The KRC Conference Call
Kilroy Realty Corporation (KRC) had their earnings conference call yesterday. You can read the full transcript at SeekingAlpha. The CEO, John Kilroy Jr., was conspicuously absent from the call. (SMART - I wouldn’t want that liability either!)
At the beginning of the call, COO John Hawken talked about the rental environment:
“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.”
Later in the call, CFO Richard Moran gave his assumptions for 2009 FFO Guidance of $3.05-$3.25:
“… let me outline some of the key assumptions that we’ve made in our guidance at this point. Given the uncertainties in the economy and the corollary uncertainty in our own market outlook, at this point, we simply assumed essentially flat average occupancy at 89.6% for the year. We’ve also assumed G&A cost of $34 million this year down from $38 million last year. That $34 million projection for this year includes amortization of prior year stock awards and the higher prices that were then prevalent.”
During the question and answer period, one analyst, David Aubuchon from Baird, called management on their BS. Here is the exchange:
David Aubuchon - Baird
Thanks. The 89.6% occupancy – that was in your guidance assumption, right, Dick?
Richard Moran
Yes.
David Aubuchon - Baird
Just given the comments that you’veall made at the start of this call, doesn’t that seem aggressive, certainly, relative to – you’ve already lost 25 bps from the Sony lease, and just the difficulties in the market, and how long the lease negotiations [inaudible] this year?
Richard Moran
I think that’s certainly a possibility that it is. We try and set stretch targets, and given the outlook, I suppose it would be fair to say, there’s probably somewhat more risk to the downside there than there is possible upside to it. Nevertheless, we thought long and hard about that, and for the moment at least that’s where we wanted to start.
David Aubuchon - Baird
Should we assume that that is the midpoint of the guidance, or they are just, like you said, calculating guidances is more difficult than just kind of simplifying into that?
Richard Moran
Sure. I think, the – my own guidance think there’s the midpoint is the midpoint right now. I think, you’ve identified the core risk to our guidance for this year though, that’s really, that’s it, there’s – the rest is noise.
Bravo Dave! It’s always nice to see an analyst depart from the usual softball questions. Like me, Dave know that KRC is in a world of hurt. It is not a POSSIBILITY that the numbers are aggressive - it’s a PROBABILITY!
This year leases representing $18,885,000 in annual rents (about 8% of their total portfolio) will EXPIRE. About $5M of that amount will occur in the first quarter alone. Knowing that, how can management honestly assume that leasing will just remain flat? Personally, I would characterize that as nothing more than blatant DECEPTION. CEO Kilroy was smart not to be on the call.
By the way, 2010 won’t be any better. Leases representing about $35,979,000 in annual rents will expire (about 15% of the total portfolio) in 2010.
January 28th, 2009 at 1:01 pm
An update:
Baird downgraded KRC to Neutral from Outperform today.