Kilroy Realty Corporation (KRC) Q2 2026 Earnings Report, Transcript and Summary

Hello everyone, thank you for joining us and welcome to the Kilroy Realty Corporation's Second Quarter 2026 Earnings Conference Call. After today's prepared remarks, we will host a question-and-answer session. Please press *1 to raise your hand. To withdraw your question, press *1 again. On the call today are Angela Aman, CEO, Jeffrey Kuehling, EVP, CFO and treasurer and Eliott Trencher, EVP, CIO. In addition, Justin W. Smart, President, and A. Robert Paratte, EVP, Chief Leasing Officer, will be available for Q&A. Please note that some of the information that will be discussed during this call is forward-looking in nature. Please refer to the company's supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being webcast live on the company's website and will be available for replay. The company's earnings release and supplemental package have been filed on a Form 8-K with the SEC and both are also available on the company's website. I will now turn the call over to Angela Aman. Please go ahead, Angela.

Thanks, Marina, and thank you all for joining us today. We are pleased to report on a strong quarter of disciplined execution across every facet of our business. As we capitalize on the ongoing recovery to drive strategic leasing activity while prudently allocating capital and proactively ensuring financial strength and flexibility. The second quarter saw a continuation and broadening of the recovery that has been taking hold over the last year across our innovation-driven markets. Strong new business formation and growth both within and outside of the artificial intelligence ecosystem and shrinking shadow supply as large-scale space rationalizations by legacy tenants are being addressed are resulting in a diminishing inventory of high-quality available space and improving lease economics. Existing tenants within our markets and within our own portfolio are taking note. Demonstrating a greater sense of urgency as it relates to early renewal discussions in order to secure their long-term occupancy needs. As we execute during the second half of this year, we intend to capitalize on growing levels of tenant activity while remaining mindful of the positive inflection in supply demand dynamics. During the second quarter, we executed approximately 370,000 square feet of new and renewal leases, bringing year-to-date leasing volume to roughly 944,000 square feet. An increase of more than 40% versus the first six months of 2025. For all comparable leases signed during the quarter, GAAP rental rates were up 21%, and cash rents were up 6.1%. And when excluding leases signed on spaces vacant for longer than 12 months, releasing spreads improve further. To 27.3%, 15.6% on a GAAP and cash basis, respectively. As we look ahead, we are focused on two primary data points related to the future growth potential of our portfolio. One, the magnitude of our signed-but-not-yet-commenced pool and two, the size and quality of our forward leasing pipeline. At June 30, the signed-but-not-yet-commenced pool consisted of over 1 million square feet of leases. Representing more than $78 million of annualized base rent or ABR. it is worth noting that the ABR per square foot associated with the signed-but-not-yet-commenced pool is over $75, 30% above our current portfolio-wide ABR per square foot. In addition, 86% of the signed-but-not-yet-commenced pool comprised of triple net lease structures. Versus 53% of the existing portfolio. As a result, average commencements from this pool will have a disproportionately positive impact on NOI as they occur. Providing important visibility on future bottom line growth. In addition, over the last quarter, we have seen a material expansion in the size of the forward leasing pipeline. At June 30, the total square footage represented by pipeline transactions was 34% higher than at the end of the first quarter. With the LOI and late-stage pipeline up approximately 77%. Reflecting broad-based improvement across markets and tenant industries and the ongoing flight to quality trends that are driving demand for premium assets and Our team is focused on converting these transactions to signed leases as expeditiously as possible. And we look forward to reporting our progress as we move through the balance of this year. San Francisco, our largest market, continues to lead the West Coast recovery. Posting its fourth consecutive quarter of positive net absorption. Flight to quality dynamics are readily apparent. With Trophy and Class A assets capturing the overwhelming majority of recent leasing activity. Which has helped to compress both competitive sublease availability and direct vacancy in the market. Many tenants continue to prioritize move-in-ready spaces and buildings, for sponsors that can provide a seamless path to growth as the needs of their businesses rapidly evolve. Average deal size in the San Francisco market has steadily increased. While the availability of large contiguous blocks those 100,000 square feet and above, has materially declined. With only 20 to 25 high-quality opportunities of size remaining in the city for the more than 25 active tenants currently in the market looking for comparable spaces. As a result, rent growth has returned to the market, with average effective rents increasing approximately 15% year-over-year. Looking forward, active tenant demand has now surpassed 10 million square feet, a level not seen since 2019, which was one of the strongest leasing execution years in San Francisco's recent history. Encouragingly, the composition of demand is broad-based. Supported by both traditional occupiers and the continued expansion of the AI ecosystem, which represents approximately one-third of the active tenant demand pipeline in the market. And importantly, although the initial stages of the San Francisco recovery were promising, they were also relatively narrow in scope. Now we are seeing tangible interest migrate across our multitenant assets in the South of Market (SoMa) submarket, which saw a sequential increase in tour activity during the second quarter of nearly 65%. Turning to the Pacific Northwest, we are encouraged by momentum in both our primary submarkets in the region. In Bellevue, recent large lease executions have constrained remaining high-quality availability intensifying the competition we are seeing at Key Center and Skyline. And in Seattle, while leasing in the CBD remains challenging, our portfolio, which is concentrated in South Lake Union and Denny Regrade, has seen a significant pickup in activity. West 8 continues to be the primary beneficiary. Approximately 150,000 square feet of new leases executed over the last several quarters and a robust forward pipeline. Comprised of additional new leasing activity from both new to submarket tenants and existing tenants in the building looking to expand. In San Diego, suburban markets such as Del Mar, where the vast majority of our exposure is concentrated continue to perform exceptionally well. With low office vacancy rates and limited sublease availability. While the downtown submarket continues to be challenged our remaining vacancy at 2100 Kettner in Little Italy continues to resonate with tenants with active space requirements. And our team has done an excellent job of driving consistent activity and capturing more than our fair share of leasing demand. In Los Angeles, we are cautiously optimistic as green shoots appear to be emerging, with ongoing broad-based demand in Beverly Hills, tech and AI demand expanding in Culver City, aerospace, defense, robotics, and advanced manufacturing demand growing across the South Bay, and large tenant demand beginning to reemerge in Santa Monica and West LA. Where during the second quarter, executed a 51,000-square-foot lease with Universal Music Group at Santa Monica Media Center, bringing the project to 100% leased. And lastly, in Austin, the significant amount of supply that delivered over the last several years is being steadily absorbed. And tenant demand appears to be positively inflecting. Driving a notable improvement in the competitive landscape for remaining available Class A space. With respect to the life sciences sector, industry fundamentals continue to improve. With the XBI up more than 70% year-over-year. The biotech IPO and follow-on equity markets open, and the M&A and licensing landscape exceptionally active. All of which help to recycle capital within the ecosystem. In addition, FDA approvals have remained strong with novel drug approvals on pace with 2025 levels despite a period of leadership and staffing transition at the agency. At KOP Phase 2, where we executed the previously announced 38,000-square-foot lease with Olema Pharmaceuticals during the quarter, we have seen a meaningful pickup in tour and proposal activity across a wide range of size requirements. Today, we have active interest in all unleased space in our multitenant building, and we are seeing a variety of larger format users begin to reengage the market a very encouraging sign for our remaining full building opportunity. While lease execution timelines remain elongated, and it is difficult to predict with certainty which transactions will ultimately materialize and on what timeframe we are optimistic by the overall level and quality of life sciences demand in the market and the degree to which KOP's differentiated tenant value proposition continues to resonate with prospective users. As we work to capitalize on recent momentum, we remain focused on both speed to occupancy and net effective rent maximization across the campus. In terms of capital allocation, as Eliott will touch on in a moment, we continue to advance our objectives of simplifying and streamlining the portfolio, while improving the long-term durability and growth of our cash flow stream. We are pleased with our successful track record over the last several years, and believe that the significant work that has been completed to rationalize the future development pipeline and monetize land parcels dispose of lower quality and or capital intensive assets that no longer meet our return objectives and reinvest opportunistically both in our own portfolio and in markets where we have deep institutional knowledge and relationships have significantly improved our ability to capitalize on improving market conditions. As the West Coast recovery has continued, we have seen broader institutional interest in commercial real estate assets in our markets, resulting in greater certainty of execution for potential disposition transactions and a growing pipeline of investable acquisition opportunities which will continue to be evaluated with rigor and discipline. As we execute on our business plan, we are also intently focused on maintaining a strong and flexible capital structure. That supports our long-term value creation and cash flow objectives. As Jeffrey will cover shortly, during the second quarter, executed an amendment and extension of our unsecured credit facilities expanding available capacity, extending duration, and improving pricing. With approximately $1.6 billion of available liquidity, we are well positioned to navigate a dynamic operational and capital markets environment. In conclusion, I want to thank the entire Kilroy team for another strong quarter of hard work, focus and execution. As market conditions improve and opportunities emerge, your commitment to acting decisively and with discipline is creating value for all stakeholders. Eliott?

