KRC | Q2 2025

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Overview

• FFO of $1.13 beats by $0.14.

• Revenue of $289.9M (+3.3% Y/Y) beats by $20.24M.

KEY Takeaways

• Leasing momentum is real—and improving.

• Kilroy is selling off weaker assets to redeploy capital more effectively.

• There’s still some noise in the numbers, but fundamentals are improving.

• Flower Mart remains a long-term optionality play.

NOTES

Kilroy (KRC) had a solid second quarter, with strong execution across the board and more signs that the West Coast office market might finally be turning a corner.

Leasing momentum picked up meaningfully, especially in San Francisco and San Diego, where Kilroy’s high-end buildings continue to benefit from the ongoing flight to quality.

San Francisco, in particular, is showing real signs of life again. Active tenant demand has nearly doubled since 2023, and Kilroy signed a major 93,000-square-foot lease with an AI company at its SOMA property—marking the second big lease there in two quarters. Companies are also expanding their search beyond the Financial District thanks to visible improvements in public safety and overall confidence in the city.

Over at Kilroy Oyster Point—its flagship life sciences development in South San Francisco—the team entered lease negotiations for roughly 100,000 square feet, mostly with health care and life sciences tenants. Despite headwinds in that sector, interest in the project continues to build, and tour activity meaningfully picked up during the quarter.

San Diego continues to be another bright spot for the company. Kilroy set a new record for office rents in the county with a renewal at One Paseo and continued the successful lease-up of its 2100 Kettner project.

On the capital allocation front, Kilroy announced two completed property sales and another large one under contract: a four-building Silicon Valley campus set to sell for $365 million. Altogether, the sales and land deals will bring in over $480 million.

These sales align with the team’s goal of offloading lower-growth, higher-capex assets and freeing up capital for better opportunities. That Silicon Valley campus, for example, would’ve required major reinvestment just to keep occupancy steady. Selling it now made more sense than trying to lease it up and fund the upgrades.

All of these proceeds will go toward a mix of reinvestments, debt paydown, and potentially share buybacks. Kilroy still has its full $400 million repurchase authorization untouched and is keeping an eye on opportunities. For now, they’re leaning into selective acquisitions and reinvestments that can deliver better long-term growth without much (if any) short-term dilution.

Getting into some of the numbers, FFO for the quarter came in at $1.13 per share, which includes $0.11 in one-time boosts—mainly a lease termination fee and some tax and bad debt adjustments. Same-property NOI grew 4.5% on a cash basis, though most of that came from those same temporary items.

Occupancy dipped to 80.8%, which was expected due to some known move-outs and asset sales. More importantly, the gap between leased and occupied space widened to 270 basis points, which gives Kilroy a solid runway of built-in growth for the rest of the year.

Re-leasing spreads were sharply negative—down 11% on a GAAP basis and 15% on a cash basis—but that was mostly due to one short-term lease in San Francisco. In that case, Kilroy accepted a lower rent in exchange for flexibility and minimal upfront costs. (For context, “re-leasing spreads” measure the difference between what a space used to rent for and what it rents for now—so negative spreads mean the company is signing new leases at lower rates than before.) If you strip out that one deal, cash spreads would’ve been about flat, which is a real step up from earlier quarters.

Despite that, Kilroy raised its full-year FFO guidance to $4.05 to $4.15 per share, up $0.15 at the midpoint. That includes the second-quarter one-time items, improved NOI expectations, and a pushback in when they’ll stop capitalizing interest at the Flower Mart project, which is now assumed to end at year-end.

On that note, Flower Mart is still a long-term bet. They’re working with the city to rework entitlements for more flexibility and a broader mix of uses, but it’s not something that will drive near-term earnings.

All in all, Kilroy seems to be on the up and up. There’s some good and bad in the numbers, but with strong leasing activity, smart capital allocation, and growing AI-driven demand, this quarter felt like another step in the right direction.

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