Kilroy Realty Corporation Reports First Quarter Financial Results

By: Kilroy Realty Corporation via Business Wire

April 26, 2023 at 17:06 PM EDT

Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its first quarter ended March 31, 2023.

First Quarter Highlights

Financial Results

Revenues grew approximately 10.3% to $292.8 million for the quarter ended March 31, 2023, as compared to $265.5 million for the quarter ended March 31, 2022
Net income available to common stockholders of $0.48 per diluted share, an increase of approximately 6.7% as compared to $0.45 per diluted share for the quarter ended March 31, 2022
Funds from operations available to common stockholders and unitholders (“FFO”) of $146.0 million, or $1.22 per diluted share, an increase of approximately 5.2% as compared to $137.8 million, or $1.16 per diluted share for the quarter ended March 31, 2022

Leasing and Occupancy

Stabilized portfolio was 89.6% occupied and 91.6% leased at March 31, 2023
Signed approximately 286,000 square feet of new and renewing leases
- GAAP rents increased approximately 4.2% and cash rents decreased approximately 4.4% from prior levels in the stabilized portfolio
In April, signed approximately 52,000 square feet of leases, including an approximately 20,000 square foot lease at Indeed Tower

Balance Sheet / Liquidity

As of the date of this release, the company had approximately $1.6 billion of total liquidity comprised of approximately $330.0 million of cash and cash equivalents, $170.0 million available under the unsecured term loan facility and full availability under the $1.1 billion unsecured revolving credit facility
During the quarter, amended the unsecured term loan facility to increase the capacity to $520.0 million. The company has drawn a total of $350.0 million to date, including $150.0 million towards the end of March as per the terms of the agreement
Investment grade credit rated with approximately 95% unsecured debt and no significant debt maturities until the fourth quarter of 2024

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

Development and Redevelopment

In April, completed construction of the core and shell of an approximately 71,000 square foot office building in the University Towne Center submarket of San Diego and moved the property into the tenant improvement phase. The building is 100% leased

Other Corporate Developments

As previously reported, John Kilroy will be retiring as Chief Executive Officer (“CEO”) at the end of 2023, and the company’s Board of Directors has retained Korn Ferry to assist in a comprehensive search for the company’s next CEO, which will include internal candidates and external candidates, with a targeted start date of January 1, 2024
- The company expects to incur costs of $8 million to $14 million in 2023 related to his retirement

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 $4.30 to $4.50 per share, with a midpoint of $4.40 per share. Excluding the non-recurring executive retirement costs referenced above, FFO guidance is unchanged.


	Full Year 2023 Range
	Low End			High End
Net income available to common stockholders per share - diluted	$	1.60		$	1.79

Weighted average common shares outstanding - diluted ⁽¹⁾		117,500			117,500

Net income available to common stockholders	$	188,000		$	210,000
Adjustments:
Net income attributable to noncontrolling common units of the Operating Partnership		1,800			2,300
Net income attributable to noncontrolling interests in consolidated property partnerships		23,500			25,500
Depreciation and amortization of real estate assets		335,000			335,000
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⁾	$	513,300		$	536,800

Weighted average common shares/units outstanding – diluted ⁽³⁾		119,400			119,400

Funds From Operations per common share/unit – diluted ⁽³⁾	$	4.30		$	4.50


Key Assumptions	February 2023 Assumptions	Updated 2023 Assumptions
Same Store Cash NOI growth⁽⁴⁾	0.0% to 2.0%	0.0% to 2.0%
Average occupancy	86.5% to 88.0%	86.5% to 88.0%
General & administrative expenses	$82 million to $90 million	$82 million to $90 million
Executive retirement costs⁽⁵⁾	—	$8 million to $14 million
Total development spending ⁽⁶⁾	$450 million to $550 million	$400 million to $500 million
Dispositions	$0 to $200 million	$0 to $200 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)		Excluded from the general and administrative expenses line item, above.
(6)		Remaining 2023 development spending is $325 million to $425 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 first quarter results and the current business environment during the company’s April 27, 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/401574804. 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 558367 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=570175e8&confId=44980. A replay of the conference call will be available via telephone on April 27, 2023 through May 4, 2023 by dialing (866) 813-9403 and entering passcode 764296. 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 March 31, 2023, Kilroy’s stabilized portfolio totaled approximately 16.2 million square feet of primarily office and life science space that was 89.6% occupied and 91.6% leased. The company also had more than 1,000 residential units in Hollywood and San Diego, which had a quarterly average occupancy of 93.4%. 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 three in-process development projects with an estimated total investment of $1.7 billion, totaling approximately 1.7 million square feet of office and life science space. The in-process development and redevelopment office and life science space is 34% 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 69% LEED certified and 43% Fitwel certified, and 67% of eligible properties were ENERGY STAR certified as of March 31, 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; our ability to re-lease property at or above current market rates; reduced demand for office space, including as a result of remote work 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 March 31,
	2023			2022
Revenues	$	292,802		$	265,501

Net income available to common stockholders	$	56,608		$	53,128

Weighted average common shares outstanding – basic		117,059			116,650
Weighted average common shares outstanding – diluted		117,407			117,060

Net income available to common stockholders per share – basic	$	0.48		$	0.45
Net income available to common stockholders per share – diluted	$	0.48		$	0.45

Funds From Operations ⁽¹⁾⁽²⁾	$	145,959		$	137,766

Weighted average common shares/units outstanding – basic⁽³⁾		118,818			118,628
Weighted average common shares/units outstanding – diluted⁽⁴⁾		119,165			119,038

