Kilroy Realty Corporation Reports Third Quarter Financial Results

  Kilroy Realty Corporation Reports Third Quarter Financial Results

Business Wire

LOS ANGELES -- October 28, 2013

Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its
third quarter ended September30,2013.

Third Quarter Highlights

  *Funds from operations (FFO) per share of $0.69
  *Net income available to common stockholders of $0.07 per share
  *Revenues from continuing operations of $115.7million
  *Financial results include the receipt of a net $0.05per share cash
    payment related to the default of a prior tenant
  *Stabilized portfolio 92.2% occupied and 93.7% leased at September30,2013
  *Signed new or renewing leases on 510,000 square feet of space
  *Acquired for approximately $126 million a 13.8 acre office campus in the
    DelMar submarket of SanDiego that includes two 100% leased buildings
    totaling approximately 219,000square feet and an entitled development
    site
  *Entered into agreements to sell 13 properties in San Diego and one
    property in Orange County totaling in aggregate approximately 1.2 million
    square feet
  *Completed a public offering of 6,175,000 shares of common stock for net
    proceeds of approximately $296 million

Results for the quarter and nine months ended September30,2013

For its third quarter ended September30,2013, KRC reported FFO of
$55.9million, or $0.69per share, compared to $43.1million, or $0.57per
share, in the third quarter of 2012. Net income available to common
stockholders was $5.6million, or $0.07per share, compared to a net loss
available to common stockholders of $2.8million, or $0.04per share, in the
third quarter of 2012. Results for the third quarter ended September30,2013
included the receipt of a net $0.05per share cash payment related to the
default of a prior tenant as well as $0.01per share of acquisition-related
expenses. Results for the third quarter ended September30,2012 included a
one-time, non-cash charge of $0.03 per share related to the redemption of all
of the company’s Series A preferred units and $0.01per share of
acquisition-related expenses. The company’s revenues, including discontinued
operations, in the third quarter of 2013 totaled $127.8million, up from
$111.4million in the third quarter of 2012.

For the first ninemonths of 2013, KRC reported FFO of $160.1million, or
$1.99per share, compared to $115.6million, or $1.61per share, in the first
ninemonths of 2012. Net income available to common stockholders in the
nine-month period was $11.3million, or $0.13per share, compared to
$64.0million, or $0.92per share, in the same period of 2012. Results for the
first nine months ended September30,2013 included the receipt of two cash
payments totaling approximately $0.11 per share related to prior tenant
matters and $0.02 per share of acquisition-related expenses. Results for the
nine months ended September30,2012 included the receipt of a $0.01 per share
cash payment related to a property damage settlement, $0.05 per share of
acquisition-related expenses and a non-cash charge of $0.10 per share related
to the redemption of all of the company’s Series E and Series F preferred
stock and Series A preferred units.  Net income for the nine months ended
September 30, 2013 included an approximately $0.4million net gain from a
property disposition. Net income for the nine months ended September30,2012
included approximately $72.8million of net gains from property dispositions.
The company’s revenues, including discontinued operations, in the first
ninemonths of 2013 totaled $369.8million, up from $315.7million in the same
period of 2012.

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

Operating and Leasing Activity

At September30,2013, KRC’s stabilized portfolio, which excludes properties
held for sale, encompassing approximately 12.5million square feet of office
space located in LosAngeles, OrangeCounty, SanDiego, the SanFrancisco Bay
Area and greater Seattle, was 92.2% occupied, up from 90.7% at the end of the
second quarter. During the third quarter, the company signed new or renewing
leases on approximately 510,000 square feet of space. At September 30, 2013,
the stabilized portfolio was 93.7% leased.

Real Estate Investment Activity

In September, KRC completed the acquisition of a 13.8acre Class A office
campus in the coastal DelMar sub-market of San Diego for approximately
$126million. The campus includes a three-story office building and a
three-story life science building, which together total approximately
219,000square feet, and a land site that is fully entitled for an additional
75,000square-foot office building.

