Kilroy Realty Corporation (KRC) Q1 2026 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for joining us, and welcome to Kilroy Realty Corporation Q1 2026 Earnings Conference Call. [Operator Instructions]. I will now hand the conference over to Douglas Bettisworth, Vice President of Corporate Finance. Douglas, please go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are Angela Aman, CEO; Jeffrey Kuehling, EVP, CFO and Treasurer; and Eliott Trencher, EVP, CIO. In addition, Justin Smart, President; and Rob Paratte, EVP, Chief Leasing Officer, will be available for Q&A. Please note that some of the information we will be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being webcast live on our website and will be available for replay. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC, and both are also available on our website. Angela will start the call with a strategic overview and quarterly highlights. Eliot will provide an update on our recent transaction activity, and Jeffrey will discuss our financial results and provide you with our updated 2026 guidance. Then we'll be happy to take your questions. Angela?

Thanks, Doug, and thank you all for joining us today. Over the last several quarters, fundamentals across our West Coast markets have meaningfully improved. As return to office momentum has intensified, space rationalization by large users have abated and the artificial intelligence ecosystem has created considerable new business formation and growth, all contributing to a resurgence in space requirements from rapidly scaling new companies and well-established players alike. Recent tenant behavior, both within our portfolio and across the markets in which we operate points to a constructive dynamic around technological change with companies seeking to utilize AI to enhance their growth and augment their talented teams, rather than automating simply to manage costs. Against this backdrop, our team's disciplined execution drove our strongest first quarter leasing results since 2017 and total productivity of approximately 568,000 square feet, more than double our first quarter performance last year, positioning us to increase our full year average occupancy guidance by 25 basis points at the midpoint. Importantly, leases signed but not yet commenced, now represents nearly $78 million of contractually obligated annualized base rent to be realized over the coming years, providing significant visibility on future growth. To hit on a few highlights across our regions. In San Francisco, the epicenter of the AI innovation ecosystem, market conditions continue to tighten as first quarter leasing exceeded 3 million square feet, more than 10% above pre-pandemic quarterly averages, resulting in the third consecutive positive quarter of net absorption and positioning us well to capitalize on broad-based demand across our Bay Area portfolio. In the San Francisco CBD, we've seen significant momentum at our assets in the South of Market or SoMa submarket. At 201 Third, our lease rate improved from 26% at year-end 2024 to over 80% this quarter as we've successfully captured demand from a wide range of growing tenants including both larger format users such as Tubi and Harvey AI and a variety of smaller format users. As you may recall, in the second quarter of 2025, Harvey AI leased 93,000 square feet at 201 Third before signing a 62,000 square foot expansion this quarter, with occupancy occurring in April 2026 just 1 month following lease execution. This significant expansion occurring within 1 year of the original lease execution speaks to both the impressive growth trajectories we're seeing for a number of rapidly scaling AI companies and also to the discipline that they've generally employed with respect to the real estate decisions taking space only when necessitated by the current needs of the business. In addition, our team has captured outsized market share at 201 Third through the deployment of a creative and disciplined spec suites program with all 5 of our recently constructed spec suites leased by completion. We're also thrilled to be experiencing strong demand across other core Bay Area submarkets. By crossing 900 in downtown Redwood City, we completed a 27,000 square foot direct lease with a current subtenant during the quarter, generating an increase in cash base rent of more than 40% underscoring the depth of demand for high-quality, well-located space in this transit-oriented walkable and well-amenitized submarket. In Seattle, the strength we've seen in Bellevue over the last several years continues, optimally positioning space, we recently recaptured for near-term re-leasing and rent upside. In addition, the momentum we discussed last quarter in the Denny Regrade submarket further accelerated, benefiting our recently repositioned project West 8th. Following approximately 74,000 square feet of new lease executions at West 8th in the fourth quarter of last year, we're pleased to announce an additional 76,000 square feet of new leases signed at the project year-to-date, including a 43,000 square foot lease with General Motors signed in the first quarter and a 33,000 square foot lease with [ SoFi ] signed in the first few days of the second quarter. With additional tenant discussions underway, we have good visibility into the future pipeline, reflecting the strength and competitiveness of this asset. With the recent renovations and enhanced amenity offerings continue to resonate with tenants and position the property to capture a meaningful share of growing market demand. In Los Angeles, leasing activity within our portfolio has improved meaningfully over the last year with trailing 12-month productivity up approximately 66%, reflecting both a continued gradual improvement in the overall market and the significant portfolio repositioning work that we've done in L.A. over the last 2 years. A particular note within the region, Arrow and Long Beach is seeing a pickup in tour activity as the local market begins to experience a resurgence in defense and aerospace requirements. Blackwelder and Culver City is seeing an acceleration in activity from a wide variety of users, including technology and AI company. At Maple Plaza, our recent acquisition in Beverly Hills is continuing to experience strong broad-based demand from the financial services and media and entertainment sectors, notably surpassing our original expectations. In Life Sciences, KOP 2 continues to outperform the broader South San Francisco market as the project's purpose-built life science space and top-tier amenitization offerings resonate with decision makers who are showing higher propensity to execute than they have at any time over the last several years. Subsequent to quarter end, we executed a 38,000 square foot lease with Olema Pharmaceuticals, bringing the project to 49% leased. The future pipeline remains robust as we evaluate opportunities to complete the remaining lease-up of our multi-tenant building while also engaging with several large-format users for the remaining full building opportunity, which represents the most compelling offering within KOP Phase 2, featuring premium views and the most prominent location within the project. Turning to capital allocation, during the first quarter, we continued to raise attractively priced capital through dispositions of non-core and non-strategic assets with a long-term goal of enhancing the durability and growth profile of the company's cash flow stream. During the period, we sold 2 office properties, Kilroy Sabre Springs and Del Mar Tech Center, both in San Diego for aggregate gross proceeds of $146 million. In both cases, these assets benefited from the consistent demand we have seen across markets from owner users for well-located, high-quality real estate, driving a highly efficient execution for our shareholders. Subsequent to quarter end, we closed on the sale of our 2 Hollywood residential assets, Columbia Square living and Jardine for aggregate gross proceeds of $202 million, resulting in year-to-date operating property dispositions of approximately $350 million, exceeding our original full year goal. The residential sales followed the implementation of a holistic asset management strategy for our residential portfolio, through which we recognized significant margin expansion, resulting in a materially better evaluation at the time of disposition. Following the transaction, our residential exposure is now limited to One Paseo Living, which we view as a core long-term holding given the asset's significant synergies with the retail and office components of the broader One Paseo campus, where we continue to achieve record-setting commercial rents. With proceeds from our first quarter dispositions, we elected to opportunistically capitalize on recent capital markets volatility, repurchasing approximately $73 million of stock at an average price of $30.80 per share. And in April, we fully redeemed the $50 million tranche of private placement notes scheduled to mature in July. Looking forward, we'll continue to explore opportunities to harvest attractively price capital from our existing portfolio while exploring the full range of redeployment alternatives available to us. In last night's release, we also announced the formation of a joint venture to develop a premier substantially pre-leased Class A office asset in downtown Redwood City, one of the strongest submarkets in the entire Kilroy portfolio. This complex transaction was a long time in the making, requiring substantial effort and coordination across our platform with our partner and with the project's anchor tenant. 1900 Broadway, which is fully entitled for a 250,000 square foot office project is located just blocks from Kilroy's highly successful crossing 900 assets, which has remained 100% leased since delivery in 2015. Over time, we've consistently captured meaningful rent growth at Crossing 900, releasing over 80,000 square feet since the fourth quarter of 2023, a cash rent spreads up nearly 60%. Concurrently with closing on the venture, we executed a 20-year lease with a top-tier global law firm for 145,000 square feet, representing approximately 60% of the building at the highest rates ever realized in the Kilroy portfolio. Since closing, we've experienced strong inbound interest from a wide range of high-quality tenants, and we look forward to updating you on our progress as the project advances. Eliott will cover project costs, estimated returns and timing in a few moments, but I would note that substantially all of our equity investment in this project has been prefunded through the land parcel sales that are currently under contract. Before turning the call over, I want to provide a few comments on the Flower Mart project. As Jeffrey will touch on in a moment, we have revised our expense capitalization assumptions for Flower Mart to reflect continued capitalization through the fourth quarter of this year. As we previously stated, we're working with the city of San Francisco to redesign and reimagine the Flower Mart project, while maintaining and building upon our current approvals. In addition to seeking flexibility to develop a broader mix of uses, we're also looking to amend the existing development agreement and create a special use district to provide relief from certain plan and code requirements, the specifics of which are still under discussion. The city, which has been a constructive and valued partner in this process has suggested an alternative approach to analyzing and documenting the changes in the special use district, which we believe will ultimately increase our long-term flexibility and optionality, though the alternative approval process will take additional time. We now expect the process to be completed late in the fourth quarter and would assume that expense capitalization ceases at that time. We're highly convicted that the path we're pursuing at the Flower Mart will result in the best possible outcome for shareholders. And as always, we'll continue to update you as the process unfolds. In conclusion, I want to thank the entire Kilroy team for an incredibly busy quarter across nearly every facet of our business. Your efforts are creating meaningful value for all of our stakeholders, and I'm grateful for your continued energy and enthusiasm. Eliot?

