Please ensure Javascript is enabled for purposes of website accessibility

Kilroy Realty: West Coast Office Markets Are Still Booming

By Brent Nyitray, CFA - Feb 8, 2021 at 8:37AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Kilroy's tenant mix is an important differentiator.

One of the biggest stories of 2020 has been the mass adoption of working from home. Office vacancy rates have risen throughout the year as companies go out of business or decide they need less space.

We recently heard from SL Green (SLG 0.89%), which is concentrated in New York City, while Kilroy (KRC 2.16%) is focused on the West Coast. New York City is seeing increased vacancy rates; however, according to Kilroy, the West Coast is holding up a little better.

Picture of a modern office building

Image source: Getty Images.

Kilroy has exposure to the best markets on the West Coast

Kilroy is an office real estate investment trust (REIT) that focuses on Class A properties on the West Coast. Class A properties are the newest and highest-quality buildings with the most amenities and the best construction. These properties generally command the highest rents. Kilroy's portfolio is concentrated in San Diego, Los Angeles, San Francisco, and Seattle. Its stabilized portfolio totals approximately 14.6 million square feet, along with 808 residential units. The company is currently building six projects with an estimated capacity of 1.9 million square feet.

Funds from operations grew last year

In the fourth quarter, Kilroy reported funds from operations (FFO) of $0.95 per share compared to $1.00 in the fourth quarter of 2019. For the full year, FFO fell 5% to $3.71 per share. The decrease in FFO per share was driven by a 9% increase in shares outstanding. For the year, funds from operations actually rose 3.6% to $433 million. Cash same-store net operating income rose 3.9% in the fourth quarter and 8.3% for the full year, which was driven by the expiration of promotional rent specials in San Francisco.

Kilroy collected 96% of contractual rent in the fourth quarter across all property types. Rent collections for the office and life science tenants came in at 98%. Importantly, these leases are longer term, and Kilroy has limited roll-over exposure; only 6.3% of its portfolio will expire each year through 2025. Kilroy has about 14% of its portfolio in healthcare and life sciences tenants, which are less exposed to the overall economy. Kilroy's development pipeline intends to focus heavily on these sectors.

On the earnings conference call, CEO John Kilroy discussed the life sciences sector:

Specifically, we believe the life science industry represents a huge opportunity for our Company. The pandemic has highlighted how critically important medical innovation is to our economy and to our health. The attention is now driving big increases in private and public investment. The growing demand for quality lab and workspaces in preferred West Coast life science submarkets has driven vacancy rates to 2% or lower. We've been building the capabilities to serve life science tenants for more than two decades and we are now in a strong position to capitalize on additional opportunities. We currently have the third-largest portfolio of life science and healthcare tenants among publicly traded REITs, approximately 14% of our total base rent.

Life sciences is the differentiator

He went on to discuss what tenants are saying, which is that they want to return to work. While the core tech, advertising, media, and information (TAMI) clients, along with the financial, insurance, and real estate (FIRE) clients, are conducive to remote working, this is a bit harder to do in the life sciences business. He characterized the first few weeks of 2021 as having "significantly more positive" sentiment. Seattle is becoming the cloud capital of the world, and tech job growth was positive in 2020 despite COVID. Life sciences capacity is largely maxed out, and there is huge demand. Kilroy's exposure to the life sciences sector gives it a differentiating factor compared to comparable office REITs like SL Green, which are mainly dominated by TAMI and FIRE clients.

Kilroy is trading at just under 16 times funds from operations, which is on the expensive side compared to comparable office REITs like Boston Properties or SL Green. That said, Kilroy reported an increase of FFO for the year, while the others reported declines. Kilroy pays a $0.50 per share quarterly dividend, which gives it a yield of 3.4%. This is somewhat lower than the comparables, but Kilroy is investing heavily in future growth. Kilroy has exposure to some of the strongest markets and has less exposure to the economy than other office REITs. This probably explains its premium multiple.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Kilroy Realty Corporation Stock Quote
Kilroy Realty Corporation
KRC
$61.96 (2.16%) $1.31
SL Green Realty Corp. Stock Quote
SL Green Realty Corp.
SLG
$62.62 (0.89%) $0.55

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.