Kilroy Realty Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 10, 2015. This combined filing covers Kilroy Realty Corporation (a REIT) and its operating partnership. The business owns, develops, acquires and manages primarily Class A office properties concentrated in coastal California and greater Seattle.
Business context and portfolio
- At year-end, the stabilized portfolio comprised 111 office buildings, 14.1 million rentable square feet and 526 tenants; occupancy was 94.4%, versus 93.4% a year earlier.
- During 2014, the company completed and stabilized two development projects totaling about 928,000 square feet, both fully leased, and stabilized its 360 Third Street redevelopment at 99.2% occupancy.
- Six projects totaling 1.732 million square feet were under construction and 82% leased; estimated total investment was approximately $1.0 billion. Nine future development sites represented potential capacity for more than 3.0 million square feet.
Financial performance and liquidity
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Revenue from continuing operations | $521.7 million | $457.1 million | Up 14.1% |
| Net operating income (NOI) | $372.9 million | $319.7 million | Up 16.6%; NOI was about 71.5% of revenue |
| Income from continuing operations | $59.3 million | $14.9 million | Up $44.4 million |
| Net income available to common stockholders | $167.0 million; $1.99 per basic share | $30.6 million; $0.37 per share | Includes substantial disposition gains |
| NAREIT funds from operations (FFO) | $250.7 million | $218.6 million | Up 14.7%; supplemental, non-GAAP measure |
| Operating cash flow | $245.3 million | $240.6 million | Up 1.9% |
| Investing cash flow | $(501.4) million | $(506.5) million | Major uses included development and acquisitions |
| Financing cash flow | $244.6 million | $284.6 million | Lower equity proceeds, partly offset by debt issuance |
Year-end total assets were $5.63 billion and total debt was approximately $2.47 billion. Debt was 28.2% of market capitalization; debt plus preferred equity was 30.4%. Approximately 86.6% of debt was fixed-rate, and the weighted-average stated debt rate was 4.4% (GAAP effective rate 4.3%). Cash and cash equivalents were $23.8 million, restricted cash $75.2 million, and undrawn capacity under the $600 million revolver was $460 million. The revolver matures in July 2019.
Common dividends remained $1.40 per share for the year ($0.35 quarterly); preferred dividends were $13.25 million. The company reported compliance with debt covenants. Its $325 million unsecured notes due November 2015 were the largest near-term maturity; total 2015 scheduled principal payments were approximately $395.1 million.
Material changes and unusual items
- Continuing revenue growth reflected acquisitions, stabilized development projects and same-store improvement. Same-store NOI increased 6.3%; stabilized development and redevelopment NOI rose $22.4 million.
- Net income included $121.9 million of gains on dispositions reported in discontinued operations, compared with $12.3 million in 2013. The 2014 result therefore should not be read as recurring operating earnings.
- The company sold 17 office buildings and one land parcel in 2014 for gross proceeds of about $432.6 million. A further land parcel sold in January 2015 for $26.0 million.
- The company issued $400 million of 4.25% senior notes due 2029, repaid $83 million of notes at maturity, and repaid the remaining $135.5 million principal of exchangeable notes at maturity. The exchangeable-note settlement resulted in net issuance of 1,575,981 common shares after capped-call settlements.
- Common shares outstanding increased from 82.2 million to 86.3 million. The company raised approximately $103.1 million net through at-the-market share sales in 2014.
- NOI growth and higher revenues were partly offset by higher property costs, real estate taxes, general and administrative expense, and depreciation. Interest expense fell to $67.6 million from $75.9 million, partly because more interest was capitalized to development projects.
Outlook, management commentary and risks
- Management described West Coast markets as strengthening, with particularly strong demand and rent growth in the San Francisco Bay Area and improving conditions in Seattle, San Diego and Los Angeles. It reported weighted-average portfolio cash rents about 10% below current market rents, but cautioned that future renewals and re-leasing rates are uncertain.
- For 2015, management anticipated dispositions of approximately $250–$400 million of assets. It expected development spending of $50–$75 million beyond $465 million of already committed development costs, subject to market conditions and project progress. No formal earnings, FFO or occupancy guidance is provided in the filing text.
- Management said it believed it could maintain common distributions at 2014 levels in 2015, while noting there was no assurance. REIT distribution requirements and debt covenants constrain financial flexibility.
- Key exposures include geographic concentration in California and Seattle; technology and media tenants contributed 45% of annualized base rent, and the 15 largest tenants contributed 35.3%. Leases covering 8.7% of leased space were scheduled to expire in 2015 and 6.0% in 2016.
- Other risks include development cost, timing and lease-up; refinancing and interest-rate exposure; earthquakes and other natural disasters; environmental liabilities; competition; tenant defaults; and reliance on capital markets. The company had accrued $15.5 million for environmental remediation and stated that further costs could arise. It reported no litigation expected to have a material adverse effect.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Separate recurring operating performance from the $121.9 million of disposition gains; review FFO and its reconciliation to GAAP results.
- Assess refinancing plans and funding sources for the $325 million 2015 notes and other scheduled 2015 principal payments.
- Track delivery, total cost, leasing and stabilization of the six-project development pipeline and the additional expected 2015 spending.
- Monitor lease expirations, tenant retention, leasing costs and whether rents actually achieve management’s estimated market-rate premium.
- Review tenant and geographic concentration, environmental remediation estimates, and any changes in variable-rate debt, liquidity or covenant headroom.
- Confirm the sustainability of distributions against operating cash flow, REIT requirements, development commitments and debt service needs.