Kilroy Realty Corporation (NYSE: KRC) today reported
financial results for its third quarter ended September 30,
2023.
Third Quarter Highlights
Financial Results
- Revenues grew 2.8% to $283.6 million for the quarter ended
September 30, 2023, as compared to $276.0 million for the quarter
ended September 30, 2022
- Net income available to common stockholders of $0.45 per
diluted share for the quarter ended September 30, 2023, as compared
to $0.68 per diluted share for the quarter ended September 30,
2022, which included a $0.15 per diluted share gain on sale of an
operating property
- Funds from operations available to common stockholders and
unitholders (“FFO”) of $134.0 million, or $1.12 per diluted share
for the quarter ended September 30, 2023, as compared to $139.7
million, or $1.17 per diluted share for the quarter ended September
30, 2022
Leasing and Occupancy
- Stabilized portfolio was 86.2% occupied and 87.5% leased at
September 30, 2023
- Signed approximately 188,000 square feet of new and renewing
leases
- GAAP rents increased 16.1% and cash rents remained
approximately flat from prior levels in the stabilized
portfolio
- In October, signed approximately 117,000 square feet of new and
renewing leases, including extensions of in-place leases
Development and Redevelopment
- In July, commenced GAAP revenue recognition at 9514 Towne
Centre Drive, an approximately 71,000 square foot office building
in the University Towne Center submarket of San Diego, and added
the building to the stabilized portfolio. The building is 100%
leased to a global technology company
Balance Sheet / Liquidity
- In July, entered into an eleven-year, non-recourse mortgage
note for $375.0 million. The mortgage note bears interest at a
fixed rate of 5.90% and matures on August 10, 2034
- In September, drew the remaining $170.0 million available on
the unsecured term loan facility in accordance with the terms of
the agreement
- As of the date of this release, the company had approximately
$1.9 billion of total liquidity comprised of approximately $790.0
million of cash and short term investments and approximately $1.1
billion available under the unsecured revolving credit
facility
Dividend
- The company’s Board of Directors declared and paid a regular
quarterly cash dividend on its common stock of $0.54 per share,
equivalent to an annual rate of $2.16
Recent Awards / Recognition
- In October, the company received a 5-star ESG rating from GRESB
for the ninth consecutive year and was named the 2023 regional
leader for diversified development in the Americas. Kilroy has
received a number one ranking from GRESB for seven consecutive
years, which reflects the company’s extensive integration of ESG
initiatives
Net Income Available to Common Stockholders / FFO Guidance
and Outlook
The company is providing an updated guidance range of
Nareit-defined FFO per diluted share for the full year 2023 of
$4.55 to $4.60 per share, with a midpoint of $4.58 per share.
Full Year 2023 Range
Low End
High End
Net income available to common
stockholders per share - diluted
$
1.75
$
1.80
Weighted average common shares outstanding
- diluted (1)
117,500
117,500
Net income available to common
stockholders
$
206,000
$
212,000
Adjustments:
Net income attributable to noncontrolling
common units of the Operating Partnership
2,200
2,400
Net income attributable to noncontrolling
interests in consolidated property partnerships
24,500
25,500
Depreciation and amortization of real
estate assets
345,000
345,000
Gains on sales of depreciable real
estate
—
—
Funds From Operations attributable to
noncontrolling interests in consolidated property partnerships
(35,000
)
(36,000
)
Funds From Operations (2)
$
542,700
$
548,900
Weighted average common shares/units
outstanding – diluted (3)
119,200
119,200
Funds From Operations per common
share/unit – diluted (3)
$
4.55
$
4.60
Key Assumptions
July 2023 Assumptions
Updated 2023
Assumptions
Same Store Cash NOI growth (4)
1.50% to 2.50%
2.75% to 3.25%
Average occupancy
86.75% to 87.75%
87.00% to 87.50%
Total development spending (5)
$425 million to $475 million
$400 million to $450 million
Dispositions
$0 to $200 million
$0 million
________________________
(1)
Calculated based on estimated weighted
average shares outstanding including non-participating share-based
awards.
(2)
See management statement for Funds From
Operations at end of release.
