Kilroy Realty Corporation (KRC)

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Kilroy Realty Corporation (KRC)

Q1 2010 Earnings Call

April 26, 2010 5:00 pm ET


Tyler H. Rose – Chief Financial Officer

John B. Kilroy, Jr. – President, Chief Executive Officer & Director

Jeffrey C. Hawken – Chief Operating Officer & Executive Vice President

Heidi Roth – Controller

Michelle Ngo – Treasurer


Jamie Feldman – Bank of America Merrill Lynch

Chris Caton – Morgan Stanley

John Guinee – Stifel Nicolaus & Company, Inc.

Mitchell Germain – JMP Securities

Michael Knott – Green Street Advisors, Inc.

Michael Billerman – Citi

Dave Rodgers – RBC Capital Markets

Ross Nassbaum – UBS



Welcome to the first quarter 2010 Kilroy Realty Corporation earnings conference call. At this time all participants are in a listen only mode. We will facilitate a question and answer session at the end of the presentation. (Operator Instructions) I would now like to turn your presentation over to Mr. Tyler Rose, Chief Financial Officer.

Tyler H. Rose

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 discuss this morning is forward-looking in nature. Please refer to our supplemental package for a statement regarding forward-looking information on this call and in the supplementals.

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 8K with the SEC and both are also available on our website. John will start the call with an overview of the quarter in our key markets. I’ll add financial highlights and then update earnings guidance for 2010 and then we’ll be happy to take your questions.

John B. Kilroy, Jr.

It’s been a busy period for us at KRC so far this year. As most of you know from our public disclosures over the past few weeks, we are in the process of acquiring two new office campuses, one in San Diego and one in San Francisco. We’ve been active in the capital markets raising nearly $300 million in common equity and we’ve received investment grade rates from both Moodys and S&P. We also continue to see good momentum in our leasing activity.

Year-to-date we’ve signed new or renewing leases on about 494,000 square feet of space including a 15 year corporate headquarters lease for our entire 141,000 square foot governors park office property in San Diego County and an 11 year corporate headquarters lease for a 90,000 square foot Agoura Road office building in North Los Angeles County.

All of this active took place against the real estate market that remains chopping but is showing clear signs of stabilizing. Our occupancy remained flat from last quarter at 82.8% and cash rents went down 12%, about the same as last quarter on the leases that were signed year-to-date. Financial strength remains a crucial advantage and today’s still highly competitive leasing environment and has continued to underwrite landlords seeking owners who can deliver on promises and maintain their buildings.

This point applies to acquisitions as well where buyers like KRC do not have financing contingencies and who can provide surety of execution and have a clear competitive advantage. Now, let me give you some details on our recent acquisitions. In mid March we completed the acquisitions of an 89,000 square foot office building in Mission Valley, a submarket of San Diego County.

We purchased the building for $18 million, an all cash transaction. It’s currently 72% occupied. The building is one of four properties within Mission City Corporate Center. We are also acquiring the three remaining buildings totaling 190,000 square feet for approximately $52 million. They are 81% occupied.

The completion of this second transaction is subject to the assumption of $52 million of existing debt that is secured by the three buildings. The acquisition is expected to close in the second quarter. We were attracted to this asset because it was extremely well located with terrific amenities adjacent to the project including 560,000 square feet of retail, immediate access to the I15 freeway and adjacency to the San Diego Light Rail System.

We see a solid opportunity to significantly increase the value of this property as it has been under leased given the capital constraints of the prior owner and was acquired at an average purchase price of approximately $250 per square foot which is well below replacement costs. The cap rate is in the mid 7% range. We view the Mission Valley location as an excellent expansion of our presence in San Diego. It introduces KRC to a broader array of young growing companies many of whom who will develop larger real estate needs down the road that our portfolio of properties and land pipeline may satisfy. The total vacancy rate in the Mission Valley area is currently 19%.

With our third transaction, we’ve reentered Northern California and are in escrow to purchase 303 2nd Street which is in the South Financial District submarket of downtown San Francisco. The purchase price was $237 million. 303 2nd street is a two tower, 732,000 square foot multitenant office complex occupying a full city block surrounded by Folsom and Harrison Streets. The two towers are interconnected at the lower levels which provides tenants with the opportunity for larger floor plays.

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