Kilroy Realty Stock: A Great Company But Not At A Great Price (NYSE:KRC)

Hand picked wooden block written with REIT stands for Real Estate Investment Trust

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One of the most stable and consistently growing diversified REITs on the market today is a company called Kilroy Realty Corporation (NYSE:KRC). In recent years, management has succeeded in growing the company at a steady pace. This applies not only to revenue but also its cash flow figures. Current guidance provided by management suggests that this growth is set to continue for at least the near term. As a result, this enterprise makes for an interesting prospect. But it’s not exactly a cheap one. All things considered, Kilroy Realty probably is more or less fairly valued, both relative to its peers and on an absolute basis.

Steady as she goes

Today, Kilroy Realty describes itself as a REIT that focuses on a variety of assets such as premier office properties, life science assets, and mixed-use properties. Management describes its focus as being on Class A properties, which are those that are classified as above average in terms of quality. Not only are these properties of attractive quality. They are also fairly young. Whereas the average age of properties in the portfolios of its peers tends to be around 30 years old, its own properties are only about 11 years old, on average. These assets are also generally focused on attractive markets, such as the Greater Los Angeles area, San Diego County, the San Francisco Bay area, Greater Seattle, and Austin, Texas. In all, the company’s stabilized office properties number about 120 buildings that have a combined 15.46 million square feet. By the end of 2021, these properties were 91.9% occupied and 93.9% leased. The company also owns three residential properties they have a combined 1,001 units that, as of the end of last year, boasted a 78% occupancy rate.

In terms of tenant concentration, it is worth noting that the company is fairly diverse. Having said that, its top 15 largest tenants make up 48.1% of its annualized base rent. This is quite large when you consider the company ended 2021 with 422 office tenants. Its largest exposure is to an unnamed Fortune 50 publicly-traded company. That business makes up 5% of the company’s annualized base rent. In second place, we have GM Cruise, LLC, a subsidiary of General Motors (GM), accounting for 4.5% of annualized base rent. This is then followed up by Amazon (AMZN) at 4.2%.

Over the past few years, management has done a great job in growing the company. Back in 2017, for instance, the firm boasted revenue of $719 million. This number has increased each year since, climbing to $955 million in 2021. This came even as the occupancy rate of the properties dropped from 95.2% to 93.9%. It was driven, instead, by a surge in square footage and unit count. Over the past five years, the rentable square footage of the company’s office portfolio has grown at a nice clip, climbing from 13.72 million square feet to 15.46 million square feet. The company also saw the number of residential units it owns rise from 200 to 1,001, while the occupancy rate of these units has remained in a fairly narrow range of between 72.2% and 82.4%. Last year, this figure was a solid 78%.

Of course, revenue is not the only thing that matters. Investors should also pay attention to profitability. One way to do this is to look at operating cash flow. Over the past five years, this metric has increased, climbing from $347 million to $516.4 million. After making some adjustments, this figure would have increased from $317.6 million to $485.6 million. Investors should also pay attention to FFO, or funds from operations. This metric expanded over the past five years from $346.8 million to $462.3 million. On top of this, we also have NOI, or net operating income. This expanded from $513 million in 2017 to $688.7 million in 2021. And finally, we also have EBITDA, which grew from $449.4 million in 2017 to $602.4 million last year.

When it comes to the company’s 2022 fiscal year, management has offered some guidance. But not much. At present, they anticipate FFO of between $517.2 million and $541.6 million. At the midpoint, this implies FFO of $529.4 million. If we assume the same year-over-year change for other profitability metrics as we should see with this, then we should anticipate adjusted operating cash flow of $556.1 million. This increase would turn NOI into $788.7 million. And EBITDA for the company would total about $689.8 million.

Using this data, we can now attempt to price the business. On a price to FFO basis, this multiple, using the company’s 2022 estimates, comes out to 16.5. This is down from the 18.9 reading that we get using 2021 figures. The price to adjusted operating cash flow multiple, meanwhile, would come in at 15.7. This stacks up against the 18 reading that we get for 2021. Another metric to consider is the price to NOI metric. This gives us a multiple of 11.1 using our 2022 forecasts, but that’s down from the 12.7 experienced one year earlier. The last metric to consider is the EV to EBITDA approach. This comes out at 18.2 if we rely on 2022 estimates. Using the 2021 figures, this would increase to 20.5. The reason why this particular metric seems to be higher than the others relates to the fact that the company does have a rather lofty, but not unreasonable, net leverage ratio of 5.2.

As part of my analysis into this business, I also decided to compare it to five similar firms. On a price to operating cash flow basis, the range for these companies was from 5.2 to 204.1. Of the five firms, three were cheaper than Kilroy Realty. I also worked at the companies through the lens of the EV to EBITDA multiple, resulting in a range of 10.5 to 283.8. Once again, three of the five firms were cheaper than our prospect.

Company Price / Operating Cash Flow EV / EBITDA
Kilroy Realty Corporation 18.0 20.9
Paramount Group (PGRE) 9.6 17.6
Office Properties Income Trust (OPI) 5.2 10.5
Equity Commonwealth (EQC) 204.1 283.8
Alexandria Real Estate Equities (ARE) 29.6 27.1
Boston Properties (BXP) 16.9 19.0

Takeaway

At this point in time, Kilroy Realty strikes me as a high-quality REIT that will likely generate attractive value for its investors in the long run. But this doesn’t mean that it makes for a prime opportunity today. Frankly, shares of the business don’t look particularly cheap, but they don’t look pricey either. I would place the company as being more or less fairly valued, both relative to similar firms and on an absolute basis. From a quality perspective, some investors may find it worth buying into the business even if that means paying a price that value-oriented investors wouldn’t. But for those who do adhere to the value approach to investing, I would make the case that there are likely better prospects to be had on the market today.

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