KILROY REALTY CORP - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-12675

KILROY REALTY CORPORATION

(Exact name of registrant as specified in its charter)

Maryland

95-4598246

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification Number)

12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064

(Address of principal executive offices)

(310) 481-8400

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

As of October 26, 2004, 28,527,920 shares of common stock, par value $.01 per share, were outstanding.

KILROY REALTY CORPORATION

QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS


		Page

	PART I—FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS (unaudited)	3

	Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003	3

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2004 and 2003	4

	Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2004	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003	6

	Notes to Consolidated Financial Statements	7

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42

Item 4.	CONTROLS AND PROCEDURES	43

	PART II—OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS	44

Item 2.	CHANGES IN SECURITIES	44

Item 3.	DEFAULTS UPON SENIOR SECURITIES	44

Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	44

Item 5.	OTHER INFORMATION	44

Item 6.	EXHIBITS AND REPORTS ON FORM 8-K	44

SIGNATURES		46

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except share data)


	September 30, 2004			December 31, 2003
ASSETS
REAL ESTATE ASSETS (Notes 2 and 3):
Land and improvements	$	288,861		$	289,730
Buildings and improvements, net		1,357,626			1,305,145
Undeveloped land and construction in progress, net		84,218			131,411

Total real estate held for investment		1,730,705			1,726,286
Accumulated depreciation and amortization		(353,025	)		(321,372	)

Total real estate assets, net		1,377,680			1,404,914

CASH AND CASH EQUIVALENTS		3,652			9,892
RESTRICTED CASH (Note 4)		1,283			8,558
CURRENT RECEIVABLES, NET		4,190			4,919
DEFERRED RENT RECEIVABLES, NET		43,956			36,804
DEFERRED LEASING COSTS, NET		39,420			36,651
DEFERRED FINANCING COSTS, NET		3,190			3,657
PREPAID EXPENSES AND OTHER ASSETS		6,008			7,240

TOTAL ASSETS	$	1,479,379		$	1,512,635

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Secured debt (Note 4)	$	494,932		$	526,048
Unsecured senior notes (Note 4)		144,000
Unsecured line of credit (Note 4)		92,000			235,000
Accounts payable, accrued expenses and other liabilities (Note 5)		52,889			41,147
Accrued distributions (Note 13)		16,498			16,369
Rents received in advance, tenant security deposits and deferred revenue		19,974			20,904

Total liabilities		820,293			839,468

COMMITMENTS AND CONTINGENCIES

MINORITY INTERESTS (Note 6):
7.45% (8.075% as of December 31, 2003) Series A Cumulative Redeemable Preferred unitholders		73,638			73,716
9.25% Series D Cumulative Redeemable Preferred unitholders		44,321			44,321
Common unitholders of the Operating Partnership		61,782			66,502

Total minority interests		179,741			184,539

STOCKHOLDERS’ EQUITY (Note 7):
Preferred stock, $.01 par value, 25,290,000 shares authorized, none issued and outstanding
7.45% Series A Cumulative Redeemable Preferred stock, $.01 par value, 1,700,000 shares authorized, none issued and outstanding
Series B Junior Participating Preferred stock, $.01 par value, 400,000 shares authorized, none issued and outstanding
9.25% Series D Cumulative Redeemable Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued and outstanding
7.80% Series E Cumulative Redeemable Preferred stock, 1,610,000 shares authorized, issued and outstanding		38,425			38,437
Common stock, $.01 par value, 150,000,000 shares authorized, 28,527,920 and 28,209,213 shares issued and outstanding, respectively		286			282
Additional paid-in capital		515,086			508,568
Deferred compensation		(1,929	)		(852	)
Distributions in excess of earnings		(71,456	)		(53,449	)
Accumulated net other comprehensive loss (Note 5)		(1,067	)		(4,358	)

Total stockholders’ equity		479,345			488,628

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,479,379		$	1,512,635

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except share and per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
REVENUES (Note 10):
Rental income	$	50,501		$	45,870		$	147,127		$	131,695
Tenant reimbursements		4,817			4,472			15,370			14,845
Other property income (Note 8)		(273	)		18,441			875			23,312

Total revenues		55,045			68,783			163,372			169,852

EXPENSES (Note 10):
Property expenses		8,620			7,738			25,904			23,261
Real estate taxes		4,423			3,869			12,631			11,197
Provision for bad debts (Note 9)		(524	)		2,749			116			1,662
Ground leases		334			326			996			970
General and administrative expenses		9,399			5,089			22,342			13,231
Interest expense		9,540			8,869			27,898			24,143
Depreciation and amortization		14,832			14,299			43,317			40,685

Total expenses		46,624			42,939			133,204			115,149

OTHER INCOME
Interest and other income (Note 8)		77			36			462			130

Total other income		77			36			462			130

INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS		8,498			25,880			30,630			54,833

MINORITY INTERESTS:
Distributions on Cumulative Redeemable Preferred units (Note 6)		(2,437	)		(3,375	)		(7,396	)		(10,125	)
Minority interest in earnings of Operating Partnership attributable to continuing operations		(564	)		(2,983	)		(2,642	)		(5,947	)

Total minority interests		(3,001	)		(6,358	)		(10,038	)		(16,072	)

INCOME FROM CONTINUING OPERATIONS		5,497			19,522			20,592			38,761
DISCONTINUED OPERATIONS (Notes 2 and 11)
Revenues from discontinued operations		367			1,279			2,386			5,667
Expenses from discontinued operations		(117	)		(638	)		(989	)		(2,891	)
Net gain (loss) on disposition of discontinued operations		6,212			(48	)		6,148			3,642
Impairment loss on property held for sale								(726	)
Minority interest in earnings of Operating Partnership attributable to discontinued operations.		(817	)		(76	)		(862	)		(854	)

Total income from discontinued operations		5,645			517			5,957			5,564

NET INCOME		11,142			20,039			26,549			44,325
PREFERRED DIVIDENDS		(785	)					(2,355	)

NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS	$	10,357		$	20,039		$	24,194		$	44,325

Income from continuing operations per common share—basic (Note 12)	$	0.19		$	0.71		$	0.73		$	1.42

Income from continuing operations per common share—diluted (Note 12)

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