Time to Raise Dividends, Kilroy? (Part 2/2)


Click here to read Part 1

Kilroy Realty Corporation (NYSE:KRC) has certainly demonstrated superior financial performance than other REITs in the office segment. They have surpassed their peers in all of the key metrics that increase dividends, except for dividend growth. The fact that the company’s dividend has yet to grow is not a bad sign; in fact, it is quite the opposite. It can be an opportunity.

The company’s second quarter year over year results are favorable. They have increased revenues twice as fast as its competition. In addition, internal growth, expressed by the same store net operating income, increased by an impressive five percent. The industry sector average is only two percent. They will discuss their third quarter results next Thursday, October 28.

Kilroy has displayed an extremely impressive dividend disbursement history. The company has been trading publicly since 1997, and to date have yet to miss a single quarterly dividend payment. Their only dividend decrease occurred in May of 2009, and has maintained the same $0.35 since that time.

chart02The business currently enjoys a high level of performance. Combine that with the robustness of their target region, the west coast market, it is clear that Kilroy should raise their dividend rate. In addition, the company needs to significantly improve their meager two percent dividend yield because it is less than half of the sector median of 4.1 percent.

Due to the fact that Kilroy’s valuation is high when compared to their competition, a dividend increase should lead to a timid to mild increase in the yield performance. The company’s price-to-FFO of 20x places their valuation in the bracket of Manhattan centered REITs. It is certainly one of the highest ratios in the office sector for REITs. The sector currently reports a price-to-FFO of 14x. It will take a major increase in order to position this stock in the high yielding category.

Regarding leverage, Kilroy has a total debt to total capitalization ratio of 27 percent. The sector average is 43 percent. There is certainly room for additional growth; however, the company may decide to stay conservative in order to maintain their investment grade by both Moody’s and Standard and Poor’s from 2010.

In conclusion, all of the indicators we have analyzed lead us to believe that the company should raise its dividends in the short term.

Important notes about the first chart:
Given the differences in criteria among companies, we make best efforts to use comparable figures.
Occupancy and Total debt to total capitalization value are the actual percentages (not growth).
FFO figure used by company to track their performance; criteria may vary from company to company. We’re using AFFO in this case.
Dividend per share = Forward dividend per share.
Dividend payout ratio = Forward dividend divided by AFFO.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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