KRC Kilroy Realty Corporation

Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its first quarter ended March 31, 2019.

First Quarter Highlights

Financial Results

• Net income available to common stockholders per share of $0.36
• Funds from operations available to common stockholders and unitholders (“FFO”) per share of $0.95
  • FFO for the first quarter 2019 included a positive $0.03 per share impact related to the improved credit quality of a tenant for which the company recorded a bad debt reserve in 2018
  • The adoption of the new lease accounting standard requires expensing of internal leasing costs and third-party legal fees which had the impact of lowering first quarter FFO by $0.02 per share when compared to what the results would have been under the prior standard
• Revenues of $201.2 million

Stabilized Portfolio

• Stabilized portfolio was 92.5% occupied and 96.2% leased at March 31, 2019
• Signed approximately 203,000 square feet of new or renewing leases

Development

• In March, commenced construction on Phase I of Kilroy Oyster Point in South San Francisco and 9455 Towne Centre Drive in the University Towne Center submarket of San Diego
  • Phase I of Kilroy Oyster Point encompasses approximately 630,000 square feet of office and lab space and represents a total estimated investment of $600.0 million
  • 9455 Towne Centre Drive encompasses approximately 160,000 square feet of office and lab space and represents a total estimated investment of $125.0 million
• In March, transferred the $95.0 million retail component of One Paseo, encompassing 96,000 square feet in the Del Mar submarket of San Diego, from under construction to the tenant improvement phase. The retail component is currently 92% leased

Finance

• In February, repaid at par a mortgage note for $74.3 million due June 2019
• In March and April, executed 12-month forward equity sale agreements under the ATM program for 1,201,204 shares at a weighted average sales price of $75.92
• As of the date of this report, the company had not drawn down any portion of the shares sold under the forward equity agreements, including the transaction executed in August 2018

Results for the Quarter Ended March 31, 2019

For the first quarter ended March 31, 2019, KRC reported net income available to common stockholders of $36.9 million, or $0.36 per share, including a $0.03 per share decrease related to the expensing of indirect leasing costs in connection with the adoption of the new lease accounting standard compared to $36.2 million, or $0.36 per share, in the first quarter of 2018. FFO in the first quarter of 2019 was $99.8 million, or $0.95 per share, including a $0.02 per share decrease related to the expensing of indirect leasing costs in connection with the new lease accounting standard adoption, compared to $96.3 million, or $0.94 per share, in the year-earlier quarter. Net income available to common stockholders and FFO for the first quarter 2019 also included a positive $0.03 per share impact related to the improved credit quality of a tenant for which we recorded a bad debt reserve in 2018.

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

Net Income Available to Common Stockholders / FFO Guidance and Outlook

The company has updated its guidance range of NAREIT-defined FFO per diluted share for its fiscal year 2019 to $3.64 to $3.78 per share, with a midpoint of $3.71 per share, reflecting management’s views on current and future market conditions, including assumptions with respect to rental rates, occupancy levels, and the earnings impact of events referenced in this press release.

        Full Year 2019 Range Low End High End Net income available to common stockholders per share - diluted $ 1.49 $ 1.63   Weighted average common shares outstanding - diluted (1) 105,700 105,700   Net income available to common stockholders $ 157,000 $ 172,000 Adjustments: Net income attributable to noncontrolling common units of the Operating Partnership 3,200 3,600 Net income attributable to noncontrolling interests in consolidated property partnerships 17,000 20,000 Depreciation and amortization of real estate assets 241,000 241,000 Gains on sales of depreciable real estate — — Funds From Operations attributable to noncontrolling interests in consolidated property partnerships (26,500 ) (29,500 ) Funds From Operations (2) $ 391,700   $ 407,100     Weighted average common shares/units outstanding – diluted (3) 107,700 107,700   Funds From Operations per common share/unit – diluted (2)(3) $ 3.64   $ 3.78    

Key 2019 assumptions include:

• Dispositions of approximately $150.0 million to $350.0 million
• Flat same store cash net operating income
• Year-end occupancy of 94.0% to 95.0%
• Total remaining development spending of approximately $400.0 million to $500.0 million

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(1)   Calculated based on estimated weighted average shares outstanding including non-participating share-based awards. (2) See management statement for FFO at end of release. (3) Calculated based on weighted average shares outstanding including participating and non-participating share-based awards, dilutive impact of stock options, contingently issuable shares, and shares issuable under forward equity sale agreements and assuming the exchange of all common limited partnership units outstanding. Reported amounts are attributable to common stockholders, common unitholders and restricted stock unitholders.  

