Kilroy Realty Corporation Reports Fourth Quarter Financial Results

    Business Editors

    LOS ANGELES--(BUSINESS WIRE)--Jan. 31, 2005--Kilroy Realty Corporation (NYSE:KRC) today reported financial results for its fourth quarter ended December 31, 2004, with net income available for common shareholders of $2.2 million, or $0.08 per share, compared to $4.9 million, or $0.18 per share in the fourth quarter of 2003. Revenues from continuing operations in the fourth quarter totaled $58.0 million, compared to $53.0 million in the prior year's fourth quarter. Funds from operations (FFO) for the period totaled $17.4 million, or $0.53 per share, compared to $20.2 million, or $0.62 per share, in the year-earlier period.
    For its fiscal year ended December 31, 2004, KRC reported net income available for common shareholders of $26.4 million, or $0.93 per share, compared to $49.3 million, or $1.78 per share, in fiscal year 2003. Revenues from continuing operations in 2004 totaled $221.4 million, compared to $222.8 million in 2003. FFO for the year totaled $81.9 million, or $2.52 per share, compared to $108.9 million, or $3.41 per share, a year ago.
    The annual results include $0.8 million and $17.9 million of income in the fiscal years 2004 and 2003, respectively, that are part of a $21.3 million settlement reached with Peregrine Systems, Inc. over claims arising from its bankruptcy filing in September 2002. Excluding this income, KRC's FFO would have been $81.1 and $91.0 million in 2004 and 2003, respectively.
    The quarterly and annual results for 2004 and 2003 were also impacted by charges related to KRC's three-year long-term compensation plan that will be paid out when the plan terminates at the end of 2005. Included in the 2004 fourth quarter and annual results were charges of $7.8 million and $18.5 million, respectively, related to the plan. Included in the 2003 fourth quarter and annual results were charges of $3.4 million and $5.9 million, respectively, related to the plan.
    All per-share amounts in this report are presented on a diluted basis.
    "Recovering Southern California real estate markets and a successfully executed leasing program boosted occupancy in our stabilized portfolio by four percentage points in 2004 to 94.6% at year-end," said John B. Kilroy, Jr., president and chief executive officer of KRC. "Our markets continue to improve and we're actively seeking new development opportunities in the strongest of these, particularly San Diego," he said.
    KRC added $160 million of new properties to its portfolio in 2004, including $62 million of new development and $98 million of acquisitions. These include a newly developed 208,000 square-foot office property in Del Mar that is 100% leased and a newly acquired two-building, 282,000 square-foot office property along the I-15 Corridor that is 90% leased. The acquired property also includes development rights for a third, 143,000 square-foot office building.
    KRC maintains an active committed development and redevelopment program in the Southern California commercial real estate market that currently includes two buildings under construction totaling approximately 103,000 square feet and two buildings in lease-up totaling approximately 310,000 square feet. This committed pipeline represents a total estimated investment of approximately $111 million, of which $77 million has been spent to date.
    Earnings guidance for 2005 will be discussed by KRC management during the company's February 1, 2005, earnings conference call. The call will begin at 11:00 a.m. PDT 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 800-299-7098, passcode 49888425. A replay of the conference call will be available via telephone through February 11th, at 888-286-8010, passcode 26925192, 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; fluctuations in the company's share price and the resulting impact on general and administrative 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, 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 more than 50 years, the company has owned, developed, acquired and managed real estate assets primarily in the coastal regions of California and Washington. KRC is currently active in office development and redevelopment in Los Angeles and San Diego counties. At December 31, 2004, the company owned 7.7 million square feet of commercial office space and 4.6 million square feet of industrial space. More information is available at www.kilroyrealty.com.

