Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its first quarter ended March 31, 2013.

First Quarter Highlights

  • Funds from operations (FFO) per share of $0.62.
  • Net loss available to common stockholders of $0.02 per share, primarily attributable to an increase in depreciation and amortization expense.
  • Revenues from continuing operations of $117.5 million.
  • Stabilized portfolio was 90.3% occupied and 93.4% leased at March 31, 2013.
  • The company signed new or renewing leases on 434,000 square feet of space.
  • The company acquired a two-building, approximately 321,000 square-foot office property in the South Lake Union submarket of Seattle for approximately $170 million, including the assumption of approximately $84 million in debt.
  • The company completed a public offering of 3.8% senior unsecured 10-year notes for net proceeds of approximately $297 million.

Results for the quarter ended March 31, 2013

For its first quarter ended March 31, 2013, KRC reported FFO for the period of $49.1 million, or $0.62 per share, compared to $33.0 million, or $0.49 per share, in the first quarter of 2012. Net loss available to common stockholders was $0.9 million, or $0.02 per share, compared to net income available to common stockholders of $67.5 million, or $1.06 per share, in the first quarter of 2012. Net loss available to common stockholders in the first quarter of 2013 included a year over year increase in depreciation and amortization expense of approximately $11.0 million related to properties the company acquired in 2012 and 2013. Net income available to common stockholders in the first quarter of 2012 included approximately $3.7 million of income from discontinued operations, $72.8 million of net gains from property dispositions and a $4.9 million charge for the early redemption of preferred stock.

The company's revenues from continuing operations in the first quarter of 2013 totaled $117.5 million, up from $92.4 million in the first quarter of 2012.

All per-share amounts in this report are presented on a fully diluted basis.

Operating and Leasing Activity

At March 31, 2013, the company's stabilized portfolio, encompassing approximately 13.6 million square feet of office space located in Los Angeles, Orange County, San Diego, the San Francisco Bay Area and greater Seattle, was 90.3% occupied, down from 92.8% at year-end 2012. The decline was largely due to scheduled expirations. At the end of the first quarter, KRC's stabilized portfolio was 93.4% leased. During the first quarter, the company also signed new or renewing leases on approximately 434,000 square feet of office space.

Real Estate Investment Activity

In January, KRC completed the acquisition of a two-building, 321,000 square-foot office property located in the South Lake Union submarket of greater Seattle. The company paid approximately $170 million for the property, including the assumption of approximately $84 million in debt. The property is currently 100% occupied.

KRC currently has four 100% pre-leased development projects under construction aggregating approximately 1.4 million square feet of space. The company estimates its total investment in the four development projects will be approximately $809.5 million. Scheduled completion dates for the four projects range from fourth quarter 2013 to first half of 2015.

Capital Financing Activity

In January, KRC completed a public offering of $300.0 million aggregate principal amount of 3.8% senior unsecured notes that mature on January 15, 2023 for net proceeds of approximately $297.0 million. During the quarter, the company also sold approximately $23.4 million, net of selling commissions, of its common stock via its at-the-market stock offering program.

Management Comments

"As our first quarter activity demonstrates, we remain focused on building the long-term value of our portfolio through both opportunistic acquisitions and well-executed development, while maintaining a strong balance sheet," said John Kilroy, Jr., the company's president and chief executive officer.

"Our first-quarter purchase of Westlake Terry, a fully leased, premier office property located in one of greater Seattle's most desirable submarkets, strengthens our footprint in the region, continues our strategic expansion into high quality West Coast markets, and underscores the competitive advantage we believe we are gaining from a larger operating platform and more visible franchise."

Conference Call and Audio Webcast

KRC management will discuss updated earnings guidance for fiscal 2013 during the company's May 1, 2013 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) 679-8033 reservation # 57852562. A replay of the conference call will be available via phone through May 8, 2013 at 888-286-8010, reservation # 50797205, or via the Internet at the company's website.