Thanks, Angela. The capital markets for office and life science continue to strengthen across our regions. there is more depth to buyer pools, optimism on leasing fundamentals, and confidence in the financing market. And as a result, deal volume nationally is up 20% year-over-year. San Francisco has been the biggest beneficiary of this trend among the markets in our portfolio. deal volume is on track to be the highest since 2021, Deal size is increasing with nine-figure deals becoming more common, and investment profiles are broadening out. With core-plus and value-add deals seeing more interest from sophisticated capital. For Kilroy, the improvements in the transaction market presents opportunity in several ways. First, as a seller, more deal volume has led to improved pricing and certainty of execution. We have already capitalized on this by selling $348 million year-to-date, including the $22 million LA residential sale discussed last quarter. We are pleased with the capital recycling completed to date And as market trends continue to evolve, we will explore additional disposition opportunities. Notably, we are starting to see some instances of buyers' pricing risk more generously. Specifically as it relates to future leasing demand and or CapEx requirements. We will evaluate these opportunities carefully and sell them to strength if we believe the risk-adjusted returns are favorable for shareholders. Second, this presents opportunity as a buyer. More volume and better asset quality increase the chances of finding investments that meet our stringent criteria. We are actively evaluating several acquisitions, but we will be patient and picky to keep our discipline in seeking appropriate risk-adjusted returns. As we have demonstrated in the past, our investment decisions will continue to balance our goals of improving portfolio quality and strengthening our balance sheet. Turning to our future development pipeline. We continue to evaluate additional opportunities to sell non-strategic land, and expect to have more to discuss later this year. As a reminder, we have $165 million of land sales under contract with roughly half expected to close late this year or early next year. Lastly, as it relates to the Flower Mart, our overall path forward remains consistent with what we discussed last quarter. As we continue to work constructively with the city of San Francisco on revised plans for the site. Importantly, the updated framework is expected to provide greater flexibility around phasing as well as a broader range of uses, including residential, in order to maximize optionality as market conditions improve. As current rents do not yet support development economics, for either an office or residential project, we expect to stop expense capitalization at year-end 2026 consistent with our prior expectations. With that, I will turn the call over to Jeffrey.

