Kilroy Realty Corporation — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. Although the request identifies 2020 Q4, this filing is an annual report; fourth-quarter figures are noted separately below. Kilroy is a West Coast-focused office, life science and mixed-use REIT, operating principally through Kilroy Realty, L.P.
Business and portfolio
At year-end, the stabilized office portfolio comprised 117 buildings and 14.62 million rentable square feet, with 91.2% occupancy and 94.3% leased. The stabilized residential portfolio comprised 808 units and averaged 72.0% occupancy. The portfolio is concentrated in California and Greater Seattle. Five future development sites totaled about 61 acres, with more than 6.0 million square feet of estimated potential development.
Financial and operating results
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $898.4 million | $837.5 million | +7.3% |
| Net income | $207.3 million | $215.2 million | -3.7% |
| Net income available to common stockholders | $187.1 million | $195.4 million | -4.3% |
| Diluted earnings per share | $1.63 | $1.86 | -12.4% |
| Funds from Operations (FFO) | $433.4 million | $418.5 million | +3.6% |
| Net cash from operating activities | $455.6 million | $386.5 million | +17.9% |
| Net cash used in investing activities | $542.1 million | $1,228.3 million | Lower use of cash |
| Net cash from financing activities | $833.3 million | $747.1 million | +11.5% |
Fourth-quarter 2020 revenue was $229.3 million, versus $220.2 million in Q4 2019. Net income available to common stockholders was $78.6 million, versus $72.5 million; diluted EPS was $0.67, versus $0.67.
Portfolio Net Operating Income (NOI), a non-GAAP measure, rose 8.6% to $642.2 million. Same-store NOI declined 1.4%, while development NOI increased $58.5 million as newly completed properties contributed results. GAAP revenue was nearly all rental income. The filing reports a net $19.0 million reduction to rental income for collectability reversals and allowances in 2020, primarily related to tenant credit concerns during the pandemic.
Year-end total assets were $10.00 billion. Debt was $3.954 billion at gross principal value ($3.924 billion net of discounts and financing costs), compared with $3.553 billion gross principal at the prior year-end. Debt was 37.0% of market capitalization; all outstanding debt was fixed-rate, and the weighted-average stated rate was 3.8%. Cash and cash equivalents were $732.0 million, with a further $91.1 million of restricted cash. The $750 million revolving credit facility was undrawn. Management reported $715 million cash and $750 million revolver availability as of February 10, 2021.
The company declared $1.97 per share in 2020 dividends, up from $1.91 in 2019. The board retains discretion over future distributions. Cash from operations covered 2020 dividends, while REIT requirements and debt covenants may affect distribution decisions.
Material changes and notable items
- Office occupancy fell to 91.2% from 94.6%; average residential occupancy fell to 72.0% from 82.4%. Same-store average office occupancy was 92.2%, versus 93.5%.
- Revenue growth reflected development completions and leasing, but same-store revenue fell 2.6%, including pandemic-related tenant credit adjustments, lower parking income and reduced occupancy. Property expenses declined, partly offsetting the revenue decline.
- Interest expense increased 45.8% to $70.8 million, primarily as average debt outstanding increased. Depreciation and amortization rose 9.6% to $299.3 million.
- FFO growth was supported by completed developments; per-share comparisons were also affected by increased weighted-average shares following equity issuance.
- During 2020, the company issued 8.90 million shares through forward equity settlements for net proceeds of about $721.7 million; issued $350 million of 4.27% senior notes due 2031 and $425 million of 2.50% green notes due 2032; and repaid a $150 million term loan. It sold one office property for $75.9 million and made no acquisitions.
- General and administrative expense increased 12.6%, including $14.1 million cash severance related to an executive departure, accelerated share-based compensation, and political contributions. The company also recorded $35.5 million of gains on sales of depreciable properties.
Outlook, risks and contingencies
The filing provides no formal numeric earnings or FFO guidance. Management expected to spend approximately $400–$500 million on development projects in 2021 and $75–$85 million on stabilized-property capital improvements, tenant improvements and leasing costs, with actual spending dependent on construction progress and leasing.
Management said development activity was largely unaffected in 2020 but cautioned that COVID-19 restrictions, construction delays or cost increases, weaker leasing and tenant credit, and lower demand could impair results. Retail tenants were particularly affected: 2020 rent collections were 58.6% of retail billings, compared with 98.5% for office; across property types, collections were 96.9%. The top 15 tenants represented 49.1% of annualized base rent, and the portfolio had significant technology-industry exposure.
Other material risks include geographic concentration, lease expirations and available sublease space, refinancing and capital-market access, natural disasters including earthquakes and fires, and environmental remediation. Accrued environmental remediation liabilities were $71.3 million at year-end; additional costs were possible but not reasonably estimable. The next stated debt maturity was the revolving credit facility in July 2022. The company reported compliance with debt covenants at year-end and no litigation expected to have a material adverse effect. Deloitte issued unqualified opinions on the financial statements and internal controls.
Key investor verification points
- Confirm subsequent office leasing, occupancy and tenant retention, especially against the 1.3 million square feet of vacant stabilized office space and 1.4 million square feet of available sublease space reported at year-end.
- Track COVID-related rent deferrals, collection outcomes and tenant-credit reserves, particularly for retail and other affected tenants.
- Compare development budgets, delivery dates, leasing and stabilization with the 2021 spending outlook; assess exposure to construction delays and environmental remediation.
- Review debt maturities, refinancing plans, liquidity, covenant headroom and the effect of equity issuance and dividends on per-share FFO and leverage.
- Verify the resolution of the disputed termination option involving up to approximately 150,000 square feet leased by DIRECTV, and monitor concentration among the largest tenants and technology tenants.