We value KRC through a combination of net asset value analysis and relative earnings multiples approach. Our methodology results in a target price of $42, which represents a discount to spot NAV and a ~12x 2026E FFO multiple. We view this as justified given the factors described above.

In a potential recessionary environment and given secular challenges facing office real estate, office REIT earnings could be negatively impacted by lower leasing volumes, slower transaction markets, stock price volatility, and less availability to tap the capital markets. KRC shares are also exposed to the following risks: 1) economic risk; 2) operating risk; 3) concentrated exposure to West Coast markets, which have been slower to recover relative to the East Coast and Sun Belt; 4) development risk given several projects under way; 5) interest rate risk; and 6) a reliance on healthy credit markets in order to refinance maturing debt and fund growth. A delay in the timing of development lease-up or an increase in costs could negatively impact projected returns.

If the impact on the company from any of these factors proves to be greater than we anticipate, it may prevent the stock from achieving our target price. In addition, if private market cap rates compress more than we anticipate, the stock could outperform our target price. Alternatively, if private market cap rates expand more than we anticipate, the stock could underperform our target price.