About Kilroy Realty Corporation

Kilroy Realty Corporation, a member of the S&P MidCap 400 Index, is a real estate investment trust active in major West Coast office markets. For over 65 years, the company has owned, developed, acquired and managed real estate assets primarily in the coastal regions of Los Angeles, Orange County, San Diego, the San Francisco Bay Area and greater Seattle. At March 31, 2013, the company owned 13.6 million rentable square feet of commercial office 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. 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; trends in the real estate industry; significant competition, which may decrease the occupancy and rental rates of properties; the ability to successfully complete acquisitions and dispositions on announced terms; the ability to successfully operate acquired properties; the availability of cash for distribution and debt service and exposure of risk of default under debt obligations; adverse changes to, or implementations of, applicable laws, regulations or legislation; 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, 2012 and our other filings with the Securities and Exchange Commission. All forward-looking statements are based on information that was available, 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 U.S. securities laws.

KILROY REALTY CORPORATION

SUMMARY QUARTERLY RESULTS

(unaudited, in thousands, except per share data)

 
Three Months

Ended

March 31, 2013

   Three Months

Ended

March 31, 2012

Revenues from continuing operations $ 117,497 $ 92,397
 
Revenues including discontinued operations $ 117,497 $ 100,413
 
Net (loss) income available to common stockholders(1) $ (903 ) $ 67,540
 
Weighted average common shares outstanding - basic 74,977 63,649
Weighted average common shares outstanding - diluted 74,977 63,649
 
Net (loss) income available to common stockholders per share - basic (1) $ (0.02 ) $ 1.06
Net (loss) income available to common stockholders per share - diluted (1) $ (0.02 ) $ 1.06
 
Funds From Operations (1), (2), (3) $ 49,086 $ 32,990
 
Weighted average common shares/units outstanding - basic (4) 78,039 66,371
Weighted average common shares/units outstanding - diluted (4) 79,725 67,156
 
Funds From Operations per common share/unit - basic (1), (4) $ 0.63 $ 0.50
Funds From Operations per common share/unit - diluted (1), (4) $ 0.62 $ 0.49
 
Common shares outstanding at end of period: 75,350 68,350
Common partnership units outstanding at end of period 1,827   1,718  
Total common shares and units outstanding at end of period 77,177 70,068
 
March 31, 2013 March 31, 2012
Stabilized office portfolio occupancy rates:(5)
Los Angeles and Ventura Counties 93.4 % 87.0 %
Orange County 90.0 % 93.3 %
San Diego County 87.2 % 91.7 %
San Francisco Bay Area 94.5 % 89.2 %
Greater Seattle 88.7 % 90.3 %
Weighted average total 90.3 % 90.0 %
 
Total square feet of stabilized office properties owned at end of period:(5)
Los Angeles and Ventura Counties 3,488 2,981
Orange County 497 541
San Diego County 5,250 5,184
San Francisco Bay Area 2,287 2,201
Greater Seattle 2,048   890  
Total 13,570 11,797
 

(1) Net Income Available to Common Stockholders includes a net gain on dispositions of discontinued operations of $72.8 million for the three months ended March 31, 2012. In addition, Net Income Available to Common Stockholders and Funds from Operations for the three months ended March 31, 2012 include a non-cash charge of $4.9 million related to the original issuance cost of the Series E and F Preferred Stock called for redemption on March 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.

(5) Occupancy percentages and total square feet reported are based on the Company's stabilized office portfolio for the period presented. Occupancy percentages and total square feet shown for March 31, 2012 include the office properties that were sold during the fourth quarter of 2012.

KILROY REALTY CORPORATION CONSOLIDATED BALANCE SHEETS

(in thousands)

 
March 31, 2013 December 31, 2012
(unaudited)

ASSETS

REAL ESTATE ASSETS:
Land and improvements $ 637,854 $ 612,714
Buildings and improvements 3,631,057 3,335,026
Undeveloped land and construction in progress 747,679   809,654  
Total real estate held for investment 5,016,590 4,757,394
Accumulated depreciation and amortization (790,878 ) (756,515 )
Total real estate held for investment, net 4,225,712 4,000,879
 
Cash and cash equivalents 135,676 16,700
Restricted cash 19,465 247,544
Marketable securities 8,029 7,435
Current receivables, net 10,666 9,220
Deferred rent receivables, net 122,142 115,418
Deferred leasing costs and acquisition-related intangible assets, net 196,525 189,968
Deferred financing costs, net 20,501 18,971
Prepaid expenses and other assets, net 16,571   9,949  
TOTAL ASSETS $ 4,755,287   $ 4,616,084  
 