Thanks, Angela. Over the last several months, the capital markets have demonstrated continued momentum as buyers recognize the inflection in fundamentals and the positive impact AI is having on our markets. As a result, transaction size is increasing and asset quality is improving. For example, the Transamerica Pyramid in San Francisco recently traded for $1,050 per square foot. The first time in institutional property has eclipsed $1,000 a foot level in that market since 2022. Kilroy continues to be an active seller, and during the quarter, we closed on $146 million comprised of the previously announced Kilroy Sabre Springs for $125 million and Del Mar Tech Center sold in March for $21 million. Del Mar Tech Center is a 40,000 square foot building in the Del Mar submarket of San Diego. And at the time of sale, the building was roughly 50% leased, with a weighted average remaining lease term of 1 year. We remain big believers in Del Mar Heights and are still the largest owner in the submarket, but selling this property made economic sense. Additionally, last week, we closed on the sale of our 2 residential towers in Hollywood for $202 million. As many of you know, these towers were developed by Kilroy as part of our Columbia Square and On Vine project, and the layout of the campus allows the residential to be separate and distinct from the neighboring office properties. We determined these buildings would be good sales candidates given the lack of synergies with the office as well as the depth of demand for high-quality apartments. Before bringing the properties to market, we spend time ensuring the operations and structure were optimized to facilitate a sale and maximize proceeds. The cap rate on all sales announced year-to-date averages in the mid-single digits. As a reminder, in addition to the operating property sales, we have $165 million of land sales under contract with roughly half expected to close late this year or early next year. We continue to evaluate additional opportunities to sell or repurpose nonstrategic land. Turning to acquisitions, as Angela mentioned, we closed on the joint venture to develop 1900 Broadway, a 250,000 square foot project in Downtown Redwood City that is already roughly 50% pre-leased. 1900 Broadway is adjacent to Downtown Redwood City's restaurant row, making it one of the most walkable and amenitized properties in the area and worthy of premium rents. Kilroy was uniquely positioned to take advantage of this off-market opportunity given our deep market insight, strong local relationships and proven development acumen. These factors gave our partner, Lane Partners and our anchor tenant, Cooley, confidence in our ability to bring this deal together. We intend to break ground next year, and Cooley is expected to take occupancy in early 2030. The total anticipated cost for the project is between $330 million and $350 million, of which our share will be 97% upon completion. Stabilized yields are expected to be in the low to mid-9% range. Before turning the call over to Jeffrey, I think it would be beneficial to summarize the substantial disposition progress we have made over the last 2.5 years. As private capital return to the office sector, Kilroy meaningfully ramped up sales efforts with a total of roughly $980 million of land and operating properties completed or under contract. We have talked about individual transactions in detail on prior calls, but in total, this demonstrates the private market is open and functional and can be a source of attractively priced capital if executed thoughtfully. We elected to redeploy a portion of the sales proceeds into 4 high-caliber, infill amenitized multi-tenant investments totaling roughly $765 million, which includes the full cost of building out 1900 Broadway. This capital recycling gives us a more diversified and sustainable cash flow stream, while also making the portfolio more amenitized, walkable and supply constraints. As a result of being a net seller of roughly $215 million, we were able to use a portion of the savings to pay down debt and opportunistically repurchase stock. We are proud of the progress made to date and intend to keep making the next best capital allocation decision one step at a time. With that, I will turn the call over to Jeffrey.

