Q3 2025 Kilroy Realty Corp Earnings Call

Speaker #1: Hello everyone , and welcome to the KRC third Quarter 2020 Earnings Conference Call . My name is Emily and I'll be coordinating your call today after the presentation , you will have the opportunity to ask any questions which you can do so at any time by pressing star , followed by the number one on your telephone keypad .

Speaker #1: I would now like to turn the call over to Douglas Bettisworth, Vice President of Corporate Finance, to begin. Please go ahead.

Speaker #2: Good morning everyone . Thank you for joining us on the call with me today . Are Angela Almond , CEO , Jeffrey Kuehling EVP , CFO and treasurer .

Speaker #2: And Eliott Trencher EVP , CIO in addition , Justin Smart , president , and Rob Parrott , EVP , Chief Leasing Officer , will be available for Q&A .

Speaker #2: 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.

Speaker #2: And in the supplemental, this call is being webcast live on our website and will be available for replay for the next eight days.

Speaker #2: Our earnings release and supplemental package have been filed on a form 8-K with the SEC , and and both are also available on our website , and we'll start the call with a strategic overview and quarterly highlights .

Speaker #2: Elliott will provide an update on our recent transaction activity, and Jeffrey will discuss our financial results and provide you with updated 2020 guidance.

Speaker #2: Then we'll be happy to take your questions. Angela.

Speaker #3: Thanks , Doug , and thank you all for joining today's call . As we enter the final stretch of the year , Kilroy is capitalizing on accelerating momentum across our West Coast office and life science markets .

Speaker #3: Return to office continues to improve, supported by evolving workplace norms, shifting employer expectations, and recognition of the office as a driver of culture, collaboration, and innovation.

Speaker #3: These trends , in combination with improving quality of life dynamics , are driving enhanced vibrancy . A resurgence in leasing activity , and a meaningful increase in institutional investor interest in high quality West Coast commercial assets .

Speaker #3: At the same time, rapid advancements in artificial intelligence are reshaping demand across both the office and life science sectors, accelerating innovation and reinforcing the strategic importance of well-located real estate and concentrated tech and biotech hubs.

Speaker #3: Nowhere is this more evident than in the Bay Area. In the city of San Francisco alone, office demand has reached a post-pandemic high of nearly 9,000,000 ft², up from approximately 7,000,000 ft² last quarter, with much of this demand being driven by AI and other technology companies.

Speaker #3: Importantly, the growth in demand statistics has persisted even as the pace of lease executions has significantly increased, with San Francisco leading all U.S. metros and office leasing growth over the last 12 months.

Speaker #3: Against this backdrop , I'm pleased to report another strong quarter of execution across our portfolio . During the quarter , we signed over 550,000ft² of new and renewal leases , marking our highest third quarter of leasing activity and our strongest year to date performance in six years .

Speaker #3: Leasing momentum was robust in San Francisco , with activity in the south of Market , or Soma submarket particularly notable . Our Soma assets continue to outperform , with over 95,000ft² of new and renewal leases executed this quarter and a growing forward pipeline with tour activity in our Soma assets up 170% year over year , a 203rd street .

Speaker #3: We signed a full floor lease with Tubi , a global streaming entertainment company , for their new headquarters , marking the third consecutive quarter of major leasing at this property .

Speaker #3: Our continued success at 201 Third highlights the exceptional ability of our leasing, construction, and asset and property management teams to understand and meet the evolving needs of today's tenants, many of whom are prioritizing landlords that can deliver speed from lease execution through tenant occupancy.

Speaker #3: Encouragingly , as the San Francisco recovery continues to accelerate , we're now seeing this momentum expand to nearby assets in our portfolio , such as three 63rd Street , where we recently signed our first lease since 2022 .

Speaker #3: While the recovery in San Francisco certainly deserves a significant amount of focus and attention, it's important to note that we're seeing improving dynamics across nearly all of our markets, with tenants demonstrating greater conviction and willingness to execute during the third quarter.

Speaker #3: Capitalizing on this improved sentiment , we made important progress in addressing some of our largest remaining 2026 lease expirations in San Diego . We completed a long term renewal with Scripps for their entire 119,000 square foot lease at Kilroy Center , Del Mar and in Long Beach .

Speaker #3: We executed a short term renewal with scan for 87,000 of their approximately 220,000ft² at arrow , while we anticipate that scan will vacate at the end of their extended term and relocate into owner occupied space , the phasing of this move out provides valuable near-term stability as we work to programmatically backfill and subsequent quarter end , we signed an additional 148,000ft² of renewal related to 2026 lease expirations .

Speaker #3: As Jeffrey will detail in a moment , taking into account the renewal signed subsequent to quarter end 2026 lease expirations . Now , total approximately 970,000ft² , reflecting a retention ratio of over 40% on the pool reported at the beginning of this year .

Speaker #3: Our leasing team has worked diligently to renew tenants as early as possible, and I'm very pleased with the progress we've made to date.

Speaker #3: That said, the pool of remaining renewal opportunities in 2026 is now much more limited. The path forward will require a greater emphasis on new leasing activity.

Speaker #3: As a result, we're approaching the remainder of this year with a clear focus on capturing growing demand across our markets and ensuring that our assets are well positioned to outperform as momentum continues to accelerate.

Speaker #3: Turning to life sciences, we're encouraged by a variety of important signals that speak to the improving fundamentals we're seeing in our portfolio.

Speaker #3: The Xbi is up more than 20% year to date with strong , broad based performance from both large and small cap biotech companies , fueled in part by greater clarity on the regulatory backdrop for the sector and a variety of positive company specific clinical trial and drug approval announcements .

Speaker #3: In addition, biotech M&A volume is accelerated, with large pharmaceutical companies actively pursuing new pipelines to offset significant patent expirations over the coming years.

Speaker #3: Kilroy, Oyster Point Phase Two, our premier development project in the heart of the South San Francisco life science ecosystem, is benefiting from this material improvement in sentiment and activity.

Speaker #3: We're pleased to report that we've signed 84,000 sq. ft. of leases to date with well-established biotech companies, in addition to the 24,000 sq. ft. lease with Color that was announced in September.

