Kilroy Realty Corporation Stock

So good afternoon, everyone. Welcome to Bank of America's 2026 Global Real Estate Conference. I'm Jana Galan, BofA's office REIT analyst, and we're pleased to have with us Kilroy's CEO, Angela Aman; CIO and Interim CFO, Eliott Trencher, Chief Leasing Officer, Rob Paratte; and Investor Relations and Capital Markets, [ John Perry.]

I'll turn over the mic to Angela for opening remarks, and then we can jump into Q&A.

Great. Sounds good. Thank you, and thank you for having us. We're happy to be with all of you today. And happy to be here to tell the story about Kilroy and what's been going on in our markets and across our portfolio over the last couple of years.

For those of you who aren't familiar with the company, we are West Coast company life science assets across the West Coast and in Austin, Texas. It's a very high-quality portfolio and about half of the portfolio is actually in the San Francisco Bay Area, which a few years ago, if we were at this conference would have been the most challenging part of the story and now has become one of the most exciting parts of the story given the momentum we're seeing in that market from sort of a wide breadth of tenants, including those tenants in the AI and tech space, but more broadly across other sectors, professional services, legal, et cetera.

We have been experiencing, I think, across all of our markets, a real inflection over the last few quarters in leasing volume and momentum and activity has been most pronounced, certainly in the San Francisco Bay Area. But as Rob will touch on later, I'm sure we're seeing good activity and momentum in the Pacific Northwest and our portfolio in Bellevue. And that activity in Bellevue is now spilling over into the Seattle side of our portfolio, where we have a few high-quality assets in Denny Regrade and South Lake Union up through Fremont. We've seen very strong activity really over the last several years in our San Diego portfolio, where we own a significant concentration of assets in Del Mar, which has been one of the best-performing West Coast office markets really over the course of the last cycle.

We've seen recently a real uptick in activity in our Austin portfolio, where we have one significant asset there that has been in lease-up. And I think there's been very exciting momentum around completing the lease-up of that project. And then Los Angeles, where the company is based has also seen some green shoots recently with activity in the defense and aerospace, robotics and advanced manufacturing sectors coming back to the South Bay, where we have some vacancy and opportunity for portfolio improvement and really across the board, particularly in new assets we bought over the last couple of years in Beverly Hills primarily.

So across the board, we feel like activity has returned and continues to get better. At the same time, over the last 3 years, we've been very intentional about improving and rationalizing the portfolio and being as thoughtful and strategic as we can be from a capital allocation perspective. So we've made, I think, some smart disposition decisions over the last few years, both to take advantage of situations where we felt like we had maximized value in the portfolio and could raise really attractively priced capital to reinvest elsewhere and places in the portfolio where we really felt our ability to create value and drive cash flow over the longer term was going to be compromised based on location or quality or just CapEx burdens at some of those assets. All of our intentional efforts over the last couple of years, I think, have made this a more focused portfolio and a portfolio that's really well positioned for durable growth over the coming years.

Great. Maybe let's start with -- on the demand side, just the latest color across key markets, breadth of demand for AI versus traditional tech versus FIRE, law, professional services.

Yes, I'll jump in and then turn it over to Rob. Like I was mentioning, we've seen really good demand in the San Francisco Bay Area. And that's -- there's sort of different pockets of activity happening in different parts of the market. Obviously, AI and the amount of leasing that's happening from an AI perspective certainly receives the most headlines in the San Francisco CBD, and it certainly has been an important driver of activity and demand. We have assets in that market that really tell the full story of the inflection in the San Francisco market.

So one asset that Rob and I like to talk about a lot is our 201 Third Street asset that went from effectively fully leased down to about 20% occupancy with a big move out of a financial services user in the fourth quarter of 2024 and is now back to 90%, and that improvement has been through leasing up space to some larger, well-capitalized later-stage kind of AI and tech companies and also a very intentional spec suites program that's been able to tap into some of that earlier-stage AI demand that's been in the market.

In addition to some more traditional firms, we did a full floor deal with a streaming use. There's been other activity in the building that I think just points to how broad-based the demand and activity has been in that market. So it's a great story of sort of the full ride in San Francisco and how quickly activity has really improved and come back.

As we look at the broader San Francisco portfolio outside of AI and some of the tech-based uses that are at market, one of the key themes we've been seeing over the last really quarter or 2 has been kind of a resurgence in larger format activity and interest. given the success of leasing over the last couple of years market-wide. And as I'm sure you're all very aware of some of the market statistics about remaining vacancy in the market, we think it's important to really bifurcate that into what's truly competitive supply in the space versus what is effectively obsolete or functionally obsolete space in the market.

Right now, we think there's 35, 36 large contiguous blocks left in the city in total, that's blocks over 100,000 square feet. And more than half of them are really not competitive to the type of product that Kilroy owns today. So probably 15 to 20 of those 35 or 36 opportunities are truly competitive to what we own. And right now in the market, you've got 31 tenants looking for space above 100,000 square feet. So there's truly for some of those larger blocks of space, more demand in the market than there is supply to meet that demand. And where we've seen that show up in our portfolio, yes, is on the demand side for some of the larger contiguous blocks we have left but as importantly, more larger format tenants in the market coming to speak with us about potential early renewals.

I think that speaks to 2 things. Certainly, the trend in rents and the inflection we've seen just in asking rate and net effective rents over the last year has been significant, and I think everybody is watching that trend closely. But increasingly, some of these tenants that have been in our portfolio for a while are looking down the road, thinking about their expiration that might be coming a few years out and beginning to voice some concerns about locking in space today, particularly if you're in a building that has other vacancy or you're in a building that has another lease expiration coming up, I think people are becoming concerned you could be displaced by a landlord looking at some of the bigger demands or requirements that are in the market. So all of those are really healthy fundamentals, right, both on the occupancy side, you really are seeing rates start to move in these markets, which is very, very exciting as well.

Further down the peninsula and through Silicon Valley, you're seeing in addition to just the tech users that have really changed the way they're using space in some of those markets, some of them taking significant sublease space off of the market over the course of the last year. We've seen a lot of demand and activity from robotics uses in those markets, and that's really been a driver of activity as well.

Bellevue, we've seen good activity really over the course of the cycle over the course of the last few years in the Bellevue market have been able to push both occupancy and rate in that market for a while. Over the course of the last few quarters, we've seen more tension in the market on the Seattle side as well. We have one project that was subject to a major repositioning that delivered a couple of years ago, and it had been very quiet from a tour and demand perspective until probably 2 or 3 quarters ago.

We completed that major repositioning, brand-new lobbies, new food and beverage offerings, great outdoor space and amenities, a conference facility, a fitness facility, everything that tenants are in the market we were looking for, but there just wasn't enough depth of demand on the Seattle side or in South Lake Union. And over the last 2, 2.5 quarters, we signed over 150,000 square feet of really high-quality leasing in that project. Several top-tier law firms, a host of a Fortune 100 company looking for space, a financial services firm looking for space. Many of these tenants are kind of new to the market for the use they're looking for.

So bringing in a tech group to take advantage of a highly educated, very deep tech talent pool that's resident in the Seattle and Bellevue markets without sort of the start-up ecosystem that's competing for talent in markets like the San Francisco Bay Area. So that's been a really encouraging point as well.

San Diego has been consistently strong, right, over the course of the last few years. We own about 40% of the market in Del Mar, in particular, which is high demographic, proximate to executive decision-makers, and we've really been able to push rate pretty consistently over the last few years. I think about a year ago, we signed a lease and had mentioned on prior earnings calls that it was set a record at our One Paseo asset, which is a mixed-use project we own in the San Diego market at the highest office rent that had ever been signed in San Diego County. So there's been good tension in that market. We have some very differentiated product in that market in terms of being able to provide that mixed-use environment that's been very compelling to tenants. And so that's been a fantastic market for us and our efforts there.

And then in Austin, as I mentioned earlier, we own one building in the CBD. It's a 750,000 square foot building called Indeed Tower where we've had lease-up to do there. And really also over the last quarter or 2, we've seen a significant uptick in tour activity and demand there and continue to work through the last pieces of that lease-up. Rents, capital, net effective rents have trended very well in that market for us as well.

I'll leave. Anything else?

No, I'll just touch on a couple of points Angela made. When you look at the 2013 asset that Angela talked about and our lease-up going from 20% to almost 90%, our effective rents were 30% higher than they were at the time we started. So I never thought in the short order that we've been talking about that we'd be talking about rent growth in San Francisco. But right now, it's projected to have about 3% growth over the year. But clearly, in particular assets like 2013 or other assets that have views or the right kind of space, the rent growth is substantially higher than that.

I'd say another thing that's new to the market we're tracking very closely is the robotics demand that Angela mentioned. There's 0.5 million square feet of robotics demand in San Francisco and 1.5 million on the Peninsula where our Oyster Point project is. And what's really interesting about that, robotics companies, for the most part, have office and really lab use, so they're using lab space also. You're also seeing life science companies using robotics. So the demand profile at Oyster Point, particularly is really amazing right now. We're very busy there. We have more tenants looking at our spec lab space than we have space. And we also have large users coming back to the market.

The last point I'd make, and this is sort of focused on the Bay Area, but we're starting to see it in other markets is for the first time in a long time, we've got tenants compete for the same space, and that's really important. We haven't seen that in a long time, and it shows that the quality space keeps continuing to decline, especially in the larger format uses. So we've had that happen in life science, and we've also had it in tech.

Yes. Tenant sentiment has really improved on the life science side, right? We had been -- we had talked and had conversations with tenants really over the course of the last few years, particularly at Kilroy Oyster Point and at Menlo Corporate Center, where we did a life science conversion for one of the buildings on that campus several years ago. And look, there were lots of tenants in the market who kind of knew they needed to upgrade their space to meet their business objectives, but everybody was really just in a cautious kind of stance. And that had to do with a lot of things, capital raising concerns, -- you just weren't seeing really any capital recycling in that ecosystem from venture capital dollars that have been tied up for a very long time. And the combination of how the XBI, the biotech index has performed this year, it's up over 100%.

I don't know about today, but over 100% over the course of the last year. That has sort of opened up the IPO and follow-on equity windows, which has been very positive, both from an actual capital recycling standpoint and also just from a sentiment standpoint. And you pair that with what's happened in M&A in that space as you've got big pharma companies looking at patent expirations in that patent cliff, the amount of revenue that's going to be lost associated with that. You've seen a lot of M&A activity in that space as well, just another way you're seeing capital kind of be recycled in that space.

Whether it's actual because tenants have raised capital as a result of all these things or it is just a belief that the capital will be available when companies are ready to raise it. we've seen both management teams and the Boards of some of these companies be more inclined to make longer-term commitments and to get space that's actually going to facilitate their growth objectives as a company. And that's a very different or very striking change in sentiment relative to where we were 12, 24 months ago.

Within life science, can you maybe talk a little bit about your assets relative to market in South San Francisco and in San Diego? And then very curious on kind of like the robotics uses. What do you -- what would rents for that look like relative to more traditional life science rents?

Do you want to take that?

Sure. So -- and this isn't just us saying this. Our Oyster Point project is best-in-class in the Oyster Point submarket, which is the main and main location for where life science wants to be. With respect to pricing for robotics companies, it's sort of similar because a lot of our space is shell. So we're having to go from pure shell to a build-out that's partially lab. It might be a little bit cheaper to do a robotics company deal than a life science deal, but some of our life science deals have been cheaper, too. It just -- it depends company by company.

But Oyster Point is attracting attention from outside of the Bay Area. We have some companies that are outside of California actually that have looked and that are looking now. And so the amenities in terms of just the quality of product that's in the market, we've got waterside amenities. We've got our fitness center gym business center and the project with tenants in it now is actually thriving. So that's created a lot of momentum. We also have Menlo Court Center in Menlo Park, which is also in Northern California, where we have a smaller life science building where we had a tenant that didn't make it several years back. We're now in discussions with the tenant. That's the example I gave with one of the buildings where we had competition from 2 different tenants.

And then our other trophy life science project is Nautilus, which Eliott acquired a year ago, I guess, in December, which we acquired from AREE & Torrey Pines, which is arguably the best use, but really happy with that acquisition and the activity we're seeing there.

Yes. I mean just to talk a little bit more and build on some of what Rob said about KOP and how that lease has gone over the course of the last couple of years. As a reminder, we delivered 875,000 square feet in Phase 2, split across 3 buildings. One building has now been fully leased to UCSF. So a great, very stable use, high credit tenancy, et cetera. One building we went multi-tenant on early, built some spec suites and had great success at kind of completing the lease-up of that building with a wide range of tenants, all life science and a combination of very well-capitalized private companies, public biotech companies, et cetera. And then we have remaining that's arguably the best positioned building [indiscernible] from an access and visibility perspective, et cetera. We have this project delivered and life science market was not what it is today described. That market has continued to improve certain shift recently. But back when we delivered, we were very open to the range of tenancy we might see show up for that project.

Obviously, it had been special purpose built for life science. But then the project, which is also purpose-built for life science, we have Cytokinetics, a traditional life science use and Stripe, so a fintech use. So the project has worked well in prior phases for a wide range of uses here today is that between UCSF and the use that they'll be putting into their building and the way the multi-tenant building lease-up has gone, we've got a great stable of life science tenants at sort of all different sizes and ranges in that multi-tenant building.

And with UCSF as an anchor and validation of the project, we continue to build a lot of excitement in the life science community, in particular, around the ecosystem we're building at Phase 2 of this project and already have in Phase 1. Many of you are aware, but we have land at Oyster Point for future development at Oyster Point, Phases 3, 4 and 5 down the road. And we were always hopeful when we began the lease-up of this project that we'd be able to build that kind of life science ecosystem that would provide a pipeline of growth for future phases of the project.

But again, we're pretty agnostic about where the initial leasing demand would come from. And it's very exciting, I think, to everybody on the team that we have seen that life science demand that's going to facilitate future growth at the project. And you're seeing it now in the pipeline at the project. There's a lot of buzz in the market about the types of tenants we brought in and again, that ecosystem that we're creating with life science tenants that want to be proximate to each other and feel good about the growth and the activity of that project.

Great. And then maybe just turning to San Francisco and the tremendous upswing in that market. Wondering if you could talk a little bit more about your Flower Mart site and potential opportunities there.

Yes. So we have a site called the Flower Mart site in the Central SoMa District in San Francisco. It was bought with the intention that it would be a large-scale development project. We have a development agreement currently on the site that will an entitlements for about 2.4 million square feet of commercial development, primarily office, a little bit of a retail component as well. We began a process a couple of years ago, given the changes in the San Francisco market and the changes certainly in the office market, in particular, at engaging with the city around how we could potentially work through changes to the development agreement that would give us more flexibility and optionality on the site to ultimately be able to build a different mix of uses than what was originally envisioned.

And we are very intentional as we went through this process, given our historical experience with the San Francisco market and the knowledge, I think everybody in this room has that San Francisco has been from a commercial real estate perspective, historically, a bit of a boom-bust market. It has recovered quickly in a number of different cycles, and we knew this would be an elongated process to get that kind of flexibility and optionality.

And the last thing we wanted to do was pick a path and go through an extended entitlement process only to get to the end of it and realize our original plan was actually the right one. The city has been a wonderful partner to us as we've worked through this. And we feel good that we're making really constructive progress towards a plan that would provide with the Board of Supervisors approval, additional flexibility and optionality on the site that will really allow us to meet the needs of the Central SOMA community earlier than we potentially otherwise could have. We are very open-minded about what the actual execution path here looks like. It's going to be driven by market conditions. We've talked about it on prior earnings calls. But even if we have all this flexibility and optionality, residential and commercial rents are not yet at a place where new development would pencil, but they're getting closer all the time.

And so we hope and expect that we'll be through this process with the city on sort of reimagining the approval path for the Flower Mart by the end of this year. And then we'll really be in a bit of a holding pattern as we wait to see which use or which mix of uses ultimately makes sense for development to commence at the site.

And then now maybe turning to L.A.. This market overall has remained a bit more challenged, but you guys have done some capital recycling there into different submarkets. Curious if you could talk about that. And then also you did mention some green shoots on the second quarter call.

Yes. I mean I'll start, and I want both Eliott and Rob to speak to this. But maybe to zoom out for a minute just from the L.A. portfolio and talk about the capital allocation strategy more broadly. As I mentioned at the beginning, we are in 5 markets, primarily West Coast and then Austin, Texas that are all high-growth markets, but also have been historically higher volatility markets. And as we think about how to put this company in the best position to consistently produce for shareholders over time, we really think there's an opportunity here to focus a bit more on the durability side of the equation and manage some of that volatility without giving up the excess growth that these markets typically have over the course of cycles. So that's sort of the strategy from a zoomed out kind of 10,000 square foot perspective.

Out of all of our markets, I would say we've been clear since the beginning or since I joined that. L.A., we probably have the most repositioning work to do. Our portfolio, and we have had a few assets when I have here on the West side. We had assets in Hollywood, sort of 3 commercial assets and 2 residential assets. There are submarket. We have one asset in Culver City and then some assets in the South Bay, El Segundo down through Long Beach. There are submarkets that have continued to perform really well in Los Angeles despite some of the headlines we see about the L.A. market. Century City has been an outstanding office market over the course of the last cycle.

