KRC Kilroy Realty Corporation

Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its third quarter ended September 30, 2015.

Third Quarter Highlights

Financial Results

• Funds from operations (FFO) of $0.77 per share, up 12% from $0.69 per share in the third quarter of 2014
• Net income available to common stockholders of $1.09 per share; includes an $0.85 per share gain on property dispositions
• Revenues of $141.6 million

Stabilized Portfolio

• Stabilized portfolio was 95.6% occupied and 97.2% leased at September 30, 2015
• Signed over 385,000 square feet of new or renewing office leases

Development

• Delivered the fully leased office component of the historic buildings at the Columbia Square mixed-use development project in Hollywood
• Completed the acquisition of a fully entitled, 3.3 acre mixed-use development site in the south of market area of San Francisco for approximately $78.0 million in cash

Capital Recycling

• Completed the sale of the second tranche of a two-part transaction encompassing six office properties in San Diego for gross proceeds of approximately $163.0 million

Finance

• Completed the sale of 3,773,766 shares of common stock at a price of $66.19 per share for aggregate net proceeds of $249.6 million
• Completed an underwritten public offering of 10-year, 4.375% senior unsecured notes for gross proceeds of approximately $400.0 million

Recent Developments

• In October, re-paid at par, two secured mortgages totaling approximately $90.1 million
• In October, completed and delivered the first of two buildings encompassing 226,000 rentable square feet at the company’s Crossing/900 project in Redwood City. Both buildings are fully leased to Box, Inc.

Results for the Quarter Ended September 30, 2015

For its third quarter ended September 30, 2015, KRC reported FFO of $73.6 million, or $0.77 per share, compared to $60.4 million, or $0.69 per share, in the third quarter of 2014. Net income available to common stockholders was $101.4 million, or $1.09 per share, compared to $15.7 million, or $0.18 per share, in the year-earlier period. Net income in the third quarter of 2015 included a $78.5 million gain from property dispositions. Net income in the third quarter of 2014 included a $5.6 million gain from property dispositions. The company’s total revenues in the third quarter of 2015 were $141.6 million, up from $131.1 million in the third quarter of 2014.

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

Operating and Leasing Activity

At September 30, 2015, KRC’s stabilized portfolio totaled approximately 13.1 million square feet of office space located in Los Angeles, Orange County, San Diego, the San Francisco Bay Area and greater Seattle. During the third quarter, the company signed new or renewing leases on 385,026 square feet of space in the stabilized portfolio. At quarter end, the portfolio was 95.6% occupied, up from 94.1% at September 30, 2014, and was 97.2% leased.

Real Estate Development Activity

In July, KRC delivered the office component of the historic buildings at the company’s 685,000-square-foot mixed-use Columbia Square project in Hollywood. The two buildings total just under 100,000 square feet of office space and are fully leased to NeueHouse, a private workspace collective.

Also in July, KRC acquired a fully designed and entitled development project situated on 3.3 acres at 100 Hooper Street in the south of market area of San Francisco for approximately $78.0 million in cash. The company plans to develop, own and manage approximately 400,000 square feet of office, production, distribution and repair space within the project, for a total investment, including the acquisition costs, of approximately $250.0 million.

At September 30, 2015, KRC had seven projects under construction totaling approximately 2.3 million square feet of space representing a total estimated investment of approximately $1.5 billion. The office portion of these seven projects is 56% leased.

Management Comments

“Operating conditions for commercial real estate in our West Coast markets remain strong, driven by a continuing healthy economy and robust demand for well-designed contemporary office environments,” said John Kilroy, the company’s chairman, president and chief executive officer. “With this favorable backdrop, we continue to make steady progress on all fronts, including leasing, occupancy, development, capital recycling and financial strength—all of which drive our ability to build the long-term value of our enterprise.”

