Kilroy Realty Corporation Reports Second Quarter Financial Results

LOS ANGELES--()--Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its second quarter ended June 30, 2016.

“Six months into 2016, we’re on track for another strong financial and operating year at KRC”

Second Quarter Highlights

Financial Results

  • Net income available to common stockholders of $0.31 per share
  • Funds from operations (FFO) of $0.86 per share which includes $0.01 per share of acquisition-related expenses
  • Revenues of $160.1 million
  • In May, increased our regular quarterly cash dividend to an annualized rate of $1.50 per share, a 7.1% increase from the previous annualized dividend level of $1.40 per share

Stabilized Portfolio

  • Stabilized portfolio was 95.5% occupied and 96.6% leased at June 30, 2016
  • Signed approximately 266,000 square feet of new or renewing leases

Development

  • In June, completed construction of the 200 unit, 21-story residential building at the company’s mixed-used Columbia Square project in Hollywood. As of June 30, 2016, 22% of the 200 units were leased

Acquisitions

  • In June, acquired a fully leased 114,000 square-foot office building in Mountain View, CA for $55.4 million

Capital Recycling

  • In June, completed the sale of three land parcels aggregating 24.4 acres in Carlsbad, CA for total gross proceeds of $14.9 million

Recent Developments

  • In July, received final entitlement approval for the company’s 1.1 million square-foot mixed-used One Paseo project in the Del Mar submarket of San Diego
  • In July, completed the sale of two office properties aggregating 137,000 rentable square feet and a 7.0 acre land site in the Sorrento Mesa submarket of San Diego for gross proceeds of $49.0 million

Results for the Quarter Ended June 30, 2016

For the second quarter ended June 30, 2016, KRC reported net income available to common stockholders of $29.5 million, or $0.31 per share, compared to $54.2 million, or $0.61 per share, in the prior year period, which included a $31.4 million, or $0.35 per share, gain from property dispositions. FFO for the period was $82.7 million, or $0.86 per share, compared to $74.8 million, or $0.82 per share, in the second quarter of 2015. FFO per share in 2Q16 includes approximately $0.01 per share of acquisition-related expenses compared to $0.003 in 2Q15. Total revenues in the second quarter of 2016 were $160.1 million, compared to $146.2 million in the second quarter of 2015.

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

Operating and Leasing Activity

At June 30, 2016, KRC’s stabilized portfolio totaled approximately 13.7 million square feet of office space located in Los Angeles, Orange County, San Diego, the San Francisco Bay Area and greater Seattle. During the second quarter, the company signed new or renewing leases in its stabilized portfolio totaling 266,112 square feet of space. At quarter-end, the portfolio was 95.5% occupied, compared to 94.8% at December 31, 2015 and 96.7% at June 30, 2015, and was 96.6% leased.

Real Estate Development Activity

KRC currently has one project under construction, The Exchange on 16th in the Mission Bay submarket of San Francisco. It has a total estimated investment of approximately $485.0 million. The company also has two office properties currently in lease-up that represent a total estimated investment of approximately $265.0 million and one recently completed residential property with a total estimated investment of $160.0 million. As of June 30, 2016, the office properties were 73% committed and the residential property was 22% leased.

Management Comments

“Six months into 2016, we’re on track for another strong financial and operating year at KRC,” said John Kilroy, the company’s chairman, president and chief executive officer. “Our stabilized portfolio is at frictional occupancy levels and generating strong same-store NOI growth. We’re making excellent progress moving our in-process development projects forward, on both the construction and leasing fronts. And we continue to advance our development pipeline, acquiring key entitlements and ensuring broad access to capital, including continued success in our capital recycling program.”

FFO per Share Guidance

The company has updated its guidance range of NAREIT defined FFO per share (diluted) for the full year 2016 to $3.36 - $3.44 per share with a midpoint of $3.40 per share. The updated guidance reflects an increase in proceeds related to 2016 capital recycling to a new estimated 2016 target of approximately $800 million from the previous midpoint of $500 million.