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

Three Three Months Months Year Year Ended Ended Ended Ended December December December December 31, 31, 31, 31, 2004 2003 2004 2003 -------- -------- --------- ---------

Revenues from continuing operations $58,027 $52,988 $221,399 $222,837

Revenues including discontinued operations $58,027 $54,218 $223,785 $229,719

Net income available to common stockholders (1) $2,191 $4,938 $26,386 $49,263

Weighted average common shares outstanding - basic 28,368 27,941 28,244 27,527 Weighted average common shares outstanding - diluted 28,581 28,167 28,422 27,738

Net income per share of common stock - basic $0.08 $0.18 $0.93 $1.79 Net income per share of common stock - diluted $0.08 $0.18 $0.93 $1.78

Funds From Operations (2) (3) $17,360 $20,197 $81,886 $108,881

Weighted average common shares/units outstanding - basic (4) 32,358 32,149 32,317 31,745 Weighted average common shares/units outstanding - diluted (4) 32,572 32,374 32,495 31,957

Funds From Operations per common share/unit - basic (4) $0.54 $0.63 $2.53 $3.43 Funds From Operations per common share/unit - diluted (4) $0.53 $0.62 $2.52 $3.41

Common shares outstanding at end of period 28,549 28,209 Common partnership units outstanding at end of period 3,989 4,154 --------- --------- Total common shares and units outstanding at end of period 32,538 32,363

December December 31, 2004 31, 2003 --------- --------- Stabilized portfolio occupancy rates: Los Angeles 86.5% 81.0% Orange County 99.2% 94.9% San Diego 97.1% 92.3% Other 92.3% 93.1% --------- --------- Weighted average total 94.6% 90.3%

Total square feet of stabilized properties owned at end of period: Office 7,674 7,316 Industrial 4,603 4,879 --------- --------- Total 12,277 12,195

(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 shareholders 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 ---------------------------------------------------------------------- (unaudited, in thousands)

December December 31, 31, 2004 2003 ----------- -----------

ASSETS ------ REAL ESTATE ASSETS: Land and improvements $304,033 $289,730 Buildings and improvements, net 1,445,918 1,305,145 Undeveloped land and construction in progress, net 96,545 131,411 ----------- ----------- Total real estate held for investment 1,846,496 1,726,286 Accumulated depreciation and amortization (365,831) (321,372) ----------- ----------- Total real estate assets, net 1,480,665 1,404,914

Cash and cash equivalents 4,853 9,892 Restricted cash 332 8,558 Current receivables, net 4,843 4,919 Deferred rent receivables, net 46,816 36,804 Deferred leasing costs and other related intangibles, net 51,251 36,651 Deferred financing costs, net 5,409 3,657 Prepaid expenses and other assets 5,046 7,240 ----------- -----------

TOTAL ASSETS $1,599,215 $1,512,635 =========== ===========

LIABILITIES & STOCKHOLDERS' EQUITY ------------------------------------------ LIABILITIES: Secured debt $490,441 $526,048 Unsecured senior notes 144,000 Unsecured line of credit 167,000 235,000 Accounts payable, accrued expenses and other liabilities 72,565 41,147 Accrued distributions 16,923 16,369 Rents received in advance, tenant security deposits and deferred revenue 21,605 20,904 ----------- ----------- Total liabilities 912,534 839,468 ----------- -----------

MINORITY INTERESTS: 7.450% Series A Cumulative Redeemable Preferred unitholders 73,638 73,716 9.250% Series D Cumulative Redeemable Preferred unitholders 44,321 Common unitholders of the Operating Partnership 60,351 66,502 ----------- ----------- Total minority interests 133,989 184,539 ----------- -----------

STOCKHOLDERS' EQUITY: 7.800% Series E Cumulative Redeemable Preferred stock 38,425 38,437 7.500% Series F Cumulative Redeemable Preferred stock 83,157 Common stock 286 282 Additional paid-in capital 515,285 508,568 Deferred compensation (1,412) (852) Distributions in excess of earnings (83,394) (53,449) Accumulated net other comprehensive income (loss) 345 (4,358) ----------- ----------- Total stockholders' equity 552,692 488,628 ----------- -----------

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $1,599,215 $1,512,635 =========== ===========

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

Three Three Months Months Year Year Ended Ended Ended Ended December December December December 31, 2004 31, 2003 31, 2004 31, 2003 -------- -------- --------- ---------

REVENUES: Rental income $50,854 $47,146 $197,981 $178,842 Tenant reimbursements 6,152 5,153 21,522 19,997 Other property income 1,021 689 1,896 23,998 -------- -------- --------- --------- Total revenues 58,027 52,988 221,399 222,837 -------- -------- --------- ---------

