1 Stock I Wouldn’t Touch With a 10-Foot Pole

While Kilroy Realty offers shareholders a tasty dividend yield, the REIT remains a high-risk choice in 2024.

| More on:
Bad apple with good apples

Image source: Getty Images

While the equity markets have created game-changing wealth for long-term shareholders over several decades, just a handful of stocks have driven the majority of these gains. This means finding winning bets consistently is pretty difficult, given that most companies fail to outperform the broader markets.

So, while it is essential to identify quality companies and add them to your equity portfolio, it is equally important to avoid fundamentally weak companies. One such stock I wouldn’t touch with a 10-foot pole is Kilroy Realty (NYSE:KRC). Let’s see why.

An overview of Kilroy Realty

Valued at US$4.1 billion by market cap, Kilroy Realty is a U.S.-based landlord and real estate developer with operations in San Diego, Los Angeles, Austin, Seattle, and San Francisco. The company ended 2023 with a real estate portfolio totalling 17 million square feet of office space. It also owns around 1,000 residential units in Hollywood and San Diego, with an average occupancy rate of 92.5%.

Unlike several other real estate investment trusts (REITs), Kilroy Realty has struggled to provide shareholders with inflation-beating returns. In fact, shares of the REIT have risen marginally over the last two decades. If we account for dividend reinvestments, Kilroy Realty stock has returned 118% since March 2004. In this period, the S&P 500 index has returned 577%.

Let’s see what makes Kilroy Realty a high-risk investment today.

The commercial real estate market is under pressure

The commercial real estate market south of the border is wrestling with headwinds such as rising interest rates. Generally, REITs, including Kilroy, leverage debt to acquire properties. While bond rates were quite low in the decade prior to 2022, interest rates touched multi-year highs, making it difficult for property developers to refinance their debts.

According to a report from the National Bureau of Economic Research (NBER), commercial real estate loans held by U.S. banks are around US$2.7 trillion. Further, the NBER emphasized that 14% of commercial real estate loans and 44% of office building loans have outstanding debt that is greater than property values. This means property valuations for commercial real estate have fallen significantly in recent years.

Another report from Green Street, an analytics firm, stated commercial property values are down 22% while office prices have plunged 35% since 2022 due to lower demand and the shift towards work-from-home.

How did Kilroy Realty perform in Q4 of 2023?

Similar to other commercial real estate companies, Kilroy will be impacted by the work-from-home trend in the upcoming decade, increasing its vacancy rates in the process. Currently, Kilroy has a vacancy rate of 14%, which is lower than its peers as it aims to diversify away from commercial real estate.

In the fourth quarter of 2023, Kilroy reported revenue of $269 million and a net income of $0.40 per share. Its funds from operations stood at $129.3 million, or $1.08 per share.

Kilroy pays shareholders an annual dividend of $2.16 per share and expects funds from operations per share to range between $4.10 per share and $4.25 per share in 2024, indicating a payout ratio of less than 60%, which is sustainable.

While Kilroy’s fundamentals are quite strong, it is part of a market that might be on the brink of collapse, driving share prices significantly lower in the upcoming decade.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

A worker gives a business presentation.
Dividend Stocks

TSX Communications in April 2024: The Best Stocks to Buy Right Now

Here are two of the best TSX communication stocks you can buy in April 2024 and hold for years to…

Read more »

Man considering whether to sell or buy
Dividend Stocks

Royal Bank of Canada Stock: Buy, Sell, or Hold?

Royal Bank of Canada (TSX:RY) has a high dividend yield. Should you buy it?

Read more »

Businessman looking at a red arrow crashing through the floor
Dividend Stocks

BCE’s Stock Price Has Fallen to its 10-Year Low of $44: How Low Can it Go?

BCE stock price has dipped 39% in two years and shows no signs of growth in the next few months.…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

Invest $10,000 in This Dividend Stock for $3,974.80 in Passive Income

This dividend stock gives you far more passive income than just from dividends alone, so consider it if you want…

Read more »

Payday ringed on a calendar
Dividend Stocks

This 6% Dividend Stock Pays Cash Every Month

Can a 6% dividend yield help you build a monthly retirement income? An investment made right can help you build…

Read more »

Payday ringed on a calendar
Dividend Stocks

Passive Income: How Much Should You Invest to Earn $1,000 Every Month?

These three monthly-paying dividend stocks can help you earn a monthly passive income of $1,000.

Read more »

Dividend Stocks

3 Dividend Stocks to Double Up on Right Now

Some of these dividend stocks will take longer to recover than others, but they'll certainly pay you to stick around.

Read more »

TFSA and coins
Dividend Stocks

TFSA Passive Income: How Much to Invest to Earn $250/Month

Want to earn $250/month of tax-free passive income? Here are four Canadian dividend stocks to look at buying in your…

Read more »