FFO per Share Guidance

The company has updated its guidance range for NAREIT defined FFO per share (diluted) for full year 2015 to $3.36 - $3.40 per share from $3.30 - $3.40 per share. The updated guidance reflects, when compared to the company’s prior guidance, a midpoint increase of $0.03 per share.

These estimates reflect management’s view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and the earnings impact of the events referenced in this release and otherwise referenced during the conference call referred to below. These estimates do not include possible future gains or losses or the impact on operating results from other possible future property acquisitions or dispositions, other possible capital markets activity or possible future impairment charges. There can be no assurance that the company’s actual results will not differ materially from these estimates. A reconciliation of the company’s NAREIT defined FFO guidance range to its projected net income range is provided at the company's website http://www.kilroyrealty.com in the quarterly supplemental report.

Conference Call and Audio Webcast

KRC management will discuss updated earnings guidance for fiscal 2015 during the company’s October 29, 2015 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 #64060462. A replay of the conference call will be available via phone through November 5, 2015 at (888) 286-8010, reservation #37153501, or via the Internet at the company’s website.

About Kilroy Realty Corporation

With more than 65 years’ experience owning, developing, acquiring and managing real estate assets in West Coast real estate markets, Kilroy Realty Corporation (KRC), a publicly traded real estate investment trust and member of the S&P MidCap 400 Index, is one of the region’s premier landlords. The company provides physical work environments that foster creativity and productivity and serves a broad roster of dynamic, innovation-driven tenants, including technology, entertainment, digital media and health care companies.

At September 30, 2015, the company’s stabilized portfolio totaled 13.1 million square feet of office properties, all located in the coastal regions of greater Seattle, the San Francisco Bay Area, Los Angeles, Orange County and San Diego. The company is recognized by the Global Real Estate Sustainability Benchmark (GRESB) as the North American leader in sustainability and was ranked first among 155 North American participants across all asset types. At the end of the third quarter, the company’s properties were 45% LEED certified and 64% of eligible properties were ENERGY STAR certified. In addition, KRC had approximately 2.3 million square feet of office and mixed-use development under construction with a total estimated investment of approximately $1.5 billion. 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, 2014 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   Nine Months Ended September 30, September 30, 2015   2014   2015       2014   Revenues from continuing operations $ 141,553 $ 129,024 $ 433,862 $ 379,960   Revenues including discontinued operations $ 141,553 $ 131,082 $ 433,862 $ 386,594   Net income available to common stockholders (1)(2) $ 101,446 $ 15,669 $ 195,508 $ 139,429   Weighted average common shares outstanding – basic 92,150 83,161 89,077 82,525 Weighted average common shares outstanding – diluted 92,639 85,110 89,593 84,623   Net income available to common stockholders per share – basic (1)(2) $ 1.10 $ 0.18 $ 2.18 $ 1.67 Net income available to common stockholders per share – diluted (1)(2) $ 1.09 $ 0.18 $ 2.17 $ 1.63  

Funds From Operations (1)(3)(4)

$ 73,588 $ 60,399 $ 239,939 $ 180,927  

Weighted average common shares/units outstanding – basic (5)

95,097 86,189 92,048 85,555

Weighted average common shares/units outstanding – diluted (5)

95,586 88,138 92,564 87,653   Funds From Operations per common share/unit – basic (5) $ 0.77 $ 0.70 $ 2.61 $ 2.11 Funds From Operations per common share/unit – diluted (5) $ 0.77 $ 0.69 $ 2.59 $ 2.06   Common shares outstanding at end of period 92,220 83,388 Common partnership units outstanding at end of period   1,788     1,804  

Total common shares and units outstanding at end of period

94,008 85,192   September 30, September 30,   2015     2014   Stabilized office portfolio occupancy rates: (6) Los Angeles and Ventura Counties 94.1 % 92.7 % Orange County 95.7 % 97.8 % San Diego County 96.3 % 90.8 % San Francisco Bay Area 96.8 % 98.8 % Greater Seattle   94.7 %   95.2 % Weighted average total 95.6 % 94.1 %   Total square feet of stabilized office properties owned at end of period: (6) Los Angeles and Ventura Counties 3,505 3,503 Orange County 272 272 San Diego County 3,318 4,244 San Francisco Bay Area 3,890 3,279 Greater Seattle   2,066     2,188   Total 13,051 13,486