Thanks, Eliott. FFO for the quarter was $0.92 per diluted share, which includes a $5.9 million bankruptcy settlement through 2023 and representing $0.05 per share. This settlement was disclosed and incorporated in the last quarter's adjusted guidance. Portfolio occupancy including KOP Phase 2, ended the quarter at 77% down 60 basis points from the prior quarter. Despite two previously communicated large move-outs that negatively impacted occupancy by approximately 140 basis points. Strong leasing activity over the last several quarters resulted in significant commencement activity during Q2. Providing an important counterbalance to the quarter's large move-outs. In addition, as Angela previously mentioned, tenant posture around renewal activity appears to be changing. During the second quarter, we executed approximately 75,000 square feet of renewals on space that we had previously anticipated would vacate. This helped to drive overall retention to 27.9% during the quarter, or 30% year-to-date, including subtenants. As we look ahead, the balance of our 2026 expiration schedule becomes more granular, with no remaining expirations above 50,000 square feet. Combined with the visibility provided by our signed-but-not-commenced pipeline, which grew incrementally during the second quarter, despite significant commencement activity we are confident in the path to occupancy stabilization and growth. Cash, same-property NOI, increased 1.5% in the second quarter driven by the previously mentioned bankruptcy settlement from 2023 and Me and base rent growth these gains were partially offset by nonrecurring bad debt reversals in net expenses due to a difficult year-over-year comparison related to positive benefits recognized in the second quarter of 2025. On the leasing front, both GAAP and cash re-leasing spreads were meaningfully positive this quarter at 21% and 6.1%, respectively. Leasing spreads on space vacant for 12 months or less were even stronger, generating positive GAAP spreads of 27.3% and cash spreads of 15.6%. This marks the first quarter that both GAAP and cash re-leasing spreads were positive in nearly two years, which we view as further evidence that the improved leasing environment we have discussed over the last several quarters is increasingly translating into stronger lease economics across the portfolio. While leasing spreads will fluctuate quarter to quarter based on the mix of transactions executed, we were encouraged by the breadth of positive mark-to-market activity achieved during the period. Turning to the balance sheet, During the quarter, we amended and extended our unsecured credit facilities. Increasing the size, extending the term and improving pricing by 20 basis points. We increased our revolver from $1.1 billion to $1.25 billion and extended the maturity date to July 2030. The term loan was upsized from $200 million to $250 million and extended five years to July 2031. The incremental $50 million of term loan capacity is a delayed draw feature available to us through June 2027. We are grateful for the continued support of our banking group whose confidence allowed to complete this transaction with improved terms and leaves us well positioned to navigate what remains a dynamic market. In July, we also elected to repay the outstanding $200 million of private placement notes with cash on hand approximately three months ahead of the scheduled October maturity. Together, these actions reflect our continued commitment to proactively managing our liabilities ensuring that we remain well positioned to capitalize on opportunities as market conditions continue to improve. Lastly, turning to guidance. We affirmed our previous guidance range and assumptions last night with an FFO range of $3.49 to $3.63 per diluted share and same-property NOI growth range of 25 basis points to 125 basis points. As it relates to the same-property NOI growth trajectory, please note that in the third quarter of 2025, we recognized $4 million or 32 basis points in restoration fees and net real estate tax refund benefits which will create a difficult year-over-year comparison in Q3. In conclusion, this quarter marked meaningful progress across every operational and financial metric. Leasing momentum continues to improve, but GAAP and cash re-leasing spreads were positive. Our signed-but-not-commenced pipeline continued to expand and we further enhance the strength and flexibility of our balance sheet. The environment is moving in the right direction, and we remain focused on capitalizing. With that, we are happy to answer your questions.

We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. We ask that you pick up your handset when asked a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jana Galan with Bank of America. Please go ahead.

Thank you and congrats on the quarter. Maybe digging into the leasing spreads, which were very strong and very encouraging to hear was pretty broad-based across the various markets. Can you help us think about what we should expect kind of moving forward something on the mark-to-market on the overall portfolio?

Sure. Yeah, I will jump in here and then Rob and Jeffrey can jump in. As well. I would say a few things. As Jeffrey mentioned and you highlighted, Jana, the spreads in the quarter were pretty broad-based. This is not a quarter that was driven by one or two leases. We had pretty consistently positive economics across most of the pool of leases that were signed during the quarter in a wide range of markets. So really encouraging activity, both new leases and renewals. As Jeffrey mentioned in his prepared remarks, spreads in any given quarter are going to depend a lot on the mix of transactions, the mix of markets those transactions are in. And so spreads, even as we continue to move in the right direction in terms of the improvement in broader lease economics, spreads can vary quarter to quarter based on the pool. As we think about the broader mark-to-market across the portfolio, which is it is reasonably consistent with what we have described on previous calls. So again, we continue to move in the right direction. We continue to be a bit above market. In both San Francisco and Los Angeles. And below market in our other three markets. I would just note that in San Francisco, and LA, but San Francisco to a larger degree, The degree to which we are currently sitting above market has compressed over the last quarter or two. As we have seen that improvement in supply and demand dynamics translate into stronger leasing economics. Thank you.

And then maybe following up just on Flower Mart where you are kind of seeing current rents not yet supporting office or resi development, but both are moving very quickly. Any indication of you know, which would make more sense, or could this maybe go all office eventually?

