As a real estate investment trust (REIT) specializing in class A office and industrial real estate in California, Kilroy Realty
In the fourth quarter, Kilroy's sales increased 7% to $64 million, and its funds from operations (FFO) -- a measure of cash flow -- more than tripled to $27.3 million. Much of this improvement came from the reduction of a special compensation plan for the company's executives. For the year, sales improved 6%, and FFO jumped to $118 million from $63 million. The company also signed some leases in the El Segundo market with prime tenants such as Mattel
In the earnings call, management noted that "Our 2007 G&A (general and administrative) costs will include most of our first-year costs of both the 2006 and 2007 executive compensation plans." In other words, because the laws of accounting say so, some compensation expenses in 2006 will be pulled into 2007. Management estimates $0.31 per share in additional compensation costs in 2007. Thus, the company provided 2007 FFO guidance of $2.87-$3.03 per share, down from 2006 FFO of $3.48.
About 60% of the company's net operating income comes from Southern California markets in San Diego, Los Angeles, and Orange County. As a result, the company's properties are in some of the most attractive markets that have been prime beneficiaries of the real estate boom -- in the past four years the shares have more than quadrupled. The California economy and population continues to expand; according to management, California added 170,000 net new jobs in 2006 and has seen some rents escalate in the near-double digits.
Occupancy for stabilized properties ended the year at 95.8%, down slightly from the third quarter. Management noted that 95% is about as good as it gets, so much of the company's same-store improvement will have to come from rent escalation. However, management did estimate that their overall portfolio rent levels are 5%-10% below market level. This should provide a built-in gain when leases come up for renewal; in the fourth quarter, cash rents increased 5.9%.
Despite all the positive things about Kilroy -- great geography, great exposure to office property, prime tenants -- one has to wonder about the company's valuation. At roughly $86 per share, the company trades at nearly 30 times 2007's estimated FFO. Bidding wars for companies such as Equity Office Properties
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates comments, concerns, and complaints. The Motley Fool has a disclosure policy.