These estimates reflect management’s view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and the earnings impact of the events referenced in this release and otherwise referenced during the conference call referred to below. These estimates do not include possible future gains or losses or the impact on operating results from other possible future property acquisitions or dispositions, other possible capital markets activity or possible future impairment charges. There can be no assurance that the company’s actual results will not differ materially from these estimates.

Conference Call and Audio Webcast

KRC management will discuss earnings guidance for fiscal year 2016 during the company’s July 26, 2016 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) 680-0878 reservation #80256205. A replay of the conference call will be available via phone through August 2, 2016 at (888) 286-8010, reservation #85935244, or via the Internet at the company’s website.

About Kilroy Realty Corporation

With nearly 70 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 broad roster of dynamic, innovation-driven tenants, including technology, entertainment, digital media and health care companies.

At June 30, 2016, the company’s stabilized portfolio totaled 13.7 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. The company is recognized by GRESB as the North American leader in sustainability, ranking first among 155 North American participants across all asset types. At the end of the second quarter, the company’s properties were 47% LEED certified and 69% of eligible properties were ENERGY STAR certified. In addition, KRC had one office project totaling approximately 700,000 square feet under construction, two office projects in lease-up totaling approximately 443,000 square feet and a 200-unit residential tower in lease-up. More information is available at http://www.kilroyrealty.com.

Non-GAAP Financial Information

The Company does not provide a reconciliation for its guidance range of FFO per common share/unit - diluted to net income available to common stockholders per common share - diluted, the most directly comparable forward-looking GAAP financial measure, because it is unable to provide a meaningful or accurate estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing and/or amount of various items that would impact net income available to common stockholders per share - diluted, including, for example, gains on sales of depreciable real estate and other items that have not yet occurred and are out of the Company’s control. For the same reasons, the Company is unable to address the probable significance of the unavailable information and believes that providing a reconciliation for its guidance range of FFO per common share/unit - diluted would imply a degree of precision as to its forward-looking net income available to common stockholders per common share - diluted that would be confusing or misleading to investors.

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, 2015 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 OF QUARTERLY RESULTS

(unaudited, in thousands, except per share data)
 
Three Months Ended
June 30,
Six Months Ended
June 30,
2016   2015 2016   2015
Revenues $ 160,133 $ 146,227 $ 305,579 $ 292,309
 
Net income available to common stockholders (1) $ 29,535 $ 54,188 $ 200,530 $ 94,062
 
Weighted average common shares outstanding – basic 92,210 88,126 92,217 87,515
Weighted average common shares outstanding – diluted 92,825 88,646 92,784 88,044
 
Net income available to common stockholders per share – basic (1) $ 0.32 $ 0.61 $ 2.17 $ 1.07
Net income available to common stockholders per share – diluted (1) $ 0.31 $ 0.61 $ 2.15 $ 1.06
 
Funds From Operations (1)(2)(3) $ 82,722 $ 74,819 $ 160,915 $ 166,351
 
Weighted average common shares/units outstanding – basic (4) 95,966 91,109 95,642 90,498
Weighted average common shares/units outstanding – diluted (4) 96,581 91,629 96,209 91,028
 
Funds From Operations per common share/unit – basic (4) $ 0.86 $ 0.82 $ 1.68 $ 1.84
Funds From Operations per common share/unit – diluted (4) $ 0.86 $ 0.82 $ 1.67 $ 1.83
 
Common shares outstanding at end of period 92,255 88,406
Common partnership units outstanding at end of period 2,631   1,793  
Total common shares and units outstanding at end of period 94,886 90,199
 
June 30, 2016 June 30, 2015
Stabilized office portfolio occupancy rates: (5)
Los Angeles and Ventura Counties 94.2 % 95.4 %
Orange County 97.8 % 98.1 %
San Diego County 89.0 % 95.5 %
San Francisco Bay Area 98.7 % 98.5 %
Greater Seattle 98.1 % 97.0 %
Weighted average total 95.5 % 96.7 %
 
