Kilroy Realty Corporation (NYSE: KRC) today reported
financial results for its third quarter ended September
30, 2016.
Third Quarter Highlights
Financial Results
- Net income available to common
stockholders of $0.54 per share
- Funds from operations available to
common stockholders and unitholders (“FFO”) of $0.92 per share
- Revenues of $168.3 million
- Net income and FFO included proceeds of
approximately $0.05 per share related to a property damage
settlement
Stabilized Portfolio
- Stabilized portfolio was 96.6% occupied
and 97.8% leased at September 30, 2016
- Signed approximately 314,000 square
feet of new or renewing leases
Strategic Venture
- Entered into agreements with Norges
Bank Real Estate Management (“NBREM”) through which NBREM will
invest for a 44% common equity interest in two existing companies
that own office buildings in San Francisco. The properties are
located at 100 First Street and 303 Second Street in San
Francisco’s SOMA district and aggregate approximately 1.2 million
rentable square feet of office space. NBREM will contribute a total
of $452.9 million to the companies, which is net of approximately
$55.3 million that represents a proportionate share of the existing
mortgage debt. The transaction was structured with a staggered
closing and the 100 First Street venture closed on August 30 with a
contribution by NBREM of $191.4 million. The 303 Second Street
venture is scheduled to close in the fourth quarter
Capital Recycling
- Completed the sale of two office
properties aggregating 137,000 rentable square feet and a 7.0-acre
land site in San Diego’s Sorrento Mesa submarket for gross proceeds
of $49.0 million
- Agreed to sell a 68,000 square-foot
office building in San Diego’s Sorrento Mesa submarket for gross
proceeds of $12.1 million with a scheduled closing date in the
first quarter of 2017. This property is reported as held for sale
as of September 30, 2016
Finance
- Completed a private placement of $175.0
million of ten-year, 3.35% unsecured senior notes and $75.0 million
of twelve-year, 3.45% unsecured senior notes with a delayed draw
option required to be exercised by February 17, 2017. No amounts
were drawn or outstanding as of September 30, 2016
Results for the Quarter Ended September 30, 2016
For the third quarter ended September 30, 2016, KRC
reported net income available to common stockholders of
$50.6 million, or $0.54 per share, compared to
$101.4 million, or $1.09 per share, in the third quarter of
2015. Net income in the 2016 third quarter included $18.3 million,
or $0.20 per share, of gains from property dispositions and
proceeds of $5.0 million, or approximately $0.05 per share, related
to a property damage settlement. Net income in the 2015 third
quarter included $78.5 million, or $0.85 per share, of property
disposition gains. FFO in the third quarter of 2016 was
$88.5 million, or $0.92 per share, including proceeds
from the property damage settlement, compared to
$73.6 million, or $0.77 per share, in the year-earlier
quarter. Revenues totaled $168.3 million in the third quarter,
compared to $141.6 million in the prior year period.
All per share amounts in this report are presented on a diluted
basis.
Operating and Leasing Activity
At September 30, 2016, KRC’s stabilized portfolio totaled
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 and 200 residential
units. During the third quarter, the company signed new or renewing
leases in the office portfolio totaling 314,026 square feet of
space. At quarter-end, the office portfolio was 96.6% occupied,
compared to 94.8% at December 31, 2015 and 95.6% at
September 30, 2015, and was 97.8% leased.
Real Estate Development Activity
At September 30, 2016, KRC had one project under
construction totaling approximately 700,000 square feet of space
and representing a total estimated investment of approximately
$485.0 million. The company also had two office properties
encompassing approximately 450,000 square feet in lease-up
representing a total estimated investment of approximately $275.0
million that were 81% committed at the end of the third quarter. In
addition, the company’s recently completed residential property was
22% leased at September 30, 2016.
Management Comments
“We’re approaching the end of 2016 from a position of
significant strength,” said John Kilroy, the company’s chairman,
president and chief executive officer. “Our stabilized portfolio is
generating strong same-store NOI growth. Our existing properties
and new development continue to attract major leasing commitments,
supporting the strategic choices we’ve made in the ongoing
evolution of our portfolio. And our disciplined commitment to a
strong balance sheet and strategic access to multiple capital
sources has enabled us to lock in our funding needs at attractive
rates for the next stage of our development pipeline.”
FFO per Share Guidance
The company has updated its guidance range of NAREIT defined FFO
per share (diluted) for the full year 2016 to $3.43 - $3.47 per
share with a midpoint of $3.45 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.
Conference Call and Audio Webcast
KRC management will discuss earnings guidance for fiscal year
2016 during the company’s October 27, 2016 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) 713-4214 reservation #27486596. A replay
of the conference call will be available via phone through November
3, 2016 at (888) 286-8010, reservation #81807567, or via the
Internet at the company’s website.
