Kilroy Realty Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with fiscal 2020 unless stated otherwise. This annual filing covers the full year, not standalone fourth-quarter results. Kilroy is a REIT focused on office, life science and mixed-use properties, primarily in California, with portfolios in Greater Seattle and Austin. The Operating Partnership conducts substantially all operations.
Business and portfolio
- At year-end, the stabilized office and life science portfolio comprised 120 buildings and 15.46 million rentable square feet; economic occupancy was 91.9% and leased percentage was 93.9%. Stabilized residential properties totaled 1,001 units, with 78.0% average occupancy in 2021.
- Technology tenants accounted for 56% of stabilized portfolio annualized base rent; the 15 largest tenants represented 47.4%. Four development projects totaling 1.11 million square feet and 193 residential units entered the stabilized portfolio during 2021.
Financial and operating results
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $955.0 million | $898.4 million |
| Net income | $658.9 million | $207.3 million |
| Net income available to common stockholders | $628.1 million | $187.1 million |
| Diluted earnings per share | $5.36 | $1.63 |
| Net Operating Income (non-GAAP) | $688.7 million | $642.2 million |
| Funds From Operations (non-GAAP) | $462.3 million | $433.4 million |
| Cash from operating activities | $516.4 million | $455.6 million |
Net income growth was driven principally by $463.1 million of gains on depreciable property sales, versus $35.5 million in 2020. FFO, which excludes property-sale gains, increased about 6.7%. Revenue was predominantly rental income (99.4% of revenue in 2021).
- Investing cash outflow was $747.9 million; financing cash outflow was $164.6 million. Cash and cash equivalents ended the year at $414.1 million, down from $732.0 million; cash plus restricted cash was $427.1 million.
- Aggregate debt principal was $4.10 billion, equal to 34.4% of market capitalization. All outstanding debt was fixed-rate at year-end; the weighted-average stated rate was 3.7%. Secured debt was $249.0 million. The $1.1 billion revolving facility was undrawn, and the company reported covenant compliance.
- Quarterly common dividends increased during 2021; declared dividends totaled $2.04 per share for the year versus $1.97 in 2020. The board retains discretion over future distributions.
Changes, outlook and management commentary
- Same-store NOI rose 4.4%; total NOI increased 7.2%, including contributions from development and acquisition properties and offsetting dispositions. Average stabilized office occupancy was 91.7% versus 92.6% in 2020; year-end occupancy improved to 91.9% from 91.2% a year earlier.
- Leases commenced during 2021 showed a 20.8% increase in GAAP rents and a 7.0% increase in cash rents, as reported for the relevant comparable leasing activity. Management said leasing tours and inquiries increased as restrictions eased, while acknowledging pandemic-related effects on leasing timing and volume.
- 2021 acquisitions totaled approximately $1.16 billion, including Austin’s Indeed Tower; three office buildings were sold for gross proceeds of approximately $1.12 billion. A $1.08 billion sale gain was deferred through a Section 1031 exchange. The company issued $450 million of 2.65% green notes due 2033 and redeemed $300 million of 3.80% notes early, recording a $12.2 million extinguishment loss.
- Management anticipated $200–$500 million of dispositions and $550–$650 million of development spending in 2022, plus approximately $120–$130 million for stabilized-property capital improvements, tenant improvements and leasing costs. These are expectations, not guarantees; the filing provides no earnings or FFO guidance.
- Development pipeline included projects under construction and in tenant-improvement phases, plus six future sites with estimated potential density exceeding 5.5 million square feet. Estimated future investment for those sites was $5–$7 billion, dependent on entitlements, market conditions and project scope.
Risks, contingencies and unusual items
- COVID-19, changes in office-space demand, tenant credit and renewals, construction costs and delays, and exposure to technology and life-science industries remain material risks. Approximately 1.4 million square feet, or 8.8% of stabilized portfolio space, was available for sublease, primarily in the San Francisco Bay Area. Leases for 5.8% and 11.1% of leased square footage were scheduled to expire in 2022 and 2023, respectively.
- The company recorded $75.2 million of environmental remediation liabilities for certain development sites; additional costs are possible but not reasonably estimable. Development commitments and other operating, lease and contractual obligations are substantial.
- DIRECTV’s successor sued over an alleged contraction of approximately 200,000 square feet at El Segundo properties. Kilroy disputes the tenant’s claim and intends to defend the case; the filing does not identify a probable loss amount.
- The filing reports audited financial statements with unqualified opinions and effective internal controls. The auditor identified revenue recognition timing for development properties and tenant improvements as a critical audit matter involving management judgment.
Investor verification priorities
- Separate recurring operating performance from large property-sale gains; review FFO, same-store NOI and cash generation alongside GAAP earnings.
- Track occupancy, sublease availability, lease expirations, tenant renewals and cash rent spreads, especially in San Francisco and among large technology tenants.
- Monitor development leasing, project budgets, completion dates and the planned 2022 capital and disposition programs, including the execution and tax treatment of any 1031 exchanges.
- Review debt maturities, interest costs, liquidity and covenant headroom, as well as the board’s decisions on distributions.
- Follow the DIRECTV litigation and environmental remediation estimates for any change in exposure or required spending.