Total square feet of stabilized office properties owned at end of period: (5)
Los Angeles and Ventura Counties 3,619 3,505
Orange County 272 272
San Diego County 2,711 3,318
San Francisco Bay Area 4,992 3,890
Greater Seattle 2,066   2,066  
Total 13,660 13,051
________________________
(1)   Net income available to common stockholders for the six months ended June 30, 2016 includes a gain on sale of depreciable operating properties of $146.0 million. Net income available to common stockholders and Funds From Operations for the three and six months ended June 30, 2016 includes a loss on sale of land of $0.3 million. Net income available to common stockholders for the three and six months ended June 30, 2015 includes gains on sales of depreciable operating properties of $31.4 million. Net income available to common stockholders and Funds From Operations for the six months ended June 30, 2015 includes a gain on sale of land of $17.3 million.
(2) 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.
(3) Reported amounts are attributable to common stockholders and common unitholders.
(4) Calculated based on weighted average shares outstanding including participating share-based awards and assuming the exchange of all common limited partnership units outstanding.
(5) 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, 2015 include the office properties that were sold subsequent to June 30, 2015 and held for sale at June 30, 2016.
 
   

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands)
 
June 30, 2016 December 31, 2015
(unaudited)

ASSETS

REAL ESTATE ASSETS:
Land and improvements $ 1,020,287 $ 875,794
Buildings and improvements 4,639,003 4,091,012
Undeveloped land and construction in progress 894,057   1,361,340  
Total real estate assets held for investment 6,553,347 6,328,146
Accumulated depreciation and amortization (1,054,828 ) (994,241 )
Total real estate assets held for investment, net 5,498,519 5,333,905
 
Real estate assets and other assets held for sale, net 30,257 117,666
Cash and cash equivalents 26,332 56,508
Restricted cash 266,158 696
Marketable securities 13,388 12,882
Current receivables, net 10,112 11,153
Deferred rent receivables, net 207,851 189,704
Deferred leasing costs and acquisition-related intangible assets, net 186,903 176,683
Prepaid expenses and other assets, net (1) 58,913   27,233  
TOTAL ASSETS $ 6,298,433   $ 5,926,430  
 

LIABILITIES AND EQUITY

LIABILITIES:
Secured debt, net (1) $ 373,500 $ 380,835
Unsecured debt, net (1) 1,845,992 1,844,634
Unsecured line of credit 220,000
Accounts payable, accrued expenses and other liabilities 211,196 246,323
Accrued dividends and distributions 37,733 34,992
Deferred revenue and acquisition-related intangible liabilities, net 138,394 128,156
Rents received in advance and tenant security deposits 44,663 49,361
Liabilities of real estate assets held for sale 321   7,543  
Total liabilities 2,871,799   2,691,844  
 
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 923 923
Additional paid-in capital 3,074,508 3,047,894
Retained earnings/(distributions in excess of earnings) 62,647   (70,262 )
Total stockholders’ equity 3,330,489 3,170,966
Noncontrolling Interests
Common units of the Operating Partnership 89,495 57,100
Noncontrolling interest in consolidated subsidiary 6,650   6,520  
Total noncontrolling interests 96,145   63,620  
Total equity 3,426,634   3,234,586  
TOTAL LIABILITIES AND EQUITY $ 6,298,433   $ 5,926,430  
________________________
(1)   Effective January 1, 2016, the Company adopted Financial Accounting Standards Board Accounting Standards Update No. 2015-03 and 2015-15, which changed the presentation of deferred financing costs on the balance sheet. As a result, for all periods presented, deferred financing costs, with the exception of deferred financing costs related to the unsecured line of credit, have been reclassified as a reduction to the related secured debt, net and unsecured debt, net line items. Deferred financing costs related to the unsecured line of credit are included in prepaid expenses and other assets, net.
 
   

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)
 
Three Months Ended
June 30,
Six Months Ended
June 30,
2016   2015 2016   2015
REVENUES
Rental income $ 143,653 $ 131,450 $ 277,408 $ 262,382
Tenant reimbursements 16,138 14,174 27,542 28,599
Other property income 342   603   629   1,328  
Total revenues 160,133   146,227   305,579   292,309  
 
EXPENSES
Property expenses 29,221 26,866 55,186 51,580
Real estate taxes 13,845 12,430 24,877 25,145
Provision for bad debts 47 289
Ground leases 768 813 1,597 1,589
General and administrative expenses 13,979 12,633 27,416 25,401
Acquisition-related expenses 714 265 776 393
Depreciation and amortization 53,346   51,658   103,786   103,145  
Total expenses 111,873   104,712   213,638   207,542  
 
