Kilroy Realty Corporation and Kilroy Realty, L.P. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. The company is a West Coast office and industrial REIT; substantially all operations are conducted through its Operating Partnership. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and operating performance
- At quarter-end, the stabilized portfolio comprised 147 buildings and 15.1 million rentable square feet: 107 office buildings and 40 industrial buildings. Occupancy was 90.2% overall, 87.9% for office and 97.6% for industrial.
- The company acquired eight office properties in the first half for approximately $413 million, adding 1.16 million rentable square feet. Acquisitions, including properties bought in 2010, were the primary driver of revenue and NOI growth.
- Management reported improving occupancy and generally stabilizing rents in many submarkets, but described regional real estate fundamentals as challenging. Average second-quarter occupancy was 90.2%, compared with 84.7% a year earlier.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $92.1 | $72.4 | $180.2 | $139.2 |
| Net income | $3.5 | $2.0 | $8.3 | $10.8 |
| Net income available to common stockholders | $(0.3) | $(1.8) | $0.7 | $3.1 |
| Basic earnings per share | $(0.01) | $(0.04) | $0.00 | $0.05 |
| Net Operating Income (NOI) | $65.5 | $51.0 | $127.4 | $99.8 |
| Cash from operations | Not separately stated | Not separately stated | $56.5 | $57.4 |
- Revenue rose 27.1% in Q2 and 29.4% in the first half; NOI increased 28.4% and 27.6%, respectively. NOI margin was approximately 71.2% in Q2 versus 70.5% a year earlier, and 70.7% for the first half versus 71.7%.
- Net income available to common stockholders remained negative in Q2 after preferred distributions and dividends. For the first half it declined year over year despite higher NOI, as interest expense increased to $42.1 million from $25.0 million and depreciation and amortization rose to $61.6 million from $44.7 million.
- Reported FFO attributable to common stockholders and unitholders was $31.6 million in Q2 versus $21.7 million, and $61.8 million for the first half versus $47.5 million. FFO is a supplemental non-GAAP measure and does not capture capital expenditures or leasing costs.
- First-half cash flow: operating activities provided $56.5 million; investing activities used $435.5 million, including $378.6 million of cash acquisition expenditures and $16.5 million of additional escrow deposits; financing activities provided $389.6 million. Cash and cash equivalents were $25.4 million at June 30.
- At June 30, total assets were $3.265 billion and total liabilities were $1.888 billion. Debt carrying value was approximately $1.680 billion; gross principal debt was $1.699 billion. The company reported debt at 39.6% of total market capitalization and debt plus preferred liquidation value at 44.3%.
- The $500 million revolving credit facility had $245 million drawn and $255 million of remaining capacity. Its maturity was extended to August 2015; the stated rate was LIBOR plus 1.750% and the facility fee was reduced to 0.35%. Management said debt covenants were met at quarter-end.
Material changes, outlook and risks
- The April common-stock offering raised approximately $221 million net through issuance of 6.04 million shares. Gross debt maturities included $148 million of exchangeable notes due in 2012 and $72.3 million of scheduled principal payments for the remainder of 2011.
- After quarter-end, the Operating Partnership issued $325 million of 4.80% senior notes due 2018, with proceeds intended partly to repay credit-facility borrowings. The company also began a discretionary at-the-market equity program of up to $200 million; no shares had been sold as of the filing.
- Management said it believed projected liquidity needs for the next 12 months could be met using operating cash flow, borrowings, debt or equity issuance, and possible asset sales. It was evaluating possible dispositions totaling approximately $175–$200 million, but gave no assurance they would occur. No formal earnings or occupancy guidance was provided.
- Leasing remains a key risk: for leases commencing in the first half, reported changes versus expiring leases were negative 12.7% for GAAP rents and negative 17.9% for cash rents, subject to the filing’s exclusions and calculation methodology. Management estimated portfolio cash rents were about 10% above current average market rents, creating potential renewal and re-leasing pressure.
- Management cited economic growth, tenant conditions, market rents, occupancy, interest rates, capital-market access, acquisition integration and property values as factors that could affect results and financing. Development activity had been delayed or reduced; seven of eight pipeline properties did not qualify for interest capitalization in Q2. Two redevelopment projects had estimated investments of $52.4 million and $19.4 million, with expected completion in Q3 2011 and Q2 2012, respectively.
- The filing reported no material change in risk factors, no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls.
Most important facts for investors to verify
- Whether the acquired properties sustain occupancy and NOI growth, and how much of reported growth reflects acquisitions rather than the existing portfolio.
- Upcoming maturities and refinancing needs, including the 2012 exchangeable notes, and the effect of post-quarter debt issuance on revolver borrowings and interest expense.
- Lease rollover, rent changes, and occupancy—especially the 205,000-square-foot tenant vacancy and office occupancy of 87.9% at quarter-end.
- Whether proposed property dispositions and the discretionary $200 million equity program are completed, and their impact on leverage and per-share results.
- Development and redevelopment spending, timing, leasing progress, and the related commitments; assess FFO alongside recurring capital and tenant-improvement requirements.