EXPENSES: Property expenses 9,115 8,575 35,018 31,835 Real estate taxes 4,180 4,260 16,811 15,457 Provision for bad debts 796 (83) 912 1,579 Ground leases 406 326 1,401 1,296 General and administrative expenses 11,679 6,864 34,021 20,095 Interest expense 9,749 9,242 37,647 33,385 Depreciation and amortization 15,105 14,521 58,422 55,206 -------- -------- --------- --------- Total expenses 51,030 43,705 184,232 158,853 -------- -------- --------- ---------

OTHER INCOME: Interest and other income 59 66 521 196 -------- -------- --------- --------- Total other income 59 66 521 196 -------- -------- --------- ---------

Income from continuing operations before minority interests 7,056 9,349 37,688 64,180

Minority interests: Distributions on Cumulative Redeemable Preferred units (2,183) (3,038) (9,579) (13,163) Original issuance costs of redeemed preferred units (1,200) (945) (1,200) (945) Minority interest in earnings of Operating Partnership attributable to continuing operations (284) (632) (2,927) (6,579) -------- -------- --------- --------- Total minority interests (3,667) (4,615) (13,706) (20,687) -------- -------- --------- ---------

Income from continuing operations 3,389 4,734 23,982 43,493

Discontinued operations: Revenues from discontinued operations 1,230 2,386 6,882 Expenses from discontinued operations (598) (989) (3,472) Net gain on disposition of discontinued operations 6,148 3,642 Impairment loss on property held for sale (726) Minority interest in earnings of Operating Partnership attributable to discontinued operations (79) (862) (933) -------- -------- --------- --------- Total income from discontinued operations 553 5,957 6,119 -------- -------- --------- ---------

Net income 3,389 5,287 29,939 49,612

Preferred dividends (1,198) (349) (3,553) (349) -------- -------- --------- ---------

Net income available for common shareholders $2,191 $4,938 $26,386 $49,263 ======== ======== ========= =========

Weighted average shares outstanding - basic 28,368 27,941 28,244 27,527 Weighted average shares outstanding - diluted 28,581 28,167 28,422 27,738

Net Income per common share - basic $0.08 $0.18 $0.93 $1.79 ======== ======== ========= ========= Net Income per common share - diluted $0.08 $0.18 $0.93 $1.78 ======== ======== ========= =========

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

Three Three Months Months Year Year Ended Ended Ended Ended December December December December 31, 31, 31, 31, 2004 2003 2004 2003 -------- -------- -------- ---------

Net income available for common shareholders $2,191 $4,938 $26,386 $49,263

Adjustments: Minority interest in earnings of Operating Partnership 284 711 3,789 7,512 Depreciation and amortization 14,885 14,548 57,859 55,748 Net gain on dispositions of operating properties (6,148) (3,642) -------- -------- -------- --------- Funds From Operations (1) (2) $17,360 $20,197 $81,886 $108,881 ======== ======== ======== =========

Weighted average common shares/units outstanding - basic 32,358 32,149 32,317 31,745 Weighted average common shares/units outstanding - diluted 32,572 32,374 32,495 31,957

Funds From Operations per common share/unit - basic $0.54 $0.63 $2.53 $3.43 ======== ======== ======== ========= Funds From Operations per common share/unit - diluted $0.53 $0.62 $2.52 $3.41 ======== ======== ======== =========

(1) Management believes that Funds From Operations ("FFO") is a useful supplemental measure of the Company's operating performance. The Company computes FFO in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"). The White Paper defines FFO as net income or loss computed in accordance with generally accepted accounting principles ("GAAP"), excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non- real estate assets), and after adjustment for unconsolidated partnerships and joint ventures. Other real estate investment trusts ("REITs") may use different methodologies for calculating FFO and, accordingly, the Company's FFO may not be comparable to other REITs.

Because FFO excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, providing perspective on operating performance not immediately apparent from net income. In addition, management believes that FFO provides useful information to the investment community about the Company's operating performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs.

However, FFO should not be viewed as an alternative measure of the Company's operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of the Company's properties, which are significant economic costs that could materially impact the Company's results of operations.

(2) Reported amounts are attributable to common shareholders and common unitholders.

--30--TM/la*

CONTACT: Kilroy Realty Corporation Richard E. Moran Jr., 310-481-8483 Tyler H. Rose, 310-481-8484

KEYWORD: CALIFORNIA INDUSTRY KEYWORD: REAL ESTATE BUILDING/CONSTRUCTION EARNINGS CONFERENCE CALLS SOURCE: Kilroy Realty Corporation

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