About Kilroy Realty Corporation
With nearly 70 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, 2016, the company’s stabilized portfolio
totaled 13.6 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 GRESB as the North American leader in
sustainability and was ranked first among 178 North American
participants across all asset types. At the end of the third
quarter, the company’s properties were 51% LEED certified and 72%
of eligible properties were ENERGY STAR certified. In addition, KRC
had one office project totaling approximately 700,000 square feet
under construction and two office projects in lease-up totaling
approximately 450,000 square feet. More information is available at
http://www.kilroyrealty.com.
Non-GAAP Financial Information
The company does not provide a reconciliation for its guidance
range of FFO per common share/unit - diluted to net income
available to common stockholders per common share - diluted, the
most directly comparable forward-looking GAAP financial measure,
because it is unable to provide a meaningful or accurate estimation
of reconciling items and the information is not available without
unreasonable effort. This is due to the inherent difficulty of
forecasting the timing and/or amount of various items that would
impact net income available to common stockholders per share -
diluted, including, for example, gains on sales of depreciable real
estate and other items that have not yet occurred and are out of
the company’s control. For the same reasons, the company is unable
to address the probable significance of the unavailable information
and believes that providing a reconciliation for its guidance range
of FFO per common share/unit - diluted would imply a degree of
precision as to its forward-looking net income available to common
stockholders per common share - diluted that would be confusing or
misleading to investors.
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: global market and general economic
conditions and their effect on our liquidity and financial
conditions and those of our tenants; adverse economic or real
estate conditions generally, and specifically, in the States of
California and Washington; investment in our real estate assets,
which are illiquid; trends in the real estate industry; defaults on
or non-renewal of leases by tenants; any significant downturn in
tenants’ businesses; our ability to release property at or above
current market rates; costs to comply with government regulations,
including environmental remediations; the availability of cash for
distribution and debt service and exposure to risk of default under
debt obligations; increases in interest rates and our ability to
manage interest rate exposure; failure of interest rate hedging
contracts to perform as expected and the effectiveness of such
arrangements; the availability of financing on attractive terms or
at all, which may adversely impact our future interest expense and
our ability to pursue development, redevelopment and acquisition
opportunities and refinance existing debt; a decline in real estate
asset valuations, which may limit our ability to dispose of assets
at attractive prices or obtain or maintain debt financing;
significant competition, which may decrease the occupancy and
rental rates of properties; potential losses that may not be
covered by insurance; the ability to successfully complete
acquisitions and dispositions on announced terms; the ability to
successfully operate acquired, developed and redeveloped
properties; the ability to successfully complete development and
redevelopment projects on schedule and within budgeted amounts;
delays or refusals in obtaining all necessary zoning, land use and
other required entitlements, governmental permits and
authorizations for our development and redevelopment properties;
increases in anticipated capital expenditures, tenant improvement
and/or leasing costs; defaults on leases for land on which some of
our properties are located; adverse changes to, or implementations
of, applicable laws, regulations or legislation; risks associated
with joint venture investments, including our lack of sole
decision-making authority, our reliance on co-venturers' financial
condition and disputes between us and our co-venturers;
environmental uncertainties and risks related to natural disasters;
and our ability to maintain our status as a REIT. 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, 2015 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 OF QUARTERLY
RESULTS
(unaudited, in thousands, except per share
data)
Three Months EndedSeptember 30, Nine Months
EndedSeptember 30, 2016 2015
2016 2015 Revenues $ 168,348 $ 141,553 $
473,927 $ 433,862 Net income available to common
stockholders (1) $ 50,582 $ 101,446 $ 251,112 $ 195,508
Weighted average common shares outstanding – basic 92,227 92,150
92,221 89,077 Weighted average common shares outstanding – diluted
92,920 92,639 92,832 89,593 Net income available to common
stockholders per share – basic (1) $ 0.54 $ 1.10 $ 2.71 $ 2.18 Net