(3)
Calculated based on weighted average
shares outstanding including participating and non-participating
share-based awards, dilutive impact of contingently issuable
shares, and assuming the exchange of all common limited partnership
units outstanding. Reported amounts are attributable to common
stockholders, common unitholders and restricted stock
unitholders.
(4)
See management statement for Same Store
Cash Net Operating Income on page 32 of our Supplemental Financial
Report furnished on Form 8-K with this press release.
(5)
Remaining 2023 development spending is
$100 million to $150 million.
The company’s guidance estimates for the full year 2023, and the
reconciliation of net income available to common stockholders per
share - diluted and FFO per share and unit - diluted included
within this press release, reflect management’s views on current
and future market conditions, including assumptions with respect to
rental rates, occupancy levels, and the earnings impact of the
events referenced in this press release. Although these guidance
estimates reflect the impact on the company’s operating results of
an assumed range of future disposition activity, these guidance
estimates do not include any estimates of possible future gains or
losses from possible future dispositions because the magnitude of
gains or losses on sales of depreciable operating properties, if
any, will depend on the sales price and depreciated cost basis of
the disposed assets at the time of disposition, information that is
not known at the time the company provides guidance, and the timing
of any gain recognition will depend on the closing of the
dispositions, information that is also not known at the time the
company provides guidance and may occur after the relevant guidance
period. We caution you not to place undue reliance on our assumed
range of future disposition activity because any potential future
disposition transactions will ultimately depend on the market
conditions and other factors, including but not limited to the
company’s capital needs, the particular assets being sold and the
company’s ability to defer some or all of the taxable gain on the
sales. These guidance estimates also do not include the impact on
operating results from potential future acquisitions, possible
capital markets activity, possible future impairment charges or any
events outside of the company’s control. There can be no assurance
that the company’s actual results will not differ materially from
these estimates.
Conference Call and Audio Webcast
The company’s management will discuss third quarter results and
the current business environment during the company’s October 26,
2023 earnings conference call. The call will begin at 10:00 a.m.
Pacific Time and last approximately one hour. Those interested in
listening via the Internet can access the conference call at
https://events.q4inc.com/attendee/556184498. It may be necessary to
download audio software to hear the conference call. Those
interested in listening via telephone can access the conference
call at (844) 200-6205 and enter access code 383102 five to 10
minutes prior to the start time to allow time for registration.
International callers should dial (929) 526-1599 and enter the same
passcode. In order to bypass speaking to the operator on the day of
the call, please pre-register anytime at
https://www.netroadshow.com/events/login?show=7038fe96&confId=45368.
A replay of the conference call will be available via telephone on
October 26, 2023 through November 2, 2023 by dialing (866) 813-9403
and entering passcode 902548. International callers should dial
(929) 458-6194 and enter the same passcode. The replay will also be
available on our website at
https://investors.kilroyrealty.com/shareholders/investor-events/default.aspx.
About Kilroy Realty Corporation
Kilroy Realty Corporation (NYSE: KRC, the “company”, “Kilroy”)
is a leading U.S. landlord and developer, with operations in San
Diego, Greater Los Angeles, the San Francisco Bay Area, the Pacific
Northwest and Austin, Texas. The company has earned global
recognition for sustainability, building operations, innovation and
design. As pioneers and innovators in the creation of a more
sustainable real estate industry, the company’s approach to modern
business environments helps drive creativity and productivity for
some of the world’s leading technology, entertainment, life science
and business services companies.
The company is a publicly traded real estate investment trust
(“REIT”) and member of the S&P MidCap 400 Index with more than
seven decades of experience developing, acquiring and managing
office, life science and mixed-use projects.
As of September 30, 2023, Kilroy’s stabilized portfolio totaled
approximately 16.3 million square feet of primarily office and life
science space that was 86.2% occupied and 87.5% leased. The company
also had more than 1,000 residential units in Hollywood and San
Diego, which had a quarterly average occupancy of 92.7%. In
addition, the company had two in-process life science redevelopment
projects with total estimated redevelopment costs of $80.0 million,
totaling approximately 100,000 square feet, and two in-process
development projects with an estimated total investment of $1.6
billion, totaling approximately 1.6 million square feet of office
and life science space. The in-process development and
redevelopment office and life science space is 32% leased.
