Kilroy Realty Faces Challenges Amid Big Tech Slowdown, but Offers Attractive Yield

Kilroy Realty stock faces headwinds from big tech slowdown - Evercore ISI By Investing.com

On Monday, Evercore ISI adjusted its price target for Kilroy Realty Corporation (NYSE:KRC), a real estate investment trust, reducing it to $38.00 from the previous $39.00. The firm maintained its "In Line" rating for the stock. The revision follows Kilroy Realty's reported decrease in leasing volume, which dropped to 235,000 square feet in the current quarter from 400,000 square feet in the first quarter. The company saw a decline in both long-term leases, which decreased to 193,000 square feet from 270,000 square feet, and short-term leases, which fell to 42,000 square feet from 130,000 square feet. The analyst noted that investor focus will likely center on occupancy trends. Evercore ISI revised its occupancy projections for Kilroy Realty, anticipating a 7.6% decrease in funds from operations (FFO) in 2024 and an additional 2.6% or $0.11 decline to $4.16 in 2025. These projections are primarily due to the dilutive effect following the maturity of a 3.45% $404 million bond. The raised capital for this bond is expected to incur interest at approximately 5%, influenced by a reduction in capitalized interest related to the King of Prussia (KOP) development later in 2025. The analysis by Evercore ISI suggests that approximately 50% of the projected FFO decline can be attributed to both the bond's maturity and the KOP development's impact. The firm emphasized the importance for Kilroy Realty to focus on increasing occupancy and advancing leasing for its developments as key objectives. In summary, the updated price target reflects a modest decrease based on the company's recent leasing performance and projected financial outcomes. Evercore ISI's revised figures incorporate a conservative stance on retention and leasing within Kilroy Realty's core markets. In other recent news, Kilroy Realty Corporation reported a strong Q2 in 2024, indicating a recovery in their real estate portfolio, especially in San Diego and Bellevue markets. The company announced plans for organizational changes, including the hiring of a new CFO and an EVP General Counsel. The updated 2024 guidance projects an increase in Funds From Operations (FFO) and same-store Net Operating Income (NOI), despite a projected negative 3-4% cash same-store NOI for the next quarter. Demand for office space in San Francisco, driven by the tech and AI sectors, is nearing pre-pandemic levels. However, recovery in the Los Angeles market is slower, particularly for larger format tenants. Kilroy Realty expressed interest in expanding its Austin portfolio and exploring opportunities in other parts of the capital stack. The company's updated 2024 guidance indicates a midpoint FFO of $4.26, attributed to higher net reimbursements and better parking revenues. These are some of the recent developments within Kilroy Realty Corporation. In light of Evercore ISI's recent price target adjustment for Kilroy Realty Corporation (NYSE:KRC), current data from InvestingPro provides additional context for investors. Kilroy Realty's market capitalization stands at approximately $4.01 billion, with a price-to-earnings (P/E) ratio of 20.12, suggesting a market valuation that aligns with its earnings. Despite recent challenges, the company has maintained a strong gross profit margin of 67.33% over the last twelve months as of Q2 2024, which indicates efficient cost management relative to its revenues. Moreover, Kilroy Realty has shown dedication to its shareholders through consistent dividend payments, having raised its dividend for six consecutive years and maintaining payments for an impressive 28 consecutive years. InvestingPro Tips highlight the company's resilience, such as its ability to cover short-term obligations, as its liquid assets exceed its short-term liabilities. Additionally, analysts predict Kilroy Realty will remain profitable this year, a reassuring sign amidst concerns over leasing volume declines. For investors seeking further insights, there are over 6 additional InvestingPro Tips available, including detailed analysts' earnings revisions and the stock's recent performance metrics. These tips can provide a more nuanced understanding of Kilroy Realty's position within the real estate investment sector and can be accessed for deeper analysis on InvestingPro.

Kilroy Realty: Why I'm Buying More Of This 6.4% Yield (NYSE:KRC)