Thanks, Eliot. Before turning to results, I want to highlight 2 disclosure enhancements this quarter aimed at providing investors with better visibility into leasing performance now executed activity translates into future results. First, we've added a leasing spread calculation focused on space vacant for less than 12 months. This aligns with how most of our peers present spreads and better isolates true mark-to-market activity, our historical calculation remains unchanged and is presented alongside the new metric. Second, we've expanded our disclosure regarding signed but not commenced leases, which currently totals over 1 million square feet and nearly $78 million of contractually obligated annualized base rent. This disclosure highlights the embedded growth already in place and provides greater visibility into the forward trajectory of the operating platform. Turning to our financial results. FFO for the first quarter was $0.91 per diluted share. With respect to occupancy, as a reminder, KOP 2 entered the stabilized pool during the quarter, impacting reported portfolio metrics. As a result, portfolio occupancy ended the quarter at 77.6%, excluding KOP 2, the first quarter occupancy would have been 81.5%, down only 10 basis points despite our previously communicated first quarter move-outs. The dispositions of Kilroy Sabre Springs and Del Mar Tech Center completed during the quarter had no impact on overall reported occupancy. Cash same-property NOI increased 1.8% in the first quarter, driven by lower bad debt expense and contributions from net expenses, settlements and restoration fee income and other property income. These positive impacts were partially offset by a detraction from base rent despite a marginal increase in overall occupancy, reflecting free rent periods from certain new tenants in the portfolio. On the leasing front, activity during the quarter resulted in GAAP spreads of negative 10.6% and cash spreads of negative 16.8%. Those spreads were primarily -- driven primarily by 2 leases in San Francisco, both of which involved space that was vacant for longer than 12 months. Importantly, these were capital-light transactions that generated attractive net effective rent outcomes. These 2 leases were partially offset in the quarter's reported spreads by the lease Angela previously mentioned at Crossing 900 in Redwood City, which not only generated the highest net effect rent of the quarter in our operating portfolio, but also delivered significant positive cash and GAAP releasing spreads. Leasing on space is vacant for less than 12 months performed well, generating positive GAAP spreads of 19.2% and cash spreads of 5.2%. Turning to guidance. Last night, we increased our 2026 FFO guidance by $0.21 at the midpoint with a new FFO range of $3.49 to $3.63 per diluted share reflecting improving in our core portfolio and platform operations and updated timing assumptions on Flower Mart expense capitalization. With respect to Flower Mart, as Angela discussed, we are now assuming that expense capitalization will cease late in the fourth quarter, at that point, a little less than $1 million of quarterly operating expenses and real estate taxes along with $7 million of quarterly capitalized interest will begin impacting earnings. This change increased guidance by approximately $15 million to $16 million or $0.14 per share and is reflected in the capitalized interest and development guidance provided last night. Cash same-property NOI growth is now expected to range from 25 to 125 basis points, representing a 150 basis point increase at the midpoint from our prior range. This increase is driven by 2 factors: First, in April, we received a $5.9 million settlement related to the 23andMe bankruptcy, which fully results our economic interest in that process contributes approximately 90 basis points to NOI growth. Second, strengthening fundamentals in our core operations driven primarily by improving net expenses and increased average occupancy contribute an additional 60 basis points to growth. We also raised the top end of our operating asset dispositions guidance range reflects our progress to date. We moved decisively closing dispositions earlier than anticipated through recycling capital into compelling investment opportunities, including $73 million of opportunistic share repurchases and prudent debt repayment. Looking ahead, and as Angela and Eliott noted, we will continue to take a balanced, disciplined approach to capital allocation, seeking opportunities to create value for shareholders while prioritizing balance sheet strength and financial flexibility. With that, we're happy to answer your questions.

[Operator Instructions] Your first question comes from the line from Manus [indiscernible] from Evercore ISI.

Perfect. And I just wanted to say thanks in the beginning for the additional disclosures in the supplements. It's been very helpful. My question was just along for Los Angeles and San Diego to see if you could maybe elaborate a little bit further on the leasing demand that you see here and how far along we are here on the recovery. Obviously, we understand, and it's great to see how positive San Francisco has responded recently.

Yes. Manas, this is Rob Paratte. I'll just kind of continuing on the theme that Angela mentioned. Across our entire company portfolio, we're seeing an increase in activity, including tours, proposals and done deals and Los Angeles is no exception. In Q1, we signed 24 deals in L.A. and we're seeing quite a bit of activity at our Long Beach project, Maple Plaza, and we're starting to see a pickup in activity here at Westside Media Center on the West side of L.A. and one of our other assets here. Our pipeline continues to grow in the L.A. market. We have sort of following on to the 24 deals I mentioned, we have more deals that are in the pipeline in leases actually, but not going to quantify all that until they're done. And it just is improving. And again, I'd say this across our entire portfolio that what we're seeing is this continued flight to quality. There's a world of haves and have-nots. So the recovery is not the same for all owners or all properties. And we're benefiting from having these high-quality assets in L.A., San Diego, et cetera. At Nautilus, which I'll really focus on because that's our newest acquisition, we had 400,000 square feet of tours since January 1. We have several tenants that are looking to grow in the project and we continue to entertain tours and just the other normal activity that goes with leasing and couldn't be happier with that. The amenities are really showing well now. Now that is spring, everything looks great at the site. So very happy with that. At Kilroy Center, Del Mar, we're seeing an exceptional amount of activity. Our spec suite program there is really paying off as it is in other markets like Austin and we're going to continue on that front being very strategic in bringing spec suites to market but providing what the market wants.

