aggregate purchase price of these transactions is approximately $516 million.

KRC remains in various stages of negotiations on three additional office acquisitions that would have an aggregate estimated purchase price of approximately $199 million, including the assumption of approximately $55 million of secured debt. Two of these projects are in Northern California and one is in Southern California. The company is also in various stages of negotiations on the disposition of four Southern California properties that would generate aggregate estimated proceeds of approximately $205 million. No assurances can be made that the company will complete the pending acquisitions and dispositions.

"We're making strong progress on all fronts," said John B. Kilroy, Jr., KRC's president and chief executive officer. "We are on track to lease more square footage in 2011 than in all of 2010. We continue to find opportunities to acquire well-located, high quality assets at economically advantageous prices, building the long-term value of our portfolio. And there is good momentum with our capital recycling plans, as we see good demand for our disposition properties."

KRC management will discuss updated earnings guidance for fiscal 2011 during the company's November 2, 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 #58493051. A replay of the conference call will be available via phone through November 9, 2011 at (888) 286-8010, reservation #95754685, 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 KRC 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 KRC'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; its 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 potential acquisitions and potential dispositions on the terms or by the dates currently contemplated; its ability to complete current and future development projects on schedule and on budget; its ability to successfully operate properties; the demand for office space in markets in which KRC has a presence; and risks detailed from time to time in the company's Securities and Exchange Commission reports and filings, 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 KRC's ability to control or predict. Forward-looking statements are not guarantees of performance. For forward-looking statements herein, KRC 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 September 30, 2011, the company owned 11.6 million rentable square feet of commercial office space and 3.6 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, 2011

Three Months

Ended

September 30, 2010

Nine Months

Ended

September 30, 2011

Nine Months

Ended

September 30, 2010

Revenues from continuing operations $ 97,337 $ 79,276 $ 276,434 $ 217,469
Revenues including discontinued operations $ 97,806 $ 79,804 $ 277,995 $ 219,039
Net income (loss) available to common stockholders $ 10,195 $ (126 ) $ 10,912 $ 2,977
Weighted average common shares outstanding - basic 58,355 52,274 56,136 48,562
Weighted average common shares outstanding - diluted 58,355 52,274 56,136 48,565
Net income (loss) available to common stockholders per share - basic $ 0.17 $ (0.01 ) $ 0.18 $ 0.04
Net income (loss) available to common stockholders per share - diluted $ 0.17 $ (0.01 ) $ 0.18 $ 0.04
Funds From Operations (1), (2) $ 33,878 $ 29,690 $ 95,648 $ 77,154
Weighted average common shares/units outstanding - basic (3) 61,015 54,778 58,774 51,106
Weighted average common shares/units outstanding - diluted (3) 61,017 54,782 58,961 51,109
Funds From Operations per common share/unit - basic (3) $ 0.56 $ 0.54 $ 1.63 $ 1.51
Funds From Operations per common share/unit - diluted (3) $ 0.56 $ 0.54 $ 1.62 $ 1.51
Common shares outstanding at end of period 58,464 52,350
Common partnership units outstanding at end of period 1,718 1,723
Total common shares and units outstanding at end of period 60,182 54,073

September 30, 2011

September 30, 2010
Stabilized portfolio occupancy rates:
Office 90.6 % 84.8 %
Industrial 100.0 % 90.6 %
Weighted average total 92.8 % 86.4 %
Los Angeles and Ventura Counties 85.1 % 90.2 %
San Diego County 92.6 % 82.2 %
Orange County 98.8 % 88.3 %
San Francisco Bay Area 95.4 % 89.4 %
Greater Seattle 90.2 % --
Weighted average total 92.8 % 86.4 %
Total square feet of stabilized properties owned at end of period:
Office 11,574 9,810
Industrial 3,605 3,654
Total 15,179 13,464
(1) Reconciliation of Net Income (Loss) 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)

September 30, 2011 December 31, 2010

ASSETS

REAL ESTATE ASSETS:
Land and improvements $ 537,973 $ 491,333
Buildings and improvements 2,881,504 2,435,173
Undeveloped land and construction in progress 328,785 290,365
Total real estate held for investment 3,748,262 3,216,871
Accumulated depreciation and amortization (732,162 ) (672,429 )
Total real estate assets, net 3,016,100 2,544,442
Cash and cash equivalents 15,481 14,840
Restricted cash 25,436 1,461
Marketable securities 5,213 4,902
Current receivables, net 6,860 6,258
Deferred rent receivables, net 103,668 89,052
Deferred leasing costs and acquisition-related intangible assets, net 155,757 131,066
Deferred financing costs, net 19,638 16,447
Prepaid expenses and other assets, net 19,531 8,097
TOTAL ASSETS $ 3,367,684 $ 2,816,565

