Kilroy Earnings: Share Price Correction Creates Attractive Opportunity for Patient Investors

No-moat-rated Kilroy Realty’s KRC third-quarter results were largely in line with our expectations as the firm reported funds from operations, or FFO, of $1.12 per share in the third quarter, which was around 4.3% lower than the $1.17 per share FFO reported in the third quarter of the previous year. The demand for West Coast office real estate remains muted because of macroeconomic factors and a slower recovery in physical office utilization rates, but shares are compellingly cheap from a long-term perspective.

The shares of the company have corrected around 30% in the past couple of months from August highs. We continue to believe that the current share price of the company reflects excessive pessimism. Kilroy Realty is trading at around $27 per share after releasing its third-quarter results, which implies a 6-times 2023 FFO multiple. We think that a 6-times FFO multiple for high-quality office properties with low leverage offers an attractive entry point for patient investors who can stomach short-term volatility. We agree that it will take several years for the office sector to recover, but the patience of prospective investors will be duly rewarded. We are maintaining our fair value estimate of $63 per share for Kilroy Realty after incorporating the third-quarter results.

The portfolio occupancy rates declined 40 basis points on a sequential basis and 460 basis points on a year-over-year basis as it was reported at 86.2% for the third quarter. The same-store GAAP rental income declined by 3.4% and the same-store GAAP net operating income declined by 5.0% on a year-over-year basis in the third quarter, partly due to weaker occupancy rates compared with the previous year. Same-store cash NOI was up 0.2% in the current quarter compared with the previous year. Management has increased its 2023 full-year same-store cash NOI guidance to 2.75%-3.25% from 1.50%-2.50% because of better than anticipated parking income and some nonrecurring revenue.