Kilroy Realty Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Kilroy is a West Coast office and mixed-use REIT, with properties concentrated in California and Washington. Unless stated otherwise, financial amounts below are in millions.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $228.3 | $215.5 | $669.1 | $617.2 |
| Net income | $54.1 | $48.3 | $123.8 | $137.3 |
| Net income available to common stockholders | $49.0 | $43.8 | $108.5 | $122.9 |
| Diluted earnings per share | $0.42 | $0.41 | $0.95 | $1.18 |
| Net operating income (NOI, company-defined) | $163.1 | $152.2 | $478.3 | $436.5 |
| Funds from Operations (FFO, company-defined) | $117.4 | $109.2 | $320.7 | $309.0 |
- Nine-month operating cash flow was $364.0, versus $301.4 a year earlier. Investing used $475.7; financing provided $900.7. Cash and restricted cash increased $789.0 to $865.3, including $849.0 of cash and cash equivalents.
- At September 30, total debt was $3,955.7 principal, or $3,923.8 net of discounts and financing costs. Debt was 39.4% of total market capitalization. The $750.0 revolving facility was undrawn; covenant compliance was reported, with no material debt maturity before July 2022.
- Stabilized office occupancy was 92.2% at quarter-end, down from 94.6% at December 31, 2019. The portfolio was 95.5% leased. Approximately 9.0% of stabilized office space was available for sublease.
Changes versus comparable periods
- Q3 revenue rose 5.9% and common-stockholder income rose 11.8%. Nine-month revenue rose 8.4%, but common-stockholder income fell 11.8% and diluted EPS declined from $1.18 to $0.95.
- Nine-month NOI increased 9.6%, mainly due to development projects entering service and acquired properties. Same-store NOI decreased 1.1% for the nine months and 1.9% in Q3, reflecting COVID-related rent and parking impacts, lower occupancy, and comparison with prior-year lease termination fees.
- Nine-month FFO increased about 3.8%. Interest expense rose 43.9% to $49.8, principally because average debt was higher; general and administrative expense increased 15.8%, including severance costs.
- Cash and cash equivalents increased substantially from $60.0 at year-end, supported by equity and debt issuance. The company issued 8.9 million shares through forward equity settlements during the nine months, raising $721.7 net in total, and issued $425.0 of green senior notes and $350.0 of private-placement notes.
Outlook, commentary, risks, and unusual items
- No specific earnings or FFO guidance was provided. Management said available liquidity and staggered maturities position the company to navigate uncertainty, while noting future financing depends on market conditions. As of October 27, it reported approximately $685.0 cash and $750.0 of revolver capacity.
- COVID-19 remained the central risk. Management reported 95.8% collection of Q3 gross rent billings and 96.7% for the nine months; retail collections were notably weaker at 47.5% for Q3 and 53.6% year to date. It expected continued retail rent relief and uncertainty around future collections, occupancy, leasing, rental rates, development costs, and capital markets.
- The top 15 tenants represented 48.0% of annualized base rent; the company reported collecting all rent due from them through September and October. Retail tenant rent deferrals generally involved lease extensions; office relief was considered case by case.
- Development commitments are significant: three projects under construction had approximately $366.0 of remaining committed costs, and four tenant-improvement projects had approximately $175.0 committed. COVID-related restrictions could delay projects or increase costs. A five-site future pipeline represents an estimated $5–$7 billion investment, subject to entitlements and market conditions.
- Unusual items included $14.1 of cash severance costs for the nine months, including the departure of an executive officer; $14.2 of rental-income reductions from collectability assessments, primarily COVID-related; and a $1.7 note receivable write-off. Environmental remediation liabilities were approximately $72.0, with possible additional costs not reasonably estimable.
- The Board raised the quarterly dividend 3.1% to $0.50 per share in August. The filing states distributions remain discretionary and may be affected by REIT requirements, cash generation, market conditions, and potential special dividends if tax-deferred exchanges cannot be completed.
Important facts for investors to verify
- Whether rent collections, especially from retail and other financially pressured tenants, remain stable and whether recorded rent receivables require further adjustments.
- Occupancy, sublease availability, lease renewals, and rent growth as office demand and return-to-work patterns evolve.
- Development completion schedules, leasing and stabilization progress, remaining committed spending, and environmental remediation estimates.
- Debt levels, interest expense, covenant headroom, access to refinancing, and liquidity after dividends and construction spending.
- The effects of equity issuance and share-count growth on per-share results, and the sustainability of dividends relative to operating cash flow and REIT distribution requirements.