Kilroy Realty Corporation Reports Third Quarter Financial Results

Kilroy Realty Corporation (NYSE:KRC) today reported financial results for its third quarter ended September 30, 2007 with net income available for common stockholders of $9.0 million, or $0.28 per share, compared to $31.6 million, or $0.98 per share, in the third quarter of 2006. Revenues from continuing operations in the third quarter totaled $67.6 million, up from $62.7 million in the prior year's third quarter. Funds from operations (FFO) for the period totaled $28.2 million, or $0.81 per share, compared to $26.5 million, or $0.76 per share, in the year-earlier period. For the first nine months of 2007, KRC reported net income available for common stockholders of $38.6 million, or $1.19 per share, compared to $63.1 million, or $2.03 per share, in the first nine months of 2006. Revenues from continuing operations in the nine-month period totaled $196.2 million, up from $187.3 million in the same period of 2006. FFO in the first nine months of 2007 totaled $80.9 million, or $2.33 per share, compared to $90.9 million, or $2.69 per share, in first nine months of 2006. All per-share amounts in this report are presented on a diluted basis. "Solid demand and restrained supply characterized market conditions for our commercial real estate portfolio last quarter," said John B. Kilroy, Jr., president and chief executive officer of KRC. "In our development program, we delivered more than 780,000 square feet of new office space in two projects during the quarter, with both projects 100% leased and occupied at quarter-end," he said. KRC currently has three buildings under construction, all located in coastal submarkets of central San Diego County. These three buildings total approximately 344,000 rentable square feet and are 42% pre-leased. In the aggregate, they represent a total estimated investment of approximately $137 million, of which $81 million has been spent to date. The company also has two redevelopment projects underway, a 107,000 square-foot property in Los Angeles County and a two-building, 104,500 square-foot property located along the I-15 corridor in central San Diego County. The two projects represent a total estimated incremental investment of approximately $26 million, of which $16 million has been spent to date. They are 49% leased. Updated earnings guidance for 2007 will be discussed by KRC management during the company's October 23, 2007 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 www.kilroyrealty.com. Please go to the website 15 minutes before the call and register. It may be necessary to download audio software to hear the conference call. Those interested in listening via telephone can access the conference call at 888-679-8033, reservation #84724380. A replay of the conference call will be available via phone through November 9, 2007 at 888-286-8010, reservation #12016258, or via the Internet at the company's website. Some of the information presented in this release is forward looking in nature within the meaning of the Private Securities Litigation Reform Act of 1995. Although Kilroy Realty Corporation believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, there can be no assurance that its expectations will be achieved. Certain factors that could cause actual results to differ materially from Kilroy Realty's expectations are set forth as risk factors in the company's Securities and Exchange Commission reports and filings. Included among these factors are changes in general economic conditions, including changes in the economic conditions affecting industries in which its principal tenants compete; Kilroy Realty's ability to timely lease or re-lease space at current or anticipated rents; changes in interest rates; changes in operating costs, including utility costs; future demand for its debt and equity securities; its ability to refinance its debt on reasonable terms at maturity; its ability to complete current and future development projects on schedule and on budget; the demand for office space in markets in which Kilroy Realty has a presence; and risks detailed from time to time in the company's SEC reports, including quarterly reports on Form 10-Q, current reports on Form 8-K and annual reports on Form 10-K. Many of these factors are beyond Kilroy Realty's ability to control or predict. Forward-looking statements are not guarantees of performance. For forward-looking statements herein, Kilroy Realty claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Kilroy Realty Corporation, a member of the S&P Small Cap 600 Index, is a Southern California-based real estate investment trust active in the office and industrial property sectors. For 60 years, the company has owned, developed, acquired and managed real estate assets primarily in the coastal regions