Your next question comes from the line of Anthony Paolone from JPMorgan.

My first question is on 1900 Broadway and wondering if you can talk about the expected yield you expect to make on that and where rents need to be for the unleased space to kind of achieve it?

So Tony, it's Eliot. In my prepared remarks, I mentioned that we're expecting stabilized yields in the low to mid-9% range. And we've obviously leased 60% of the building and have a good rent comp for where market rents are. So we -- if we replicate that, we'll be in really good shape.

Yes. I just also emphasize as we sort of talked about 1900 Broadway, it's really just a few blocks away from our Crossing 900 asset, where we've leased 80,000 square feet over the last couple of years at rents that are up on average 60%. So we have a lot of data points in the market in addition to the Cooley lease that really point us to the direction of where rents should be in this market. Eliot mentioned in his prepared remarks earlier as well that 1900 Broadway is just adjacent for restaurant row in this submarket. So it is highly walkable, highly amenitized and really should drive premium rents as we think we saw in the transaction that's already been executed. So we're really excited about having additional supply to lease in what has been and continues to be one of the strongest submarkets in the entire Kilroy portfolio.

Okay. And then just maybe I missed this, but did you give a cap rate on the 2 resi sales?

We gave cap rates for all the sales that we've done to date, which was in the mid-single digits, but the resi sales were around in the 4% range.

Your next question comes from the line of John Kim from BMO Capital Markets.

And thanks for the new disclosure. On that signed leases not commenced, I was wondering what was driving most of the leases, 86% to net leases. I know that KOP 2 is a big part of that. But assuming 1900 Broadway is as well, it would suggest the yield on that could be closer to 13% versus 9%. And I'm wondering if my math right? And if there's any conservatism in that number?

Yes. I would say there's not much to point to in terms of why the population of signed but not commenced side is skewed so much to net leases. It really is just a mix issue. And the properties and markets that make up the signed but not occupied pool at this point in time. On the yield, I'd just reiterate what Eliot mentioned in his prepared remarks in response to the last question, stabilized yield on this project, we think, is in the low to mid-9% range, which we think is very compelling. There's going to be good growth at this project over time as well, again, in one of the strongest submarkets in the Kilroy portfolio. So we feel like the sort of development upside here is worth what's a relatively small amount of leasing still to complete at this project.

Okay. And at Flower Mart, I know you talked about extending the capitalized interest. I'm wondering what's the possibility that you keep this development going forward? I know that you're committed to One Paseo, and this looks like this could be another mixed-use development with a big multifamily component. Just wanted to get your latest thoughts on the Flower Mart as far as keeping it as a development project.

Yes. Look, we're watching the San Francisco market really closely and how things evolve in addition to sort of where we're able to take the process we're going through right now in terms of design and entitlement, flexibility and optionality. There's still a lot for us to sort out as we move through this process. And we have time as this process continues to unfold to watch what happens with both commercial and residential rents within the city of San Francisco. And so we'll continue to monitor it. We're committed to making sure that whatever we do in terms of next steps in 2027 beyond at the Flower Mart project maximizes value for shareholders. And I think we've been honest before. Certainly, the company had a very strong plan to develop this on the commercial side prior to the pandemic. We're exploring a broader mix of uses that would allow us, as you mentioned, to add more residential into the projects. We just have to see how the market continues to evolve and what the project ultimately looks like to decide what the right or optimal execution path is. So maintaining a lot of flexibility and prioritizing optionality as a way to create additional economic value at the Flower Mart.

Your next question comes from the line of Seth Bergey from Citi.

As you think about kind of the revised disposition guidance, what would kind of get you to the higher end? Is it are you just evaluating kind of the depth of buyer pool and kind of any changes you've seen in terms of office or demand for assets? And then are there any kind of submarkets you would look to kind of exit within that revised disposition range?

So the revised disposition range at the low end implies that we kind of stop with what we've done to date and then we have about $150 million of disposed that at the high end of the range beyond what we've done. So that clearly has some room to execute. And our approach is going to be consistent with what we've talked about in the past, which is if we can find compelling opportunities then we're going to pursue them. And so we wanted to reflect that with an adjustment to the disposition range. There's not a particular market or submarket that we're focused on exiting. We're really just looking for the way to maximize proceeds on good execution on assets that we think are going to be mispriced given our forward-looking view.

Yes. I mean the only thing I'd add to that is to just echo some of what Eliot mentioned in his prepared remarks, which is that in addition to healthy demand that we've seen over the last couple of years, particularly from owner users looking to acquire assets. We've really seen a resurgence in institutional demand and interest across our West Coast markets. And so where there are opportunities, as Eliot just mentioned, to take advantage of that renewed demand for West Coast commercial assets. We certainly want to make sure we allow ourselves enough room within the guidance range to be able to capitalize on that.

And then I think in the prepared remarks, you mentioned AI as in technology as a demand driver for some of the L.A. submarkets. Do you think L.A. will kind of have a spillover effect from San Francisco and be a large component of kind of recovery in that market? Or how do you kind of quantify the impact that AI can have on a market like Los Angeles?

Yes, I don't think we're mentioning and to suggest it's going to be a huge driver of demand in the L.A. market. We've certainly seen a lot more San Francisco native companies or AI native companies, leasing space, particularly in the Pacific Northwest, where you've got a much larger kind of resident talent pool in the tech sector. So we've certainly seen the spillover benefits in that market. I think we're seeing some of it in the L.A. market. It's pretty concentrated in a few specific submarkets we had called out to your question, Culver City, in particular, in the L.A. market. So I think it's interesting to note that we're seeing some of those tenants pop up. I think it's great from a marginal demand standpoint, but we're certainly seeing much broader demand even in markets such as Culver City across different industry categories as well.

Your next question comes from the line of Andrew Berger from Bank of America.

Sounds like the first quarter was a very strong quarter for leasing. Could you just talk a bit about where the pipeline is today, if there's any way to quantify how big it is going forward. I think last quarter, you said it was up about 65% year-over-year. So just any color you're able to provide would be helpful.

