Executive Summary / Key Takeaways

• Kilroy Realty Corporation is strategically repositioning its premium West Coast office and life science portfolio to capitalize on accelerating demand, particularly from the burgeoning AI and biotech sectors, amidst improving return-to-office trends.
• The company's robust capital recycling program, including significant asset dispositions and targeted acquisitions like Maple Plaza in Beverly Hills, is optimizing its portfolio and strengthening its balance sheet for long-term value creation.
• Strong leasing momentum, notably in San Francisco and at the Kilroy Oyster Point Phase 2 life science development, underscores KRC's ability to attract high-caliber tenants seeking modern, amenity-rich, and purpose-built spaces.
• KRC's 2025 FFO guidance has been raised, reflecting operational efficiencies and strategic development progress, though the company remains vigilant regarding future lease expirations and the timelines of its major development projects.
• A foundational commitment to sustainability and innovation in building design and operations provides KRC with a distinct competitive advantage, enhancing tenant appeal and contributing to durable cash flow growth.

Setting the Scene for a West Coast Leader

Kilroy Realty Corporation, a self-administered real estate investment trust (REIT) with over seven decades of experience, has established itself as a premier landlord and developer across the dynamic West Coast markets of San Francisco Bay Area, Los Angeles, Seattle, San Diego, and more recently, Austin. The company's core business revolves around owning, developing, acquiring, and managing high-quality office, life science, and mixed-use properties. This long-standing presence has allowed Kilroy to cultivate a portfolio tailored to the evolving needs of leading technology, media, life science, and business services companies.

The industry landscape is currently undergoing significant shifts, presenting both opportunities and challenges for office and life science REITs. A notable trend is the improving return-to-office (RTO) mandates, which are driving enhanced vibrancy and a resurgence in leasing activity across KRC's markets. This is further bolstered by rapid advancements in artificial intelligence (AI), which are reshaping demand in both the office and life science sectors, accelerating innovation, and reinforcing the strategic importance of well-located real estate in concentrated tech and biotech hubs. Kilroy's overarching strategy is to remain agile, tenant-focused, and to leverage strategic capital recycling to optimize its portfolio and maintain financial flexibility.

Kilroy's foundational strength lies in its differentiated approach to modern business environments, emphasizing sustainability, innovation, and design. The company has consistently earned global recognition for its leadership in these areas, which forms a critical part of its competitive moat. While KRC does not disclose proprietary hardware or software technology in the traditional sense, its "core technology" is embedded in its advanced building operations and design philosophy. This approach yields tangible benefits for tenants, fostering creativity and productivity, and for KRC, by potentially leading to higher occupancy rates and tenant retention. For instance, KRC's investment in Fifth Wall, a PropTech leader, aims to better integrate technology into its operations, driving efficiencies and potentially reducing utility costs across the portfolio, similar to the benefits realized from its historical sustainability investments. This commitment to creating high-performance, eco-friendly spaces provides a qualitative edge in attracting environmentally conscious tenants, which can translate into stronger pricing power and market share in competitive West Coast markets.

Strategic Repositioning and Portfolio Optimization

Kilroy has actively pursued a strategic capital recycling program, aiming to monetize non-core assets and undeveloped land to reinvest proceeds into new opportunities, reduce debt, or execute stock buybacks. This disciplined approach has seen KRC act as a net seller, with approximately $200 million in net sales year-to-date. The rationale behind these dispositions is to shed properties in lower-conviction locations or those requiring outsized reinvestment capital, thereby optimizing the portfolio for long-term cash flow growth.

Recent dispositions include the sale of a four-building campus in Silicon Valley for $365 million and 501 Santa Monica in Downtown Santa Monica for $40 million, both completed during the nine months ended September 30, 2025. These sales generated total gains of $127 million. Additionally, KRC has $79 million under contract from land sales, including a portion of its Santa Fe Summit site in San Diego ($38 million) and a parcel at 26th Street in Los Angeles ($41 million), both expected to close in mid-2026 upon receipt of entitlements. The company aims to generate over $150 million in gross proceeds from land sales, focusing on parcels where the highest and best use lies outside its core competencies.

On the acquisition front, Kilroy made a strategic investment in Q3 2025 by acquiring Maple Plaza, a 306,366 square-foot Class A office campus in Beverly Hills, Los Angeles, for $205.30 million. This marks KRC's first entry into Beverly Hills, a submarket characterized by high barriers to entry, low vacancy rates, and limited new supply (only 260,000 square feet over the last decade). The acquisition was made at a basis of roughly $670 per square foot, significantly below the estimated replacement cost of $1,200 per square foot. Management anticipates a stabilized yield in the high single digits and an unlevered IRR in the low double digits as vacancy is leased up.

Kilroy's development pipeline is also undergoing strategic adjustments. Kilroy Oyster Point (KOP) Phase 2 in South San Francisco, an 871,738 square-foot office and life science campus with an estimated $1 billion investment, received its temporary certificate of occupancy in January 2025 and is expected to stabilize in Q1 2026. The Flower Mart project in San Francisco, a 7-acre development site with a $693.30 million cost basis, is undergoing a significant redesign. Originally planned as a 2.3 million square-foot, primarily office project, KRC is now exploring a broader mix of commercial and residential uses and phased development to maximize long-term value and respond to evolving market conditions. Four development scenarios were submitted to the City's Planning Department in September 2025, with interest and other expense capitalization for the project now expected to continue through June 2026.

