Kilroy Realty Corporation (KRC) — Q1 2023 Form 10-Q
Period: Three months ended March 31, 2023; unaudited. Kilroy is a REIT focused on office, life science and mixed-use properties, primarily in California, with assets in Seattle and Austin. The filing presents the Corporation and its Operating Partnership on a consolidated basis.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $292.8 million | $265.5 million; up 10.3% |
| Net income | $65.2 million | $59.4 million; up 9.8% |
| Net income available to common stockholders | $56.6 million; $0.48 per diluted share | $53.1 million; $0.45 per diluted share |
| Net operating income (NOI, company-defined) | $208.4 million | $192.4 million; up 8.3% |
| NOI margin (NOI / revenue, calculated) | 71.2% | 72.5% |
| Net cash from operating activities | $182.1 million | $178.7 million; up 1.9% |
| Cash used in investing activities | $121.3 million | $169.4 million |
| Cash from / (used in) financing activities | $68.2 million | ($91.7 million) |
| Funds From Operations (FFO, company-presented) | $146.0 million | $137.8 million |
At March 31, 2023, total assets were $11.0 billion and total liabilities were $5.3 billion. Cash and cash equivalents were $476.4 million. Debt was $4.4 billion gross principal ($4.41 billion net carrying value); 94.6% was unsecured and 7.9% was variable-rate. Weighted average stated debt rate was 3.8%; GAAP effective rate including debt issuance costs was 4.1%. Market capitalization-based debt ratio was 53.7%. The revolving facility had no borrowings and $1.1 billion available; the term loan had $350 million drawn and $170 million available.
Material changes and operating indicators
- Rental income increased 10.2%; property expenses rose 18.4%, while interest expense increased 24.5% to $25.7 million. Management attributed higher interest expense mainly to a higher average debt balance and lower capitalized interest.
- Same-store NOI grew 3.6%; development-property NOI increased $10.1 million, including a $5.4 million contribution from Indeed Tower. Development spending and completed projects contributed to the year-over-year growth.
- Office portfolio economic occupancy was 89.6% at quarter-end, down from 91.6% at December 31, 2022; average occupancy for the quarter was 89.9%, versus 91.4% in Q1 2022. Residential average occupancy was 93.4%, versus 93.7%.
- Cash increased by $129.0 million during the quarter, with $150 million borrowed under the term loan. No acquisitions were completed in Q1 2023; the prior-year period included $40.0 million of acquisition spending.
- The quarterly declared dividend was $0.54 per share/unit, compared with $0.52 in Q1 2022. The $64.4 million aggregate dividend, distribution and dividend-equivalent payment was made April 12, 2023.
Outlook, risks and unusual items
- No specific full-year financial guidance is provided in the supplied filing text. Management says available liquidity and operating cash flow are expected to support projected needs for the next 12 months, while cautioning that financing availability and terms are not assured.
- Management expects $241–$285 million of remaining 2023 spending on development and redevelopment projects. Total remaining investment for the nine listed in-process projects was $647 million. Completion timing and costs may change due to construction progress, leasing, inflation and market conditions.
- The eight-site future development pipeline represents an estimated 6.5 million-plus rentable square feet and $7–$8 billion of potential total investment, conditional on entitlements and market conditions; this is not a commitment to proceed.
- Key risks cited include weaker office demand, hybrid and remote work, tenant defaults or non-renewals, sublease competition, rent and property-value declines, higher rates, refinancing and capital-market constraints, construction-cost inflation, and environmental matters. Space available for sublease was approximately 1.7 million square feet, or 10.4% of the stabilized portfolio.
- Lease expirations represent 8.1% of occupied stabilized space for the remainder of 2023 and 7.8% in 2024. Q1 executed new and renewal leases showed 4.2% growth in GAAP rents but a 4.4% decline in cash rents; these measures cover the reported leasing activity, not the entire portfolio.
- The CEO announced retirement effective December 31, 2023. Accelerated vesting related to the CEO and former President generated $4.5 million of Q1 share-based compensation expense.
- Sorrento Therapeutics filed for Chapter 11 in February 2023 and rejected its lease after quarter-end at the 4690 Executive Drive redevelopment property. The filing also reports $78.3 million of accrued environmental remediation liabilities and $561.2 million of commitments for operating, development and redevelopment properties, excluding ground leases.
- Debt covenants were in compliance at quarter-end. The term loan matures in October 2024, with two 12-month extension options; excluding that facility, the next stated debt maturity is December 2024. Management notes that refinancing access and costs remain uncertain.
Important facts for investors to verify
- Leasing, occupancy and sublease trends by market, especially in Greater Los Angeles and San Francisco, and the conversion of signed leases into commenced occupancy and cash rent.
- Near-term tenant expirations, major tenant renewals, and the impact of Sorrento’s lease rejection on redevelopment costs and prospective income.
- Development spending, leasing progress and delivery timing for Indeed Tower and the projects under construction, including remaining funding needs.
- Debt maturities, floating-rate exposure, borrowing costs, covenant headroom and the availability and terms of refinancing or additional capital.
- Cash generation relative to dividends and development commitments; FFO is a non-GAAP measure and does not reflect capital expenditures or leasing costs.
- Potential changes in environmental remediation estimates, construction commitments, executive-related compensation expense and the assumptions underlying future pipeline investment.