Kilroy Realty Corporation (KRC) — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Kilroy is a West Coast office and mixed-use REIT; substantially all operations are conducted through Kilroy Realty, L.P. Its stabilized office portfolio comprised 114 buildings and 14.3 million rentable square feet, with 93.5% occupancy and 97.3% leased at quarter-end.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $221.3 million | $201.2 million; +10.0% |
| Net income | $45.4 million | $41.8 million; +8.7% |
| Net income available to common stockholders | $39.8 million; $0.37 per diluted share | $36.9 million; $0.36 per diluted share |
| Net operating income (NOI; supplemental, non-GAAP measure) | $157.8 million | $142.4 million; +10.8% |
| Funds from Operations (FFO; supplemental, non-GAAP measure) | $110.2 million | $99.8 million; +10.4% |
| Net cash from operating activities | $122.9 million | $99.8 million |
| Cash and cash equivalents | $762.1 million at March 31 | $60.0 million at December 31, 2019 |
| Debt | $3.713 billion gross principal; $3.687 billion net carrying value | $380 million drawn on $750 million revolver |
Investing cash outflow was $211.4 million, including $167.3 million for development and undeveloped land and $44.1 million for operating properties and other capital assets. Financing cash inflow was $790.6 million, largely reflecting $721.8 million of net equity proceeds. Cash, cash equivalents and restricted cash totaled $778.4 million at quarter-end.
Changes versus comparable periods
- Revenue growth reflected development projects entering service, acquisitions and leasing activity; development-property NOI rose $14.8 million. Same-store NOI declined $0.3 million, while total NOI increased 10.8%.
- Quarter-end stabilized office occupancy was 93.5%, down from 94.6% at December 31, 2019. Average occupancy for the quarter was 93.7%, versus 93.1% in Q1 2019.
- Interest expense increased 28.5% to $14.4 million, primarily due to higher average debt balances. Depreciation and amortization rose 12.5% to $74.4 million.
- In February and March, the Company settled forward equity sales and issued 8.9 million shares in total, raising $721.8 million net. This materially strengthened cash liquidity but diluted existing shareholders.
Outlook, risks and notable items
- COVID-19: Management cited uncertainty around rent collection, tenant credit, leasing demand, property values, financing markets and construction schedules/costs. The filing states that approximately 10% of March revenue came from parking, retail, co-working and residential tenants. April rent collection was approximately 96% of contractual billings, or 93% after accounting for the retail rent relief program; all top 15 tenants had paid April contractual rent. These are early-period figures, not assurance of future collections.
- The Company recorded a $6.5 million reduction in rental income for collectibility adjustments, including moving certain co-working and retail tenants to cash-basis recognition due to COVID-19. Management said it could not provide meaningful current portfolio cash-rent comparisons with market rates.
- Management provided no specific full-year financial guidance in the supplied filing. It said it expected to manage the balance sheet prudently and continue development, while acknowledging possible delays and cost increases. As of March 31, five projects were under construction, with an estimated $492 million of additional committed costs; three projects in tenant-improvement phase had $235 million of additional committed costs.
- At March 31, debt maturities were staggered, with the next major maturities in July 2022. The revolver had $370 million of remaining capacity. The Operating Partnership reported covenant compliance and substantial headroom. Gross debt was 33.2% of total market capitalization, as defined by the Company.
- After quarter-end, the Operating Partnership issued $350 million of 4.27% unsecured notes due January 2031 on April 28. Management reported approximately $1.0 billion of cash and $370 million of revolver availability as of that date.
- Other notable exposures include $913 million of commitments for operating and development properties, excluding ground leases, and $81 million of accrued environmental remediation liabilities for development sites. Management said additional environmental costs could arise but could not be reasonably estimated.
- The quarterly dividend declared was $0.485 per share/unit. The filing says distributions remain subject to Board discretion and REIT requirements. Routine litigation was not expected to have a material adverse effect; management reported no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether COVID-related tenant concessions, delinquencies and cash-basis accounting materially affect subsequent rent collections and reported revenue.
- Updated occupancy, leasing, rent spreads and tenant credit—particularly given 47.4% of annualized base rent came from the top 15 tenants.
- Liquidity and leverage after the post-quarter $350 million note issuance, including the use of equity proceeds and revolver borrowings.
- Development project completion dates, committed remaining costs, leasing and potential pandemic-related delays or overruns.
- Future environmental remediation costs beyond the $81 million accrued amount, and the Company’s ability to maintain covenant compliance and dividend capacity.