Kilroy FFO Edges Up Despite Slump

LOS ANGELES-Kilroy Realty Corp. finished 2008 with higher FFO and achieved what the REIT calls “excellent leasing results despite an increasingly difficult economy” in 2008, it said last week in reporting year-end and fourth-quarter financial results. This year “promises to be even more challenging,” company president and chief executive officer John B. Kilroy Jr. said in a statement. Other Kilroy execs, at the REIT’s earnings conference call last week, said that the company is initiating renewal discussions with its tenants long before leases expire, although it is finding that tenants are reluctant to make early commitments in today’s economy.

For its fiscal year ended Dec. 31, Kilroy’s FFO grew to $119.0 million and $3.42 per share, compared with $110.6 million and or $3.18 per share for 2007. Net income dropped sharply, to $34.5 million and $1.06 per share compared to $104.2 million and $3.20 per share for 2007, but the 2007 total was skewed higher by property sales that produced net gains of approximately $75 million.

Jeffrey Hawken, Kilroy executive vice president and chief operating officer, called 2008 “a good year in many respects” for the REIT. He noted that the comapny executed new or renewing leases on more than 2.1 million square feet of space, an increase of more than 25% over 2007, and ”made solid progress” on negotiating renewals with tenants whose leases expire in 2009–reducing by almost half the roughly two million square feet of space that was set to expire in 2009.

During 2008, Kilroy delivered just over 560,000 square feet of new and newly redeveloped office space to its stabilized portfolio. These six buildings, contained in five individual projects, represent an aggregate estimated investment of $193 million and are currently 75% leased. Among the major deals the company signed during the year was a lease with Bridgepoint Education, which took 300,000 square feet of space to serve as the education company’s headquarters for at least the next 10 years at Kilroy Realty’s Sabre Springs development in the San Diego County office market.

In the fourth quarter, the Los Angeles-based REIT “took the painful but prudent step of decreasing our head count by about 5%,” Hawken pointed out. Looking forward to this year, he said, “It is clear that continued severe credit market constraints and weakening national and regional economics are now translating to a more difficult period for commercial real estate in Southern California.”

The Kilroy chief operating officer also pointed out that occupancy in the REIT’s stabilized properties was down nearly 5%, to 89%, at the end of 2008. “More anecdotally, our lease negotiations continue to be slow and protracted,” he said.

In response to an analyst’s question, Kilroy executive vice president and chief financial officer Richard Moran Jr. said that the REIT is “out in front of our tenants very early” in terms of approaching them to renew leases long before they expire. “We tend to find right now that most tenants are unwilling to make long term decisions or renewals,” Moran said. “Their boards are more conservative, more disciplined about what the requirements are going to be,” he said, with many tenants electing to “wait and see what happens.”

Kilroy has owned, developed, acquired and managed real estate assets in the coastal regions of Los Angeles, Orange and San Diego counties for more than 60 years. The REIT’s portfolio includes 8.7 million square feet of office space and 3.7 million square feet of industrial space.