Kilroy Earnings: Difficult West Coast Office Market Weighs on Fundamentals; Disappointing Guidance

No-moat-rated Kilroy Realty’s fourth-quarter numbers came in lower than our expectations. The firm reported funds from operations of $1.08 per share, around 7.7% lower than the $1.17 reported in the year-ago fourth quarter. The demand for West Coast office real estate remains muted due to macroeconomic factors and a slower recovery in physical office utilization rates. The broader office REIT sector has rallied quite materially in the past few months in anticipation of interest-rate cuts. However, Kilroy’s shares have underperformed the sector over concerns associated with San Francisco and the overall West Coast office recovery. The West Coast concentration of the company was always a major risk to our thesis and has been a major overhang on the stock.