Hey, Jana. it is Eliott. So you are right. We are still not quite there, but taking what Angela just said and applying it to Flower Mart we are obviously getting closer, you know, day by day because the continues to strengthen. You know, right now, resi markets are a little bit closer to penciling in terms of where rents need to be to justify development. But both are improving at a pretty good clip, and so we will just see how the next several quarters play out.

Your next question comes from the line of Seth Bergey with Citi. Your line is open. Please go ahead.

Hi. Thanks for taking my question. Maybe just a follow-up on Flower Mart. Would you look to carry the interest expense in 2027? Or given that the current market is not supporting additional office or revenue development, would you look to sell or JV that asset? And when would you kind of expect to potentially announce something to the investment community?

Yeah. I think, you know, we have been really focused on making sure that as we move through a process with Flower Mart that we are being very transparent and open with the investment community about how that is playing out and what that will mean for potential future decision making. We continue to work through a process with the city right now and we are confident that we will be at the end of that process sometime later in the fourth quarter of this year. That process we have been working through is going to give us the ability to build a different mix of uses or a wider range of uses on the site. As well as to give us some relief under the existing or legacy development agreement that really would have made it very difficult economically to phase the project. In any way that made sense. So in order to make whatever the next best decision is on the Flower Mart, it is really critical that we get through this process with the city to enhance our flexibility and optionality at the site. Which is I am very confident I think our whole team is very confident is improving the economic value of the Flower Mart site. Long term. As we continue to navigate this process and we get into year end as we solidify the additional flexibility we expect to have, We are continuing to evaluate the market. Be really mindful of what the next best path might be, whether or not it is all resi, whether or not it is all commercial, whether or not it is probably most likely a mix of uses. We will be able to make better decisions around what that means in terms of our continued ownership of all or a part of the site. But right now, the primary focus for everybody on this platform is that we get to the end of the process with the city that we do everything we need to do to ensure that the Flower Mart site is placed into development, placed into service as soon as economically feasible. In order to support the needs of the Central SoMa community. Thanks.

And then just on KOP Phase 2, encouraging to hear that the life science market is improving. Could you just maybe kind of bucket some of the increase in demand you are seeing for the project and to how much of that is just tour activity, how much of that do you expect to kind of convert into leases? And do you have any leases out? And then just given kind of the overall strength of improving demand, have your yield expectations or time line for stabilization changed for the project?

Sure. This is Rob. Let me just lay a backdrop for you. Regarding Q2 and leasing in South San Francisco and the peninsula. There were only eight leases signed over 20,000 square feet in Q2, which comes off a very big 2025, obviously. one of the largest was our deal with Olema. two others were with in Silicon Valley and two were in the East Bay. But what is changed dramatically is the amount of touring activity, which I know is the highest predictor of where you are going to go next, which is LOIs or leases. We went from 317,000 square feet of tours in Q1 2026 to over 800,000 square feet of tours, and we are talking to many of those firms now. Just to give more color on the level of activity we have, as Angela indicated in her comments, we have a broad range of sizes that we are talking to. A lot of the deals that are in the market right now are in the 20,000- to 40,000-square-foot range. Our last spec suite that is available has multiple parties interested in it, and we expect to be able to report something shortly on that We are also building two new floors of spec labs, and those will be available in December and January, respectively. And we have got activity on the bulk of those already. And then interestingly, when you flip to larger requirements, right now, there are eight requirements over 100,000 square feet The next tier down is really that there are about 25 tenants in the 20,000- to 70,000-square-foot range. And so that is what is driving the 800,000 square feet of touring activity we have had. And I think one last point I would make is that we are seeing more and more in the Peninsula, South San Francisco and further south that robotics companies are having large, large requirements, many of them over 100,000 square feet And the result of that is that it is going to reduce the amount of available space for life science companies to take in terms of R&D type space. So we think that is going to benefit Oyster Point really well. We are not suited at KOP for R&D type space. But we could handle robotics of certain uses. So we see demand coming in on multiple fronts right now, and it just has not looked this good in quite a while.

Your next question comes from the line of Steve Sakwa with Evercore ISI. Your line is open. Please go ahead.

Yeah. Thanks. I guess, good morning out there. Obviously, your commentary, excuse me, around leasing is certainly constructive. As you just look at the pace of the recovery over the next of years, you know, I guess, what, you know, what are the things that are maybe you know, positively surprising you, and maybe what are the things that could slow or hamper the overall recovery in the Kilroy portfolio?

Yes. Thanks, Steve. I appreciate the question. We do feel really good about what we have seen, even just over the last quarter or two as it relates to strengthening of the leasing environment. it is true across markets, and there are different drivers for that across all of our different markets. But in San Francisco, our largest market, we have really seen a pretty significant change in tone that is been driven by just the degree to which availability has been taken up. The focus on high-quality space and the flight to quality trends that have really limited the remaining blocks that are available for tenants and high-quality in nature. And we have seen that translate pretty quickly into improved lease economics. And as I mentioned in my speech, one of the most encouraging dynamics we have seen is that bringing many of our existing tenants to the table that have longer dated expirations that are realizing availability and down the road will be much more limited and that large blocks will be at a premium and wanting to engage in conversations about early renewal activity sooner, certainly, than we expected it to. So there is no one data point in any of these markets, including San Francisco, that is really making us feel good about the durability of the recovery. It does feel really broad-based. It feels like we are seeing all of these things sort of falling into place in the order we would like to see and expect to. But on a compressed timeframe. that is really just driven by the amount of new business formation and growth we have seen in markets like San Francisco. And the degree to which that is pulling all tenants off the sidelines to reengage and demonstrate a higher propensity to transact. So really encouraging there, even in markets that over the last couple of years have been much slower for us. like in Los Angeles, really seeing some good trends kind of come out across many submarkets. like I mentioned earlier, And specifically, what we are seeing in the South Bay down through Long Beach in terms of defense, aerospace, robotics, those kinds of uses has been really exciting and encouraging as well. So I think lots of reasons to be optimistic We, over the last year or two, have continued to underscore that the recovery is not going to be a perfectly straight line. And that leasing activity is an example, spread activity is not going to consistently improve quarter to quarter to quarter. But we feel very good about the trend. We feel very good about the size of the pipeline right now. About the degree to which rents are firming up in our markets. And look forward to executing through the balance of the year.