Beverly Hills has been an outstanding office market over the course of the last cycle. Culver City has continued to tap into tech and streaming and other kind of content creation that kind of continues to work in that market. So it's all been very positive, but our exposure in those submarkets was either nonexistent or quite limited. So we've done things to intentionally reduce exposure in Santa Monica. We sold a lower quality asset in the Santa Monica market. We sold our lowest quality asset in the Hollywood market. We also sold 2 of our 3 residential buildings, the 2 that were in the Hollywood market.

So over the last 3 years, we've taken $300 million, almost $300 million of capital, between $250 million and $300 million of capital out of the Hollywood market as an example. We did find an opportunity last year to acquire an asset in the Beverly Hills market, and that has been very successful for us. We've continued to exceed underwriting, both from an occupancy and a rate perspective in that market given some unique dynamics in the micro market in which that's located and continue to look for opportunities, again, just on that general framework of how do we reduce some of the volatility in the portfolio and tap into specific submarkets and micro locations in markets like L.A. that are going to be most successful at driving growth over time.

Do you want to say anything else on the capital allocation piece?

Maybe just to add to that, as we thought about...

Acquiring in Beverly Hills. We looked at a lot of different things, including barriers to entry, which are quite high there. Not that it's easy in a lot of parts of L.A., but Beverly Hills in particular, it's very difficult to build. We also were tracking how the supply in the micro location was really changing over time with a lot of owner users coming in and acquiring real estate there. So it's really a multifaceted process for us. But given some of the pockets that Angela pointed out, I think that we're going to keep our eyes open. And if we see opportunities there that economically makes sense, we won't be afraid to pursue them.

The only other thing I'd touch on is that, as Angela said, we're exceeding underwriting at Maple Plaza, which is just a terrifically located project and a really great micro market of Beverly Hills. And hear me talk about micro markets a lot in L.A. because there are so many markets Culver City has done really well for us also, our Blackwelder project. And we've really seen since we acquired the asset, how the tenant base there has changed. There's been some -- there was a lot of entertainment in the past, and now we're seeing a lot more fintech.

We're seeing some AI, and we continue every month to enter into new leases with companies there. So it's a really fun project to work on. It's 12 buildings and it's sort of an edgy kind of architectural design for that part of the market that works perfectly. And so we're really happy with that. We are seeing some -- you mentioned green shoots. We did a lease in the second quarter with Universal Music Group. There was a full building lease that was about 50,000 feet in Santa Monica. That is the largest lease to have been signed in Santa Monica, new lease, not renewal since the pandemic. And so as you said in your question, some of L.A. has recuperated slower than other submarkets within L.A., but we're starting to see more activity and expect to see more all on our assets on the West side.

I mean L.A. is one of the largest economies in the country, and I don't think we should lose sight of that. I know entertainment as a headline gets a lot of focus in the L.A. market. It is a piece of the market, but it is -- L.A. is a much more well-diversified economy than certainly I appreciated before relocating there.

And I guess as we look at 2027, are there any larger expirations or renewals still up for debate that you want to flag? And just also latest thoughts on DIRECTV.

Do you want to take that?

Yes. So Jana, you really hit on the big one. DIRECTV is our largest maturity in 2027. It's about 500,000 square feet, plus or minus at a campus in El Segundo. We have said on prior calls and our expectation continues to be that they will give back the majority of that space, if not all of the space. So we would expect to vacate or material downsize. Outside of that, our role is pretty granular. And so we feel that it should -- that bodes well for what that means in terms of 2027.

Maybe taking that one step further into the DIRECTV campus itself, we continue to evaluate lots of different alternatives there in terms of ways to maximize value. and we're evaluating all of those real time. We're not going to wait until the fourth quarter of 2027 when that expiration happens. So we're actively working on a few different alternatives. We're also going through a parcelization of the campus for those that are not familiar with the campus, it has 3 different buildings. And so to put a parcelization map in place just improves flexibility and optionality as we evaluate our alternatives there.

Yes. I mean Eliott said it, he hit on it, but the DIRECTV tenancy, that larger expiration is until the fourth quarter of 2027. So we've got some time as we continue to work through a variety of different plans there, as Eliott did a great job of highlighting. Outside of that, there's 180,000 square foot expiration we expect to be vacate in 2027 in the Long Beach market. And beyond that, everything is below 50,000 square feet. So it's a super granular expiration pool. I think gives us a great deal of confidence that outside of certainly those 2 larger leases, it should be a year that looks pretty much like a pre-pandemic historical average retention year.

And then maybe following up on that, can you kind of help us kind of work through like the occupancy trajectory that you see given some of this demand and...

Yes. So for 2026, we've kind of talked about second quarter sort of being what we anticipate kind of the trough, and we'll look to build off of that. We outlined in our supplemental what our signed but not occupied pipeline looks like. I think it's a little over 1 million square feet right now. which we expect to come in over the coming quarters, and we kind of break that out. So it sort of bodes well for us. And then obviously, in the fourth quarter of '27, we'll have DIRECTV, which will be, as we talked about, about 500,000.

And I guess maybe just -- I've been hearing a lot about kind of this like Long Beach to El Segundo Space Beach, aerospace and defense demand. Are you kind of -- is that a potential backfill...

Yes. It's been really encouraging to see that kind of demand, which had been a historical driver of that part of the market come back, and that's really been a phenomenon over the last handful of quarters. You have seen some important leasing activity happen from those kinds of tenants. But most of the actual leasing that's been done to date has been more in kind of 1- or 2-story office or flex industrial kind of product. We think that, that is like there is a second derivative benefit of additional leasing that wants to co-locate around those uses coming that would be more appropriate for the kinds of space that we own in the market. But you're not quite seeing it yet or we're really just getting to see it.

You think about Anduril, as an example, is building a $1.2 billion campus down in Long Beach. Definitely, we're going to see more and are starting to benefit already at our Aero campus down there. So it's without question, a really positive dynamic given things like the AT&T lease expiration in the back half of 2027 and certainly gives us more hope on a variety of potential paths for that site than we might have had 12 months ago. But it's difficult to point to something specific in the market that would lead you towards a specific outcome for that campus at this point in time.

Maybe just going back to Rob, your comment earlier around robotics demand. Can you just help us understand how new is this as a group of tenants in the marketplace? And then the 1.5 million, how fragmented is that?

So Angela alluded to it, this is the robotics demand in the Bay Area is relatively new, I mean, meaning probably 2 quarters ago, and I sort of liken it to where AI was probably 3 years ago. It's just starting to come on to its own. Some of the demand is comprised of really big household name than type companies and other start-ups. And as I said earlier, some from outside the state. When you say how fragmented, do you mean -- are there any really large Yes, there's...

Within that like multiple hundreds of thousands of square feet or is it a lot 20, 30...

A lot of -- there's -- throughout the Bay Area, there are a lot of larger requirements. The one thing I'd say to distinguish is that in San Francisco and at KOP, the demand is more what you office life science, I think I said that earlier. As you go further into Silicon Valley, the demand goes up to about 4 million, but a lot of that is heavy manufacturing because the buildings in Silicon Valley lend themselves to that being R&D type buildings. So it is a new trend in the market, and we're monitoring it closely. I mean there's a lot of automobile companies, for example, that are both in San Francisco and in the Valley that people don't think about like Toyota that have smaller kind of entrepreneurial engineering teams in San Francisco. So we're expecting to see more of that.

How about defense contractors in Southern California aerospace where you've got a push? Are you seeing any demand there yet? Or do you don't expect it because that kind of go?

I think in El Segundo proper, the renewal from industrial or excuse me, from aerospace, which has always been kind of the core market there, the renewal rate has been a little better than it has in the past. But we haven't seen per se demand like in Long Beach, as Angela said yet, from Anduril and their campus and the other campuses that are going on. But as those companies grow and expand, there's going to be service providers, et cetera, that want to be near there, just like what happened in Mission Bay with OpenAI. OpenAI went to Mission Bay, the vacancy rate was 30%. Now it's down to about 6% because not only OpenAI, but all the companies that want to be near them have led in Mission Bay.

Yes. It's really like the combination, I think, of what's happening geopolitically, the push for more modernization of the military all of -- and what's happening with robotics and technology more broadly has sort of reenergized what had been a somewhat dormant ecosystem in the South Bay. But there are -- a lot of those companies that are really active in that space have long ties to that region. And so it's exciting to see that come back in that way. It's just candidly, a bit early to point to it really creating demand in our assets over the type of assets we own in that market. But I think without question, it's coming. It's just the first wave of that has been more like on the flex industrial or kind of manufacturing side.

Unfortunately, we're out of time, but I have 3 rapid-fire questions. We're asking all the REITs at the conference.

The first is if long-term rates stay higher for longer, which has the biggest impact on your sector's earnings? Is it higher refinancing costs, lower transaction activity or less new supply?

Relative to where we are today, refinancing costs.

Over the next 3 years, will third-party capital become a more important source of growth for public REITs?

Yes or no?

Yes.

And for your sector, will 2027 same-store NOI growth be higher, the same or lower than 2026?

For the sector? Higher.

Thank you very much. Appreciate it.

Thank you.

Thank you.

Hello, everyone. Thank you for joining us, and welcome to the Kilroy Realty Corporation Second Quarter 2026 Earnings Conference Call. [Operator Instructions] On the call today are Angela Aman, CEO; Jeffrey Kuehling, EVP, CFO and Treasurer; and Eliott Trencher, EVP, CIO. In addition, Justin Smart, President; and Rob Paratte, EVP, Chief Leasing Officer will be available for Q&A.

Please note that some of the information 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 376,000 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 6 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, 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 2 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'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 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 [Audio Gap].

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 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 1/3 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're seeing tangible interest migrate across our multi-tenant assets in the south of market or SoMa submarket, 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 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.

Westgate continues to be the primary beneficiary with 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 L.A., where during the second quarter, we 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 Kilroy Oyster Point Phase II, where we executed the previously announced 38,000 square foot 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, and 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 time lines remain elongated, and it is difficult to predict with certainty which transactions will ultimately materialize and in what time frame, 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 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, 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. 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's 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. Sales volume is on track to be the highest since 2021. Deal size is increasing with 9-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 improvement 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 and 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 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're actively evaluating several acquisitions, but we'll be patient and picky as we keep our discipline and 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 nonstrategic 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 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 from 23andMe, representing $0.05 per share. This settlement was disclosed and incorporated in the last quarter's adjusted guidance. Portfolio occupancy, including KOP 2, ended the quarter at 77%, down 60 basis points from the prior quarter despite 2 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 23andMe 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 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 2 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 5 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 3 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 to $3.63 per diluted share and same-property NOI growth range of 25 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 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 marked meaningful progress across every operational and financial metric. Leasing momentum continues to improve, both GAAP and cash re-leasing spreads were positive. Our signed not commenced pipeline continued to expand, and 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 that.

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

[Operator Instructions] Our first question comes from the line of Jana Galan with Bank of America.

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. Yes, I'll jump in here, and then certainly, Rob and Jeffrey can jump in as well. I'd say a few things. As Jeffrey mentioned and you highlighted, Jana, the spreads in the quarter were pretty broad-based. This wasn't a quarter that was driven by 1 or 2 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, I would say it's reasonably consistent with what we've 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 3 markets. I would just note that in San Francisco and L.A., but San Francisco to a larger degree, the degree to which we are currently sitting above market has compressed over the last quarter or 2 as we have seen that improvement in supply and demand dynamics translate into stronger leasing economics.

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

Jana, it's Eliott. So you're right, we're still not quite there, but taking what Angela just said and applying it to Flower Mart, we're obviously getting closer day by day because the market continues to strengthen. 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'll just see how the next several quarters play out.

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

Maybe just a follow-up on Flower Mart. Would you kind of look to carry the interest expense into 2027? Or given that the current market isn't supporting additional office or resi 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?

Yes. I think we've 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've 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's really critical we get through this process with the city to enhance our flexibility and optionality at the site, which is, I'm 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're 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's all commercial, whether or not it's probably most likely a mix of uses.

We'll 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.

And then just on KOP 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're seeing for the project? And 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 8 leases signed over 20,000 feet in Q2, which comes off a very big 2025, obviously. One of the largest was our deal with Olema, 2 others were with -- in Silicon Valley and 2 were in the East Bay.

But what's changed dramatically is the amount of touring activity, which I know -- that is the highest predictor of where you're going to go next, which is LOIs or leases. We went from 317,000 square feet of tours in Q1 of '26 to over 800,000 feet of tours, and we're 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're talking to. A lot of the deals that are in the market right now are in the 20,000 to 40,000 foot range.

Our last Spec Suite that's available has multiple parties interested in it, and we expect to be able to report something shortly on that. We are also building 2 new floors of Spec Labs, and those will be available in December and January, respectively, and we've got activity on the bulk of those already. And then interestingly, when you flip to larger requirements, right now, there are 8 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 foot range.

And so we are -- that is what's driving the 800,000 feet of touring activity we've had. And I think one last point I'd make is that we're seeing more and more in the Peninsula -- South San Francisco Peninsula and further south that robotics companies are having large, large requirements, many of them over 100,000 feet. And the result of that is that it's 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's going to benefit Oyster Point really well. We're 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 hasn't looked this good in quite a while.

Your next question comes from the line of Steve Sakwa with Evercore ISI.

Obviously, your commentary around leasing is certainly constructive. As you just look at the pace of the recovery over the next couple of years, I guess, what are the things that are maybe 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've seen even just over the last quarter or 2 as it relates to strengthening of the leasing environment. It's true across markets, and there are different drivers for that across all of our different markets. But in San Francisco, our largest market, we've really seen a pretty significant change in tone that's 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've seen that translate pretty quickly into improved lease economics. And as I mentioned in my speech, one of the most encouraging dynamics we've seen is that bringing many of our existing tenants to the table that have longer-dated expirations that are realizing availability and options 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's no one data point in any of these markets, including San Francisco, that's really making us feel good about the durability of the recovery. It does feel really broad-based. It feels like we're seeing all of these things sort of fall into place in the order we would like to see and expect to, but on a compressed time frame. That's really just driven by the amount of new business formation and growth we've seen in markets like San Francisco and the degree to which that's 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 Los Angeles, really seeing some good trends kind of come out across many submarkets, like I mentioned earlier. And specifically, what we're 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 2, have continued to underscore that the recovery is not going to be a perfectly straight line and that leasing activity as 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. And then maybe just as a follow-up to that comment, you've got the DIRECTV space, I guess, coming due maybe a little over a year from now. And you talked about the defense tech and robotics. To what extent do you have more confidence around re-leasing that building? Or do you still kind of view that as possibly a better sale candidate?

We continue to evaluate all options with respect to the Kilroy Airport Center campus. I think we'll have multiple different paths we can take there. I do think what's happening in that market, like I mentioned, based on sort of 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've got new companies in that space and existing companies that are expanding or changing the way they're using their space is pretty interesting.

So we feel like things are moving in the right direction in that market, either for re-leasing or for a disposition. As you mentioned, the bulk of that lease expiration doesn't happen until the fourth quarter of 2027. 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.

My question first was going to be about 2027 renewals, which probably then follows up on that last point. So I realize that there might be some overlap there. But I guess when you look at the lease expirations that you have in 2027, it's around 1 million square feet, which is essentially the same as a year ago.

So I'm wondering when do you really start working on or making progress on those '27 expirations? And then given the weighting to L.A., kind of how does that make you feel about the '27 retention versus '26?

Yes. The weight in L.A. is primarily driven by that DIRECTV, AT&T expiration in the fourth quarter of 2027. Outside of that, across the balance of the 2027 expiration pool, it's highly granular in nature. So I think maybe we have one other expiration that's give or take around 80,000 to 90,000 square feet. And after that, it drops down to below 50,000. So we feel good about the granularity of the pool.

Obviously, we need to work through DIRECTV, AT&T at Kilroy Airport Center. As I mentioned, we're 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 you expect to be active on in the second half?

Caitlin, it's Jeffrey. Yes, the primary component of the development spend is for KOP 2. So as leasing activity and the build-out from some of the leases you see in the signed not commenced pipeline continues, you'll see the capital spend accelerate in the second half of the year.

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

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?

Blaine, it's Rob. It's a good question. I think what we're seeing is equilibrium coming back between San Francisco and the valley for years. The Valley had a lot of vacant space in the market. That is being absorbed. And as I mentioned earlier, there's a lot of robotics companies. It's actually amazing how much autonomous vehicles and robotics companies related to vehicles as well as other medical, et cetera, is coming into the market.

So I think certain formats lend themselves better to the valley like Waymo, which is in one of our buildings and other formats lend themselves better to a San Francisco or South San Francisco type location. So we're not really seeing displacement. It's more a choice between San Francisco and Silicon Valley.

And then I would really hone in on our assets in Redwood City, where we're 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 into its own as a key city or factor in Silicon Valley office market. So to me, it looks like a pretty broad-based recovery in demand profile across Silicon Valley up to San Francisco.

Yes. The only thing I'd add to that is that we've 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's been a significant driver to kind of tighten up the Silicon Valley market in addition.

