Kilroy Realty Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Kilroy is a West Coast office REIT; substantially all property operations are conducted through Kilroy Realty, L.P. (the Operating Partnership). Figures below are consolidated and in U.S. dollars.
Business and portfolio
- At quarter-end, the stabilized portfolio comprised 116 office buildings and 13.57 million rentable square feet, with 90.3% occupancy, down from 92.8% at December 31, 2012.
- Four development projects were under construction; two properties were in lease-up. The company acquired two Seattle office buildings for approximately $170 million in January.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $117.5 million | $92.4 million |
| Net operating income (NOI) | $82.4 million | $67.8 million |
| Income from continuing operations | $2.4 million | $2.2 million |
| Net income (loss) available to common stockholders | $(0.9) million; $(0.02) per share | $67.5 million; $1.06 per share |
| Funds from operations (FFO) | $49.1 million | $33.0 million |
| Cash provided by operating activities | $56.5 million | $48.7 million |
- Revenue increased 27.2% and NOI increased 21.6%, driven mainly by acquisitions and completed redevelopment. Same-store NOI declined $2.7 million, or 4.0%, partly due to higher property expenses and the absence of prior-year miscellaneous income. Property-revenue NOI margin was approximately 70.2%, versus 73.4%.
- Common-stockholder net income fell sharply from the prior-year period, which included $76.5 million of income from discontinued operations, principally a $72.8 million disposition gain. Q1 2013 had no discontinued-operations income. Depreciation and amortization rose 45.4% to $50.4 million, largely reflecting acquired properties.
- At March 31, cash and cash equivalents were $135.7 million and restricted cash was $19.5 million. The $500 million revolving credit facility was undrawn. Operating cash flow increased 15.9% year over year.
- Total debt principal was approximately $2.16 billion; debt was 33.7% of total market capitalization. About 93% of debt was fixed-rate. The company reported compliance with debt covenants. Debt maturities include $265.3 million in 2014 and $395.1 million in 2015.
- The company issued $300 million of 3.80% senior notes due 2023, assumed mortgage debt in the Seattle acquisition, and repaid an $83.1 million mortgage scheduled to mature in April 2013. The $0.35-per-share quarterly common dividend was maintained.
Outlook, risks, and notable items
- Management stated that anticipated liquidity needs for the next 12 months were expected to be met through operating cash flow and available financing. No specific earnings or FFO guidance was provided.
- Management described improving rental rates and vacancies in many submarkets, but noted that market conditions and leasing outcomes remain uncertain. Leases covering 14.2% of total annualized base rent were scheduled to expire during the remainder of 2013 and 2014 combined; current portfolio space availability was 9.7%.
- Four projects under construction had estimated total investment of $809.5 million, of which $343.7 million had been incurred by quarter-end. If planned additional projects commence in 2013, management estimated a further $80–$100 million of investment beyond stated commitments.
- Contractual development and redevelopment commitments were approximately $455 million. Risks include construction costs and timing, leasing and tenant demand, refinancing and credit-market access, covenant compliance, and interest-rate exposure. A 100-basis-point LIBOR increase was estimated to raise annual interest expense by about $1.5 million, before capitalization.
- The filing reported no material change to previously disclosed risk factors, no material litigation known to management, and no known environmental liability expected to materially affect results. Management stated disclosure controls were effective.
Important facts for investors to verify
- Whether occupancy and leasing improve in the regions with quarter-over-quarter declines, particularly San Diego and Seattle, and how upcoming expirations affect rent and retention.
- Execution, leasing, costs, and funding needs for the development pipeline and the $455 million of development commitments.
- Debt maturity and refinancing plans, including the 2014–2015 maturities and the exchangeable notes due 2014; also monitor covenant headroom and variable-rate exposure.
- Whether operating cash flow and FFO support the dividend and capital program, given the GAAP common-stockholder loss and ongoing investment requirements.
- Potential dilution from the at-the-market equity program, under which approximately $126.1 million remained available for sale at quarter-end.