Yes, Andrew, it's -- honestly, the change in San Francisco is so dramatic over the last 12 to 18 months, and it's actually hard to pinpoint the pipeline because it continues to grow. Just to add some color to what Angela was talking about with the 3 consecutive quarters of positive absorption, there were 13 deals done in Q1 over 100,000 feet, and that's a very big number for the city. Another really important note I want to point out is that 5 million square feet of availability has been absorbed since its peak in mid-2025, and that's very meaningful because that availability rate was really the headline that had everyone across the country concerned. And the third point that I think is really important is that these deals, the 100,000 feet plus other parts of that 3 million feet that we mentioned are expansionary, and that's also a very positive indicator, I think. And so you look at our deal with Harvey, for example, where they took an additional 60,000 feet. So the pipeline for us keeps growing. Our team has done a terrific job at 201, as Angela pointed out. We're focused on 363 and 303 Second. We're talking to folks about 345 Brannan. So south of market itself was the strongest submarket of the San Francisco market, and that is Kilroy is a direct beneficiary of that because that's where all of our assets are. And so we're poised and ready to start executing on these. But things are looking really good and the momentum, not only for us but others in the market is quite strong.

And it sounds like speed to occupancy is becoming more important. Can you just talk a little bit more about this? How much of the comments around speed to occupancy are related to the AI types of tenants versus just tenants more broadly. And you mentioned spec suites. Can you talk a little bit more about which markets you're really leaning into spec suites more and what type of results that's creating for your leasing teams?

Sure. This is Rob again. I guess I'll use the Olema example. They're in 2 different spaces in San Francisco. One was a space that was not, I would say, current or modern enough for what their uses were. The other one is a space where they got pushed out by an AI company. And so that created immediate need for space, and we were ready to execute on that because they're taking a portion of our spec labs and then they're taking to-be-built space. So that's a very good example of what's happening. You either have rapidly growing AI companies that just organically need this space or others are getting displaced by larger AI companies. And one point I'd like to raise also about San Francisco is that the F.I.R.E. category in San Francisco was quite active in Q1. So you're still seeing a lot of venture capital leasing and banking and finance. And so San Francisco is really hitting on all cylinders from both the traditional as well as technology front. And I think in terms of our spec suites in general and strategy, it's case by case and market by market. If we have a spec suite or 2 in a building and they haven't leased, we're not going to build more until we've got activity on that. And we've been really judicious about how we apply it. But the markets that we've seen a lot of traction with the spec suites or clearly San Francisco, Seattle, Austin, San Diego and parts of L.A.

Yes. It's been an interesting dynamic. We mentioned the 201 Third having -- we built out 5 spec suites on 1 floor with some shared common space, amenity, conference center and having all 5 of those spec suites leased before we had completed construction was really telling in terms of where demand is, particularly in the SoMa submarket from some of those earlier stage companies and the degree to which they are really prioritizing speed to occupancy. So we've seen that there in markets like Austin, as Rob mentioned, we've seen a similar dynamic over a longer period of time where every time we begin building out the spec suites, we have a different level of interest in some of the vacancy than we had from pure shell conditions. So really tried, as Rob said, and I think this is an important point to be thoughtful and disciplined about how we're building out the spec suites both in terms of making sure we don't get over our skis and build out specific suites with specific sizes when the market demand may shift and change, but also making sure that we have inventory at these projects really at all times. So as they're getting leased up or as we're seeing incremental interest being prepared and willing to lean in and to replicate some of the success we've had in earlier phases of the spec suites program. So really across most of our markets, it's been highly effective and certain driven both a higher lease rate and faster occupancy commencements over the last couple of years.

Your next question comes from the line of Nicholas Yulico from Scotiabank.

I had a couple of questions on specific buildings. So in terms of West 8th, I know you've got a lot of leasing traction there. Can you just maybe talk a little bit more about the dynamic of taking market share in Seattle, which just seems like you've done versus pulling tenants that are maybe looking at Seattle and Bellevue. And then secondly, on, 360 Third, San Francisco, I think you have an expiration there, a little over 100,000 square feet this year. If you could just talk about the traction on that and remind us when that expiration is?

Yes. Nick, it's Rob. On West 8th, I think it's -- 2 factors are in play here in terms of the absorption we've done, both SoFi and General Motors are new to market. And I think that what's really played into that is the renovation that we did at West 8th and the traction that we've built with Databricks and other tenants that are in the market. And I think what we're seeing both with the earlier law firm deal we did SoFi and GM is that this part of town, the Denny Regrade, which is just right on the edge of the traditional CBD, is where people are wanting to be and it's where the talent is either living or very close by, and it's got the type of amenities that the tenants want. And so that's what's really causing that absorption and what we're able to capitalize on. In Bellevue, we expect to see, but we haven't seen, I'd say, a direct correlation between the higher rates in Bellevue and more absorption in Seattle. Most tenants are pretty focused on the either one or being one or the other. But we expect over time that we may see some tenants that flow from Bellevue to Seattle. At 360 Third, we do have that expiration coming up. We've been marketing the space. We have some -- we've had different levels of conversations, some larger tenants that are over 100,000 feet and some that are 50,000 feet. So we're pretty focused on the asset right now and trying to really reach into the market to the proximity of 360 Third between the Bay Bridge and BART and Muni is really strategic for a lot of companies. And that's why it always did well in the past and we expect the same going forward.

Nick, just to clarify the 360 Third expiration is a little over 100,000 square feet in Q2.

Okay. And that's -- that's a known vacate.

Yes.

Okay. And then just, I guess, second question is on DIRECTV. Just sort of any latest thoughts there on a renewal possibility. And if it's not a renewal, I think you were contemplating some other uses for the assets or a potential sale. If you could just give some thoughts there.

Yes. I don't want to give too much color, but DIRECTV is a possibility. We have some other activity and the project is really well-amenitized, really terrific outdoor spaces, landscaping and that kind of thing. And so we've really been pushing the marketing of that. So we do have some conversations going on.