Speaker #3: Last night we announced the execution of a 44,000 square foot lease with NBC Bio Labs and a 16,000 square foot lease with Acadia Pharmaceuticals .

Speaker #3: NBC Biolabs is the Bay area's leading life science incubator , and has helped launch more than 500 companies , collectively raising over $20 billion in capital .

Speaker #3: NBC's presence will help create a diversified tenant base of early stage biotech companies at Cop , advancing our strategic goal of cultivating a dynamic , innovation driven life science ecosystem .

Speaker #3: At Kilroy, Oyster Point, that will support the long-term growth and value creation of the project. NBC is expected to commence occupancy in the fourth quarter of 2026.

Speaker #3: Acadia Pharmaceuticals is a biopharmaceutical company committed to advancing therapies for underserved neurological disorders and rare diseases , and this recent execution marks Acadia's entry into the San Francisco Bay area , already a valued Kilroy tenant in our San Diego portfolio , we're proud to expand our relationship as trusted partners .

Speaker #3: Katie is expected to take occupancy in the second quarter of 2026. The future pipeline at CP2 is robust, and we're actively engaged with a variety of potential tenants, including several with larger format requirements.

Speaker #3: These discussions , though still early , reflect both an overall improvement in the life science market and a growing appreciation of Kilroy . Oyster points , purpose built life science , construction and market leading monetization based on the status of current conversations .

Speaker #3: We believe that Cp2 is now well positioned to exceed our previously communicated goal of 100,000 ft² of lease executions by year-end, and we expect this project to be a meaningful contributor to the company's growth over the next several years.

Speaker #3: From a capital allocation perspective , we continue to be active and disciplined as we recycle capital with a focus on long term cash flow and cash flow , growth and value creation .

Speaker #3: Our approach remains responsive to evolving dynamics in both the office and life science sectors, as well as shifts in the relative attractiveness of the submarkets in which we operate.

Speaker #3: Staying agile and prioritizing opportunities that align with our long term strategic vision for the portfolio . During the quarter , we completed the previously announced sale of a four building campus in Silicon Valley for gross sales proceeds of $365 million , and the acquisition of Maple Plaza , a class A office campus in the iconic Beverly Hills submarket of Los Angeles .

Speaker #3: For $205 million , Maple Plaza marks Kilroy's first investment in Beverly Hills , a highly sought after , well amenitized and supply constrained environment with one of the lowest vacancy rates in the Greater Los Angeles market and the asset has quickly become the strongest driver of leasing activity in our Los Angeles portfolio .

Speaker #3: Looking forward, we expect to continue to thoughtfully and strategically rotate capital out of assets where we believe value has been maximized. As proceeds are realized, we will pursue a balanced mix of selective reinvestment opportunities and debt repayment.

Speaker #3: Considering all redeployment alternatives with a focus on optimizing portfolio returns and maintaining a strong and flexible capital structure with respect to our future development pipeline, we continue to work through additional land parcel monetization and expect to have further announcements in the coming quarters.

Speaker #3: In addition , we've been hard at work on the Flower Mart project , which is our single largest investment in the future pipeline .

Speaker #3: As we pursue additional flexibility and optionality that will allow us to ultimately maximize value on the site while being responsive to the evolving needs of the San Francisco community .

Speaker #3: During September, as part of our redesign and reimagining of the Flower Mart Project, we submitted development scenarios to the city's planning department.

Speaker #3: Each illustrating a potential path forward for the site , including a range of commercial and residential uses . Our conversations with the city to date have been constructive and encouraging , and while those discussions are still ongoing , we have now gained greater clarity on both the approval process and the timeline required to secure the optionality we're targeting .

Speaker #3: As a result, based on the best information available today, we expect interest and other expense capitalization to Flower Mart to continue through June 2026.

Speaker #3: We'll keep you updated on this assumption as appropriate. In conclusion, I want to thank the entire Kilroy team for an extraordinary effort this quarter, as the pace of leasing and transaction activity has accelerated.

Speaker #3: I couldn't be more pleased with the energy, enthusiasm, and execution that this team is delivering each and every day. Elliot.

Speaker #2: Thanks Angela .

Speaker #4: As Angela noted, fundamentals are accelerating across all of our markets, which is not only good for leasing, but also for transactions.

Speaker #4: Buyers are underwriting vacancy and rollover with more conviction, leading to deeper bidding pools, which in turn is giving sellers increased confidence.

Speaker #4: They are transacting at market pricing. All of this is leading to more deals being marketed and closing. We have been fortunate to benefit from these trends as both a buyer and a seller, starting with dispositions.

Speaker #4: We had a productive first three quarters of the year , closing on $405 million of previously disclosed sales . As we continue to evaluate dispositions , our strategy remains the same monetize properties in lower conviction locations and values that imply forward returns less than our cost of capital .

Speaker #4: We are fortunate to have the benefit of a strong balance sheet, meaning we are not going to sell at any price and instead will only transact when a deal meets our rigorous thresholds.

Speaker #4: Turning to land sales as previously discussed , we had $79 million under contract between 26th Street and Santa Monica and Santa Fe Summit and San Diego , both buyers continued to advance their plans , and the transactions will close upon receipt of entitlements , which we currently estimate to be mid 2026 .

Speaker #4: We are making progress on additional land sales and remain on track to hit our goal of at least $150 million in gross proceeds on the acquisition side , during the quarter , we bought Maple Plaza on Devilly Hills .

Speaker #4: Beverly Hills has many of the characteristics we look for in a submarket . It is centrally located within the west side of Los Angeles , with proximity to decision makers , amenities , and a diverse mix of tenants across multiple industries .

Speaker #4: Because it is so centrally located, the barriers to entry are quite high, with cumulative new supply of only 260,000 ft² over the last ten years.

Speaker #4: Additionally, three of the neighboring properties totaling roughly 400,000 ft² have been acquired by users in recent quarters, which has further reduced competitive supply and enhanced vibrancy in the micro-market.