________________________

(1)   Net income available to common stockholders and Funds From Operations for the nine months ended September 30, 2015 and 2014 includes gains on sale of land of $17.3 million and $3.5 million, respectively. (2) Net income available to common stockholders for the three and nine months ended September 30, 2015 includes gains of sales of depreciable operating properties of $78.5 million and $110.0 million, respectively. Net income available to common stockholders for the three and nine months ended September 30, 2014 includes gains on dispositions of discontinued operations of $5.6 million and $110.4 million, respectively. (3) 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. (4) Reported amounts are attributable to common stockholders and common unitholders. (5) Calculated based on weighted average shares outstanding including participating share-based awards and assuming the exchange of all common limited partnership units outstanding. (6) Occupancy percentages and total square feet reported are based on the company’s stabilized office portfolio for the periods presented. Occupancy percentages and total square feet shown for September 30, 2014 include the office properties that were sold during 2014 and 2015.  

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands)

   

September 30, 2015

 

December 31, 2014

(unaudited)

ASSETS

REAL ESTATE ASSETS: Land and improvements $ 850,280 $ 877,633 Buildings and improvements 4,028,044 4,059,639 Undeveloped land and construction in progress   1,475,718     1,120,660   Total real estate assets held for investment 6,354,042 6,057,932 Accumulated depreciation and amortization   (999,557 )   (947,664 ) Total real estate assets held for investment, net 5,354,485 5,110,268   Real estate assets and other assets held for sale, net — 8,211 Cash and cash equivalents 567,940 23,781 Restricted cash 8,130 75,185 Marketable securities 12,638 11,971 Current receivables, net 11,533 7,229 Deferred rent receivables, net 183,352 156,416 Deferred leasing costs and acquisition-related intangible assets, net 173,457 201,926 Deferred financing costs, net 18,709 18,374 Prepaid expenses and other assets, net   23,148     20,375   TOTAL ASSETS $ 6,353,392   $ 5,633,736    

LIABILITIES AND EQUITY

LIABILITIES: Secured debt $ 475,923 $ 546,292 Unsecured debt, net 2,181,382 1,783,121 Unsecured line of credit — 140,000 Accounts payable, accrued expenses and other liabilities 249,980 225,830 Accrued distributions 34,993 32,899 Deferred revenue and acquisition-related intangible liabilities, net 127,473 132,239 Rents received in advance and tenant security deposits 46,579 49,363 Liabilities of real estate assets held for sale   —     56   Total liabilities   3,116,330     2,909,800     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 922 863 Additional paid-in capital 3,042,330 2,635,900 Distributions in excess of earnings   (62,850 )   (162,964 ) Total stockholders’ equity 3,172,813 2,666,210 Noncontrolling Interests Common units of the Operating Partnership 57,913 51,864 Noncontrolling interest in consolidated subsidiary   6,336     5,862   Total noncontrolling interests   64,249     57,726   Total equity   3,237,062     2,723,936   TOTAL LIABILITIES AND EQUITY $ 6,353,392   $ 5,633,736    

