KRC | Q2 2024
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Overview
FFO of $1.10 per share
Revenue of $280.7M (-1.3% Y/Y)
Takeaways
In Q2 2024, Kilroy reported funds from operations (FFO) at $1.10 per share, slightly down from the previous quarter due to reduced interest income and higher general and administrative expenses. On a same-store basis, cash net operating income (NOI) was flat compared to the previous quarter.
At the end of the quarter, Kilroy's stabilized portfolio was 83.7% occupied and 85.4% leased, with the decrease in occupancy mainly due to move-outs in Los Angeles, partially offset by move-ins in San Diego.
Net debt to trailing 12-month EBITDA remained in the mid-6x range, and liquidity was strong with over $1.9 billion available, including $835 million in cash and $1.1 billion available on their line of credit.
Kilroy's overall market trends are encouraging, with notable strength in San Diego and Bellevue, Washington. These areas benefit from broad-based demand and higher physical occupancy rates.
San Francisco is also seeing a resurgence, with tenant demand doubling over the last 18 months, driven by an influx of new-to-market tenants, especially those in the AI sector.
AI-related transactions have comprised about 15% of all market transactions year-to-date, highlighting significant growth in this area. Seattle is benefiting as well, with AI demand spilling over due to the region's strong workforce and its attractiveness for AI technology.
A key factor in Kilroy's recovery is the flight to quality, with tenants prioritizing high-quality spaces and financially strong landlords. During the second quarter, Kilroy signed approximately 235,000 square feet of leases, with an average lease term of 5.5 years.
Leasing activity picked up towards the end of the quarter, continuing into July with an additional 184,000 square feet of leases, including a key early renewal with SAP at Key Center in Bellevue.
Regarding dispositions, Kilroy is reevaluating some of the sites in their development pipeline to determine their best use. Some sites are no longer suited for office or life science purposes.
The company is actively working on transactions and restructuring plans for that land and exploring various ways to maximize value. While these transactions may take time, they are expected to provide additional “dry powder” for acquisitions and will help maintain a strong liquidity profile.
Looking ahead, Kilroy's 2024 guidance includes anticipated development spending of $100 million to $150 million, a $400 million bond maturity in December, and projected average occupancy of 82.75% to 83.75%. The company expects three large move-outs in the second half of the year, which will impact occupancy rates.
Same-store NOI is projected to be between -3% and -4%, with improved net reimbursements and parking revenue offering positive contributions. The updated FFO guidance is projected to range between $4.21 and $4.31, reflecting better operating performance.
Regarding capital allocation and share repurchases, Kilroy is focused on ensuring their development pipeline is fully funded and maintaining a strong balance sheet. CEO Angela Aman emphasized that share buybacks would only be considered with an identified source of proceeds and after evaluating all investment alternatives.
CIO Elliott Trencher echoed this sentiment, highlighting the importance of prioritizing development funding and balance sheet health.
In summary, Kilroy is navigating the office and commercial real estate recovery with a strong financial position and a commitment to growing and maintaining their high-quality portfolio. I think their conservative approach to capital allocation and emphasis on financial stability position them well for continued growth and success.