Kilroy Earnings: Encouraging Signs on Stabilization of West Coast Office Fundamentals

No-moat-rated Kilroy Realty’s third-quarter numbers had some encouraging signs of fundamentals being close to bottoming out as the firm reported funds from operations, or FFO, of $1.17 per share, which was around 4.5% higher on a year-over-year basis. The demand for office real estate in West Coast cities like Los Angeles and San Francisco has remained tepid due to city-specific factors and a slower recovery in physical office utilization rates for tech companies compared with other sectors. While Kilroy’s high-quality portfolio holds up significantly better than the overall market, the pressure on its portfolio remains intense. We think that the headline performance for Kilroy will remain under significant stress in the medium term, but the current valuation of the company implies an extremely pessimistic outlook for the long run that we think is unlikely. We are maintaining our $59 per share fair value estimate for Kilroy Realty as we incorporate third-quarter results.