income available to common stockholders per share – diluted (1) $
0.54 $ 1.09 $ 2.69 $ 2.17 Funds From Operations (1)(2)(3) $
88,535 $ 73,588 $ 249,450 $ 239,939 Weighted average common
shares/units outstanding – basic (4) 95,992 95,097 95,760 92,048
Weighted average common shares/units outstanding – diluted (4)
96,686 95,586 96,371 92,564 Funds From Operations per common
share/unit – basic (4) $ 0.92 $ 0.77 $ 2.60 $ 2.61 Funds From
Operations per common share/unit – diluted (4) $ 0.92 $ 0.77 $ 2.59
$ 2.59 Common shares outstanding at end of period 92,272
92,220 Common partnership units outstanding at end of period 2,631
1,788 Total common shares and units outstanding at
end of period 94,903 94,008
September 30,2016
September 30,2015
Stabilized office portfolio occupancy rates: (5) Los Angeles and
Ventura Counties 94.8 % 94.1 % Orange County 97.8 % 95.7 % San
Diego County 94.5 % 96.3 % San Francisco Bay Area 98.3 % 96.8 %
Greater Seattle 98.2 % 94.7 %
Weighted average total
96.6 % 95.6 % Total square feet of stabilized office
properties owned at end of period: (5) Los Angeles and Ventura
Counties 3,633 3,505 Orange County 272 272 San Diego County 2,643
3,318 San Francisco Bay Area 4,992 3,890 Greater Seattle 2,066
2,066
Total
13,606 13,051 ________________________ (1) Net income
available to common stockholders for the three and nine months
ended September 30, 2016 includes gains on sales of depreciable
operating properties of $18.3 million and $164.3 million,
respectively. Net income available to common stockholders and Funds
From Operations for the nine months ended September 30, 2016
includes a loss on sale of land of $0.3 million. Net income
available to common stockholders for the three and nine months
ended September 30, 2015 includes gains on sales of depreciable
operating properties of $78.5 million and $110.0 million,
respectively. Net income available to common stockholders and Funds
From Operations for the nine months ended September 30, 2015
includes a gain on sale of land of $17.3 million. (2)
Reconciliation of Net income available to common stockholders to
Funds From Operations available to common stockholders and
unitholders 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 periods
presented. Occupancy percentages and total square feet shown for
September 30, 2015 include the office properties that were sold
subsequent to September 30, 2015 and held for sale at September 30,
2016.
KILROY REALTY
CORPORATION
CONSOLIDATED BALANCE
SHEETS
(in thousands)
September 30, 2016 December 31,
2015 (unaudited)
ASSETS
REAL ESTATE ASSETS: Land and improvements $ 1,017,591 $ 875,794
Buildings and improvements 4,669,442 4,091,012 Undeveloped land and
construction in progress 945,805 1,361,340 Total real
estate assets held for investment 6,632,838 6,328,146 Accumulated
depreciation and amortization (1,095,562 ) (994,241 ) Total real
estate assets held for investment, net 5,537,276 5,333,905
Real estate assets and other assets held for sale, net 9,440
117,666 Cash and cash equivalents 250,523 56,508 Restricted cash
57,501 696 Marketable securities 14,121 12,882 Current receivables,
net 9,709 11,153 Deferred rent receivables, net 212,204 189,704
Deferred leasing costs and acquisition-related intangible assets,
net 180,613 176,683 Prepaid expenses and other assets, net (1)
60,752 27,233 TOTAL ASSETS $ 6,332,139 $
5,926,430
LIABILITIES AND
EQUITY
LIABILITIES: Secured debt, net (1) $ 370,666 $ 380,835 Unsecured
debt, net (1) 1,846,672 1,844,634 Unsecured line of credit — —
Accounts payable, accrued expenses and other liabilities 252,122
246,323 Accrued dividends and distributions 37,749 34,992 Deferred
revenue and acquisition-related intangible liabilities, net 134,436
128,156 Rents received in advance and tenant security deposits
48,518 49,361 Liabilities and deferred revenue of real estate
assets held for sale 74 7,543
Total liabilities
2,690,237 2,691,844 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 923 923 Additional paid-in capital 3,191,718
3,047,894 Retained earnings/(distributions in excess of earnings)
78,107 (70,262 )
Total stockholders’ equity
3,463,159 3,170,966 Noncontrolling Interests Common units of the
Operating Partnership 93,270 57,100 Noncontrolling interests in
consolidated property partnerships 85,473 6,520 Total
noncontrolling interests 178,743 63,620 Total equity
3,641,902 3,234,586 TOTAL LIABILITIES AND EQUITY $
6,332,139 $ 5,926,430 ________________________ (1)
Effective January 1, 2016, the company adopted Financial
Accounting Standards Board Accounting Standards Update No. 2015-03
and 2015-15, which changed the presentation of deferred financing
costs on the balance sheet. As a result, for all periods presented,
deferred financing costs, with the exception of deferred financing
costs related to the unsecured line of credit, have been
reclassified as a reduction to the related secured debt, net and
unsecured debt, net line items. Deferred financing costs related to
the unsecured line of credit are included in prepaid expenses and
other assets, net.
