Kilroy Realty Corporation (NYSE:KRC) -- Guidance for 2010 is Overly Optimistic
Kilroy Realty Corporation (NYSE:KRC) is a real estate investment trust (REIT) that operates in Southern California. It’s recently reported earnings and, according to Dan Amoss, the guidance for 2010 appears to be overly optimistic.
Amoss, Agora Financial’s expert on distressed companies, provides his latest scoop on KRC:
“Kilroy Realty (NYSE:KRC) reported first quarter funds from operations (FFO) of 57 cents per share. This is down from 82 cents per share in the first quarter of 2009 — mostly because KRC’s shares outstanding have grown by 58% in just the past 12 months.
“Kilroy management has guided for a range of $2.07 – $2.22 per share in 2010 FFO. So KRC now trades for roughly 16 times 2010 FFO. Inverting this multiple translates into a 6% FFO yield — the dividend yield that KRC could theoretically afford to pay in 2010 if its guidance is accurate and rental and economic conditions in California don’t deteriorate at a faster rate than expected.
“I think this 2010 guidance is optimistic. It assumes average 2010 occupancy of 85% and yearend 2010 occupancy of 87%. Compare this to Kilroy’s occupancy rate as of March 31: 82.8%.
“What’s more, the declines on new and renewed leases are down sharply. In the first quarter, cash rents on new leases were down roughly 20% year-over-year. And Kilroy’s current portfolio of leases — the ones signed during the rent bubble era — will roll off into lower rents over the next few years. Kilroy management estimates that its existing leases are 5-10% above the market on a cash basis. And the average market rent will keep falling from here, because California is a glut of office and industrial space.
“Analysts covering KRC have fallen in love with the idea of Kilroy as an acquisition vehicle — an acquisition vehicle that, by the way, pays its executives a king’s ransom in bonuses and stock options for mediocre performance.”
At its current price level, Amoss finds Kilroy Realty overvalued. Bullish analysts have assigned the company an unrealistic premium over net asset value compared to most REITs that grow by acquiring more property. To keep your finger on the pulse of Kilroy, and companies like it, subscribe to Amoss’ research newsletter, the Strategic Short Report. It’s available through the Agora Financial reports page, which can be found here.
[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]