Also in the third quarter, as part of the company’s ongoing capital recycling
program, KRC negotiated sales agreements for 14non-strategic properties
totaling 1.2million square feet in three separate transactions. Thirteen of
the 14 properties are located in submarkets of San Diego County and one
property is located in Orange County. The transactions for the properties in
San Diego are expected to close by year-end 2013, subject to customary closing
conditions. The sale of the Orange County property closed in October 2013. All
14 assets have been reclassified as properties held for sale as of
September30,2013 and their financial results are accounted for as
discontinued operations for all periods presented.

Also during the quarter, KRC had five development projects under construction,
four of which are 100%preleased. The five projects aggregate approximately
1.5million square feet, and the company estimates its total investment in the
five projects will be approximately $861.7million. Scheduled completion dates
range from the fourth quarter of 2013 to the first quarter of 2015. In
October2013, the company stabilized the 331 Fairchild development project in
Mountain View, California.

Capital Financing Activity

During the third quarter, KRC completed an underwritten public offering of
6,175,000 shares of its common stock for net proceeds of approximately
$296million. The company also raised approximately $11million of net
proceeds from the sale of its common stock via its at-the-market stock
offering program.

Management Comments

“Demand for contemporary, well-located and well-designed commercial real
estate is growing in all of our West Coast markets,” said John Kilroy, Jr.,
the company’s president and chief executive officer. “Against this welcome
backdrop, our organization continues to execute a disciplined strategy of
portfolio transformation and long-term value creation.”

“Over the past three months, we increased our occupancy, remained on-time and
on budget with our fourfully preleased development projects, acquired a top
quality DelMar campus and negotiated the sale of 1.2million square feet of
non-strategic properties. KRC continues to deliver on all fronts.”

Conference Call and Audio Webcast

KRC management will discuss updated earnings guidance for fiscal 2013 during
the company’s October29,2013 earnings conference call. The call will begin
at 10:00a.m. Pacific Time and last approximately onehour. 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)713-4213 reservation #29681690. A replay of the
conference call will be available via phone through November5,2013 at
(888)286-8010, reservation #92159760, or via the Internet at the company’s
website.

About Kilroy Realty Corporation

Kilroy Realty Corporation, a member of the S&P MidCap 400 Index, is a real
estate investment trust active in major West Coast office markets. For over
65years, the company has owned, developed, acquired and managed real estate
assets primarily in the coastal regions of Los Angeles, Orange County, San
Diego, the San Francisco Bay Area and greater Seattle. At September 30, 2013,
the company owned 12.5million rentable square feet of commercial office
space. More information is available at http://www.kilroyrealty.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are
based on our current expectations, beliefs and assumptions, and are not
guarantees of future performance. Forward-looking statements are inherently
subject to uncertainties, risks, changes in circumstances, trends and factors
that are difficult to predict, many of which are outside of our control.
Accordingly, actual performance, results and events may vary materially from
those indicated in forward-looking statements, and you should not rely on
forward-looking statements as predictions of future performance, results or
events. Numerous factors could cause actual future performance, results and
events to differ materially from those indicated in forward-looking
statements, including, among others, risks associated with: investment in real
estate assets, which are illiquid; trends in the real estate industry;
significant competition, which may decrease the occupancy and rental rates of
properties; the ability to successfully complete acquisitions and dispositions
on announced terms; the ability to successfully operate acquired properties;
the availability of cash for distribution and debt service and exposure of
risk of default under debt obligations; adverse changes to, or implementations
of, applicable laws, regulations or legislation; and the ability to
successfully complete development and redevelopment projects on schedule and
within budgeted amounts. These factors are not exhaustive. For a discussion of
additional factors that could materially adversely affect our business and
financial performance, see the factors included under the caption “Risk
Factors” in our annual report on Form 10-K for the year ended December 31,
2012 and our other filings with the Securities and Exchange Commission. All
forward-looking statements are based on information that was available, and
speak only, as of the date on which they are made. We assume no obligation to
update any forward-looking statement made in this press release that becomes
untrue because of subsequent events, new information or otherwise, except to
the extent required in connection with ongoing requirements under U.S.
securities laws.


