Kilroy Realty Corporation Reports Second Quarter Financial Results

Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its second quarter ended June 30, 2008 with net income available for common stockholders of $5.6 million, or $0.17 per share, compared to $13.1 million, or $0.40 per share, in the second quarter of 2007. Net income for the second quarter of 2007 included $4.8 million related to gains from property dispositions. Revenues from continuing operations in the second quarter of 2008 totaled $69.6 million, up from $62.2 million in the prior year's second quarter. Funds from operations (FFO) for the period totaled $27.1 million, or $0.78 per share, compared to $26.7 million, or $0.77 per share, in the year-earlier period. For the first six months of 2008, KRC reported net income available to common stockholders of $15.4 million, or $0.48 per share, compared to $29.6 million, or $0.91 per share, in the first half of 2007. Net income for the six months ended June 30, 2007 included $13.5 million related to gains from property dispositions. Revenues from continuing operations in the six-month period totaled $140.4 million, up from $123.6 million in the same period of 2007. FFO in the first half of 2008 totaled $57.3 million, or $1.65 per share, compared to $52.7 million, or $1.52 per share, in first half of 2007. Included in the results for the six months ended June 30, 2008 is an increase in the company’s provision for bad debts of approximately $3.1 million, or $0.09 per share, related to the company’s lease with Favrille, Inc. ("Favrille”). In the second quarter, Favrille notified the company that it will cease its business operations and of its intent to not pay any future rental payments under its lease beyond June 2008. In July 2008, the company and Favrille entered into an agreement to terminate the lease effective August 31, 2008 and the company drew $3.6 million under a letter of credit that was held as credit support under the terms of the lease. The company also held a $0.3 million cash security deposit related to the lease. All per-share amounts in this report are presented on a diluted basis. "KRC made solid leasing progress during the quarter although the commercial real estate markets continue to be impacted by persistent economic uncertainty,” said John B. Kilroy, Jr., the company's president and chief executive officer. "With the remainder of 2008 likely to bring more of the same, we remain diligently focused on leasing, delivering our under-construction properties, and preserving our strong financial position." KRC is currently developing four new office buildings located in high-growth submarkets of San Diego County. The four properties encompass approximately 400,000 square feet of rentable space and represent a total estimated investment of approximately $160 million, of which $127 million has been spent to date. They are 73% leased. The company also has two redevelopment projects underway totaling just under 211,000 square feet of space. These two projects represent a total estimated incremental investment of approximately $27 million, of which $20 million has been spent to date. They are 60% leased or committed. Updated earnings guidance for 2008 will be discussed by KRC management during the company's July 29, 2008 earnings conference call. The call will begin at 11:00 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 888-713-4209, reservation #81042415. A replay of the conference call will be available via phone through August 12, 2008 at 888-286-8010, reservation #85680246, 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 over 60 years, the company has owned, developed, acquired and managed real estate assets primarily in the coastal regions of Los Angeles, Orange and San Diego counties. Kilroy Realty currently has an in-process development and redevelopment pipeline of approximately 600,000 square feet. At June 30, 2008, the company owned 8.1 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 Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007   Revenues from continuing operations $ 69,629 $ 62,180 $ 140,431 $ 123,614   Revenues including discontinued operations $ 69,828 $ 64,630 $ 140,630 $ 128,709   Net income available for common stockholders(1) $ 5,581 $ 13,090 $ 15,445 $ 29,572   Weighted average common shares outstanding - basic 32,351 32,371 32,404 32,360 Weighted average common shares outstanding - diluted 32,510 32,486 32,532 32,486   Net income per share of common stock - basic $ 0.17 $ 0.40 $ 0.48 $ 0.91 Net income per share of common stock - diluted $ 0.17 $ 0.40 $ 0.48 $ 0.91   Funds From Operations(2), (3) $ 27,061 $ 26,674 $ 57,260 $ 52,698   Weighted average common shares/units outstanding - basic(4) 34,540 34,619 34,593 34,609 Weighted average common shares/units outstanding - diluted(4) 34,699 34,734 34,721 34,735   Funds From Operations per common share/unit - basic(4) $ 0.78 $ 0.77 $ 1.66 $ 1.52 Funds From Operations per common share/unit - diluted(4) $ 0.78 $ 0.77 $ 1.65 $ 1.52   Common shares outstanding at end of period 32,652 32,707 Common partnership units outstanding at end of period   2,188     2,248   Total common shares and units outstanding at end of period 34,840 34,955     June 30, 2008 June 30, 2007 Stabilized portfolio occupancy rates: Office 93.8 % 93.6 % Industrial   90.7 %   91.0 % Weighted average total 92.8 % 92.7 %   Los Angeles 96.2 % 94.2 % Orange County 89.0 % 91.0 % San Diego 93.8 % 93.9 % Other   93.8 %   90.5 % Weighted average total 92.8 % 92.7 %   Total square feet of stabilized properties owned at end of period: Office 8,089 7,835 Industrial   3,876     3,870   Total 11,965 11,705     (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.                 