Kilroy Realty Corporation (KRC) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results cover Kilroy Realty Corporation and its operating partnership. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Kilroy is a REIT focused on Class A office, life science and mixed-use properties, primarily in California, Seattle and Austin. At quarter-end, its stabilized office portfolio comprised 121 buildings and 15.2 million rentable square feet, with 91.5% occupancy and 93.9% leased; its 1,001 residential units averaged 74.0% occupancy for the nine-month period.
Financial and operating highlights
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $232.3 | $228.3 | $694.0 | $669.1 |
| Net income | $53.5 | $54.1 | $603.8 | $123.8 |
| Net income available to common stockholders | $47.0 | $49.0 | $580.5 | $108.5 |
| Diluted earnings per share | $0.40 | $0.42 | $4.96 | $0.95 |
| Net operating income (NOI) | $165.6 | $163.1 | $496.7 | $478.3 |
| Funds from operations (FFO) | $116.0 | $117.4 | $336.8 | $320.7 |
- Q3 revenue rose 1.8% and NOI rose 1.6% year over year, while net income available to common stockholders declined 4.1%. Management attributed same-store NOI growth to higher rents, tenant reimbursements and termination fees, partly offset by lower occupancy and higher property costs.
- Nine-month revenue increased 3.7% and NOI increased 3.8%. GAAP net income increased sharply due principally to a $457.8 million gain on the sale of 1800 Owens Street; excluding that gain, the headline net income comparison is not representative of underlying operating growth. FFO, which excludes the gain, increased about 5.0%.
- Cash from operating activities was $407.6 million for the nine months, up 12.0% from $364.0 million. Investing activities used $637.1 million; financing activities used $232.1 million. Cash and restricted cash declined $461.7 million to $361.5 million, including $348.4 million in unrestricted cash.
- At September 30, debt had $3.95 billion in aggregate principal (about $3.92 billion net of discounts and financing costs). Debt was entirely fixed-rate, with a 3.8% weighted-average stated rate; 93.7% was unsecured. Debt represented 33.6% of total market capitalization under the company’s calculation.
- The $1.1 billion revolving credit facility had no borrowings outstanding. The company reported covenant compliance; the next material debt maturity was stated as December 2024. In April, the facility was enlarged from $750 million, repriced and extended to July 2025, with two six-month extension options.
Material changes, outlook and risks
- Capital recycling: Kilroy sold 1800 Owens Street for $1.08 billion gross proceeds and reported a $457.8 million gain. Proceeds funded acquisitions totaling approximately $1.16 billion, including a Seattle office property, land in Bellevue and development properties in San Diego and Austin.
- Development remained a major capital commitment. Two projects under construction had estimated total investment of about $1.0 billion, with $802 million still committed at quarter-end. Four projects in tenant-improvement phase had estimated total investment of about $1.6 billion. Management cited construction timing, costs, leasing and market conditions as uncertainties; no formal earnings or FFO guidance is provided in the supplied filing text.
- Management reported increased tenant tours, inquiries and leasing activity as restrictions eased, but noted that pandemic-related uncertainty may continue to affect leasing timing, occupancy, rent collections and tenant demand. Stabilized office occupancy was 91.5% at September 30, versus 91.2% at December 31, 2020; average residential occupancy for the nine months fell to 74.0% from 87.8%.
- Leasing indicators were mixed: nine-month commenced new and renewal leases showed 54.1% changes in GAAP rents and 31.8% changes in cash rents, as defined by the company. Approximately 8.9% of stabilized portfolio space was available for sublease, primarily in the San Francisco Bay Area.
- Quarterly dividend increased 4% to $0.52 per share/unit, declared in September and paid in October. The board retains discretion over future distributions, and REIT distribution requirements and taxable gains may affect capital needs.
- Commitments and contingencies include approximately $980.1 million of contracts and executed leases, excluding ground leases, and $77.2 million accrued for environmental remediation at development sites; additional remediation costs cannot presently be estimated. The company also disclosed a tenant dispute with DIRECTV over alleged contraction rights, which it intends to contest. It stated that routine litigation was not expected to have a material adverse effect.
- Subsequent to quarter-end, Kilroy issued $450 million of 2.65% green senior notes due 2033 and redeemed $300 million of 3.80% notes due 2023, incurring a $12.4 million extinguishment loss. These events were not reflected in September 30 debt balances.
Important facts for investors to verify
- How much of nine-month GAAP earnings growth reflects the one-time property-sale gain, and how operating measures such as FFO and same-store NOI are trending.
- Whether occupancy, leasing spreads, sublease availability and rent collection improve, particularly in the San Francisco Bay Area and Greater Los Angeles.
- Remaining development spending, project delivery schedules, pre-leasing and exposure to construction-cost increases or delays.
- Post-quarter-end debt refinancing effects, covenant headroom, liquidity needs and the sustainability of the $0.52 quarterly dividend.
- Potential changes in environmental remediation costs and the outcome or financial impact of the DIRECTV litigation.