Okay. Thanks. And then maybe just as a follow-up to that comment, you know, you have got the DIRECTV space. I guess, coming due maybe a little over a year from now. And you talked about you know, the defense tech and robotics, you know, to what extent do you have more confidence around releasing that building, or do you still kind of view that as a better sale candidate?

Well, we continue to evaluate all with respect to the Kilroy Airport Center campus. I think we will have multiple different paths we can take there. I do think what is happening in that market, like I mentioned, based on some industries that used to be pretty prevalent in that market really coming back in a pretty significant way. Given the way that technology is changing. And that you have got new companies in that space and existing companies that are expanding or changing the way they are using their space is pretty interesting. So we feel like things are moving in the right direction in that market, either for releasing or for a disposition. As you mentioned, the bulk of that lease expiration does not happen until the fourth quarter of 27. So we have some time, but we will continue to explore all possible options to maximize value there.

Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is open. Please. Go ahead.

Hi. Good morning there. My question first one was going to be about 2027 renewals, which probably then follows up on that last point. So realize that there might be some overlap there. But I guess when you look at the lease expirations that you have in 2027, it is around 1 million square feet, which is essentially the same as a year ago. So I am wondering when do you really start working on or making progress on those 2027 and then giving the waiting to LA, kind of how does that make you feel about the 2027 retention versus 2026?

Yeah, the weight in LA is primarily driven by that DIRECTV/AT&T expiration in the fourth quarter of 27. Outside of that, across the balance of the 2027 expiration pool, it is highly granular in nature. So I think maybe we have one other expiration that is, give or take, around 80,000 to 90,000 square feet. And after that, it drops down to below 50,000. We feel good about the granularity of the pool. Obviously, we need to work through DIRECTV/AT&T, and Kilroy Airport Center. As I mentioned, we are exploring a wide range of options for that campus and that location. But outside of that, we feel actually pretty good about renewal possibilities given the granularity and how diversified the rest of the pool really is. Okay.

And then on the development front, I think guidance for development spend is now plus or minus $150 million for the year. Can you go through which project or projects do you expect to be active on in the second half?

Hey, Caitlin. This is Jeffrey. Yeah. The primary component of the development spend is for KOP Phase 2. So as leasing activity and the build out from some of the you see in the signed-but-not-commenced pipeline, continues, you will see the capital spend accelerated in the second half of the year.

Your next question comes from the line of Blaine Heck with Wells Fargo. Your line is open. Please go ahead.

Great. Thanks. Angela, your remarks on the markets are really helpful, but I was hoping you or Rob could talk a little bit about the relative strength of the Silicon Valley and Peninsula markets versus San Francisco CBD. Are you seeing any tenants being priced out or not finding large enough contiguous space in San Francisco and looking more toward the Valley or Peninsula?

Hi, Blaine. it is Rob. A good question. I think what we are seeing is equilibrium coming back between San Francisco and The Valley for years. The Valley had a lot of vacant space on the market That is being absorbed. And as I mentioned earlier, there is a lot of robotics companies. it is actually amazing how much autonomous vehicles and robotics companies related to vehicles as well as other you know, medical, etcetera, is coming into the market. So I think certain formats lend themselves better to The Valley like Waymo, which is, you know, in one of our buildings. And other formats lend themselves better to a San Francisco or South San Francisco type location. So not really seeing displacement. it is more a choice between San Francisco and Silicon Valley. And then I would really hone in on our assets in Redwood City where we are continuing to be really pleased with the activity we see, not only at Crossing 900, I wish we had more space there, but also at 1900 Broadway, our new development. So Redwood City has really come under its own as a key city or factor in Silicon Valley office market. So to me, it looks like a pretty broad-based recovery and demand profile across Silicon Valley up to San Francisco.

Yeah. The only thing I would add to that is that we have also seen in the Valley sublease space coming off the market at a pretty good clip as well. Existing users pulling space off. I think we might have even talked about that on last quarter's call. So over the last couple of quarters, that is been a significant driver to kind of tighten up the Silicon Valley market in addition.

Great. that is very helpful. And then maybe sticking with Rob, you talk about trends with respect to CapEx or concessions? It looks like the concessions on executed leases decreased a bit this quarter. Was that just a mix issue? Or are there any trends to read into with respect to TIs and free rent in particular?

it is a little bit of a mix issue, but as the market have improved, if you look at San Francisco and in quarters past, the numbers we gave you at 201 Third Leasing that we started doing at 50 or so a square foot going up into the high 70s a square foot, does mean we have a little bit more leverage. So we are able and in many cases, to negotiate down CapEx But again, it is sort of deal specific. it is going to depend on the space whether you are going from Shell or not. And I think the best thing that we have had going is our spec suite program where we really have a tight control on the cost. We are spending the money, we are designing it, and we are building it. And, you know, tenants are using them large unchanged. So to me, that is a real positive. But I just as the markets improve, hopefully, leverage continues to move into the landlord's favor.

