Kilroy Realty Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Kilroy is a REIT focused on office, life science and mixed-use properties, primarily in California, Seattle and Austin. The filing combines Kilroy Realty Corporation and its operating partnership; the operating partnership conducts substantially all operations.
Financial and operating performance
- Revenue: $278.6 million, down 4.9% from $292.8 million. Rental income fell 5.2% to $274.9 million.
- Profit: Net income was $55.7 million, down 14.6%; net income available to common stockholders was $49.9 million, or $0.42 per diluted share, versus $56.6 million, or $0.48, a year earlier.
- Property operations: Net operating income (NOI), a non-GAAP supplemental measure, was $189.3 million, down 9.2%. Same-store NOI declined 9.4%, mainly from lower rental revenue, tenant credit and lease-expiration impacts, and higher property expenses. Approximate NOI margin was 68.0%, compared with 71.2% in Q1 2023.
- FFO: Nareit Funds From Operations was $133.7 million, down from $146.0 million. FFO is non-GAAP and does not reflect capital expenditures or leasing costs.
- Cash flow: Operating cash flow was $167.9 million, down 7.8% from $182.1 million. Investing activities provided $76.8 million, primarily reflecting $178.3 million of certificate-of-deposit maturities; financing activities provided $100.1 million. Cash increased $344.8 million to $855.0 million.
- Margins and costs: Reported interest expense rose 51.4% to $38.9 million, while gross interest expense before capitalized interest rose 35.2% to $58.7 million. General and administrative expense fell 26.6% to $17.6 million, largely due to lower share-based compensation.
- Balance sheet and liquidity: Total assets were $11.6 billion and total debt was $5.12 billion net of discounts and financing costs ($5.16 billion principal). Cash was $855.0 million, with $78.3 million of certificates of deposit and $1.1 billion of revolving-credit capacity available. Debt equaled 54.5% of total market capitalization; the company reported compliance with debt covenants.
- Dividend: A quarterly dividend of $0.54 per share/unit was declared. Cash dividends and distributions paid in April totaled $64.0 million.
Material changes and portfolio indicators
- Stabilized portfolio economic occupancy was 84.2% at quarter-end, down from 85.0% at December 31, 2023; average occupancy was 84.5%, versus 89.9% in Q1 2023. Residential average occupancy was 93.1%.
- Management cited a $12.7 million decline in same-store revenue from lease expirations, partly offset by $3.9 million from new and renewed leases at higher rates. It also cited lower non-recurring revenue, including tenant credit-related adjustments and prior-year tenant restoration fees.
- Leasing results were mixed: commenced second-generation leases showed a 4.3% increase in GAAP rents but a 7.1% decrease in cash rents; executed second-generation leases showed an 8.6% increase in GAAP rents and a 2.9% decrease in cash rents. The reported retention rate on executed leases was 30.9%.
- Approximately 2.7 million square feet, or 15.8% of stabilized portfolio space, was available; approximately 1.6 million square feet of occupied space was available for sublease, primarily in the San Francisco Bay Area. Leases covering 1.4 million square feet, or 8.4% of annualized base rental revenue, expire in the remainder of 2024 and 2025.
Outlook, capital activity and risks
- Management expects to spend $150 million to $250 million on development projects during the remainder of 2024. This is a spending estimate, not earnings guidance; timing and cost may vary with construction progress, leasing, inflation and market conditions.
- One development project was under construction: Kilroy Oyster Point Phase 2, a planned 875,000-square-foot project with an estimated total investment of $1.0 billion. Two redevelopment projects totaling about 100,000 square feet were also under construction. The future pipeline includes eight sites with an estimated $1.4 billion cost basis and potential for more than 6.0 million square feet, subject to market conditions and entitlements.
- In January, the operating partnership issued $400 million of 6.25% senior notes due 2036. In March, it extended the $1.1 billion revolving facility maturity to July 2028, repaid $200 million of a term loan and extended $200 million of remaining term-loan principal to October 2025. The $120 million term loan due October 2024 has two 12-month extension options; the next stated note maturity is $403.7 million in December 2024.
- The company launched a new $500 million ATM equity program and authorized a new $500 million share repurchase program; neither had been used for sales or program repurchases by March 31. Reported share withholding for taxes on equity awards is separate from program repurchases.
- Key risks include office demand and hybrid work, tenant defaults or non-renewals, sublease competition, leasing and occupancy weakness, higher interest rates and refinancing costs, property-value declines, development delays or cost overruns, and limited capital-market access. The company reported $293.8 million of operating, development and redevelopment contractual commitments and $73.7 million of accrued environmental remediation liabilities.
- CEO John Kilroy retired in January and remained Board Chair through his current term; Angela Aman became CEO on January 22. Management said physical occupancy increased during the quarter, but economic uncertainty and hybrid work continued to affect leasing timing and volume.
Important facts for investors to verify
- Track occupancy, lease commencements, renewal retention and cash rent changes, especially in Los Angeles and the San Francisco Bay Area.
- Review the 2024 and 2025 debt maturities, extension-option conditions, refinancing plans and borrowing costs.
- Compare actual development spending, leasing progress and project economics with the $150 million to $250 million remainder-of-2024 estimate.
- Monitor collections and tenant credit exposure, including the reasons for rental-income collectability adjustments, as well as the concentration of revenue among major tenants.
- Assess whether operating cash flow and available liquidity continue to support dividends, development commitments and debt service; the filing says future financing availability is not assured.
- Follow the timing and assumptions behind environmental remediation liabilities and other contractual commitments.