Speaker #4: Maple Plaza was recently renovated and amenitized, so there are no major capital projects required at this time. Our basis of roughly $670 per square foot is meaningfully below replacement costs, which we estimate to be roughly $1,200 per square foot.

Speaker #4: And as we lease up vacancy, we anticipate a stabilized yield in the high single digits and an unlevered IRR in the low double digits.

Speaker #4: In a few weeks . We have owned the building leasing activity has been strong from a mix of new leasing from new and existing tenants .

Speaker #4: Confirming our view on the market and our underwriting . We're very excited about this acquisition and believe the inflection of leasing fundamentals , combined with below historical average interest in the office sector , created a unique opportunity .

Speaker #4: We do not know how long a window like this will last , or if other similar opportunities will present themselves , since more capital is consistently coming into the office sector , wherever we continue to evaluate the full spectrum of investment alternatives and will not be afraid to transact if we find something that meets our stringent criteria .

Speaker #4: With that , I will turn the call over to Geoffrey .

Speaker #2: Thanks, Elliot. FFO for the quarter was $1.08 per share.

Speaker #5: Diluted share , which includes approximately $0.03 per share of one time items , including $0.02 per share related to real estate tax appeal wins an additional $0.01 per share of non-cash income related to a reversal of straight line bad debt expense , cash , same property NOI growth for the third quarter was 60 basis points , with the previously mentioned real estate tax appeals contributing 150 basis points of growth .

Speaker #5: Occupancy statistics now reflect the recently stabilized redevelopment projects . 4400 Bohanan and 4690 Executive Drive , which represented a 50 basis point negative impact to occupancy during the third quarter .

Speaker #5: We expected that occupancy would dip on a sequential basis due to the redevelopment projects entering the stabilized pool and expected move outs . However , occupancy improved modestly , ending at 81% , up from 80.8% at the end of the second quarter .

Speaker #5: The improvement relative to our prior expectations was a result of earlier than anticipated rent commitments totaling approximately 200,000 ft², all of which were originally projected to take occupancy in the fourth quarter.

Speaker #5: At the end of the third quarter, the spread between leased and occupied space was 230 basis points, which represents meaningful embedded growth expected to materialize throughout the remainder of 2025 and into 2026.

Speaker #5: It's important to note that Cp2 leasing activity is not included in this lease versus occupied spread and should be considered separately. We now anticipate that any improvement in occupancy in the fourth quarter will be modest due to the accelerated rent commencement activity that occurred in the third quarter.

Speaker #5: Additionally , our assumptions now reflect the bank bankruptcy related October move out of Neuehouse , a 95,000 square foot tenant at Columbia Square .

Speaker #5: While the departure is now reflected in our occupancy outlook , the space is high quality buildout in historical significance are generating strong interest from prospective users , and the team is working diligently to minimize downtime , portfolio retention .

Speaker #5: In the third quarter was approximately 60% , and year to date retention , including Subtenants , stands at 39% . Following quarter end , we executed a 79,000 square foot renewal with Riot Games at Westside Media Center and a 67,000 square foot lease with ByteDance , a current subtenant with a 2026 expiration at Key Center .

Speaker #5: While these recent transactions are not yet reflected in our operational metrics, we are very pleased with our leasing performance on 2026 expirations, which demonstrates strong momentum heading into next year.

Speaker #5: Turning to guidance , we raised our 2025 FFO outlook to a range of 418 to 4 . 24 per share , representing an 11 cent per share increase at the midpoint .

Speaker #5: This revision reflects several key updates to our expectations . We now anticipate approximately $0.05 of additional non-cash income , driven by tenants taking occupancy earlier than expected , and the previously mentioned straight line bad debt reversal that occurred in the third quarter .

Speaker #5: Our updated same property NOI guidance contributes an incremental $0.03 per share , while interest capitalization adjustments account for $0.02 per share . As Angela mentioned , we have also updated our assumptions for the Flower Mart project , which is now expected to cease capitalization in June 2026 .

Speaker #5: With the progress made to date and the recent submission of our development application, we're in a stronger position to define the process, timeline and have updated our assumptions accordingly.

Speaker #5: As the entitlement process advances , we anticipate reaching a point where , short of executing a demand driven development , all feasible progress at the project will be complete , at which time capitalization will need to be suspended indefinitely .

Speaker #5: We will continue to revisit our assumptions and provide updates as new information becomes available. As it relates to Kilroy Oyster Point, we are making excellent progress on the lease-up of the project.

Speaker #5: Following the 84,000 sq. ft. of lease executions to date, and our healthy forward pipeline, it's appropriate to begin framing up the project's expected NOI and FFO impacts in 2026.

Speaker #5: Once the project transitions into the stabilized portfolio in January , capitalization will end and operating expenses , property taxes and interest expense will be recognized through the income statement during the third quarter , operating expenses and property taxes at Cop two totaled approximately $5 million , while capitalized interest totaled approximately 10 million , both of which are reasonable .

Speaker #5: Quarterly run rates for next year. As tenants begin to take occupancy starting in the first half of 2026, the negative earnings impact from the project will moderate before becoming a net contributor to growth in the coming years.

Speaker #5: With that, we're happy to answer your questions.

Speaker #1: Thank you . We will now begin the question and answer session as a reminder . If you would like to ask a question today , please do so now by pressing star , followed by the number one on your telephone keypad .

Speaker #1: If you change your mind or you feel like your question has already been answered, you can press star followed by two to withdraw yourself from the queue.

Speaker #1: Our first question today comes from the line of Nick Yulico, Scotiabank. Nick, please go ahead.

Speaker #6: Thanks . So first question is , I guess just turning towards , you know , some of the expirations you talked about getting addressed for 2026 .

Speaker #6: And I know you had a higher also retention ratio this quarter . So at a high level I mean are there any sort of thoughts you can give us on like next year how to think about you know , retention for expirations and then also , you know , getting some benefit as you talked about from commencing occupancy on , you know , that gap right now between , you know , sign but not occupied space .

Speaker #3: Sure . Thanks , Nick . This is Angela . I'd start with , you know , sort of going back to where we started with the 2026 expiration pool at the beginning of 2025 .

