Kilroy Realty Q1 FFO fell 11% as margin dropped to 40% and occupancy hit 77.6%. Leopold Aschenbrenner sold his 1.3 million share stake. The West Coast office bear case deepens—watch Q2 leasing.
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Kilroy Realty Corporation (KRC) reported Q1 2026 FFO of $108.8 million, or $0.91 per diluted share, a figure that beat already-lowered guidance. The headline beat obscures a deteriorating underlying story: FFO per share fell 11% from the $1.04 generated in Q1 2025. The more telling number is the FFO margin, which contracted to 40% from 45% a year earlier. Rising building operations expenses and financing costs on persistently vacant space absorbed the gross rent dollar.
Leopold Aschenbrenner’s fund, Situational Awareness LP, liquidated its 1.3 million share stake in KRC during the first quarter, according to its latest 13F filing. The stock had been held since at least Q4 2025. Aschenbrenner, known for his public bearishness on West Coast office real estate, ranks KRC 35th on his list of stocks to avoid. His exit removes a high-profile holder and aligns with the earnings signal: a business in active operational decay.
The year-over-year decline in FFO per share and the 500-basis-point margin compression are the real mechanisms at work. With portfolio occupancy at 77.6% at the end of the quarter, fixed building overhead spreads over fewer occupied square feet. Costs for maintenance, security, and utilities do not shrink when tenants leave. Financing costs on vacant space add another layer: KRC carries floating-rate debt and faces upcoming maturities that will need refinancing at higher rates if the Fed holds rates higher for longer.
The table below captures the financial erosion:
| Metric | Q1 2026 | Q1 2025 | Change |
|---|---|---|---|
| FFO per share | $0.91 | $1.04 | –11% |
| FFO margin | 40% | 45% | –500 bps |
Source: Company filings.
77.6% occupancy is a sub-basement level for a public office REIT. KRC’s assets are concentrated in San Francisco, Los Angeles, Seattle, San Diego, and Austin – markets where hybrid and remote work policies have permanently compressed demand. Tenants continue to downsize footprints and sublease unused space. The San Francisco Bay Area and Seattle are particularly exposed to large tech employers that have been among the most aggressive in reducing office square footage per employee.
When occupancy drops below 78%, the fixed-cost burden escalates. Operating expenses for building maintenance, utilities, and property taxes do not decline proportionally. KRC’s FFO margin collapse from 45% to 40% in one year reflects exactly this dynamic. The company’s building operations overhead grew faster than rental revenue as vacancy persisted.
KRC faces a wave of lease expirations in 2026 and 2027. The company’s exposure to large tech tenants – the segment most aggressive in downsizing – increases execution risk. Any acceleration in vacancy during the second half of 2026 could push occupancy below 75%, a level that would force dividend coverage ratios to tighten. Even if KRC signs new leases, the spread between new rent and the cost of capital is narrowing.
Situational Awareness LP sold its entire 1.3 million share position during Q1 2026. The sale does not move the stock on its own – the fund’s ownership was a small fraction of KRC’s market cap. The signal lies in the timing: the disposal coincided with an earnings quarter that confirmed the operational decay the bear thesis had predicted. Aschenbrenner’s public focus on AI investments and his stated view that West Coast office real estate faces structural headwinds make his exit a reinforcement of the fundamental story, not an isolated event.
Two data points would weaken the bear case. First, a meaningful lease signing at rents above prior levels would show that tenant demand still exists at KRC’s current pricing. Second, insider purchases after the stock’s decline would signal management conviction that the discount to net asset value is excessive. Neither occurred during Q1 2026.
The next concrete catalyst is Q2 2026 leasing activity. A stabilization in occupancy above 78% would give the bull case a foothold. A further drop below 75% would confirm the structural thesis and likely force a dividend cut or equity raise.
KRC’s floating-rate debt and upcoming maturities are a second confirmation layer. With the Federal Reserve holding rates higher for longer than the market expected at the start of 2025, refinancing costs will rise. The margin compression from Q1 is likely to persist even if leasing volumes improve marginally. The spread between new rent and the cost of capital continues to narrow.
The simple read: A high-profile bear exits, and the earnings confirm the stock is broken. The better read: cash-flow erosion is now visible in FFO margin and occupancy – two lagging metrics that caught up to the narrative. For traders, KRC is a watchlist name for sector-wide office REIT risk rather than an outright trade. Its geographic concentration makes it a lead indicator for peer weakness in coastal markets.
AlphaScala’s stock market analysis framework categorizes KRC as a name to monitor for the sector’s health, not a position to initiate. Until occupancy moves toward 80% or FFO margin stabilizes, the structural headwinds remain the dominant force. Aschenbrenner’s exit simply removes one voice from the long side, leaving the fundamentals to speak for themselves.
Prepared with AlphaScala research tooling and grounded in primary market data: live prices, fundamentals, SEC filings, hedge-fund holdings, and insider activity. Each story is checked against AlphaScala publishing rules before release. Educational coverage, not personalized advice.