kilroy presentation

REIT Valuation: Intrinsic Value $68.2 > $65.6 Current Price

Premium 4.0%

Dr. Lawrence Souza – Finance 372 – Spring 2016Jay Deng

Morgan FoldesiSavannah Cotten

BUY

• Kilroy Realty Background

• Financial Analysis

• REIT Valuation

• Recommendation

Overview

Background

• Kilroy Realty Corp. was founded in 1947 by John Beresford “Jim” Kilroy• Total of more than 14 million square feet of commerical properties,

spanning from Seattle to San Diego

• Type: Public

• Traded as NYSE: KRC

• Industry: REIT - Office

• No. of employees: 232 (2015)

Source: Kilroy 2015 10-K

LeadershipJohn Kilroy, Jr.Chairman and CEO

Education: USCYears with Co: 49

Heidi R. RothExecutive VP & CAOEducation: USC

A. Robert ParatteExecutive VP LeasingEducation: UC Davis & USF

Jeffrey C. HawkenExecutive VP & COOEducation: USC

Tyler H. RoseExecutive VP & CFOEducation: University of Chicago & UC Berkeley

John T. FucciExecutive VP Asset Mgmt.Education: Cal Poly Pomona

Tyler H. RoseExecutive VP & CFO

Education: UC BerkleyYears with Co: 19

A. Robert ParatteExecutive VP Leasing

Education: USFYears with Co: 2

Jeffrey C. HawkenExecutive VP & COO

Education: USCYears with Co: 33

Heidi R. RothExecutive VP & CAO

Education: USCYears with Co: 19

John T. FucciExecutive VP Asset Mgmt.

Education: Cal PolyYears with Co: 19

Organizational Structure

Self administered and self-managed REIT. Business is ownership, development, acquisition and management of real estate assets, primarily class A, with an emphasis on office space on the West Coast.

Source: Kilroy 2015 10-K

Products and Services

• Acquires properties to create long term value• As well as does construction,

lease-up, land, and redevelopment• Comparative Advantages:• Market concentration• Key market, the West Coast,

has higher occupancy rates

Source: MarketRealist

S.W.O.T

Strengths:

● High barriers of market entry● Existing West Coast distribution● Experienced and skilled work force

Weaknesses:

● Low domestic and global diversification● Highly competitive market● Sensitive to Real Estate Cycle trends

Opportunities:

● Diversification of Real Estate Sectors● Expansion in Global Markets● Possible acquisitions

Threats:

● Rising cost of raw materials● Growing competition● Sharp rise in interest rates

Industry Overview

Rank Institution Name Market Cap (B)

1 Boston Properties (BXP) 19.7

2 SL Green Realty (SLG) 10.4

3 Alexandria Real Estate Equities (ARE) 6.8

4 Kilroy Realty (KRC) 5.9

5 Douglas Emmett (DEI) 4.7

Culture, Peers, and Industry

• Kilroy as a company is that is deicated to a culture of stainability, as well as maintaining innovation and developing a more dynamic workplace.

• Killroy’s major competitors in the office REIT sector are BXP, ARE, DEI, SLG, among others

• Similarities: focus in class A properties, the use of same tenant diversification strategy, and the seeking of long term lease.

• Differences: ARE, BXP, and DEI have presance in retail and residential properties, and Kilroy has a higher EBITDA margin.

