Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its second quarter ended June 30, 2014.

Second Quarter Highlights

  • Funds from operations (FFO) of $0.72 per share
  • Net income available to common stockholders of $0.32 per share, including a gain from dispositions of $0.17 per share and a gain on sale of land of $0.04 per share
  • Revenues from continuing operations of $129.2 million
  • Stabilized portfolio was 93.6% occupied and 95.7% leased at June 30, 2014
  • Signed new or renewing leases on 429,331 square feet of space in the stabilized portfolio
  • Acquired a fully entitled, 3.1 acre land parcel in the Mission Bay submarket of San Francisco for $95.0 million with plans to develop an office project totaling approximately 680,000 gross square feet
  • Completed the sale of two vacant office buildings in the University Towne Center submarket of San Diego and a land parcel in the Rancho Bernardo submarket of San Diego for combined gross proceeds of $62.6 million
  • Increased the size of the company’s unsecured credit facility to $600 million. Additionally, lowered pricing and extended the term to July 2019 on both the credit facility and the company’s $150 million term loan

Recent Activity

  • In July 2014, executed a 15-year, 93,000 square foot lease with NeueHouse, a creative workspace provider for entrepreneurs in innovative industries, for the entire historical office component of the company’s 685,000 square foot, Columbia Square mixed-use campus in the Hollywood submarket of Los Angeles
  • In July 2014, entered into an agreement to acquire a development opportunity in the Central SOMA submarket of San Francisco for approximately $27 million

Results for the Quarter and First Half ended June 30, 2014

For its second quarter ended June 30, 2014, KRC reported FFO of $63.3 million, or $0.72 per share, compared to $55.2 million, or $0.69 per share, in the second quarter of 2013. Net income available to common stockholders in the second quarter was $27.2 million, or $0.32 per share, compared to $6.6 million, or $0.08 per share, in the year earlier period. Net income for the 2014 second quarter included approximately $18.2 million in gains from property and land dispositions. Net income for the 2013 second quarter included approximately $0.4 million in gains from a property disposition. Including discontinued operations, the company’s revenues in the second quarter of 2014 totaled $129.2 million, up from $124.5 million in the second quarter of 2013.

For the first six months of 2014, KRC reported FFO of $120.5 million, or $1.38 per share, compared to $104.2 million, or $1.30 per share, in the first six months of 2013. Net income available to common stockholders in the first half of 2014 was $123.8 million, or $1.46 per share, compared to $5.7 million, or $0.06 per share, in the year earlier period. Net income in the 2014 first half included approximately $108.3 million in gains from property and land dispositions. Net income in the 2013 first half included the $0.4 million gain from a property disposition, as noted above. Including discontinued operations, the company’s revenues in the first half of 2014 totaled $255.5 million, up from $242.0 million in the first half of 2013.

Revenues from continuing operations in the first half of 2014 totaled $255.0 million, up from $228.8 million in the first half of 2013.

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

Operating and Leasing Activity

At June 30, 2014, KRC’s stabilized portfolio encompassed approximately 13.2 million square feet of office space located in Los Angeles, Orange County, San Diego, the San Francisco Bay Area and greater Seattle. The portfolio was 93.6% occupied at June 30, 2014, compared to 92.4% at March 31, 2014 and 90.7% at June 30, 2013. During the second quarter, the company signed new or renewing leases on 429,331 square feet of space in the stabilized portfolio. At June 30, 2014, the company’s stabilized portfolio was 95.7% leased.

Real Estate Investment Activity

During the second quarter, KRC acquired a 3.1 acre land parcel in the Mission Bay submarket of San Francisco for approximately $95 million. The site is fully entitled for the development of a 680,000 gross square-foot office project. The company expects to invest approximately $450 million, including the land purchase, to develop a LEED-Gold designed project, with construction on the first of two phases expected to begin by mid 2015.

The company made two dispositions in the second quarter, selling two vacant office buildings located in the University Towne Center submarket of San Diego for gross proceeds of approximately $29.5 million, and completing the previously disclosed sale of a land parcel in the Rancho Bernardo submarket of San Diego for gross proceeds of approximately $33.1 million.

During the quarter, KRC continued construction on six development projects aggregating approximately 2.5 million square feet, with 71% of the office space pre-leased. Four of the six projects are 100% pre-leased. The company estimates its total investment in these six projects will be approximately $1.5 billion. Scheduled completion dates range from 2014 to 2016.

Financing Activity

In June 2014, KRC amended the terms of its unsecured credit facility and $150 million term loan, extending the maturity of both to July 2019 and increasing the size of the unsecured credit facility to $600 million. The unsecured credit facility now bears interest at LIBOR plus 1.25% and includes a 25 basis point facility fee. The term loan facility now bears interest at LIBOR plus 1.40%.

The company also raised $22.6 million of equity during the second quarter through its at-the-market stock offering program.

In June and July, Standard & Poor’s and Moody’s, respectively, affirmed the company’s senior unsecured debt rating and revised the outlook to positive from stable.