Great. That's very helpful. And then maybe sticking with Rob, can 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's a little bit of a mix issue. But as the markets have improved, if you look at San Francisco and in quarters past, the numbers we gave you at 201 Third, the leasing that we started doing at 50 or so IG going up into the high 70s IG does mean we have a little bit more leverage. So we're able, in many cases, to negotiate down CapEx.

But again, it's sort of deal specific. It's going to depend on the space, whether you're going from shell or not. And I think the best thing that we've had going is our spec suite program where we really have a tight control on the costs. We're spending the money. We're designing it and we're building it. And tenants are using them largely unchanged. So to me, that's a real positive. But I just -- as the markets improve, hopefully, leverage continues to move into the landlord's favor.

Yes. One other thing I'd note is that we had been running across our markets. Markets have been running with about a month per year of the lease as free rent. During the current quarter, with the population we executed, we were actually closer to half a month per year of the lease, which is the most favorable it's been in the last several years. And Rob and I continue to debate whether that's 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.

I appreciate the comments so far on sort of the demand environment across your guys' market footprint. But maybe just a quick question for you, Eliott. You mentioned you guys are in process of sort of evaluating several acquisition opportunities. You mentioned capital markets are improving and therefore, there being sort of a larger depth of assets to go after.

I mean, are you seeing any sort of divergences in your guys' mind with where you guys seeing demand fundamentals head versus where maybe cap rates or price per square foot are across your markets? I guess maybe said another way, is there any sort of 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?

Yes. I think it's 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 and I tried to allude to that in my remarks as well. But what you're really hitting on is a lot of our investment philosophy in a nutshell where we're really looking like 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've sold some of the things that we've sold in late last year and early this year in some of our L.A. markets, et cetera. But also, I think that was part of what we liked about our Maple Plaza opportunity, which is playing out favorably.

So we're -- that's really the whole trick of what we're trying to do is look for those mispricings. And if we see something that's compelling, then we won't hesitate to move on it. And if we don't, we are totally comfortable being patient.

And 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're kind of looking at office and life science because that's sort of what we feel like where our expertise is. But it's 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's part of what we'll do, and we'll continue to do it, but there's no strategic goal of doing more or doing less. It's really as the opportunities present themselves.

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

I wanted to follow up, Eliott, on that line of questioning, just the types of acquisition opportunities that Kilroy might be interested in. I mean, 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 are some CapEx that require repositioning? And are there any specific markets that are more interesting than others right now?

Yes, I'll start with the second part. I think as far as the markets, we're really focused on the 5 markets that we're in and looking for opportunities within those markets. But to the first part of your question, kind of looking at some of the things that we've 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 haven't historically bought a lot of core assets, not to say that we wouldn't, but that just hasn't been the right -- we haven't found the good risk-adjusted returns in core profiles. It's generally been somewhere around that core plus or value add where there's some expertise that we bring to the table, maybe some scale that we have in a particular geography, but 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've 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, and it looks like the available blocks, especially large blocks are kind of dwindling.

I mean, how motivated are tenants right now making decisions? I'm just trying to understand the level of FOMO that's in the market right now? And is that going to continue to ramp up here over the next few quarters?

Yes. I mean I'll start and then I'd ask Rob to jump in as well. There's definitely some degree of FOMO in the market. I think we've 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've talked about move-in ready space and space that they thought could accommodate future growth objectives.

But there was a 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 [Audio Gap] but are really thinking about how the market is shifting and changing. And it's a combination of, yes, seeing the trajectory of rents in the market.

But it's also, I think, really importantly about just availability of space and the priority that's being put on larger blocks as some of these companies that were even start-up companies a couple of years ago have matured and are looking for larger floor plates, larger sizes. So that really has changed the tone and tenor from existing tenants.

We've been in an environment for the last several years where those tenants have been sort of 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've 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 the -- something I mentioned earlier, while some of the recovery had been encouraging, but was pretty narrow, it's just broadening across the board and certainly broadening with legacy tenants in a wider range of industries who are seeing the way the market is shifting.

Yes. This is Rob. Just to add a couple of points to what Angela was saying. There's 10 million square feet of demand right now in San Francisco. And to give you sort of an order of magnitude of what's happening, 7.5 million square feet has been leased year-to-date in the city. Availability dropped 4.5 million feet.

That's what is that, 8 million, 9 million, 10 depending 400,000 to 500,000 foot buildings. So that's a pretty dramatic drop in availability. And that is focusing tenants on what is left and whether or not their expiration is now or 2 or 3 years from now, they're 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 where our asset is 101st and Salesforce Campus, vacancies dropped to about 12% -- so there's a lot of demand that's driving tenants to make decisions quicker than they would. And the last thing I'd 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. So we're really focused on 303 and 360 now.

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

Angela, you mentioned the demand for move-in-ready space. And I think we've heard that from some other office landlords as well. But I was wondering if because of that, you're providing or you plan to provide more prebuilt 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?

Yes. We certainly have thought long and hard about it within the San Francisco market that we've been executing spec suite strategies across the entirety of the portfolio. I think we've been really intentional and measured even in a market like San Francisco, where the demand has been primarily up until now, a lot of the move-in ready spaces. That has come from a combination, though, to be clear, of Spec Suites that we're building out as well as space that have been recently vacated by other users where tenants have been willing and able to reuse existing improvements, kind of bringing down that overall capital requirement.

So it's been an encouraging dynamic overall. We have been intentional about making sure we're designing and we're planning for additional Spec Suites. But in certain cases, including like a 201 Third, we've 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're seeing in the market also. When we think about the remaining vacancy we have in the portfolio, I think it's really important to acknowledge there are some places that a spec suite strategy will be really effective and other places where we don't think it's the right use of capital and that space is really better left kind of shell condition and the right tenant for that space is going to want to do a full build-out.

So it's not a one-size-fits-all approach. We're 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're looking for and trying to deliver on.

Okay. And then you mentioned sublease activity or sublease availability compressing in many of your markets. You disclosed this in your 10-Q, and I think last time it was [ it was 10.5% ] I'm wondering what that figure is today in the Kilroy portfolio?

John, it's Eliott. We're around the 7% to 8% range available, and that's down from low double digits at its peak.

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

This is Annabelle on for Brendan. How should we think about the pace of move-in from your growing backlog of signed but not yet commenced leases?

Annabelle, it's 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 stayed pretty consistent with what they were last quarter, but also a 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's really what's going to help drive the occupancy level higher.

And then 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'm not going to get too specific on details, but I can just tell you that I always say this just because the quarter end doesn't start -- it does not stop the pipeline we have. And in fact, I think I illustrated pretty well what we have going on at KOP going from 300,000 feet of tours and activity to over 800,000. And I'd say Angela covered it really well in her commentary across the board, we're seeing an uptick in demand. We're seeing at West 8th.

We're really happy with what we're seeing. We're bringing premier tenants to that building. We are seeing it in Austin, which is a nice change given that it's the middle of summer and generally people leave Austin. We've had a significant impact in terms -- or increase in true activity and transactional work we're doing. So I'm very happy with the pipeline we're working on and more to come.

Yes. I mean I'll just add a little bit and kind of read the last couple of questions together here. But when you look at the signed but not commenced pool. One thing I'd note is that, that pool is -- has been driven in large part from some of the high-quality vacancies we have in the portfolio that we've talked about historically. projects like KOP 2 delivering and being significant contributors there as well.

That is all part of what's driven the rent 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 in that pool is very high. Again, a lot of first-generation kind of leasing activity that we're 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've seen more recently has been, as we've been talking about, sort of a resurgence in tenants looking to talk about renewals as well, right? 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'd sign shorter-term renewals, preserve optionality and flexibility. And now we have more of those potential renewals and early renewals in the pipeline than we've 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.

Jeffrey, 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 in the timing, particularly dispositions, no move-outs, signed but not commenced leases and development carry? Just trying to get a sense of what is going to get you to the high end or the low end of your guidance range.

Yes, sure. The easiest place to start is really just to take the Q2 run rate. And when you back out the one-time item for $0.05 for the nonrecurring income for 23andMe 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 really revolves around some of the capital recycling assumptions. We do have a pretty wide range from a disposition perspective. Obviously, there shouldn't be much moving at this point from interest expense or capitalized interest. So it's really going to be how capital recycling plays out for the back half of the year.

Okay. Great. That was helpful. And then maybe, Rob, similar to Harvey AI and how they expanded pretty quickly, are you seeing a potential second wave of expansions 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 like a second wave I had mentioned.

Yes. 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 foot new lease at 405 Howard. So we are seeing it, and we've seen it not only with Harvey in our portfolio, but we have other tenants that we've talked to that are looking at expansion.

Yes. 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 the Harvey deal, certainly, but we've 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.

I guess just going back to the guidance piece. Clearly, obviously, the signed but not commenced will have a impact over time as you laid out. Anything new you sign is likely more '27 commencement. So I'm 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 just in light of all the positive commentary, I'm wondering like are there levers very near term that get you to the high end?

Yes. So to really push to the high end is going to be a function of our ability to accelerate rent commencements into 2026. It won't have probably a huge impact on the cash same-property NOI growth, but it would really be more of a noncash straight-line GAAP effect.

So the team, as 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's certainly things we can do on the day-to-day blocking and tackling to push to the top end, but it all just 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's all triple net. And so theoretically, is there a margin benefit as you go into next year and all of that 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, that will hit the income statement or the AFFO next year?

Sure. Angela has simply highlighted the importance of having triple net leases in the pipeline. So the ABR number we disclosed is a GAAP number, consistent with all of our disclosures. But you're right, as these leases commence, you will see a larger impact on NOI than our standard kind of occupancy would suggest.

Yes, it's 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 of the [indiscernible] .

Yes. When we look at the pipeline, it's 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.

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 $22.5 million to $24 million of NOI drag from development properties this year, do you have that number for 2Q and/or the first half, just so we can kind of understand kind of the cadence there?

Yes. The -- as we footnoted in the supplemental, the primary driver of that is really KOP 2. So you're seeing it kind of accelerate throughout the year as we did capitalize part of KOP 2 in the first quarter. So when you get to the second quarter, the run rate is much more stabilized for that property. So it's pretty easy to just take from my perspective, the total disclosed number and assume it's relatively ratable throughout the year.

Yes. Q2 is a pretty good number. We're at a point because you got a full quarter of KOP 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 2Q number?

We didn't explicitly call it out, but the total amount of the pool is KOP 2. So it's -- you can just spread it throughout the year.

Okay. So it was pretty ratable. We could just take the full year and just kind of divide it by 4 or something thereabouts.

Yes, Q1 was slightly higher, but that's it. Otherwise, it's ratable.

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

Ladies and gentlemen, thank you for joining us, and welcome to Kilroy Realty Corporation Q1 2026 Earnings Conference Call. [Operator Instructions].

I will now hand the conference over to Douglas Bettisworth, Vice President of Corporate Finance. Douglas, please go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are Angela Aman, CEO; Jeffrey Kuehling, EVP, CFO and Treasurer; and Eliott Trencher, EVP, CIO. In addition, Justin Smart, President; and Rob Paratte, EVP, Chief Leasing Officer, will be available for Q&A.

Please note that some of the information we will be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being webcast live on our website and will be available for replay. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC, and both are also available on our website.

Angela will start the call with a strategic overview and quarterly highlights. Eliot will provide an update on our recent transaction activity, and Jeffrey will discuss our financial results and provide you with our updated 2026 guidance. Then we'll be happy to take your questions. Angela?

Thanks, Doug, and thank you all for joining us today. Over the last several quarters, fundamentals across our West Coast markets have meaningfully improved. As return to office momentum has intensified, space rationalization by large users have abated and the artificial intelligence ecosystem has created considerable new business formation and growth, all contributing to a resurgence in space requirements from rapidly scaling new companies and well-established players alike.

Recent tenant behavior, both within our portfolio and across the markets in which we operate points to a constructive dynamic around technological change with companies seeking to utilize AI to enhance their growth and augment their talented teams, rather than automating simply to manage costs. Against this backdrop, our team's disciplined execution drove our strongest first quarter leasing results since 2017 and total productivity of approximately 568,000 square feet, more than double our first quarter performance last year, positioning us to increase our full year average occupancy guidance by 25 basis points at the midpoint.

Importantly, leases signed but not yet commenced, now represents nearly $78 million of contractually obligated annualized base rent to be realized over the coming years, providing significant visibility on future growth. To hit on a few highlights across our regions. In San Francisco, the epicenter of the AI innovation ecosystem, market conditions continue to tighten as first quarter leasing exceeded 3 million square feet, more than 10% above pre-pandemic quarterly averages, resulting in the third consecutive positive quarter of net absorption and positioning us well to capitalize on broad-based demand across our Bay Area portfolio.

In the San Francisco CBD, we've seen significant momentum at our assets in the South of Market or SoMa submarket. At 201 Third, our lease rate improved from 26% at year-end 2024 to over 80% this quarter as we've successfully captured demand from a wide range of growing tenants including both larger format users such as Tubi and Harvey AI and a variety of smaller format users.

As you may recall, in the second quarter of 2025, Harvey AI leased 93,000 square feet at 201 Third before signing a 62,000 square foot expansion this quarter, with occupancy occurring in April 2026 just 1 month following lease execution. This significant expansion occurring within 1 year of the original lease execution speaks to both the impressive growth trajectories we're seeing for a number of rapidly scaling AI companies and also to the discipline that they've generally employed with respect to the real estate decisions taking space only when necessitated by the current needs of the business.

In addition, our team has captured outsized market share at 201 Third through the deployment of a creative and disciplined spec suites program with all 5 of our recently constructed spec suites leased by completion. We're also thrilled to be experiencing strong demand across other core Bay Area submarkets. By crossing 900 in downtown Redwood City, we completed a 27,000 square foot direct lease with a current subtenant during the quarter, generating an increase in cash base rent of more than 40% underscoring the depth of demand for high-quality, well-located space in this transit-oriented walkable and well-amenitized submarket.

In Seattle, the strength we've seen in Bellevue over the last several years continues, optimally positioning space, we recently recaptured for near-term re-leasing and rent upside. In addition, the momentum we discussed last quarter in the Denny Regrade submarket further accelerated, benefiting our recently repositioned project West 8th. Following approximately 74,000 square feet of new lease executions at West 8th in the fourth quarter of last year, we're pleased to announce an additional 76,000 square feet of new leases signed at the project year-to-date, including a 43,000 square foot lease with General Motors signed in the first quarter and a 33,000 square foot lease with [ SoFi ] signed in the first few days of the second quarter.

With additional tenant discussions underway, we have good visibility into the future pipeline, reflecting the strength and competitiveness of this asset. With the recent renovations and enhanced amenity offerings continue to resonate with tenants and position the property to capture a meaningful share of growing market demand. In Los Angeles, leasing activity within our portfolio has improved meaningfully over the last year with trailing 12-month productivity up approximately 66%, reflecting both a continued gradual improvement in the overall market and the significant portfolio repositioning work that we've done in L.A. over the last 2 years.

A particular note within the region, Arrow and Long Beach is seeing a pickup in tour activity as the local market begins to experience a resurgence in defense and aerospace requirements. Blackwelder and Culver City is seeing an acceleration in activity from a wide variety of users, including technology and AI company. At Maple Plaza, our recent acquisition in Beverly Hills is continuing to experience strong broad-based demand from the financial services and media and entertainment sectors, notably surpassing our original expectations.

In Life Sciences, KOP 2 continues to outperform the broader South San Francisco market as the project's purpose-built life science space and top-tier amenitization offerings resonate with decision makers who are showing higher propensity to execute than they have at any time over the last several years. Subsequent to quarter end, we executed a 38,000 square foot lease with Olema Pharmaceuticals, bringing the project to 49% leased. The future pipeline remains robust as we evaluate opportunities to complete the remaining lease-up of our multi-tenant building while also engaging with several large-format users for the remaining full building opportunity, which represents the most compelling offering within KOP Phase 2, featuring premium views and the most prominent location within the project.

Turning to capital allocation, during the first quarter, we continued to raise attractively priced capital through dispositions of non-core and non-strategic assets with a long-term goal of enhancing the durability and growth profile of the company's cash flow stream. During the period, we sold 2 office properties, Kilroy Sabre Springs and Del Mar Tech Center, both in San Diego for aggregate gross proceeds of $146 million. In both cases, these assets benefited from the consistent demand we have seen across markets from owner users for well-located, high-quality real estate, driving a highly efficient execution for our shareholders.

Subsequent to quarter end, we closed on the sale of our 2 Hollywood residential assets, Columbia Square living and Jardine for aggregate gross proceeds of $202 million, resulting in year-to-date operating property dispositions of approximately $350 million, exceeding our original full year goal. The residential sales followed the implementation of a holistic asset management strategy for our residential portfolio, through which we recognized significant margin expansion, resulting in a materially better evaluation at the time of disposition. Following the transaction, our residential exposure is now limited to One Paseo Living, which we view as a core long-term holding given the asset's significant synergies with the retail and office components of the broader One Paseo campus, where we continue to achieve record-setting commercial rents.

With proceeds from our first quarter dispositions, we elected to opportunistically capitalize on recent capital markets volatility, repurchasing approximately $73 million of stock at an average price of $30.80 per share. And in April, we fully redeemed the $50 million tranche of private placement notes scheduled to mature in July. Looking forward, we'll continue to explore opportunities to harvest attractively price capital from our existing portfolio while exploring the full range of redeployment alternatives available to us.