A Leader in Sustainability and Commitment to Corporate Social
Responsibility
Kilroy has a longstanding commitment to sustainability and
continues to be a recognized leader in our sector. For over a
decade, the company and its sustainability initiatives have been
recognized with numerous honors, including being listed on the Dow
Jones Sustainability World Index, earning the GRESB five star
rating and being named a sector and regional leader in the
Americas. Other honors have included the Nareit Leader in the Light
Award, being named ENERGY STAR Partner of the Year and receiving
the ENERGY STAR highest honor of Sustained Excellence.
Kilroy is proud to have achieved carbon neutral operations
across our portfolio since 2020. The company’s portfolio was 70%
LEED certified and 44% Fitwel certified, and 65% of eligible
properties were ENERGY STAR certified as of September 30, 2023.
A significant part of the company’s foundation is its commitment
to enhancing employee growth, satisfaction and wellness while
maintaining a diverse and thriving culture. For the fourth year in
a row, the company has been named to Bloomberg’s Gender Equality
Index, which recognizes companies committed to supporting gender
equality through policy development, representation, and
transparency.
More information is available at
http://www.kilroyrealty.com.
Forward-Looking Statements
This press release contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements are based on our current
expectations, beliefs and assumptions, and are not guarantees of
future performance. Forward-looking statements are inherently
subject to uncertainties, risks, changes in circumstances, trends
and factors that are difficult to predict, many of which are
outside of our control. Accordingly, actual performance, results
and events may vary materially from those indicated or implied in
the forward-looking statements, and you should not rely on the
forward-looking statements as predictions of future performance,
results or events. Numerous factors could cause actual future
performance, results and events to differ materially from those
indicated in the forward-looking statements, including, among
others: global market and general economic conditions, including
periods of heightened inflation, and their effect on our liquidity
and financial conditions and those of our tenants; adverse economic
or real estate conditions generally, and specifically, in the
States of California, Texas and Washington; risks associated with
our investment in real estate assets, which are illiquid, and with
trends in the real estate industry; defaults on or non-renewal of
leases by tenants; any significant downturn in tenants’ businesses,
including bankruptcy, lack of liquidity or lack of funding and the
impact labor disruptions or strikes, such as episodic strikes in
the entertainment industry, may have on our tenants’ businesses;
our ability to re-lease property at or above current market rates;
reduced demand for office space, including as a result of remote
working and flexible working arrangements that allow work from
remote locations other than the employer's office premises; costs
to comply with government regulations, including environmental
remediation; the availability of cash for distribution and debt
service and exposure to risk of default under debt obligations;
increases in interest rates and our ability to manage interest rate
exposure; changes in interest rates and the availability of
financing on attractive terms or at all, which may adversely impact
our future interest expense and our ability to pursue development,
redevelopment and acquisition opportunities and refinance existing
debt; a decline in real estate asset valuations, which may limit
our ability to dispose of assets at attractive prices or obtain or
maintain debt financing, and which may result in write-offs or
impairment charges; significant competition, which may decrease the
occupancy and rental rates of properties; potential losses that may
not be covered by insurance; the ability to successfully complete
acquisitions and dispositions on announced terms; the ability to
successfully operate acquired, developed and redeveloped
properties; the ability to successfully complete development and
redevelopment projects on schedule and within budgeted amounts;
delays or refusals in obtaining all necessary zoning, land use and
other required entitlements, governmental permits and
authorizations for our development and redevelopment properties;
increases in anticipated capital expenditures, tenant improvement
and/or leasing costs; defaults on leases for land on which some of
our properties are located; adverse changes to, or enactment or
implementations of, tax laws or other applicable laws, regulations
or legislation, as well as business and consumer reactions to such
changes; risks associated with joint venture investments, including
our lack of sole decision-making authority, our reliance on
co-venturers’ financial condition and disputes between us and our
co-venturers; environmental uncertainties and risks related to
natural disasters; and our ability to maintain our status as a
REIT. These factors are not exhaustive and additional factors could
adversely affect our business and financial performance. For a
discussion of additional factors that could materially adversely
affect our business and financial performance, see the factors
included under the caption “Risk Factors” in our annual report on
Form 10-K for the year ended December 31, 2022 and our other
filings with the Securities and Exchange Commission. All
forward-looking statements are based on currently available
information and speak only as of the dates on which they are made.
