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The real estate markets in which KRC operates performed well in 2007. We made important progress in leasing, development and long-term pipeline growth, while maintaining a strong and flexible balance sheet.
Notwithstanding a slowing job growth environment, in most of our Southern California submarkets we experienced strong interest from a range of potential new tenants for the high quality, campus-style properties that represent the core of our stabilized portfolio and most of our current development.
As a result, we ended 2007 with solid operating results, a stabilized occupancy rate of 94%, two 100% leased development completions, and continued growth in our current development program and long-term entitled land pipeline.
A successful leasing program and rising rents both contributed to improvements in our 2007 operating performance. Revenues increased to $269 million, net operating income improved to $194 million, and funds from operations totaled $111 million, or $3.18 per fully diluted share. In February 2008, KRC’s board of directors increased the company’s annual cash dividend 4.5% to $2.32 per share.
Now two months into the new year, with its changing economic environment and rising uncertainties, KRC is well-positioned to weather market challenges that may arise. Our portfolio of relatively young, amenity-rich, and well-located office and industrial properties are competitive leaders in their submarkets. We are strongly capitalized and conservatively leveraged, with approximately three-quarters of our existing credit line unused. And with an excellent land bank and substantial access to capital, we have the ability to respond quickly to potential opportunities – acquisitions, development or redevelopment.
Strong Interest in KRC Properties Amid strong, continuing interest in new and existing KRC properties, our leasing program delivered excellent results last year. Overall, new and renewing leases commenced on 1.7 million square feet of space, at average GAAP rents 15% higher than the leases they replaced.
What’s more, of the approximately 1.4 million square feet of space in our stabilized portfolio set to expire during 2008, two-thirds of which is industrial, we have already released roughly 600,000 square feet.
In addition, in early February, KRC signed new, 10-year lease agreements covering nearly 290,000 square feet of new and existing space with Bridgepoint Education, Inc. at the company's Kilroy Sabre Springs office campus located along the I-15 Corridor in San Diego County. Bridgepoint, a current KRC tenant, will now occupy 100% of our newest building on the campus, currently under construction, as well as 96% of one of the two existing buildings at the site.
Development Continued to Drive Growth During 2007, new development added more than 780,000 square feet of office space to our stabilized portfolio, all of which is fully leased and occupied. In August, Intuit Inc. moved into its new four-building, regional headquarters. This office campus represents phase I of KRC’s multi-site Santa Fe Summit development property, located along State Route 56 just east of Del Mar in San Diego County. And in July, Cardinal Health took occupancy of a new two-building campus at KRC’s Pacific Corporate Center in Sorrento Mesa that includes a state-of-the-art office and research facility.
Late in the year, we added a new project to our current development program, initiating construction on a 51,000 square-foot medical office building at our Sorrento Gateway property in Sorrento Mesa. We made the decision to move forward based on visible demand and limited supply for medical office space in the region. Our total estimated investment for the new building is approximately $22 million and we expect to complete construction by the end of the year.
With that addition, our active development and redevelopment pipeline now encompasses approximately 611,000 square feet in seven office buildings, with deliveries scheduled through the fourth quarter of 2008. These projects have an estimated total investment of approximately $188 million and are 65% leased.
Strategic Portfolio Moves Continue One of our biggest portfolio reconfiguration moves last year came in the fourth quarter, when we completed the sale of a mature, non-strategic property and reinvested the capital generated into a premier development site in one of Southern California’s most attractive office markets.
In December, we completed the sale of our 530,000 square-foot Sea-Tac office campus, located immediately adjacent to the Seattle-Tacoma International Airport, for just under $80 million. Given that the project was 30 years old, held as a leasehold interest and 87% occupied, we were extremely pleased with the transaction.
We used the capital generated from the property sale to finance a successful acquisition of the one significant development site remaining in the Del Mar submarket of San Diego County. The 23-acre site is currently entitled for approximately 500,000 square feet of office space. The purchase price was approximately $88 million. With this acquisition, KRC’s future development pipeline has now grown to just over 116 acres of fully entitled land, representing future development potential of more than two million square feet of office space.
Looking Forward While it’s never easy to predict the future, today’s increasing economic uncertainties make it especially difficult to see forward with clarity. We’re approaching 2008 with cautious optimism and an aggressive focus on fundamentals: a strong leasing program; disciplined execution on the projects we currently have under construction; and depending on market conditions and preleasing, we will evaluate additional development starts. We have a very experienced management team that has weathered multiple real estate cycles and remains committed to building and sustaining the value of KRC’s real estate portfolio on your behalf.
As always, I thank you for your continued support.
Cordially,
John B. Kilroy, Jr.
President and Chief Executive Officer
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