Kilroy Fully Leases Office Tower - Analyst Blog

Kilroy Realty Corp. (KRC), a real estate investment trust (REIT), has recently signed a lease agreement with salesforce.com, a premier cloud computing company, to fully lease an under-construction building in the heart of San Francisco's South of Market financial district popularly known as SoMa. The office tower is arguably the first new office high- rise development in the city since 2008. The deal was put on paper for an undisclosed amount.

Ever since Kilroy had acquired the site in October, it had witnessed huge customer interests from a large pool of companies, including both technology and non-technology related industries. Total development cost for the 27-story building is estimated to be approximately $250 million and could further escalate by approximately $25 million. With the proposed building, the company would own 2.6 million square feet of office space in the region that is home to major software and technology companies of the world.

The lessee would occupy 445,000 square feet of space in the LEED (Leadership in Energy and Environmental Design) Platinum designed property. LEED is an internationally recognized third-party green building certification system, which ensures that a building is designed and built for environment-compatibility, providing a healthy work environment and reducing operating costs. The projects are judged on six parameters, including Sustainable Sites, Water Efficiency, Energy & Atmosphere, Materials & Resources, Indoor Environmental Quality, and Innovation in Design.

The number of points earned by a project determines the level of LEED Certification it receives, which is currently available in four progressive levels: Certified: 40 – 49 points; Silver: 50 – 59 points; Gold: 60 – 79 points; and Platinum at 80 points and above. The leased building is designed to incorporate state-of-the-art sustainability practices and energy-efficiency standards that are expected to earn it LEED Platinum certification. In such a scenario, the building would reportedly be the first ground-up commercial development property in San Francisco to achieve it.

Kilroy owns, develops and manages a diverse portfolio of office, industrial and multi-purpose real estate properties primarily in the coastal regions of Los Angeles, Orange County, San Diego, greater Seattle and the San Francisco Bay Area. As of September 30, 2012, the company owned 12.7 million rentable square feet of office space.

Kilroy maintains an active multi-year development program focused on the economically dynamic locations characterized by strong long-term demand, limited supply, and high barriers to entry. As such, most of the properties of the company are concentrated in the coastal submarkets of Southern California that offer both a vibrant economic backdrop for businesses and a unique quality of life for their employees.

Currently, we have a Neutral recommendation and a Zacks #2 Rank for Kilroy that translates into a short-term Buy rating. We have a Neutral recommendation and Zacks #3 Rank (a short-term Hold rating) for MPG Office Trust, Inc. (MPG), one of the competitors of Kilroy.