Kilroy Realty Corporation — Q2 2015 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2015. Kilroy is a REIT focused on owning, developing, acquiring, and managing primarily Class A office properties on the West Coast. Its stabilized portfolio comprised 101 buildings and 13.1 million rentable square feet, with 96.7% occupancy at quarter-end. The Company conducts substantially all operations through Kilroy Realty, L.P.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $146.2 million | $127.2 million | $292.3 million | $250.9 million |
| Net operating income (NOI, non-GAAP) | $106.1 million | $90.5 million | $213.7 million | $178.0 million |
| Net income | $58.6 million | $31.1 million | $102.6 million | $133.1 million |
| Net income available to common stockholders | $54.2 million | $27.2 million | $94.1 million | $123.8 million |
| Diluted earnings per share | $0.61 | $0.32 | $1.06 | $1.46 |
| Funds from Operations (FFO, non-GAAP) | $74.8 million | $63.3 million | $166.4 million | $120.5 million |
- Q2 revenue rose 15.0% and NOI rose 17.2% year over year. Approximate NOI margin, calculated as NOI divided by revenue, was 72.5%, versus 71.2% in Q2 2014.
- Six-month operating cash flow was $116.8 million, versus $106.9 million. Investing cash flow was negative $85.0 million and financing cash flow was negative $27.4 million. Cash and cash equivalents ended the period at $28.1 million.
- At June 30, total debt principal was approximately $2.36 billion; the balance sheet reported $479.4 million secured debt, $1.78 billion unsecured debt net, and $100.0 million drawn on the revolving credit facility. The facility had $500 million of remaining capacity. Debt was 27.4% of total market capitalization; 87.8% of debt was fixed-rate. Management reported compliance with debt covenants.
- Total assets were $5.69 billion and total liabilities were $2.77 billion. Common dividends declared were $0.35 per share for Q2, unchanged from Q2 2014.
Material changes and operating developments
- NOI growth reflected same-store improvement and contributions from completed development projects and acquisitions. Same-store NOI increased 2.7% in Q2 and 4.5% for the first six months. Management cited higher occupancy and rents, partly offset by higher property costs and lower lease-termination fees than in 2014.
- Quarter-end stabilized occupancy was 96.7%, up from 94.4% at December 31, 2014. Six-month leasing activity showed GAAP rent increases of 27.6% for new and renewal leases combined, as reported by the Company.
- Reported Q2 net income included a $31.4 million gain on sales of operating properties. Six-month results also included a $17.3 million land-sale gain. Conversely, prior-year six-month net income included $106.3 million of discontinued-operations income, largely disposition gains; this makes headline net-income comparisons less indicative of ongoing operations.
- The Company adopted new discontinued-operations accounting guidance in 2015. Properties sold or held for sale that do not represent a strategic shift are now generally included in continuing operations, affecting period-to-period presentation.
- Development spending remained substantial: seven projects were under construction, with estimated total investment of approximately $1.5 billion; about $848 million had been incurred and $531 million was committed at June 30. The projects were 58% pre-leased. The company also acquired the 333 Dexter development site in Seattle for $49.5 million during the period.
Outlook, risks, and subsequent events
- No specific earnings or revenue guidance is provided. Management said 2015 development activity and project timing would depend on market conditions, leasing, approvals, and construction costs. It estimated potential 2015 spending of $50–$75 million beyond commitments already recorded.
- Management’s initial 2015 capital-recycling target was $250–$400 million of asset sales. Following the July sale of six San Diego properties, it reported approximately $335.2 million of 2015 dispositions against that target.
- A $325 million unsecured note maturity was scheduled for November 2015. Management stated it believed the company was positioned to refinance or repay maturities, but access to financing could be affected by credit markets, property values, rental demand, tenant defaults, and credit ratings.
- Contractual and development commitments were significant: the filing reported $602.3 million of commitments tied to operating and redevelopment properties, and a contractual-obligations schedule included $531 million of development commitments. Costs and timing may vary.
- Environmental remediation liabilities of approximately $16 million were accrued; possible additional costs related to certain development acquisitions were not reasonably estimable. Routine litigation was not considered likely to have a material adverse effect.
- Subsequent to quarter-end, the Company issued 3.77 million shares for $249.6 million net proceeds, acquired a San Francisco site for approximately $78 million, and sold the six San Diego properties for $163 million gross proceeds. By July 29, it reported approximately $175 million of available cash and no revolver borrowings.
Important facts for investors to verify
- How much ongoing earnings growth is supported by same-store operations versus development completions and asset-sale gains?
- Whether the $325 million November 2015 note maturity was refinanced or repaid, and the resulting cost and liquidity impact.
- Leasing progress, occupancy, and rent growth—especially for leases expiring in 2015–2017—and tenant concentration. The top 15 tenants represented 35.5% of annualized base rent.
- Whether development projects meet budgets and delivery schedules, and whether pre-leasing and future market demand support the planned investment.
- How the July equity issuance, San Diego disposition, Section 1031 exchanges, and subsequent cash position affect dilution, taxes, and capital-allocation plans.
- Potential additional environmental remediation costs and the ability to maintain distributions while funding development, leasing costs, and debt obligations.