We assume no obligation to update any forward-looking statement
made in this press release that becomes untrue because of
subsequent events, new information or otherwise, except to the
extent we are required to do so in connection with our ongoing
requirements under federal securities laws.
KILROY REALTY CORPORATION
SUMMARY OF
QUARTERLY RESULTS
(unaudited; in thousands, except
per share data)
Three Months Ended September
30,
Nine Months Ended September
30,
2023
2022
2023
2022
Revenues
$
283,594
$
275,958
$
860,678
$
812,643
Net income available to common
stockholders
$
52,762
$
79,757
$
164,957
$
179,990
Weighted average common shares outstanding
– basic
117,185
116,873
117,133
116,783
Weighted average common shares outstanding
– diluted
117,495
117,242
117,411
117,163
Net income available to common
stockholders per share – basic
$
0.45
$
0.68
$
1.40
$
1.53
Net income available to common
stockholders per share – diluted
$
0.45
$
0.68
$
1.40
$
1.53
Funds From Operations (1)(2)
$
134,047
$
139,657
$
421,859
$
416,776
Weighted average common shares/units
outstanding – basic (3)
118,934
118,563
118,894
118,591
Weighted average common shares/units
outstanding – diluted (4)
119,245
118,933
119,172
118,972
Funds From Operations per common
share/unit – basic (2)
$
1.13
$
1.18
$
3.55
$
3.51
Funds From Operations per common
share/unit – diluted (2)
$
1.12
$
1.17
$
3.54
$
3.50
Common shares outstanding at end of
period
117,240
116,877
Common partnership units outstanding at
end of period
1,151
1,151
Total common shares and units outstanding
at end of period
118,391
118,028
September 30, 2023
September 30, 2022
Stabilized office portfolio occupancy
rates: (5)
Greater Los Angeles
81.2
%
84.5
%
San Diego County
86.1
%
86.3
%
San Francisco Bay Area
91.1
%
93.8
%
Greater Seattle
83.5
%
97.7
%
Weighted average total
86.2
%
90.8
%
Total square feet of stabilized office
properties owned at end of period: (5)
Greater Los Angeles
4,345
4,328
San Diego County
2,770
2,709
San Francisco Bay Area
6,170
6,212
Greater Seattle
3,000
3,000
Total
16,285
16,249
________________________
(1)
Reconciliation of Net income available to
common stockholders to Funds From Operations available to common
stockholders and unitholders and management statement on Funds From
Operations are included after the Consolidated Statements of
Operations.
(2)
Reported amounts are attributable to
common stockholders, common unitholders and restricted stock
unitholders.
(3)
Calculated based on weighted average
shares outstanding including participating share-based awards (i.e.
nonvested stock and certain time based restricted stock units) and
assuming the exchange of all common limited partnership units
outstanding.
(4)
Calculated based on weighted average
shares outstanding including participating and non-participating
share-based awards, dilutive impact of contingently issuable
shares, and assuming the exchange of all common limited partnership
units outstanding.
(5)
Occupancy percentages and total square
feet reported are based on the company’s stabilized office
portfolio for the periods presented. Occupancy percentages and
total square feet shown for September 30, 2022 include the office
properties that were sold subsequent to September 30, 2022.
