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Kilroy Realty: Lease Expiration and Tenant Management

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Diversified tenant base

Kilroy Realty (KRC) has a diversified tenant base comprising some of the top names in information technology, media, financial services, manufacturing, healthcare, wholesale, and retail. For fiscal ended 2014, the company’s office properties were leased to 526 tenants, compared with 514 in 2013.

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Top tenants

As of fiscal ended 2014, the 15 largest tenants contributed 35.3%, or $165.3 million, to the total annualized base rental revenue of the company. The company’s top five tenants in terms of contribution to the annualized base rental revenue are as follows:

  • LinkedIn – 6% of the total annualized base rental revenue
  • DIRECTV – 4.9% of the total annualized base rental revenue
  • Synopsys – 3.3% of the total annualized base rental revenue
  • Bridgepoint Education – 3.2% of the total annualized base rental revenue
  • Intuit – 2.9% of the total annualized base rental revenue

Long-term leases

As of fiscal ended 2014, 49.5% of the company’s leases were long term in nature, expiring after 2020. Leases expiring after 2020 comprised an area of 6.4 million square feet of the company’s total 12.9 million square feet. Long-term leases ensure steady cash flow to the company without any risk of renewals.

Tenant lease expiration is a primary cause of rental erosion. In an overrented market, new lease terms are generally fixed in favor of the tenants, and lease renewal or new lease agreement costs form part of the freeholder irrecoverable expenditure, which drives the NOI (net operating income) down, causing a drop in cash flows. This could have a direct impact on yields and the total return of the properties.

Other major office REITs such as Alexandria Real Estate Equities (ARE), SL Green Realty (SLG), and Boston Properties (BXP) are following the same tenant diversification strategy and looking for long-term leases. The iShares Dow Jones US Real Estate ETF (IYR) invests ~0.7% of its portfolio in Kilroy Realty. In the next part of this series, we’ll discuss Kilroy Realty’s property development and redevelopment.

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