Kilroy Realty Corporation — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing. The filing combines Kilroy Realty Corporation, a REIT, and Kilroy Realty, L.P., its operating partnership; the partnership owns substantially all assets and conducts substantially all operations.
Business and portfolio
Kilroy owns, develops, acquires and manages primarily Class A office and life science properties, with residential and mixed-use assets, in Greater Los Angeles, San Diego County, the San Francisco Bay Area, Greater Seattle and Austin. At year-end, its stabilized office portfolio comprised 119 buildings and 16.2 million rentable square feet; economic occupancy was 91.6% and leased occupancy was 92.9%. Three stabilized residential properties had 1,001 units and 93.5% average occupancy.
Financial performance and position
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Total revenue | $1.097 billion | $955.0 million | Up 14.9%; rental income was $1.086 billion. |
| Net income | $259.5 million | $658.9 million | Down 60.6%, largely reflecting much lower property-sale gains. |
| Net income available to common stockholders | $232.6 million; $1.98 diluted EPS | $628.1 million; $5.36 diluted EPS | Prior year included $463.1 million of gains on depreciable property sales, versus $17.3 million in 2022. |
| Net operating income (NOI, non-GAAP) | $780.8 million | $688.7 million | Up 13.4%; calculated NOI as a share of revenue was approximately 71.1% versus 72.1%. |
| Funds from Operations (FFO, non-GAAP) | $556.6 million | $462.3 million | Up approximately 20.4%; FFO is a supplemental measure, not a substitute for GAAP earnings or cash flow. |
| Net cash from operating activities | $592.2 million | $516.4 million | Up 14.7%. |
| Cash and cash equivalents | $347.4 million | $414.1 million | Down $66.7 million. |
| Debt | $4.293 billion principal; $4.263 billion net carrying value | $4.293 billion principal | Debt was 48.5% of total market capitalization; 95.3% was fixed-rate. |
Investing activities used $553.2 million of cash, while financing activities used $118.7 million. Cash, cash equivalents and restricted cash decreased by $79.7 million during 2022. At year-end, the company had no revolver borrowings and $200 million drawn under its $400 million variable-rate term loan facility. Management reported $1.1 billion available under the revolver and $300 million available under the term loan as of the filing date, following a January 2023 amendment that increased term-loan capacity.
Material changes versus 2021
- Revenue increased as same-store rental income, tenant reimbursements and parking income rose, and development properties contributed more. Same-store NOI increased 3.0%; total NOI also benefited from development and acquisition properties.
- Net income fell sharply because 2021 included a $463.1 million gain on property sales. 2022 property-sale gains were $17.3 million.
- Operating cash flow increased, while investment spending and net cash used in investing declined, chiefly because acquisitions and development expenditures were lower than in 2021.
- Average stabilized office occupancy eased to 91.2% from 91.7%; year-end occupancy was 91.6% versus 91.9%. The company completed or stabilized 1.1 million square feet of development and redevelopment space.
- 2022 property dispositions generated $48 million gross proceeds, compared with $1.12 billion in 2021. The company acquired one development site for $40 million in 2022; it made no operating-property acquisitions.
- Declared common dividends rose to $2.12 per share from $2.04. The company said 2022 distributions exceeded taxable income, resulting in a return of capital to stockholders.
Outlook, management commentary and risks
- Management expects 2023 development spending of approximately $450 million to $550 million, including $296 million to $345 million of estimated remaining 2023 costs on current projects. It also estimates $100 million to $120 million for stabilized-portfolio capital improvements, tenant improvements and leasing costs, in addition to specified contractual commitments.
- The company anticipates it could generate $0 to $200 million from dispositions in 2023, depending on market conditions; it does not assure that sales will occur. Eight future development sites represent an estimated potential of more than 6.5 million square feet, but development scope and timing depend on entitlements, market demand, costs and financing.
- Management described leasing activity and tenant return to offices as improving from 2020 levels, but noted uncertainty about the timing and extent of office attendance and its effect on leasing. Stabilized office space was 8.4% unoccupied; approximately 8.7% of stabilized portfolio area was available for sublease, primarily in the Bay Area. Leases representing 10.3% of leased area expire in 2023.
- The 15 largest tenants accounted for 46.5% of annualized base rent; technology tenants accounted for 58%. Tenant concentration, renewals, vacancies, sublease competition and potential rent concessions are key exposures.
- Interest rates, inflation, construction costs, regional concentration, property values and access to capital are material risks. A 100-basis-point rise in Adjusted SOFR would increase annual interest expense by approximately $2 million on year-end variable-rate debt, before capitalization.
- Environmental remediation liabilities accrued were approximately $80.5 million, up from $75.2 million in 2021; additional costs may arise but cannot currently be reasonably estimated. Routine litigation was not considered material by management.
- Debt maturities include $5.8 million of scheduled principal payments in 2023 and substantial maturities in 2024–2025; the 2024 term loan has two extension options. Management reported compliance with debt covenants and effective internal controls. The independent auditor issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- Review the 2023 and 2024 lease-expiration schedule, tenant renewals, sublease supply, and occupancy trends by region—particularly in the Bay Area and Greater Los Angeles.
- Check progress, leasing, costs and completion timing for Indeed Tower, Kilroy Oyster Point Phase 2 and other development projects, including the planned 2023 spending.
- Reconcile debt maturities, term-loan availability and variable-rate exposure with the company’s liquidity, refinancing plans and dividend policy.
- Assess the assumptions and potential additional costs behind the $80.5 million environmental remediation accrual.
- Distinguish recurring operating performance from property-sale gains and compare GAAP results with management’s non-GAAP NOI and FFO measures.