Speaker #3: We were showing about 1,900,000 ft². When you take into account all the leasing activity and renewal activity that's been completed through the third quarter, and the almost 150,000 ft² of renewals that were signed subsequent to quarter end.

Speaker #3: We're down to a remaining expiration pool in 2026 of about 970,000ft² . As I mentioned earlier , I think , you know , there's there's a limited opportunity for additional renewals out of that pool .

Speaker #3: So we do expect that you're going to see move-out in 2026 for the majority of what's left in the 2026 expiration pool.

Speaker #3: And we'll need to offset that through new leasing, both through a combination of, as you point out, a pretty healthy spread between signed and commenced occupancy.

Speaker #3: That's already been executed . And then additional new leasing activity that can take effect during 2026 . I think , as we've talked about on prior calls , one thing I would note that's a little bit different in the current environment is across many of our markets , the the interest that tenants have in getting into space as quickly as possible .

Speaker #3: We've seen it most notably in San Francisco, where there's a real demand, especially from some of the new business formation we're seeing in that market, to really compress the time between lease execution and occupancy commencement.

Speaker #3: But we've also seen it in other markets as well, including the Pacific Northwest and even in San Diego and Austin. So our spec suites program can be really meaningful in addressing some of that remaining expiration activity in 2026 or offsetting it.

Speaker #3: So that's what we're focused on right now: really driving some additional renewals out of the 26 pool. But we're really focusing on new leasing, particularly the new leasing that can take occupancy during 2026.

Speaker #6: Okay . Thanks . And then just second question is on San Francisco , if you could talk a little bit more about , you know , how you're seeing your space , be competitive in the market versus other options .

Speaker #6: And then also sort of an update on competitive sublease space that's in the market and sort of, you know, just sort of the depth of the tenant pool there overall.

Speaker #6: Thanks

Speaker #3: Yeah. I'll take the first part, and I'm going to turn it over to Rob to talk about some of the more specific dynamics in the market.

Speaker #3: What we've continued to see in San Francisco is a real expansion of where tenants are looking for space in the market. And then, again, a real priority on landlords who can move quickly and deliver certainty in terms of compressing that time period between lease execution and rent commencement.

Speaker #3: When we talk about sort of the where tenants are looking in the market, that's where we've seen a pretty remarkable sea change in activity from where we were, you know, 9 to 12 months ago.

Speaker #3: That's really captured our SOMA assets, and in particular, 201 Third, where, as I mentioned earlier, we've now completed three consecutive quarters of major leasing at that property.

Speaker #3: We've now seen that activity expand further into Soma and into assets like three 63rd Street . So , you know , we've seen really sort of a healthy dynamic is where tenants are willing to look as expanded .

Speaker #3: And then again , I think our vacancies are really well positioned . Given that we're very focused on delivering meeting those expectations . And delivering space as quickly as possible .

Speaker #7: Thanks , Angela . Hey , Nick , it's Rob Porat . I guess I'd make a couple of points about the market . One is that larger tenants in San Francisco are starting to come back to the market and are touring .

Speaker #7: We're also seeing that in Seattle , and I think one change we're noticing in our portfolio is that there's , I'd say less demand for bargain space and more demand for impactful space , and that impactful space ties directly to the return to office phenomenon that you're seeing .

Speaker #7: Where San Francisco, particularly, is dramatically improved in the past couple of quarters, AI demand continues to be a very strong driver in the market.

Speaker #7: There's about 1,000,000.5 ft² of AI demand currently touring in San Francisco. Relating to sublease space, over 2,000,000 ft² of sublease space has been basically taken off the market through either going direct, being taken off the market by the sublessor, or being leased.

Speaker #7: And that's a notable number. When you look at the Kilroy portfolio, we've had 200,000 ft² taken off the market this quarter by tenants.

Speaker #7: So all of that points to , I think , a sustained recovery in the the you know , as the office fundamentals are improving and showing signs of sustained recovery .

Speaker #7: You know, we’re already at pre-pandemic levels, as Angelo pointed out in some of the statistics. So I’m pretty convinced that not only the momentum we’re seeing here in Q4 will continue into Q1 and 2026.

Speaker #1: Thank you. Our next question comes from Jonah Galen with Bank of America. Please go ahead. Your line is now open.

Speaker #8: Thank you, and congrats on a great quarter. I wanted to follow up on the increased leasing outlook near term at Cop 2.

Speaker #8: And just kind of the current demand and tours, whether that continues to be more traditional biotech or it's kind of across the board.

Speaker #7: Sure , I'll let me kind of frame up where we are with life science in Cop in South San Francisco . So in Q3 , there was over 600,000ft² of leases signed , which is on par again with pre-pandemic levels .

Speaker #7: You know what we're seeing? I can only speak to our project. What we're seeing is that the best projects in the market are seeing the most demand.

Speaker #7: And our life science team, a dedicated life science team, is nimble, creative, and they're really quick to respond. Adding to this momentum gives me a lot of confidence that momentum will not only continue in Q4, but also in the remainder of Q4.

Speaker #7: As Angela Aman said, well into Q4, Q1, and 2026, Life Science demand rose over 20% from 1.8 million to 2,000,000 square feet in Q3.

Speaker #7: Another very positive . You know , indicator . And I think the one thing that we've seen that's really changed , again , as I mentioned earlier in San Francisco , there are large tenants that are coming back into the market .

Speaker #7: So combined with the life science demand , we're seeing , we're also seeing other sectors that have improving demand , including semiconductors , AI and robotics .

Speaker #7: And that's not just South San Francisco specifically. It's a trend moving from South San Francisco down through the Peninsula.

Speaker #3: Yeah , I think I mean , Rob's really hitting on the right point . We're thrilled to be at the point we are right now with 84,000ft² of leases executed at Cop as as you alluded to , we feel like we're very well positioned to exceed the goal we put out for ourselves last quarter of 100,000ft² by by year end .

Speaker #3: I also think , as we indicated last quarter , we're we're very pleased that the first wave of deals we're signing at cop two have all been biotech , biotech related .

Speaker #3: I think that's a really important point. As we think about the future growth and evolution of this project in phases three, four, and five down the road.