KILROY REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands)       June 30, December 31, 2008 2007 (unaudited) ASSETS REAL ESTATE ASSETS: Land and improvements $324,779 $324,779 Buildings and improvements 1,739,874 1,719,700 Undeveloped land and construction in progress 365,106   324,077   Total real estate held for investment 2,429,759 2,368,556 Accumulated depreciation and amortization (497,697 ) (463,932 ) Total real estate assets, net 1,932,062 1,904,624   Cash and cash equivalents 4,367 11,732 Restricted cash 756 546 Marketable securities 2,406 707 Current receivables, net 3,843 4,891 Deferred rent receivables, net 66,554 67,283 Notes receivable 10,904 10,970 Deferred leasing costs and acquisition related intangibles, net 52,282 54,418 Deferred financing costs, net 7,341 8,492 Prepaid expenses and other assets, net 7,210   5,057     TOTAL ASSETS $2,087,725   $2,068,720         LIABILITIES & STOCKHOLDERS' EQUITY LIABILITIES: Secured debt $392,511 $395,912 Exchangeable senior notes, net 456,550 456,090 Unsecured senior notes 144,000 144,000 Unsecured line of credit 159,000 111,000 Accounts payable, accrued expenses and other liabilities 44,893 58,249 Accrued distributions 21,422 20,610 Deferred revenue and acquisition-related liabilities 75,421 59,187 Rents received in advance and tenant security deposits 20,386   18,433   Total liabilities 1,314,183   1,263,481     MINORITY INTERESTS: 7.45% Series A Cumulative Redeemable Preferred units of the Operating Partnership 73,638 73,638 Common units of the Operating Partnership 36,608   38,309   Total minority interests 110,246   111,947       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 327 328 Additional paid-in capital 651,386 658,894 Distributions in excess of earnings (109,999 ) (87,512 ) Total stockholders' equity 663,296   693,292     TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $2,087,725   $2,068,720   KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share data)       Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007   REVENUES: Rental income $ 61,486 $ 54,518 $ 123,791 $ 108,951 Tenant reimbursements 7,686 5,712 15,879 11,610 Other property income   457     1,950     761     3,053   Total revenues   69,629     62,180     140,431     123,614     EXPENSES: Property expenses 11,873 10,604 23,361 20,570 Real estate taxes 4,843 4,668 10,322 9,220 Provision for bad debts 3,204 (26 ) 3,659 (199 ) Ground leases 400 389 795 792 General and administrative expenses 9,187 9,460 18,423 18,508 Interest expense 9,448 8,072 19,161 17,728 Depreciation and amortization   21,536     17,378     41,402     34,223   Total expenses   60,491     50,545     117,123     100,842     OTHER INCOME: Interest and other investment income   184     371     341     990     Income from continuing operations before minority interests 9,322 12,006 23,649 23,762   Minority interests: Distributions on Cumulative Redeemable Preferred units (1,397 ) (1,397 ) (2,794 ) (2,794 ) Minority interest in earnings of Operating Partnership attributable to continuing operations   (348 )   (531 )   (1,012 )   (1,044 ) Total minority interests   (1,745 )   (1,928 )   (3,806 )   (3,838 )   Income from continuing operations 7,577 10,078 19,843 19,924   Discontinued operations: Revenues from discontinued operations 199 2,450 199 5,095 Expenses from discontinued operations (1,509 ) (3,112 ) Net gain on dispositions of discontinued operations 234 4,848 234 13,474 Minority interest in earnings of Operating Partnership attributable to discontinued operations   (27 )   (375 )   (27 )   (1,005 ) Total income from discontinued operations   406     5,414     406     14,452     Net income 7,983 15,492 20,249 34,376   Preferred dividends   (2,402 )   (2,402 )   (4,804 )   (4,804 )   Net income available for common stockholders $ 5,581   $ 13,090   $ 15,445   $ 29,572     Weighted average shares outstanding - basic 32,351 32,371 32,404 32,360 Weighted average shares outstanding - diluted 32,510 32,486 32,532 32,486   Net income per common share - basic $ 0.17   $ 0.40   $ 0.48   $ 0.91   Net income per common share - diluted $ 0.17   $ 0.40   $ 0.48   $ 0.91       KILROY REALTY CORPORATION FUNDS FROM OPERATIONS (unaudited, in thousands, except per share data)                           Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007   Net income available for common stockholders $ 5,581 $ 13,090 $ 15,445 $ 29,572   Adjustments: Minority interest in earnings of Operating Partnership 375 906 1,039 2,049 Depreciation and amortization of real estate assets 21,339 17,526 41,010 34,551 Net gain on dispositions of discontinued operations   (234 )   (4,848 )   (234 )   (13,474 ) Funds From Operations(1), (2) $ 27,061   $ 26,674   $ 57,260   $ 52,698     Weighted average common shares/units outstanding - basic 34,540 34,619 34,593 34,609 Weighted average common shares/units outstanding - diluted 34,699 34,734 34,721 34,735   Funds From Operations per common share/unit - basic $ 0.78   $ 0.77   $ 1.66   $ 1.52   Funds From Operations per common share/unit - diluted $ 0.78   $ 0.77   $ 1.65   $ 1.52       (1) 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, 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.   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 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, the Company's FFO may not be comparable to all other REITs.   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 to be insufficient by themselves. 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.   (2) Reported amounts are attributable to common stockholders and common unitholders.