Kilroy Realty Corporation (KRC)

KRC 
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Kilroy Realty Corp. (KRC)

Q4 2008 Earnings Call

January 27, 2009 2:00 pm ET

Executives

Richard Moran - EVP and CFO

Jeffrey Hawken - EVP and COO

Analysts

Irvine Budman - Citi

Lou Taylor - Deutsche Bank

David Aubuchon - Baird

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Quarter Four 2008 Kilroy Realty Corp. Earnings Conference Call. My name is Michele and I’ll be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Richard Moran, Chief Financial Officer. Please proceed sir.

Richard Moran

Thank you very much and good morning everyone. Thanks for joining us. With me today are Jeff Hawken, our Chief Operating Officer; Tyler Rose, our Treasurer and Heidi Roth, our Controller. Unfortunately, John Kilroy woke up ill this morning and won’t be able to be with us today.

At the outset, I need to say that some of the information we will be discussing this morning is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information in this call into the supplemental.

This call is being telecast live on our website and will be available for replay for the next 10 days by phone and over the Internet. Our press release and supplemental package have been filed on Form 8-K with the SEC, and both are also available on our website.

Jeff will start the call with an overview of the quarter and the year and then review our key markets. I’ll add financial highlights and our 2009 initial earnings guidance, and then we'll be happy to take your questions. Jeff?

Jeffrey Hawken

Thanks, Dick. Hello, everyone. Thanks for joining us. Considering the turmoil in the economy and the credit markets during 2008, KRC had a good year in many respects.

We capitalized on our portfolio strengths including location and asset quality to deliver strong, pleasing results. For the year, we executed new or renewing leases on more than 2.1 million square feet of space. That’s more than a 25% increase over 2007.

As part of that leasing effort, we made solid progress on our 2009 expirations, reducing by almost half to roughly 2 million square feet of space that was set to expire in 2009. In total, on the 2.1 million square feet of leasing, rents were up 25% on a GAAP basis and 9% on a cash basis.

In a world of deteriorating credit capacity, we maintain our longstanding strategy of financial strength and conservative leverage. Throughout the year, our balance sheet emphasized simplicity, transparency and liquidity. Where necessary we also acted decisively to address changing economic conditions and their impact on our operations.

In the fourth quarter, we took the painful but prudent step of decreasing our headcount by about 5%. With all that said, however, it is clear that continued severe credit market constraints and weakening national and regional economics are now translating to a more difficult period for commercial real estate in Southern California. It is evident in our operating results and our recent market experience.

Year-end occupancy in our stabilized portfolio was 89%, down nearly five percentage points from beginning of the year. More anecdotally, our lease negotiations continue to be slow and protracted.

Businesses are demonstrating extreme caution in taking our new real estate obligations. And while none of our major tenants have exhibited credit problems or announced major layoffs, we received a few calls from smaller tenants asking for some rent relief.

It is also evident in the employment picture here in California. County unemployment rates continued to move up through December with Los Angeles 9.5%, Orange County at 6.5% and San Diego with 7.4%. But as we said last quarter, this is the point in the real estate cycle when patience, quality assets, solid execution and financial strength are rewarded.

At KRC, we’re approaching 2009 with our typical relentless determination. Our top priority this year will be to outperform the market once again in leasing. We have high quality properties in some of Southern California's strongest submarkets, and we will use those advantages to capture demand as it materializes, as well as to strengthen and possibly expand our relationship with existing tenants.

In development, having completed construction last quarter on our one committed development project, we will focus our lease – our efforts on enhancing the entitlement rights within our land pipeline, reaching for the broadest and the most flexible range of potential uses to capture opportunities as they emerge.

Finally, we will continue to emphasize liquidity, disciplined cost control, and conservative leverage in all of our financial decisions. We want plenty of dry powder as the business cycle evolves, especially given high uncertainty associated with current economic conditions.

With that overview, let's move through a quick recap of individual submarket conditions starting with San Diego.

Our Central County submarkets here are currently registering active demand of approximately 4.6 million square feet according to CB Richard Ellis. This is down from prior quarters as a few large leases were executed in San Diego in the fourth quarter.

In Del Mar, where KRC is dominant office landlord with approximately two-thirds of the top tier Class A product, current direct vacancy is approximately 17.1% and total vacancy is 19.3%. Our stabilized properties in Del Mar are 92% occupied.

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