Kilroy Realty Appears Cheap From Real Estate Valuation Perspective: Analyst

J.P. Morgan analyst Anthony Paolone maintained the Overweight rating on Kilroy Realty Corporation KRC on Tuesday, lowering the price forecast to $42 from $49.

Paolone expresses a positive view on the company’s portfolio, highlighting its high-quality assets and strong balance sheet compared to other office REITs.

According to the analyst, leasing activity in key West Coast markets will improve in the near future, especially as tech companies push to bring employees back to the office.

Additionally, the analyst projects operational expense growth to stabilize.

Looking ahead, Paolone sees improvement in the capital markets for office assets in 2025, which could help reveal that the company's stock is currently undervalued.

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The analyst notes that, based on a 9%+ implied cap rate for the company's portfolio and a current occupancy rate of around 80%, the stock appears cheap from a real estate valuation perspective.

Paolone points out that during peak cycles, Kilroy Realty’s assets were valued at cap rates in the low 4% range, further supporting their view that the stock is discounted.

The analyst has revised their financial outlook for 2025 and 2026, lowering their FFO/share estimates.

For 2025, the revised estimate is $4.01, which is slightly above Bloomberg’s consensus of $3.99 and ahead of the midpoint of the company’s guidance at $3.95, the analyst writes.

However, the estimate for 2026 has been reduced more significantly to $3.52, reflecting a 12.3% year-over-year decline, and is notably below Bloomberg’s consensus of $3.85.

Per Paolone, the key factor driving these downward revisions is a reduction in capitalized interest, which comes from assuming that another $1 billion in land and projects, not part of KOP II, will be excluded from active development.

This includes an estimated $600+ million in capital from the Flower Mart project, over $200 million from the SIX0 development, and an additional $100-$200 million from various smaller projects, contributing to the lowered projections, Paolone adds.

Price Action: KRC shares are trading higher by 1.10% to $33.22 at last check Wednesday.

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