Speaker #3: Excuse me . We're being very intentional about creating the right sort of life . Life science ecosystem at the project that can support that growth down the road , as well .

Speaker #3: And then Rob made a really important point , which is , you know , we have lots of as we think about the pipeline going forward , there continues to be lots of demand from biotech and biotech related companies as we look out at finishing this project .

Speaker #3: But we are seeing really important demand that's giving us a little bit more leverage in leasing for the remainder of Cop 2 from other uses outside of life sciences as well.

Speaker #3: So overall, I think it’s a really healthy backdrop as we think about leasing up this project and ensuring that it’s going to be a net contributor of growth over the next several years. We’ve got a lot of options and a lot of momentum, but again, I’m really pleased that we’re able with these first leases that are being signed to take the first steps at creating that dynamic life science ecosystem on site.

Speaker #8: Thank you . And just given kind of the improvement and diversity in activity across the portfolio , should we think about that ? There'll be less reliance on kind of the shorter term leasing going forward .

Speaker #3: Yeah , I mean , this quarter , you know , the shorter term leasing , I think it was 129,000ft² . Most of that was renewal activity .

Speaker #3: And I spoke to some of that in my prepared remarks . We're going to be flexible in this in this environment with tenants that need a little bit longer term , even if they're vacating just to give us additional opportunity and time to backfill some of that space .

Speaker #3: So there's probably some more of that short term renewal activity over the coming quarters . I would say , as we think about the new leasing dynamic , we've signed , very few actually new leases on a truly short term basis .

Speaker #3: There continues to be growth in the city of San Francisco as we think about some of this new company formation and AI growth, specifically in the city of San Francisco.

Speaker #3: There's still a desire for leases that are shorter term in nature than a traditional ten-year lease. So, we are seeing that demand in sort of that 3 to 5 year window for many of these AI companies.

Speaker #3: But we do believe we're in a position to stretch those terms a little bit longer, where we can provide a reasonable path to growth and expansion for some of those tenants over the course of that term.

Speaker #3: They're prioritizing that flexibility as it relates to the shorter lease term , because they do believe their businesses are going to grow and evolve , and they want to make sure that they can they can have space over the next 5 to 10 years .

Speaker #3: That's going to meet their needs. So, where we can provide that flexibility, we have a chance at getting those terms extended a little bit longer.

Speaker #3: But the truly short term leases , again , have been almost all renewal activity . And that's , you know , in many ways just a normal recurring part of the business .

Speaker #1: Thank you. Our next question comes from Steve Sakwa with Evercore ISI. Steve, please go ahead.

Speaker #9: Yeah , thanks . Good morning out there . Jeffrey . I don't know if you could provide a little bit more color on on just the Neuehouse lease .

Speaker #9: I appreciate you sort of clarifying that . That really was , I guess , in the quarter end occupancy and comes out in the fourth quarter .

Speaker #9: But could you maybe just help size up for us kind of what the rent contribution was from NeueHouse in the third quarter, so we could just kind of adjust the revenues appropriately for that?

Speaker #3: Yeah , we don't see we don't typically talk about individual rent commencements on a tenant level basis . You've got the occupancy contribution about a 50 basis point 50 to 60 basis point impact on occupancy .

Speaker #3: I think the important point here is that we really held our average occupancy guidance flat, despite taking that unexpected impact in the fourth quarter of this year.

Speaker #3: Rob and Tim, I'll let Rob comment on sort of the releasing backdrop for that space in a moment. But we're really focused on releasing that space as quickly as we can.

Speaker #3: It's got a very high quality build out , and we think there are opportunities that will really help us minimize downtime as we look to reposition that space , which will address some of the concern you're raising .

Speaker #7: By Steve . Yeah , we we . Started fairly early on looking at opportunities for the former Neuehouse space in terms of what can be done with it .

Speaker #7: And I'm actually pretty pleased with the activity we've seen from a variety of sectors , including the house fatality and entertainment sectors . And as you know , the space is very highly designed , very well designed .

Speaker #7: We own all the f.f.a . There's a lot of advantage to what's in the space , not only from a just architectural point of view , but the existing facilities , including multiple food and beverage opportunities .

Speaker #7: And I think most, or not most importantly, but a very important aspect is that our historic studio, the former CBS auditorium, can house up to 400 people.

Speaker #7: And so that's a very limited commodity in Hollywood. And so that does seem to attract quite a bit of attention and can generate revenue.

Speaker #7: So again, we're seeing kind of a disparate group of interested parties right now that we're talking to.

Speaker #9: And just any comment Rob , just about kind of how the rent would maybe stack up to the prior rent , you know , would that be a roll up , roll down flat ?

Speaker #7: It's hard to say , Steve . It depends . I mean , some of these uses may have more need for capital depending on , you know , if it moves toward hospitality , it's really going to be very deal specific .

Speaker #7: But it's quite unique space . And the thing I'd say is , if you look in Hollywood to have historic space like this , that ties back into the , you know , 30s and 40s and 50s at the , at the prime of Hollywood , that cachet carries a lot of value for future users .

Speaker #1: Thank you. Our next question comes from Seth Bergey with Citigroup. Seth, please go ahead.

Speaker #10: Hi . Thanks for taking my question . I guess the first one , just to go back to kind of the leasing activity you've done , can you provide a bit more color and kind of the lease economics ?

Speaker #10: Your achieving there and maybe touch on kind of how those leases kind of compare to your initial underwriting ?

Speaker #7: I'll start with the beginning that the lease economics vary between whether it's a spec lab or whether it's, you know, going from shell construction.

Speaker #7: So there's variability there . But , you know , we're very attuned to what the market is . And happy with where we're getting where we're achieving our rental rates .

Speaker #7: And , you know , tis of note , no doubt gone up since we originally underwrote the project . But we're meeting the market in terms of where the demand is .

Speaker #7: And providing that value that I mentioned earlier.

Speaker #3: Yeah , I think I think Rob categorized it exactly right , which is I do think rents have held in pretty well relative to our original underwriting .