Funds From Operations per common share/unit – basic ⁽²⁾	$	1.23		$	1.16
Funds From Operations per common share/unit – diluted ⁽²⁾	$	1.22		$	1.16

Common shares outstanding at end of period		117,121			116,716
Common partnership units outstanding at end of period		1,151			1,151
Total common shares and units outstanding at end of period		118,272			117,867

	March 31, 2023			March 31, 2022
Stabilized office portfolio occupancy rates: ⁽⁵⁾
Greater Los Angeles		80.8	%		85.7	%
San Diego County		85.9	%		89.4	%
San Francisco Bay Area		94.7	%		92.9	%
Greater Seattle		95.3	%		99.2	%
Weighted average total		89.6	%		91.3	%

Total square feet of stabilized office properties owned at end of period: ⁽⁵⁾
Greater Los Angeles		4,344			4,457
San Diego County		2,698			2,171
San Francisco Bay Area		6,164			6,212
Greater Seattle		3,000			2,381
Total		16,206			15,221

________________________

(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 March 31, 2022 include the office properties that were sold subsequent to March 31, 2022.

KILROY REALTY CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited; in thousands)

	March 31, 2023			December 31, 2022
ASSETS
REAL ESTATE ASSETS:
Land and improvements	$	1,738,242		$	1,738,242
Buildings and improvements		8,335,285			8,302,081
Undeveloped land and construction in progress		1,788,542			1,691,860
Total real estate assets held for investment		11,862,069			11,732,183
Accumulated depreciation and amortization		(2,294,202	)		(2,218,710	)
Total real estate assets held for investment, net		9,567,867			9,513,473

Cash and cash equivalents		476,358			347,379
Marketable securities		23,288			23,547
Current receivables, net		15,926			20,583
Deferred rent receivables, net		457,870			452,200
Deferred leasing costs and acquisition-related intangible assets, net		238,184			250,846
Right of use ground lease assets		126,277			126,530
Prepaid expenses and other assets, net		63,622			62,429
TOTAL ASSETS	$	10,969,392		$	10,796,987

LIABILITIES AND EQUITY
LIABILITIES:
Secured debt, net	$	241,547		$	242,938
Unsecured debt, net		4,171,029			4,020,058
Accounts payable, accrued expenses and other liabilities		418,902			392,360
Ground lease liabilities		124,837			124,994
Accrued dividends and distributions		64,461			64,285
Deferred revenue and acquisition-related intangible liabilities, net		195,629			195,959
Rents received in advance and tenant security deposits		80,565			81,432
Total liabilities		5,296,970			5,122,026

EQUITY:
Stockholders’ Equity
Common stock		1,171			1,169
Additional paid-in capital		5,175,402			5,170,760
Retained earnings		257,079			265,118
Total stockholders’ equity		5,433,652			5,437,047
Noncontrolling Interests
Common units of the Operating Partnership		53,386			53,524
Noncontrolling interests in consolidated property partnerships		185,384			184,390
Total noncontrolling interests		238,770			237,914
Total equity		5,672,422			5,674,961
TOTAL LIABILITIES AND EQUITY	$	10,969,392		$	10,796,987

KILROY REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited; in thousands, except per share data)

	Three Months Ended March 31,
	2023			2022
REVENUES
Rental income	$	290,104		$	263,208
Other property income		2,698			2,293
Total revenues		292,802			265,501

EXPENSES
Property expenses		53,780			45,424
Real estate taxes		28,228			25,870
Ground leases		2,369			1,826
General and administrative expenses		23,936			22,781
Leasing costs		1,372			1,013
Depreciation and amortization		93,676			88,660
Total expenses		203,361			185,574

OTHER INCOME (EXPENSES)
Interest and other income, net		1,460			81
Interest expense		(25,671	)		(20,625	)
Total other expenses		(24,211	)		(20,544	)

NET INCOME		65,230			59,383

Net income attributable to noncontrolling common units of the Operating Partnership		(560	)		(516	)
Net income attributable to noncontrolling interests in consolidated property partnerships		(8,062	)		(5,739	)
Total income attributable to noncontrolling interests		(8,622	)		(6,255	)

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	56,608		$	53,128

Weighted average common shares outstanding – basic		117,059			116,650
Weighted average common shares outstanding – diluted		117,407			117,060

Net income available to common stockholders per share – basic	$	0.48		$	0.45
Net income available to common stockholders per share – diluted	$	0.48		$	0.45

KILROY REALTY CORPORATION FUNDS FROM OPERATIONS (unaudited; in thousands, except per share data)

	Three Months Ended March 31,
	2023			2022
Net income available to common stockholders	$	56,608		$	53,128
Adjustments:
Net income attributable to noncontrolling common units of the Operating Partnership		560			516
Net income attributable to noncontrolling interests in consolidated property partnerships		8,062			5,739
Depreciation and amortization of real estate assets		91,671			87,001
Funds From Operations attributable to noncontrolling interests in consolidated property partnerships		(10,942	)		(8,618	)
Funds From Operations^(1)(2)(3)	$	145,959		$	137,766

Weighted average common shares/units outstanding – basic ⁽⁴⁾		118,818			118,628
Weighted average common shares/units outstanding – diluted ⁽⁵⁾		119,165			119,038

Funds From Operations per common share/unit – basic ⁽²⁾	$	1.23		$	1.16
Funds From Operations per common share/unit – diluted ⁽²⁾	$	1.22		$	1.16

________________________

(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 $5.2 million and $4.3 million for the three months ended March 31, 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.

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Contacts

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