Yeah. 1 other thing I would note is that we had been running across our markets had been running with about one month per year of the leases for free rent. During the current quarter, with the population we executed, we were actually closer to 0.5 month per year of the lease, which is the most favorable it is been in the last several years. Rob and I continue to debate whether that is a trend or whether that was a mix issue, but certainly things across the board moving in the right direction as it relates to holistic lease economics.

Your next question comes from the line of Dylan Burzinski with Green Street. Your line is open. Please go ahead.

Hi. Good morning. Thanks for taking the question, and appreciate the comments so far and the sort of demand environment across your guys' market footprint. But maybe just a quick question for you, Eliott. You mentioned that you guys are in process of sort of evaluating several acquisition opportunities. You mentioned capital markets are improving, and therefore, there being a sort of larger depth of assets to go after. I mean, are you seeing any sort of divergences in your guys' mind with where you guys are seeing demand fundamentals had versus where maybe cap rates or price per square feet are across your markets? Let me say it another way, is there any sort of you know, opportunity for you guys to take advantage of pricing being slower to react to that fundamental backdrop that you guys are seeing across any of your markets?

Yeah. I think it is a really good question, Dylan. And the answer is potentially. And I think it applies not just to what we would buy, but also to what we would sell. I tried to allude to that in my remarks as well. But what you are really hitting on is a lot of our investment philosophy in a nutshell where we are really looking asset by asset, taking a forward-looking view of what we think the fundamentals will be like. And then overlaying where we think values are And we definitely have seen some of those mismatches, which is why we have sold some of the things that we have sold in late last year and early this year in some of our LA markets, etcetera. But, also, I think that was part of what we liked about our Maple Plaza opportunity, which is playing out favorably. So we are that is really the whole trick of what we are trying to do is look for those mispricings And if we see something that is compelling, then we will not hesitate to move on it. And if we do not, we are totally comfortable being patient.

Maybe just a follow-up to that. I mean, is there within that opportunity set on the acquisition side, are you guys continuing to look at life science assets? Any sort of commentary in regards to that?

We are. I mean, we are kind of looking at office and life science, because that is sort of what we feel like where our expertise is. But it is important to be very picky about the right kind of life science asset, to be in the right cluster, to be in a supply constrained location, and to find something that we think, can really outperform over the coming years. So, it is it is part of what we will do and we will continue to do it, but there is no strategic goal of you know, doing more or doing less. it is really as the opportunities present themselves.

Your next question comes from the line of Michael Carroll with RBC Capital Markets. Line is open. Please go ahead.

Yep. Thanks. I wanted to follow-up, Eliott, on that line of questioning just the types of acquisition opportunities that Kilroy might be interested in. Can you kind of give us some ideas of the type of deals that you find intriguing? Is it more of these lease-up type deals that need some CapEx that require repositioning? And are there any specific markets that are more interesting than others right now?

Yeah. I will start with the second part. I think as far as the markets, we are we are really focused on the five markets that we are in. And looking for opportunities within those markets. But as to the first part of your question, you know, kind of looking at some of the things that we have done in the past there tends to be some sort of value-add component that we bring to the table. And that could be leasing up some vacancy That could be investing some capital. Or that could be taking a position on future lease role and what that might look like. So we have not historically bought a lot of core assets. Not to say that we would not, but that just has not been the right we have not found the good risk-adjusted returns in core profiles. it is generally been somewhere around that core-plus or value-add where there is some expertise that we bring to the table maybe some scale that we have in a particular geography, something that makes us a better buyer for that particular opportunity.

Okay. I appreciate that. And then just circling back on San Francisco too. I know we have been talking a little bit about tenants are now ready to make decisions just given the overall activity. But within San Francisco specifically, just with the number of tenants looking for space, it looks like the available blocks, especially large blocks are kind of dwindling. I mean, how motivated are tenants right now making decisions? I am just trying to understand the level of FOMO that is in the market right now and is that going to continue to ramp up here over the next few quarters?

Yes. I mean, I will start, and then I would ask Rob to jump in as well. there is definitely some degree of FOMO in the market. I think we have seen that on the new lease side. for a while, where people were new tenants looking for new space were acting pretty decisively. And prioritizing things like we have talked about, move-in-ready space, and space that they thought could accommodate future growth objectives. But there was real sense of urgency for many of those tenants and continues to be for many of those tenants. The shift or change over the last quarter has really been on existing tenants who have some term but are really thinking about how the market is shifting and changing. And it is a combination of, yes, seeing the trajectory of rents in the market, But it is also, I think, really importantly about just availability of space. And the priority that is being put on larger blocks as some of these companies that were even start up companies a couple years ago. Have matured and are looking for larger floor plates, larger sizes. So that really has changed tone and tenor from existing tenants. We have been in an environment for the last several years where those tenants have been slow playing things, wanted to see how the market would evolve, assuming that there was always sort of a better deal to be cut down the road. That they would have their pick of availability, and that feeling has definitely receded. The belief is, if they have got space they like now, they should be engaging in conversations to make sure that they can hold on to that space. So I think these are all really positive dynamics. And I do think that something I mentioned earlier was some of the recovery had been encouraging, but was pretty narrow, it is just broadening across the board. And certainly broadening with legacy tenants in a wider range of industries who are seeing the way the market's shifting.

