KRC Kilroy Realty Corporation

Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its second quarter ended June 30, 2012, with a net loss available to common stockholders of $800,000, or $0.02 per share, compared to a net loss available to common stockholders of $317,000, or $0.01 per share, in the second quarter of 2011. Revenues from continuing operations in the second quarter totaled $103.9 million, up from $88.4 million in the prior year's second quarter. Funds from operations (FFO) for the period totaled $39.5 million, or $0.55 per share, compared to $31.6 million, or $0.52 per share, in the year-earlier period.

Results for the second quarter of 2012 include $0.03 per share of acquisition-related expenses, and the issuance of 575,689 common shares under the company's at-the-market stock offering program at a weighted average price of $46.05, net of selling commissions.

For the first six months of 2012, KRC reported net income available to common stockholders of $66.7 million, or $1.00 per share, compared to $717,000, or less than $0.01 per share, in the first half of 2011. Revenues from continuing operations in the six-month period totaled $203.3 million, up from $172.2 million in the same period of 2011. FFO for the first half of 2012 totaled $72.5 million, or $1.04 per share, compared to $61.8 million, or $1.06 per share, in the first half of 2011. Net income for first half of 2012 included approximately $72.8 million of net gains from property dispositions. All per share amounts in this report are presented on a diluted basis.

At June 30, 2012, the company's stabilized portfolio totaled approximately 15.6 million square feet and was 90.0% occupied. Occupancy declined from 91.6% in the prior quarter primarily due to the lease expirations of two tenants in San Diego as well as an industrial tenant move-out in Orange County.

Since the end of the first quarter, KRC has completed the purchase of five office buildings in four transactions aggregating approximately 1.2 million square feet of space for an aggregate purchase price of approximately $410 million. The company also expanded its development platform into Northern California with the purchase of 690 E. Middlefield Road in Mountain View, California and 329 Brannan Street in the SOMA submarket of San Francisco that upon completion are estimated to have a total investment of approximately $285 million. A summary of these transactions is as follows:

• In May, the company purchased 690 E. Middlefield Road in Mountain View, California for a purchase price of $74.5 million, where it will develop, own and manage a 341,000 square-foot office campus under a 15-year lease for Synopsys, Inc. (NASDAQ: SNPS), the global leader in electronic design automation. The Synopsys office campus represents KRC's first ground-up development project in the greater San Francisco Bay Area and will have a projected total investment of approximately $200 million. The fully entitled office project will include two five-story Class A office buildings with state-of-the-art infrastructure and amenities, designed and pre-registered to meet LEED Gold certification requirements.
• In June, the company acquired, in two separate transactions, a three-building office campus located on the waterfront in the Lake Union submarket of Seattle, Washington. The 420,000 square foot office project was purchased for approximately $144.6 million and is currently 99% leased. As part of the acquisition, the Company assumed a mortgage loan of approximately $34.0 million that bears interest at a rate of 5.09% and matures in August 2015.
• In July, the company acquired Skyline Tower, a 417,000 square-foot, 24-story, Class A office building in Bellevue, Washington for approximately $186 million. The LEED Silver certified property is located two blocks from the company's Key Center office building and one block north of the Bellevue Transit Center. Skyline Tower is currently 92% leased. As part of the acquisition, the company assumed a mortgage loan of approximately $84 million that bears interest at a rate of 6.37% and matures in April 2013.
• In July, the company acquired 329 Brannan Street, an office development opportunity in the heart of San Francisco's SOMA district for approximately $18.5 million. The site is zoned for approximately 5.0 FAR coverage and the company intends to build a six-level office building designed to appeal to the area's growing community of technology and media companies.
• In July, the company acquired Sunset Media Center, a 322,000 square foot, 22-story, Class A office building located in the Hollywood submarket of Los Angeles, California for a purchase price of approximately $79 million. The building is currently 87% leased. As part of the acquisition, the company issued approximately $5 million in common limited partnership units of Kilroy Realty, L.P. and assumed a mortgage loan of approximately $54 million that bears interest at a rate of 5.23% and matures in January 2016.