Operational Momentum and Market Dynamics

Kilroy has demonstrated significant operational momentum, particularly in leasing activity. In Q3 2025, the company signed over 550,000 square feet of new and renewal leases, marking its highest third-quarter performance and strongest year-to-date in six years. This follows a robust Q4 2024, which saw approximately 708,000 square feet of leases executed, the highest level since Q4 2019. This acceleration is a testament to the ongoing demand for high-quality spaces that align with evolving tenant needs.

Occupancy in the stabilized office portfolio stood at 81% as of September 30, 2025, with stabilized residential properties averaging 94.1% occupancy. A key indicator of future growth is the 230 basis point spread between leased and occupied space at the end of Q3 2025, signaling embedded growth expected to materialize throughout late 2025 and into 2026.

Market dynamics are particularly encouraging in San Francisco, where office demand has reached a post-pandemic high of nearly 9 million square feet, largely driven by AI and other technology companies. San Francisco leads all U.S. metros in office leasing growth over the last 12 months, with KRC's SOMA assets outperforming; tour activity in these properties is up 170% year-over-year. Notable leases include a full floor lease with Tubi at 201 Third Street and the first lease at 360 Third Street since 2022. The competitive landscape in San Francisco is also improving, with over 2 million square feet of sublease space having been taken off the market.

The life science sector is also showing improving fundamentals, with the XBI index up over 20% year-to-date and strong biotech M&A volume. Kilroy Oyster Point Phase 2 is directly benefiting from this, having signed 84,000 square feet of leases with biotech companies, including Color (24,000 sq ft), MBC BioLabs (44,000 sq ft), and Acadia Pharmaceuticals (ACAD) (16,000 sq ft). MBC BioLabs' presence, as a leading life science incubator, is expected to cultivate a diversified tenant base of early-stage biotech companies, supporting the project's long-term growth. Management anticipates KOP 2 will exceed its goal of 100,000 square feet of lease executions by year-end.

KRC has proactively addressed its 2026 lease expirations, reducing the total to approximately 970,000 square feet, reflecting a retention ratio of over 40% on the pool reported at the beginning of the year. While a limited opportunity for additional renewals remains, the company expects move-outs for the majority of the remaining pool, which will need to be offset by new leasing activity. Tenants, particularly AI companies, are prioritizing landlords who can deliver speed from lease execution to occupancy and offer flexibility to accommodate rapid growth, a need KRC is addressing through its spec suites program and responsive leasing strategies.

Financial Performance and Capital Structure

Kilroy's financial performance in 2025 reflects a dynamic operating environment. For the three months ended September 30, 2025, Net Operating Income (NOI) decreased by $6.50 million (3.30%) to $188.78 million compared to the same period in 2024. This was primarily driven by a $5.50 million decrease from the Same Property portfolio, a $2.40 million decrease from Disposition Properties, and a $0.20 million decrease from Redevelopment Properties, partially offset by a $1.70 million increase from Acquisition Properties. For the nine months ended September 30, 2025, total NOI decreased by $11 million (1.90%) to $559.79 million.

Same Property NOI growth on a cash basis was 60 basis points in Q3 2025, benefiting from 150 basis points contributed by real estate tax appeal wins. However, for the nine months ended September 30, 2025, Same Property operating revenues decreased by $15.50 million (1.90%), primarily due to a $13 million decrease in straight-line rent and a $3.50 million decrease in amortization of deferred revenue and tenant-funded improvements.

Leasing spreads have shown variability. In Q2 2025, GAAP re-leasing spreads were negative 11.2% and cash re-leasing spreads were negative 15.2%, largely influenced by a single large San Francisco lease with minimal capital requirements. Excluding this transaction, cash re-leasing spreads would have been approximately positive 1%. In Q1 2025, GAAP re-leasing spreads were negative 15.8% and cash re-leasing spreads were negative 23%, with a significant transaction with minimal capital investment impacting these figures. Excluding this, cash re-leasing spreads would have been approximately negative 8.3%.

Interest expense trends indicate prudent debt management. Gross interest expense decreased by $2.50 million (4.40%) in Q3 2025 and $14.60 million (8.40%) for the nine months ended September 30, 2025, primarily due to a lower average outstanding debt balance. Conversely, capitalized interest increased by $1.70 million (8.40%) in Q3 2025 and $3.30 million (5.40%) for the nine months ended September 30, 2025, reflecting increased average aggregate cost basis on in-process development and future development pipeline projects.

Kilroy maintains a strong liquidity position, with approximately $372.40 million in cash and cash equivalents and $1.10 billion available under its unsecured revolving credit facility as of September 30, 2025. The company's total debt as a percentage of total market capitalization was 47.80% at that date. In August 2025, KRC's operating partnership issued $400 million of 5.88% unsecured senior notes due 2035, using the proceeds to redeem outstanding 4.38% unsecured senior notes. The maturity of the 2024 Term Loan Facility was extended by 12 months to October 3, 2026. KRC remains in compliance with all financial covenants.

