Kilroy Realty Corporation — 2012 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2012, filed February 11, 2013. Although the request identifies 2012 Q4, this filing reports full-year results and provides unaudited quarterly data. Kilroy is a West Coast office REIT operating primarily in California and Greater Seattle through Kilroy Realty, L.P.
At year-end, the stabilized portfolio comprised 114 office buildings with 13.25 million rentable square feet and 92.8% occupancy, versus 90.1% at December 31, 2011. The company sold its entire 39-property industrial portfolio during Q4 and ended the year with no industrial properties.
Key financial metrics
| Metric | 2012 | 2011 | Change or context |
|---|---|---|---|
| Revenue from continuing operations | $404.9 million | $337.6 million | Up 19.9% |
| Net operating income (NOI) | $287.8 million | $238.6 million | Up 20.6%; calculated NOI margin was approximately 71.1%, versus 70.7% |
| Income (loss) from continuing operations | $5.4 million | $(3.7) million | Improved by $9.2 million |
| Net income | $277.1 million | $67.5 million | Includes $259.2 million net gain on dispositions |
| Net income available to common stockholders | $249.8 million | $50.8 million | $3.56 per share, versus $0.87 |
| NAREIT funds from operations (FFO) | $165.5 million | $136.2 million | Up approximately 21.5%; supplemental, non-GAAP measure |
| Cash from operating activities | $180.7 million | $138.3 million | Up 30.7% |
| Cash used in investing activities | $(706.5) million | $(634.3) million | Acquisitions and development spending exceeded disposition proceeds |
| Cash from financing activities | $537.7 million | $486.0 million | Reflects substantial debt and equity financing |
| Total debt | $2.04 billion | $1.82 billion | 34.7% of market capitalization; debt plus preferred equity was 38.1% |
| Common dividend | $1.40 per share | $1.40 per share | Unchanged |
At December 31, 2012, cash and cash equivalents were $16.7 million and restricted cash was $247.5 million, largely disposition proceeds held for Section 1031 exchanges. The $500 million revolving facility had $185 million drawn and $315 million available. Approximately 83.6% of debt was fixed-rate; the reported GAAP effective rate was 4.7%.
For Q4 2012, revenue from continuing operations was $111.1 million and NOI was $79.3 million. Net income was $193.6 million, including $189.7 million of income from discontinued operations; therefore, quarterly net income was substantially affected by asset sales.
Material changes versus the prior comparable period
- NOI rose 20.6%, primarily from acquired properties; same-store NOI increased only 0.3%.
- Year-end office occupancy improved 2.7 percentage points. Management reported 2.3 million square feet of new and renewal office leases executed during 2012, its highest annual leasing volume to that point.
- The company acquired 14 office buildings for approximately $674 million and six development opportunities for approximately $340 million. Real estate held for investment before depreciation increased to $4.76 billion from $3.80 billion.
- It sold seven office properties and all industrial properties for gross proceeds of approximately $500.3 million, recognizing a $259.2 million net gain. The sale gain, rather than recurring operations alone, drove much of the increase in reported net income.
- Common shares outstanding increased from 58.8 million to 74.9 million, principally reflecting equity offerings. The company also issued Series G and H preferred stock and redeemed Series E and F preferred stock and Series A preferred units.
- Depreciation and amortization increased 30.4% to $162.9 million, largely with portfolio growth. Interest expense declined 7.8% to $79.1 million, helped by lower effective borrowing rates and increased capitalized interest.
Outlook, management commentary, risks and unusual items
- Management gave no specific full-year 2013 revenue, earnings or FFO guidance in the provided filing text. It expected to maintain 2012 distribution levels for 2013, subject to board discretion and business conditions.
- Management described rental rates and vacancy as stabilizing or improving in many submarkets. It estimated that 2013 leases scheduled to expire had cash rents approximately 5% below then-current quoted market rents; renewals and re-leasing remain uncertain.
- Planned 2013 spending included an estimated $45–$65 million for capital improvements, tenant improvements and leasing costs in the stabilized portfolio. Four development projects and one redevelopment project under construction had estimated total investment of approximately $988.8 million; remaining contractual development and redevelopment commitments were approximately $521 million, with timing subject to construction progress.
- Subsequent to year-end, the Operating Partnership issued $300 million of 3.8% notes due 2023 and used proceeds to repay its revolver balance. It also repaid an $83.1 million mortgage and acquired a Seattle office complex for approximately $170 million, including assumed debt.
- Key risks include geographic concentration in California and Greater Seattle, exposure to office demand and technology/media tenants, tenant and lease-renewal risk, development execution and funding needs, debt refinancing and interest rates, and earthquake, environmental, regulatory and property-tax exposure. The top 15 tenants represented 34.1% of annualized base rent; technology and media tenants accounted for 36%.
- Management reported compliance with debt covenants at year-end and no material litigation or known material environmental liability. The company and Operating Partnership reported effective internal controls; Deloitte issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Separate recurring operating performance and FFO from the $259.2 million disposition gain; review same-store NOI and leasing costs.
- Track occupancy, rent spreads, renewals and the 2013–2015 lease expirations, particularly the 2015 concentration of 17.7% of leased square footage.
- Confirm funding, completion schedules, pre-leasing and returns for the approximately $988.8 million under-construction program and the larger development pipeline.
- Review post-year-end debt transactions and remaining maturities, revolver availability, covenant headroom and the effect of variable-rate debt.
- Assess dilution from equity issuance, preferred-dividend obligations, and the sustainability of the $1.40 annual common dividend relative to recurring cash generation and capital needs.