Kilroy Realty Corporation (KRC) — Q1 2022 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2022 and is unaudited. 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 portfolio included 118 office and life science buildings with 15.2 million rentable square feet and 1,001 residential units.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Total revenue | $265.5 million | $235.6 million | Up 12.7% |
| Net income | $59.4 million | $507.4 million | Prior period included a $457.3 million property-sale gain |
| Net income available to common stockholders | $53.1 million; $0.45 diluted EPS | $497.6 million; $4.26 diluted EPS | Year-over-year decline largely reflects the prior-year sale gain |
| Net operating income (NOI) | $192.4 million | $169.7 million | Up 13.4%; NOI as a share of revenue was approximately 72.5%, versus 72.0% |
| Funds from Operations (FFO) | $137.8 million | $116.2 million | Up approximately 18.5% |
| Cash from operating activities | $178.7 million | $144.2 million | Up 23.9% |
| Cash used in investing activities | $169.4 million | Cash provided: $812.3 million | Prior period included $1.013 billion of disposition proceeds |
| Cash used in financing activities | $91.7 million | $93.0 million | Included $61.2 million of dividends and distributions paid |
Balance sheet and liquidity. At March 31, 2022, cash and cash equivalents were $331.7 million; cash plus restricted cash was $344.7 million. Gross debt principal was $4.098 billion, comprising $3.850 billion unsecured and $247.7 million secured debt. All outstanding debt was fixed-rate, with a 3.7% weighted-average interest rate; no revolver borrowings were outstanding, and $1.1 billion of capacity was available under the revolver, which matures in July 2025. The next stated debt maturity was in December 2024. Debt was 31.3% of total market capitalization. The company reported compliance with its debt covenants.
Material changes and operating trends
- Same-store NOI increased 9.1%, supported by higher rents, tenant recoveries and improved collection-related items; same-store property and related expenses also rose 8.2%.
- Stabilized office occupancy was 91.3% at quarter-end, down from 91.9% at December 31, 2021. Same-store average office occupancy was 90.5%, compared with 91.4% a year earlier. Residential average occupancy rose to 93.7% from 69.1%.
- For leases commenced during the quarter, reported rent changes were 25.4% on a GAAP basis and 5.9% on a cash basis. Commenced leasing included 20 leases covering about 217,000 square feet; seven additional new leases totaling about 99,700 square feet were signed but had not commenced by quarter-end.
- Approximately 1.3 million square feet, or 8.7% of the stabilized portfolio, was available; another 1.0 million square feet, or 6.5%, of leased space was available for sublease. Leases covering 3.2% of occupied space expire in the remainder of 2022 and 11.0% in 2023.
- Quarterly dividends and distributions declared were $0.52 per share or unit, up from $0.50 in Q1 2021. The $61.9 million declared for the quarter was paid on April 13, 2022.
Outlook, risks and unusual items
- The filing provides no specific full-year 2022 earnings or FFO guidance. Management said it expects to maintain a strong balance sheet, pursue development and redevelopment, and selectively evaluate acquisitions, subject to market conditions.
- Development remains a significant capital use. Two projects under construction had an estimated total investment of approximately $1.0 billion, with $714 million remaining commitments; management expected $135–$145 million of this construction spending through year-end 2022. Three tenant-improvement projects had $146 million of remaining commitments, with $70–$80 million expected through year-end. Management also cited potential spending of up to $100 million on projects that could commence construction during the remainder of 2022.
- The future development pipeline comprised seven sites with an estimated $5.5–$7.5 billion total investment potential, dependent on entitlements and market conditions. Estimates, timing and project scope may change.
- Contract and executed-lease commitments related to operating, development and redevelopment properties were approximately $819 million, excluding ground leases. Accrued environmental remediation liabilities were $74.3 million for development sites; additional costs are possible but could not be reasonably estimated.
- Management cited risks from office demand and tenant leasing decisions, sublease competition, construction costs and delays, inflation and interest-rate volatility, financing and refinancing conditions, tenant credit, COVID-19-related uncertainty and geopolitical events. A rise in rates could increase costs if the company borrows on its variable-rate revolver.
- The company disclosed litigation brought by DIRECTV concerning claimed contraction rights under a lease; Kilroy disputes the claims and intends to defend the matter. The filing states it was not aware of legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether occupancy, leasing spreads and sublease availability improve, particularly in markets with near-term lease expirations and concentrated sublease space.
- Whether development and redevelopment projects remain on budget and on schedule, and how the substantial remaining commitments will be funded.
- Whether the $74.3 million environmental remediation accrual proves adequate as site conditions and project plans develop.
- Debt maturity and refinancing plans, covenant headroom, and the effect of higher interest rates if revolver borrowings become necessary.
- Tenant concentration: the 15 largest tenants represented 47.7% of annualized base rental revenue; monitor major tenant renewals, credit and space needs.
- How much reported operating growth reflects recurring rental and NOI trends versus collections, recoveries, new developments and acquisitions.