Kilroy Realty Corporation Reports Fourth Quarter Financial Results

Kilroy Realty Corporation (NYSE: KRC) today reported financial results for its fourth quarter ended December 31, 2021.

Fourth Quarter Highlights

Financial Results

• Net income available to common stockholders per share of $0.40
• Funds from operations available to common stockholders and unitholders (“FFO”) per share of $1.05
  • Both net income available to common stockholders per share and FFO per share included an $0.11 per share charge for the early extinguishment of debt, inclusive of additional interest expense, related to the redemption of the company’s 3.800% unsecured senior notes due January 2023
• Revenues of $261.1 million

Stabilized Portfolio

• Stabilized portfolio was 91.9% occupied and 93.9% leased at December 31, 2021
• Signed approximately 312,000 square feet of new and renewing leases
  • Includes an eight-year lease with a major media company for 80,000 square feet in Los Angeles executed in November
  • GAAP and cash rents increased approximately 20.2% and 6.9%, respectively, from prior levels

Dispositions

• In December, completed the sale of Sabre Springs Corporate Center, a two-building, approximately 102,000 square foot office campus in the I-15 Corridor of San Diego for gross proceeds of $37.0 million

Development

• During the quarter, commenced GAAP revenue recognition on 100% of Kilroy Oyster Point - Phase 1, an approximately 661,000 square foot office and life science campus in South San Francisco that is 100% leased to two tenants, Cytokinetics and Stripe
• In connection with the execution of three new life science leases totaling 330,000 square feet, in December, commenced construction on the first of three redevelopments, the 96,000 square foot life science conversion of 12340 El Camino Real in the Del Mar submarket of San Diego

Balance Sheet / Liquidity Highlights

• In October, completed a public offering of $450.0 million of 12-year senior unsecured green bonds at 2.650% due November 2033
• In October, completed the early redemption of all $300.0 million of 3.800% unsecured senior notes due January 2023 for a price of approximately $313.4 million, including make whole redemption fees and other related costs
• As of the date of this release, the company had approximately $1.4 billion of total liquidity comprised of approximately $290.0 million of cash and cash equivalents and full availability under the $1.1 billion unsecured revolving credit facility
• No significant debt maturities until December 2024

Full Year 2021 Highlights

Operations

• Executed approximately 1.3 million square feet of office and life science leases, including leases on development properties, with strong increases in rental rates compared to prior rates
  • GAAP and cash rents increased approximately 20.8% and 7.0%, respectively, from prior levels
  • 67% new leases and 33% renewal leases with an average term of 7 years
  • With strong, consistent leasing performance, the company is entering the new year with average lease expirations of approximately 7.1% annually through 2025

Capital Allocation

• Generated gross proceeds of approximately $1.1 billion from the company’s capital recycling program including the disposition of The Exchange on 16^th for approximately $1,440 per square foot and a gain on sale of $457.8 million
• Redeployed the capital generated from dispositions into five off-market acquisitions of operating and development properties totaling $1.2 billion
  • Among these transactions was the acquisition of Indeed Tower, a newly constructed 734,000 square foot office tower located in the central business district of Austin, Texas, marking the company’s entry into the Southwest region
• Expanded the company’s life science platform with the execution of 330,000 square feet of life science leases and in connection with these leases, committed three buildings in San Diego to our redevelopment program: 12340 El Camino Real and 12400 High Bluff Drive in the Del Mar submarket and 4690 Executive Drive in the University Towne Center submarket, which will be converted in phases from office to life science use

Development

• Added more than $1.0 billion of new development to the stabilized portfolio
  • 9455 Towne Centre Drive, a $95.0 million, approximately 160,000 square foot office project located in the University Towne Center submarket of San Diego; the project is 100% leased to a global technology company
  • One Paseo Office, a $210.0 million, approximately 288,000 square foot component of our One Paseo mixed-use project in the Del Mar submarket of San Diego, which is 100% leased
  • Oyster Point Phase I, a $570.0 million, approximately 661,000 square foot 3-building office development project located in South San Francisco. The first building was delivered to Cytokinetics at the end of September. The remaining two buildings were delivered to fintech giant Stripe in November
  • Jardine, the $185.0 million, 193-unit luxury residential tower in Hollywood that was completed in April and is currently 84% leased
    • The company now has 1,001 residential units that are approximately 96% leased
• Commenced construction on $1.0 billion of new development projects
  • Kilroy Oyster Point - Phase 2, a $940.0 million, approximately 875,000 square foot life science project located in South San Francisco
  • 9514 Towne Centre Drive, a $60.0 million, approximately 71,000 square foot office project located in the University Towne Center submarket of San Diego; the project is 100% leased

