Kilroy Realty Buys Allen Group in First San Diego Venture
Continuing its meteoric growth spurt, Kilroy Realty Corp. said it will close today its purchase of assets of San Diego-based commercial developer Allen Group for more than $300 million in cash and stock--Kilroy’s largest purchase yet and its first venture in San Diego.
“Our strategy has been not only to be an acquirer of property within major submarkets but to position ourselves for development in key areas,” said Chief Executive John B. Kilroy Jr. “This purchase will make us the preeminent player in the north San Diego County market.”
Kilroy also announced plans Wednesday for new office projects totaling 3.3 million square feet in nine Southern California markets over the next three years, including a five-story office building at its Kilroy Airport Center in Long Beach that will break ground next month. Other projects are slated for the Burbank media district, West Los Angeles, Calabasas and on land it is acquiring in San Diego.
Kilroy has also agreed to purchase seven acres of land near Olympic and Bundy boulevards in Los Angeles, where it will build a $75-million campus-style office development of 300,000 square feet. The construction marks Kilroy’s first return to development since 1991. After its initial public offering in January--the largest IPO in California this year-- Kilroy has been rapidly acquiring existing real estate. The buying spree has doubled the size of its portfolio to 7 million square feet, said Richard Moran, Kilroy chief financial officer.
“Now is the appropriate time to go forward with development,” Kilroy said. “Vacancy rates have become [slim] and rents have rebounded nicely.”
As part of the Allen purchase, Kilroy will acquire 900,000 square feet of existing buildings in north San Diego County. It will buy eight more buildings totaling 750,000 square feet when they are completed or fully leased, Kilroy said. In addition, the company is partnering with Allen on developments of up to 1 million square feet in Sorrento Mesa and Del Mar, which it will purchase outright when complete.
In exchange for all of the buildings, Allen’s owners will receive compensation of $100 million in stock and an additional $200 million in cash and debt repayment.
Allen was founded five years ago when a family that owned a manufacturing business decided to funnel its investments into depressed San Diego commercial land. Its 10 employees will join Kilroy, including principals Steve Black and Patrick Smith, who as executive vice presidents will oversee San Diego County and Orange County, respectively.
“They have pretty aggressive plans for acquisition and development,” said Jim Sullivan, senior analyst with Green Street Advisors, a Newport Beach-based real estate investment trust research firm of Kilroy. “But that’s what they sold to Wall Street. It doesn’t appear that they have gotten too aggressive, considering what is happening with vacancy and rents.”
The REIT is financing its latest acquisitions and developments with funds from its $242-million secondary offering in August and its $250-million credit line.
