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California’s record-setting economic performance in 2000 produced another remarkable year for commercial real estate. Up and down the state, new business formations and robust job creation accelerated already strong demand for high quality, well-located office and industrial space, while entitlement hurdles and capital market discipline restrained new supply.
At KRC, we took full advantage of the favorable conditions to add new, “state of the market” properties to our portfolio while selling mature, non-strategic assets. This process of capital redeployment enhanced the overall quality of our portfolio and increased its appeal for today’s universe of tenants. Furthermore, the proceeds generated from our asset dispositions helped finance new development, enabling us to maintain a strong balance sheet and a healthy growth rate. Our financial results underscore the increasing value of the KRC portfolio. Total revenues grew 17% last year to $187 million. Funds from operations rose to $83.5 million, or $2.73 per share, up 9% on a per-share basis. Net income increased to $46.8 million, or $1.75 per share, up 22% on a per-share basis. In February 2001, our board of directors announced a 6.7% increase in KRC’s annual dividend to $1.92 per share – a clear signal of their confidence in the company’s ongoing growth prospects. New development added just over a million square feet of office space to our real estate holdings last year, at a total investment cost of $203 million. Located in many of Southern California’s fastest growing submarkets, including coastal San Diego, West Los Angeles and northwestern LA County, these nine new properties were 99% occupied at year-end. We also sold some 957,000 square feet of mature properties for total proceeds of $114 million. Our existing portfolio also benefited from the strong market. All told, we signed new and renewing leases on nearly two million square feet of space in our stabilized portfolio at average rental rates 24% above the prior rates. Total revenues generated by the stabilized portfolio increased 6.6%, to $147 million. Net operating income for these properties rose 7.1%, to $114 million. At year-end, the portfolio’s occupancy rate stood at 97%. As we went to press, our experience in the coastal submarkets of Southern California where we operate continued to signal healthy operating conditions for commercial real estate. We are certainly aware of the potential challenges ahead for the California economy given the national slowdown and rising energy prices. Yet our markets continue to perform well. Indeed, both capital and regulatory constraints on development here, have been quite effective in limiting new supply, while demand, to date, shows little evidence of weakening. If these conditions remain intact, we’re optimistic that both our markets and our company will perform well this year. And one of the key reasons for that optimism is our unwavering focus on quality. Quality describes our portfolio. Quality describes our chosen submarkets. And quality certainly describes the nature of the industries that power California’s economy as we enter the 21st century. Simply put, California commands the high ground in the battle to supply and serve our increasingly information-driven global economy. The state’s unmatched quality of life, its array of world-renowned educational institutions, its highly educated and entrepreneurial workforce, and its position at the nexus of Pacific Rim commerce all act as magnets to attract and retain high quality business enterprises. Last year, an estimated one in two new jobs and one in six new businesses in the United States were created in California. Currently, our internal planning at KRC assumes, as do most regional economic forecasts, that growth will moderate but continue in 2001. With that backdrop, we will continue to pursue the set of growth strategies that we laid out to our investors in our IPO four years ago, and that we have consistently executed every year since. Quality plays a key role in our strategies. We choose to focus our operations in the Southern California marketplace that has generated our organization’s success for more than 50 years. Within this region, we concentrate our resources in the rapidly growing, largely coastal submarkets that have come to dominate Southern California’s economic growth. And we approach these submarkets with product designs that address the style, flexibility and sophisticated technology needs of our tenant base. Suburban in feel, decentralized in structure, with a carefully balanced approach to land use and a rigorously enforced set of entitlement processes, these new communities are reshaping much of our state’s, and our nation’s landscape. They now command three-quarters of national office starts and 80% of national job creation. In California, they are the clear location of choice for the state’s fastest growing, information-driven businesses and their highly prized employees. Not surprisingly, our roster of customers in these burgeoning new submarkets includes some of the highest quality businesses in the state. Large and small, new economy and old, services- and manufacturing-oriented, our tenants represent the broad diversity of the Southern California economy itself. This year, we expect to add several new names to the list. Our committed development for 2001 includes 11 projects with 965,000 square feet of rentable space. As with all our new development, these are top quality properties in top quality Southern California submarkets. At year end, they were 56% preleased or otherwise committed – evidence, once again, that quality is always in high demand, the key to long-term value in both customer relationships and real estate assets. All in all, I am confident that we remain on track for another solid performance at Kilroy Realty Corporation in the year ahead. Our portfolio continues to grow in value. And we remain committed to delivering a sound and prosperous future for our company and its shareholders, and a high quality business environment for our customers. Thank you for your continued support. Cordially,
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Southern
California fared particularly well. The five-county region stretching
from San Diego to Ventura, where Kilroy Realty owns and operates
the overwhelming majority of its portfolio, produced more than 193,000
net new jobs last year, reducing unemployment rates to 20-year lows
in many submarkets.