KILROY REALTY CORPORATION
SUMMARY QUARTERLY RESULTS
(unaudited, in thousands, except per share data)

                      Three Months Ended         Nine Months Ended
                                              
                      September 30,              September 30,
                      2013        2012          2013           2012
Revenues from
continuing            $ 115,697    $ 98,985      $  344,496      $  276,427
operations
                                                                 
Revenues including
discontinued          $ 127,803    $ 111,375     $  369,778      $  315,712
operations
                                                                 
Net income (loss)
available to common   $ 5,584      $ (2,753  )   $  11,314       $  63,988
stockholders ^(1)
(2)
                                                                 
Weighted average
common shares         76,769       71,889        75,751          67,975
outstanding - basic
Weighted average
common shares         76,769       71,889        75,751          67,975
outstanding -
diluted
                                                                 
Net income (loss)
available to common
stockholders per      $ 0.07       $ (0.04   )   $  0.13         $  0.92
share - basic ^(1)
(2)
Net income (loss)
available to common
stockholders per      $ 0.07       $ (0.04   )   $  0.13         $  0.92
share - diluted
^(1) (2)
                                                                 
Funds From
Operations ^(1) (3)   $ 55,899     $ 43,142      $  160,139      $  115,641
(4)
                                                                 
Weighted average
common shares/units   79,806       74,850        78,795          70,830
outstanding - basic
^ (5)
Weighted average
common shares/units   81,527       76,185        80,586          71,953
outstanding -
diluted ^ (5)
                                                                 
Funds From
Operations per        $ 0.70       $ 0.58        $  2.03         $  1.63
common share/unit -
basic ^(1) (5)
Funds From
Operations per        $ 0.69       $ 0.57        $  1.99         $  1.61
common share/unit -
diluted ^(1) (5)
                                                                 
Common shares
outstanding at end                               82,113          74,693
of period
Common partnership
units outstanding                                1,822          1,827       
at end of period
Total common shares
and units                                        83,935          76,520
outstanding at end
of period
                                                                 
                                                 September 30,   September 30,
                                                 2013            2012
Stabilized office
portfolio occupancy
rates: ^(6)
Los Angeles and                                  93.2        %   94.3        %
Ventura Counties
Orange County                                    93.3        %   95.6        %
San Diego County                                 89.6        %   87.8        %
San Francisco Bay                                92.7        %   92.0        %
Area
Greater Seattle                                  95.2        %   93.2        %
Weighted average                                 92.2        %   91.1        %
total
                                                                 
Total square feet
of stabilized
office properties
owned at end of
period: ^(6)
Los Angeles and                                  3,398           3,038
Ventura Counties
Orange County                                    437             497
San Diego County                                 4,364           5,183
San Francisco Bay                                2,289           2,211
Area
Greater Seattle                                  2,048          1,727       
Total                                            12,536          12,656
                                                                             

________________________

      Net income (loss) available to common stockholders and Funds From
      Operations for the three and nine months ended September 30, 2013
      includes the receipt of $3.7 million net cash payment related the
      default of a former tenant and for the nine months ended September 30,
      2013, also includes the receipt of a $5.2 million payment related to a
      property damage settlement. In addition, Net income (loss) available to
(1)  common stockholders and Funds From Operations for the three months and
      nine months ended September 30, 2012 included a non-cash charge of $2.1
      million related to the original issuance costs of the Series A Preferred
      Units that were redeemed on August 15, 2012 and for the nine months
      ended September 30, 2012, also included a non-cash charge of $4.9
      million related to the original issuance cost of the Series E and F
      Preferred Stock redeemed on April 16, 2012.
      Net income (loss) available to common stockholders includes a net gain
(2)   on dispositions of discontinued operations of $0.4 million and $72.8
      million for the nine months ended September 30, 2013 and September 30,
      2012, respectively.
      Reconciliation of Net income (loss) available to common stockholders to
(3)   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.
      Calculated based on weighted average shares outstanding including
(5)   participating share-based awards and assuming the exchange of all common
      limited partnership units outstanding.
      Occupancy percentages and total square feet reported are based on the
      company’s stabilized office portfolio for the periods presented.
(6)   Occupancy percentages and total square feet shown for September 30, 2012
      include the office properties that were sold during the fourth quarter
      of 2012.
      