In late June, KRC obtained a $97.0 million non-recourse mortgage secured by two office projects. The mortgage has a term of 15 years, maturing on July 1, 2027, and bears interest at a rate of 4.48%. The company used the loan proceeds to pay down a portion of the outstanding balance on its credit facility.

"KRC's expanding operational footprint and management expertise in top quality real estate markets up and down the West Coast continue to generate significant opportunities for profitable growth and long-term value creation,” said John Kilroy, Jr., the company's president and chief executive officer. “With the talent and market knowledge now represented on our team, we're well-positioned to compete for and execute attractive acquisition and development projects from Seattle to San Diego. Equally important, we will continue to pursue these opportunities with financial discipline, recognizing that a strong balance sheet is essential in what remains an uncertain economic environment.”

KRC management will discuss updated earnings guidance for fiscal 2012 during the company's August 2, 2012 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) 679-8035 reservation #77332020. A replay of the conference call will be available via phone through August 9, 2012 at (888) 286-8010, reservation #61086733, or via the Internet at the company's website.

About Kilroy Realty Corporation. 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. 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, 2012, the company owned 12.2 million rentable square feet of commercial office space and 3.4 million rentable square feet of industrial space. More information is available at http://www.kilroyrealty.com.

Forward Looking Statements. This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on our current expectations, beliefs and assumptions, and are not guarantees of future performance, results or events. Forward-looking statements are inherently subject to uncertainties, risks, changes in circumstances, trends and factors that are difficult to predict, many of which are outside of our control. Accordingly, actual performance, results and events may vary materially from those indicated in forward-looking statements, and you should not rely on forward-looking statements as predictions of future performance, results or events. Numerous factors could cause actual future performance, results and events to differ materially from those indicated in forward-looking statements, including, among others: risks associated with investment in real estate assets, which are illiquid, and with trends in the real estate industry; competitive market conditions; the ability to complete potential acquisitions and dispositions on announced terms; the ability to successfully operate acquired properties; the availability of cash for debt service and exposure of risk of default under debt obligations; government regulations that may affect development, redevelopment and use of properties; and the ability to successfully complete development and redevelopment projects on schedule and within budgeted amounts. These factors are not exhaustive. For a discussion of additional factors that could materially adversely affect our business and financial performance, see the factors included under the caption “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2011, quarterly report on Form 10-Q for the quarter ended March 31, 2012, and our other filings with the Securities and Exchange Commission. All forward-looking statements are based on currently available information and speak only as of the date on which they are made. We assume no obligation to update any forward-looking statement made in this press release that becomes untrue because of subsequent events, new information or otherwise, except to the extent required in connection with ongoing requirements under Federal securities laws.

           

KILROY REALTY CORPORATION

SUMMARY QUARTERLY RESULTS

(unaudited, in thousands, except per share data)

