Kilroy Realty Corporation Reports Fourth Quarter Financial Results

  Kilroy Realty Corporation Reports Fourth Quarter Financial Results

Business Wire

LOS ANGELES -- February 3, 2014

Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its
fourth quarter ended December31,2013.

Fourth Quarter Highlights

  *Funds from operations (FFO) of $0.67 per share
  *Net income available to common stockholders of $0.23 per share
  *Revenues from continuing operations of $120.6million
  *Stabilized portfolio 93.4% occupied and 95.1% leased at December31,2013
  *Signed new or renewing leases on 732,000 square feet of space, achieving
    full-year leasing results of two million square feet for the sixth
    consecutive year
  *Initiated construction on three development projects totaling
    approximately 1.2 million square feet
  *Acquired for approximately $46 million a 3.6 acre development site in the
    Hollywood submarket of Los Angeles for a planned 475,000 square-foot,
    mixed-use media focused office campus

Recent Activity

  *Completed the sale of 14 office properties located in San Diego and Orange
    County for total proceeds of approximately $337million (the disposition
    of 12 San Diego properties closed in January 2014)
  *In January 2014, executed an approximate 182,000 square-foot lease for
    100% of the company’s 333Brannan Street office project in the SOMA
    submarket of San Francisco

Results for the quarter and full year ended December31,2013

For its fourth quarter ended December31,2013, KRC reported FFO of
$58.5million, or $0.67per share, compared to $49.8million, or $0.63per
share, in the fourth quarter of 2012. Net income available to common
stockholders was $19.3million, or $0.23per share, compared to
$185.8million, or $2.49 per share, in the year earlier period. Net income for
the fourth quarters ended December31,2013 and 2012 included approximately
$11.8 million and $186.4 million, respectively, in net gains from property
dispositions. Including discontinued operations, the company’s revenues in the
fourth quarter of 2013 totaled $128.0million, up from $115.8million in the
fourth quarter of 2012.

For the yearended December31,2013, KRC reported FFO of $218.6million, or
$2.66per share, compared to $165.5million, or $2.25per share, in the
yearended December 31, 2012. Net income available to common stockholders in
the twelve-month period was $30.6million, or $0.36per share, compared to
$249.8million, or $3.56per share, in the same period of 2012. Net income for
the full years ended December31,2013 and 2012 include approximately
$12.3million and $259.2million, respectively, in net gains from property
dispositions. Results for the full year ended December31,2013 included the
receipt of two cash payments totaling approximately $0.11per share related to
prior tenant matters and $0.02per share of acquisition-related expenses.
Results for the full year ended December 31, 2012 included a non-cash charge
of approximately $0.10per share related to the redemption of all of the
Company’s SeriesE and SeriesF preferred stock and the Operating
Partnership’s Series A preferred units and $0.07per share of
acquisition-related expenses. Including discontinued operations, revenues in
2013 totaled $497.8million, up from $431.5million in 2012.

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

Operating and Leasing Activity

At December31,2013, KRC’s stabilized portfolio, which excludes properties
held for sale, encompassed approximately 12.7million square feet of office
space located in LosAngeles, OrangeCounty, SanDiego, the SanFrancisco Bay
Area and greater Seattle. The stabilized portfolio was 93.4% occupied at
year-end 2013, compared to 92.2% at the end of the third quarter and 92.8% at
year-end 2012. During the fourth quarter, the company signed new or renewing
leases on approximately 732,000 square feet of space, including redevelopment
leasing. Across all of 2013, the company signed new or renewing leases on
approximately 2.3million square feet (including redevelopment leasing),
marking the sixth consecutive year that KRC has achieved full-year leasing of
two million square feet. The company’s stabilized portfolio was 95.1% leased
at year-end 2013.

Real Estate Investment Activity

During the fourth quarter, KRC initiated construction on threedevelopment
projects totaling approximately 1.2million square feet of space. These
include a 185,000square-foot office building located at 333Brannan Street in
the SOMA submarket of San Francisco, CA, a 300,000square-foot, two-building
office campus known as Crossing/900 in Redwood City, CA and the second phase
of a 675,000square-foot mixed-use campus at Columbia Square in Hollywood, CA.

With the addition of these three projects, KRC has six development projects
under construction, four of which are 100% preleased. These six projects
aggregate approximately 2.5million square feet of space, and the company
estimates its total investment in these projects will be approximately
$1.5billion. Scheduled completion dates range from 2014 to 2016.

