Kilroy Realty Corp. (KRC)
Q1 2009 Earnings Call
April 28, 2009: 2:00 pm ET
Richard Moran - Executive Vice President & Chief Financial Officer
Jeff Hawken - Chief Operating Officer
Tyler Rose - Treasurer
Heidi Roth - Controller
Dave AuBuchon - R.W. Baird
Mark Montana - Citi
Dave Rogers - RBC Capital Markets
Michael Knott - Green Street Advisors
Previous Statements by KRC
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I’d now like to turn the presentation over to your host for today’s call, Mr. Richard Moran, Executive Vice President and Chief Financial Officer. Please proceed.
Thank you very much and good morning everyone. Thank you for joining us. With me today are Jeff Hawken, our COO; Tyler Rose, our Treasurer and Heidi Roth, our Controller. John Kilroy isn’t able to join us today, because his recovery from surgery to fix an old athletic injury is taking a bit longer than expected. He plans to be back in the office soon.
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 and in the supplemental. This call is being telecast live on our website and will be available for replay for the next 10 days both by phone and over the internet. Our press release and supplemental package have been filed on a 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 our key markets. I’ll add financial highlights and updated earnings guidance for 2009 and then we’ll be happy to take your questions. Jeff.
Thanks Dick. Hello everyone. Thank for joining us. Let me start with a brief review of general market conditions. As you all know, the difficult credit markets and recessionary business conditions have created a challenging leasing environment. Perspective tenants continue to look, but are extremely cautious about committing to new space and lease discussions remain protracted.
Existing tenants, depending on their individual business circumstances are generally extending path, sinking to shrink their overall real estate footprint or in some cases choosing to relocate and everyone is negotiating very hard. We are aggressively competing for new lease opportunities and are using our high quality and well located assets to the best competitive advantage.
Unfortunately, we started the New Year with roughly half of our 2009 expirations of about 2 million square pre-leased. During the first quarter, we reduced that figure by another 250,000 square feet and for the leases that were signed in the first quarter rents were up 15% on a cash basis and 24% on a GAAP basis.
Nonetheless, our occupancy rates slipped 1.5 points during the first quarter, as Sony and two industrial tenants moved out of their buildings. Looking ahead, we know that Boeing will move out of a 113,000 square feet in Anaheim in the second quarter and Epicor will not renew a 173,000 square feet in Sorrento Mesa that expires in the third quarter.
In addition, Accredited Home Lenders which leases 182,000 square feet has expressed an interest in negotiating a reduction in the space that occupies in San Diego. We are in current discussions with them, but have no resolution at this point.
Re-leasing our vacant space is clearly our number one priority. With existing tenants we’re using a range of incentives, including flexibility in renewal rents, lease periods, tenant improvement packages and other terms to improve our retention rate.
Our larger vacancies in newly developed properties, we’re spending considerable time and effort identifying viable prospects, understanding their individual real estate needs and shaping proposals to suit them. Despite all the difficulties in today’s market, we have some clear advantages in what is going to be difficult leasing competition throughout the year.
They include top quality properties and amenities, highly desirable locations, a strong reputation of responsive tenant service and a financially sound and stable organization. We are capitalized on all these assets in our marketing efforts.
We also have an extensive track record and a long term commitment in our Southern California markets that major businesses with serious plans to expand here find compelling. We represent a real estate partner with both development expertise and the available or end resources to support long term growth plans. Even in today’s constrained economic circumstances that give us traction with perspective tenants.
In addition to leasing, our other key priority this year is to maintain financial strength and flexibility, both to see us through today’s challenging market conditions and to ensure we’re prepared for emerging opportunities. As an overwriting business philosophy, we have always emphasized liquidity, disciplined cost control and conservative leverage in all of our financial decisions; that will not change.
This past quarter we successfully negotiated new terms with our existing lender for the only loan in our debt structure maturing this year. Dick will give you details of the transaction, but I mentioned it here because I think it’s indicative of the strong relationships we have with the financial community.
With that, let’s move through a quick recap of individual submarket conditions. In Del Mar, where KRC is the dominant office landlord with approximately two-thirds of top tier Class A product, current direct vacancy is approximately 20.2% and total vacancy is 21.7%. Our stabilized properties in Del Mar are 92% occupied.