Kilroy Realty Corporation (KRC)
Q3 2008 Earnings Call
October 28, 2008 2:00 pm ET
John Kilroy – President & CEO
Richard Moran – EVP & CFO
Jeff Hawken – EVP & COO
Irwin Guzman - Citi
David Rodgers - RBC Capital Markets
Dave Aubuchon – Robert W. Baird
Previous Statements by KRC
» Kilroy Realty Corp. Q1 2009 Earnings Call Transcript
» Kilroy Realty Corp. Q4 2008 Earnings Call Transcript
» Kilroy Realty Corporation Q2 2008 Earnings Call Transcript
Good morning everyone and thanks for joining us. With me today are John Kilroy, our CEO; Jeff Hawken, our COO; Tyler Rose, our Treasurer and Heidi Roth, our Controller.
At the outset, I need to say that some of the information we will be discussing this morning is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information in this call and in the supplemental. This call is being telecast live on our website and will be available for replay for the next 10 days, both by phone and over the internet.
Our press release and supplemental package have been filed on a Form 8-K with the SEC and both are also available on our website.
John will start the call with an overview of the quarter and our key markets, I'll add financial highlights and update our 2008 earnings guidance, and then we will be happy to take your questions.
Thanks Richard and hello everyone and thanks for joining us. KRC had a good third quarter. We reported solid financial results and added two office properties to the portfolio that were on schedule, on budget, and fully leased.
But the economic uncertainty caused by the extraordinary turmoil we’re seeing in credit markets has caused many companies in the region to continue to delay making business decisions including real estate decisions.
They are trying to digest what all of the negative economic news means to their businesses. Meanwhile unemployment rates in our submarkets continue to tick up with Los Angeles with 7.8%, Orange County at 5.7% and San Diego at 6.4%.
Yet we haven’t seen any wide spread layoffs across regions or industries and so far we’re not seeing any new financial distress among our current roster of tenants other then the situations we discussed on previous calls.
This is a market that will reward patience, quality assets, solid execution, and financial strength. In leasing we’ve made very significant progress this year. Year-to-date we have executed new or renewing leases on 1.9 million square feet of space by way of comparison, we signed 1.7 million square feet in all of 2007.
In the third quarter leases commenced on approximately 575,000 square feet of space at rents that were 34% higher on a GAAP basis and we are making good progress on our 2009 expirations. We started 2008 with 2 million square feet expiring next year.
We now have approximately 1.4 million square feet of that left. Of the 600,000 square feet of 2009 renewals to date, the cash rents were up approximately 11% and the GAAP rents were up approximately 29%.
In development we delivered two properties totaling 253,000 square feet during the quarter with a total investment of approximately $66 million. The first property is a newly developed 146,000 square foot medical facility in our Innovation Corporate Center located along the I-15 corridor in the Rancho Bernardo submarket of San Diego County.
Our total investment in the property is approximately $49 million. The property is 100% leased to [The Scripts Health]. The second property is our redevelopment project at Cur Oyo Port Center in El Segundo. Our total incremental investment on this 107,000 square foot building is approximately $17 million and is leased to Direct TV.
With two projects delivered our active development and redevelopment program now totals approximately 358,000 square feet in four projects. Included in our active development is the third and final building our Kilroy Sabre Springs office campus located at the intersection of Route 56 and I-15 in San Diego.
This 148,000 square foot building is 100% leased to Bridgepoint Education and will be fully delivered later this quarter. We are working on two smaller 50,000 square foot development buildings in our Sorrento Gateway project fronting the 805 freeway, one is an office building, and one is a medical office building.
While leasing has been slower then anticipated we are in serious negotiations with prospective tenants for both buildings. In terms of redevelopment, we are in lease-up on our 104,000 square foot two-building Sabre Springs corporate center located along the I-15 corridor in Rancho Bernardo.
It is currently 19% leased and we are actively marketing the remaining space. All of our in-process development and redevelopment was started in 2006 and 2007. Given the current economic climate our activities on our development pipeline are to continue to improve our overall entitlement position where possible so as to accommodate a broader spectrum of users and to be positioned for the future.
With that overview, let’s move through a quick recap of our individual submarkets starting in San Diego, in central San Diego active demand is currently registering approximately 5.9 million square feet of office space according to CB Richard Ellis. This includes several hundred thousand square feet that is expected to be signed by the end of this year.