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Kilroy Realty’s Earnings Call: Positive Outlook Amid Challenges

Kilroy Realty’s Earnings Call: Positive Outlook Amid Challenges

Kilroy Realty ((KRC)) has held its Q2 earnings call. Read on for the main highlights of the call.

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The recent earnings call for Kilroy Realty Corporation conveyed a generally positive sentiment, underscored by robust leasing activity and strategic capital recycling efforts, particularly in high-demand markets such as San Francisco and San Diego. However, the company is facing challenges with occupancy declines and negative re-leasing spreads, alongside broader hurdles in the life science ecosystem.

Strong Leasing Activity

Kilroy Realty reported a significant uptick in leasing activity, with over 400,000 square feet of new and renewal leases signed. This marks a substantial improvement both sequentially and year-over-year, with a notable 110% increase in activity in San Francisco’s SoMa submarket.

Positive Market Dynamics in San Francisco

San Francisco’s market dynamics are improving, with tenant demand nearly doubling since 2023. This growth is largely driven by the burgeoning AI sector and enhancements in public safety and downtown revitalization efforts.

Record Leasing Rate in San Diego

In San Diego, Kilroy Realty achieved a record leasing rate with a renewal and expansion at One Paseo, marking the highest rate ever recorded for an office lease in San Diego County.

Capital Recycling and Dispositions

The company announced the successful disposition of properties in Santa Monica and Silicon Valley, generating over $480 million in gross proceeds. These sales are part of Kilroy’s strategy to monetize lower-growth assets efficiently.

Guidance Increase

Kilroy Realty has raised its FFO guidance by $0.15 at the midpoint, reflecting the cessation of capitalization at the Flower Mart, a significant termination fee, and improved same-property NOI guidance.

Occupancy Decline

Occupancy rates have declined to 80.8% from 81.4% in the previous quarter, primarily due to tenant rightsizing and bankruptcy-related vacancies.

Negative Re-leasing Spreads

The company reported negative re-leasing spreads, with GAAP re-leasing spreads at -11.2% and cash re-leasing spreads at -15.2%, mainly due to a significant lease in San Francisco completed at lower base rents.

Life Science Ecosystem Challenges

Despite positive leasing activity, the broader life science ecosystem is facing challenges, affecting the capital required for deals at Kilroy Oyster Point and impacting original underwriting expectations.

Forward-Looking Guidance

Kilroy Realty has provided an updated guidance for 2025, raising its FFO outlook to a range of $4.05 to $4.15 per share. This revision includes contributions from the Flower Mart project, significant lease termination fees, and improved same-property NOI guidance. While a modest occupancy decline is expected in the third quarter due to redevelopment projects, positive net absorption is anticipated in the fourth quarter. The company also plans to close the sale of a four-building campus in Silicon Valley by the end of the third quarter as part of its capital recycling strategy.

In summary, Kilroy Realty’s earnings call highlighted a positive outlook with strong leasing activity and strategic capital recycling efforts. Despite challenges with occupancy and re-leasing spreads, the company remains optimistic about its market position and future growth prospects.

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