In last night's release, we also announced the formation of a joint venture to develop a premier substantially pre-leased Class A office asset in downtown Redwood City, one of the strongest submarkets in the entire Kilroy portfolio. This complex transaction was a long time in the making, requiring substantial effort and coordination across our platform with our partner and with the project's anchor tenant. 1900 Broadway, which is fully entitled for a 250,000 square foot office project is located just blocks from Kilroy's highly successful crossing 900 assets, which has remained 100% leased since delivery in 2015. Over time, we've consistently captured meaningful rent growth at Crossing 900, releasing over 80,000 square feet since the fourth quarter of 2023, a cash rent spreads up nearly 60%.

Concurrently with closing on the venture, we executed a 20-year lease with a top-tier global law firm for 145,000 square feet, representing approximately 60% of the building at the highest rates ever realized in the Kilroy portfolio. Since closing, we've experienced strong inbound interest from a wide range of high-quality tenants, and we look forward to updating you on our progress as the project advances. Eliott will cover project costs, estimated returns and timing in a few moments, but I would note that substantially all of our equity investment in this project has been prefunded through the land parcel sales that are currently under contract.

Before turning the call over, I want to provide a few comments on the Flower Mart project. As Jeffrey will touch on in a moment, we have revised our expense capitalization assumptions for Flower Mart to reflect continued capitalization through the fourth quarter of this year. As we previously stated, we're working with the city of San Francisco to redesign and reimagine the Flower Mart project, while maintaining and building upon our current approvals. In addition to seeking flexibility to develop a broader mix of uses, we're also looking to amend the existing development agreement and create a special use district to provide relief from certain plan and code requirements, the specifics of which are still under discussion.

The city, which has been a constructive and valued partner in this process has suggested an alternative approach to analyzing and documenting the changes in the special use district, which we believe will ultimately increase our long-term flexibility and optionality, though the alternative approval process will take additional time. We now expect the process to be completed late in the fourth quarter and would assume that expense capitalization ceases at that time. We're highly convicted that the path we're pursuing at the Flower Mart will result in the best possible outcome for shareholders. And as always, we'll continue to update you as the process unfolds.

In conclusion, I want to thank the entire Kilroy team for an incredibly busy quarter across nearly every facet of our business. Your efforts are creating meaningful value for all of our stakeholders, and I'm grateful for your continued energy and enthusiasm. Eliot?

Thanks, Angela. Over the last several months, the capital markets have demonstrated continued momentum as buyers recognize the inflection in fundamentals and the positive impact AI is having on our markets. As a result, transaction size is increasing and asset quality is improving. For example, the Transamerica Pyramid in San Francisco recently traded for $1,050 per square foot. The first time in institutional property has eclipsed $1,000 a foot level in that market since 2022. Kilroy continues to be an active seller, and during the quarter, we closed on $146 million comprised of the previously announced Kilroy Sabre Springs for $125 million and Del Mar Tech Center sold in March for $21 million. Del Mar Tech Center is a 40,000 square foot building in the Del Mar submarket of San Diego. And at the time of sale, the building was roughly 50% leased, with a weighted average remaining lease term of 1 year.

We remain big believers in Del Mar Heights and are still the largest owner in the submarket, but selling this property made economic sense. Additionally, last week, we closed on the sale of our 2 residential towers in Hollywood for $202 million. As many of you know, these towers were developed by Kilroy as part of our Columbia Square and On Vine project, and the layout of the campus allows the residential to be separate and distinct from the neighboring office properties. We determined these buildings would be good sales candidates given the lack of synergies with the office as well as the depth of demand for high-quality apartments.

Before bringing the properties to market, we spend time ensuring the operations and structure were optimized to facilitate a sale and maximize proceeds. The cap rate on all sales announced year-to-date averages in the mid-single digits. As a reminder, in addition to the operating property sales, we have $165 million of land sales under contract with roughly half expected to close late this year or early next year. We continue to evaluate additional opportunities to sell or repurpose nonstrategic land.

Turning to acquisitions, as Angela mentioned, we closed on the joint venture to develop 1900 Broadway, a 250,000 square foot project in Downtown Redwood City that is already roughly 50% pre-leased. 1900 Broadway is adjacent to Downtown Redwood City's restaurant row, making it one of the most walkable and amenitized properties in the area and worthy of premium rents. Kilroy was uniquely positioned to take advantage of this off-market opportunity given our deep market insight, strong local relationships and proven development acumen. These factors gave our partner, Lane Partners and our anchor tenant, Cooley, confidence in our ability to bring this deal together. We intend to break ground next year, and Cooley is expected to take occupancy in early 2030. The total anticipated cost for the project is between $330 million and $350 million, of which our share will be 97% upon completion. Stabilized yields are expected to be in the low to mid-9% range.

Before turning the call over to Jeffrey, I think it would be beneficial to summarize the substantial disposition progress we have made over the last 2.5 years. As private capital return to the office sector, Kilroy meaningfully ramped up sales efforts with a total of roughly $980 million of land and operating properties completed or under contract. We have talked about individual transactions in detail on prior calls, but in total, this demonstrates the private market is open and functional and can be a source of attractively priced capital if executed thoughtfully.

We elected to redeploy a portion of the sales proceeds into 4 high-caliber, infill amenitized multi-tenant investments totaling roughly $765 million, which includes the full cost of building out 1900 Broadway. This capital recycling gives us a more diversified and sustainable cash flow stream, while also making the portfolio more amenitized, walkable and supply constraints. As a result of being a net seller of roughly $215 million, we were able to use a portion of the savings to pay down debt and opportunistically repurchase stock. We are proud of the progress made to date and intend to keep making the next best capital allocation decision one step at a time.

With that, I will turn the call over to Jeffrey.

Thanks, Eliot. Before turning to results, I want to highlight 2 disclosure enhancements this quarter aimed at providing investors with better visibility into leasing performance now executed activity translates into future results. First, we've added a leasing spread calculation focused on space vacant for less than 12 months. This aligns with how most of our peers present spreads and better isolates true mark-to-market activity, our historical calculation remains unchanged and is presented alongside the new metric.

Second, we've expanded our disclosure regarding signed but not commenced leases, which currently totals over 1 million square feet and nearly $78 million of contractually obligated annualized base rent. This disclosure highlights the embedded growth already in place and provides greater visibility into the forward trajectory of the operating platform.

Turning to our financial results. FFO for the first quarter was $0.91 per diluted share. With respect to occupancy, as a reminder, KOP 2 entered the stabilized pool during the quarter, impacting reported portfolio metrics. As a result, portfolio occupancy ended the quarter at 77.6%, excluding KOP 2, the first quarter occupancy would have been 81.5%, down only 10 basis points despite our previously communicated first quarter move-outs. The dispositions of Kilroy Sabre Springs and Del Mar Tech Center completed during the quarter had no impact on overall reported occupancy.

Cash same-property NOI increased 1.8% in the first quarter, driven by lower bad debt expense and contributions from net expenses, settlements and restoration fee income and other property income. These positive impacts were partially offset by a detraction from base rent despite a marginal increase in overall occupancy, reflecting free rent periods from certain new tenants in the portfolio.

On the leasing front, activity during the quarter resulted in GAAP spreads of negative 10.6% and cash spreads of negative 16.8%. Those spreads were primarily -- driven primarily by 2 leases in San Francisco, both of which involved space that was vacant for longer than 12 months. Importantly, these were capital-light transactions that generated attractive net effective rent outcomes. These 2 leases were partially offset in the quarter's reported spreads by the lease Angela previously mentioned at Crossing 900 in Redwood City, which not only generated the highest net effect rent of the quarter in our operating portfolio, but also delivered significant positive cash and GAAP releasing spreads. Leasing on space is vacant for less than 12 months performed well, generating positive GAAP spreads of 19.2% and cash spreads of 5.2%.

Turning to guidance. Last night, we increased our 2026 FFO guidance by $0.21 at the midpoint with a new FFO range of $3.49 to $3.63 per diluted share reflecting improving in our core portfolio and platform operations and updated timing assumptions on Flower Mart expense capitalization. With respect to Flower Mart, as Angela discussed, we are now assuming that expense capitalization will cease late in the fourth quarter, at that point, a little less than $1 million of quarterly operating expenses and real estate taxes along with $7 million of quarterly capitalized interest will begin impacting earnings. This change increased guidance by approximately $15 million to $16 million or $0.14 per share and is reflected in the capitalized interest and development guidance provided last night.

Cash same-property NOI growth is now expected to range from 25 to 125 basis points, representing a 150 basis point increase at the midpoint from our prior range. This increase is driven by 2 factors: First, in April, we received a $5.9 million settlement related to the 23andMe bankruptcy, which fully results our economic interest in that process contributes approximately 90 basis points to NOI growth. Second, strengthening fundamentals in our core operations driven primarily by improving net expenses and increased average occupancy contribute an additional 60 basis points to growth.

We also raised the top end of our operating asset dispositions guidance range reflects our progress to date. We moved decisively closing dispositions earlier than anticipated through recycling capital into compelling investment opportunities, including $73 million of opportunistic share repurchases and prudent debt repayment. Looking ahead, and as Angela and Eliott noted, we will continue to take a balanced, disciplined approach to capital allocation, seeking opportunities to create value for shareholders while prioritizing balance sheet strength and financial flexibility.

With that, we're happy to answer your questions.

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

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

Yes. Manas, this is Rob Paratte. I'll just kind of continuing on the theme that Angela mentioned. Across our entire company portfolio, we're seeing an increase in activity, including tours, proposals and done deals and Los Angeles is no exception. In Q1, we signed 24 deals in L.A. and we're seeing quite a bit of activity at our Long Beach project, Maple Plaza, and we're starting to see a pickup in activity here at Westside Media Center on the West side of L.A. and one of our other assets here.

Our pipeline continues to grow in the L.A. market. We have sort of following on to the 24 deals I mentioned, we have more deals that are in the pipeline in leases actually, but not going to quantify all that until they're done. And it just is improving. And again, I'd say this across our entire portfolio that what we're seeing is this continued flight to quality. There's a world of haves and have-nots. So the recovery is not the same for all owners or all properties. And we're benefiting from having these high-quality assets in L.A., San Diego, et cetera.

At Nautilus, which I'll really focus on because that's our newest acquisition, we had 400,000 square feet of tours since January 1. We have several tenants that are looking to grow in the project and we continue to entertain tours and just the other normal activity that goes with leasing and couldn't be happier with that. The amenities are really showing well now. Now that is spring, everything looks great at the site. So very happy with that. At Kilroy Center, Del Mar, we're seeing an exceptional amount of activity. Our spec suite program there is really paying off as it is in other markets like Austin and we're going to continue on that front being very strategic in bringing spec suites to market but providing what the market wants.

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

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

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

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

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

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

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

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

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

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

Yes. Look, we're watching the San Francisco market really closely and how things evolve in addition to sort of where we're able to take the process we're going through right now in terms of design and entitlement, flexibility and optionality. There's still a lot for us to sort out as we move through this process. And we have time as this process continues to unfold to watch what happens with both commercial and residential rents within the city of San Francisco. And so we'll continue to monitor it. We're committed to making sure that whatever we do in terms of next steps in 2027 beyond at the Flower Mart project maximizes value for shareholders. And I think we've been honest before.

Certainly, the company had a very strong plan to develop this on the commercial side prior to the pandemic. We're exploring a broader mix of uses that would allow us, as you mentioned, to add more residential into the projects. We just have to see how the market continues to evolve and what the project ultimately looks like to decide what the right or optimal execution path is. So maintaining a lot of flexibility and prioritizing optionality as a way to create additional economic value at the Flower Mart.

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

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

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

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

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

Yes, I don't think we're mentioning and to suggest it's going to be a huge driver of demand in the L.A. market. We've certainly seen a lot more San Francisco native companies or AI native companies, leasing space, particularly in the Pacific Northwest, where you've got a much larger kind of resident talent pool in the tech sector. So we've certainly seen the spillover benefits in that market. I think we're seeing some of it in the L.A. market. It's pretty concentrated in a few specific submarkets we had called out to your question, Culver City, in particular, in the L.A. market.

So I think it's interesting to note that we're seeing some of those tenants pop up. I think it's great from a marginal demand standpoint, but we're certainly seeing much broader demand even in markets such as Culver City across different industry categories as well.

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

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

Yes, Andrew, it's -- honestly, the change in San Francisco is so dramatic over the last 12 to 18 months, and it's actually hard to pinpoint the pipeline because it continues to grow. Just to add some color to what Angela was talking about with the 3 consecutive quarters of positive absorption, there were 13 deals done in Q1 over 100,000 feet, and that's a very big number for the city.

Another really important note I want to point out is that 5 million square feet of availability has been absorbed since its peak in mid-2025, and that's very meaningful because that availability rate was really the headline that had everyone across the country concerned. And the third point that I think is really important is that these deals, the 100,000 feet plus other parts of that 3 million feet that we mentioned are expansionary, and that's also a very positive indicator, I think. And so you look at our deal with Harvey, for example, where they took an additional 60,000 feet.

So the pipeline for us keeps growing. Our team has done a terrific job at 201, as Angela pointed out. We're focused on 363 and 303 Second. We're talking to folks about 345 Brannan. So south of market itself was the strongest submarket of the San Francisco market, and that is Kilroy is a direct beneficiary of that because that's where all of our assets are.

And so we're poised and ready to start executing on these. But things are looking really good and the momentum, not only for us but others in the market is quite strong.

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

Sure. This is Rob again. I guess I'll use the Olema example. They're in 2 different spaces in San Francisco. One was a space that was not, I would say, current or modern enough for what their uses were. The other one is a space where they got pushed out by an AI company. And so that created immediate need for space, and we were ready to execute on that because they're taking a portion of our spec labs and then they're taking to-be-built space. So that's a very good example of what's happening. You either have rapidly growing AI companies that just organically need this space or others are getting displaced by larger AI companies.

And one point I'd like to raise also about San Francisco is that the F.I.R.E. category in San Francisco was quite active in Q1. So you're still seeing a lot of venture capital leasing and banking and finance. And so San Francisco is really hitting on all cylinders from both the traditional as well as technology front. And I think in terms of our spec suites in general and strategy, it's case by case and market by market. If we have a spec suite or 2 in a building and they haven't leased, we're not going to build more until we've got activity on that. And we've been really judicious about how we apply it. But the markets that we've seen a lot of traction with the spec suites or clearly San Francisco, Seattle, Austin, San Diego and parts of L.A.

Yes. It's been an interesting dynamic. We mentioned the 201 Third having -- we built out 5 spec suites on 1 floor with some shared common space, amenity, conference center and having all 5 of those spec suites leased before we had completed construction was really telling in terms of where demand is, particularly in the SoMa submarket from some of those earlier stage companies and the degree to which they are really prioritizing speed to occupancy. So we've seen that there in markets like Austin, as Rob mentioned, we've seen a similar dynamic over a longer period of time where every time we begin building out the spec suites, we have a different level of interest in some of the vacancy than we had from pure shell conditions.

So really tried, as Rob said, and I think this is an important point to be thoughtful and disciplined about how we're building out the spec suites both in terms of making sure we don't get over our skis and build out specific suites with specific sizes when the market demand may shift and change, but also making sure that we have inventory at these projects really at all times. So as they're getting leased up or as we're seeing incremental interest being prepared and willing to lean in and to replicate some of the success we've had in earlier phases of the spec suites program. So really across most of our markets, it's been highly effective and certain driven both a higher lease rate and faster occupancy commencements over the last couple of years.

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

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

Yes. Nick, it's Rob. On West 8th, I think it's -- 2 factors are in play here in terms of the absorption we've done, both SoFi and General Motors are new to market. And I think that what's really played into that is the renovation that we did at West 8th and the traction that we've built with Databricks and other tenants that are in the market. And I think what we're seeing both with the earlier law firm deal we did SoFi and GM is that this part of town, the Denny Regrade, which is just right on the edge of the traditional CBD, is where people are wanting to be and it's where the talent is either living or very close by, and it's got the type of amenities that the tenants want. And so that's what's really causing that absorption and what we're able to capitalize on.

In Bellevue, we expect to see, but we haven't seen, I'd say, a direct correlation between the higher rates in Bellevue and more absorption in Seattle. Most tenants are pretty focused on the either one or being one or the other. But we expect over time that we may see some tenants that flow from Bellevue to Seattle. At 360 Third, we do have that expiration coming up. We've been marketing the space. We have some -- we've had different levels of conversations, some larger tenants that are over 100,000 feet and some that are 50,000 feet. So we're pretty focused on the asset right now and trying to really reach into the market to the proximity of 360 Third between the Bay Bridge and BART and Muni is really strategic for a lot of companies. And that's why it always did well in the past and we expect the same going forward.

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

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

Yes.

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

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

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

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

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

Blaine, it's Rob. So the pipeline is similar to what we've executed on in Q4 and Q1. Basically, life science focused right now primarily almost exclusively. The tenant ranges in size down in South San Francisco right now are -- the bulk of them are in the probably 10,000 feet to 50,000 feet. That's probably 50% of the demand in the market right now, and there are quite a few. There are over 4 requirements over 100,000 feet in the market, and there are some that are significantly above 100,000 feet.