As part of the company’s ongoing capital recycling program, KRC completed the
previously announced disposition of 14 properties, located in submarkets of
Orange County and San Diego, during the fourth quarter and in early January
2014, for total proceeds of approximately $337million. The 12properties sold
in January2014 were reported as properties held for sale as of
December31,2013. The financial results of all 14properties have been
accounted for as discontinued operations for all periods presented.

Also in November2013, KRC completed the acquisition of an approximate
four-acre development site in the Hollywood submarket of Los Angeles for
approximately $46million. Upon receipt of entitlements, the company plans to
develop a 475,000square-foot, mixed-use media focused office campus on the
site, including low- and mid-rise office space, apartments and retail space.

Management Comments

“Against a backdrop of improving economic and commercial real estate
fundamentals, KRC continued to create value across the franchise and delivered
another strong performance in fiscal 2013,” said John Kilroy, Jr., the
company’s chairman, president and chief executive officer. “Throughout the
year, we executed an ambitious leasing program — driving occupancy up to
93.4%, decreasing 2015 lease expirations by 440 bps, and fully leasing up our
two redevelopment projects at 360 Third Street and 3880 Kilroy Airport Way.

“Leveraging our strong balance sheet and the funds generated from our ongoing
capital recycling program, we made significant progress in expanding our
market presence within the West Coast’s most dynamic economies and reshaping
our real estate assets to deliver the quality, efficiency and sustainability
that our tenants now expect in their professional work environment. This
transformation will serve our company and shareholders well, not just over the
coming year, but across the next decade.”

Conference Call and Audio Webcast

KRC management will discuss initial earnings guidance for fiscal 2014 during
the company’s February4,2014 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) 680-0890 reservation #29128751. A replay of the
conference call will be available via phone through February 11, 2014 at (888)
286-8010, reservation #96412388, 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; publicly traded real
estate investment trust Kilroy Realty Corporation (KRC), a member of the S&P
MidCap 400 Index, is one of the region’s premier landlords. The company
provides physical work environments that can advance creativity and
productivity to serve a roster of dynamic, innovation-driven tenants that
includes technology, entertainment, digital media and health care companies.

At December31,2013, the company’s stabilized portfolio totaled 12.7million
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. 40% of the company’s properties were LEED certified and 53% were
Energy Star certified. In addition, KRC has approximately 2.5million square
feet of new office development under construction with a total estimated
investment of approximately $1.5billion. 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        Year Ended
                     December 31,                December 31,
                     2013        2012          2013           2012
Revenues from
continuing           $ 120,602     $ 104,573     $  465,098       $  381,000
operations
                                                                  
Revenues
including            $ 128,041     $ 115,763     $  497,819       $  431,474
discontinued
operations
                                                                  
Net income
available to
common               $ 19,316      $ 185,839     $  30,630        $  249,826
stockholders
^(1) (2)
                                                                  
Weighted average
common shares          82,071        74,596         77,344           69,640
outstanding –
basic
Weighted average
common shares          83,761        74,596         79,109           69,640
outstanding –
diluted
                                                                  
Net income
available to
common               $ 0.23        $ 2.49        $  0.37          $  3.56
stockholders per
share – basic
^(1)(2)
Net income
available to
common               $ 0.23        $ 2.49        $  0.36          $  3.56
stockholders per
share – diluted
^(1)(2)
                                                                  
Funds From
Operations           $ 58,482      $ 49,816      $  218,621       $  165,455
^(1)(3)(4)
                                                                  
Weighted average
common
shares/units           85,124        77,595         80,390           72,531
outstanding -
basic ^ (5)
Weighted average
common
shares/units           86,813        78,720         82,155           73,654
outstanding -
diluted ^ (5)
                                                                  
Funds From
Operations per
common               $ 0.69        $ 0.64        $  2.72          $  2.28
share/unit –
basic ^(1)(5)
Funds From
Operations per
common               $ 0.67        $ 0.63        $  2.66          $  2.25
share/unit –
diluted ^(1)(5)
                                                                  
Common shares
outstanding at                                      82,154           74,927
end of period
Common
partnership
units                                              1,805          1,827   
outstanding at
end of period
Total common
shares and units                                    83,959           76,754
outstanding at
end of period
                                                                  
