Investment Thesis
Kilroy Realty (NYSE:KRC) is severely beaten down as a result of COVID-19 lockdowns, work from home (WFH) restrictions, growing sub-lease space and rent delinquencies across the nation. KRC’s development pipeline, mid/large-cap tenant base, active management and financial strength should provide enough cushion to ride out of COVID-19 pandemic. Average sell-side P/FFO estimate- 12x 2020E P/FFO; 11x 2021E P/FFO and NOI estimates- $650MM-$700MM, suggests that KRC is undervalued by at least 20%-30% on a forward P/FFO and P/NAV basis. With macro catalysts around the horizon (fiscal/monetary stimulus, vaccine, fewer restrictions), should provide support to the bull thesis. Expect shares to trade back near historical range $70-$80 range by the end of Q1 2021.
Note: This article is primarily geared towards investors looking for short-term opportunities in the office REIT spacel it may not be useful for a long-term dividend investor (no analysis on KRC's yield or payout ratios).
Key Catalysts
Kilroy Realty is an office REIT that owns, develops, and manages Class A properties located in the premier sub-urban areas within the West Coast region. As of Q2 2020 KRC, the company had 114 office properties (including retail space) and one residential building under its belt. KRC generates 70% of the revenue from technology and life science tenants.
- Tenant concentration and Sub-lease Market
Just like every office REIT across N.A., KRC is under pressure from the COVID storm and it's likely to continue for an extended period. However, Kilroy has a strong foothold in major central business districts (CBD) across the west coast region where office supply (and construction permits) is limited. The company also generates most of the income from established mid/large-cap technology and life science tenants (accounting for around 65% of revenue as of Q2 20’), which have been financially strong and stable during this recession.
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