Speaker #3: Even on these first handful of deals , we're executing , what you would expect to come in a little bit below . So , rents are pretty much in line .

Speaker #3: Capital is higher, and that's a comment we've made on prior calls as well. One thing I would note, when you look at our disclosure around the lease executions and the second or first generation space in the supplemental, any deals that are signed for spec suites are burdened with 100% of the spec suite capital in those T.I.

Speaker #3: numbers , even though those tend to be almost by definition , some of some shorter term deals . And that capital is designed to be easily reusable for future tenants .

Speaker #3: So that's just one element I would note as you think about some of the T.I. numbers you're seeing in the supplemental, and we'll see on the spec sweet deals going forward.

Speaker #10: Yeah , thanks . That's helpful . And then maybe for a second one , I believe in your prepared remarks , you mentioned one point 9,000,000ft² of kind of expiry , 26 expirations that kind of need to be backfilled primarily kind of by new leasing activity .

Speaker #10: Can you just kind of quantify kind of what the tour activity you're seeing on those spaces and maybe kind of how it compares to last quarter or , you know , some way to benchmark it just kind of , as you guys are seeing this , this recovery and demand .

Speaker #3: Yeah. Let me make a point of clarification. Then I'll turn it over to Rob. But $1.9 million was the 2026 lease expiration tower.

Speaker #3: We were facing at the beginning of 2025. Over the course of the last three quarters, and with some renewal signs subsequent to quarter end, we're now down to 970,000 ft² of remaining 2026 lease expirations.

Speaker #3: So we've substantially addressed that original tower. That's translated into about a 40% retention on the original 1.9 million ft², with additional vacancy or potential move-outs being addressed through disposition.

Speaker #3: So we've actually been very successful at addressing the original 1.9 million. I'd just say tour activity across the board and the pipeline across the board looks really very strong right now.

Speaker #3: And we mentioned specifically in San Francisco a 170% increase in tour activity in our SoMa properties, in particular, where we do have vacancy.

Speaker #3: We're seeing really great momentum, but I'll let Rob comment on the broader pipeline and tour activity.

Speaker #7: Yeah , Seth , the only thing I'd add to what Angela said is that , you know , it goes beyond the market .

Speaker #7: We're talking about demand, and it's just that demand is across the board increasing. Of the 900,000 sq. ft. remaining, there's always a chance someone you know— a lot of times things pop up at the end where somebody wants to hold over.

Speaker #7: It could end up in a short term, or it could end up in a longer term lease. But as Angela said, I think we've harvested most of what we can get.

Speaker #7: That said, we have marketing and business plans put together for all that vacancy for the 900,000 that remains, and, you know, we're really positioning it early on to start leasing it.

Speaker #7: And we are in conversations on some of it already.

Yeah. Um, thanks, Brandon. The big, I think, kind of bogey is just a difficult comp in the fourth quarter from last year. So we did recognize about $6.7 million of restoration fee income. So when you look at kind of the sequential decline, at least for the fourth quarter, you should see a pretty big rundown or expect to see that.

Okay, thank you. That's helpful. And then, may I just—uh, you mentioned strength in all your markets. Maybe just to hone in on Austin. It looked like you had a lot of leasing progress there at the Indeed Tower, Penny. Maybe any extra color that you can provide there? And then an update on the ground floor space that's available.

Sure. Um, Brandon, in the ground floor space, is exactly what I wanted to talk about, which is, um, I think a really monumental.

Accomplishment by our Austin team, uh, leasing what we call the Post, which is a freestanding historic building on the project site. And, um, we're not at Liberty to disclose the tenant, but I'll say that they're a nationally recognized successful operator of food and beverage venues across the country and have many successful, um, startups and and built several chains uh, through that entity. Um, and this this amenity, it's really an amenity, but it's not only an amenity for the building, it's suited for the tenants, in the building, which we think is really going to improve, uh, the food.

With traffic and demand on the 6th Street Corridor, where we are. But it's also a really important amenity; it's big enough, um, meaningful enough that it's a big enough amenity for the overall Austin, uh, CBD. And, um, all I can say is it's a complicated project. It took a long time. We have a multi-floor building, uh, that's historic that was in shell condition and, uh, will truly be special space. And I think all of us.

At Kilroy, we really looked to our Austin team for having the perseverance and patience to go through that and execute it. And then, you know what,

Office space and we continue again. I can't speak to the competition. I can only speak to what we see. And as Angela said a couple of times, we're seeing a lot of activity, on our spec Suites, oftentimes as they're under construction, they lease. So we're continuing on that program and we don't have much, uh, contiguous space left for larger tenants, but we do have 2 floors that we're marketing. So we're really pleased with the activity. We're seeing it indeed Tower and we think this post enhancement, um, will also uh, lead to increased activity. And I think long term, uh, just a great investment in that project.

Thank you. Our next question comes from John Kim with BMO.

John, please go ahead.

Thank you.

Um, I had a couple of questions on your leasing pipeline at KOPP2. If you could maybe provide some more color on how large that pipeline is today versus last quarter or the last time you provided an update.

And how many of these tenants are growing within the South San Francisco market versus just upgrading space within the market or playing musical chairs?

Hey John, it's Rob. Um,

I'd say our demand. I mean, we've said this for maybe three quarters now that our demand has continued to increase; at least we've seen a continuous uptick in tour activity. Suffice to say what I said earlier, that we're confident.

Uh, in the pipeline, we have in the remainder of Q4 and the executions that Angela talked about, and I think that our, uh, momentum is strong enough that Q1 and Q2 and well into, you know, the rest of the year is going to be quite strong. The project—I've said this on a couple of calls—is attracting interest from across the Bay Area. So, uh, you know, we have a very concerted focused marketing effort. Um, the project can accommodate tech as well as life science. The bulk of our activities is in the life science space because it's purpose-built life science. But other entities are also interested in. So I'm very confident in the white line. I've got.

And then, I'm sorry. The second part of your question was, are they seeking, uh,

Other places.

If they're taking additional space within the market, or is it just upgrading space?

It's both, it's, you know, leases expiring plus, you know, they're seeking upgraded space.