                                                 December 31,     December 31,
                                                 2013             2012
Stabilized
office portfolio
occupancy rates:
^(6)
Los Angeles and                                     93.7    %        94.0    %
Ventura Counties
Orange County                                       92.8    %        92.0    %
San Diego County                                    90.8    %        90.7    %
San Francisco                                       94.8    %        95.5    %
Bay Area
Greater Seattle                                    96.7    %       93.3    %
Weighted average                                    93.4    %        92.8    %
total
                                                                  
Total square
feet of
stabilized
office
properties owned
at end of
period: ^(6)
Los Angeles and                                     3,507            3,488
Ventura Counties
Orange County                                       437              497
San Diego County                                    4,368            5,250
San Francisco                                       2,377            2,287
Bay Area
Greater Seattle                                    2,048          1,727   
Total                                               12,737           13,249


________________________

(1) Net income available to common stockholders and Funds From Operations for
theyearended December31, 2013, also includes the receipt of a $3.7million
net cash payment related the default of a former tenant and the receipt of a
$5.2million payment related to a property damage settlement. In addition, Net
income available to common stockholders and Funds From Operations for the year
ended December31, 2012, included a non-cash charge of $2.1million related to
the original issuance costs of the SeriesA Preferred Units that were redeemed
on August15,2012 and a non-cash charge of $4.9million related to the
original issuance cost of the Series E and F Preferred Stock redeemed on
April16,2012.

(2) Net income available to common stockholders includes a net gain on
dispositions of discontinued operations of $12.3million and $259.2million
for the year ending December31, 2013 and December31, 2012, respectively.

(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 December31, 2012 include the
office properties that were sold during 2013 and held for sale at December31,
2013.


KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)

                                             December 31,    December 31,
                                               2013              2012
                                               (unaudited)
ASSETS
REAL ESTATE ASSETS:
Land and improvements                          $ 657,491         $ 612,714
Buildings and improvements                       3,590,699         3,335,026
Undeveloped land and construction in            1,016,757       809,654   
progress
Total real estate held for investment            5,264,947         4,757,394
Accumulated depreciation and amortization       (818,957  )      (756,515  )
Total real estate held for investment, net       4,445,990         4,000,879
                                                                 
Real estate assets and other assets held         213,100           —
for sale, net
Cash and cash equivalents                        35,377            16,700
Restricted cash                                  49,780            247,544
Marketable securities                            10,008            7,435
Current receivables, net                         10,743            9,220
Deferred rent receivables, net                   127,123           115,418
Deferred leasing costs and                       186,622           189,968
acquisition-related intangible assets, net
Deferred financing costs, net                    16,502            18,971
Prepaid expenses and other assets, net          15,783          9,949     
TOTAL ASSETS                                   $ 5,111,028      $ 4,616,084 
                                                                 
LIABILITIES AND EQUITY
LIABILITIES:
Secured debt                                   $ 560,434         $ 561,096
Exchangeable senior notes, net                   168,372           163,944
Unsecured debt, net                              1,431,132         1,130,895
Unsecured line of credit                         45,000            185,000
Accounts payable, accrued expenses and           198,467           154,734
other liabilities
Accrued distributions                            31,490            28,924
Deferred revenue and acquisition-related         101,286           117,904
intangible liabilities, net
Rents received in advance and tenant             44,240            37,654
security deposits
Liabilities and deferred revenue of real        14,447          —         
estate assets held for sale
Total liabilities                               2,594,868       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                                     822               749
Additional paid-in capital                       2,478,975         2,126,005
Distributions in excess of earnings             (210,896  )      (129,535  )
Total stockholders’ equity                      2,461,312       2,189,630 
Noncontrolling Interests
Common units of the Operating Partnership        49,963            46,303
Noncontrolling interest in consolidated         4,885           —         
subsidiary
Total noncontrolling interests                  54,848          46,303    
Total equity                                    2,516,160       2,235,933 
TOTAL LIABILITIES AND EQUITY                   $ 5,111,028      $ 4,616,084 



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

                      Three Months Ended            Year Ended
                        December 31,                    December 31,
                        2013          2012            2013          2012
REVENUES:
Rental income           $ 110,258       $ 96,014        $ 419,189       $ 349,613
Tenant                    9,810           8,022           38,313          29,889
reimbursements
Other property           534           537           7,596         1,498   
income
Total revenues           120,602       104,573       465,098       381,000 
                                                                        