So as Angela alluded to, we're working on filling the rest of Building F, which is our multi-tenant building, and we're in conversations on the vacant building, which, again, is the most prominent of the 3 buildings in the campus and really has terrific signage opportunities and prominence for tenants that want that.

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

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

Yes. I mean, look, I think what we've demonstrated over the last couple of quarters is a real desire to make sure that as we're thinking about capital allocation, we're number one, prioritizing balance sheet strength and flexibility as we make decisions. And we're employing a really balanced approach to looking at sort of all of our options and making the best decision or determination we can at the time.

You've seen us be active going back several quarters on the acquisition side. You saw us this quarter with operating property disposition proceeds realized during the quarter to tear those with debt repayment for, again, a really balanced approach in executing any share repurchases just like we told you we would in a leverage-neutral or deleveraging way. I think as we look at all of our -- right now, we continue to see, I think, good value in the stock. We also recognize and appreciate that we're sitting at a period in time in which there's been significant capital markets volatility and specifically quite a bit of volatility with respect to our sector.

And we want to make sure that we are -- again, as we prioritize the balance sheet, keeping enough financial flexibility to be able to really step in when things -- we see some of that volatility materialize, and we see periods of significant or extreme dislocation. So as we discussed earlier, we increased the operating property disposition guidance. We feel like the land sale proceeds we've already announced are kind of earmarked for the 1900 Broadway project, and that's effectively fully funded from an equity standpoint. So additional operating property disposition proceeds will be available for balanced redeployment based on how we see the full set of alternatives at that point in time.

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

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

Yes. I mean we had shared going back, I think, a couple of quarters now that we expect that even when that pool was larger, probably around 1 million square feet at the time that we expected the vast majority of those lease expirations would, in fact, be moved out. If you go all the way back -- or 2 years ago when you look at what was in totality in the 2026 pool, which was about 2 million square feet. We did successfully during the course of 2025 renew a number of those spaces early.

So the blended retention rate on that initial, I would think it was almost 2 million square feet pool of 2026 expirations was about, like 40%, maybe a bit better than 40% relatively in line with kind of historical prepandemic averages. That said, when we're looking at the lease expiration schedule right now for 2026, we do expect there are probably a few opportunities for us to continue to work through some renewals, but they are reasonably limited.

When you think about reported retention stats, though, you're also going to see us begin renewing early some of the '27 exploration pool. So it's a little bit harder to tell you exactly in any given quarter what the retention rate would look like from a reported standpoint. But we do think that just from a modeling standpoint, the bulk of the 2026 remaining expirations will be move-outs.

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

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

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

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

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

Yes. I mean, that's, I think, really the right way to frame it. This has been an opportunistic exercise. I wouldn't frame it to how much do we have to sell. Especially when you think about what we did during the quarter, what we announced last night in terms of the residential sales, those certainly weren't have to sell transactions. So there's a real opportunity there to raise some very attractively priced capital on behalf of our shareholders, and we took advantage of that.

So we will continue to be opportunistic as we evaluate the disposition pool as we talked about before, really prioritizing balance sheet strength and flexibility, prioritizing making the cash flow stream of this company more durable and faster growing over the medium to longer term. But again, very opportunistic execution.

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

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

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

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

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

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

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

Yes. I mean, just to add to that a little, specifically in the San Francisco CBD, where we've talked about this trend in some ways being most pronounced. I think the execution with Harvey this quarter really underscores why we thought it made sense to do that original deal last year, which was a shorter-term deal. But as we talked about at the time, had very little capital spend, where they were effectively reusing existing improvements left over by the last tenant, so very positive NER deal, but a shorter-term deal.

That made a ton of sense in our minds because the reason they wanted flexibility wasn't that they necessarily wanted out at the end of the term, but it was that they didn't know what their full space requirements were going to be over time and wanted the flexibility to make sure that they could meet those growth objectives as effectively as possible. So where we've worked with tenants like that and been willing to go a little bit shorter term, it has been with a view making sure that we are thoughtful about our ability to accommodate their future growth down the road.

And the Harvey example this quarter, leasing 93,000 square feet last year, and another 62,000 feet this quarter, I think, really speaks to why that strategy in certain submarkets and for certain kinds of tenants can and has been highly effective.

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

At this moment in time, I think we feel like that's a pretty hard stop. Now -- that's with a view of the process we have in front of us to finish up the revised sort of design and entitlement process with the city and getting to the point where we feel like we have done everything we've been talking about in terms of the redesign and reimagining of Flower Mart projects, and we have more flexibility around the mix of uses and greater ability to ultimately face the projects, whatever those uses really look like.

Once we're at the completion of that project, we're sort of waiting for demand to be sufficient in the market at rents that will justify new construction. And right now, we think there's a gap between those 2 things that would necessitate us stopping capitalization, probably in the fourth quarter or late in the fourth quarter of this year. The only thing I will say is we're watching the San Francisco market very closely. I think you've heard around this table today, a lot of enthusiasm for what we're seeing in terms of rent demand. There are very few large contiguous blocks of high-quality space in the city remaining available and it is a low probability, I think, but not a 0% probability, that there is more work to do or something demand-driven and actionable as we get into 2027. Again, right now, I'd say it's a low probability, but it's not a 0% probability.

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

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

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

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

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

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

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

Yes. It's a good question. I'd start, I guess, with talking about the Pacific Northwest. I think Bellevue has been, as we talked about for the last couple of years, very strong, but the availability of remaining space available in Bellevue has just continued to compress. And I think rents have performed very well in the Bellevue market as a result. And there's -- that market from a fundamental condition standpoint feels very tight right now. And so I think that's encouraging.

I do think over the last couple of quarters, as we've pointed out, our assets in Seattle, which are not in the Seattle downtown, but really in Denny Regrade, South Lake Union have definitely seen increased momentum. And I think if I went back a quarter ago, I still wasn't prepared to say that we were seeing a full trend there. But we did have 1 tenant -- in 1 example, move out of the CBD and entered Denny Regrade. We had one tenant move from over the last couple of years, I guess, moved from Bellevue over to Denny Regrade as well. But I think now with 150,000 square feet, give or take signs over the last couple of quarters. We do feel like there's a lot more momentum on the Seattle side. And again, I think from very high-quality tenants and a broader mix of uses. So I think that's been across the board, really encouraging to see.

L.A., as we pointed out, feels like it's gradually improving. But I would candidly admit that I think that improvement is, in fact, gradual. And the reason we're pointing to such an improvement in our pipeline in the L.A. Market and our executed productivity has been both because of that gradual improvement in the market overall. But really importantly, in the portfolio reallocation work we've done within the L.A. market over the last couple of years. So I think our portfolio is better positioned than it was 2 or 3 years ago to capture what has been slowly improving market on the L.A. side.

There are pockets that we're interested in, in L.A. that are actually performing better, where there's some changing in industry dynamics going on. We talked about Arrow and Long Beach benefiting from a resurgence in kind of local defense and aerospace requirements. You're seeing that not just in Long Beach, but really up through the South Bay and seeing some of that activity in El Segundo as well. So that's encouraging. L.A. is going to be a story where it's not one industry driving the narrative, but it has to be sort of a broader aggregation of industries moving in the right direction. And we're seeing reasons to be, I think, cautiously optimistic there. But without question, it's going to be a step behind.

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

Yes. I mean I'd say we got a couple of things going for us in '27. Overall, even at this point, in that exploration window, it's a considerably smaller exploration year than 2026 was a year ago. So I think we've got that going in our favor. And then as you point out, the largest expiration next year is AT&T/DIRECTV, which is a fourth quarter expiration. Outside of that, the pool is very, very granular. So there's nothing above 100,000 feet. There's only really one lease between 50,000 and 100,000 square feet. So it's a much more granular execution.

And we're beginning some of those conversations as we speak. I think we've got some expirations happening and some pretty strong markets where we're already having conversations either about renewal or significant interest in -- from potential backfill tenants. So we really just need to put our heads down and execute as it relates to the 2027 pool. But again, the overall size and the granularity of that pool, outside of AT&T/DIRECTV is encouraging.

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

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

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

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

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

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

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

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

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

No. I mean that's sort of the point I was going to make, Peter. I think if you go back over the last several years, that software category is a category where we had seen -- and this is going back several years, sort of the height of the pandemic, some of the largest blocks of sublease space coming out of that portion of the population. And thankfully, a lot of those blocks have been spoken for, right? And so we've got -- while it might look one way on the lease expiration schedule or something else, we've got a much more granular tenancy within some of that space and tenants that we do believe, especially in the San Francisco market are high likelihood of renewing or going direct with us down the road.

So a lot of that sort of pressure, attention or headline impact has already been felt in the portfolio was felt several years ago. That space was successfully re-leased in many circumstances. And I'm not aware of any conversation we've had in the portfolio over the last probably 6 months, where the tone or tenor from those tenants has changed in a material way.

I'll let Rob jump in as well.

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

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

Angela Aman. This session is for Citi clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to LiveQA and enter code GPC26 to submit questions.

Angela, we will now turn it over to you to introduce your company and team, provide any opening remarks and tell the audience the top reasons and investors should buy your stock today, and then we can get into the Q&A.

Thank you. Thank you all for joining us today. We're happy to be here. My name is Angela Aman. I'm the CEO of Kilroy Realty. Kilroy is a premier owner of high-quality office and life science assets up and down the West Coast and in Austin, Texas. We're uniquely positioned to benefit from some of the trends associated with AI and emerging technologies that are really taking hold across our markets and driving a significant amount of leasing demand today.

I'm joined today by Jeffrey Kuehling, our Chief Financial Officer; Eliott Trencher, our Chief Investment Officer; Rob Paratte, our Chief Leasing Officer; and Doug Bettisworth, our Head of Investor Relations. I think in addition to what I mentioned earlier, which is what's happening with AI across West Coast markets and the fact that companies like Kilroy, in particular, are uniquely positioned to benefit from some of these short, medium and longer-term trends.

There are a number of other things as a company I would also point to as significant reasons to buy the stock today, including a long-term track record of successful capital allocation across cycles. What's happening in West Coast markets right now certainly has presented interesting opportunities for us as a company, both in terms of disposition activity and in very select circumstances in terms of acquisition activity as well.

Given some of the recent market movement, we also have a whole new host of capital allocation alternatives available to us as it relates to stock buybacks at very attractive and accretive levels, particularly as fundamentals continue to inflect across our West Coast markets and the transaction market continues to improve across all of our markets as well.

And then the last thing I would point to is as we look at those -- the inflection of those fundamentals as it relates to '25, '26 and into 2027, we're in a very favorable position in terms of the amount of leasing that's been done, particularly over the last 12 to 18 months, much of which is scheduled to come online throughout the course of 2026 and into 2027. So we have a significant tailwind from leases that have been signed, but have not yet commenced and will be commencing over the coming years. It's going to be a significant source of growth for the company going forward.

And maybe just can we start off with -- could you provide just any color on kind of what you're seeing across the markets through the first quarter, where are you seeing the most strength, where you're seeing the weakness?

Sure. I'll jump in and start, and then I'm going to turn it over to Rob to give a little bit more color on some of the high-level trends I'll sort of discuss as we walk through our markets. San Francisco, the Bay Area overall is our largest market at right around 50% of our square footage or ABR. It's also the market that's seen the most significant improvement in fundamentals over the last 12 months without question.

We've seen and continue to talk about some of the exciting trends we've witnessed in that market as the radius in which tenants are looking to occupy space has continued to expand. You've got tremendous amounts of new business formation and growth occurring in the city of San Francisco, but really across the Bay Area. Over the last couple of quarters, we talked about the improvement in fundamentals from historical or legacy large users of space in the market. As they stopped putting additional space onto the market, either in terms of direct vacancy or sublease space.

And over the last quarter or 2, we started to see some of those traditional Big Tech users who had significant amounts of space on the sublease-market begin to pull space off of the sublease-market, which is an incredibly positive trend as it relates to the overall health of the San Francisco Bay Area. Over the last few months, we've seen Google pull over 1 million square feet of sublease space off the market in Silicon Valley.

So again, pointing to some very positive trends in terms of how new users are utilizing space across the market, but also some of those legacy companies that have been an overhang in terms of how the market has performed from a fundamental perspective, really reengaging with their real estate and bringing people back in to occupy space that they didn't expect to occupy before. So really positive trends in San Francisco. We're seeing some pretty similar trends actually in the Pacific Northwest, in particular, in Bellevue.

We've seen a lot of companies, a lot of names that have been high-growth companies in the San Francisco market begin to take space in Bellevue really to tap into what is a significant tech talent base in the Bellevue market and the Seattle market overall. Bellevue is pretty tight from an availability standpoint, certainly within our own portfolio or the market at large. And so you're starting to see some of those positive fundamentals and dynamics spill over to the Seattle side as well.

We have one asset in Seattle that's got a fair amount of vacancy. It's called West8. It's an asset that we had done a major repositioning on a couple of years ago. And we just in the last quarter or 2 started to see some of those really positive dynamics play out. We signed about 74,000 square feet of new leases at West8 in the fourth quarter, and the pipeline behind that is very strong as well. So as I mentioned in a moment, I'll let Rob sort of unpack some of what we're seeing in the Seattle market in more detail.

San Diego has been a consistently strong market for us. The bulk of our San Diego portfolio is in the Del Mar submarket, which has been extraordinarily strong and where we have significant market presence that allows us to really drive occupancy and rate in that market. So we've seen consistently good performance and fundamentals out of San Diego. Austin, we have one large asset in that market, and we've consistently worked at leasing that asset up and had some big wins over the last quarter or 2. So good progress there as well.

And then we have the Los Angeles portfolio, which we've been candid about historically has been more of a challenge given the overall market dynamics. I would say for us as a company, however, and our feeling about sort of the pace or trajectory of leasing activity in the Los Angeles market, it's improved dramatically over the last couple of quarters. And that's both because I do think fundamentals are starting to firm up to some degree in different submarkets within Los Angeles for different reasons, but also because it's one of the markets we've been the most intentional in, in terms of capital allocation.

We sold a small asset in Santa Monica towards the beginning of 2025. In the fourth quarter, we sold our lowest quality asset in the Hollywood submarket, and we bought one asset in Beverly Hills, which along with Century City are the 2 best-performing submarkets in the greater Los Angeles market. So we have seen from an activity perspective, an occupancy perspective, an execution perspective, a rent perspective, a significant improvement. But I will acknowledge it's 2 things: one, some improvement in the market and then some very intentional capital allocation work that we've done in that market as well.

I'll just add a couple of points to underscore what Angela said. Bellevue speaks for itself. We continue to see positive Net Effective Rent Growth. I think the thing that's really interesting about Seattle is that in the last 90 days or so, we've seen a lot more activity at West8. As Angela mentioned, we did a 2-floor law firm deal, moving them from the CBD to our West8 project, and that's just the start of the momentum we're seeing.

And I think what's particularly notable is the new-to-market tenants that we're seeing and that we're talking to. So there's more to come on West8, but Pacific Northwest is sort of following a little bit behind, but the same sort of trend San Francisco hit on. Angela said most of it. I'll just underscore a couple of points. Everybody hears about the 30% availability rate in San Francisco. Of that 30%, 50%, I said this on the earnings call and emphasized it.

I'll say it again, 50% of that 30% that's on the market has not transacted since 2023 or later, and that's either because it's functionally obsolete or the landlord cannot fund tenant improvements or a combination of both. So that 15% is something that we don't compete with and we've really had strong leasing success. The other thing I'd hit on is that Silicon Valley has also made a pretty dramatic in '25 recovery, but I emphasize that it's on transit-centric lines like especially the Caltrain line.

So for example, our Crossing 900 project in Redwood City, we did a significant mark-to-market downsizing Box and putting Davis Polk law firm in. And there's more activity like that in Redwood City, but again, you have to be on a rail line or on a major freeway. Los Angeles, I would say we have really excited about Maple. We've surpassed Eliott's underwriting and lease-up assumptions just in terms of the activity we had, and it's a really high-barrier market. You can't build the type of asset we have with the amount of parking we have, and it's very attractive to residents in and around Beverly Hills and it provides a different sort of experience than high-rise in Century City.

And Century City is arguably the strongest market in L.A. Just touching on San Diego quickly. I wish we had more space there. One Paseo continues to set rental record highs for North County, San Diego, actually last time for the entire San Diego office market. Austin, we know we continue to have really steady net rents. They are still above our underwriting. It's just a little bit slower in terms of transactions, but we don't have big blocks of contiguous space left. So we're making very good progress.

The last one I'll hit on is Oyster Point in South San Francisco. There's about 2 million square feet of activity right now in the Bay Area market. We're talking to about 30% of that. And of the availability that's in the market, a lot of it has been absorbed just like San Francisco. So the good quality sublease space is gone and now you have non-contiguous blocks that are various vintages and configurations. So across our platform, the flight to quality continues to be a factor, but we're also seeing tenants by and large, in expansionary mode, and we're reaping the benefits of that as we continue to focus on executing quickly and efficiently.

I think in that, you kind of mentioned large tenant activity is up. Are those -- are you seeing conversions from tours to signed leases on the large tenant kind of side? Or are they -- is it more of just the increase in tour activity that you're seeing for now?

