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Kilroy Realty Sees Market Turning Up

A payment agreement with a troubled tenant helps the West L.A. real estate investment trust post an earnings jump.

July 30, 2003|Roger Vincent | Times Staff Writer

Profit at Kilroy Realty Corp. almost tripled in the second quarter as it reached a payment agreement with a major, financially troubled tenant and the real estate market improved.

Kilroy, a West Los Angeles real estate investment trust that owns West Coast office and industrial properties, earned $13.4 million, or 49 cents a share, in the quarter ended June 30, compared with $5 million, or 18 cents, in the same period a year ago, the company reported late Monday. Revenue rose to $51.3 million, from $48.7 million.

Kilroy's funds from operations, a key measure of profitability for REITs, totaled $24.9 million, or 78 cents a share, compared with $23.4 million, or 73 cents, in the second quarter of last year.

A REIT allows individual investors to participate in large real estate ventures. Unlike other public companies, REITs must distribute 95% of their income to shareholders.

This month, a U.S. Bankruptcy Court in Delaware approved a Chapter 11 reorganization plan for San Diego software maker Peregrine Systems Inc. As part of the plan, Peregrine will pay Kilroy $18 million plus additional annual payments of $750,000 over the next four years.

Of the initial payment, $2.5 million was recognized in the second quarter. An additional $15 million will be included in the third quarter and $500,000 will go to legal expenses.

The Peregrine settlement "was a big win for the company," said analyst Christopher Hartung of WR Hambrecht & Co. "It seemed fair to Peregrine and fair to Kilroy -- and it removes one area of doubt and uncertainty."

Kilroy also is benefiting from improvements in the Southern California office market, which is flattening out after several quarters of decline. Chief Executive John Kilroy Jr. said managers who have been waiting for the bottom of the market have begun to get off the fence and make commitments to lease space.

"Decision makers were looking for reasons not to make decisions," said Kilroy in a conference call with analysts. "Now they're looking for reasons to make decisions."

Los Angeles money manager Craig Silvers of Bricks & Mortar Capital, who holds shares in Kilroy, agreed. "The market has been in paralysis and now people are starting to do things," he said. "That's a positive sign for landlords in that we are at or very near the bottom."

But analyst Hartung rates Kilroy a "hold" because of uncertainly related to the California budget shortfall and the "political circus" of the gubernatorial recall election. His San Francisco company does not own Kilroy stock and has not done corporate work for the company during the last three years.

Kilroy shares rose 34 cents to $28.36 on the New York Stock Exchange.

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