Morningstar | Kilroy Realty Delivers Strong 4Q as West Coast Office Market Remains Robust
No-moat Kilroy Realty reported a decent fourth quarter that fit well within our expectations, and we will maintain our fair value estimate of $82 per share. Funds from operations grew 2.4% to $3.48 per diluted share in 2018. The fundamentals behind Kilroy’s West Coast office portfolio remain sound. Re-leasing spreads came in at 10.7%, somewhat lower than previous years, but we think this level is reasonable because this year’s base rent was substantially higher than previous years’ base rent. Looking forward, we anticipate that Kilroy will be able to generally maintain a similar rate of rent increases. Average same-store occupancy decreased 40 basis points to 94.1%, but we do not think this indicates deteriorating portfolio quality. We were impressed that Kilroy landed a large long-term lease with Netflix, which demonstrates that it continues to thrive at the top tier of West Coast office leasing. We see the 3% growth in same-store cash net operating income as a continuation of Kilroy’s longstanding story of solid, if slowing, growth as the West Coast office market matures.Kilroy is positioning itself as an environmentally friendly landlord. In September, the company announced a commitment to achieving carbon-neutral operations by 2020 through a combination of increasing its buildings’ energy efficiency and an off-site energy purchase agreement to offset power consumed. The company has also received LEED certifications for about 60% of its stabilized portfolio. Though we applaud these efforts, we will be interested to see the extent to which management can directly tie its environmentally friendly policies to tenant demand and pricing power.
Kilroy Realty is a self-administered real estate investment trust engaged in premier office and mixed-use submarkets along the West Coast. The company owns, develops, acquires and manages real estate assets, consisting primarily of class A properties in the coastal regions of Greater Los Angeles, San Diego County, the San Francisco Bay Area and Greater Seattle. The company owns its interests in all of its real estate assets through Kilroy Realty, L.P. (Operating Partnership) and Kilroy Realty Finance Partnership, L.P. and conducts substantially all of its operations through the Operating Partnership. The company's stabilized portfolio of operating properties include stabilized office and residential properties.
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