Yes. Remember, it's only a little bit less than 50,000 square feet in the 2026 expiration pool. A larger portion of that lease doesn't expire until the fourth quarter of 2027. So we've got some time to work through that.

Your next question comes from the line of Blaine Heck from Wells Fargo.

I was hoping you could talk a little bit more specifically about the forward leasing pipeline at KOP 2. Just Wondering how much of the demand is for spec suites versus larger spaces, anything you could tell us about tenant profiles and whether the mid-5% yield forecast is still intact?

Blaine, it's Rob. So the pipeline is similar to what we've executed on in Q4 and Q1. Basically, life science focused right now primarily almost exclusively. The tenant ranges in size down in South San Francisco right now are -- the bulk of them are in the probably 10,000 feet to 50,000 feet. That's probably 50% of the demand in the market right now, and there are quite a few. There are over 4 requirements over 100,000 feet in the market, and there are some that are significantly above 100,000 feet. So as Angela alluded to, we're working on filling the rest of Building F, which is our multi-tenant building, and we're in conversations on the vacant building, which, again, is the most prominent of the 3 buildings in the campus and really has terrific signage opportunities and prominence for tenants that want that.

Yes. And I just confirm the yield expectations we shared last quarter in the mid-5% range. Those are still fully intact.

Great. Then switching gears to capital allocation. Can you give us an update on your thoughts on share repurchases going forward, just given where the stock is trading? And how do you think about their attractiveness relative to acquisitions or development?

Yes. I mean, look, I think what we've demonstrated over the last couple of quarters is a real desire to make sure that as we're thinking about capital allocation, we're number one, prioritizing balance sheet strength and flexibility as we make decisions. And we're employing a really balanced approach to looking at sort of all of our options and making the best decision or determination we can at the time. You've seen us be active going back several quarters on the acquisition side. You saw us this quarter with operating property disposition proceeds realized during the quarter to tear those with debt repayment for, again, a really balanced approach in executing any share repurchases just like we told you we would in a leverage-neutral or deleveraging way. I think as we look at all of our -- right now, we continue to see, I think, good value in the stock. We also recognize and appreciate that we're sitting at a period in time in which there's been significant capital markets volatility and specifically quite a bit of volatility with respect to our sector. And we want to make sure that we are -- again, as we prioritize the balance sheet, keeping enough financial flexibility to be able to really step in when things -- we see some of that volatility materialize, and we see periods of significant or extreme dislocation. So as we discussed earlier, we increased the operating property disposition guidance. We feel like the land sale proceeds we've already announced are kind of earmarked for the 1900 Broadway project, and that's effectively fully funded from an equity standpoint. So additional operating property disposition proceeds will be available for balanced redeployment based on how we see the full set of alternatives at that point in time.

Your next question comes from the line of Brendan Lynch from Barclays.

You've managed our expectations on churn this year. Maybe you could give us your current expectations on the retention rate for the remaining 740,000 square feet that are set to expire?

Yes. I mean we had shared going back, I think, a couple of quarters now that we expect that even when that pool was larger, probably around 1 million square feet at the time that we expected the vast majority of those lease expirations would, in fact, be moved out. If you go all the way back -- or 2 years ago when you look at what was in totality in the 2026 pool, which was about 2 million square feet. We did successfully during the course of 2025 renew a number of those spaces early. So the blended retention rate on that initial, I would think it was almost 2 million square feet pool of 2026 expirations was about, like 40%, maybe a bit better than 40% relatively in line with kind of historical prepandemic averages. That said, when we're looking at the lease expiration schedule right now for 2026, we do expect there are probably a few opportunities for us to continue to work through some renewals, but they are reasonably limited. When you think about reported retention stats, though, you're also going to see us begin renewing early some of the '27 exploration pool. So it's a little bit harder to tell you exactly in any given quarter what the retention rate would look like from a reported standpoint. But we do think that just from a modeling standpoint, the bulk of the 2026 remaining expirations will be move-outs.

Okay. That's helpful. And maybe just another modeling question. Are you still anticipating that occupancy trust in the second quarter?

Yes. Yes. Just given the pace of move-outs, you can see that on the lease expiration page, Q2 is by far our biggest move-out quarter during the course of 2026. So that's certainly currently our expectation.

Your next question comes from the line of Upal Rana from KeyBanc Capital Markets.

On dispositions, I appreciate the details already provided so far. And just curious, do you anticipate elevated dispositions or being a net seller to continue to '27? Or will '26 be the bulk of it or the tail end of it, just trying to get a sense of how much more there is to do on your end?

So I think it's a little too early to talk about 2027 and the way we've approached dispositions to date is to just try to be flexible and dynamic and look at what the market is telling us, take the signals and do what we think is in the best interest of shareholders. So we gave guidance on what we thought dispositions would be to date in '26. We executed beyond that, and we're adjusting, and we're going to continue to take that approach. So to the extent that we still see appealing opportunities, we're going to continue to sell. And if not, we won't.

Yes. I mean, that's, I think, really the right way to frame it. This has been an opportunistic exercise. I wouldn't frame it to how much do we have to sell. Especially when you think about what we did during the quarter, what we announced last night in terms of the residential sales, those certainly weren't have to sell transactions. So there's a real opportunity there to raise some very attractively priced capital on behalf of our shareholders, and we took advantage of that. So we will continue to be opportunistic as we evaluate the disposition pool as we talked about before, really prioritizing balance sheet strength and flexibility, prioritizing making the cash flow stream of this company more durable and faster growing over the medium to longer term. But again, very opportunistic execution.

Okay. Great. That was helpful. And then, Angela, you mentioned Maple Plaza is seeing some strong broad-based demand there. Could you provide more detail there? And any update on you can provide on Beverly's Hills broadly, just given there has been some recent transactions there as well?

Yes. I mean, I'll turn it over to Rob in a moment, but I'd just reiterate in my comments from earlier, we have seen great traction there overall. I think the lease up there and our retention experience with respect to some tenants we had originally underwritten to vacate has just been much better than we expected. And the demand is from a complexion standpoint, sort of exactly what we had hoped for. It's pretty broad-based. It's not overly tied to any one sector or any one industry. We've got great demand from media and entertainment, certainly, but also financial services, professional services, a much broader mix of uses. So we're encouraged about the momentum we're seeing there and long-term potential for Beverly Hills overall.