It's definitely -- conversions are happening. It depends on the tenant. They can happen very quickly. AI companies are very nimble and move quickly, especially when they need space and they keep growing. Basic technology companies that aren't necessarily AI also tend to move quickly. And then you have -- I'm using San Francisco as an example, you have a large component of FIRE category tenants. And depending on the tenant and whether their lease is expiring in the near term, they can move quickly or they can move more like a bank or an insurance company would, but just a little more slowly. But definitely -- and that's not just San Francisco in terms of converting tours to LOIs or leases. We're seeing it across the spectrum.

Yes. I think 2 of the largest leases we signed last year, which would be the Harvey AI deal we did in the city of San Francisco at 93,000 feet and then the backfill for NeueHouse in Hollywood were both deals that sort of began their infancy and got executed within the same quarter. So we have seen in certain circumstances, things move very quickly with tenants being very willing to act and to execute. Across the board, if we step back and just think about all that new business formation and growth we're seeing in the city of San Francisco, one of the most interesting dynamics is the sense of urgency a lot of these earlier-stage companies have to get into space that's ready to go plug-and-play space.

So that's where, as an example, the Harvey AI deal, we had space that had come back to us from a financial services tenant that was fully built out and furnished and they could get into occupancy very, very quickly. That gave us a huge competitive advantage on that deal. We've been intentional at building out in certain circumstances where we believe it's warranted spec suites that can really service some of those earlier-stage companies, and we can have inventory that's ready to go for them. So in certain circumstances where you really can meet the needs of the tenant in terms of speed to occupancy, not just speed to lease execution, but speed to occupancy, you can get things executed really across our markets quite quickly now.

And then kind of the leasing pipeline, how much of that is kind of that spec suites leasing that you kind of alluded to versus the kind of larger spaces?

Spec suites is a factor, but it's much more targeted in terms of where we're using it. It doesn't -- it's sort of not a blanket strategy. We have not rent out and built spec suites across the entirety of the portfolio. It's really been sort of a thoughtful exercise to think about where we have vacancy and where we think that vacancy would be best positioned for the kinds of tenants who are looking for spec suites in the market. So 201 Third is one of the best examples within the city of San Francisco where we've done that. That depends on the size of the floor plate for that asset, amenities we already have in the building that can help support that spec suites activity and where the pace of leasing is.

So that project has been highly successful. We're still under construction on a full floor of spec suites with some shared amenities. And we leased all 4 or 5 of the spec suites before we finish construction of the spec suites, fully executed deals before we finish construction. Again, just speaking to the sense of urgency you're seeing in a market like San Francisco to get into that kind of space that's plug-and-play and ready to go.

Spec suites have obviously been very helpful in our lease-up at KOP. We've done several spec suites deals. We still have basically 2 half floors of spec suites remaining, and that's been a key differentiator to some, certainly not all, but some of the leasing traction we've had at KOP. And with the Nautilus acquisition in San Diego that we announced this quarter in Torrey Pines, we had communicated on the call that we think a smart, disciplined spec suites initiative there will be very impactful for leasing as well. So -- it has been a real contributor to securing some of those deals and making things move faster and really meeting the demand that's in the market today for speed to occupancy, but it has been a targeted strategic approach as opposed to running out and building spec suites everywhere and hoping for the best.

I don't really have sorry, we used to the live mic the entire time. I don't have much to add to that. I mean I think what's different from a year ago is that, yes, there's a lot of demand for spec suites and they lease quickly, but we're also seeing larger tenants in the market, larger than we've seen in quite a while. So a lot of our pipeline right now are 50,000 feet or bigger. So -- and those tenants tend to be -- larger tenants tend to be more willing to and have the capacity to hire architects, build out space the way they want it.

Yes. And the time -- I mean, not to keep coming back to 201 Third, but it is an asset that's really uniquely positioned for us in San Francisco today where we have the vacancy, and it's very much in that radius where tenants want to occupy. We still have some remaining vacancy at that building. And given the success I just mentioned on the spec suites program, the next logical step would be to keep going with another floor of spec suites, but we have enough demand from larger users, we think, may be executable that we're being patient as we think about what the right outcome is for remaining vacancy at that building.

And then I think you've talked about kind of the second quarter of this year being kind of the low point for occupancy. What kind of level of expiration on the -- what kind of level of execution on the expiration schedule kind of gives you confidence that, that will kind of be the trough? And then what target retention rate do you need to kind of hit to achieve kind of the guidance?

Yes. So what we discussed on the earnings call, not in the Q4 call, but really the Q3 call is that we are expecting very little in terms of additional retention out of the 2026 lease expiration pool in order to hit the guidance numbers we gave this most recent quarter. When you step all the way back to the end of 2024 to get sort of a complete population of the 2026 lease expirations, we had about 1.9 million square feet of leases expiring in 2026. We are down to 1 million square feet at this point. And really all of those, that 900,000 feet or so have all been re-leased or handled through disposition activity, primarily to owner-occupiers. So that gets us pretty close to, let's call it, a 40% to 50% retention rate, even if we renew nothing else in the 2026 pool. 40% to 50% retention rate overall on what was the original 1.9 million square feet of 2026 lease expirations. That is very strong performance.

That 40% to 50% is effectively in line with the company's historical pre-pandemic averages for retention. Now because it's split between renewals that were done during 2025 and space that's going to come back to us in 2026, that doesn't immediately show up in the reported retention statistics, but that's why we feel like it's so important to quantify that for you on the earnings call and help you understand, if you look at the complete population, it was a very strong retention experience. So that's very positive. But to answer your question directly, we're expecting very little in terms of additional retention in the 2026 pool to achieve the guidance numbers we've laid out.

And then maybe just touching on it since it's been very topical over the past couple of weeks. But what is your kind of view on AI in terms of job growth and space needs? Is that coming up at all in conversations with tenants as they think about their future space needs? Or do you still view it as kind of a net demand driver, especially for markets like San Francisco?

Yes. We view it as a net demand driver given where our markets are, in particular. There's without question going to be disruption that occurs across the broader employment landscape as a result of AI. But when we look at sort of the new business formation and growth that's occurring within our markets and some of the signals we've seen that I pointed to recently from Big Tech users pulling space off the sublease market, I think the solidification of fundamentals and real estate utilization in the San Francisco Bay Area is very, very telling right now. That disruption, if you think about it from a national perspective, there's no question that disruption is not going to be felt equally across markets.

And I very much believe it was the first point I gave at the beginning about why investors should be interested in our stock is that our markets and this portfolio from a quality perspective is uniquely positioned to be a net beneficiary from some of those trends. None of us have a crystal ball and know exactly how this is going to play out, but we feel very confident that our innovation-driven markets, the amount of VC funding that's going into our markets and sort of on the ground, the real estate fundamentals and dynamics are supportive to continued growth in 2026 and beyond.

Maybe just switching topics a little bit. kind of what -- you brought KOP 2 to 44% leased. It sounds like there's good activity on kind of the back and you kind of gave the mid-5% range on the yield. What are your -- kind of your expectations for leasing for that project in 2026?

Yes. We feel great about the pipeline and sort of how it's shaped up. We've done a great job at back -- we had significant executions, as you point out, during 2025, far exceeding the 100000-square-feet goal we established for ourselves by leasing 384,000 square feet at KOP 2 last year. I've been really encouraged by the way the team has continued to execute at that project and has more than backfilled the pipeline we had prior to some of those executions.

So we've got good traction across the board. Also at a moment in time when sentiment is significantly improving for life science companies. where life science companies are finding it easier to raise VC capital, particularly if they do have some AI angle to their story or their business strategy. So we've seen significant capital inflows improving. We've also seen capital recycling within the sector with significant M&A transactions and the IPO market reopening for many of those companies as well. So there's just really great fundamentals occurring.

And one statistic or chart we just added to the investor deck that we posted this morning that specifically really benefits a project like KOP is that we're seeing tenants over the last really 2 quarters across the market be more willing to relocate to get space that best fits their business strategy and needs going forward. That hasn't been true for many years, where the boards of many of these companies and their investors, their funding sources have been very much in a risk-off strategy, let's take the short-term renewal, let's try to make it work in the space we have for as long as possible. And that dynamic has really shifted over the last 2 quarters. So I think that will be significantly to a project like KOP's benefit, and we're seeing that in the pipeline today as well.

And then just some clarification on kind of the yield metrics that you gave on the 4Q call. How much of the kind of yield compression is attributable to kind of higher-than-expected TIs and concessions versus lower kind of base rents?

Nearly all of it was on the capital side, capital for individual deals, but also just carry costs given that the lease-up time line here has taken longer than expected.

And then you've kind of maintained flexibility with Flower Mart. Can you kind of give us an update on how you're thinking about that opportunity for Kilroy?

Yes. The Flower Mart project, which for those of you who aren't familiar, is a 7-acre site in the Central SoMa District of San Francisco that's entitled for a very high-density primarily office development program. So 2.4 million square feet of office entitlements in the Central SoMa District. Starting, I gosh, probably about a year ago, we began a very intentional effort with the city to explore whether or not we can get greater flexibility around our entitlements and greater flexibility around the development agreement we have with the city.

The goal of our efforts is to get to sort of get flexibility under the high-density entitlement plan we have that would enable us to execute a mix of different uses on the site. So that could look like a mix of office and residential as an example, a full residential plan, a mix of institutional and office or residential uses, just broad flexibility around the mix of uses that we could build at that site. And then also, as it relates to the development agreement to explore whether or not we can get some flexibility around certain of the design elements that are required by our original development agreement in order to effectively be able to phase the project from an execution standpoint.

So right now, we have some limitations that would effectively mean it's very difficult from an economic standpoint to do a Phase I, Phase II, Phase III at that project as you build it out. We've also been very intentional about wanting to explore this flexibility without giving up the high-density office plan we have in place, given that San Francisco has historically been a market that comes back very quickly when it comes back.

And I think that's part of what you're hearing Rob and I talk about in terms of the dynamics in that market today. So the last thing we wanted to do is get to the end of a re-entitlement process for different uses only to find out that the original office program or commercial program we had in place would have been the right one. The city under the Mayor and his leadership has been very open and communicative and constructive as it relates to what we're trying to accomplish on the site. We still have additional work to do, but things continue to move forward. And we are highly convicted that wherever we end up on this project, we're going to be creating significant value from shareholders through that additional flexibility and optionality.

And then I guess, is kind of the capital plan in the near term focused on entitlements or redesign or premarketing to like potential tenants? Or just how are you thinking about that space right now?

There's very little capital we're spending at the Flower Mart right now, but our efforts, our time, energy, resources is spent really on all 3. It's working with the city on the re-entitlement plan. It's understanding where development economics would be for any of these uses or any mix of these uses and having continued and ongoing conversations with potential users of the space down the road.

We have really been approaching this project sort of as a full company effort across the development team, the leasing team, the investment team, trying to make sure that we're acting with a high degree of urgency and driving towards the best possible outcome for shareholders at the site.

And then you ceased kind of the capitalization in June. Are you kind of prepared to kind of carry that full expense load indefinitely? Or would you consider a JV or a sale? Or are any of those options, anything you're exploring?

Everything is on the table, right? As it always should be, I think, in terms of how do we know where we're at right now in terms of the amount that's been spent on this project, the entitlements we have today. I'm highly confident that we are on the right path in terms of more flexibility around those entitlements and potentially getting approved a broader mix of uses and the ability to phase the project. We'll be open to lots of different execution paths for that project as we get more clarity around some of these components. And I guess that's where I'd leave it. Yes, we're open to lots of potential different outcomes there.

Maybe switching to kind of some of the capital rotation you've done. You sold the KSS and Sunset Media and you bought Nautilus and Maple Plaza. I guess, I think you've described these as neutral to NAV, but maybe kind of dilutive in the near term to FFO. How long is the runway to get those acquisitions accretive to earnings?

Yes. I don't know that that's how we've described it actually. I'd say it's accretive to NAV. It's probably neutral-ish to earnings in the near term, but I'll let Eliott jump in here.

Yes. I think that what you might be referring to is when we looked at what historical cash flows were at some of the assets that we're selling. And we're not convinced that, that's the right way to evaluate it. When we're making these decisions, we're looking at what the forward-looking earnings or cash flow impact is and several of the properties that we sold, there was a fair amount of lease rollover that would impact the yield on cost. So -- and then you layer on that we're executing on some land sales, it's a lot more -- it's a lot less negative to FFO than you may think.

I think that it's a lot more beneficial to cash flow. And when we evaluate the CapEx impact and CapEx as a percentage of NOI, and we went through some of the stats on the earnings call, it was pretty high on the properties that we sold, and we think it's going to be much more in line with our portfolio averages on the assets that we acquired. So we kind of view this as good NAV growth, minimal earnings impact and good cash flow growth.

Yes. I'd say just from an IRR -- from an IRR perspective, just to tie together what Eliott said, the acquisitions we've been underwriting things in the low to mid-teens from a forward IRR perspective. Some of the assets we sold over the last couple of years have been in the mid-single digit to maybe the higher single digit from a forward IRR perspective. So the amount of cash flow growth we're generating through that trade, I think, is really significant for shareholders. It's going to show up in the long-term durability and growth of cash flow stream.

You -- can you talk a little bit about what makes kind of the Nautilus acquisition attractive, just kind of given market views on life science and the softness in demand that we've seen kind of there today?

Yes. What we really like about that transaction is there's 2 pieces. There's the submarket, the Torrey Pines submarket, which we think is best-in-class submarket for life science, very supply-constrained over a long period of time, has the lowest vacancy, highest rents in the entire San Diego region. It has that critical mass that you really look for in any life science location with clustering from different institutions and commercial companies that really have developed an ecosystem there.

So it has a really good track record as a submarket. And then the asset itself is a top-notch asset. It's a multi-tenant property that's been pretty well invested in over the years, had an institutional owner that has performed very well over their ownership. And it's got amenities from in-place food and fitness and outdoor spaces and frankly, everything you look for.

So when we step back and we say, what are we trying to do with our capital, we're trying to allocate it to really high-barrier markets that have performed over time and really good assets within those submarkets. And so we think that Nautilus fits both of those descriptions. There has been some noise in the life science market. But frankly, the execution that we've had at KOP 2 demonstrates that high-quality assets can perform. And so we're confident we have about 50,000 square feet to lease there that we'll be able to execute at Nautilus as well.

Yes. I'd really emphasize that. I think sentiment, we've been acutely aware of some of the challenges in life science over the last few years, particularly at KOP with lease-up. We really believe there is a shift happening right now from a life science sentiment standpoint and the tenant willingness to execute, as I sort of talked about earlier. We've seen that at KOP 2. We've taken care of about half of that vacancy.

As we're talking to tenants in the market, the tone and sentiment around their businesses, their ability to secure funding, the broader environment around that in terms of the IPO market, the secondary market, M&A activity in the space has all really changed the way tenants are approaching the real estate decisions. And we feel all things considered being in sort of the best cluster in the San Francisco market, which we believe is South San Francisco and Oyster Point, in particular, the best clusters in the San Diego market in Torrey Pines and Del Mar positions us uniquely well to capture some of that momentum shift that we see occurring in life science right now.

Real quick, some of our rapid-fire property sector have more or fewer or the same number of companies a year from now.

Sorry, what was that?

More, fewer the same number of Office REITs a year from now.

Fewer.

And then Net Effective Rent Growth for office in '27.

3%.

Thank you.

Hello, everyone, and welcome to the KRC 4Q '25 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I will now hand over to Doug Bettisworth, Vice President of Corporate Finance to begin. Please go ahead, Doug.

Good morning, everyone. Thank you for joining us. On the call with me today are Angela Aman, CEO; Jeffrey Kuehling, EVP and CFO and Treasurer; and Eliott Trencher, EVP, CIO. In addition, Justin Smart, President; and Rob Paratte, EVP, Chief Leasing Officer, will be available for Q&A.

Please note that some of the information we will be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being webcast live on our website and will be available for replay for the next 8 days, our earnings release and supplemental package have been filed on a Form 8-K with the SEC, and both are also available on our website.

Angela will start the call with a strategic overview and quarterly highlights. Eliott will provide an update on the recent transaction activity, and Jeffrey will discuss our financial results and provide you with our 2026 guidance. Then we'll be happy to take your questions. Angela?

Thanks, Doug, and thank you all for joining today's call. 2025 was a year of meaningful progress and momentum for Kilroy, highlighted by disciplined execution across our entire platform. We remain focused on driving leasing across both our operating and development portfolios harvesting value through noncore asset sales, monetizing or advancing strategic plans for parcels within our future development pipeline and thoughtfully redeploying proceeds and to select opportunities that have enhanced the long-term growth and durability of our cash flow stream. I'm grateful for the way this team has demonstrated its creativity and discipline while navigating a rapidly improving operational and transactional environment.

Fourth quarter leasing totaled approximately 827,000 square feet. Marking our strongest fourth quarter performance in 6 years and resulting in total full year leasing of approximately 2.1 million square feet, a significant increase on a year-over-year basis.