Management has raised its 2025 FFO outlook to a range of $4.18 to $4.24 per diluted share, an $0.11 per share increase at the midpoint. This revision incorporates $0.05 of additional noncash income, an incremental $0.03 per share from updated same-property NOI guidance, and $0.02 per share from interest capitalization adjustments. The 2025 average occupancy is expected to range between 80% and 82%, a decrease of approximately 300 basis points versus 2024, primarily due to Q4 2024 move-outs and three larger move-outs/downsizes in Q1 2025. Capitalized interest is projected to be approximately $72 million in 2025, down from $82.5 million in 2024, with KOP Phase 2 capitalization ceasing in January 2026 and Flower Mart capitalization expected to continue through June 2026.

Competitive Positioning and Differentiated Edge

Kilroy Realty maintains a strong competitive position as a leading West Coast REIT, particularly through its focus on sustainability-driven properties that appeal to tech and life science tenants. Compared to specialized life science REITs like Alexandria Real Estate Equities (ARE), KRC's broader portfolio, which includes mixed-use developments, and its emphasis on sustainability offer a unique value proposition. While ARE may exhibit stronger revenue growth in niche life science sectors due to its deep specialization, KRC's eco-friendly designs and building operations can lead to enhanced tenant loyalty and potentially superior operating margins through energy efficiency, contributing to more robust cash flow.

Against larger, more diversified office REITs such as Boston Properties (BXP), KRC's West Coast-centric strategy and innovation in modern workplace design provide a qualitative differentiator. KRC's focus on creating productive, employee-retention-focused environments can lead to stronger occupancy and cash flow in its target segments. While BXP benefits from a broader geographic presence and scale, KRC's strategic adaptability to emerging trends like AI-related demand, coupled with its sustainability edge, positions it to capture market share in eco-conscious, innovation-driven regions. Similarly, when compared to urban mixed-use focused REITs like Vornado Realty Trust (VNO), KRC's emphasis on tech and life science tenants in high-growth West Coast markets provides a distinct advantage, potentially leading to better capital efficiency and profitability by exploiting VNO's vulnerabilities in adapting to rapidly evolving tenant demands.

KRC's competitive advantages, or moats, include its strong brand in sustainability, its proprietary design innovations, and its established networks within key tech and biotech hubs. These factors translate into tangible benefits such as enhanced tenant loyalty and potentially superior margins through energy-efficient operations. These advantages allow KRC to differentiate itself from competitors, potentially improving its pricing power and market share. However, KRC faces vulnerabilities, primarily its geographic concentration, which could lead to revenue volatility during regional economic downturns, and its exposure to fluctuations in office demand. The high capital requirements and regulatory hurdles inherent in the REIT sector act as significant barriers to entry, helping KRC defend its market position and supporting stable financial performance.

Risks and Future Considerations

Despite the positive momentum, Kilroy faces several risks and future considerations. General economic conditions, including inflation and interest rate fluctuations, can impact liquidity, tenant stability, and the cost of financing. Increases in interest rates could adversely affect KRC's interest expense and its ability to pursue development opportunities or refinance existing debt. The company's significant development pipeline, including the Flower Mart project, carries execution risk related to project timelines, budgeting, and the ability to secure necessary entitlements and pre-leasing. The updated capitalization timeline for Flower Mart through June 2026, while providing clarity, also highlights the extended period before the project can generate operating income.

The transition of Kilroy Oyster Point Phase 2 into the stabilized portfolio in January 2026 will result in operating expenses, property taxes, and interest expense being recognized through the income statement, potentially creating a negative earnings impact initially before tenant occupancies begin to contribute positively to growth. Furthermore, while the 2026 lease expiration pool has been significantly addressed, the expectation of move-outs for the majority of the remaining 970,000 square feet necessitates continued focus on new leasing activity to offset potential occupancy declines.

Conclusion

Kilroy Realty Corporation is demonstrating a compelling resurgence, strategically leveraging its high-quality, sustainable West Coast portfolio to capitalize on a recovering market. The company's proactive capital recycling, marked by strategic dispositions and value-accretive acquisitions like Maple Plaza, is enhancing its financial flexibility and optimizing its asset base. Simultaneously, robust leasing activity, particularly in the dynamic San Francisco and South San Francisco life science markets, underscores KRC's ability to attract and retain discerning tenants, including those from the rapidly expanding AI and biotech sectors.

KRC's commitment to sustainability and innovative building design provides a distinct competitive advantage, fostering tenant loyalty and contributing to long-term operational efficiency. While challenges persist, including managing lease expirations and the complex development timelines of projects like the Flower Mart, the company's raised 2025 FFO guidance and strong liquidity position reflect a disciplined approach to growth. Kilroy's strategic repositioning and technological leadership in creating modern, adaptable workspaces position it favorably to drive sustained value creation for investors amidst the evolving competitive landscape.