Yes. I don't have much to add, Upal. Angela hit the nail on the head. We're really happy with the leasing momentum we have. We're leading the market right now at Maple Plaza. There's a lot of media, private wealth and financial services, as Angela pointed out. And I think in these cases, like Maple and at 201 Third, you start building momentum in leasing and that attracts other activity. And I think that's what we're seeing. And we've really worked hard since taking the project over really buff up the lobbies and landscaping and it's really showing well right now, and that's what we're seeing is just activity from that, and we're really happy with the rental rates based on the underwriting, we're exceeding underwriting in all cases.

And Upal, on the capital side, I think all that we've seen in the market since we've acquired has just reaffirmed that capital really wants to be in Beverly Hills, and we've seen a wide array of capital really focused on Beverly Hills. And so we feel really good about when we bought the building.

Your next question comes from the line of Tom Catherwood from BTIG.

Maybe Rob, starting with you, I think over from a leasing kind of strategy perspective, over the last year or so you've put some tenants into shorter-term leases with the hope that some could grow into more space or convert into longer-term leases. For some of the demand that you're talking about today, is some of that those shorter-term leases actually converting longer term?

Some is, but a lot of it is also -- I think, just a trend in the market as tenants are willing to commit with conviction, meaning longer-term leases. So in the case of Olema, it's a longer-term lease and some of the other cases, it is a short-term deal that we've extended. So we're hitting it on both fronts.

Yes. I mean, just to add to that a little, specifically in the San Francisco CBD, where we've talked about this trend in some ways being most pronounced. I think the execution with Harvey this quarter really underscores why we thought it made sense to do that original deal last year, which was a shorter-term deal. But as we talked about at the time, had very little capital spend, where they were effectively reusing existing improvements left over by the last tenant, so very positive NER deal, but a shorter-term deal. That made a ton of sense in our minds because the reason they wanted flexibility wasn't that they necessarily wanted out at the end of the term, but it was that they didn't know what their full space requirements were going to be over time and wanted the flexibility to make sure that they could meet those growth objectives as effectively as possible. So where we've worked with tenants like that and been willing to go a little bit shorter term, it has been with a view making sure that we are thoughtful about our ability to accommodate their future growth down the road. And the Harvey example this quarter, leasing 93,000 square feet last year, and another 62,000 feet this quarter, I think, really speaks to why that strategy in certain submarkets and for certain kinds of tenants can and has been highly effective.

Perfect. That was exactly what I was looking for. And then, Angela, apologies if you mentioned before, and I have missed it. But as you work through a revised program for the Flower Mart, is there a potential outcome where capitalization carries beyond December? Or is that more of a hard stop?

At this moment in time, I think we feel like that's a pretty hard stop. Now -- that's with a view of the process we have in front of us to finish up the revised sort of design and entitlement process with the city and getting to the point where we feel like we have done everything we've been talking about in terms of the redesign and reimagining of Flower Mart projects, and we have more flexibility around the mix of uses and greater ability to ultimately face the projects, whatever those uses really look like. Once we're at the completion of that project, we're sort of waiting for demand to be sufficient in the market at rents that will justify new construction. And right now, we think there's a gap between those 2 things that would necessitate us stopping capitalization, probably in the fourth quarter or late in the fourth quarter of this year. The only thing I will say is we're watching the San Francisco market very closely. I think you've heard around this table today, a lot of enthusiasm for what we're seeing in terms of rent demand. There are very few large contiguous blocks of high-quality space in the city remaining available and it is a low probability, I think, but not a 0% probability, that there is more work to do or something demand-driven and actionable as we get into 2027. Again, right now, I'd say it's a low probability, but it's not a 0% probability.

Your next question comes from the line of Caitlin Burrows with Goldman Sachs.

Maybe just a follow-up on that specific topic you were just talking about. So on Flower Mart and trying to figure out how it could potentially work in the future. If you were to stop capitalizing at the end of 2026 kind of put pause on the project and then resume whether it's 6 months or multiple years later, would that like full capitalization come back? Or does it work that you then start capitalizing on like the incremental spend, if that makes sense?

It's Jeffrey. In the event that we do have a great outcome where we can start capitalizing in the near future, it would be on the full kind of cost accrued balance. So it wouldn't be the marginal spend due to the same rate that you are seeing today.

Okay. Got it. And then maybe just back to the leasing pipeline today versus a quarter ago. I think a while ago, somebody else asked exactly that question, and Rob mentioned it's hard to tell. So maybe phrasing it differently, do you think the leasing pace of over 550,000 square feet is sustainable? Or what is required in order to meet the low versus high end of the occupancy guidance this year?

Caitlin, I would love to be in the prediction business, but I've said what I said in the script we outlined, but I can just tell you that the demand that we're seeing is real and all of our teams. I couldn't be happier with our whole leasing team and the people that support them in getting these things executed. So we're really busy and more to come.

Your next question comes from the line of Dylan Burzinski from Green Street.

And not to sort of ask you another question that's sort of geared towards predicting anything, but going to do so anyway. I mean, obviously, things continue to be firing on all cylinders in San Francisco. Do you guys have any sort of sense for how far behind L.A. and Seattle CBD is relative to what you're seeing in San Francisco? In the broader Bay Area, I guess.