                                                          
KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
                                                             
                                        September 30, 2013   December 31, 2012
                                        (unaudited)
ASSETS
REAL ESTATE ASSETS:
Land and improvements                   $   612,843          $   612,714
Buildings and improvements              3,527,729            3,335,026
Undeveloped land and construction in    907,959             809,654        
progress
Total real estate held for investment   5,048,531            4,757,394
Accumulated depreciation and            (781,580        )    (756,515       )
amortization
Total real estate held for              4,266,951            4,000,879
investment, net
                                                             
Real estate assets and other assets     239,411              —
held for sale, net
Cash and cash equivalents               197,150              16,700
Restricted cash                         17,931               247,544
Marketable securities                   9,192                7,435
Current receivables, net                11,769               9,220
Deferred rent receivables, net          121,659              115,418
Deferred leasing costs and
acquisition-related intangible          190,085              189,968
assets, net
Deferred financing costs, net           17,809               18,971
Prepaid expenses and other assets,      17,319              9,949          
net
TOTAL ASSETS                            $   5,089,276       $   4,616,084  
                                                             
LIABILITIES AND EQUITY
LIABILITIES:
Secured debt                            $   563,898          $   561,096
Exchangeable senior notes, net          167,236              163,944
Unsecured debt, net                     1,431,048            1,130,895
Unsecured line of credit                —                    185,000
Accounts payable, accrued expenses      210,111              154,734
and other liabilities
Accrued distributions                   31,479               28,924
Deferred revenue and
acquisition-related intangible          102,991              117,904
liabilities, net
Rents received in advance and tenant    41,668               37,654
security deposits
Liabilities and deferred revenue of     16,751              —              
real estate assets held for sale
Total liabilities                       2,565,182           2,380,151      
                                                             
EQUITY:
Stockholders’ Equity
6.875% Series G Cumulative Redeemable   96,155               96,155
Preferred stock
6.375% Series H Cumulative Redeemable   96,256               96,256
Preferred stock
Common stock                            821                  749
Additional paid-in capital              2,476,424            2,126,005
Distributions in excess of earnings     (201,048        )    (129,535       )
Total stockholders’ equity              2,468,608           2,189,630      
Noncontrolling Interests
Common units of the Operating           50,601               46,303
Partnership
Noncontrolling interest in              4,885               —              
consolidated subsidiary
Total noncontrolling interests          55,486              46,303         
Total equity                            2,524,094           2,235,933      
TOTAL LIABILITIES AND EQUITY            $   5,089,276       $   4,616,084  
                                                                            

                                                  
KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
                                                     
                          Three Months Ended         Nine Months Ended

                          September 30,              September 30,
                          2013         2012         2013         2012
REVENUES:
Rental income             $ 104,939     $ 90,828     $ 308,931     $ 253,599
Tenant reimbursements     9,656         8,022        28,503        21,867
Other property income     1,102        135         7,062        961       
Total revenues            115,697      98,985      344,496      276,427   
                                                                   
EXPENSES:
Property expenses         25,123        21,016       71,728        55,531
Real estate taxes         10,295        8,746        29,707        23,668
Provision for bad debts   124           —            219           2
Ground leases             929           859          2,665         2,276
General and               10,226        8,727        29,750        26,745
administrative expenses
Acquisition-related       568           556          1,387         3,897
expenses
Depreciation and          47,569       41,724      141,814      109,780   
amortization
Total expenses            94,834       81,628      277,270      221,899   
                                                                   
OTHER (EXPENSES)
INCOME:
Interest income and
other net investment      673           330          1,084         703
gains
Interest expense          (18,853   )   (19,854  )   (58,021   )   (60,172   )
Total other (expenses)    (18,180   )   (19,524  )   (56,937   )   (59,469   )
income
                                                                   
INCOME (LOSS) FROM        2,683         (2,167   )   10,289        (4,941    )
CONTINUING OPERATIONS
                                                                   
DISCONTINUED
OPERATIONS:
Income from               6,344         4,689        10,806        15,603
discontinued operations
Net gain on
dispositions of           —            —           423          72,809    
discontinued operations
Total income from         6,344        4,689       11,229       88,412    
discontinued operations
                                                                   