Yeah. This is Rob. Just to add a couple of points to what Angela was saying. You know, there is 10 million square feet of demand right now in San Francisco. And to give you sort of a order of magnitude of what is happening, 7.5 million square feet has been leased year-to-date in the city. Availability dropped 4.5 million feet. that is-- 8 or 8, 9, 10, you know, 400,000- to 500,000-square-foot buildings. So that is a pretty dramatic drop in availability. And that is, focusing tenants on what is left and whether or not their expiration is now or two or three years from now. They are not seeing that let up in demand. And so areas like Showplace Square Mission Bay, Jackson Square have had the highest demand in the last couple of quarters, but now the South Financial District is seeing that demand. So when you look at, 101 First, for example, vacancy in that submarket that where our asset is 101 First and the Salesforce campus, vacancies dropped to about 12%. So there is a lot of demand that is driving tenants to make decisions quicker than they would. And the last thing I would say is we have the good fortune of being pretty highly leased in San Francisco. We went from 25% leased at 201 Third to almost 90% in over a year. We are really focused on 303 and 63 now.

Your next question comes from the line of John Kim with BMO Capital Markets. Your line is open. Please go ahead.

Thank you. Angela, you mentioned the demand for move-in-ready space. And I think we have heard that from some other office landlords. As well. But I was wondering if because of that, you are providing or you plan to provide more spec space to accommodate that demand. And if so, how much of your portfolio can that be? And if you could discuss what the leasing economics look like versus the standard lease?

Yeah. We certainly have thought long and hard about it within the San Francisco market. So we have been executing spec suite strategies across the entirety of the portfolio. I think we have been really intentional and measured even in a market like San Francisco where the demand has been primarily up until now. Lot of the move-in-ready spaces. That has come from a combination, though, to be clear. Of spec suites that we are building out as well as space that has been recently vacated by other users where tenants have been willing and able to reuse existing improvements, kind of bringing down that overall you know, capital requirement. it is been an encouraging dynamic over overall. We have been intentional about making sure we are designing and we are planning for additional spec suites. But in certain cases, including like at 201 Third, we have seen demand for some of these companies have grown and evolved. Demand for non spec suites really start showing up ahead of the building out of some of those spec suites. So an encouraging dynamic as it relates to the maturity of some of the demand we are seeing in the market also. When we think about the remaining vacancy we have in the portfolio, I think it is really important to acknowledge there are some places that a spec suite strategy will be really effective and other places where we do not think the right use of capital, and that space is really, you know, better left in a kind of shell condition, and the right tenant for that space is gonna want to do a full build out. So it is not a one-size-fits-all approach. We are trying to be really targeted and strategic by how we spend that capital. Where we spend it, and making sure that we have high conviction around being able to lease that space really quickly In the case of 201 Third, we actually leased all those spec suites while they were still in construction. So those are the kind of stories we are looking for and trying to deliver on.

Okay. And then you mentioned sublease activity or sublease availability compressing many of your markets. Do you by this in your 10-Qs? And I think last time, I thought it was 10 and I am wondering what that figure is today in the Kilroy portfolio.

Hey, John. it is Eliott. We are we are around the 7% to 8% range available, and that is that is down from low-double digits at its peak.

Your next question comes from the line of Brendan Lynch with Barclays. Your line is open. Please. Go ahead.

Hi. This is Annabel on for Brendan Lynch. Thank you for taking our question. How should we think about the pace of move in from your growing backlog of signed-but-not-yet-commenced leases?

Annabel, it is Jeffrey. So the best place to really start when you think about that is the signed-but-not-occupied disclosure on page 18 of the supplemental. So the really important piece to pick up this quarter was the leasing activity that Rob and team done. Effectively increased the size of that pool. So the second half commencements stay pretty consistent with what they were last quarter, but also pretty sizable increase in 2027. So we still see a lot of positive momentum from that perspective. But as new leasing activity comes in, that is really what is gonna help drive the occupancy level higher.

Thank you. Can you give me just a little bit more color on your leasing pipeline and how much of that is for new leases versus renewals?

I am not gonna get too specific on you know, details, but I can just tell you that, you know, I always say this just because the quarter end does not stop the pipeline we have. And in fact, think I illustrated pretty well what we have going on at KOP going from 300,000 square feet of, you know, tours activity to over 800,000 square feet. And I would say Angela covered it really well in her commentary. You know, across the board, we are seeing an uptick in demand. We are seeing at West 8. We are really happy with what we are seeing. We are bringing premier tenants to that building. We are seeing it in Austin, which is a nice change given that it is the middle of summer and generally people leave town. We have had a significant impact in terms of increased activity and transactional work we are doing. So I am very happy with the pipeline we are working on, and more to come.

Yeah. I mean, I will just add a little bit and kind of thread the last couple of questions together here. But when we looked at the signed-but-not-commenced pool, one thing I would note is that pool is has been driven in large part from some of the high-quality vacancies we have in the portfolio that we have talked about historically. Projects like KOP Phase 2 delivering and being significant contributors there as well. That is all part of what is driven the rents and the composition of the leases in the signed-but-not-commenced pool. To really be a significant and disproportionate contributor to NOI as those leases deliver. The rent per square foot in that pool is very high. Again, a lot of first-generation kind of leasing activity that we are really excited about. and it provides a really strong foundation for growth as we look ahead. I do think part of the expansion in the pipeline we have seen more recently has been, as we have been talking about, sort of a resurgence in tenants looking to talk about renewals as well. That part of the pipeline had been not entirely missing, but had been more limited over the last couple of years as tenants were, again, sort of slow playing. Maybe they would sign shorter-term renewals, preserve optionality and flexibility. Now we have more of those potential renewals and early renewals. In the pipeline than we have had historically. So without breaking down, I would say the composition is certainly becoming more balanced than it was before and, again, sort of speaking to how broad-based the recovery is at this point.