LIABILITIES, NONCONTROLLING INTEREST AND EQUITY

LIABILITIES:
Secured debt, net $ 473,997 $ 313,009
Exchangeable senior notes, net 305,115 299,964
Unsecured senior notes, net 980,487 655,803
Unsecured line of credit -- 159,000
Accounts payable, accrued expenses and other liabilities 93,050 68,525
Accrued distributions 22,565 20,385
Deferred revenue and acquisition-related intangible liabilities, net 95,120 79,322
Rents received in advance and tenant security deposits 29,369 29,189
Total liabilities 1,999,703 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 1,435,580 1,211,498
Distributions in excess of earnings (296,476 ) (247,252 )
Total stockholders' equity 1,261,271 1,086,351
Noncontrolling Interest
Common units of the Operating Partnership 33,072 31,379
Total equity 1,294,343 1,117,730
TOTAL LIABILITIES, NONCONTROLLING INTEREST AND EQUITY $ 3,367,684 $ 2,816,565

KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

Three Months

Ended

September 30, 2011

Three Months

Ended

September 30, 2010

Nine Months

Ended

September 30, 2011

Nine Months

Ended

September 30, 2010

REVENUES:
Rental income $ 89,306 $ 72,135 $ 252,102 $ 196,883
Tenant reimbursements 7,683 6,156 21,469 18,261
Other property income 348 985 2,863 2,325
Total revenues 97,337 79,276 276,434 217,469
EXPENSES:
Property expenses 19,361 15,802 54,548 42,255
Real estate taxes 8,360 7,582 24,878 20,035
Provision for bad debts (5 ) (857 ) 141 (843 )
Ground leases 503 336 1,266 648
General and administrative expenses (1) 6,355 7,273 20,355 21,096
Acquisition-related expenses 1,163 354 2,829 1,624
Depreciation and amortization 36,152 29,951 97,513 74,405
Total expenses 71,889 60,441 201,530 159,220
OTHER (EXPENSES) INCOME:
Interest income and other net investment gains 30 337 272 703
Interest expense (24,051 ) (15,853 ) (66,155 ) (40,897 )
Loss on early extinguishment of debt -- -- -- (4,564 )
Total other (expenses) income (24,021 ) (15,516 ) (65,883 ) (44,758 )
INCOME FROM CONTINUING OPERATIONS 1,427 3,319 9,021 13,491
DISCONTINUED OPERATIONS:
Net income from discontinued operations 308 350 1,053 1,011
Net gain on dispositions of discontinued operations 12,555 -- 12,555 --
Total income from discontinued operations 12,863 350 13,608 1,011
NET INCOME 14,290 3,669 22,629 14,502
Net (income) loss attributable to noncontrolling common units of the Operating Partnership (296 ) 4 (320 ) (128 )
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION 13,994 3,673 22,309 14,374
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 INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 10,195 $ (126 ) $ 10,912 $ 2,977
Weighted average common shares outstanding - basic 58,355 52,274 56,136 48,562
Weighted average common shares outstanding - diluted 58,355 52,274 56,136 48,565
Net income (loss) available to common stockholders per share - basic $ 0.17 $ (0.01 ) $ 0.18 $ 0.04
Net income (loss) available to common stockholders per share - diluted $ 0.17 $ (0.01 ) $ 0.18 $ 0.04
(1) For the three months ended September 30, 2011, general and administrative expenses was reduced by a $0.5 million mark to market adjustment related to our deferred compensation plan liability. This reduction was offset by a related reduction in interest income and other net investment gains resulting from the mark to market of the marketable securities held for our deferred compensation plan.

KILROY REALTY CORPORATION FUNDS FROM OPERATIONS

(unaudited, in thousands, except per share data)

Three Months

Ended

September 30, 2011

Three Months

Ended

September 30, 2010

Nine Months

Ended

September 30, 2011

Nine Months

Ended

September 30, 2010

Net income (loss) available to common stockholders $ 10,195 $ (126 ) $ 10,912 $ 2,977
Adjustments:
Net income (loss) attributable to noncontrolling common units of the Operating Partnership 296 (4 ) 320 128
Depreciation and amortization of real estate assets 35,942 29,820 96,971 74,049
Net gain on dispositions of discontinued operations (12,555 ) -- (12,555 ) --
Funds From Operations (1) $ 33,878 $ 29,690 $ 95,648 $ 77,154
Weighted average common shares/units outstanding - basic 61,015 54,778 58,774 51,106
Weighted average common shares/units outstanding - diluted 61,017 54,782 58,961 51,109
Funds From Operations per common share/unit - basic (2) $ 0.56 $ 0.54 $ 1.63 $ 1.51
Funds From Operations per common share/unit - diluted (2) $ 0.56 $ 0.54 $ 1.62 $ 1.51
(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