KILROY
REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited; in thousands)
September 30, 2023
December 31, 2022
ASSETS
REAL ESTATE ASSETS:
Land and improvements
$
1,743,170
$
1,738,242
Buildings and improvements
8,431,499
8,302,081
Undeveloped land and construction in
progress
1,950,424
1,691,860
Total real estate assets held for
investment
12,125,093
11,732,183
Accumulated depreciation and
amortization
(2,443,659
)
(2,218,710
)
Total real estate assets held for
investment, net
9,681,434
9,513,473
Cash and cash equivalents
618,794
347,379
Marketable securities
278,789
23,547
Current receivables, net
11,383
20,583
Deferred rent receivables, net
466,073
452,200
Deferred leasing costs and
acquisition-related intangible assets, net
228,742
250,846
Right of use ground lease assets
125,765
126,530
Prepaid expenses and other assets, net
60,141
62,429
TOTAL ASSETS
$
11,471,121
$
10,796,987
LIABILITIES AND
EQUITY
LIABILITIES:
Secured debt, net
$
604,480
$
242,938
Unsecured debt, net
4,330,326
4,020,058
Accounts payable, accrued expenses and
other liabilities
426,662
392,360
Ground lease liabilities
124,517
124,994
Accrued dividends and distributions
64,423
64,285
Deferred revenue and acquisition-related
intangible liabilities, net
178,542
195,959
Rents received in advance and tenant
security deposits
74,646
81,432
Total liabilities
5,803,596
5,122,026
EQUITY:
Stockholders’ Equity
Common stock
1,173
1,169
Additional paid-in capital
5,195,106
5,170,760
Retained earnings
237,665
265,118
Total stockholders’ equity
5,433,944
5,437,047
Noncontrolling Interests
Common units of the Operating
Partnership
53,328
53,524
Noncontrolling interests in consolidated
property partnerships
180,253
184,390
Total noncontrolling interests
233,581
237,914
Total equity
5,667,525
5,674,961
TOTAL LIABILITIES AND EQUITY
$
11,471,121
$
10,796,987
KILROY
REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except
per share data)
Three Months Ended September
30,
Nine Months Ended September
30,
2023
2022
2023
2022
REVENUES
Rental income
$
280,681
$
272,546
$
852,094
$
804,330
Other property income
2,913
3,412
8,584
8,313
Total revenues
283,594
275,958
860,678
812,643
EXPENSES
Property expenses
59,445
52,075
168,233
147,421
Real estate taxes
28,363
27,415
84,868
78,718
Ground leases
2,390
1,771
7,172
5,473
General and administrative expenses
(1)
24,761
23,524
71,356
68,425
Leasing costs
1,852
1,015
4,550
3,475
Depreciation and amortization
85,224
81,140
269,262
266,215
Total expenses
202,035
186,940
605,441
569,727
OTHER INCOME (EXPENSES)
Interest and other income, net
7,015
295
11,896
501
Interest expense
(29,837
)
(19,982
)
(81,891
)
(60,728
)
Gain on sale of depreciable operating
property
—
17,329
—
17,329
Total other expenses
(22,822
)
(2,358
)
(69,995
)
(42,898
)
NET INCOME
58,737
86,660
185,242
200,018
Net income attributable to noncontrolling
common units of the Operating Partnership
(515
)
(664
)
(1,612
)
(1,695
)
Net income attributable to noncontrolling
interests in consolidated property partnerships
(5,460
)
(6,239
)
(18,673
)
(18,333
)
Total income attributable to
noncontrolling interests
(5,975
)
(6,903
)
(20,285
)
(20,028
)
NET INCOME AVAILABLE TO COMMON
STOCKHOLDERS
$
52,762
$
79,757
$
164,957
$
179,990
Weighted average common shares outstanding
– basic
117,185
116,873
117,133
116,783
Weighted average common shares outstanding
– diluted
117,495
117,242
117,411
117,163
Net income available to common
stockholders per share – basic
$
0.45
$
0.68
$
1.40
$
1.53
Net income available to common
stockholders per share – diluted
$
0.45
$
0.68
$
1.40
$
1.53
________________________
(1)
The three and nine months ended September
30, 2023 includes $5.8 million and $11.6 million, respectively, of
retirement costs for our CEO and former President, primarily
comprised of accelerated stock compensation expense.