The company’s guidance estimates for the full year 2019, and the reconciliation of net income available to common stockholders per share - diluted and FFO per share and unit - diluted included within this press release, reflect management’s views on current and future market conditions, including assumptions with respect to rental rates, occupancy levels, and the earnings impact of the events referenced in this press release. Although these guidance estimates reflect the impact on the company’s operating results of an assumed range of future disposition activity, these guidance estimates do not include any estimates of possible future gains or losses from possible future dispositions because the magnitude of gains or losses on sales of depreciable operating properties, if any, will depend on the sales price and depreciated cost basis of the disposed assets at the time of disposition, information that is not known at the time the company provides guidance, and the timing of any gain recognition will depend on the closing of the dispositions, information that is also not known at the time the company provides guidance and may occur after the relevant guidance period. We caution you not to place undue reliance on our assumed range of future disposition activity because any potential future disposition transactions will ultimately depend on the market conditions and other factors, including but not limited to the company’s capital needs, the particular assets being sold and the company’s ability to defer some or all of the taxable gain on the sales. These guidance estimates also do not include the impact on operating results from potential future acquisitions, possible capital markets activity, possible future impairment charges or any events outside of the company’s control. 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 updated earnings guidance for fiscal year 2019 during the company’s May 7, 2019 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 https://services.choruscall.com/links/krc190425.html. 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 (866) 312-7299. International callers should dial (412) 317-1070. In order to bypass speaking to the operator on the day of the call, please pre-register anytime at http://dpregister.com/10126352. A replay of the conference call will be available via telephone on May 7, 2019 through May 14, 2019 by dialing (877) 344-7529 and entering passcode 10126352. International callers should dial (412) 317-0088 and enter the same passcode. The replay will also be available on our website at http://investors.kilroyrealty.com/CustomPage/Index?KeyGenPage=1073743647.

About Kilroy Realty Corporation

Kilroy Realty Corporation (KRC), a publicly traded real estate investment trust and member of the S&P MidCap 400 Index, is one of the West Coast’s premier landlords. The company has over 70 years of experience developing, acquiring and managing office and mixed-use real estate assets. 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 March 31, 2019, the company’s stabilized portfolio totaled approximately 13.2 million square feet of office space located in the coastal regions of Los Angeles, Orange County, San Diego, the San Francisco Bay Area and Greater Seattle and 200 residential units located in the Hollywood submarket of Los Angeles. The stabilized portfolio was 92.5% occupied and 96.2% leased. In addition, KRC had under construction five projects totaling approximately 2.1 million square feet of office space that was 26% leased and 801 residential units. KRC also had three projects in the tenant improvement phase totaling approximately 1.2 million square feet of office, PDR and retail space of which the office components of the projects are fully leased to Adobe and Dropbox.

The company’s commitment and leadership position in sustainability has been recognized by various industry groups across the world. In September 2018, the company was recognized by GRESB both as North American leader across all asset classes and a global leader among all publicly traded real estate companies. Other sustainability accolades include NAREIT’s Leader in the Light award for the past five years, the EPA’s highest honor of Sustained Excellence and winner of Energy Star Partner of the Year for the past six years. The company is listed in the Dow Jones Sustainability World Index. At the end of the first quarter, the company’s stabilized portfolio was 63% LEED certified and 76% of eligible properties were ENERGY STAR certified. 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 or implied in the forward-looking statements, and you should not rely on the 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 the forward-looking statements, including, among others: 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; risks associated with our investment in real estate assets, which are illiquid, and with trends in the real estate industry; defaults on or non-renewal of leases by tenants; any significant downturn in tenants’ businesses; our ability to re-lease property at or above current market rates; costs to comply with government regulations, including environmental remediation; 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; 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, and which may result in write offs or impairment charges; 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 enactment or implementations of, tax laws or other applicable laws, regulations or legislation, as well as business and consumer reactions to such changes; 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 and additional factors could adversely affect our business and financial performance. 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, 2018 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 dates 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 we are required to do so in connection with our ongoing requirements under federal securities laws.