    Three Months

Ended

June 30, 2012

Three Months

Ended

June 30, 2011

Six Months

Ended

June 30, 2012

Six Months

Ended

June 30, 2011

Revenues from continuing operations $ 103,922 $ 88,390 $ 203,332 $ 172,163   Revenues including discontinued operations $ 103,922 $ 92,064 $ 204,335 $ 180,189   Net (loss) income available to common stockholders(1) $ (800 ) $ (317 ) $ 66,740 $ 717   Weighted average common shares outstanding - basic 68,345 57,686 65,997 55,009 Weighted average common shares outstanding - diluted 68,345 57,686 65,997 55,009   Net (loss) income available to common stockholders per share - basic (1) $ (0.02 ) $ (0.01 ) $ 1.00 $ 0.00 Net (loss) income available to common stockholders per share - diluted (1) $ (0.02 ) $ (0.01 ) $ 1.00 $ 0.00   Funds From Operations (1), (2), (3) $ 39,508 $ 31,643 $ 72,498 $ 61,770   Weighted average common shares/units outstanding - basic (4) 71,226 60,337 68,799 57,634 Weighted average common shares/units outstanding - diluted (4) 72,473 60,817 69,815 58,010   Funds From Operations per common share/unit - basic (1), (4) $ 0.55 $ 0.52 $ 1.05 $ 1.07 Funds From Operations per common share/unit - diluted (1), (4) $ 0.55 $ 0.52 $ 1.04 $ 1.06   Common shares outstanding at end of period: 68,928 58,464 Common partnership units outstanding at end of period 1,718   1,718   Total common shares and units outstanding at end of period 70,646 60,182   June 30, 2012 June 30, 2011 Stabilized portfolio occupancy rates: Office 89.3 % 87.9 % Industrial 92.5 % 97.6 % Weighted average total 90.0 % 90.2 %   Los Angeles and Ventura Counties 88.0 % 84.0 % San Diego County 87.5 % 88.4 % Orange County 92.7 % 96.7 % San Francisco Bay Area 91.4 % 93.1 % Greater Seattle 93.8 % 90.4 % Weighted average total 90.0 % 90.2 %   Total square feet of stabilized properties owned at end of period: Office 12,227 11,466 Industrial 3,413   3,605   Total 15,640 15,071   (1)     Net (Loss) Income Available to Common Stockholders includes a net gain on dispositions of discontinued operations of $72.8 million for the six months ended June 30, 2012. In addition, Net (Loss) Income Available to Common Stockholders and Funds from Operations for the six months ended June 30, 2012 include a non-cash charge of $4.9 million related to the original issuance cost of the Series E and F Preferred Stock that were redeemed on April 16, 2012. (2) 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. (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

(unaudited, in thousands)

    June 30, 2012 December 31, 2011

ASSETS

REAL ESTATE ASSETS: Land and improvements $ 576,433 $ 537,574 Buildings and improvements 3,137,665 2,830,310 Undeveloped land and construction in progress 557,657   430,806  

Total real estate held for investment

4,271,755 3,798,690 Accumulated depreciation and amortization (801,083 ) (742,503 ) Total real estate held for investment, net 3,470,672 3,056,187   Real estate assets and other assets held for sale, net — 84,156 Cash and cash equivalents 18,111 4,777 Restricted cash 97 358 Marketable securities 6,546 5,691 Current receivables, net 7,643 8,395 Deferred rent receivables, net 110,689 101,142 Deferred leasing costs and acquisition-related intangible assets, net 168,488 155,522 Deferred financing costs, net 18,919 18,368 Prepaid expenses and other assets, net 46,357   12,199   TOTAL ASSETS $ 3,847,522   $ 3,446,795    

LIABILITIES, NONCONTROLLING INTEREST AND EQUITY

LIABILITIES: Secured debt $ 381,097 $ 351,825 Exchangeable senior notes, net 161,844 306,892 Unsecured debt, net 1,130,732 980,569 Unsecured line of credit 102,000 182,000 Accounts payable, accrued expenses and other liabilities 98,940 81,713 Accrued distributions 25,975 22,692 Deferred revenue and acquisition-related intangible liabilities, net 108,462 79,781 Rents received in advance and tenant security deposits 31,768 26,917 Liabilities and deferred revenue of real estate assets held for sale —   13,286   Total liabilities 2,040,818   2,045,675     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 7.50% Series F Cumulative Redeemable Preferred stock — 83,157 6.875% Series G Cumulative Redeemable Preferred stock 96,155 — Common stock 689 588 Additional paid-in capital 1,856,431 1,448,997 Distributions in excess of earnings (259,495 ) (277,450 ) Total stockholders' equity 1,693,780   1,293,717   Noncontrolling Interest Common units of the Operating Partnership 39,286   33,765   Total equity 1,733,066   1,327,482   TOTAL LIABILITIES, NONCONTROLLING INTEREST AND EQUITY $ 3,847,522   $ 3,446,795                  

KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

   

Three Months Ended

June 30, 2012

Three Months Ended

June 30, 2011

Six Months Ended

June 30, 2012

Six Months Ended June 30, 2011 REVENUES: Rental income $ 94,265 $ 80,158 $ 184,484 $ 157,155 Tenant reimbursements 9,065 7,130 17,369 13,152 Other property income 592   1,102   1,479   1,856   Total revenues 103,922   88,390   203,332   172,163     EXPENSES: Property expenses 21,196 17,356 38,731 34,865 Real estate taxes 8,881 8,127 17,270 16,017 Provision for bad debts — 120 2 146 Ground leases 615 424 1,417 763 General and administrative expenses 9,251 7,440 18,018 14,000 Acquisition-related expenses 1,813 1,194 3,341 1,666 Depreciation and amortization 40,624   31,378   77,370   59,819   Total expenses 82,380   66,039   156,149   127,276     OTHER (EXPENSES) INCOME: Interest income and other net investment (losses) gains (110 ) 58 374 242 Interest expense (19,155 ) (21,228 ) (40,318 ) (42,104 ) Total other (expenses) income (19,265 ) (21,170 ) (39,944 ) (41,862 )   INCOME FROM CONTINUING OPERATIONS 2,277 1,181 7,239 3,025   DISCONTINUED OPERATIONS: Income from discontinued operations — 2,291 900 5,314 Net gain on dispositions of discontinued operations —   —   72,809   —   Total income from discontinued operations —   2,291   73,709   5,314     NET INCOME 2,277 3,472 80,948 8,339   Net loss (income) attributable to noncontrolling common units of the Operating Partnership 20   10   (1,775 ) (24 )   NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION 2,297 3,482 79,173 8,315   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 (1,700 ) (2,402 ) (4,721 ) (4,804 ) Original issuance costs of preferred stock called for redemption —   —   (4,918 ) —   Total preferred distributions and dividends (3,097 ) (3,799 ) (12,433 ) (7,598 )   NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS $ (800 ) $ (317 ) $ 66,740   $ 717     Weighted average common shares outstanding - basic 68,345 57,686 65,997 55,009 Weighted average common shares outstanding - diluted 68,345 57,686 65,997 55,009   Net (loss) income available to common stockholders per share - basic $ (0.02 ) $ (0.01 ) $ 1.00   $ 0.00   Net (loss) income available to common stockholders per share - diluted $ (0.02 ) $ (0.01 ) $ 1.00   $ 0.00                  

KILROY REALTY CORPORATION FUNDS FROM OPERATIONS

(unaudited, in thousands, except per share data)

   

Three Months Ended

June 30, 2012

Three Months Ended

June 30, 2011

Six Months Ended

June 30, 2012

Six Months Ended June 30, 2011 Net (loss) income available to common stockholders $ (800 ) $ (317 ) $ 66,740 $ 717 Adjustments: Net (loss) income attributable to noncontrolling common units of the Operating Partnership (20 ) (10 ) 1,775 24 Depreciation and amortization of real estate assets 40,328 31,970 76,792 61,029 Net gain on dispositions of discontinued operations —   —   (72,809 ) — Funds From Operations (1) $ 39,508   $ 31,643   $ 72,498   $ 61,770   Weighted average common shares/units outstanding - basic 71,226 60,337 68,799 57,634 Weighted average common shares/units outstanding - diluted 72,473 60,817 69,815 58,010   Funds From Operations per common share/unit - basic (2) $ 0.55   $ 0.52   $ 1.05   $ 1.07 Funds From Operations per common share/unit - diluted (2) $ 0.55   $ 0.52   $ 1.04   $ 1.06   (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, gains and losses from sales of depreciable real estate and impairment write-downs associated with depreciable real estate, 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.