Kilroy Realty Stock: A great company but not a bargain price (NYSE: KRC)
One of the most stable and steadily growing diversified REITs on the market today is a company called Kilroy Realty Company (NYSE: KRC). Over the past few years, management has successfully grown the business to a steady pace. This applies not only to revenue, but also to its cash figures. Current forecasts provided by management suggest that this growth should continue at least in the short term. As a result, this company offers an interesting prospect. But it’s not exactly cheap. All things considered, Kilroy Realty is probably more or less correctly rated, 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 prime office buildings, life science assets and mixed-use properties. Management describes its focus as being on Class A properties, which are those rated as above average in terms of quality. Not only are these properties of attractive quality. They are also quite young. While the average age of properties in his peers’ portfolios tends to be around 30 years old, his own properties are only around 11 years old, on average. These assets are also typically concentrated in attractive markets, such as the Greater Los Angeles Area, San Diego County, San Francisco Bay Area, Greater Seattle, and Austin, TX. In total, the Company’s stabilized office properties consist of approximately 120 properties that total 15.46 million square feet. At the end of 2021, these properties were 91.9% occupied and 93.9% rented. The company also owns three residential properties, they have a combined 1,001 units which, at the end of last year, had an occupancy rate of 78%.
In terms of tenant concentration, it should be noted that the business is quite diverse. That said, its top 15 tenants represent 48.1% of its annualized base rent. That’s pretty significant considering the company ended 2021 with 422 office tenants. Its largest exposure is to a publicly traded Fortune 50 corporation. This business accounts for 5% of the company’s annualized base rent. In second place we have GM Cruise, LLC, a subsidiary of General Engines (GM), representing 4.5% of annualized base rent. This is then followed by Amazon (AMZN) at 4.2%.
Over the past few years, the management has done an excellent job in growing the business. In 2017, for example, the company posted a turnover of 719 million dollars. That number has grown every year since, reaching $955 million in 2021. This happened even as property occupancy rates rose from 95.2% to 93.9%. Rather, it was driven by an increase in square footage and number of units. Over the past five years, the lettable area of the company’s office portfolio has grown at a healthy pace, from 13.72 million square feet to 15.46 million square feet. The company also saw the number of residential units it owns drop from 200 to 1,001, while the occupancy rate for those units remained in a fairly narrow range of between 72.2% and 82.4. %. Last year, that figure was a solid 78%.
Of course, income 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 measure has increased from $347 million to $516.4 million. After some adjustments, this figure would have gone from $317.6 million to $485.6 million. Investors should also pay attention to FFOs, or funds from operations. This measure has increased over the past five years from $346.8 million to $462.3 million. On top of that, we also have the NOI, or net operating profit. This went from $513 million in 2017 to $688.7 million in 2021. And finally we also have EBITDA, which went from $449.4 million in 2017 to $602.4 million. dollars last year.
Regarding the company’s 2022 financial year, management gave some indications. But not much. Currently, they are forecasting FFOs between $517.2 million and $541.6 million. At the midpoint, this implies an FFO of $529.4 million. If we assume the same year-over-year change for the other profitability metrics we should see with this, then we should be anticipating adjusted operating cash flow of $556.1 million. This increase would turn the NOI into $788.7 million. And the company’s EBITDA would total approximately $689.8 million.
Using this data, we can now attempt to price the business. On a price/FFO basis, this multiple, using the company’s 2022 estimates, comes out at 16.5. That’s down from the 18.9 reading we get using 2021 numbers. The price of the adjusted operating cash flow multiple, meanwhile, would come in at 15.7. This compares to the 18 readings we get for 2021. Another metric to consider is the measure of price versus NOI. That gives us a multiple of 11.1 using our 2022 forecast, but that’s down from the 12.7 recorded a year earlier. The final metric to consider is the EV to EBITDA approach. This comes out to 18.2 if we rely on the 2022 estimates. Using the 2021 figures, this would rise to 20.5. The reason why this particular metric appears to be higher than the others has to do with the fact that the company has a rather high, but not unreasonable, net leverage ratio of 5.2.
As part of my analysis of this company, I also decided to compare it to five similar companies. On a price/operating cash flow basis, the range for these companies was 5.2 to 204.1. Of the five companies, three were cheaper than Kilroy Realty. I’ve also worked in companies through the prism of the EV to EBITDA multiple, resulting in a range of 10.5 to 283.8. Again, three of the five companies were cheaper than our prospect.
|Company||Price / Operating Cash||EV / EBITDA|
|Kilroy Realty Company||18.0||20.9|
|Paramount Group (PGRE)||9.6||17.6|
|Office Property Income Trust (OPI)||5.2||10.5|
|Equity Commonwealth (EQC)||204.1||283.8|
|Alexandria Real Estate Shares (ARE)||29.6||27.1|
|Boston Properties (BXP)||16.9||19.0|
At present, Kilroy Realty strikes me as a high-quality REIT that will likely generate attractive value for its long-term investors. But that doesn’t mean it’s a great opportunity today. Frankly, the company’s shares don’t look particularly cheap, but they don’t look expensive either. I would say the company is more or less fairly fairly valued, both relative to similar companies and on an absolute basis. From a quality perspective, some investors may find the company worth investing in, even if it means paying a price that value investors would not pay. But for those who buy into the value approach to investing, I’d say there’s probably better prospects in the market today.