KILROY REALTY CORPORATION

SUMMARY OF QUARTERLY RESULTS

(unaudited, in thousands, except per share data)

  Three Months Ended March 31, 2019   2018 Revenues (1) $ 201,202 $ 182,822   Net income available to common stockholders (1) $ 36,903 $ 36,246   Weighted average common shares outstanding – basic 100,901 98,744 Weighted average common shares outstanding – diluted 101,443 99,214   Net income available to common stockholders per share – basic (1) $ 0.36 $ 0.36 Net income available to common stockholders per share – diluted (1) $ 0.36 $ 0.36   Funds From Operations (1)(2)(3) $ 99,812 $ 96,285   Weighted average common shares/units outstanding – basic (4) 104,062 102,030 Weighted average common shares/units outstanding – diluted (5) 104,603 102,499   Funds From Operations per common share/unit – basic (1)(3) $ 0.96 $ 0.94 Funds From Operations per common share/unit – diluted (1)(3) $ 0.95 $ 0.94   Common shares outstanding at end of period 100,967 98,840 Common partnership units outstanding at end of period 2,023   2,071   Total common shares and units outstanding at end of period 102,990 100,911     Stabilized office portfolio occupancy rates: (6) Greater Los Angeles 95.6 % 93.9 % Orange County 90.3 % 89.6 % San Diego County 90.2 % 98.0 % San Francisco Bay Area 92.5 % 95.1 % Greater Seattle 88.8 % 90.2 % Weighted average total 92.5 % 94.3 %   Total square feet of stabilized office properties owned at end of period: (6) Greater Los Angeles 3,956 4,182 Orange County 272 272 San Diego County 2,046 2,043 San Francisco Bay Area 5,160 5,303 Greater Seattle 1,802   2,066   Total 13,236 13,866  

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(1)  

Effective January 1, 2019, the company adopted ASC 842 “Leases.” Please refer to our consolidated statements of operations for a description of the changes made to our consolidated financial statements. In accordance with the adoption of the new standard, previously reported periods are not restated for the impact of the standard.

(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, common unitholders, and restricted stock unitholders. (4) Calculated based on weighted average shares outstanding including participating share-based awards (i.e. nonvested stock and certain time based restricted stock units) and assuming the exchange of all common limited partnership units outstanding. (5) Calculated based on weighted average shares outstanding including participating and non-participating share-based awards, dilutive impact of stock options, contingently issuable shares, and shares issuable under forward equity sale agreements 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 March 31, 2018 include the office properties that were sold subsequent to March 31, 2018.  

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands)

    March 31, 2019 December 31, 2018

ASSETS

REAL ESTATE ASSETS: Land and improvements $ 1,184,496 $ 1,160,138 Buildings and improvements 5,300,313 5,207,984 Undeveloped land and construction in progress 2,131,358   2,058,510   Total real estate assets held for investment 8,616,167 8,426,632 Accumulated depreciation and amortization (1,441,506 ) (1,391,368 ) Total real estate assets held for investment, net 7,174,661 7,035,264   Cash and cash equivalents 49,693 51,604 Restricted cash 6,300 119,430 Marketable securities 24,098 21,779 Current receivables, net 28,016 20,176 Deferred rent receivables, net 280,756 267,007 Deferred leasing costs and acquisition-related intangible assets, net 187,309 197,574 Right of use ground lease assets (1) 82,794 — Prepaid expenses and other assets, net 50,360   52,873   TOTAL ASSETS $ 7,883,987   $ 7,765,707    

LIABILITIES AND EQUITY

LIABILITIES: Secured debt, net $ 259,878 $ 335,531 Unsecured debt, net 2,552,883 2,552,070 Unsecured line of credit 185,000 45,000 Accounts payable, accrued expenses and other liabilities 373,691 374,415 Ground lease liabilities (1) 87,247 — Accrued dividends and distributions 47,676 47,559 Deferred revenue and acquisition-related intangible liabilities, net 138,973 149,646 Rents received in advance and tenant security deposits 55,457   60,225   Total liabilities 3,700,805   3,564,446     EQUITY: Stockholders’ Equity Common stock 1,010 1,007 Additional paid-in capital 3,976,204 3,976,953 Distributions in excess of earnings (62,690 ) (48,053 ) Total stockholders’ equity 3,914,524 3,929,907 Noncontrolling Interests Common units of the Operating Partnership 78,413 78,991 Noncontrolling interests in consolidated property partnerships 190,245   192,363   Total noncontrolling interests 268,658   271,354   Total equity 4,183,182   4,201,261   TOTAL LIABILITIES AND EQUITY $ 7,883,987   $ 7,765,707  

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(1) Effective January 1, 2019, the company adopted ASC 842 “Leases,” which requires right of use assets and liabilities for leases in which the company is the lessee to be presented on the company’s consolidated balance sheets.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