EXPENSES:
Property expenses         24,878          20,688          96,606          76,219
Real estate taxes         10,466          8,655           40,156          32,323
Provision for bad         185             151             404             153
debts
Ground leases             839             892             3,504           3,168
General and
administrative            9,910           9,443           39,660          36,188
expenses
Acquisition-related       575             1,040           1,962           4,937
expenses
Depreciation and         50,920        43,550        192,734       153,251 
amortization
Total expenses           97,773        84,419        375,026       306,239 
                                                                        
OTHER (EXPENSES)
INCOME:
Interest income and
other net                 551             145             1,635           848
investment gains
Interest expense         (17,849 )      (18,942 )      (75,870 )      (79,114 )
Total other               (17,298 )       (18,797 )       (74,235 )       (78,266 )
(expenses) income
                                                                        
INCOME (LOSS) FROM
CONTINUING                5,531           1,357           15,837          (3,505  )
OPERATIONS
                                                                        
DISCONTINUED
OPERATIONS:
Income from
discontinued              5,687           5,839           16,476          21,361
operations
Net gain on
dispositions of          11,829        186,435       12,252        259,245 
discontinued
operations
Total income from
discontinued             17,516        192,274       28,728        280,606 
operations
                                                                        
NET INCOME                23,047          193,631         44,565          277,101
                                                                        
Net income
attributable to
noncontrolling           (419    )      (4,479  )      (685    )      (6,187  )
common units of the
Operating
Partnership
                                                                        
NET INCOME
ATTRIBUTABLE TO           22,628          189,152         43,880          270,914
KILROY REALTY
CORPORATION
                                                                        
PREFERRED
DISTRIBUTIONS AND
DIVIDENDS:
Distributions on
noncontrolling
cumulative
redeemable                —               —               —               (3,541  )
preferred units of
the Operating
Partnership
Preferred dividends       (3,312  )       (3,313  )       (13,250 )       (10,567 )
Original issuance
costs of redeemed        —             —             —             (6,980  )
preferred stock
Total preferred
distributions and        (3,312  )      (3,313  )      (13,250 )      (21,088 )
dividends
NET INCOME
AVAILABLE TO COMMON     $ 19,316       $ 185,839      $ 30,630       $ 249,826 
STOCKHOLDERS
                                                                        
Weighted average
common shares             82,071          74,596          77,344          69,640
outstanding – basic
Weighted average
common shares             83,761          74,596          79,109          69,640
outstanding –
diluted
                                                                        
Net income
available to common     $ 0.23         $ 2.49         $ 0.37         $ 3.56    
stockholders per
share – basic
Net income
available to common     $ 0.23         $ 2.49         $ 0.36         $ 3.56    
stockholders per
share – diluted



KILROY REALTY CORPORATION
FUNDS FROM OPERATIONS
(unaudited, in thousands, except per share data)

                 Three Months Ended             Year Ended
                   December 31,                     December 31,
                   2013          2012             2013          2012
Net income
available to       $ 19,316        $ 185,839        $ 30,630        $ 249,826
common
stockholders
Adjustments:
Net income
attributable
to
noncontrolling       419             4,479            685             6,187
common units
of the
Operating
Partnership
Depreciation
and
amortization         50,576          45,933           199,558         168,687
of real estate
assets
Net gain on
dispositions
of                  (11,829 )      (186,435 )      (12,252 )      (259,245 )
discontinued
operations
Funds From
Operations         $ 58,482       $ 49,816        $ 218,621      $ 165,455  
^(1)(2)
                                                                    
Weighted
average common
shares/units         85,124          77,595           80,390          72,531
outstanding –
basic
Weighted
average common
shares/units         86,813          78,720           82,155          73,654
outstanding –
diluted
                                                                    
Funds From
Operations per
common             $ 0.69         $ 0.64          $ 2.72         $ 2.28     
share/unit –
basic ^(3)
Funds From
Operations per
common             $ 0.67         $ 0.63          $ 2.66         $ 2.25     
share/unit –
diluted ^(3)


________________________

(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 $3.1million and $2.3million for the three months
ended December31, 2013 and 2012, respectively, and $10.7million and
$9.1million for the yearsended December31, 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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