KRC

Business Context and Reporting Period

Kilroy Realty Corporation (KRC) and Kilroy Realty, L.P. (the Operating Partnership) filed a combined Form 10-K for the fiscal year ended December 31, 2025. The Company is a self-administered Real Estate Investment Trust (REIT) focused on premier office, life science, and mixed-use properties in the San Francisco Bay Area, Los Angeles, Seattle, San Diego, and Austin. As of December 31, 2025, the Company owned approximately 99.1% of the Operating Partnership.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Growth: Net income increased 29.9% to $302.6 million, driven primarily by a $127.0 million gain on the sale of depreciable operating properties, partially offset by a $16.3 million impairment charge on a property held for sale.
• NOI Decline: Net Operating Income decreased 3.7% to $736.2 million. The Same Property Portfolio NOI declined 3.0% due to lease expirations and lower straight-line rent, partially offset by higher rental rates on renewals.
• Portfolio Occupancy: Stabilized office portfolio occupancy was 81.6% as of December 31, 2025, down from 82.8% in 2024. Residential portfolio occupancy increased to 94.1% from 92.5%.
• Capital Recycling: The Company sold three operating properties (six buildings) for gross proceeds of approximately $466.0 million and acquired two operating properties (five buildings) for $397.3 million.
• Interest Expense: Interest expense decreased 13.1% to $126.3 million due to a lower average outstanding debt balance, despite a slight increase in the weighted average interest rate.

Guidance, Outlook, and Risks

Outlook and Strategy: Management continues to focus on capital recycling to reshape the portfolio, disposing of non-core assets to redeploy capital into innovation-driven markets. The Company anticipates spending between $150 million and $200 million on development projects in 2026. The dividend remains at $0.54 per share per quarter ($2.16 annually).

Risks and Contingencies:

• Office Market Uncertainty: Continued uncertainty in the office leasing market, driven by hybrid work trends and space efficiency demands, poses risks to occupancy and rental rates.
• Lease Expirations: Approximately 8.0% of leased square footage is scheduled to expire in 2026, and 7.7% in 2027. Renewal rates and rental rate resets are critical to future performance.
• Environmental Liabilities: The Company has accrued approximately $70.0 million in environmental remediation liabilities for development projects. Actual costs may vary based on site conditions.
• Interest Rate Risk: While 95.7% of debt is fixed-rate, variable-rate debt (4.3%) exposes the Company to interest rate fluctuations. A 100 basis-point increase in SOFR would increase annual interest expense by approximately $2.0 million.
• Development Pipeline: The future development pipeline includes eight sites with an estimated total cost of $1.49 billion. Delays in entitlements or construction costs could impact returns.

Investor Verification Checklist

• Lease Renewal Performance: Verify the retention rate and rental rate changes for the 8.0% of leases expiring in 2026 to assess revenue stability.
• Development Progress: Monitor the leasing status and stabilization timeline for the Kilroy Oyster Point Phase 2 project (871,738 sq. ft.), which is currently 44% leased.
• Environmental Accruals: Review the $70.0 million environmental remediation liability for potential increases as development projects advance.
• Debt Maturities: Confirm refinancing plans for the $601.3 million in principal payments due in 2026, including the $200 million term loan facility.
• Impairment Charges: Assess the impact of the $16.3 million impairment charge on the Sunset Media Center property and potential future impairments in the portfolio.