Management Comments

“Our stabilized portfolio is now nearly 96% leased, and our current development pipeline is just over 70% pre-leased, strong evidence of the economic dynamism occurring in coastal regions from Seattle to San Diego,” said John Kilroy, Jr., the company’s chairman, president and chief executive officer. “Demand for high quality, contemporary office space continues to grow and our strong franchise is allowing us to take advantage of these significant opportunities. As the current real estate cycle heats up, we remain focused on creating long-term shareholder value through disciplined and well-integrated leasing, acquisition, development and capital recycling strategies.”

Conference Call and Audio Webcast

KRC management will discuss updated earnings guidance for fiscal 2014 during the company’s July 29, 2014 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 #87335700. A replay of the conference call will be available via phone through August 6, 2014 at (888) 286-8010, reservation #46042773, 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 roster of dynamic, innovation-driven tenants, including technology, entertainment, digital media and health care companies.

At June 30, 2014, the company’s stabilized portfolio totaled 13.2 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. 41% of the company’s properties were LEED certified and 57% of the eligible properties were ENERGY STAR certified. In addition, KRC has approximately 2.5 million square feet of new office 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/A for the year ended December 31, 2013 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

June 30,

Six Months Ended

June 30,

2014   2013 2014   2013
Revenues from continuing operations $ 129,194 $ 117,835 $ 254,979 $ 228,799
 
Revenues including discontinued operations $ 129,194 $ 124,478 $ 255,512 $ 241,975
 
Net income available to common stockholders (1)(2) $ 27,228 $ 6,633 $ 123,760 $ 5,730
 
Weighted average common shares outstanding – basic 82,278 75,486 82,202 75,233
Weighted average common shares outstanding – diluted 84,602 77,454 84,375 77,059
 
Net income available to common stockholders per share – basic (1)(2) $ 0.33 $ 0.08 $ 1.49 $ 0.06
Net income available to common stockholders per share – diluted (1)(2) $ 0.32 $ 0.08 $ 1.46 $ 0.06
 
Funds From Operations (3)(4) $ 63,307 $ 55,154 $ 120,528 $ 104,240
 
Weighted average common shares/units outstanding – basic (5) 85,305 78,518 85,233 78,282
Weighted average common shares/units outstanding – diluted (5) 87,629 80,485 87,407 80,107
 
Funds From Operations per common share/unit – basic (5) $ 0.74 $ 0.70 $ 1.41 $ 1.33
Funds From Operations per common share/unit – diluted (5) $ 0.72 $ 0.69 $ 1.38 $ 1.30
 
Common shares outstanding at end of period 82,916 75,711
Common partnership units outstanding at end of period 1,804   1,822  
Total common shares and units outstanding at end of period 84,720 77,533
 
June 30, 2014 June 30, 2013
Stabilized office portfolio occupancy rates: (6)
Los Angeles and Ventura Counties 91.9 % 91.9 %
Orange County 94.1 % 89.3 %
San Diego County 92.0 % 87.6 %
San Francisco Bay Area 96.7 % 91.8 %
Greater Seattle 95.5 % 95.7 %
Weighted average total 93.6 % 90.7 %
 
Total square feet of stabilized office properties owned at end of period: (6)
Los Angeles and Ventura Counties 3,503 3,398
Orange County 438 497
San Diego County 4,241 5,249
San Francisco Bay Area 2,819 2,287
Greater Seattle 2,188   2,048  
Total 13,189 13,479

________________________

(1)   Net income available to common stockholders and Funds From Operations for the three and six months ended June 30, 2013 include the receipt of a $5.2 million payment related to a property damage settlement.
(2) Net income available to common stockholders includes gains on dispositions of discontinued operations of $14.7 million and $104.8 million for the three and six months ended June 30, 2014, respectively, $0.4 million for the three and six months ended June 30, 2013 and a $3.5 million gain on sale of land for the three and six months ended June 30, 2014.
(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 June 30, 2013 include the office properties that were sold during 2013 and 2014.
 

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands)
     
June 30, 2014 December 31, 2013
(unaudited)

ASSETS

REAL ESTATE ASSETS:
Land and improvements $ 675,489 $ 657,491
Buildings and improvements 3,720,863 3,590,699
Undeveloped land and construction in progress 1,270,675   1,016,757  
Total real estate assets held for investment 5,667,027 5,264,947
Accumulated depreciation and amortization (885,580 ) (818,957 )
Total real estate assets held for investment, net 4,781,447 4,445,990
 
Real estate assets and other assets held for sale, net — 213,100
Cash and cash equivalents 24,571 35,377
Restricted cash 93,522 49,780
Marketable securities 11,747 10,008
Current receivables, net 10,588 10,743
Deferred rent receivables, net 134,269 127,123
Deferred leasing costs and acquisition-related intangible assets, net 178,841 186,622
Deferred financing costs, net 16,978 16,502
Prepaid expenses and other assets, net 21,829   15,783  
TOTAL ASSETS $ 5,273,792   $ 5,111,028  
 

