KILROY REALTY CORP (KRC) stock intrinsic value fair value estimate & owner earnings analysis

Kilroy Realty owns and leases office and life science buildings on the West Coast and in Austin: the San Francisco Bay Area, Los Angeles, San Diego, Seattle and Austin. It earns contractual rent on long leases (about $765 million of annualized base rent at the end of 2025, 55% of it on leases running past 2030), spends to re-lease and maintain its buildings, and recycles capital by selling mature assets and developing new ones. It also holds a large land bank that currently earns nothing. How we measure it. We start from operating cash flow, strip out working-capital timing, and deduct stock compensation and the spending on existing buildings (tenant improvements and upkeep, which ran $88-166 million a year over the past decade). We treat spending on new developments and land as growth investment, not upkeep. On that basis the cash left for shareholders after interest was $3.71 per share in 2022, $3.99 in 2023, $4.02 in 2024 and $3.64 in 2025. Because Kilroy carries about $4.4 billion of borrowings, we value the business before its lenders are paid and then subtract what it owes. Before interest, the buildings produced $515 million in 2022, $575 million in 2023, $602 million in 2024 and $548 million in 2025. What changed since our previous estimate. Our earlier figures valued the after-interest cash as if today's cheap debt would roll over forever on today's terms, and did not deduct the borrowings. We now value the business first and subtract the debt, which is the main reason every case is lower. We also changed two other things, in opposite directions. We now credit the land bank and the fact that much of the debt carries fixed coupons of 2.5% to 4.75%, well below today's rates, which adds value. But we previously assumed expiring leases would re-price upward. The 2025 annual report shows the opposite: on 1.2 million square feet of renewals and re-leasing, cash rents fell 18.4% and only 34% of expiring tenants renewed. Leases expiring in 2028-2030 carry rents of $52-62 per square foot, not below the $58 portfolio average, so we no longer treat roll-over as a tailwind. Starting point. We anchor on 2025, not a multi-year median. Occupancy has fallen every year (the stabilized office portfolio was 81.6% occupied at the end of 2025, and 77.0% at June 30, 2026 once the largely empty Kilroy Oyster Point Phase 2 was added). The company has also been shrinking: it sold $466 million of buildings in 2025 and another $347.5 million in 2026 (Kilroy Sabre Springs, 12348 High Bluff Drive and the Columbia Square Living residential properties). Earlier, fuller years overstate what the smaller portfolio earns. Taking out the rent from the 2026 sales, we start from about $527 million a year before interest. Before-interest cash fell 9.0% in 2025. For the first year we assume roughly a further 8% decline from 2025 to about $505 million, a smaller drop than 2025's. The reason is leases already signed but not yet paying: at June 30, 2026 the portfolio outside Kilroy Oyster Point was 83.3% leased but only 80.8% occupied, and Kilroy Oyster Point Phase 2 was 49% leased but 7% occupied. Offsetting that, that $1.2 billion South San Francisco campus stopped capitalizing its costs in early 2026, so its operating costs now hit cash flow. Base case (about $37.86 per share). Signed leases start paying through 2027. The heavy 2028-2030 expirations (about a third of rent) then re-lease at modestly lower rents with occupancy near 80%. Contractual rent bumps roughly offset roll-downs and re-leasing costs, so cash before interest holds near $500 million a year. With no further growth credited, it stays at that level indefinitely: the buildings are long-lived and kept competitive by the upkeep spending already deducted. The operating business is worth about $8.37 billion. The land is worth about $0.84 billion: the Santa Fe Summit and 1633 26th Street sites under contract for $165 million, 1900 Broadway (preleased to Cooley LLP for 20 years) at its $66 million cost, and the remaining roughly $1.36 billion of land, led by the Flower Mart site in San Francisco, at 45% of cost. The company owes about $4.74 billion. That is $4.42 billion of debt, less about $0.26 billion for the value of its below-market fixed coupons, less about $54 million of spare cash, plus $178 million of committed development spending, plus about $0.45 billion for the partners' share of the jointly owned buildings whose cash flow we count in full. That leaves $4.47 billion, or about $37.86 per share. Bear case (about $16.65 per share). The trend of the last five years continues. Renewals keep rolling down at 2025's pace, retention stays near a third, occupancy keeps sliding, and Kilroy Oyster Point Phase 2 stalls at its signed 49%. Cash before interest falls to about $400 million by 2031, then erodes about 1% a year. We also assume a credit downgrade, so debt maturing through 2033 (including $400 million in 2028, $475 million in 2029 and $500 million in 2030) refinances at about 7.25%. That adds roughly $0.27 billion to the cost of the debt. The operating business is worth about $6.33 billion and the land about $0.54 billion, with the non-contracted land at 25% of cost. The company owes about $4.90 billion, leaving $1.97 billion, or about $16.65 per share. Even here, cash flow of about $400 million covers interest of about $320 million at the higher rates, so the debt remains serviceable. Bull case (about $54.36 per share). The company's own leasing momentum keeps going: 1.8 million square feet signed in 2025, including 384,000 square feet at Kilroy Oyster Point. Kilroy Oyster Point Phase 2 fills toward 80%, and roll-downs ease to single digits. Cash before interest climbs to about $590 million by 2030 and edges up about 1% a year to about $620 million, then holds. The operating business is worth about $10.03 billion and the land about $1.18 billion, with the non-contracted land at 70% of cost. The company owes about $4.79 billion, leaving $6.43 billion, or about $54.36 per share. We did not credit a broad office-market recovery or new development profits in any case. Judgements and caveats. Gains on property sales and impairments were excluded. Development overhead and interest that the company capitalizes into projects are treated as growth spending. The debt is investment-grade unsecured notes with a $1.25 billion revolving credit line, and the company reports compliance with its covenants. The chief risk is that falling occupancy squeezes the fixed-charge covenants just as the 2028-2030 maturities arrive. The shares are a leveraged claim: the lenders' $4.4 billion ranks ahead of shareholders, so modest changes in rent move the equity value sharply. We could not tie the first quarter of 2026's stronger operating cash flow to a lasting cause from the filings, so we did not raise the starting level on it.