Across our markets, we are experiencing the healthiest level of office demand since 2019, with a forward leasing pipeline that has grown by more than 65% over the last year. New business formation and our innovation-driven West Coast markets has dramatically improved. The dynamics for multi-tenant buildings and spec suites, while larger tenants are increasingly reclaiming sublease space for their own operations or reengaging on expansion plans that have been previously deferred.

Key leasing highlights in our portfolio during the quarter included: In Hollywood, a 93,000 square foot new lease with the Fitler Club. At Columbia Square, to backfill the space recently vacated by NOI House following their bankruptcy filing, minimizing downtime and avoiding outsized capital investment on a highly specialized space. In West L.A., a 79,000 square foot renewal with Riot Games for the Arena building, providing several years of ongoing cash flow as we evaluate the highest and best use of the site going forward. In Beverly Hills, a total of eight new and renewal lease executions at Maple Plaza, our recent acquisition, improving the lease rate by 230 basis points during the quarter and further validating our conviction in the growth potential of this asset and the Beverly Hill submarket.

In Seattle, 74,000 square feet of new long-term lease executions at West 8th, our recently renovated and repositioned project in the regrade submarket. In San Francisco, additional AI leasing during the quarter and a growing pipeline of AI and other tenants for spec suite space that we currently have under construction in the SOMA submarket. And importantly, in South San Francisco, 316,000 square feet of lease executions at Kilroy Oyster Point Phase 2, our recently completed premier life science development project, including a 280,000 square foot full building lease with UCSF, bringing the lease rate at KOP 2 to 44%.

We are thrilled by the momentum we've captured at KOP 2 over the last 2 quarters, demonstrating a meaningful resurgence in life science demand and providing confidence in our pipeline as we move into 2026. Biotech equities have significantly outperformed over the last 6 months, which has led to a reopening of the IPO and follow-on market.

Last week alone, four biotech companies completed IPO transactions, selectively raising nearly $1 billion. In addition, M&A activity picked up considerably during 2025, including in the fourth quarter and expectations for 2026 volume are robust.

At the same time, the innovation pipeline remains exceptionally active with more than 50 novel drug therapies anticipated to receive FDA approval in 2026, reflecting continued scientific advancement and investment.

Against this encouraging backdrop, as we have executed on our holistic long-term plan for KOP 2, we've been mindful to create an innovation ecosystem at the project that will support future growth, while also maximizing risk-adjusted returns.

We have captured exposure to fast-growing early-stage biotech companies through our strategic lease execution with [ MBC ] BioLab, a well-established life science incubator in the San Francisco Bay area, that has the financial wherewithal and scientific expertise to capably bet and support early-stage companies. In addition, we gained exposure to mid-stage and late-stage life science companies in our spec suites our capital investment is specifically designed to be highly reuseful by future tenants in the same space.

And now with the execution of the full building UCSF lease, we have established a high-quality anchor for the project that has continued to elevate KOP's profile in the market. While providing long-term cash flow stability through a 16.5-year lease to an institutional tenant with exceptional credit quality. Taken together, these tenants build a promising foundation of long-term leasing prospects for future phases of the project while also ensuring that tenant credit risk is appropriately managed within Phase 2.

Across the KOP two leasing transactions completed to date, we expect varying occupancy commencement time lines based on the scale and complexity of each tenant's build-out. However, occupancy has already commenced in one of the spec suites beginning the activation of the campus.

As we move forward, our entire team is focused on accelerating tenant build-out time lines, and we will continue to update you as additional progress is made.

Given our leasing success to date, we have now refined our expectations for total project costs at KOP 2 as reported in our supplemental financial package. With these refinements incorporated, our anticipated yield at KOP 2 is now in the mid-5% range, approximately 100 basis points below our original underwriting.

While this is not reflective of where we would begin a new project today, we continue to believe in the exceptional long-term growth and value creation potential of Kilroy Oyster Point.

Turning to our broader capital allocation strategy. We successfully paired fourth quarter leasing and operational wins with strategic portfolio repositioning initiatives.

In December, we completed the sale of Sunset Media Center in Hollywood for $61 million. monetizing a mature capital-intensive assets that no longer met our stringent criteria for incremental investments.

In January, we closed on the sale of Kilroy Sabre Springs, or KSS in the I-15 corridor submarket of San Diego for $125 million. Over the last 10 years, fundamentals in the I-15 corridor have not kept pace with the sustained strength we have observed in clusters, such as Del Mar and Torrey Pines.

Over time, KSS has experienced significant tenant churn, resulting in higher average vacancy rates and requiring consistently elevated capital investment, impacting both historical and anticipated future returns.

In late 2025, we successfully identified a user interested in purchasing the totality of the campus, resulting in a highly efficient execution for both parties.

In addition to these operating portfolio sales, we also entered into an agreement to sell the remaining portion of the Santa Fe Summit and parcel held in our future development pipeline for $86 million in gross sales proceeds. With this agreement, commitments for land parcel dispositions under contract represent $165 million in gross proceeds, exceeding our previously communicated goal of $159.

With respect to capital deployment, during the fourth quarter, as momentum continued to build across the Life Science sector, we further strengthened our platform with the acquisition of Nautilus, a multi-tenant life science campus in Torrey Pines were $192 million. This was truly a generational opportunity to enter one of the most supply-constrained and tightly held life science clusters in the country. Supported by proximity to leading research institutions, a deep talent pool and a world-class innovation ecosystem. Nautilus provides meaningful scale and is one of the well-amenitized Class A campuses consistently considered for a wide range of active tenant requirements in the market.

This acquisition not only strengthens our San Diego presence but also enhances our platform scale and relevance in the life science sector, positioning Kilroy to capture cutting-edge lab and associated office demand across all of our West Coast markets. I couldn't be any more pleased with the quality and long-term value creation potential of the investments we've sourced over the last 6 months.

Our value-add acquisitions in Beverly Hills and Torrey Pines represent historic opportunities to reshape the portfolio in response to a rapidly evolving environment. As we look forward, it will be imperative that we continue to proactively rationalize our portfolio and concentrate our investments in high conviction assets that will enhance the durability and growth of our cash flow over time. Accordingly, we will continue to pursue dispositions of noncore assets with forward returns followed lower cost of capital. And as we evaluate redeployment alternative, we will be mindful of the signals we are receiving from both the public and private markets, our long-term portfolio construction goals and balance sheet strength and flexibility.

In conclusion, I want to thank the entire Tilbury team for an extraordinary effort during 2025 that drove exceptional results. I'm incredibly grateful to be part of this team, and I'm looking forward with enthusiasm to what we can deliver together in 2026. Eliott?

Thanks, Angela. 2025 was a very active year for Kilroy on the capital allocation front. Starting with dispositions, we closed or entered into contracts on roughly $755 million of sales broken down as follows: approximately $465 million of operating property sales across three transactions a $125 million operating property sale that closed in January and $165 million of land sales under contract across three transactions.

To give a little more color on the four operating properties sold in 2025 and January 2026, occupancy was 79%, rents were approximately 15% above market, weighted average remaining lease term was 2.5 years, and the CapEx to NOI ratio was over 30%. All of this translated into some of the lowest forward-looking returns in the portfolio and highlights the strategic rationale behind our decision to sell.

Turning to land sales. As Angela mentioned, we put the remaining 17 acres of Santa Fe Summit and under contract with a residential developer for $86 million, and the transaction is expected to close upon approvals for development.

Unlike the 5-acre portion we put under contract earlier in 2025, the 17 acres require a change in zoning to accommodate residential, which we currently estimate to be complete in 2028. As a reminder, we continue to anticipate the 5-acre portion will close in 2026 to $38 million in gross proceeds.

Now that we have three land sites under contract, we will look for additional opportunities to repurpose land and/or noncore properties to a higher and better use in order to position them for sale.

Shifting to acquisitions. Over the last 12 months, we closed on two significant investments, Nautilus, which Angela discussed, and Maple Plaza and Beverly Hills, which we talked about last quarter. These projects represent compelling opportunities to scale in high barrier, high-growth submarkets, which are leading the fundamental recovery in their respective regions. We have been underwriting deals in these submarkets for many years, patiently waiting for the right time to establish a presence. A host of factors came together over the last several months and our patients paid off as we were fortunate to acquire these trophy projects at compelling risk-adjusted terms.

Turning to Nautilus. San Diego is one of the primary life science hubs in the country, and Torrey Pines is the heart of the region. Torrey has the highest rents and lowest vacancy rates among all of the submarkets in San Diego. Unlike several other life science clusters across the country, there is no new supply under construction and over the last several years, the only new deliveries have come from demolishing and reconstructing existing buildings. Torrey Pines has both high and density restrictions that make it incredibly difficult to add net square footage. So inventory has essentially stayed the same over the last 20 years.

The four building Nautilus campus has been well maintained and invested in with on-site food, fitness and outdoor amenities, making it appealing to a wide variety of innovative life science company. The campus has historically performed very well, averaging 94% occupancy over the last 10 years. However, a late 2025 move-out brought occupancy to 75% when we closed the acquisition.

The purchase price of $192 million or approximately $825 per square foot compares very favorably with other comparable trades in the submarket and is well below estimated replacement cost of $1,400 to $1,500 per square foot.

Our business plan is to add additional spec suites to accelerate the lease-up of the remaining vacancy and continue to drive rent growth via the amenity offering at the campus and the overall appeal of the neighborhood.

We expect stabilized yields in the upper single digits and unlevered IRRs in the low double digits.

In summary, in 2025, we demonstrated the ability to raise capital via strategic dispositions and redeploy it into compelling opportunities.

As we look forward to 2026, our top investment priority is to capitalize on the recovering leasing environment and improving capital markets and sell $300 million within the operating portfolio using the same disciplined approach we have employed in the past.

As proceeds are raised, we will thoughtfully and strategically evaluate all of our alternatives, is continued goal of maximizing shareholder value.

With that, I will turn the call over to Jeffrey. Thanks, Eliott.

As we look back on the year, our consistent execution across the platform has strengthened our financial performance and position us well for the year ahead.

Turning to our financial results. FFO was $0.97 per diluted share in the fourth quarter. Occupancy ended the year at 81.6%, representing a 60 basis point sequential improvement as we successfully accelerated rent commencement dates on recently leased space.

In addition, occupancy benefit from recent capital recycling activity, which had a net positive impact of approximately 30 basis points during the quarter. Cash same-property NOI growth was negative 7.2% in the fourth quarter primarily reflecting a sizable restoration fee recognized in the fourth quarter of 2024, which detracted 350 basis points from current year growth. Base rent detracted 190 basis points due to a year-over-year decline in average occupancy, while net recoveries detracted with 140 basis points, impacted by the change in occupancy and real estate tax appeal wins recognized in 2024.

Leasing spreads in the fourth quarter were negatively impacted by two unique transactions in the L.A. market. First, we executed a renewal with right games for their arena space allowing us to maintain occupancy and preserve cash flow over the next several years, while we evaluate the highest and best use for the property and explorer upzoning.

Second, we executed a new lease for the former [indiscernible] House space in Hollywood, where we were able to quickly release a dynamic and complex space to a well-capitalized and reputable sponsor. The long-term nature of the lease, minimal downtime and moderate capital investment resulted in a strong net effective rent, albeit at a lower pace rate than the prior tenant. Excluding these two deals, GAAP rents on leases signed would have increased 16.2% and cash rents would have decreased only 2.6% from prior levels, comparing very favorably to spreads reported in recent quarters.

Now let's discuss 2026 guidance. Our 2026 FFO guidance range is $3.25 to $3.45 per diluted share, representing a midpoint of $3.35. 2026 average occupancy is expected to range between 76% and 78%, reflecting a year-over-year decline of 390 basis points at the midpoint of the range. The decrease is almost entirely driven by KOP 2, which entered the stabilized portfolio in January 2026. Excluding KOP 2, 2026 average occupancy is expected to range between 80% and 81.5% and roughly in line with 2025 average occupancy at the midpoint.

As a reminder, 2026 lease expirations are front half weighted and several larger tenant move-outs are expected to weigh on portfolio occupancy during the first half of the year.

Cash same-property NOI growth, which excludes KOP 2, is projected to be flat to negative 1.5%, at the midpoint of the range, base rent is expected to contribute approximately 50 basis points to growth, while net recoveries are expected to detract approximately 125 basis points.

Noncash GAAP NOI adjustments are expected to range between $12 million and $14 million, up from a little over $8 million in 2025 as recent new leasing activity takes occupancy across the portfolio.

Our guidance for NOI from development properties and capitalized interest are primarily driven by two projects, KOP 2 and Flower Mart, which we'll cover together.

KOP 2 expense capitalization ceased at the end of January 2026, following the 1-year anniversary of substantial completion of the base building components. As a result, operating expenses and real estate taxes at KOP 2, which totaled approximately $5 million per quarter and capitalized interest, which totaled approximately $10 million per quarter, will begin flowing through earnings beginning in February of 2026. The carry costs for KOP 2 will slowly moderate its tenants take occupancy over the course of the year.

As Angela previously mentioned, we have updated KOP 2's total estimated costs and the supplemental reflect leases executed to date in prevailing market leasing economics for the remainder of the project. And finally, as a reminder, the project will not enter the same-property pool until 2028.

With respect to the Flower Mart project, our assumptions remained unchanged from last quarter. We continue to assume that capitalization will cease at the end of June 2026 and at which point, approximately $1 million of quarterly operating expenses in real estate taxes and $7 million of quarterly capitalized interest expense will begin impacting earnings.

The NOI impact of KOP 2 and Flower Mart represents the majority of our guidance for NOI from development properties, which is expected to range from negative $23.5 million to negative $25 million. In addition, our capitalized interest guidance of $32 million to $34 million reflects our fourth quarter capitalized interest run rate adjusted for KOP 2 and Flower Mart as previously detailed.

In addition, in last night's release, we also provided line item guidance for GAAP lease formation fee income, interest income and combined G&A and leasing costs. Please note that while our G&A and leasing cost guidance reflects a year-over-year increase 2026 levels remain below our historical averages. As it relates to capital recycling activity, we expect to complete approximately $325 million of operating dispositions in 2026, which includes the $125 million disposition of Kilroy Sabre Springs reported last night.

As Angela and Eliott highlighted, we will take a balanced and disciplined approach to capital allocation, evaluating all available options to maximize shareholder value while also prioritizing balance sheet strength and flexibility.

In closing, we head into 2026 with the same disciplined execution that has guided our progress this year. Our focus on leasing, monetizing noncore assets and redeploying capital into high-quality opportunities to strengthen the durability of our cash flows and the flexibility of our platform. With that, we're happy to answer any of your questions. Operator?

[Operator Instructions] Our first question today comes from Jana Galan with Bank of America.

Congrats on the leasing at KOP 2. I was hoping if you could talk to UCSF -- sorry, University of California, San Francisco anchor lease and kind of the late commencement on that? Is that due to kind of significant kind of build-out or reading out other lease expirations? And maybe if you can kind of help us think about further going some leasing to occupancy on that asset.

Sure. Thanks for the question. We appreciate it. We are thrilled about the progress that we've made at KOP this year. As you remember, we originally put out a goal of 100,000 square feet of lease execution during 2025 and exceeded that goal by almost 4x. So we're really pleased with the progress we made.

As you point out, the UCSF lease was an important part of getting to that level. Remember that this is a brand-new development project. So the building that they're taking is currently in shell condition. And we have multiple user groups that will be moving into that facility. It's just going to take time from a space planning and build-out perspective.

As I mentioned in my prepared remarks, our entire team is focused on accelerating and doing everything we can, and that's in our power to accelerate occupancy commencement time lines, not only on the UCSF lease, but on all the leases we've signed at KOP as we move forward and getting tenants into occupancy and rent commenced as quickly as possible.

And then just to clarify, on the same store other than the addition of KOP 2, is there anything else we should think about in terms of acquisitions, dispositions? .

Well, what I would say, KOP 2, as Jeffrey mentioned in his remarks, doesn't go into the same property pool until 2028, though it is entering the stabilized portfolio. And as a result, our total portfolio occupancy statistics beginning in January. So there's a bit of a disconnect there. But that asset won't come into the same property pool until 2028.

I would say at this point in time, nothing -- as we think about the $300 million of operating property dispositions that we communicated as part of guidance, I would note anything material as it relates to changes in the same property pool that we think needs to be called out.

Our next question comes from the line of Nick Yulico with Scotiabank.

So Angela, I appreciate the commentary on the mid-5% yield now on KOP 2. Can you just unpack that a little bit. I just want to be clear if that's a gap or a cash yield and how we should think about the TIs. I wasn't sure if that was kind of already built into the new cost you have in this up.

Yes. Thanks, Nick. That's a cash stabilized yield number. And as it relates to [ CICF ], we've reflected all of the transactions that have been signed to date. And as Jeffrey mentioned in his remarks, we've also incorporated our estimates of prevailing market leasing economics for the remaining vacancy of the project.

Okay. Great. And then I guess second question is on leasing, maybe for Rob, if you could just touch a little bit on sort of key highlights across markets. And particularly, I'd say, like in San Francisco, how sublease. Is that an impact -- competitive impact versus your portfolio? And then just a little bit more about sort of what drove the leasing at West 8th in Seattle.

Sure. Why don't we start with what you finished with, which is West 8th in Seattle and the Bellevue market. Bellevue is clearly a leader in the country in terms of not only demand and tenants in the market right now, but also we're really excited about the rental growth. We've seen the net effective rental growth.

