Leasing Momentum In San Francisco Will Offset Office Headwinds Across Markets

Key Takeaways

• Ongoing shifts to hybrid work and tech tenant consolidation threaten occupancy, rental income stability, and pricing power for core urban office assets.
  
• Growing ESG investment needs and tenant downsizing trends pressure margins, capital requirements, and elevate risks in a cautious financial environment.
  
• Strategic focus on high-quality assets, innovation clusters, and ESG standards strengthens revenue prospects, portfolio quality, and long-term shareholder returns amid evolving tenant demand.

Catalysts

Kilroy is a leading U.S. landlord and developer, with operations in San Diego, Los Angeles, the San Francisco Bay Area, Seattle, and Austin.

• Anticipated weakness in long-term office demand due to the persistent adoption of remote and hybrid work models is likely to keep Kilroy's occupancy rates and rent growth below historical averages, pressuring future revenues and NOI despite current leasing momentum.
  
• Elevated exposure to tech sector tenants, who are increasingly consolidating space and embracing flexible work arrangements, creates vulnerability to future lease expirations and renewals at lower rates, increasing volatility in rental income and compressing net margins.
  
• Continuing migration and corporate expansion into secondary markets could reduce the pricing power and demand for Kilroy's core West Coast urban assets, leading to weaker rent growth and potential asset revaluations, negatively impacting projected NAV and future earnings.
  
• The need for ongoing significant ESG investments to keep buildings compliant with tenant and investor sustainability demands may strain capital expenditures; failure to keep up could risk reputation and occupancy, while maintaining compliance may weigh on net margins.
  
• Industry-wide stagnant or declining rents and persistent tenant downsizing trends accelerate vacancy, necessitating costly repositioning of assets and increasing capital requirements, which will constrain FFO growth and elevate refinancing risks in a risk-averse capital market.

Kilroy Realty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kilroy Realty's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.2% today to 5.7% in 3 years time.
• Analysts expect earnings to reach $64.0 million (and earnings per share of $0.66) by about September 2028, down from $218.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $117 million in earnings, and the most bearish expecting $29.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 95.5x on those 2028 earnings, up from 22.7x today. This future PE is greater than the current PE for the US Office REITs industry at 37.8x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

Kilroy Realty Future Earnings Per Share Growth

Risks

• The accelerated recovery and leasing momentum in key West Coast markets-especially in San Francisco with a surge in AI-driven tenant demand and tour activity-could drive revenue growth and occupancy stabilization, supporting higher long-term cash flows.
  
• Kilroy's strategic repositioning towards trophy assets and innovation clusters (such as life science campuses in San Diego and San Francisco) leverages secular growth in AI, biotech, and healthcare sectors, potentially delivering above-average rent growth and improving net operating income.
  
• Robust capital recycling efforts, including the disciplined sale of non-core or lower-growth assets at attractive valuations and redeployment into higher-growth submarkets, improve portfolio quality and support future earnings and margin resilience.
  
• Kilroy's strong balance sheet, liquidity, and leverage-neutral flexibility (including share repurchase authorization) position the company to capitalize on value-accretive acquisition opportunities as weaker peers exit the market, potentially leading to enhanced shareholder returns and FFO expansion.
  
• The continued industry emphasis on "flight to quality" and ESG demands benefits Kilroy's LEED and WELL-certified portfolio, allowing it to command premium rents, reduce operating expenses, and maintain high occupancy, all positively impacting revenue and net margins over the long term.

Valuation

• The analysts have a consensus price target of $39.933 for Kilroy Realty based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $55.0, and the most bearish reporting a price target of just $33.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $64.0 million, and it would be trading on a PE ratio of 95.5x, assuming you use a discount rate of 8.4%.
• Given the current share price of $42.0, the analyst price target of $39.93 is 5.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.