Kilroy Realty, a no-moat company, presents an attractive investment opportunity due to its high-quality office portfolio, which appears undervalued following the recent selloff of office REITs. While we acknowledge the uncertainty surrounding the future of office spaces and anticipate a challenging environment for office owners in the near to medium term, we believe the recent market reaction has been excessive. The current implied valuation of Kilroy’s shares does not align with the prevailing private market valuations of its office portfolio.
Long-term investors may find this stock appealing, as it is trading significantly below our fair value estimate of $59 per share. Kilroy’s office portfolio is among the best in the publicly traded REIT sector, with an average age of just 11 years, compared to 30 years for its peers. Additionally, Kilroy excels in other important metrics, such as rent spread and sustainability.
The company is well-positioned to capitalize on the growing flight-to-quality trend, as employers increasingly seek to bring employees back to the office. However, there are risks to consider. The recovery in physical office occupancy levels has been slow; according to Kastle Systems' weekly work barometer, average occupancy remains around 50% of pre-pandemic levels. Furthermore, Kilroy's geographic concentration in California and significant exposure to the technology and life sciences sectors present additional risks.
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