LIABILITIES AND EQUITY

LIABILITIES:
Secured debt $ 553,427 $ 560,434
Exchangeable senior notes, net 170,704 168,372
Unsecured debt, net 1,431,301 1,431,132
Unsecured line of credit 90,000 45,000
Accounts payable, accrued expenses and other liabilities 215,535 198,467
Accrued distributions 31,730 31,490
Deferred revenue and acquisition-related intangible liabilities, net 114,670 101,286
Rents received in advance and tenant security deposits 43,085 44,240
Liabilities of real estate assets held for sale —   14,447  
Total liabilities 2,650,452   2,594,868  
 
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 829 822
Additional paid-in capital 2,519,268 2,478,975
Distributions in excess of earnings (145,851 ) (210,896 )
Total stockholders’ equity 2,566,657 2,461,312
Noncontrolling Interests
Common units of the Operating Partnership 51,798 49,963
Noncontrolling interest in consolidated subsidiary 4,885   4,885  
Total noncontrolling interests 56,683   54,848  
Total equity 2,623,340   2,516,160  
TOTAL LIABILITIES AND EQUITY $ 5,273,792   $ 5,111,028  
 
 

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)
     
Three Months Ended
June 30,		 Six Months Ended
June 30,
2014   2013 2014   2013
REVENUES
Rental income $ 115,555 $ 102,385 $ 227,611 $ 203,992
Tenant reimbursements 10,592 9,717 22,164 18,847
Other property income 3,047   5,733   5,204   5,960  
Total revenues 129,194   117,835   254,979   228,799  
 
EXPENSES
Property expenses 25,713 23,800 50,807 46,605
Real estate taxes 10,910 9,748 22,083 19,412
Provision for bad debts — — — 95
Ground leases 773 889 1,535 1,736
General and administrative expenses 11,857 9,855 22,668 19,524
Acquisition-related expenses 609 164 837 819
Depreciation and amortization 50,767   46,527   99,969   94,228  
Total expenses 100,629   90,983   197,899   182,419  
 
OTHER (EXPENSES) INCOME
Interest income and other net investment gains 419 19 596 411
Interest expense (16,020 ) (19,434 ) (33,272 ) (39,168 )
Total other (expenses) income (15,601 ) (19,415 ) (32,676 ) (38,757 )
 
INCOME FROM CONTINUING OPERATIONS BEFORE GAIN ON SALE OF LAND 12,964 7,437 24,404 7,623
Gain on sale of land 3,490   —   3,490   —  
INCOME FROM CONTINUING OPERATIONS 16,454   7,437   27,894   7,623  
 
DISCONTINUED OPERATIONS:
Income from discontinued operations — 2,243 377 4,445
Gains on dispositions of discontinued operations 14,689   423   104,804   423  
Total income from discontinued operations 14,689   2,666   105,181   4,868  
 
NET INCOME 31,143 10,103 133,075 12,491
 
Net income attributable to noncontrolling common units of the Operating Partnership (603 ) (157 ) (2,690 ) (135 )
 
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION 30,540 9,946 130,385 12,356
 
PREFERRED DIVIDENDS (3,312 ) (3,313 ) (6,625 ) (6,626 )
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 27,228   $ 6,633   $ 123,760   $ 5,730  
 
Weighted average common shares outstanding – basic 82,278 75,486 82,202 75,233
Weighted average common shares outstanding – diluted 84,602 77,454 84,375 77,059
 
Net income available to common stockholders per share – basic $ 0.33   $ 0.08   $ 1.49   $ 0.06  
Net income available to common stockholders per share – diluted $ 0.32   $ 0.08   $ 1.46   $ 0.06  
 

KILROY REALTY CORPORATION

FUNDS FROM OPERATIONS

(unaudited, in thousands, except per share data)

 

     
Three Months Ended June 30, Six Months Ended June 30,
2014   2013 2014   2013
Net income available to common stockholders $ 27,228 $ 6,633 $ 123,760 $ 5,730
Adjustments:
Net income attributable to noncontrolling common units of the Operating Partnership 603 157 2,690 135
Depreciation and amortization of real estate assets 50,165 48,787 98,882 98,798
Gains on dispositions of discontinued operations (14,689 ) (423 ) (104,804 ) (423 )
Funds From Operations (1)(2)(3) $ 63,307   $ 55,154   $ 120,528   $ 104,240  
 
Weighted average common shares/units outstanding – basic 85,305 78,518 85,233 78,282
Weighted average common shares/units outstanding – diluted 87,629 80,485 87,407 80,107
 
Funds From Operations per common share/unit – basic (3) $ 0.74   $ 0.70   $ 1.41   $ 1.33  
Funds From Operations per common share/unit – diluted (3) $ 0.72   $ 0.69   $ 1.38   $ 1.30  

________________________

(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 $2.7 million and $2.5 million for the three months ended June 30, 2014 and 2013, respectively, and $5.0 million and $5.0 million for the six months ended June 30, 2014 and 2013, respectively.
 
(3) Reported amounts are attributable to common stockholders and common unitholders.