Source: MarketRealist

Financial Ratios

Financial Ratio KRC BXP DEI Peer GroupIndustry Average Conditions

ROA 4.0 4.4 0.9 3.1 2.6 Good

ROE 7.5 10.1 3.0 6.9 5.3 Good

ROI 4.2 4.0 1.1 3.1 2.7 Excellent

Dividend Yield 2.2% 2.0% 2.7% 2.3% 2.6% Above Average

Dividend Payout 74.3% 190.0% 221.2% 161.8% 90.0% Below Average

Overall Good

Financial Ratios

Financial Ratio KRC BXP DEI Peer GroupIndustry Average Conditions

FFO 3.4 5.4 1.6 3.7 3.0 Average

FFO Multiple 19.8x 21.8x 18.4x 20.9x 14.0x Good

Debt-to-Equity 0.2x 1.0x 1.5x 0.9x 0.9x Below Average

Debt-to-Total Market Cap 37.6% 46.8% 75.9% 53.4% 52.7% Average

Cash Flow to Debt 12.1% 6.7% 7.5% 8.8% 8.7% Above Average

Overall Average

Scenario Analysis

• Upwards Trend Line

• Rising RSI and MACD• Relative Strength Index &

Moving Average Convergence Divergence

Upwards TrendSource: Stockcharts

Target Price $80.0 > $65.6 Current PricePremium 22.0%

Valuation: Perpetuity ModelREIT Value $53.7 < $65.6 Current Price

Premium 18.1%

CAPM ModelRisk Free Rate 2%

Beta 1.1

Expected Market Return 8%

R 8.3%

2015 2016E 2017EFFO $3.4 $3.8 $4.1

R REIT Value Range

6% $62.67 High

7% $53.71 Medium

8% $47.0 Low

Source: Nasdeq, Morningstar, S&P

Valuation: Gordon Growth ModelREIT Value $75.2 > $65.6 Current Price

Premium 14.6%

CAPM ModelRisk Free Rate 2.0%

Beta 1.1

Expected Market Return 8.0%

R 8.3%

2015 2016E 2017E gFFO $3.4 $3.8 $4.1 2%

1 2 3 Range

6 $75.2 $94.0 $125.3 High

7 $62.7 $75.2 $94.0 Medium

8 $53.7 $62.7 $75.2 Low

Range Low Medium High

Rg

Source: Nasdaq, S&P

Valuation: Multiple ApproachREIT Value $71.4 > $65.6 Current Price

Premium 8.8%

FFO in 2016

$3.8

KRC BXP DEI

2015 19.8 21.8 18.4

FFO Multiple REIT Value Range

21x $79.0 Low

19x $71.4 Medium

17x $63.9 High

Competitors

FFO Multiple

Source: Morningstar, Nasdaq

Valuation: DCF ModelREIT Value $67.4 > $65.6 Current Price

Premium 2.7%

Weighted Debt 47%

Weighted Equity 53%

R Debt 4%

R Equity 8.3%

WACC 6.3%CAPM 8.3%

2015 2016g=10.9

2017g=8.0

2018g=6.0

2019g=4.0

2020g=2.0 TV

FFO $ $3.4 $3.8 $4.1 $4.3 $4.5 $4.6 $50.7

Corporation Value $67.4

CAPM REIT Value Range

7% $74.3 High

8.3% $67.4 Medium

9% $62.0 Low long-term cash flow growth rate (g’)= 2%

Source: Morningstar, MarketWatch

Valuation: Net Asset ValueREIT Value $57.2 < $65.6 Current Price

Franchise Value 12.8%

NOI: 422.0 Million

Shares Outstanding: 92.3 Million

CAPM: 8.3%

R REIT Value Range

6% $76.2 Low

7% $65.3 Medium

8% $57.2 High

Source: Morningstar, Nasdaq

Weighted REIT Valuation

ModelREIT Value Weight

Perpetuity $53.7 5% 5% 5%Gordon Growth $75.2 5% 10% 15%

Multiple $71.4 30% 30% 25%DCF $67.4 55% 50% 50%NAV $57.2 5% 5% 5%

Intrinsic Value by Weights $67.8 $68.2 $68.4

REIT Value $71.4 > $65.6 Current Price Premium 8.8%

BUY

Recommendation

Intrinsic Value $68.2 > $65.6 Current PricePremium 4.0%

BUYTrades:Buy Call OptionsWrite Put OptionsBuy KRC Stock on MarginBuy Office REIT ETFs on MarginBuy Call Options on Office REIT ETFsWrite Put Options on Office REIT ETFsBuy Call Options on Office REIT IndiciesWrite Put Options on Office REIT Indicies Total: 8