Kilroy Realty Corporation (KRC)

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Kilroy Realty Corp. (KRC)

Q4 2009 Earnings Call

January 26, 2010 2:00 pm ET

Executives

John Kilroy, Jr - President & Chief Executive Officer

Tyler Rose - Executive Vice President and Chief Financial Officer

Jeff Hawken - Chief Operating Officer

Heidi Roth - Controller

Michelle Ngo – Treasurer

Analysts

Michael Bilerman – Citi

Anar Ismailov – Gem Realty

Chris Kattan - Morgan Stanley

Michael Knott - Green Street Advisors

George Auerbach - ISI Group

Stuart Seale - Morgan Stanley

Robert Salisbury – UBS

Mitch Germain - JMP Securities

Dave Rogers - RBC Capital Markets

Presentation

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2009 Kilroy Realty Corporation Earnings Conference Call. My name is Josh and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions)

I’d now like to turn the presentation over to our host for today’s call, the Chief Financial Officer Tyler Rose, you may proceed, sir.

Tyler Rose

Good morning everyone. Thank you for joining us. With me today are John Kilroy, our CEO; Jeff Hawken, our COO; Heidi Roth, our Controller; and Michelle Ngo, our Treasurer.

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 our initial earnings guidance for 2010 and then we’ll be happy to take your questions. John.

John Kilroy

Thanks, Tyler. Hello everyone and thank you for joining us today. As we reported yesterday, we ended the year with some excellent leasing results. We delivered one of the strongest quarterly leasing performances we posted as a public company executing more than 1.1 million square feet of new or renewing leases in just three months. That number exceeded our results for the first three quarters of the year combined and boosted our total executed leases for all of 2009 2 million square feet.

The fourth quarter activity was deep and broad based reaching at a pretty much every corner of our portfolio, the deals split about half and half between office and industrial and about half now between new and renewal leases. And in 53 total transactions, they include some large leases as well as a substantial number of smaller ones. Our average office leases were 14,000 square feet and our average industrial was 45,000 square feet. Overall, we converted every LOI outstanding going into the fourth quarter into an executed lease.

And more good news, the leasing pace has continued into the New Year through the first weeks of 2010, we signed leases totaling 122,000 square feet and have letters of intent place for an additional 200,000 square feet. As we’ve discussed previously, we think leasing success has to more to do with the quality of our markets and portfolio combined with our balance sheet strength in long operating philosophy than with the definitive change in overall market conditions.

Certainly the economic outlook has improved and companies are moving to capitalize on favorable terms. But historically, any sustain improvement in commercial real estate markets is preceded by job growth, which we haven’t yet seen in our markets. In addition, potential tenants are negotiating hard on new leases even in the best markets. This is evident in overall rental rate trends across the 1.1 million square feet of leases we signed in the period average rents declined 4% on a GAAP basis and 15% on a cash basis. This is in line with what we’re seeing in our markets in general.

So what we are delighted to report, we’ve outperformed the market and increased our capture rate of current demand. We’re not ready yet to forecast at a sustainable recovery has started. We believe that 2010 is likely to be a choppy period for Southern California real estate market.

Given out our number of one part company priority will continue to be our leasing of our vacant space in renewing our expirations. At the same time, we continue to position the company to take advantage of potential opportunities to expand our portfolio is difficult to predict with any certainty when or where those opportunities may occur, but at this point in the cycle, we believe attractive acquisitions over the next couple of years, our distinct possibility and we’re prepared to act under the right conditions.

We also continue to focus on enhancing the entitlement of our existing land pipeline preparing for the time we develop, well again the economically attractive. But there was a backdrop, let’s review our individual markets in our fourth quarter activity beginning on San Diego. As you all know, the region is been challenging for us over the last year, our union occupancy here was approximately 77%. The good news is that we have a significant amount of leasing success in San Diego during the fourth quarter and off to a good start in 2010.

Overall we executed lease in San Diego during the fourth quarter on 281,000 square feet of space signing or renewing leases with such names as Hitachi, Verisk, (Inaudible) and ID Analytics. We now have leases in place for almost half of the space previously occupied by our credit and home lenders along the I-15 and two thirds of the property vacated by Paul Hastings and Del Mar.

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