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

    Three Months Ended   Nine Months Ended September 30, September 30,   2015       2014     2015       2014   REVENUES Rental income $ 129,510 $ 115,221 $ 391,892 $ 338,911 Tenant reimbursements 11,681 11,346 40,280 33,399 Other property income   362     2,457     1,690     7,650   Total revenues   141,553     129,024     433,862     379,960     EXPENSES Property expenses 26,684 25,801 78,264 75,448 Real estate taxes 12,087 11,008 37,232 32,728 Provision for bad debts — 58 289 58 Ground leases 862 771 2,451 2,306 General and administrative expenses 10,799 11,138 36,200 33,806 Acquisition-related expenses 4 431 397 1,268 Depreciation and amortization   49,422     50,032     152,567     148,647   Total expenses   99,858     99,239     307,400     294,261     OTHER (EXPENSES) INCOME Interest income and other net investment (loss) gain (694 ) (9 ) 177 587 Interest expense   (12,819 )   (16,608 )   (44,561 )   (49,880 ) Total other (expenses) income (13,513 ) (16,617 ) (44,384 ) (49,293 )   INCOME FROM CONTINUING OPERATIONS BEFORE GAINS ON SALES OF REAL ESTATE 28,182 13,168 82,078 36,406 Gain on sale of land — — 17,268 3,490 Gains on sales of depreciable operating properties   78,522     —     109,950     —   INCOME FROM CONTINUING OPERATIONS   106,704     13,168     209,296     39,896     DISCONTINUED OPERATIONS: Income from discontinued operations — 548 — 2,091 Gains on dispositions of discontinued operations   —     5,587     —     110,391   Total income from discontinued operations   —     6,135     —     112,482     NET INCOME 106,704 19,303 209,296 152,378   Net income attributable to noncontrolling common units of the Operating Partnership   (1,945 )   (321 )   (3,850 )   (3,011 )   NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION 104,759 18,982 205,446 149,367   PREFERRED DIVIDENDS   (3,313 )   (3,313 )   (9,938 )   (9,938 ) NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 101,446   $ 15,669   $ 195,508   $ 139,429     Weighted average common shares outstanding – basic 92,150 83,161 89,077 82,525 Weighted average common shares outstanding – diluted 92,639 85,110 89,593 84,623   Net income available to common stockholders per share – basic $ 1.10   $ 0.18   $ 2.18   $ 1.67   Net income available to common stockholders per share – diluted $ 1.09   $ 0.18   $ 2.17   $ 1.63    

KILROY REALTY CORPORATION

FUNDS FROM OPERATIONS

(unaudited, in thousands, except per share data)

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

  2015       2014     2015       2014   Net income available to common stockholders $ 101,446 $ 15,669 $ 195,508 $ 139,429 Adjustments: Net income attributable to noncontrolling common units of the Operating Partnership 1,945 321 3,850 3,011 Depreciation and amortization of real estate assets 48,719 49,996 150,531 148,878 Gains on sales of depreciable real estate   (78,522 )   (5,587 )   (109,950 )   (110,391 ) Funds From Operations (1)(2)(3) $ 73,588   $ 60,399   $ 239,939   $ 180,927     Weighted average common shares/units outstanding – basic 95,097 86,189 92,048 85,555 Weighted average common shares/units outstanding – diluted 95,586 88,138 92,564 87,653   Funds From Operations per common share/unit – basic (3) $ 0.77   $ 0.70   $ 2.61   $ 2.11   Funds From Operations per common share/unit – diluted (3) $ 0.77   $ 0.69   $ 2.59   $ 2.06  

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(1)   We calculate 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.   We believe that FFO is a useful supplemental measure of our 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 our 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 operating performance to other REITs. However, other REITs may use different methodologies to calculate FFO, and accordingly, our 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, we believe that FFO along with the required GAAP presentations provides a more complete measurement of our performance relative to our 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 our operating performance because 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 our properties, which are significant economic costs and could materially impact our results from operations.   (2) FFO includes amortization of deferred revenue related to tenant-funded tenant improvements of $3.7 million and $2.7 million for the three months ended September 30, 2015 and 2014, respectively and $10.0 million and $7.7 million for the nine months ended September 30, 2015 and 2014, respectively.   (3) Reported amounts are attributable to common stockholders and common unitholders.

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Kilroy Realty CorporationTyler H. RoseExecutive Vice President and Chief Financial Officer(310) 481-8484orMichelle NgoSenior Vice President and Treasurer(310) 481-8581