Kilroy Realty Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Kilroy is a West Coast office REIT; substantially all operations and assets are held through Kilroy Realty, L.P. Unless noted, dollar amounts below are in millions.
Business context and operating portfolio
At quarter-end, the stabilized portfolio comprised 115 office properties and 13.48 million rentable square feet, with 90.7% occupancy. Five development properties under construction and two lease-up properties were excluded. The company owned approximately 97.7% of the Operating Partnership.
Financial and operating performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $124.5 | $97.1 | $242.0 | $189.5 |
| Net operating income (NOI) | $88.4 | $68.4 | $170.9 | $136.2 |
| NOI as a share of revenue | 71.0% | 70.5% | 70.6% | 71.9% |
| Income from continuing operations | $9.7 | $0.04 | $12.1 | $2.2 |
| Net income | $10.1 | $2.3 | $12.5 | $80.9 |
| Net income available to common stockholders | $6.6 | $(0.8) | $5.7 | $66.7 |
| Common EPS | $0.08 | $(0.02) | $0.06 | $1.00 |
| FFO attributable to common holders and unitholders | $55.2 | $39.5 | $104.2 | $72.5 |
| Operating cash flow | — | — | $107.0 | $78.6 |
Q2 revenue rose 28.2% and NOI rose 29.2% year over year, largely reflecting acquired properties; same-store NOI increased 6.8%. A $5.2 million property-damage settlement recognized in Q2 also boosted other property income. Six-month common earnings and net income were far below 2012, when results included a $72.8 million gain on dispositions of discontinued operations. FFO increased 43.8% for the six-month period.
Six-month investing cash flow was a net use of $20.6 million, versus $301.6 million used in 2012; the current period included release of $228.3 million of restricted cash related to completed Section 1031 exchanges. Financing cash flow was $4.7 million provided, versus $236.3 million provided in 2012. Common distributions were $0.35 per share per quarter ($0.70 for the six months).
Balance sheet, debt, and liquidity
- Total assets were $4.78 billion and total liabilities were $2.54 billion at June 30, 2013. Cash and cash equivalents were $107.8 million; restricted cash was $19.2 million.
- Gross debt principal was $2.16 billion. Debt was 33.3% of total market capitalization; debt plus preferred liquidation value was 36.3%. Approximately 93% of debt was fixed-rate. The stated/GAAP effective weighted-average rates were 4.8%.
- The $500 million revolving facility had no borrowings outstanding, leaving $500 million available; maturity is April 2017. The Operating Partnership also issued $300 million of 3.80% senior notes due 2023 in January.
- Debt maturities include $172.5 million of exchangeable notes due November 2014 and $265.3 million of total debt maturities and scheduled amortization in 2014. The notes were exchangeable as of June 30, 2013, subject to their terms.
- Management reported compliance with debt covenants. A 100-basis-point increase in LIBOR was estimated to raise annual interest expense by about $1.5 million, before capitalization.
Material changes, outlook, and risks
- Acquired two fully occupied Seattle office buildings for approximately $170 million, assuming mortgage debt; sold a Calabasas office building for approximately $14.7 million and recorded a $0.4 million gain.
- Stabilized occupancy was 90.7%, down from 92.8% at December 31, 2012. Same-store average occupancy for the first half was 90.2%, compared with 92.0% in 2012. Management reported improving rents in many submarkets, but leasing and occupancy remain sensitive to regional demand and market conditions.
- Management anticipated $150–$300 million of potential property or land dispositions over the next 12–18 months; this is an expectation, not a commitment. It also said liquidity sources were expected to cover projected needs for the next 12 months and that distributions could be maintained at 2012 levels to meet 2013 REIT requirements. No formal earnings or FFO guidance was provided.
- Five development projects under construction had estimated total investment of approximately $856.5 million, with $410.5 million incurred at quarter-end. The company reported $434 million of redevelopment and development commitments and $514.1 million of contracts and executed leases, including $27.5 million expected for land purchase. Costs and timing may change; potential additional projects could require another $90–$110 million.
- Key risks include lease expirations and tenant retention, development cost and leasing execution, access to capital and refinancing, interest-rate exposure, and possible covenant pressure in a downturn. The filing reported no material litigation, no off-balance-sheet arrangements, and no known environmental liability expected to have a material adverse effect.
Important facts for investors to verify
- Underlying same-store leasing, occupancy, and rent trends, separating them from acquired-property growth and the one-time property-damage settlement.
- Development commitments, remaining project costs, pre-leasing, construction schedules, and whether planned dispositions occur.
- 2014 debt maturities, exchangeability and potential dilution from the 4.25% notes, and continued covenant headroom.
- Cash available for distributions after capital spending, debt service, and REIT distribution requirements; the stated distribution outlook is not a guarantee.
- Reconcile reported net income with FFO and GAAP cash flows; FFO is a supplemental measure and does not include all capital and leasing costs.