Kilroy Realty Corporation (KRC) — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Kilroy is a REIT focused on office, life science and mixed-use properties in California, Seattle and Austin. Figures below are consolidated and generally in U.S. dollars.
Business context and portfolio
- At quarter-end, the stabilized office portfolio comprised 120 buildings and 16.25 million rentable square feet, with 90.8% economic occupancy and 92.6% leased. Three stabilized residential properties contained 1,001 units, averaging 93.6% occupancy.
- Office occupancy was 90.8% at September 30, down from 91.4% at June 30. Average Q3 occupancy was 91.1%, versus 91.7% a year earlier.
- Four development and redevelopment projects entered the stabilized portfolio during the first nine months. The company also had three development projects and one redevelopment project in process, plus eight future development sites.
Financial performance and liquidity
- Revenue: Q3 total revenue was $276.0 million, up 18.8% year over year; nine-month revenue was $812.6 million, up 17.1%.
- Net income and EPS: Q3 net income was $86.7 million versus $53.5 million; income available to common stockholders was $79.8 million, or $0.68 per diluted share, versus $47.0 million, or $0.40. Nine-month net income was $200.0 million versus $603.8 million, and diluted EPS was $1.53 versus $4.96. The prior-year comparison includes a $457.8 million property-sale gain, compared with $17.3 million in 2022.
- Operating performance: Q3 net operating income (NOI, a non-GAAP supplemental measure) increased 17.6% to $194.7 million; nine-month NOI increased 17.0% to $581.0 million. Same-store NOI increased 2.2% in Q3 and 4.9% year to date. Management attributed growth to development and acquisition contributions, higher rents and tenant reimbursements, and increased parking activity; higher property expenses partly offset the gains.
- Funds from operations: FFO was $139.7 million in Q3 versus $116.0 million, and $416.8 million for nine months versus $336.8 million. FFO is non-GAAP and should not be treated as a substitute for net income or cash flow.
- Cash flow: Nine-month operating cash flow was $484.2 million, up 18.8%. Investing activities used $406.9 million, including $334.7 million for development and redevelopment and $65.5 million for operating-property and other capital expenditures. Financing activities used $241.5 million, including $183.8 million of dividends and distributions. Cash and restricted cash totaled $263.0 million at period-end, down from $427.1 million at year-end 2021.
- Debt and liquidity: Net debt carrying value was $4.07 billion; gross principal was $4.09 billion. Debt was 45.2% of total market capitalization. At September 30, all debt was fixed-rate, with a 3.7% stated weighted-average rate; the $1.1 billion revolver was undrawn. Cash and cash equivalents were $250.0 million. Management said available sources were expected to meet projected needs for the next 12 months, subject to financing and market conditions. The company reported compliance with debt covenants.
- Dividends: The quarterly dividend increased 3.8% to $0.54 per share/unit. The corresponding $64.3 million payment was made October 12, 2022.
Material changes, outlook and risks
- Revenue growth reflected additional contribution from development projects placed in service and acquired properties, as well as same-store growth. Q3 same-store revenue rose 4.4%, while related property expenses rose 9.9%, limiting same-store NOI growth.
- Leasing commenced in Q3 included 349,682 square feet; second-generation leases showed 7.5% growth in cash rents and 23.3% growth in GAAP rents. However, retention was 58.6% for the quarter and 30.2% year to date. Approximately 1.2 million square feet, or 7.2% of stabilized portfolio area, was available for sublease, primarily in the San Francisco Bay Area.
- Management reported weighted-average cash rents about 10–15% below current average market rents, but cautioned that occupancy, leasing volume and rent outcomes depend on office-return patterns, tenant demand and market conditions. No specific full-year financial guidance is provided in the supplied filing text.
- After quarter-end, the Operating Partnership entered a $400 million unsecured term loan facility and drew $200 million. The variable-rate loan is currently priced at one-month adjusted SOFR plus 95 basis points, matures in October 2024 and has two 12-month extension options. The revolver’s borrowing-rate option was amended from LIBOR to SOFR.
- Development investment remained substantial: estimated total investment across eight in-process projects was $2.43 billion, with $756 million of committed investment remaining at quarter-end. Management estimated $79–$102 million of remaining 2022 spend on these projects, plus up to $30 million for potential projects commencing construction.
- Key disclosed risks include inflation-driven operating and construction costs, higher interest rates and refinancing costs, weaker office demand or tenant credit, vacancies and sublease competition, construction delays or cost overruns, capital-market access and potential declines in property values. The company had accrued approximately $81 million for environmental remediation at development sites and disclosed approximately $620.2 million of commitments for contracts and executed leases, excluding ground leases.
- The filing identifies ongoing DIRECTV litigation over claimed lease contraction rights; the company disputes the claim and intends to defend it. Separately, it stated that it was not party to legal proceedings it believed could have a material adverse effect.
Important facts for investors to verify
- Whether occupancy, retention and sublease availability improve, particularly in the San Francisco Bay Area and Greater Los Angeles.
- Execution, leasing, remaining costs and timing of the development pipeline, including inflation and environmental-remediation exposure.
- Effects of the post-quarter $200 million variable-rate term-loan draw, future rates and debt maturities beginning in December 2024.
- Whether operating cash flow and financing access continue to support development spending and the dividend.
- Updates on DIRECTV litigation and any changes to the company’s $81 million remediation estimate or other commitments.