  Three Months Ended March 31, 2019   2018 REVENUES (1) Rental income $ 199,382 $ 162,871 Tenant reimbursements — 19,150 Other property income 1,820   801   Total revenues 201,202   182,822     EXPENSES Property expenses (1) 38,149 31,671 Real estate taxes (1) 18,639 17,146 Provision for bad debts (1) — (265 ) Ground leases (1) 1,972 1,561 General and administrative expenses 23,341 15,559 Leasing costs (1) 1,757 — Depreciation and amortization 66,135   62,715  

Total expenses

149,993   128,387     OTHER (EXPENSES) INCOME Interest income and other net investment gain 1,828 34 Interest expense (11,243 ) (13,498 )

Total other (expenses) income

(9,415 ) (13,464 )   NET INCOME 41,794   40,971     Net income attributable to noncontrolling common units of the Operating Partnership (700 ) (751 ) Net income attributable to noncontrolling interests in consolidated property partnerships (4,191 ) (3,974 ) Total income attributable to noncontrolling interests (4,891 ) (4,725 )   NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 36,903   $ 36,246     Weighted average common shares outstanding – basic 100,901 98,744 Weighted average common shares outstanding – diluted 101,443 99,214   Net income available to common stockholders per share – basic $ 0.36   $ 0.36   Net income available to common stockholders per share – diluted $ 0.36   $ 0.36    

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(1)  

Effective January 1, 2019, the company adopted ASC 842 “Leases,” which required the following changes for all periods beginning and subsequent to January 1, 2019. In accordance with the adoption of the new standard under the modified retrospective method, previously reported periods are not restated for the impact of the standard.

- All lease related revenue required to be reported as a single component within rental income. For the three months ended March 31, 2019, rental income includes $27.5 million of tenant reimbursements and $3.3 million of lease termination fees. - Rental income to be presented net of provision for bad debts. For the three months ended March 31, 2019, rental income includes a recovery of provision for bad debts of $3.5 million.

- All property expenses paid directly by the company and reimbursed by the tenant to be presented on a gross basis. For the three months ended March 31, 2019, rental income and property expenses both include $3.0 million of additional tenant reimbursements and the related property expenses, which were previously shown net in property expenses in prior periods. This change has no impact to net income, Net Operating Income or Funds From Operations.

- Non-tenant parking income to be presented in other property income instead of rental income since recognized under ASC 606 “Revenue from Contracts with Customers” and outside the scope of ASC 842 “Leases.”

- Real estate taxes for properties where the company is a lessee under ground leases to be presented in ground leases instead of real estate taxes. For the three months ended March 31, 2019, ground leases includes $0.5 million of property taxes for properties where the company is a lessee.

- Indirect leasing costs to be expensed as incurred and reported in leasing costs.  

KILROY REALTY CORPORATION

FUNDS FROM OPERATIONS

(unaudited, in thousands, except per share data)

  Three Months Ended, March 31 2019   2018 Net income available to common stockholders $ 36,903 $ 36,246 Adjustments: Net income attributable to noncontrolling common units of the Operating Partnership 700 751 Net income attributable to noncontrolling interests in consolidated property partnerships 4,191 3,974 Depreciation and amortization of real estate assets 64,971 61,677 Funds From Operations attributable to noncontrolling interests in consolidated property partnerships (6,953 ) (6,363 ) Funds From Operations(1)(2)(3) $ 99,812   $ 96,285     Weighted average common shares/units outstanding – basic (4) 104,062 102,030 Weighted average common shares/units outstanding – diluted (5) 104,603 102,499   Funds From Operations per common share/unit – basic (2) $ 0.96   $ 0.94   Funds From Operations per common share/unit – diluted (2) $ 0.95   $ 0.94  

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(1)   We calculate Funds From Operations available to common stockholders and common unitholders (“FFO”) in accordance with the 2018 Restated 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, common unitholders, and restricted stock unitholders.   (3) FFO available to common stockholders and unitholders includes amortization of deferred revenue related to tenant-funded tenant improvements of $3.8 million and $4.3 million for the three months ended March 31, 2019 and 2018, respectively.   (4) Calculated based on weighted average shares outstanding including participating share-based awards (i.e. nonvested stock and certain time based restricted stock units) and assuming the exchange of all common limited partnership units outstanding.   (5) Calculated based on weighted average shares outstanding including participating and non-participating share-based awards, dilutive impact of stock options, contingently issuable shares, and shares issuable under forward equity sale agreements and assuming the exchange of all common limited partnership units outstanding.

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Tyler H. RoseExecutive Vice Presidentand Chief Financial Officer(310) 481-8484orMichelle NgoSenior Vice Presidentand Treasurer(310) 481-8581