LIABILITIES AND EQUITY

LIABILITIES:
Secured debt $ 570,676 $ 561,096
Exchangeable senior notes, net 165,022 163,944
Unsecured debt, net 1,430,880 1,130,895
Unsecured line of credit -- 185,000
Accounts payable, accrued expenses and other liabilities 171,694 154,734
Accrued distributions 29,106 28,924
Deferred revenue and acquisition-related intangible liabilities, net 118,118 117,904
Rents received in advance and tenant security deposits 37,251   37,654  
Total liabilities 2,522,747   2,380,151  
 
EQUITY:
Stockholders' Equity
6.875% Series G Cumulative Redeemable Preferred stock 96,155 96,155
6.375% Series H Cumulative Redeemable Preferred stock 96,256 96,256
Common stock 753 749
Additional paid-in capital 2,149,052 2,126,005
Distributions in excess of earnings (157,211 ) (129,535 )
Total stockholders' equity 2,185,005   2,189,630  
Noncontrolling Interest
Common units of the Operating Partnership 47,535   46,303  
Total equity 2,232,540   2,235,933  
TOTAL LIABILITIES AND EQUITY $ 4,755,287   $ 4,616,084  
 

KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

 
Three Months

Ended

March 31, 2013

Three Months

Ended

March 31, 2012

REVENUES:
Rental income $ 107,380 $ 84,349
Tenant reimbursements 9,887 7,180
Other property income 230   868  
Total revenues 117,497   92,397  
 
EXPENSES:
Property expenses 23,773 16,132
Real estate taxes 10,337 7,665
Provision for bad debts 95 2
Ground leases 847 807
General and administrative expenses 9,669 8,767
Acquisition-related expenses 655 1,528
Depreciation and amortization 50,391   34,652  
Total expenses 95,767   69,553  
 
OTHER (EXPENSES) INCOME:
Interest income and other net investment gains 392 484
Interest expense (19,734 ) (21,163 )
Total other (expenses) income (19,342 ) (20,679 )
 
INCOME FROM CONTINUING OPERATIONS 2,388 2,165
 
DISCONTINUED OPERATIONS:
Income from discontinued operations -- 3,697
Net gain on dispositions of discontinued operations --   72,809  
Total income from discontinued operations --   76,506  
 
NET INCOME 2,388 78,671
 
Net loss (income) attributable to noncontrolling common units of the Operating Partnership 22   (1,795 )
 
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION 2,410 76,876
 
PREFERRED DISTRIBUTIONS AND DIVIDENDS:
Distributions on noncontrolling cumulative redeemable preferred units of the Operating Partnership -- (1,397 )
Preferred dividends (3,313 ) (3,021 )
Original issuance costs of redeemed preferred stock --   (4,918 )
Total preferred distributions and dividends (3,313 ) (9,336 )
 
NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS $ (903 ) $ 67,540  
 
Weighted average common shares outstanding - basic 74,977 63,649
Weighted average common shares outstanding - diluted 74,977 63,649
 
Net (loss) income available to common stockholders per share - basic $ (0.02 ) $ 1.06  
Net (loss) income available to common stockholders per share - diluted $ (0.02 ) $ 1.06  
 

KILROY REALTY CORPORATION FUNDS FROM OPERATIONS

(unaudited, in thousands, except per share data)

 
Three Months

Ended

March 31, 2013

Three Months

Ended

March 31, 2012

Net (loss) income available to common stockholders $ (903 ) $ 67,540
Adjustments:
Net (loss) income attributable to noncontrolling common units of the Operating Partnership (22 ) 1,795
Depreciation and amortization of real estate assets 50,011 36,464
Net gain on dispositions of discontinued operations --   (72,809 )
Funds From Operations (1)(2) $ 49,086   $ 32,990  
 
Weighted average common shares/units outstanding - basic 78,039 66,371
Weighted average common shares/units outstanding - diluted 79,725 67,156
 
Funds From Operations per common share/unit - basic (3) $ 0.63   $ 0.50  
Funds From Operations per common share/unit - diluted (3) $ 0.62   $ 0.49  
 

(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. Our calculation of FFO includes the amortization of deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets.

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) FFO includes amortization of deferred revenue related to tenant-funded tenant improvements of $2.4 million and $2.3 million for the three months ended March 31, 2013 and March 31, 2012, respectively.

(3) Reported amounts are attributable to common stockholders and common unitholders.

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