Kilroy Realty Corporation is a US$7.4b mid-cap, real estate investment trust (REIT) based in Los Angeles, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. In this commentary, I’ll take you through some of the things I look at when assessing KRC.
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of KRC’s daily operations. For KRC, its FFO of US$347m makes up 67% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether KRC has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take KRC to pay off its debt using its income from its main business activities, and gives us an insight into KRC’s ability to service its borrowings. With a ratio of 15%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take KRC 6.76 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
I also look at KRC’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 5.25x, it’s safe to say KRC is generating an appropriate amount of cash from its borrowings.
In terms of valuing KRC, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In KRC’s case its P/FFO is 21.33x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
In this article, I’ve taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Kilroy Realty can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:
- Future Outlook: What are well-informed industry analysts predicting for KRC’s future growth? Take a look at our free research report of analyst consensus for KRC’s outlook.
- Valuation: What is KRC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether KRC is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.