KILROY
REALTY CORPORATION
FUNDS FROM
OPERATIONS
(unaudited; in thousands, except
per share data)
Three Months Ended September
30,
Nine Months Ended September
30,
2023
2022
2023
2022
Net income available to common
stockholders
$
52,762
$
79,757
$
164,957
$
179,990
Adjustments:
Net income attributable to noncontrolling
common units of the Operating Partnership
515
664
1,612
1,695
Net income attributable to noncontrolling
interests in consolidated property partnerships
5,460
6,239
18,673
18,333
Depreciation and amortization of real
estate assets
83,518
79,410
263,662
261,129
Gain on sale of depreciable real
estate
—
(17,329
)
—
(17,329
)
Funds From Operations attributable to
noncontrolling interests in consolidated property partnerships
(8,208
)
(9,084
)
(27,045
)
(27,042
)
Funds From Operations(1)(2)(3)
$
134,047
$
139,657
$
421,859
$
416,776
Weighted average common shares/units
outstanding – basic (4)
118,934
118,563
118,894
118,591
Weighted average common shares/units
outstanding – diluted (5)
119,245
118,933
119,172
118,972
Funds From Operations per common
share/unit – basic (2)
$
1.13
$
1.18
$
3.55
$
3.51
Funds From Operations per common
share/unit – diluted (2)
$
1.12
$
1.17
$
3.54
$
3.50
________________________
(1)
We calculate Funds From Operations
available to common stockholders and common unitholders (“FFO”) in
accordance with the 2018 Restated White Paper on FFO approved by
the Board of Governors of Nareit. The White Paper defines FFO as
net income or loss calculated in accordance with GAAP, excluding
extraordinary items, as defined by GAAP, gains and losses from
sales of depreciable real estate and impairment write-downs
associated with depreciable real estate, plus real estate-related
depreciation and amortization (excluding amortization of deferred
financing costs and depreciation of non-real estate assets) and
after adjustment for unconsolidated partnerships and joint
ventures. Our calculation of FFO includes the amortization of
deferred revenue related to tenant-funded tenant improvements and
excludes the depreciation of the related tenant improvement assets.
We also add back net income attributable to noncontrolling common
units of the Operating Partnership because we report FFO
attributable to common stockholders and common unitholders.
We believe that FFO is a useful
supplemental measure of our operating performance. The exclusion
from FFO of gains and losses from the sale of operating real estate
assets allows investors and analysts to readily identify the
operating results of the assets that form the core of our activity
and assists in comparing those operating results between periods.
Also, because FFO is generally recognized as the industry standard
for reporting the operations of REITs, it facilitates comparisons
of operating performance to other REITs. However, other REITs may
use different methodologies to calculate FFO, and accordingly, our
FFO may not be comparable to all other REITs.
Implicit in historical cost accounting for
real estate assets in accordance with GAAP is the assumption that
the value of real estate assets diminishes predictably over time.
Since real estate values have historically risen or fallen with
market conditions, many industry investors and analysts have
considered presentations of operating results for real estate
companies using historical cost accounting alone to be
insufficient. Because FFO excludes depreciation and amortization of
real estate assets, we believe that FFO along with the required
GAAP presentations provides a more complete measurement of our
performance relative to our competitors and a more appropriate
basis on which to make decisions involving operating, financing and
investing activities than the required GAAP presentations alone
would provide.
However, FFO should not be viewed as an
alternative measure of our operating performance because it does
not reflect either depreciation and amortization costs or the level
of capital expenditures and leasing costs necessary to maintain the
operating performance of our properties, which are significant
economic costs and could materially impact our results from
operations.
(2)
Reported amounts are attributable to
common stockholders, common unitholders and restricted stock
unitholders.
(3)
FFO available to common stockholders and
unitholders includes amortization of deferred revenue related to
tenant-funded tenant improvements of $4.9 million and $5.0 million
for the three months ended September 30, 2023 and 2022,
respectively, and $15.0 million and $14.2 million for the nine
months ended September 30, 2023 and 2022, respectively.
(4)
Calculated based on weighted average
shares outstanding including participating share-based awards (i.e.
certain time based restricted stock units) and assuming the
exchange of all common limited partnership units outstanding.
(5)
Calculated based on weighted average
shares outstanding including participating and non-participating
share-based awards, dilutive impact of contingently issuable
shares, and assuming the exchange of all common limited partnership
units outstanding.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20231025890603/en/
Eliott Trencher Executive Vice President, Chief Financial
Officer and Chief Investment Officer (310) 481-8587 or Bill
Hutcheson Senior Vice President, Investor Relations & Capital
Markets (415) 778-5678
Kilroy Realty (NYSE:KRC)
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