Kilroy Realty: Standing Tall with Highest Earnings Margin



Cost control

Kilroy Realty’s (KRC) consolidated cost was $398.9 million for fiscal 2014, up by 8.4% over 2013. This came on the back of a 16.3% rise in total cost in 2013. Depreciation and amortization comprised 50.7% of the total cost, followed by property operating expenses at 26%, G&A (general and administrative) expenses at 11.6%, and real estate taxes at 11.3%.

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Property operating expenses

Property operating expenses increased by 6.1% to $103.6 million in 2014 over the previous year. The rise in operating expenses was mainly due to higher expenses incurred on repairs and maintenance, utilities, security, parking, other services, and property damage settlements. Higher real estate taxes due to higher assessed rates and rising tax rates also contributed to the rise in operating expenses.

The rise in G&A expenses by 16.4% to $46.2 million in 2014 was due to higher payroll costs and other professional services. Depreciation and amortization expenses increased by 7.2% to $202.4 million in 2014 over 2013. The rise in depreciation expenses in 2014 was primarily due to more properties being acquired during the year.

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Highest earnings margin

Kilroy Realty (KRC) recorded an EBITDA (earnings before interest, tax, depreciation, and amortization) margin of 62.7% in 2014, compared with 63.6% in 2013. This was the lowest EBITDA margin recorded by the company in the last four years. Despite the decline in the EBITDA margin in 2014, the company has consistently been experiencing higher EBITDA margins in the last ten years. The company’s EBITDA margin has been higher due to strong revenue growth and strict control over expenses.

The EBITDA margin recorded by the company is much higher than the industry average of 52.3% and those recorded by its peers. SL Green Realty (SLG) reported an EBITDA margin of 60.2%, followed by Boston Properties (BXP) at 59.7% and Alexandria Real Estate Equities (ARE) at 55.4%. The SPDR Dow Jones REIT ETF (RWR) invests ~1% of its portfolio in Kilroy Realty. In the next part of this series, we’ll discuss Kilroy Realty’s funds from operations.


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