Business Overview and History
Kilroy Realty Corporation (KRC) has long been a leader in the U.S. real estate market, establishing a strong presence across premier markets on the West Coast and in Austin, Texas. As a diversified REIT, Kilroy has built a portfolio of high-quality office, life science, and mixed-use properties that have earned global recognition for their sustainability, innovation, and design. However, the company has faced its fair share of challenges in recent years, navigating a complex market environment marked by pandemic-driven disruptions, economic volatility, and evolving tenant preferences.
Kilroy Realty Corporation was incorporated in the state of Maryland on September 13, 1996, with Kilroy Realty, L.P. organized in the state of Delaware on October 2, 1996. The company is a self-administered real estate investment trust (REIT) that specializes in premier office, life science, and mixed-use properties in the United States. Kilroy has consistently been recognized for its leadership in sustainability and building operations.
In August 2016, Kilroy entered into agreements with Norges Bank Investment Management (NBIM), allowing NBIM to acquire a 44% common equity interest in two existing companies that owned Kilroy's 100 First Street and 303 Second Street office properties in San Francisco. This transaction did not qualify as a sale of real estate, as Kilroy maintained effective control of the properties and continued to account for them on a consolidated basis in its financial statements.
The company has demonstrated resilience in the face of various challenges. In 2020, Kilroy recorded a $35.5 million gain on the sale of long-lived assets, followed by a substantial $463.1 million gain on the sale of depreciable operating properties in 2021. Throughout the COVID-19 pandemic, Kilroy successfully navigated the impacts on its operations and tenant base.
Today, Kilroy's stabilized portfolio consists of 123 office, life science, and mixed-use properties encompassing approximately 17.1 million rentable square feet, as well as 1,000 residential units. The company has a proven track record of developing and redeveloping high-quality assets, with a future development pipeline comprising eight potential sites representing over 6 million square feet of potential density.
Financials
Kilroy's financial performance has been solid, with the company reporting annual revenues of $1.14 billion and net income of $210.97 million in 2024. The company's balance sheet remains strong, with a debt-to-total-market-capitalization ratio of 49% as of the end of 2024. Kilroy has also maintained a conservative leverage profile, with a weighted average interest rate of 4.5% on its outstanding debt.
For the year ended December 31, 2024, Kilroy reported rental income of $1.12 billion, unchanged from the prior year. Other property income increased 46.5% to $17.51 million, primarily due to a $3.9 million increase in transient parking income in the Seattle region and a $0.3 million increase in ancillary other property income.
In the fourth quarter of 2024, Kilroy reported revenue of $286.38 million and a net loss of $4.98 million. The company's funds from operations (FFO) for the quarter were $1.20 per diluted share, which was impacted by several one-time items totaling approximately $0.11 per share. For the full year 2024, Kilroy reported FFO of $551.63 million.
Navigating Market Challenges
Despite Kilroy's strong market position and financial footing, the company has faced a number of challenges in recent years that have tested its resilience. The COVID-19 pandemic, for example, had a significant impact on the office and mixed-use sectors, as many tenants reassessed their real estate needs amid the shift towards remote and hybrid work arrangements.
In response, Kilroy has worked diligently to address its lease expiration schedule, proactively engaging with tenants and signing new leases to shore up occupancy levels. The company's leasing efforts have been particularly impressive, with Kilroy reporting its highest quarterly and annual leasing volumes since 2019 in the fourth quarter of 2024.
Moreover, Kilroy has taken steps to enhance its portfolio, selectively disposing of non-core assets and reinvesting the proceeds into high-quality development projects, such as the second phase of its Kilroy Oyster Point life science campus in South San Francisco. This project, which received its temporary certificate of occupancy in January 2025, is poised to be a substantial growth driver for the company in the coming years as it attracts a diverse range of tenants.
Addressing the Lease Expiration Challenge
One of Kilroy's key priorities has been addressing its significant lease expiration schedule, particularly in 2026. The company has made significant progress in this area, having already addressed over 70% of the largest expiration in 2026 through new leases signed with a global technology company.
Kilroy's proactive approach to managing its lease expirations is a testament to the strength of its relationships with tenants and its ability to anticipate market trends. The company's focus on high-quality, strategically located assets has also positioned it well to capitalize on the renewed demand for office and life science space as the market continues to recover.
During the year ended December 31, 2024, Kilroy executed new and renewal leases totaling 1.40 million square feet within its stabilized portfolio, excluding short-term leases, with an increase in GAAP rents of 8.2% and a decrease in cash rents of 4.5%. The company's stabilized office portfolio was 82.8% occupied and 84.9% leased as of December 31, 2024.