OTHER (EXPENSES) INCOME
Interest income and other net investment gains 311 511 582 871
Interest expense (14,384 ) (14,864 ) (26,213 ) (31,742 )
Total other (expenses) income (14,073 ) (14,353 ) (25,631 ) (30,871 )
 
INCOME FROM OPERATIONS BEFORE GAINS (LOSSES) ON SALES OF REAL ESTATE 34,187 27,162 66,310 53,896
Net (loss) gain on sales of land (295 ) (295 ) 17,268
Gains on sale of depreciable operating properties   31,428   145,990   31,428  
NET INCOME 33,892   58,590   212,005   102,592  
 
Net income attributable to noncontrolling common units of the Operating Partnership (829 ) (1,090 ) (4,439 ) (1,905 )
Net income attributable to noncontrolling interest in consolidated subsidiary (216 )   (411 )  
Total income attributable to noncontrolling interests (1,045 ) (1,090 ) (4,850 ) (1,905 )
 
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION 32,847 57,500 207,155 100,687
 
PREFERRED DIVIDENDS (3,312 ) (3,312 ) (6,625 ) (6,625 )
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 29,535   $ 54,188   $ 200,530   $ 94,062  
 
Weighted average common shares outstanding – basic 92,210 88,126 92,217 87,515
Weighted average common shares outstanding – diluted 92,825 88,646 92,784 88,044
 
Net income available to common stockholders per share – basic $ 0.32   $ 0.61   $ 2.17   $ 1.07  
Net income available to common stockholders per share – diluted $ 0.31   $ 0.61   $ 2.15   $ 1.06  
 
   

KILROY REALTY CORPORATION

FUNDS FROM OPERATIONS

(unaudited, in thousands, except per share data)
 
Three Months Ended June 30, Six Months Ended June 30,
2016   2015 2016   2015
Net income available to common stockholders $ 29,535 $ 54,188 $ 200,530 $ 94,062
Adjustments:
Net income attributable to noncontrolling common units of the Operating Partnership 829 1,090 4,439 1,905
Depreciation and amortization of real estate assets 52,358 50,969 101,936 101,812
Gains on sales of depreciable real estate   (31,428 ) (145,990 ) (31,428 )
Funds From Operations (1)(2)(3) $ 82,722   $ 74,819   $ 160,915   $ 166,351  
 
Weighted average common shares/units outstanding – basic 95,966 91,109 95,642 90,498
Weighted average common shares/units outstanding – diluted 96,581 91,629 96,209 91,028
 
Funds From Operations per common share/unit – basic (3) $ 0.86   $ 0.82   $ 1.68   $ 1.84  
Funds From Operations per common share/unit – diluted (3) $ 0.86   $ 0.82   $ 1.67   $ 1.83  
________________________
(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 also add back net income attributable to noncontrolling common units of the Operating Partnership because we report FFO attributable to common stockholders and common unitholders.
 
We believe that FFO is a useful supplemental measure of our operating performance. The exclusion from FFO of gains and losses from the sale of operating real estate assets allows investors and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those operating results between periods. Also, because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons of operating performance to other REITs. However, other REITs may use different methodologies to calculate FFO, and accordingly, our FFO may not be comparable to all other REITs.
 
Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets, we believe that FFO along with the required GAAP presentations provides a more complete measurement of our performance relative to our competitors and a more appropriate basis on which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide.
 
However, FFO should not be viewed as an alternative measure of our operating performance because it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs and could materially impact our results from operations.
 
(2) FFO includes amortization of deferred revenue related to tenant-funded tenant improvements of $3.2 million and $3.3 million for the three months ended June 30, 2016 and 2015, respectively, and $6.1 million and $6.3 million for the six months ended June 30, 2016 and 2015, respectively.
 
(3) Reported amounts are attributable to common stockholders and common unitholders.
 

Contacts

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

Recent Stories

RSS feed for Kilroy Realty Corporation

Kilroy Realty Corporation