Kilroy Realty Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Kilroy is a West Coast office REIT focused on Class A properties; it operates primarily through Kilroy Realty, L.P. Figures below are consolidated and in U.S. dollars unless noted.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $141.6 million | $129.0 million | $433.9 million | $380.0 million |
| Net income | $106.7 million | $19.3 million | $209.3 million | $152.4 million |
| Common-stockholder net income per diluted share | $1.09 | $0.18 | $2.17 | $1.63 |
| FFO attributable to common stockholders and unitholders | $73.6 million | $60.4 million | $239.9 million | $180.9 million |
| Net cash provided by operating activities | Not reported quarterly | Not reported quarterly | $202.6 million | $197.3 million |
- Revenue rose 9.7% in Q3 and 14.2% for the first nine months. Nine-month rental income was $391.9 million, up from $338.9 million.
- Net income rose sharply, mainly reflecting $78.5 million of Q3 gains on sales of operating properties. For the nine-month period, gains included $110.0 million on operating-property sales and $17.3 million on a land sale. Thus reported earnings growth does not solely reflect recurring operations.
- Management-defined net operating income (NOI) was $101.9 million in Q3, up 11.5%, and $315.6 million for nine months, up 17.2%. Same-store NOI increased 1.6% in Q3 and 3.5% for nine months. FFO increased 21.8% in Q3 and 32.6% for nine months.
- Cash from operations was up 2.7% year over year for nine months. Investing used $136.7 million, while financing provided $478.2 million; cash and cash equivalents ended at $567.9 million, versus $23.8 million at year-end 2014.
- At September 30, total debt principal was $2.658 billion; balance-sheet secured and unsecured debt, net of discounts and premiums, totaled about $2.657 billion. The company had no revolver borrowings and $600 million of available capacity. Debt was 92.9% fixed-rate and 7.1% variable-rate. Total debt equaled 29.6% of market capitalization; debt plus preferred liquidation value equaled 31.8%.
- Total assets were $6.353 billion and total liabilities $3.116 billion. Debt maturities included $325 million due in November 2015; the company issued $400 million of 4.375% notes due 2025 in September. Two secured mortgages totaling about $90.1 million were repaid in October 2015.
- Common dividends declared were $0.35 per share for Q3 and $1.05 per share for nine months. The July registered placement issued 3.77 million shares for net proceeds of $249.6 million; nine-month at-the-market sales generated $138.2 million net proceeds.
Portfolio, changes, and outlook
- The stabilized portfolio comprised 101 buildings and 13.05 million rentable square feet, 95.6% occupied at quarter-end. Average stabilized occupancy was 95.8% in Q3 2015 versus 94.0% a year earlier. Management reported market rents generally rising and portfolio cash rents about 15% below current market rates, but future rent and occupancy outcomes are not assured.
- Q3 NOI improvement included higher rents and occupancy, recently stabilized developments and acquisitions; same-store revenue gains were partly offset by lower tenant reimbursements and other property income. Nine-month growth also benefited from completed developments and acquisitions.
- The company sold ten operating buildings totaling 1.05 million square feet for $309.2 million gross, recognizing $110.0 million in gains, and sold land for $26.0 million gross. It acquired two development sites for $127.5 million in total purchase price.
- Seven projects were under construction, estimated at $1.5 billion total investment, with $901 million incurred and $411 million committed; projects were 56% pre-leased. Management expected to spend up to a further $25 million in 2015 beyond commitments. Development timing, cost and scope remain subject to market conditions, leasing and approvals.
- Management stated that it expected available liquidity sources to meet projected needs over the next 12 months and believed it could maintain distributions at 2015 levels, while noting there is no assurance. No quantified full-year earnings or FFO guidance is provided in the filing text.
Risks, contingencies, and unusual items
- The 2015 accounting change for discontinued operations means properties sold in 2015 are included in continuing operations; 2014 discontinued operations included substantial property-sale gains. Comparisons should account for this presentation change.
- Debt covenants were met at quarter-end. Covenant headroom could be affected by weaker property values, lower rents or occupancy, tenant defaults, economic or credit-market volatility, or higher financing costs. A 100-basis-point LIBOR increase was estimated to add about $1.9 million to annual interest expense on then-outstanding variable-rate debt.
- Environmental remediation liabilities of approximately $19.4 million were accrued for certain development acquisitions and activities. Additional remediation costs are possible but not reasonably estimable. The company also reported approximately $481.2 million of operating-property and redevelopment contract and lease commitments, excluding ground leases.
- Management reported no material adverse environmental liability known for the stabilized portfolio, no material litigation proceedings, no material change to previously disclosed risk factors, and no off-balance-sheet arrangements. Results for interim periods may not indicate full-year performance.
Investor verification priorities
- Separate recurring operating performance from property-sale gains and account for the discontinued-operations presentation change when comparing periods.
- Review FFO and same-store NOI definitions and reconciliations, development leasing progress, project costs and delivery schedules.
- Track the 2015 debt maturity repayment, October mortgage repayments, remaining revolver capacity, covenant compliance and future funding needs.
- Assess occupancy, lease expirations, rent spreads and tenant concentration; the top 15 tenants generated 35.2% of annualized base rent.
- Monitor potential additional environmental remediation costs, development commitments, equity issuance and the sustainability of distributions.