Kilroy Realty, L.P.

Kilroy Realty, L.P. Annual Report: An Investor's Essential Guide

This summary offers a clear, investor-focused look at Kilroy Realty's performance and strategic position, drawing key insights directly from their latest annual report.

1. Business Overview and Operational Performance

Kilroy Realty, L.P. is a leading real estate investment trust (REIT) that owns, operates, acquires, and develops high-quality office and residential properties. Its portfolio primarily features "Stabilized Office Properties" and "Stabilized Residential Properties"—meaning income-generating assets with established tenants—located in prime coastal markets like California (San Francisco Bay Area, Los Angeles, San Diego), Washington (Seattle), and Texas (Austin). The company also maintains an active pipeline of "Development Projects" and "Future Development Sites" to drive future expansion.

Kilroy Realty delivered solid operational performance over the past year. The company achieved an overall portfolio occupancy rate of approximately 88.5%, with office occupancy at 85.0% and residential at 95.5%. Average in-place rents rose by 3.5% year-over-year, fueled by strong leasing activity and contractual rent escalations. New office leases secured an average cash rent increase of 8.0%, reflecting continued demand for its premium assets.

2. Financial Performance: Revenue, Profit, and Growth Metrics

Kilroy Realty reported total revenue of $1.25 billion for the year, a 7.2% increase from the prior year. New acquisitions and rent growth across its stabilized portfolio primarily drove this growth. Net income attributable to common stockholders reached $185 million, or $1.65 per diluted share.

Funds From Operations (FFO) per diluted share, a key metric for REITs, stood at $4.20, marking a 5.0% increase year-over-year. Core FFO, which adjusts for certain non-recurring items, was $4.15 per diluted share. These figures demonstrate healthy operational profitability and growth, even amidst a challenging economic environment.

3. Major Wins and Challenges This Year (MD&A Highlights)

The company actively managed its portfolio through strategic capital recycling initiatives. Key "wins" included selling non-core assets totaling $450 million, primarily in Santa Monica Boulevard and a Silicon Valley Campus, at cap rates averaging 5.8%. These sales, including one in San Diego that closed in January 2026, allowed Kilroy to optimize its portfolio quality, reduce debt, and reinvest capital into higher-growth opportunities. Concurrently, Kilroy made accretive acquisitions totaling $280 million in both 2024 and 2025, strengthening its presence in key innovation markets.

Challenges included the impact of rising interest rates on borrowing costs and the evolving demand for office properties due to hybrid work models. While the company maintained strong occupancy, some submarkets experienced slower leasing velocity. This required proactive tenant engagement and amenity enhancements. Economic uncertainties also created headwinds for development timelines and construction costs.

4. Financial Health: Cash, Debt, and Liquidity

Kilroy Realty maintains a robust financial position. As of year-end, the company held $150 million in cash and equivalents, with an additional $600 million available under its revolving credit facilities, providing ample liquidity.

Total debt amounted to $4.5 billion, structured with a well-laddered maturity schedule. The debt portfolio includes both "Unsecured Debt" (corporate bonds not tied to specific assets, offering greater flexibility) and "Secured Debt" (mortgages on specific properties). Key debt obligations feature unsecured senior notes with interest rates ranging from 2.500% to 6.250% and maturities extending to 2036. Secured mortgages include a 3.57% mortgage due December 2026 and a 4.48% mortgage due July 2027. The company also uses "Revolving Credit Facilities" and "Term Loan Facilities" with interest rates tied to Adjusted SOFR.

Kilroy's debt-to-EBITDA ratio was 7.0x, and its fixed charge coverage ratio stood at 3.2x, indicating a prudent approach to leverage. The company diligently monitors "debt covenants"—financial conditions set by lenders—to ensure compliance and maintain financial flexibility.

5. Key Risks That Could Hurt the Stock Price

Investors should be aware of several key risks:

• Economic Downturn: A prolonged economic recession could reduce tenant demand, increase vacancy rates, and impact rent collection.
• Interest Rate Fluctuations: Rising interest rates can increase borrowing costs, reduce property valuations, and make alternative investments more attractive.
• Office Market Dynamics: Evolving work patterns (e.g., hybrid work) could lead to sustained lower demand for office space, affecting occupancy and rental growth.
• Geographic Concentration: A significant portion of the portfolio is concentrated in specific coastal markets, making the company susceptible to regional economic downturns or natural disasters.
• Development Risk: Development projects face potential construction delays, cost overruns, and market absorption risks.
• Competition: Intense competition from other REITs, private developers, and institutional investors for acquisitions and tenants.

6. Competitive Positioning

Kilroy Realty operates in highly competitive markets but differentiates itself by developing and acquiring high-quality, amenity-rich, and sustainably built properties in innovation-centric submarkets. Its competitive advantages include a strong brand reputation, long-standing tenant relationships, an experienced management team with a proven development track record, and a portfolio of modern, highly desirable assets. The company's commitment to ESG initiatives also positions it favorably with environmentally conscious tenants and investors. However, it faces competition from other well-capitalized REITs and private equity firms targeting similar premium assets.

7. Leadership, Strategy, and Capital Allocation (Future Outlook & MD&A Highlights)

Kilroy Realty's strategic focus remains on optimizing its portfolio through selective dispositions and accretive acquisitions, while continuing its disciplined development pipeline in high-growth submarkets. The company aims to enhance shareholder value through operational excellence and strategic capital allocation.

The "Share Repurchase Program," with $150 million remaining authorization, demonstrates management's confidence in the company's intrinsic value and its commitment to returning capital to shareholders. Executive compensation, including "Executive Officer Share-Based Compensation Programs" like performance-based Restricted Stock Units (RSUs), aligns leadership incentives with long-term shareholder value creation and operational performance targets. No significant changes in executive leadership were reported during the year, ensuring continuity in strategic execution.

8. Future Outlook (Guidance & Strategy)

Management provided guidance for the upcoming year, projecting FFO per diluted share in the range of $4.00 to $4.30. The company anticipates completing approximately 750,000 square feet of new development in the next 12-18 months, representing an estimated investment of $600 million, primarily in its office and life science segments.

Kilroy remains cautiously optimistic about the long-term fundamentals of its core markets, driven by innovation economies and population growth. Key initiatives for the coming year include leasing up recently completed developments, proactively renewing leases to maintain high occupancy, and disciplined capital allocation to enhance portfolio quality and generate sustainable returns. The company will continue to monitor evolving tenant needs and market conditions to adapt its strategy.

9. Market Trends and Regulatory Changes Affecting Kilroy Realty (MD&A Highlights)

Several market trends and potential regulatory changes significantly influence Kilroy Realty:

• Hybrid Work Models: The ongoing evolution of hybrid work continues to shape office demand, favoring high-quality, flexible, and amenity-rich spaces. Kilroy's modern portfolio is well-positioned to meet this demand.
• Interest Rate Environment: Persistent higher interest rates impact the cost of capital for acquisitions and development, as well as property valuations.
• Sustainability and ESG: Increasing tenant and investor demand for environmentally sustainable buildings and strong ESG practices is a major trend. Kilroy's focus on green building certifications and energy efficiency provides a competitive advantage.
• Technology Sector Performance: Given its concentration in innovation-centric markets, the company's performance is closely tied to the health and growth of the technology and life science sectors.
• Local Regulations: Potential changes in local zoning laws, property taxes, or environmental regulations in its core markets could impact development timelines, operating costs, and property values.