Kilroy Realty Corporation / Kilroy Realty, L.P. — Q1 2011 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2011. Kilroy is a West Coast office and industrial REIT, with substantially all operations conducted through its Operating Partnership. At quarter-end, the stabilized portfolio comprised 141 buildings and 14.1 million rentable square feet, with 90.8% occupancy. Office occupancy was 89.0% and industrial occupancy 95.9%.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total revenue | $88.1 million | $66.8 million; up 31.9% |
| Net operating income (NOI) | $61.9 million | $48.8 million; up 26.9% |
| Core portfolio NOI | $49.9 million | $47.8 million; up 4.4% |
| Net income | $4.9 million | $8.9 million; down 45.2% |
| Net income available to common stockholders | $1.0 million; $0.01 per diluted share | $4.9 million; $0.11 per diluted share |
| Funds from Operations (FFO) | $30.1 million | $25.8 million |
| Cash from operating activities | $43.8 million | $33.6 million |
| Cash used in investing activities | $61.1 million | $37.5 million |
| Cash and cash equivalents at quarter-end | $6.7 million | $14.8 million at December 31, 2010 |
NOI as a share of revenue was approximately 70.2%, compared with 73.0% a year earlier. The company reported $20.9 million of interest expense, versus $12.0 million; depreciation and amortization was $29.3 million, versus $20.9 million. Common dividends were $0.35 per share, unchanged year over year.
At March 31, total debt principal was $1.483 billion, comprising $447.1 million of secured debt, $320.5 million of exchangeable notes, $658.0 million of unsecured senior notes and $57.0 million drawn on the $500 million credit facility. Undrawn facility capacity was $443 million. Debt was 96.2% fixed-rate; the stated weighted average interest rate was 5.2% and the GAAP effective rate 6.3%. Debt equaled 39.2% of total market capitalization; debt plus preferred liquidation value equaled 44.6%. Total assets were $2.842 billion and total liabilities $1.666 billion.
Changes versus the prior comparable period
- Revenue and NOI rose primarily from properties acquired in 2010 and one San Francisco acquisition in January 2011, as well as improved occupancy in the core portfolio. Core average occupancy increased to 90.6% from 82.4%.
- Higher acquisition-related expenses, depreciation, and interest costs more than offset higher NOI, contributing to the decline in net income. Management attributed higher interest expense mainly to greater average debt balances; the weighted average effective interest rate rose from approximately 5.7% to 6.1%.
- Operating cash flow increased 30.5%; investing cash use increased 63.2%, principally reflecting higher property acquisition spending and redevelopment expenditures.
- At quarter-end, stabilized portfolio occupancy was 90.8%, up from 86.4% at March 31, 2010. The industrial property segment fell below GAAP reporting thresholds and was no longer a reportable segment.
Outlook, management commentary, risks and unusual items
- Management said occupancy had generally improved and rents and leasing concessions had stabilized in many submarkets, while emphasizing continuing regional market and economic uncertainty. New leases commencing during Q1 had weighted-average rent declines of 12.1% on a GAAP basis and 17.4% on a cash basis, excluding space vacant for more than a year. For lease commencements shown in the filing’s separate activity table, changes were declines of 18.6% GAAP and 22.1% cash.
- Approximately 9.2% of stabilized rentable area was available at quarter-end. Management estimated portfolio cash rents were about 10% above current average market rents and cautioned that renewals or reletting may occur at lower rates. One tenant’s 205,000-square-foot lease in Ventura County was expected to expire and the tenant planned to vacate.
- The company expected to complete a 300,000-square-foot El Segundo redevelopment in Q3 2011, at an estimated total investment of about $50 million. Its development pipeline comprised 116.7 gross acres with an aggregate cost basis of approximately $269.2 million; six of seven pipeline properties did not qualify for interest capitalization in Q1.
- No formal earnings guidance was provided. Management said it believed liquidity needs over the next 12 months could be met through operating cash flow, the credit facility, debt or equity financing, and asset dispositions. The board retained discretion over common distributions; management believed it could maintain 2010 distribution levels during 2011.
- Debt maturities include $304.3 million in 2012 and $261.3 million in 2014. The company reported compliance with debt covenants, but warned that a prolonged slowdown, tenant defaults, weaker rents or property values, credit-market volatility, or a ratings downgrade could impair financing access or covenant compliance.
- Subsequent to quarter-end, Kilroy acquired four Kirkland, Washington office buildings for approximately $100.1 million, including assumed mortgage debt of about $30 million, and completed a 6,037,500-share offering that generated approximately $221.2 million net. A $19.2 million common dividend/distribution was paid April 15.
- Management reported no material off-balance-sheet arrangements, no material change in risk factors, and no legal proceedings expected to have a material adverse effect. It noted increased legal and consulting costs, approximately $1.5 million, related to a dispute with a former industrial-property tenant. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether occupancy gains translate into sustained core NOI growth, given below-market lease commencements and upcoming expirations.
- The maturity and refinancing plan for the $148 million exchangeable notes due in 2012 and other near-term debt, alongside remaining credit-facility availability.
- Funding and expected returns for the Kirkland acquisition and the El Segundo redevelopment, including leasing progress and completion costs.
- The sustainability of the $0.35 quarterly common dividend relative to cash flows, capital needs, debt service and REIT distribution requirements.
- The outcome and financial exposure, if any, from the former-tenant dispute; the filing does not provide a clear estimate of potential ultimate liability.