KILROY REALTY
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
Three
Months EndedSeptember 30, Nine Months
EndedSeptember 30, 2016 2015
2016 2015 REVENUES Rental income $ 146,539 $
129,510 $ 423,947 $ 391,892 Tenant reimbursements 16,406 11,681
43,948 40,280 Other property income 5,403 362 6,032
1,690
Total revenues
168,348 141,553 473,927 433,862
EXPENSES Property expenses 30,050 26,684 85,236 78,264 Real estate
taxes 14,501 12,087 39,378 37,232 Provision for bad debts — — — 289
Ground leases 909 862 2,506 2,451 General and administrative
expenses 13,533 10,799 40,949 36,200 Acquisition-related expenses
188 4 964 397 Depreciation and amortization 56,666 49,422
160,452 152,567 Total expenses 115,847
99,858 329,485 307,400 OTHER (EXPENSES)
INCOME Interest income and other net investment gains (losses) 538
(694 ) 1,120 177 Interest expense (14,976 ) (12,819 ) (41,189 )
(44,561 ) Total other (expenses) income (14,438 ) (13,513 ) (40,069
) (44,384 ) INCOME FROM OPERATIONS BEFORE GAINS (LOSSES) ON
SALES OF REAL ESTATE 38,063 28,182 104,373 82,078 Net (loss) gain
on sales of land — — (295 ) 17,268 Gains on sale of depreciable
operating properties 18,312 78,522 164,302
109,950 NET INCOME 56,375 106,704 268,380
209,296 Net income attributable to
noncontrolling common units of the Operating Partnership (1,453 )
(1,945 ) (5,892 ) (3,850 ) Net income attributable to
noncontrolling interests in consolidated property partnerships
(1,027 ) — (1,438 ) — Total income attributable to
noncontrolling interests (2,480 ) (1,945 ) (7,330 ) (3,850 )
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION 53,895 104,759
261,050 205,446 PREFERRED DIVIDENDS (3,313 ) (3,313 ) (9,938
) (9,938 ) NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 50,582
$ 101,446 $ 251,112 $ 195,508
Weighted average common shares outstanding – basic 92,227 92,150
92,221 89,077 Weighted average common shares outstanding – diluted
92,920 92,639 92,832 89,593 Net income available to common
stockholders per share – basic $ 0.54 $ 1.10 $ 2.71
$ 2.18 Net income available to common stockholders
per share – diluted $ 0.54 $ 1.09 $ 2.69 $
2.17
KILROY REALTY
CORPORATION
FUNDS FROM
OPERATIONS
(unaudited, in thousands, except per share data)
Three
Months Ended September 30, Nine Months Ended September
30, 2016 2015 2016
2015 Net income available to common stockholders $ 50,582 $
101,446 $ 251,112 $ 195,508 Adjustments: Net income attributable to
noncontrolling common units of the Operating Partnership 1,453
1,945 5,892 3,850 Net income attributable to noncontrolling
interests in consolidated property partnerships 1,027 — 1,438 —
Depreciation and amortization of real estate assets 55,460 48,719
157,587 150,531 Gains on sales of depreciable real estate (18,312 )
(78,522 ) (164,302 ) (109,950 ) Funds From Operations attributable
to noncontrolling interests in consolidated property partnerships
(1,675 ) — (2,277 ) — Funds From Operations(1)(2)(3)
$ 88,535 $ 73,588 $ 249,450 $ 239,939
Weighted average common shares/units outstanding – basic
95,992 95,097 95,760 92,048 Weighted average common shares/units
outstanding – diluted 96,686 95,586 96,371 92,564 Funds From
Operations per common share/unit – basic (2) $ 0.92 $ 0.77
$ 2.60 $ 2.61 Funds From Operations per common
share/unit – diluted (2) $ 0.92 $ 0.77 $ 2.59
$ 2.59 ________________________ (1) We calculate
Funds From Operations available to common stockholders and common
unitholders (“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 also add back net income attributable
to noncontrolling common units of the Operating Partnership because
we report FFO attributable to common stockholders and common
unitholders. 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) Reported
amounts are attributable to common stockholders and common
unitholders. (3) FFO available to common stockholders and
unitholders includes amortization of deferred revenue related to
tenant-funded tenant improvements of $3.5 million and $3.7 million
for the three months ended September 30, 2016 and 2015,
respectively, and $9.6 million and $10.0 million for the nine
months ended September 30, 2016 and 2015, respectively.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20161026006990/en/
Kilroy Realty CorporationTyler H. RoseExecutive Vice
Presidentand Chief Financial Officer(310) 481-8484orMichelle
NgoSenior Vice Presidentand Treasurer(310) 481-8581
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