Um, on the 970,000 square feet of potential move-outs next year, um, can you provide color on why these tenants are not renewing their space?

And just your ability to backfill that space next to you, either through leasing or expending the current lease.

Yeah, I mean, I guess I go back to the comments I made earlier. When you think about the Q1, Q2, and Q3 performance...

And look at just what's been released, you know, in a long term basis within that pool. We've achieved a 40% retention rate or a little bit over 40%, which is, uh, a material Improvement. Um, since any year, you know, through the pandemic. So, actually on the total retention basis, those numbers are very strong and I think what you're saying is normal course, activity in the portfolio in any year, even even close to pre-pandemic level of retention. So it's just, you know, a combination of, you know, tenants with shifting needs. Uh, we mentioned 1 example, in my script that was a tenant moving to owner occupied space or sent some of that activity in the portfolio. But it really does just run the gamut and again, at a 40%, or better than 40% retention rate. We think we're back to, you know, prehistorical levels of activity, uh, from a move out perspective.

Thank you. Our next question comes from Upala with KeyCorp.

Please go ahead. Paul.

Great. Thank you for taking my question. I wanted to get your thoughts on your capital allocation strategy and priorities going forward, especially with the recent Maple Plaza acquisition and the expectation of getting some space back next year. Thanks.

Hey Paul. It's Elliot. I mean, as we mentioned, we're looking at all different alternatives that are out there. So, um, you know, our general arts alternative. Is there anything from investing in an asset, be that an office asset or life science, that...

Looking at all of the above. Yeah, I just add to that, you know, we're on that seller this year so far of about million dollars. Um, you know, we continue to evaluate what we think are a growing number of opportunities in the market. And then a point Elliott made earlier, which I just think is really important, is that we do think we're in a really unique window of time here. Where fundamentals from a leasing perspective, are getting better across all of our markets and we're still early in Institutional Investor interest coming back to the market. We're seeing it happen across San Francisco certainly but really all of our West Coast markets and that can change quickly and change the dynamic quickly in terms of what's actionable For Us from an acquisition perspective. Certainly helps us on the disposition side so we'll continue to evaluate all opportunities and execute where we do feel like we're, you know, in a unique period of time where valuations are are pretty compelling and compelling relative to other alternatives

Okay, great. That was helpful. And then, uh, as as a follow-up, you know, because you talk a little bit more about flower more and I could, you share any recent conversations, you've had with the city on that project, you know, you mentioned continuing Gap interest there until June 2026, but any additional call there would be helpful, thanks.

Yeah, sure. I'll, I'll take it and we can certainly dig more into it. Justin's here as well to talk about it, to the extent, you have follow-up questions. But, uh, as I mentioned in my script, we, uh, submitted to the planning department recently, I believe in early September, uh, additional potential, uh, paths forward for the, The Flower Mart that included a broad.

Mix of commercial and residential uses. We're going through the exercise with the planning department, um, to understand sort of what's what's achievable on the site. And how that would lay out and what the, the, the ultimate path forward will look like from an execution perspective. So, as I said earlier, you know, we're pretty early Days, Inn in those conversations, but everything to date has been constructive. And I think we are aligned with the city in ensuring that whatever, uh, ultimately gets approved here meets the needs of the San Francisco Community as it continues to evolve.

Thank you. Our next question comes from Caitlyn Borrows with Goldman Sachs.

Please go ahead Kaitlyn.

Hi, I guess maybe just says the follow up on the Flower Mart, uh, point. So, it seems like over the call it year to date. Um, the amount of activity that you've been able to continue doing. Has changed in your own expectations, have changed, I guess, can you just go through like what those changes are and like, uh, that the current expectation is for June 30th. Like how much visibility do you have on that or is it kind of up to the city? And that's causing the changes and kind of we'll see as it gets closer to June if that changes things

Yeah, thanks Caitlin. You might remember from prior calls, sort of the path we're taking here on the Flower Mart and what we're looking for, in terms of additional flexibility and optionality, that will help us maximize value on the site. Um, is, uh, you know, is is unique, um, relative to the Way San Francisco is historically approved projects. So the timeline and the path forward hasn't been completely clear, which is why we've tried to do the best job we can. But being transparent with investors about what we know at different periods in time and then updating those expectations as appropriate with us, uh, filing, you know, the additional, uh, proposals or additional, uh, potential paths for the Flower, Mart with the planning department in September. We have greater Clarity on that process, uh, that step of the entitlement process and believe that'll take us through, um, you know, the first half of of 2026 as we continue to work through the process and get additional information. We'll update that assumption as appropriate

Okay, and then just, um, maybe a minor point on the Silicon Valley show: could you guys give some more detail just on when that closed in September? Was it the beginning of the month or the end of the month?

It would be the very end of the month.

Thank you. Our next question comes from Michael Carroll with RBC.

Michael, please go ahead.

Yeah, thanks. Um, I wanted to quickly circle up on the Flower Mart. Are you able to have discussions with potential partners as you kind of re-enter that site? If you're going to build residential and/or sell off certain sites, or is it just too early to tell, and you can't have those discussions because you just don't know what the city is going to be willing to give you yet?

With the development agreement to execute on, whichever 1 of those paths is ultimately going to maximize value for the the site but we need to get a little bit further through that process, to better understand it, to continue to evaluate economics in the market as those shift and change as well, to be able to really determine the best path forward. Um, so, you know, stay tuned. We're continuing to work through it. I'm really pleased with the progress. We've made to date, but we have, you know, some significant work still to do.

Okay. Now it's helpful and then just related to the other land sales that you kind of mentioned in your prepared remarks. Um, are these really going to be focused on this the the the the the parcels that have kind of been pre-announced or or are there other potential sales that could be announced that that it's new that we haven't heard about yet. I mean I guess it would be like kind of a near-term type event or are these going to be a longer term multiple year process to kind of wind down that that land book.

Yeah, I think to get to the $150 million, those are things that are actively being worked on right now. So, um, I think that that should be more near than long term. We’ve really focused our efforts on where we thought there were actionable items within the land bank. Um, and so as markets continue to recover, I think that the opportunity can really broaden. But we've tried to take it in phases, and the $150 million is kind of that first phase, and then we'll reassess as to what the right next thing is to do with, um, with more for me. Yeah. But just to be clear, that $150 million includes both.