Financial Performance and Guidance
Kilroy's financial performance in 2024 was strong, with the company reporting funds from operations (FFO) of $1.20 per diluted share in the fourth quarter, which was impacted by several one-time items totaling approximately $0.11 per share. For the full year 2024, Kilroy reported FFO of $551.63 million.
Looking ahead, Kilroy has provided guidance for 2025, with the company expecting FFO in the range of $3.85 to $4.05 per diluted share, representing a midpoint of $3.95. The company's average occupancy is expected to range between 80% and 82% in 2025, a decrease of approximately 300 basis points from 2024, primarily driven by several large move-outs in the first quarter of 2025.
Kilroy's same-property net operating income (NOI) is projected to decline between negative 1.5% and negative 3% in 2025, with base rent, net recoveries, and non-recurring items like restoration fee income expected to detract from growth. The company has also guided to a significant reduction in interest income, from $38 million in 2024 to around $6 million in 2025, as it maintains lower cash balances during the year.
Additional guidance for 2025 includes:
- Lease termination fee income expected to decrease from $7 million in 2024 to $3 million in 2025.
- Non-cash GAAP NOI adjustments expected to decline significantly from over $20 million in 2024 to a range of $2 million to $5 million in 2025.
- G&A and leasing costs expected to be $83 million to $85 million, up from an artificially low level of just under $81 million in 2024.
- Capitalized interest expected to decrease from $82.5 million in 2024 to approximately $72 million in 2025.
Liquidity
Kilroy maintains a strong liquidity position, which provides the company with financial flexibility to navigate market challenges and pursue growth opportunities. The company's conservative balance sheet management and access to diverse funding sources contribute to its solid liquidity profile.
As of December 31, 2024, Kilroy reported:
- Cash and cash equivalents of $165.69 million
- A debt-to-equity ratio of 0.8781
- A current ratio of 1.17
- A quick ratio of 1.17
The company also maintains a $1.1 billion unsecured revolving credit facility, with $1.1 billion of remaining borrowing capacity as of December 31, 2024. This facility was amended and restated in March 2024 to maintain the existing borrowing capacity and extend the maturity date to July 2028.
In January 2024, Kilroy issued $400 million of new unsecured senior notes at a stated interest rate of 6.25%, further strengthening its financial position.
Capitalizing on Market Opportunities
Despite the near-term headwinds, Kilroy remains well-positioned to capitalize on emerging opportunities in its markets. The company's strong balance sheet and liquidity position, along with its disciplined capital allocation strategy, have allowed it to navigate the volatile market environment.
Moreover, Kilroy's focus on high-quality, strategically located assets has positioned the company to benefit from the recovery in demand for office and life science space. The company's recently completed developments, such as the second phase of Kilroy Oyster Point, are attracting significant interest from a diverse pool of tenants, underscoring Kilroy's ability to deliver premier, market-leading projects.
Kilroy has also been proactive in exploring alternative uses for its future development pipeline, including potential residential conversions in certain markets. This flexibility and adaptability have been critical in the company's efforts to maximize value for shareholders, even in the face of uncertain market conditions.
The company's future development pipeline as of December 31, 2024, included eight potential development sites representing approximately 64 gross acres of undeveloped land, on which Kilroy believes it could develop more than 6 million rentable square feet of office, life science, residential, and retail space.
Geographic Concentration and Portfolio Composition
Kilroy's operations are primarily concentrated in the state of California, with the exception of ten stabilized office properties and one future development project located in the state of Washington, and one stabilized office property and one future development project located in Austin, Texas. This strategic focus on high-growth markets along the West Coast and in Austin positions Kilroy to capitalize on the continued demand for premium office and life science space in these regions.
The company's stabilized portfolio of operating properties as of December 31, 2024, consisted of 123 office, life science, and mixed-use properties encompassing approximately 17.14 million rentable square feet and 1,000 residential units. This diverse mix of assets allows Kilroy to cater to a wide range of tenant needs and capitalize on emerging trends in the commercial real estate market.
Conclusion
Kilroy Realty Corporation has demonstrated its resilience and adaptability in the face of significant market challenges. The company's diversified portfolio, disciplined approach to capital allocation, and focus on high-quality, sustainable assets have all contributed to its success. As Kilroy navigates the evolving market landscape, investors can take comfort in the company's proven track record, strong financial position, and strategic vision for the future.
With a solid balance sheet, ample liquidity, and a robust development pipeline, Kilroy is well-positioned to weather near-term headwinds and capitalize on long-term growth opportunities in its core markets. The company's proactive approach to leasing, portfolio management, and development positions it to create sustainable value for shareholders in the years to come.