Kilroy Realty Corporation — FY2023 Form 10-K
Business context and period. The filing covers the fiscal year ended December 31, 2023. Kilroy is a REIT focused on office, life science and mixed-use properties, principally in California, Seattle and Austin. The company owns substantially all assets and conducts operations through Kilroy Realty, L.P. Its stabilized office portfolio comprised 121 buildings and 17.0 million rentable square feet; economic occupancy was 85.0% and leased occupancy was 86.4% at year-end. Three residential properties had 1,001 units and average 2023 occupancy of 92.8%.
Financial and operating results
- Revenue: $1.130 billion, up 3.0% from $1.097 billion in 2022. Rental income was $1.118 billion; rental income represented approximately 98.9% of revenue.
- Profit: Net income available to common stockholders was $212.2 million, down 8.8%; diluted EPS was $1.80 versus $1.97. The 2022 comparison included a $17.3 million gain on property sales; no operating properties were sold in 2023.
- Property operations: Net operating income (NOI, a non-GAAP measure) was $785.1 million, up 0.6%. Same-store NOI fell 3.6% to $702.1 million, while development-property NOI increased to $83.0 million.
- FFO: Funds from Operations was $551.1 million, compared with $556.6 million in 2022. FFO is a supplemental non-GAAP measure and does not reflect capital expenditures or leasing costs.
- Cash flow: Operating cash flow was $602.6 million, up 1.7%; investing cash outflow was $800.4 million and financing cash inflow was $360.6 million. Cash and cash equivalents ended the year at $510.2 million. Investing cash outflow included $256.6 million placed in certificates of deposit.
- Liquidity and debt: The company reported $256.6 million of short-term certificates of deposit and $1.1 billion available on its revolving credit facility, with no revolver borrowings. Gross principal debt was $4.961 billion ($4.928 billion net of discounts and financing costs), equal to 51.3% of market capitalization. Debt was 89.5% fixed-rate; the stated weighted-average rate was 4.1%. The $520 million variable-rate term loan bore 6.41% at year-end.
- Dividends: The 2023 common dividend was $2.16 per share, up from $2.12 in 2022. Distributions exceeded 2023 taxable income, with $0.069 per share classified as return of capital. Future dividends remain at the board’s discretion.
Material changes versus 2022
- Year-end office occupancy declined to 85.0% from 91.6%; average stabilized-office occupancy decreased to 87.3% from 91.2%. Same-store occupancy averaged 87.7% versus 91.6%.
- Same-store NOI fell $26.2 million: lower rental revenue, including lease expirations, and higher property expenses outweighed new leasing and tenant recoveries. Property expenses rose $20.4 million, with utilities, insurance and services among the cited drivers.
- Interest expense increased 35.5% to $114.2 million, reflecting higher average debt and interest rates. Gross interest expense before capitalized interest rose 19.3% to $193.0 million.
- Operating cash flow increased modestly, while cash used in investing rose, partly because of the certificate-of-deposit investment. Debt rose with a larger term loan balance and a new $375 million mortgage.
- Leasing volume reached its highest level since 2019. The company executed 1.2 million square feet of new and renewal leases; GAAP rents on executed leases increased 14.8%, while cash rents increased 0.1%.
Outlook, risks and unusual items
- Development: Management estimated $200–$300 million of 2024 development spending. Oyster Point Phase 2, an 875,000-square-foot project estimated at $1.0 billion, was under construction and not leased at year-end; stabilization was estimated for Q4 2025. Two redevelopment projects totaling 100,000 square feet were also underway.
- Debt maturities: Scheduled 2024 principal payments were approximately $929.7 million, including the $520 million term loan due October 2024, which has two 12-month extension options. Excluding that term loan, $403.7 million of notes was due in December 2024. After year-end, the partnership issued $400 million of 6.25% notes due 2036 in January 2024.
- Leasing exposure: 15.0% of stabilized office space was unoccupied at year-end; 10.0% of portfolio square footage was available for sublease. Leases representing 7.3% of leased area expired in 2024 and 4.8% in 2025. The 15 largest tenants represented 46.1% of annualized base rent; technology tenants represented 54%.
- Management commentary and risks: Management cited hybrid work, tenant space efficiency, longer negotiations, sublease competition and economic uncertainty as ongoing leasing headwinds. Other key exposures include concentrated West Coast markets, tenant and industry concentration, higher rates and construction costs, refinancing access, natural disasters and environmental obligations.
- Environmental contingency: Accrued remediation liabilities were $76.6 million at year-end, down from $80.5 million. Additional costs are possible but could not be reasonably estimated.
- Unusual compensation and leadership: Accelerated vesting tied to CEO and former-president transitions contributed $27.3 million of 2023 share-based compensation expense. John Kilroy retired as CEO on January 21, 2024; Angela Aman became CEO the following day.
- Other filing points: No material adverse legal proceedings were reported. The auditors issued unqualified opinions on the financial statements and internal controls. The critical audit matter concerned judgment over tenant-improvement ownership and timing of rental revenue recognition on development properties.
Investor verification checklist
- Review the 2024 debt refinancing plan, including the term-loan extensions or repayment and the December 2024 note maturity; assess the effect of the January 2024 notes issuance.
- Track leasing, occupancy, sublease availability, renewal retention and rent spreads by region, particularly San Francisco, Los Angeles, Seattle and Austin.
- Verify development leasing, remaining costs, timing and stabilization assumptions for Oyster Point Phase 2 and the two redevelopment projects.
- Assess whether cash flow and liquidity can support dividends, development spending and debt service; the dividend is discretionary despite REIT distribution requirements.
- Monitor the $76.6 million environmental accrual and potential additional remediation costs, as well as tenant credit quality and concentration.