KILROY REALTY CORP Q2 2026 earnings call

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 376,000 sq ft of new and renewal leases, bringing year-to-date leasing volume to roughly 944,000 sq ft, 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%. When excluding leases signed on spaces vacant for longer than 12 months, re-leasing spreads improved further to 27.3% and 15.6% on a GAAP and cash basis, respectively.

As we look ahead, we're 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 30th, 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's 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 is 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've seen a material expansion in the size of the forward leasing pipeline. At June 30th, 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 sponsors. 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, continued 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 or 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 sq ft and above, has materially declined, with only 20-25 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 a third of the active tenant demand pipeline in the market. Importantly, although the initial stages of the San Francisco recovery were promising, they were also relatively narrow in scope. Now we're seeing tangible interest migrate across our multi-tenant assets in the South of Market or SoMa sub-market, which saw a sequential increase in tour activity during the second quarter of nearly 65%.

Turning to the Pacific Northwest, we're encouraged by momentum in both of our primary sub-markets 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. 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. Westlake continues to be the primary beneficiary, with approximately 150,000 sq ft of new leases executed over the last several quarters and a robust forward pipeline comprised of additional new leasing activity from both new to sub-market 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 sub-market continues to be challenged, our remaining vacancy at 2100 Kettner in Little Italy continues to resonate with tenants with active space requirements. 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 L.A., where during the second quarter, we executed a 51,000 sq ft lease with Universal Music Group at Santa Monica Media Center, bringing the project to 100% leased. Lastly, in Austin, the significant amount of supply that delivered over the last several years is being steadily absorbed.

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 helps 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 Kilroy Oyster Point Phase 2, where we executed the previously announced 38,000 sq ft lease with Olema Pharmaceuticals during the quarter, we've 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 multi-tenant building. We're 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, it is difficult to predict with certainty which transactions will ultimately materialize and in what timeframe, we are optimistic by the overall level and quality of life science 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 list 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 our 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, we 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.

Thanks, Angela. The capital markets for office and life science continue to strengthen across our regions. There's more depth to buyer pools, optimism on leasing fundamentals, and confidence in the financing market. 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. Sales volume is on track to be the highest since 2021. Deal size is increasing, with nine-figure deals becoming more common. 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 $202 million L.A. residential sale discussed last quarter. We're pleased with the capital recycling completed to date. As market trends continue to evolve, we will explore additional disposition opportunities. Notably, we're 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 into strengths 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're actively evaluating several acquisitions. We'll be patient and picky as we 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. 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 a revised plan 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 23andMe, representing $0.05 per share. This settlement was disclosed and incorporated in last quarter's adjusted guidance. Portfolio occupancy, including KOP 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 activities over the last several quarters resulted in significant commencement activity during Q2, providing an important counterbalance to the quarter's large move-outs. As Angela previously mentioned, tenant posture around renewal activity appears to be changing. During the second quarter, we executed approximately 75,000 sq ft 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 sq ft. 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 23andMe and base rent growth. These gains were partially offset by non-recurring bad debt reversals and 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 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're grateful for the continued support of our banking group, whose confidence allowed us 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 their scheduled October maturity. Together, these actions reflect our continued commitment to proactively managing our liabilities and 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-$3.63 per diluted share and same property NOI growth range of 25-125 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 230 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 marks meaningful progress across every operational and financial metric. Leasing momentum continues to improve, both GAAP and cash leasing spreads were positive. Our signed not commenced pipeline continued to expand. We further enhanced the strength and flexibility of our balance sheet. The environment is moving in the right direction, and we remain focused on capitalizing on it.

With that, we are happy to answer your questions. Marina?