Kilroy Realty Corporation — Q2 2022 Form 10-Q
Business context and reporting period. Unaudited results for the three and six months ended June 30, 2022. Kilroy Realty is a REIT focused on office, life science and mixed-use properties, primarily in California, Seattle and Austin. Its stabilized office portfolio comprised 118 buildings and 15.8 million rentable square feet; the filing combines the Company and its approximately 99%-owned Operating Partnership.
Financial performance and position
- Q2 revenue: $271.2 million, up 20.0% from $226.0 million. Rental income was $268.6 million.
- Q2 earnings: Net income was $54.0 million, up 25.9%; net income available to common stockholders was $47.1 million, or $0.40 per diluted share, versus $35.8 million, or $0.30, a year earlier. Q2 NOI was $194.0 million, up 20.2%; NOI as a share of revenue was approximately 71.5%, versus 71.4%.
- First-half results: Revenue was $536.7 million, up 16.3%; net income was $113.4 million versus $550.3 million, and diluted EPS was $0.85 versus $4.56. The prior-year period included a $457.8 million gain on sale of depreciable property. NOI increased 16.7% to $386.3 million; FFO increased to $277.1 million from $220.8 million.
- Cash flow: First-half operating cash flow was $278.9 million, compared with $216.5 million. Investing used $312.7 million, including $227.2 million for development and redevelopment and $40.0 million for a development-site acquisition; no property dispositions were completed. Financing used $170.3 million. Cash and restricted cash ended at $223.1 million, down from $427.1 million at year-end.
- Debt and liquidity: Debt principal totaled $4.096 billion ($4.068 billion net of unamortized discounts and financing costs). All outstanding debt was fixed-rate, with a 3.7% stated weighted-average rate; no revolver borrowings were outstanding and $1.1 billion of capacity remained. The next stated debt maturity is December 2024. Debt was 39.9% of total market capitalization. The company reported compliance with debt covenants.
- Dividends: The quarterly dividend was $0.52 per share/unit; $61.9 million of dividends, distributions and equivalents was paid July 13, 2022.
Material changes and operating developments
- Q2 same-store NOI rose 3.5%; total NOI growth also reflected development and acquisition properties. Management cited stronger rents, tenant reimbursements and parking income, partly offset by lower occupancy in some markets and higher property expenses as tenants returned to offices.
- Stabilized office economic occupancy was 91.4% at June 30, versus 91.9% at year-end 2021. Same-store average occupancy was 90.5% in Q2, down from 92.1% a year earlier. The residential portfolio averaged 93.7% occupancy.
- Leases commenced in Q2 showed 25.1% GAAP rent growth and 15.4% cash rent growth; these are reported leasing measures and exclude specified leases. Management estimated portfolio cash rents were 10–15% below current market rents.
- One Seattle development, 333 Dexter, entered the stabilized portfolio; it is 100% leased. Two projects were under construction, two in tenant-improvement phase and three redevelopment projects under construction. The future pipeline comprised eight sites, with estimated total investment of $5.8–$7.8 billion, subject to entitlements and market conditions.
Outlook, risks and unusual items
- No specific earnings or FFO guidance was provided. Management said it expects to fund projected liquidity needs over the next 12 months through operating cash flow, available credit, capital recycling and potential debt or equity financing, while continuing development and selectively evaluating acquisitions. It cautioned that financing and project completion are not assured.
- Development commitments were substantial: approximately $699.1 million for contracts and executed leases, excluding ground leases. The company estimated $85–$95 million of spending through year-end 2022 on under-construction developments, plus additional planned development, tenant-improvement and redevelopment spending.
- Inflation may increase operating, financing and construction costs. Tenant expense recoveries and rent escalations may not fully offset inflation; higher interest rates could raise future financing costs and pressure property valuations. Supply-chain, labor and construction-cost issues could delay projects or reduce returns.
- Environmental remediation liabilities of approximately $70.3 million were accrued for certain development sites; additional costs are possible but not currently reasonably estimable. The company reported no legal proceedings expected to have a material adverse effect, but disclosed ongoing litigation with DIRECTV over alleged lease contraction rights.
- The six-month comparison is materially affected by the prior-year $457.8 million property-sale gain and approximately $1.013 billion in disposition proceeds. First-half 2022 interest expense also benefited from increased capitalization of development interest; extended project stoppages could affect capitalization.
Important facts for investors to verify
- Leasing, occupancy, sublease availability and tenant retention in the company’s office-heavy markets, including the 2022–2023 expirations and the impact of return-to-office trends.
- Development budgets, leasing progress, completion schedules and the extent to which inflation or supply constraints change expected project costs and returns.
- Cash needs and funding plans relative to the $1.1 billion revolver, 2024 debt maturity, dividend commitments and development spending.
- Environmental remediation estimates, DIRECTV litigation developments and any change in the company’s ability to recover higher property costs from tenants.
- How much reported earnings and cash generation depend on noncash items, capitalized development costs and the prior-year property disposition comparison.