of California and Washington. Kilroy Realty currently has an in-process development and redevelopment pipeline of approximately 556,000 square feet in Los Angeles and San Diego counties. At September 30, 2007, the company owned 8.6 million rentable square feet of commercial office space and 3.9 million rentable square feet of industrial space. More information is available at www.kilroyrealty.com. KILROY REALTY CORPORATION SUMMARY QUARTERLY RESULTS (unaudited, in thousands, except per share data)       Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended September September September September 30, 30, 30, 30, 2007 2006 2007 2006   Revenues from continuing operations $ 67,639 $   62,661 $   196,249   $   187,292     Revenues including discontinued operations $ 67,921 $ 63,058 $ 196,629 $ 199,988   Net income available for common stockholders (1) $ 9,028 $ 31,574 $ 38,601 $ 63,073   Weighted average common shares outstanding - basic 32,373 32,200 32,364 30,906 Weighted average common shares outstanding - diluted 32,502 32,324 32,491 31,044   Net income per share of common stock - basic $ 0.28 $ 0.98 $ 1.19 $ 2.04 Net income per share of common stock - diluted $ 0.28 $ 0.98 $ 1.19 $ 2.03   Funds From Operations (2), (3) $ 28,212 $ 26,462 $ 80,911 $ 90,874   Weighted average common shares/units outstanding - basic (4) 34,621 34,570 34,614 33,597 Weighted average common shares/units outstanding - diluted (4) 34,749 34,694 34,740 33,735   Funds From Operations per common share/unit - basic (4) $ 0.81 $ 0.77 $ 2.34 $ 2.70 Funds From Operations per common share/unit - diluted (4) $ 0.81 $ 0.76 $ 2.33 $ 2.69   Common shares outstanding at end of period 32,707 32,389 Common partnership units outstanding at end of period     2,248         2,329     Total common shares and units outstanding at end of period 34,955 34,718   (1) Net income after minority interests.   (2) Reconciliation of Net Income to Funds From Operations and management statement on Funds From Operations are included after the Consolidated Statements of Operations.   (3) Reported amounts are attributable to common stockholders and common unitholders.   (4) Calculated based on weighted average shares outstanding assuming conversion of all common limited partnership units outstanding.   September 30, 2007   September 30, 2006 Stabilized portfolio occupancy rates: Office 93.4% 96.2% Industrial 91.0% 96.1% Weighted average total 92.6% 96.2%   Los Angeles 96.2% 93.4% Orange County 91.1% 95.6% San Diego 91.4% 99.7% Other 93.2% 92.6% Weighted average total 92.6% 96.2%   Total square feet of stabilized properties owned at end of period: Office 8,620 7,823 Industrial 3,870 4,179 Total 12,490 12,002 KILROY REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited, in thousands)   September 30,   December 31, 2007 2006   ASSETS REAL ESTATE ASSETS:   Land and improvements $312,057 $293,059 Buildings and improvements 1,730,833 1,484,051 Undeveloped land and construction in progress 250,028   263,651     Total real estate held for investment 2,292,918 2,040,761 Accumulated depreciation and amortization (488,050 ) (443,807 ) Total real estate held for investment, net 1,804,868 1,596,954 Properties held for sale, net   4,512   Total real estate assets, net 1,804,868 1,601,466   Cash and cash equivalents 3,655 11,948 Restricted cash 1,362 494 Funds held at qualified intermediary for Section 1031 exchange 43,794 Marketable securities 455 Current receivables, net 4,231 5,890 Deferred rent receivables, net 66,073 61,929 Notes receivable 11,002 11,096 Deferred leasing costs and acquisition related intangibles, net 56,629 49,019 Deferred financing costs, net 9,144 5,100 Prepaid expenses and other assets, net 6,331   8,616     TOTAL ASSETS $1,963,750   $1,799,352     LIABILITIES & STOCKHOLDERS' EQUITY LIABILITIES: Secured debt $398,283 $459,198 Exchangeable senior notes, net 455,860 Unsecured senior notes 144,000 144,000 Unsecured line of credit 52,000 276,000 Accounts payable, accrued expenses and other liabilities 67,356 67,729 Accrued distributions 20,610 19,610 Deferred revenue and acquisition related liabilities 56,638 25,353 Rents received in advance and tenant security deposits 17,862   19,900   Total liabilities 1,212,609   1,011,790     MINORITY INTERESTS: 7.45% Series A Cumulative Redeemable Preferred units of the Operating Partnership 73,638 73,638 Common units of the Operating Partnership 35,968   39,628   Total minority interests 109,606   113,266     STOCKHOLDERS' EQUITY: 7.80% Series E Cumulative Redeemable Preferred stock 38,425 38,425 7.50% Series F Cumulative Redeemable Preferred stock 83,157 83,157 Common stock 327 324 Additional paid-in capital 654,569 671,484 Distributions in excess of earnings (134,943 ) (119,094 ) Total stockholders' equity 641,535   674,296     TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $1,963,750   $1,799,352   KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share data)   Three   Three   Nine   Nine Months Months Months Months Ended Ended Ended Ended September September September September 30, 30, 30, 30, 2007   2006   2007   2006   REVENUES:   Rental income $60,560 $56,264 $173,329 $168,036 Tenant reimbursements 6,945 5,876 19,729 17,603 Other property income 134   521   3,191   1,653     Total revenues 67,639   62,661   196,249   187,292     EXPENSES: Property expenses 12,285 11,344 34,582 32,112 Real estate taxes 5,374 4,728 14,973 14,158 Provision for bad debts (111 ) 56 (310 ) 626 Ground leases 511 514 1,529 1,507 General and administrative expenses 8,719 5,673 27,227 15,322 Interest expense 9,009 10,312 26,737 33,491 Depreciation and amortization 18,771   17,764   53,753   52,808   Total expenses 54,558   50,391   158,491   150,024     OTHER INCOME AND EXPENSE: Interest and other investment income 305 359 1,295 841 Net settlement receipts on interest rate swaps 299 747 Loss on derivative instruments   (324 )   (580 ) Total other income 305   334   1,295   1,008     Income from continuing operations before minority interests 13,386 12,604 39,053 38,276   Minority interests: Distributions on Cumulative Redeemable Preferred units (1,397 ) (1,397 ) (4,191 ) (4,191 ) Minority interest in earnings of Operating Partnership attributable to continuing operations (620 ) (593 ) (1,807 ) (2,148 ) Total minority interests (2,017 ) (1,990 ) (5,998 ) (6,339 )   Income from continuing operations 11,369 10,614 33,055 31,937   Discontinued operations: Revenues from discontinued operations 282 397 380 12,696 Expenses from discontinued operations (217 ) (719 ) (236 ) (2,286 ) Net gain on dispositions of discontinued operations 25,603 13,474 31,259 Minority interest in earnings of Operating Partnership attributable to discontinued operations (4 ) (1,919 ) (866 ) (3,327 ) Total income from discontinued operations 61   23,362   12,752   38,342     Net income 11,430 33,976 45,807 70,279   Preferred dividends (2,402 ) (2,402 ) (7,206 ) (7,206 )   Net income available for common stockholders $ 9,028   $ 31,574   $ 38,601   $ 63,073     Weighted average shares outstanding - basic 32,373 32,200 32,364 30,906 Weighted average shares outstanding - diluted 32,502 32,324 32,491 31,044   Net income per common share - basic $ 0.28   $ 0.98   $ 1.19   $ 2.04   Net income per common share - diluted $ 0.28   $ 0.98   $ 1.19   $ 2.03   KILROY REALTY CORPORATION FUNDS FROM OPERATIONS (unaudited, in thousands, except per share data)     Three Months   Three Months   Nine Months   Nine Months Ended Ended Ended Ended September 30, 2007 September 30, 2006 September 30, 2007 September 30, 2006   Net income available for common stockholders $ 9,028 $ 31,574 $ 38,601 $ 63,073   Adjustments: Minority interest in earnings of Operating Partnership 624 2,512 2,673 5,475 Depreciation and amortization of real estate assets 18,560 17,979 53,111 53,585 Net gain on dispositions of discontinued operations     (25,603 )   (13,474 )   (31,259 ) Funds From Operations (1), (2) $ 28,212 $ 26,462   $ 80,911   $ 90,874     Weighted average common shares/units outstanding - basic 34,621 34,570 34,614 33,597 Weighted average common shares/units outstanding - diluted 34,749 34,694 34,740 33,735   Funds From Operations per common share/unit - basic $ 0.81 $ 0.77   $ 2.34   $ 2.70   Funds From Operations per common share/unit - diluted $ 0.81 $ 0.76   $ 2.33   $ 2.69     (1) Management believes that Funds From Operations ("FFO") is a useful supplemental measure of the Company's operating performance. The Company computes FFO in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"). The White Paper defines FFO as net income or loss computed in accordance with generally accepted accounting principles ("GAAP"), excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, 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. Other real estate investment trusts ("REITs") may use different methodologies for calculating FFO and, accordingly, the Company's FFO may not be comparable to other REITs.   Because FFO excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, providing perspective on operating performance not immediately apparent from net income. In addition, management believes that FFO provides useful information to the investment community about the Company's operating performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs.   However, FFO should not be viewed as an alternative measure of the Company’s operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company's properties, which are significant economic costs that could materially impact the Company’s results of operations.   (2) Reported amounts are attributable to common stockholders and common unitholders.