NET INCOME                9,027         2,522        21,518        83,471
                                                                   
Net (income) loss
attributable to
noncontrolling common     (131      )   67          (266      )   (1,708    )

units of the Operating
Partnership
                                                                   
NET INCOME ATTRIBUTABLE
TO KILROY REALTY          8,896         2,589        21,252        81,763
CORPORATION
                                                                   
PREFERRED DISTRIBUTIONS
AND DIVIDENDS:
Distributions on
noncontrolling
cumulative redeemable     —             (747     )   —             (3,541    )

preferred units of the
Operating Partnership
Preferred dividends       (3,312    )   (2,533   )   (9,938    )   (7,254    )
Original issuance costs
of redeemed preferred     —            (2,062   )   —            (6,980    )
stock
Total preferred
distributions and         (3,312    )   (5,342   )   (9,938    )   (17,775   )
dividends
NET INCOME (LOSS)
AVAILABLE TO COMMON       $ 5,584      $ (2,753 )   $ 11,314     $ 63,988  
STOCKHOLDERS
                                                                   
Weighted average common
shares outstanding -      76,769        71,889       75,751        67,975
basic
Weighted average common
shares outstanding -      76,769        71,889       75,751        67,975
diluted
                                                                   
Net income (loss)
available to common       $ 0.07       $ (0.04  )   $ 0.13       $ 0.92    
stockholders per share
- basic
Net income (loss)
available to common       $ 0.07       $ (0.04  )   $ 0.13       $ 0.92    
stockholders per share
- diluted
                                                                             

                                                
KILROY REALTY CORPORATION
FUNDS FROM OPERATIONS
(unaudited, in thousands, except per share data)
                                                   
                  Three Months Ended September     Nine Months Ended September
                  30,                              30,
                  2013            2012            2013           2012
Net income
(loss)
available to      $  5,584         $  (2,753  )    $  11,314       $ 63,988
common
stockholders
Adjustments:
Net income
(loss)
attributable to
noncontrolling    131              (67        )    266             1,708

common units of
the Operating
Partnership
Depreciation
and
amortization of   50,184           45,962          148,982         122,754
real estate
assets
Net gain on
dispositions of   —               —              (423        )   (72,809   )
discontinued
operations
Funds From
Operations        $  55,899       $  43,142      $  160,139     $ 115,641 
^(1)(2)
                                                                   
Weighted
average common
shares/units      79,806           74,850          78,795          70,830
outstanding -
basic
Weighted
average common
shares/units      81,527           76,185          80,586          71,953
outstanding -
diluted
                                                                   
Funds From
Operations per
common            $  0.70         $  0.58        $  2.03        $ 1.63    
share/unit -
basic ^(3)
Funds From
Operations per
common            $  0.69         $  0.57        $  1.99        $ 1.61    
share/unit -
diluted ^(3)
                                                                             

________________________

      The company calculates 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
(1)  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.
      
      Management believes that FFO is a useful supplemental measure of the
      company’s 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 the company’s 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 the company’s operating performance
      to other REITs. However, other REITs may use different methodologies to
      calculate FFO, and accordingly, the company's 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, management believes that FFO along with the
      required GAAP presentations provides a more complete measurement of the
      company’s performance relative to its 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 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 and could
      materially impact the company’s results from operations.
      
      FFO includes amortization of deferred revenue related to tenant-funded
      tenant improvements of $2.6 million and $2.4 million for the three
(2)   months ended September 30, 2013 and 2012, respectively, and $7.6 million
      and $6.9 million for the nine months ended September 30, 2013 and 2012,
      respectively.
      
(3)   Reported amounts are attributable to common stockholders and common
      unitholders.

Contact:

Kilroy Realty Corporation
Tyler H. Rose
Executive Vice President and Chief Financial Officer
(310) 481-8484
or
Michelle Ngo
Senior Vice President and Treasurer
(310) 481-8581
 
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