Your next question comes from the line of Upal Rana with KeyBanc Capital Markets. Your line is open. Please go ahead.

Great. Thank you. Jeffrey, you know, the company generated $1.83 in the first half and the full year earnings guidance implies a step down in the back half. Could you walk us through the specific items driving the sequential step down and the timing particularly disposition, known move-outs, signed-but-not-commenced leases and development carry. I am just trying to get a sense of what is going to get you to the high end or the low end of your of your guidance range.

Yeah. Sure. The easiest place to start is really just to take the Q2 run rate. And when you back out the onetime item for $0.05 for the nonrecurring income for 2023 and just take that and effectively carry that forward. That should get you to the midpoint of the guidance range. From there, the real question just revolves around some of the capital recycling assumptions. We do have a pretty wide range from a disposition perspective. Obviously, there should not be much moving at this point from interest expense or capitalized interest. So it is really gonna be, you know, how capital recycling played out for the back half of the year.

Okay. Great. That was helpful. And then, yep, maybe Rob, you know, similar to how Harvey they expanded pretty quickly. Are you seeing a potential second wave of from AI tenants that are either already in your portfolio or not? Just trying to get a sense of whether the upside from AI demand is just new tenant formation or a second wave I mentioned.

Yeah. I think probably the best example in San Francisco is Anthropic that did a 249,000-square-foot new lease at 500 Howard, and then they followed up pretty quickly thereafter with a 72,000-square-foot new lease at 405 Howard. So we are seeing it, and we have seen it not only with Harvey in our portfolio, but we have other tenants that we have talked to that are looking at expansion.

Yeah. We had one deal during the quarter where one of the tenants that originally leased one of the spec suites at 201 Third already expanded into part of another floor. So smaller in scale than our Harvey deal certainly, we have definitely seen some of those companies sort of, again, taking the space they need when they need it and then being prepared to expand pretty quickly after that.

Your next question comes from the line of Vikram Malhotra with Mizuho. Your line is open. Please go ahead.

Morning. Morning. Thanks for taking the questions. I guess just going back to the guidance piece. Know, clearly, obviously, the sign but not commence will have a you know, impact over time as you laid out. Anything new you sign is likely more 2027 commencement. So I am just wondering, in terms of the biggest swing factors, in the second half, just puts and takes to get you to the bottom or the high end, do you mind just walking us through this light of all the positive commentary?

I am wondering, like, are there levers very near term that get you to the high end Yeah. So to really push to the high end is gonna be a function of our ability to accelerate rent commencements into 2026. It will not have probably a huge impact on the cash same property growth, but it would really build more of a noncash straight-line GAAP effect. So the team, we were in the second quarter, is hustling to get every tenant we can into the spaces as quickly as possible. Obviously, spec suite leasing activity can drive short-term occupancy and growth. The lead time to get those tenants into the spaces is much shorter. Than your traditional leasing cycle. So there is certainly things we can do on the day to day blocking and tackling to push to the top end. But it all just continues to requires continued execution on our end.

Okay. And then just lastly, do you mind clarifying? So the SNO pipeline, the information you gave, I just want to be clear. one, that is all triple net And so, theoretically, is there a margin benefit as you go into next year and all of commences? And do you mind giving us some high-level, maybe a range? Or, like, how much TI or leasing CapEx is associated with that will hit the income statement on the AFFO next year.

Sure. You know, Angela has consistently highlighted the importance of having triple net leases in the SNO pipeline. So ABR number we disclose is a GAAP number consistent with all of our disclosures. But you are right, as these leases commence, you will see a larger impact on NOI than our standard kind of occupancy would suggest. Yeah, it is 86% for the 86% of the leases in the signed-but-not-commenced pipeline are triple net, and that is actually disclosed with that disclosure on Page 18 on the top. Yeah. When we look at the pipeline, it is about 50/50 first-generation, second-generation. So to get a frame of reference on how to think about capital, if you look at our historical disclosures on just the amount of first and second-generation capital we need, that will give you a good starting point.

Your next question comes from the line of Anthony Paolone with JPMorgan. Your line is open. Please go ahead.

Thanks. I think I just have one left on numbers, and it might be overlapping. Some of the things you just mentioned. But if I look at the $21 million to $24 million of NOI drag from development properties this year, Do you have that number for Q2 and/or the first half just so we kind of understand kind of the cadence there?

Yeah. The as we have put noted in the supplemental, the primary driver of that is really KOP Phase 2. So you are seeing it kind of accelerate throughout the year. Because we did capitalize part of KOP Phase 2 in the first quarter. When you get to the second quarter, the run rate is much more stabilized for that property. So it is pretty easy to just take it. From my perspective, the total disclosed number assumed as relatively ratable throughout the year. Yeah, Q2 is a pretty good number. We are at a point because you got a full quarter of KOP Phase 2 in the stabilized pool in Q2. From there, it will be incrementally offset as some of these tenants take occupancy. But Q2 is a good starting point. So sorry. I missed it there. Did you give us the Q2 number? We did not explicitly call it out, but the total amount to the pool is KOP Phase 2. So it is you can just spread it throughout the year. Okay. So it was pretty ratable. We could just take the take the full year and just kind of divide it by four, something thereabouts. Yep. Yeah. Q1 was slightly higher, but that is it. Otherwise, it is ratable.

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