kilroy presentation
TRANSCRIPT
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