Kilroy Realty Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited results; comparison is with Q1 2020. Kilroy is a West Coast office and mixed-use REIT, with substantially all operations conducted through Kilroy Realty, L.P.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $235.6 million | $221.3 million | +6.5% |
| Net income | $507.4 million | $45.4 million | +$462.0 million |
| Net income available to common stockholders | $497.6 million | $39.8 million | +1,149.8% |
| Diluted earnings per share | $4.26 | $0.37 | — |
| Net operating income (NOI) | $169.7 million | $157.8 million | +7.5% |
| Funds from Operations (FFO) | $116.2 million | $110.2 million | +5.5% |
| Cash from operating activities | $144.2 million | $122.9 million | +$21.2 million |
Net income and EPS were dominated by a $457.3 million gain on the sale of a San Francisco property; FFO excludes the gain and is a supplemental, non-GAAP measure. Total operating expenses were $164.6 million versus $158.3 million. Interest expense rose 54.6% to $22.3 million, primarily reflecting higher average debt and reduced interest capitalization.
Portfolio, liquidity and debt
- Sold 1800 Owens Street (The Exchange on 16th), a 750,370-square-foot San Francisco property, on March 1 for $1.08 billion gross proceeds. Approximately $1.0 billion of net proceeds was held as restricted cash by a qualified intermediary for a potential Section 1031 exchange.
- At quarter-end: cash and cash equivalents were $657.8 million; restricted cash was $1.029 billion. Total debt was $3.953 billion at principal value ($3.923 billion net carrying value); all outstanding debt was fixed-rate, with a 3.8% weighted-average interest rate. Debt was 33.8% of total market capitalization.
- The $750 million revolver was undrawn at March 31. In April, it was amended to $1.1 billion, with lower borrowing costs and maturity extended to July 2025, plus two six-month extension options. It remained undrawn at closing. Management reported covenant compliance.
- Q1 investing cash flow was $812.3 million, mainly reflecting disposition proceeds; financing cash flow was negative $93.0 million. The increase in cash and restricted cash was $863.4 million.
- The stabilized office portfolio had 117 buildings and 14.05 million square feet, with 91.5% occupied and 93.3% leased. Average office occupancy was 91.5%, versus 93.7% in Q1 2020; same-store average occupancy was 90.8%, versus 93.5%.
Changes, outlook and risk factors
- NOI increased overall, but same-store NOI declined 1.4% to $139.2 million. Lower same-store occupancy and COVID-related reductions in rent, parking and reimbursements were partly offset by lower property expenses. Development-property NOI increased as projects entered service.
- Management reported collection of approximately 96% of Q1 gross rent billings, or 97% excluding rent relief. It continued retail rent deferrals and case-by-case review of office requests; the company cautioned that collections and tenant demand could remain affected by the pandemic.
- No specific full-year earnings or FFO guidance is provided in the filing text. Management said it would pursue development prudently, selectively assess acquisitions, and use capital recycling and available financing as needed. Three projects in tenant-improvement phases were expected to stabilize in 2021–2022; development schedules and costs remain subject to market and construction conditions.
- Planned and committed development spending is significant: management estimated remaining commitments of $55 million for projects under construction and $265 million for tenant-improvement projects, plus other project spending. The six-site future pipeline represented estimated total investment of $5–$7 billion, dependent on entitlements and market conditions.
- COVID-19, office leasing demand, tenant defaults or non-renewals, sublease competition, financing availability, interest rates, construction costs, entitlement delays and environmental obligations are key risks. About 10.9% of stabilized portfolio space was available for sublease. Environmental remediation liabilities were accrued at $72.3 million; additional costs may arise but were not reasonably estimable.
- On April 5, DIRECTV filed suit alleging it properly exercised contraction rights at a leased property. Kilroy disputed the claim and said it would defend the litigation. The filing stated routine litigation was not expected to have a material adverse effect; monitor the matter given DIRECTV’s tenant concentration.
- The Board declared a quarterly dividend of $0.50 per share/unit. Management said distributions remain subject to Board discretion and REIT requirements; inability to complete a 1031 exchange for the property-sale gain could require a special distribution.
Investor verification points
- Assess recurring performance using FFO and same-store NOI, separating the $457.3 million disposition gain from operating results.
- Confirm the use and availability of the $1.0 billion restricted sale proceeds and whether a qualifying 1031 exchange was completed.
- Track office occupancy, lease commencements, sublease space, rent collections and tenant concessions, especially in markets affected by remote work.
- Review development spending, lease-up and stabilization timelines, cost escalation, and the $72.3 million environmental accrual.
- Monitor the DIRECTV litigation, debt covenant headroom, the enlarged revolver, and the sustainability of the $0.50 quarterly dividend.