Overall, Kilroy gets 46.5% of its ABR from its top 15 tenants, primarily in the media and technology sectors. That tenant concentration is a potential concern for several reasons. First of all, technology companies are increasingly embracing remote work because of the pandemic, leading many to reduce their office space needs. For example, Dropbox (NASDAQ: DBX) has been subleasing space in a building that Kilroy developed for the company. Meanwhile, other large California-based tech giants are relocating their headquarters to states with better business climates, like Texas.
Finally, DIRECTV filed a lawsuit against Kilroy, claiming that it properly exercised its contractual rights to certain space it leased. If technology and media companies need less West Coast office space in the future, it could significantly impact Kilroy's occupancy level and rental rates.
Kilroy Realty news
The pandemic had a noticeable impact on the office real estate market in 2020. A shift to remote work lessened parking revenue at office buildings and caused some tenants to reduce their office space needs as leases rolled over.
Meanwhile, some businesses couldn't pay rent due to financial issues. These headwinds had some impact on Kilroy. It collected 97% of the rent it billed last year, while same-store GAAP NOI declined by 1.4% during the year. However, its overall NOI increased, driven by recently completed expansion projects.
A highlight of 2020 was the completion of The Exchange on 16th, a $585 million 750,000-square-foot office development in San Francisco 100% leased to Dropbox. The company would go on to sell that property in early 2021 for $1.08 billion, valuing it at a record $1,440 per square foot. Overall, Kilroy completed a record $1 billion of office projects in 2020. It also finished construction on a $245 million, 371-unit residential development as part of a mixed-use project in San Diego.
Kilroy has gotten 2021 off to a solid start. In addition to selling The Exchange, the company completed construction on an office development project in San Diego, phase one of a life science development project in San Francisco, and a 193-unit residential project in Los Angeles.
The company had $1.5 billion of office and life science development projects in process at the end of the first quarter. It has already leased 88% of the space and had only $350 million of remaining spending. Meanwhile, its rental collection rate was solid at 96%, while its FFO grew overall, though it dipped slightly on a per-share basis due to stock sales in the last year.
Kilroy Realty Corporation stock price
Kilroy Realty's strategy of focusing on West Coast office markets hasn't created much value for its investors in recent years.