Kilroy Earnings: West-Coast Office Market Remains Under Tremendous Pressure, but Shares Are Cheap

No-moat-rated Kilroy Realty’s first-quarter numbers were in line with our expectations as the firm reported funds from operations, or FFO, of $1.11 per share, which was around 9% lower on a year-over-year basis. The demand for office real estate in cities like Los Angeles and San Francisco remains tepid due to city-specific factors and a slower recovery in physical office utilization rates for tech companies compared with other sectors. The broader office REIT sector has rallied quite materially, but Kilroy’s shares have underperformed the sector because of concerns associated with San Francisco and the overall West Coast office recovery. The West Coast office market remains under tremendous pressure, but we continue to believe that Kilroy’s shares remain notably cheap from a long-term perspective. We are maintaining our $59 per share fair value estimate for Kilroy Realty as we incorporate first-quarter results.