Both what has already been announced and some expectation of things that haven't been announced quite yet. I mentioned in my remarks that we hope to have additional announcements to get up to that 150 million number over the coming quarters. So, as Elliott said, pretty near-term. Stay tuned.

Thank you. Our next question comes from Omo Okasa with Deutsche Bank.

Please go ahead.

Hi, good afternoon everyone. Uh, just a quick 1 around just some of the quarterly numbers. Um, Elliott. Could you again just walk us through the the straight line back that reversal exactly what that was. And also, what drove the, the the Fairly large increase in tenant reimbursements for a recorder.

Jeffrey, um, straight line, bad debt. Um, it's just an assumption related to a tenant moving from, uh, cash to across. So, we had to unwind the previous, uh, adjustment we made in a prior period, uh, from the reimbursement income. From our perspective, we look at it from a net number. So, we'll take into consideration operating expenses, real estate taxes, and when we look sequentially, Q2 to Q3, it's about a $1.5 million change. So, it's not a huge driver, uh, quarter over quarter. Um,

Okay, that's helpful. Um, and then on the whole side in regards to this potential office demand from AI and Angela, you kind of made a couple of comments earlier on, but I guess from our end, like, how does one really kind of think through?

How large of an opportunity is that for KRC? I mean, you know, could we kind of see some AI companies and some of the KOP Phase 2 cards? Like, how do you kind of think helped us kind of think through that a little bit more about kind of...?

Real kind of new leasing that could come from that, uh, from that driver.

Yeah, I mean, I think if you look at—and I mentioned the total, you know, requirements and market in the city of San Francisco right now being about 9 million square feet, which is a dramatic increase relative to even just last quarter when we were totaling and had been covering around 7 million square feet for quite a while. You know, a big driver of that is AI-related companies. So I think it's probably over 30% of tenants in market at this point are AI or AI-related, and we've definitely seen that be a driver of leasing activity across our portfolio. It wasn't, interestingly, a huge driver of leasing activity in our San Francisco portfolio in Q3, where we had just broad-based demand from a wide range of users. So that's definitely come back in the San Francisco market as well. But certainly, even in Q2, where we signed the 93,000 square foot lease with Harvey AI, it has been a driver of activity, particularly in our Soma port.

Other projects in the portfolio, including other markets like Belleview and and South Lake Union. We're seeing demand, you know, from AI tenants across the board. Um we definitely executed some on the AI side and the specific Northwest we've seen some of that demand at, um, at kop and, you know, we'll continue to work through and and find ways that we can continue to capture that demand. We'll also ensuring that our tenant profile overall remains broad-based and reflects, you know, a wide range of potential uses that will help us continue to uh, you know, maximize cash flow durability and growth over time.

Thank you. Our next question comes from Dillon Bazinsky with Green Street Advisors.

Dylan, please go ahead.

Great thanks guys and good afternoon Elliott just going back to your comments around sort of the the capital markets and transaction environment. Improving in terms of owners bringing their being more comfortable, bringing their properties. And Market, are you, are you seeing more of these types of assets that are being brought to Market more similar and risk profile to a Mabel Plaza? Or are you seeing more stabilized core deals? Come to Market. I guess just as you guys are evaluating these opportunities given the existing level of vacancy in the market and you guys more focused on maybe more stabilized type transactions or is it purely a project level risk-reward analysis that you guys are doing.

Yeah, so uh, we're really seeing all of the above and um, we've seen core deals core Plus value, add and then, you know, heavy heavy, repositioning opportunities. Um, and I think that speaks to just the overall Trends as far as where we try to spend our time. Um, it's a, it's more Bottoms Up than top down and we're looking at the dynamic that that particular asset in that particular submarket and then how it relates to other risks that are already existing, uh, in the portfolio. And so, um, we want to make sure that we're smart and thoughtful about the kind of risk that we're taking and not necessarily, um, doubling down on existing opportunities that already, uh, exist with, uh, vacancy that we had Elsewhere on the portfolio. So, um, in the instance of maple, um, we were not in that submarket, but we spent a lot of time studying it and

Getting comfortable with the leasing Trends and we thought we could underwrite it in a way, um, that gave us enough Runway to be able to execute on on a lease up plan. And um, you know, so far we feel encouraged by what we see.

Yeah, I just want to add to that. I think you know our cost of capital has improved on both the debt and equity side over the last 3 to 6 months, which we're encouraged by. But, you know, we're still trading at a discounted cost of capital and as a result, we're probably not the best buyer for truly core stabilized properties. We need to find opportunities where, you know, all of the core competencies on the Kilroy platform can be brought to bear to really drive value and create value through those acquisitions. I think we found that in the case of Maple Plaza, and that's how we're continuing to think through and look at opportunities across the board.

Great appreciate that context, guys.

Sure, thank you.

Thank you. Our next question is a follow-up from Caitlyn Burrows with Goldman Sachs. Please go ahead, Caitlyn.

Oh, hi again. Um, I feel like we've talked a lot about the leasing volume, um, but not as much on the pricing side, so it looks like the leasing spreads you guys. Uh, report did get better in the third quarter. I guess, as you guys, um, look out to 2026, do you have an idea of um, if you think like the year to date results or the 3 key results, would be more telling of what could happen in the future. Any comments on what you expect on like this?

Pricing side. Thanks.

We're getting more stability on the occupancy side. You're seeing it through new leasing activity. And as Rob mentioned earlier, bubbly space is coming off the market. So, occupancy is starting to stabilize, starting to firm up a little, and then starting to move in the right direction. As occupancy moves in this direction, there will be inherently more pricing power in the market. So, I think we're at the big.

I think all the pieces are in place, including that growing demand picture, for things to continue to get better in San Francisco. However, Lisa signed over the next year probably on average in that market are going to be negative releasing spreads.

Thank you.

We have no further questions, and so this concludes our call. Thank you all for your participation. You may now disconnect your lines.