Looking for a portfolio of ideas like this one? Members of Hoya Capital Income Builder get exclusive access to our subscriber-only portfolios. Learn More " Looking past headlines is not an easy thing to do, as we often get bombarded with doom and gloom from mainstream media outlets. This includes the so-called retail apocalypse in the pre-2020 years, when some believed that online shopping on Amazon (AMZN) was going to make in-person shopping go the way of the dodo. That did not come true, as Class A mall owner Simon Property Group (SPG) and shopping center owner Kimco Realty (KIM) are now trading at or above where they were in pre-pandemic times. This brings me to office REIT Kilroy Realty Corp. (NYSE:KRC), which I last covered in July of last year, highlighting its quality property profile and deep undervaluation with more than its fair share of risks priced into the stock. The market has responded in kind, with the stock giving investors a 14.4% total return since my last piece, which is not bad over a 13-month timeframe. In this article, I revisit KRC and discuss why it remains undervalued for income and value investors at present, so let's get started. Kilroy Realty is a U.S. West coast focused office REIT. It's been around for over 70 years and was led by long-time CEO John Kilroy before he retired at the end of last year. As shown below, KRC's properties are located in tech hubs along the west coast like Greater Seattle, SF Bay Area, Southern California, and it has a growing presence in Austin, Texas, which has been a destination for tech companies in recent years. KRC continues to feel the effects of the downturn in office use since 2020. This is reflected by occupancy declining from 87% in the prior year period to 84% as of Q2, 2024. FFO per share declined by 7.6% YoY to $1.10 and down by $0.01 on a sequential QoQ basis, as a result of lower occupancy. There are positive signs, however, that KRC's occupancy decline is turning the corner as tenants fly to high quality properties with amenities, as is the case with KRC's relatively young portfolio compared to the office sector. In particular, management saw leasing momentum during both the second quarter and into the current third quarter in progress, as reflected by comments during the recent conference call: Over the last 60 days, we've been particularly encouraged by a number of discussions with potential new tenants, with space requirements over 100,000 square feet. In addition, recent high-profile return to work announcements by major employers and a new found focus on the enforcement of new and existing mandates underscores the recognition that in-person connection is critical to the long-term success of both employees and organization. In San Francisco, total tenant demand in the market has doubled over the course of the last 18 months, and leasing volumes are slowly but consistently improving, supported by growing demand for many new-to-market tenants, including those in the AI sector. As a result of this trend, management raised the same store cash NOI guidance for the full-year from a loss of 4.25% previously to a loss of 3.5% at the midpoint of the range. In addition, FFO per share guidance was raised by $0.04 from the previous target to $4.26. Beyond 2024, I do see a path for KRC to retake its 2023 FFO per shares of $4.62 with continued recovery in the office sector and with new developments as KRC pivots toward the fast-growing life sciences category, with $1.7 billion in in-process developments. This includes KRC's Oyster Point project in South San Francisco, which is garnering interest from multiple early-stage life sciences companies. Meanwhile, KRC's balance sheet is supported by BBB/Baa2 investment grade credit ratings from S&P and Moody's. It also has $1.9 billion in liquidity and a reasonably safe debt to EBITDA ratio of 6.2x, with no debt maturities through the end of this year. Importantly for income investors, KRC currently sports a 6.4% dividend yield. The dividend is well-covered by a 51% payout ratio, leaving plenty of retained capital to fund developments and deleverage the balance sheet. KRC has paid an uninterrupted dividend since 2009 and while dividend growth has been lacking since 2022, it could resume after occupancy stabilizes and improves. KRC remains attractive, especially after the price drop along with the market over the past week, at the current price of $33.80 with a forward P/FFO of just 8.0x, sitting far below its historical P/FFO of 17.2, as shown below. KRC also trades at a discount to another Class A office REIT, BXP, Inc. (BXP), formerly known as Boston Properties, which carries a P/FFO of 9.5x. At KRC's current discounted valuation, the market is pricing in a no-growth future for the REIT, which I don't believe to be the case, considering its stabilizing fundamentals and early signs of a rebound. Sell side analysts who follow the company estimate that KRC will return to growth in 2026 with a 5.6% increase in FFO per share. Over the long run, I believe that KRC can achieve at least a mid-single digit FFO per share annual growth rate, considering its in-demand properties and lack of new supply in recent years, benefits of which take time to realize. As such, KRC appears to be highly appealing at the current price. Risks to the thesis include the potential for a 'hard landing' in the economy, as the economy added fewer jobs in July than previously expected. This could lower demand in the near term and push out the recovery time for KRC. In addition, KRC could see its cost of capital rise should interest rates remain high due to stubborn inflation. Kilroy Realty remains a compelling investment with its high-quality, tech-centric office properties along the U.S. West Coast, continued undervaluation, and high dividend yield. Despite ongoing challenges in office space demand, KRC has shown signs of stabilizing occupancy and increasing leasing momentum, particularly in high-demand sectors like AI and life sciences. With a solid balance sheet supported by investment-grade credit ratings, and a well-covered 6.4% dividend yield, KRC is attractively priced at a significant discount to its historical valuation and peers. While near-term risks include potential economic downturns and high interest rates, they appear to be more than baked into the share price, presenting income and value investors with potentially strong total returns from here.