Kilroy Realty Corporation’s Year-to-Date Dive: Will Zero Rate Cuts Tank REIT Market?

Los Angeles, CA – Kilroy Realty Corporation, a real estate investment trust (REIT), has faced an 18% dip in its year-to-date performance as market sentiments shift from optimism surrounding potential Federal Reserve rate cuts in 2024 towards concerns about a prolonged period of high rates. With the possibility of no rate cuts in 2024 looming, investors are now cautious about REITs trading at historically low valuations. Kilroy Realty reported a strong first-quarter performance in fiscal year 2024, outperforming expectations with funds from operations (FFO) reaching $1.11 per share. The company raised its full-year FFO guidance to between $4.15 to $4.30 per share, reflecting a positive outlook for the remainder of the year.

Kilroy Realty manages a diversified portfolio of 121 office buildings and 3 residential properties, totaling 17 million rentable square feet and 1,001 units respectively. The company’s occupancy rate stood at 84.2% for office properties and 93.1% for residential properties as of the end of the first quarter. Despite a decline in its valuation multiple to 7.68x compared to 17x in the first quarter of 2021, Kilroy Realty continues to face challenges from rising interest rates set by the Federal Reserve, impacting its total return profile.

The company’s leasing momentum in the first quarter of 2024 showed promise, with 400,000 square feet of leases signed – the highest volume since 2017. While GAAP rents increased by 8.6%, cash rents experienced a slight dip of 2.9%. However, occupancy rates dipped to 84.2%, maintaining a downward trend due to evolving workplace dynamics influenced by the pandemic. Kilroy Realty aims to stabilize its occupancy by the end of 2024 within the range of 82.5% to 84%, aligning its portfolio performance with national office vacancy rates.

In terms of developments, liquidity, and leverage, Kilroy Realty remains well-positioned to cover its dividend from 2024 FFO projections. The company plans to invest $200 million to $300 million in total development spending for the year, with new properties adding 975,000 rentable square feet by the end of 2025. While maintaining a strong financial position with $900 million in cash and short-term investments, Kilroy Realty also has access to a $1.1 billion unsecured revolving credit facility to meet upcoming debt obligations.

Despite facing challenges such as a worsening net debt to EBITDA ratio, Kilroy Realty’s strong leasing activity and dividend coverage provide a bullish outlook. The company’s ability to adapt to market conditions, coupled with the potential impact of future interest rate cuts, may serve as key catalysts for its growth and performance in the coming quarters.