Kilroy Realty slumps on weak 2026 FFO guidance amid office downturn
West Coast REIT cuts outlook as same-property NOI declines and cash rents fall in challenging commercial real estate market
Kilroy Realty Corporation shares fell sharply after the West Coast office REIT reported fourth-quarter results that beat earnings expectations but delivered a sharply lower 2026 outlook, highlighting the deepening challenges facing commercial real estate landlords in California's major markets.
The Los Angeles-based REIT reported funds from operations of $0.97 per diluted share in the fourth quarter of 2025, down 19% from the prior year, while surpassing analyst EPS estimates of $0.28 by a wide margin. However, the earnings beat was driven largely by one-time items, masking underlying deterioration in core property performance.
More concerning for investors was the company's 2026 FFO guidance of $3.25 to $3.45 per share, which represents a 15-23% decline from 2025 FFO of $4.20. The reduced outlook reflects ongoing pressure on office fundamentals as remote work persists and tenants demand concessions in prime coastal markets.
Kilroy's same-property net operating income declined 7.2% in the fourth quarter, with leasing spreads turning negative as cash rents fell 27.1% year-over-year. The company signed approximately 827,000 square feet of leases during the period, but leasing spreads were negatively impacted by specific tenant deals. Excluding those select transactions, GAAP rents increased 16.2% while cash rents still declined 2.6%.
"Same Property Cash NOI growth ranged from negative 1.50% to 0.00% in the fourth quarter," the company stated in its earnings materials, underscoring the difficult leasing environment facing office landlords in San Francisco, Los Angeles, and San Diego—Kilroy's primary markets.
The guidance cut sent shares tumbling, with the stock down 1.3% in recent trading to $34.54. The stock has now fallen roughly 21% from its 52-week high of $43.83, though it remains above its 52-week low of $25.94 reached last year. Kilroy currently trades at a price-to-book ratio of 0.76, suggesting investors are pricing the company below the value of its real estate assets.
Analysts remain divided on the REIT's prospects. Of the 17 analysts covering the stock, 13 rate it a hold, while two maintain strong buy ratings and one recommends buy. The consensus target price of $42.14 implies upside potential of approximately 22% from current levels, though the lowered 2026 guidance could prompt downward revisions.
The forward price-to-earnings ratio stands at an elevated 61.35, reflecting the compressed earnings outlook. However, the stock offers an attractive dividend yield of 6.3%, with the company maintaining its quarterly dividend of $0.54 per share despite the operational challenges.
Kilroy's struggles reflect broader headwinds facing office REITs, particularly those with heavy exposure to West Coast markets where return-to-office rates have lagged behind other major US cities. The company's focus on high-quality, sustainable properties in prime locations has historically provided defensive characteristics, but even trophy assets are facing pressure as lease expirations force landlords to reset rents at significantly lower levels.
The 2026 FFO guidance range of $3.25-$3.45 compares unfavorably to 2025 levels, suggesting that recovery in the office market may take longer than anticipated. Commercial real estate investors will be watching closely for signs of stabilization in leasing spreads and occupancy levels in the coming quarters, as these metrics will be crucial indicators of whether the worst of the office downturn has passed.
For Kilroy specifically, the ability to maintain its dividend payout while navigating the challenging environment will be a key focus for shareholders. The company's relatively low leverage and high-quality asset base provide some buffer, but the prolonged weakness in California office markets presents significant challenges for earnings growth in the near term.