Yes. It's a good question. I'd start, I guess, with talking about the Pacific Northwest. I think Bellevue has been, as we talked about for the last couple of years, very strong, but the availability of remaining space available in Bellevue has just continued to compress. And I think rents have performed very well in the Bellevue market as a result. And there's -- that market from a fundamental condition standpoint feels very tight right now. And so I think that's encouraging. I do think over the last couple of quarters, as we've pointed out, our assets in Seattle, which are not in the Seattle downtown, but really in Denny Regrade, South Lake Union have definitely seen increased momentum. And I think if I went back a quarter ago, I still wasn't prepared to say that we were seeing a full trend there. But we did have 1 tenant -- in 1 example, move out of the CBD and entered Denny Regrade. We had one tenant move from over the last couple of years, I guess, moved from Bellevue over to Denny Regrade as well. But I think now with 150,000 square feet, give or take signs over the last couple of quarters. We do feel like there's a lot more momentum on the Seattle side. And again, I think from very high-quality tenants and a broader mix of uses. So I think that's been across the board, really encouraging to see. L.A., as we pointed out, feels like it's gradually improving. But I would candidly admit that I think that improvement is, in fact, gradual. And the reason we're pointing to such an improvement in our pipeline in the L.A. Market and our executed productivity has been both because of that gradual improvement in the market overall. But really importantly, in the portfolio reallocation work we've done within the L.A. market over the last couple of years. So I think our portfolio is better positioned than it was 2 or 3 years ago to capture what has been slowly improving market on the L.A. side. There are pockets that we're interested in, in L.A. that are actually performing better, where there's some changing in industry dynamics going on. We talked about Arrow and Long Beach benefiting from a resurgence in kind of local defense and aerospace requirements. You're seeing that not just in Long Beach, but really up through the South Bay and seeing some of that activity in El Segundo as well. So that's encouraging. L.A. is going to be a story where it's not one industry driving the narrative, but it has to be sort of a broader aggregation of industries moving in the right direction. And we're seeing reasons to be, I think, cautiously optimistic there. But without question, it's going to be a step behind.

That's incredibly helpful detail, Angela. I really appreciate that. And then just one more, if I could. Not sort of trying to get into any sort of '27 guidance, but as you sort of look at lease expirations next year, I think they're largely Q1 weighted if we exclude the DIRECTV lease expiration in '27, which sounds like it's in flux. As you guys sort of reach out and get a sense for renewal possibility for next year, I mean, those conversations? Are tenants more receptive than maybe they were coming into '26 and 25? Just sort of curious, any comments you have around that?

Yes. I mean I'd say we got a couple of things going for us in '27. Overall, even at this point, in that exploration window, it's a considerably smaller exploration year than 2026 was a year ago. So I think we've got that going in our favor. And then as you point out, the largest expiration next year is AT&T/DIRECTV, which is a fourth quarter expiration. Outside of that, the pool is very, very granular. So there's nothing above 100,000 feet. There's only really one lease between 50,000 and 100,000 square feet. So it's a much more granular execution. And we're beginning some of those conversations as we speak. I think we've got some expirations happening and some pretty strong markets where we're already having conversations either about renewal or significant interest in -- from potential backfill tenants. So we really just need to put our heads down and execute as it relates to the 2027 pool. But again, the overall size and the granularity of that pool, outside of AT&T/DIRECTV is encouraging.

Your next question comes from the line of Michael Carroll from RBC Capital Markets.

I wanted to circle back on Rob's comments regarding the leasing pipeline. I know it's you kind of highlight there's a lot of volatility. So it's hard to say how that has trended over the past 12 to 18 months. But has that pipeline continue to build and grow? I mean, is it bigger today than it was in the beginning of the fourth quarter 2025?

Absolutely. I mean, it's continued to grow throughout '25, and its -- pipeline is increasing now. There is a pending transaction that's relatively significant that's going to happen south of market probably in Q2, not with us. But it's just another indication that the market is thriving and particularly south of market is on a tear right now. The real upswing started kind of mid '25 and really took on steam for the rest of the year and into Q1.

Okay. And is this volatility that you're highlighting is that mainly driven by the San Francisco market? I mean is it just tenants are leasing space that they're kind of getting taken out of the pipeline? Or is it a part of where tenants are delaying decisions or it's hard to kind of quantify what their space needs are?

I mean it on the positive end that it's hard to pinpoint because literally, every week, there's new demand that's coming from tenants.

Yes. And some significant demand, like larger format tenants, I think of anything that's size of the pipeline certainly up materially on a year-over-year basis. But we've also seen an increase in average size requirements, more larger tenants kind of coming into the pool. A greater propensity of tenants or a greater concentration, I guess, I should say, tenants between 50,000 and 100,000 square feet. And you've seen that kind of come through the execution stats as well. So the pipeline over the last couple of quarters being sort of over the last quarter or to being marginally up, while we've had substantial execution, I think it's a really good sign.

The last thing I'd say, Michael, is that rolling 12-month leasing totals have returned as historical averages in San Francisco. So there are about 9 million square feet. That gives you more color on the pipeline.

Your next question comes from the line of Peter Abramowitz from Deutsche Bank.

Most of my questions have been asked, but I guess just one on software tenants in the portfolio and potential tenants. I guess, could you just give some color on kind of the tone of conversations with software tenants these days, particularly in the Bay Area? It seems so far this year that the equity markets are kind of pricing these companies as if there's an existential threat to their business. So kind of curious what's the tone of conversations with them? And have there been any meaningful additions to the sublease market from that portion of the portfolio?

No. I mean that's sort of the point I was going to make, Peter. I think if you go back over the last several years, that software category is a category where we had seen -- and this is going back several years, sort of the height of the pandemic, some of the largest blocks of sublease space coming out of that portion of the population. And thankfully, a lot of those blocks have been spoken for, right? And so we've got -- while it might look one way on the lease expiration schedule or something else, we've got a much more granular tenancy within some of that space and tenants that we do believe, especially in the San Francisco market are high likelihood of renewing or going direct with us down the road. So a lot of that sort of pressure, attention or headline impact has already been felt in the portfolio was felt several years ago. That space was successfully re-leased in many circumstances. And I'm not aware of any conversation we've had in the portfolio over the last probably 6 months, where the tone or tenor from those tenants has changed in a material way. I'll let Rob jump in as well.

No, I agree with that, Peter. It's just -- we have software companies we're talking to that need more space. So the news is national, but what's happening on the ground. I can only speak to what we're seeing, which is no pullbacks and increased demand.

Thank you for your questions. There are no further questions at this time. And this concludes today's call. Thank you for attending. You may now disconnect.