Financial and Balance Sheet

• Increased the size of the company’s unsecured revolving credit facility from $750.0 million to $1.1 billion, reduced borrowing costs and extended its maturity to July 2025, with two six-month extension options
• Increased the annual dividend on the company’s common stock by 4.0% to $2.08 per share
• Completed a public offering of $450.0 million, 2.650% 12-year senior unsecured green bonds

Sustainability

• Maintained industry leadership position in sustainability, as measured by accredited organizations and ranking systems, including the GRESB 2021 Real Estate Assessment, NAREIT’s Leader in the Light award, the Dow Jones Sustainability World Index (DJSI), and ENERGY STAR Partner of the Year Sustained Excellence
• Debuted on the U.S. EPA’s National Top 100 List of largest green power users
• International WELL Building Institute WELL Portfolio Class of 2021

Results for the Quarter Ended December 31, 2021

For the fourth quarter ended December 31, 2021, the company reported net income available to common stockholders of $47.6 million, or $0.40 per share, including a $0.05 per share gain on sale of operating properties, compared to $78.6 million, or $0.67 per share, including a $0.31 per share gain on sale of operating properties in the fourth quarter of 2020. FFO in the fourth quarter of 2021 was $125.5 million, or $1.05 per share, compared to $112.7 million, or $0.95 per share, in the fourth quarter of 2020. Net income available to common stockholders and FFO in the fourth quarter of 2021 included an $0.11 per share charge for the early extinguishment of debt, inclusive of additional interest expense, related to the redemption of the company’s 3.800% unsecured senior notes due January 2023. Prior period net income available to common stockholders and FFO per share included a reversal of revenue of $0.03 per share net charge due to co-working, advertising and residential tenant creditworthiness related to the COVID-19 pandemic.

All per share amounts in this report are presented on a diluted basis.

Net Income Available to Common Stockholders / FFO Guidance and Outlook

The company is providing a guidance range of NAREIT-defined FFO per diluted share for the full year 2022 of $4.35 to $4.55 per share, with a midpoint of $4.45 per share.

Key 2022 assumptions:

• Dispositions of $200.0 million to $500.0 million
• Same Store Cash NOI growth of 4.5% to 5.5% ⁽²⁾
• Year-end occupancy of approximately 91.0% to 92.0%
• Total development spending of approximately $550.0 million to $650.0 million

The company’s guidance estimates for the full year 2022, 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 fourth quarter results and the current business environment during the company’s February 1, 2022 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/813755000. 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 734934 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.incommglobalevents.com/registration/q4inc/9126/q4-2021-kilroy-realty-corporation-earnings-conference-call/. A replay of the conference call will be available via telephone on February 1, 2022 through February 8, 2022 by dialing (866) 813-9403 and entering passcode 009720. International callers should dial (929) 458-6194 and enter the same passcode. The replay will also be available on our website at http://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 December 31, 2021, Kilroy’s stabilized portfolio totaled approximately 15.5 million square feet of primarily office and life science space that was 91.9% occupied and 93.9% leased. The company also had more than 1,000 residential units in Hollywood and San Diego, which had a quarterly average occupancy of 88.9%. In addition, the company had one 96,000 square foot in-process life science redevelopment project with total estimated redevelopment costs of $40.0 million and five in-process development projects with an estimated total investment of $2.2 billion, totaling approximately 2.6 million square feet of office and life science space. The in-process development and redevelopment office and life science space was 46% leased.

A Leader in Sustainability and Commitment to Corporate Social Responsibility

The company is listed on the Dow Jones Sustainability World Index and has been recognized by industry organizations around the world. The company’s stabilized portfolio was 73% LEED certified, 37% Fitwel certified, 76% of eligible office properties were ENERGY STAR certified, and 80% of our eligible stabilized residential properties were ENERGY STAR certified as of December 31, 2021.

The company has been recognized by GRESB as the listed sustainability leader in the Americas for eight of the last nine years. Other honors have included the National Association of Real Estate Investment Trust’s (NAREIT) Leader in the Light award for eight consecutive years and ENERGY STAR Partner of the Year for eight years as well as ENERGY STAR’s highest honor of Sustained Excellence, for the past six years.

A big 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 third year in a row, the company has been named to Bloomberg’s Gender Equality Index—recognizing 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 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; our ability to re-lease property at or above current market rates; 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; 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; our ability to maintain our status as a REIT; and uncertainties regarding the impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business and the economy generally. 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, 2020 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.

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