I would say unrelated to the growth and the rental increase in Bellevue, we're seeing a similar phenomenon starting to happen in Seattle. And we're really pleased over the last 90 days, with the new tenant activity that we're seeing at West. And we're -- our team up there is very busy working on several fronts on West 8th. So the renovation that we did really is paying off and creating a sense of -- that it's a special project in a great location.

In fact, underscored by the fact we did a law firm deal in the quarter that moved from the CBD to state. So we're very excited about that. I would say one of the things we've been through the San Francisco recovery cycle before. I think one of the things that's most amazing about San Francisco is the recovery that's going on.

And I'd say a couple of things, sublease space the really good premium sublease space is really virtually gone. There's still some but it's -- there are not big contiguous blocks of space like we had a year to 1.5 years ago. So that's a positive sign. And I think if you really look at it, yes, people can say there's 32% availability but -- and I want to emphasize this, 47% of that availability has not transacted since 2021. So I'm going to say that again, 47% hasn't transacted since 2021 of that 32% vacancy. And that's a really important metric because our product, our office buildings in San Francisco don't -- are not impacted by that. We've had activity on all fronts. So we see the San Francisco recovery as really having the clearest signs of a recovery of a market, and Silicon Valley also had a very, very strong 2025 4th quarter, and a lot of that is driven by Fortune 100 companies.

So I think you're seeing diversity in the market in San Francisco and the Bay Area, meaning types of tenants and also the large tenants. We get a lot of questions over earnings calls about one of the large tenants coming back, they're back in the market now.

L.A. We are continuing the [ Fitler ] Club lease was a major lease in the Hollywood submarket. We're really happy to have that. [ Fitler ] is a members-only lifestyle social club sponsored by [ Dean Adler ] and Associates, so very strong sponsorship we had other opportunities to do other leasing there, but [ Fitler ] saw the benefit of the space that [ NOI ] House freed up. So that was a very exciting December to get that started and closed very quickly.

Other parts of Los Angeles on the West side, our tour activity is improving, and we expect to see that continue. So [ Pulver ] cities continue to do well. We're seeing net effective rent growth in Long Beach. So for us at Kilroy in our specific markets, we're very excited. And Maple Plaza has sort of led our leasing since we acquired it.

San Diego, again, great success story, I wish we had more space at One Paseo, which we don't. And very excited to get our hands on Nautilus, and we're underway right now on working on several potential deals there. So San Diego continues to be a great market for us.

And lastly, Austin, we continue to have activity in the space we have remaining. We don't have that much left and we're going to be fine there. Rates have helped. So we're continuing our program there in Austin.

Our next question comes from Steve Sakwa with Evercore ISI.

You guys have a little -- you have a little over 1 million feet, I guess, now expiring in '26. Can you just remind us what your kind of broad retention expectations are on that kind of $1.050 million. And as you think about new leasing activity, is there kind of a pipeline that you could sort of quantify of leases that are set to commence in '26? How do we think about kind of the, I guess, retention and the new leases starting?

Sure. Thanks, Steve. You're right. The current lease expiration schedule showed just over 1 million square feet of remaining 2026 declaration. We had mentioned on last quarter's call that we expect substantial move-outs from that pool. And we continue to believe that's right. There is a footnote on that page of the supplemental that points out that we've already backfilled about 140,000 square feet of that $1.05 million. we've made some progress already on backfilling it with additional items, including some subtenants, where there won't be downtime between those leases. .

There's a small additional, I would probably say expect another somewhere between 50,000 and 100,000 square feet of potential renewals, out of that pool. But the biggest driver of addressing that vacancy is really going to come from the signed but not yet commence.

We've got probably 300,000 square feet sitting there that's contractually obligated already. and where we have high confidence we can get them into occupancy over the course of 2026.

So that cuts that lease expiration number by more than half, I believe. And that gets us to sort of the commentary about the forward-looking pipeline. I mentioned in my script, our pipeline as we sit here today, is about 65% higher than it was a year ago, including the later stage part of the pipeline where we've got great visibility and activity there to get additional leases closed over the next couple of quarters, which can have an impact on 2026 occupancy.

So we feel very optimistic about the occupancy guidance we put out. We're going to push really hard to meet or exceed that guidance and think that there's a pretty clear path to doing it, particularly given Rob's commentary about the recovery we're seeing across our markets and most importantly, in our most significant market, which is San Francisco.

Okay. Great. And just kind of second question. I appreciate the color on the KOP 2 yield at mid-5. I know you don't want to provide details on individual leases. But for the space that's left to lease, does that imply net rents are kind of equal to what you did on kind of the leasing thus far? Does it imply rents go up? Will it go down? Just how do we think about rents on the remaining space compared to kind of what's been leased thus far?

Yes. I think they're generally around the same ballpark, but we do believe, given the momentum we've demonstrated at the projects that we can push higher on the remaining vacancy.

When you think about what we have left from a composition perspective at KOP 2. We have about half of the multi-tenant building remaining. That likely is going to be a combination of those remaining spec suites where we sort of already know what that capital looks like and some shelf space that we'll be talking to additional tenants that are in conversations with already. And then that leaves on full building remaining.

And what I would say about the full building vacancy that we have remaining is that it is the most prominent building within Phase 2 of the project and arguably within the entire KOP ecosystem, Phases 1 through 5, it has some of the best views of the project. And we think we have a real opportunity there to appropriately push rate while also prioritizing near-term occupancy. So that's kind of how we're seeing the remaining vacancy and our expectations for how that will play out.

Thank you SP1 Our next question comes from Blaine Heck with Wells Fargo.

Great. Just following up on the leasing environment. I was hoping you guys could give us an update on the mark-to-market in each of your target markets and whether you've seen any change in that metric recently, especially in Los Angeles where you have a pretty large proportion of your expirations over the next 2 years.

Yes. Eliott will give some more specific commentary on mark-to-market. But what I would say specifically when you think about the Los Angeles market is that, that is a market in which we have been clear over the course of the last 18 to 24 months that we had portfolio repositioning work to do, and it's the market where we've completed most of the portfolio repositioning mark by selling an asset in Santa Monica, by now selling Sunset Media Center, in Hollywood and by buying Maple Plaza, which Rob mentioned earlier, has been a real driver of activity and success within the Los Angeles market.

When we look at how spreads are trending across the market, I would say we are seeing rents comp up in Beverly Hills, not huge numbers, but certainly above prior rents and marginally above where we underwrote rents for that project. We're seeing rents come up nicely in long bets where we've got a significant amount of activity, so despite sort of pressure on the Los Angeles market overall, our portfolio is doing much better than it did a year ago, in part because of the capital recycling activity that we've completed. And because now we've got opportunities within the Los Angeles market in submarkets where there is a lot of activity and where our in-place rents are reasonably compelling.

It's -- Blaine. So if we look at it market by market, L.A. and San Francisco were about 10% above market. San Diego and Washington, we're about 5% below market, and then Austin is about 15% below market.

Okay. Great. That's very helpful. Second question, Angela, can you just comment a little bit about where each of your markets are politically, which of them you think are providing the best environments for businesses and their employees and what specific improvement you've seen in the time that you've been at Kilroy?

Yes. I mean San Francisco clearly has had the biggest story and the biggest momentum over the course of the last couple of years. The new Mayer, the Board of Supervisors have really been working together to put forward, I think, policies that are, yes, good for the business environment, but good for the community at large within that market.

We've seen a real change in approach to how they're interacting with businesses and interacting with developers in particular in the city. And that's sort of been the thread behind a lot of the work we're doing at [ Palomar ] right now is to engage with the city in a way that we think can really help get a project off the ground in the Central [ Summa ] district as quickly as possible and do so in a way from an execution standpoint that can be best for the community at large. So that's clearly the market where we've seen the most momentum and additional progress over the last couple of years without a question.

Thank you. Our next question comes from Seth Bergey with Citi Group.

Angela, I think in your prepared remarks, you talked a little bit about kind of the IPO market and M&A environment for life science. I was wondering just with KOP 2, if you could comment a little bit more on any changes in the number of tours that have gone on? And just anything specifically within the pipeline as it relates to life science.

Yes, I'll ask Rob to jump in here a little bit. But what I would say is, I think the leasing progress we made during 2025 clearly demonstrates that the team at KOP has been exceptionally active and busy fielding requests and tour activity and prospects from all the tenants we closed last year, but certainly a much broader set behind that. We feel really good about the pipeline and KOP as we head into 2026.

Particularly for the remaining vacancy within the multi-tenant building. We feel like we've got great momentum and visibility behind continued leasing there. And as I mentioned, then we'll have the one full building to go and really feel great about how that project or that building sits within the broader project. So we're feeling great about not only what we accomplished, but about the pipeline from here, and I'll let Rob add to that..

I don't have much to add to what Angela said. Our pipeline has remained consistent overall. And even though we've executed the 300-plus thousand feet we did our -- the pipeline has refilled. And so our team there boots on the ground are responding via paper to proposals and things like that, our tour activity continues to be consistent in terms of every week, every other week, someone new is coming to the market. And the remarks I made last quarter pulled through today that the project is really attracting a lot of the tension Bay Area wide from a variety of users. So we're excited about what we see in the pipeline in '26, and we're completely focused as we were in '25 on executing. .

And then maybe moving towards your guidance. I think your guidance implies kind of $175 million of dispositions that you haven't announced. Just kind of as you kind of look across the portfolio, are those kind of targeted and specific markets? And just as the markets kind of continue to recover, can you talk a little bit about what type of capital is in the market that's interested in buying and just the depth of the buyer pool and how that's changed at all?

Seth, it's Eliott. So the buyer pool has definitely improved. We've seen more capital. We touched on prior calls how we're seeing more institutional capital come in. And some of the results of that is that transaction size is able to grow. I think San Francisco is the best example of this, where deal size continues to creep up in a good way. .

So we think we have a lot of options for what that means. And we're going to keep using the same sort of approach that we have in the past to evaluate the entire portfolio, project forward where we think returns are going to be asset by asset and look for where we think we can get the most efficient pricing. So that's our plan for '26.

Yes. I mean I think Eliott said it really well. We're seeing significant renewed institutional appetite and interest in West Coast commercial assets, in particular, I would say, appetite residential assets have continued over the course of the last couple of years. We've got a number of different opportunities available to us, and we're going to be opportunistic as we execute going forward.

Our next question comes from Anthony Paolone with JPMorgan.

Great. I was wondering if you could help on Page 29 of the supplemental. If we think about year-end 2026 after you do the land sales and flower bar comes out and so forth. Like what's left that you'll be capitalizing against at the end of this year?

Yes. Tony, this is Jeffrey. So when we give the cap interest guidance for this year, we've effectively said anything that we're capitalizing on Q4, we're going to continue to keep capitalizing on. So the primary pieces of that are the future phases of KOP 3 and 4. So we've disclosed the big movers for Flower Mart in KOP 2 season, and that was contemplated in Q4's actual results. And then as we look forward into 2026, there's no real changes to those assumptions.

Yes. I mean the capitalized interest guidance this year really is Flower Mart and KOP. There's effectively nothing else being capitalized or assumed to be capitalized in 2026.

Okay. So all these other ones stay in there with the exception of the sales?

Yes. I mean, we may be holding them, but because we're not actively pursuing development of some of these parcels as we assess highest and best use in other things, we're not capitalizing on them. So some of them will be sold and when they're sold because we're not capitalizing on them that will all be upside. We'll be removing sort of a drag on -- that's sitting within the NOI from development guidance we got.

The next question comes from Vikram Malhotra with Mizuho.

I guess just first one going back to KOP. Just curious on two things sort of you look at the pipeline, you mentioned, what are the competitive spaces that you're sort of pitching against? And is there a point at which you'd maybe perhaps considering monetizing KOP in terms of a potential sale?

Yes, I'll take the last question first, and then I'd reiterate what I said in my prepared remarks. We continue to be big believers in the long-term growth and value creation potential of this project. I believe we've created a tremendous amount of value in Phase 2. I appreciate the 5.5% yield on Phase 2 is a challenging number in the context of the current market, but we fully believe that with the leases we're signing today over time, we're also going to create a ton of value in Phase 2.

In future phases of KOP will be dependent on us getting to yields that make sense on future development and being substantially pre-leased and derisked. So we feel great when we think about the campus overall. South San Francisco remains one of the primary life science hubs in the country. And we have, I believe, the most compelling projects within that submarket. And we believe, over time, we're going to create a lot of value from that project. So I'd start there. I'll leave it to Rob to answer the pipeline questions again.

Yes. I don't have much to add. I mean, to what I said, the pipeline is continuing to grow, and we're executing. We're making market deals, positive [ NER ] and we're just going to keep aggressively going out there and securing our share of the deals.

Yes. And I think the only other thing I'd say is we can't share anything more specific about the tenants that are in the future pipeline. But we spent a lot of time in our prepared remarks talking about the quality of tenancy that we've already added at the project in Phase 2 a real mix of tenants that are going to provide sort of that innovation ecosystem that's going to drive future leasing growth at the project and balancing that with the stability an institutional lease with someone like UCSF and their credit quality provides.

So I think the leasing that we've done to date in Phase 2 has been highly strategic and really puts us in the best position possible to drive enhanced value at Phase 2 and future phases of the project as well.

Okay. That's helpful. And then just maybe a broader question. While there are a lot of AI tenants in the market like you highlighted, I'm just wondering, across the broader Bay Area in San Francisco City, there's probably a market concern about just software and the need or lack of need for future hiring in terms of software developers, engineers I don't know if you've had conversations with any of your tenant base you can share. Just how are they thinking about space needs, specialty tenants that fit into that broad software category?

I'll say a few things and then Eliott, Rob, Jeffrey -- anybody can jump in to augment this. But what we're seeing in the San Francisco market is clearly a tremendous amount of new business formation and growth. much of which is coming on the back of what's happened with AI over the last few years. And we believe that's a really exciting dynamic we're seeing in the city. We continue to [ reap ] tenants that we've signed deals with from an AI perspective that are already talking about expansion and growth. and there are a lot of additional new companies in the market thinking about taking additional space.

So right now, based on what we see and what we're actively navigating from a leasing transaction perspective, it has been and will continue to be a significant driver from an office using space capacity in the San Francisco market over time.

As it relates to some big tech platforms where maybe that concern around job losses or how jobs are going to be allocated as a little more amplified. Again, it's early days as it relates to how AI is going to play out over the longer term. And candidly, none of us have a crystal ball or know very specifically. But we do know that there are big tech companies within the broader San Francisco Bay region that have recently done things like pull sublease space off the market the intent to occupy.

So we can only be responsive to the signals that are in the market. But I think the signals we're seeing in the real estate market and the office market in San Francisco or the Bay Area in general, do not support the thesis that we are retrenching from a space perspective.

Two points I'd add is that, again, as I said, leasing is going very strong in San Francisco 2/3 of the leases, large leases done, which is 30,000 square feet or greater done in San Francisco in '25 were expansion focused. So I think that's a really important piece of color. Also, I just look at -- we usually give you some kind of sense of how many deals over 100,000 feet are in the market in 2025. And there were 16 deals over 100,000 feet that got completed and some bigger ones.

So that metric of the 100,000 feet in '16 goes right back to 2018, 2017 and sort of the boom years in the last cycle. So all things are pointing in the right direction, and we're planning to capitalize on that.

Thank you. Next question comes from Brendan Lynch with Barclays.

I want to follow up on Jeffrey's comment about the Ride games renewal. Are there any other unique renewal considerations or fixed rate options or anything like that, that we should expect to impact the re-leasing spreads in 2026?

Look, I the spreads in any given quarter are going to depend on the special mix of leases we have in that quarter. But I don't have anything in particular to point out to you right now. And as I look at the activity in our very near-term pipeline, we actually feel really good about where spreads are shaking out.

Again, it's the mix of of leases that have already been executed in Q1 that we expect to execute in the first quarter or 2 of this year.

But certainly, as we pointed out, and Jeffrey pointed out in his comments, one lease, sometimes has the ability to change what those metrics look like. But nothing in particular I'd point out to you. And again, the near-term pipeline, we feel pretty good about from a rent for perspective.

Okay. Great. That's helpful. And maybe while we're talking about the pipeline, congratulations on being up 65% year-over-year. Can you tell us what that means in terms of square footage and what your historic conversion rate of that pipeline has been?

Yes, we haven't typically given sort of the aggregate square footage of the pipeline in part, to your point, because at any different point, it's very different mix of early-stage deals, middle stage deals or late-stage deals. But, as I mentioned in response to a prior question about our lease expirations, we feel really good about the near-term pipeline that's embedded within that number and our ability to execute and meet or exceed our occupancy guidance as we move through the year.

Our next question comes from Caitlin Burrows with Goldman Sachs.

Maybe as you guys look at the debt maturities that you have in the second half, wondering if you can discuss your plans for those? And what would make you use disposition proceeds on debt reduction versus using those proceeds for acquisitions.

Okay. Caitlin, it's Jeffrey. So we have three maturities in the back half of the year. Two of them are private placement notes. So the wonderful part about that for us is we have a bunch of flexibility. That's the timing of retiring them. So as proceeds come in from the disposition program, I think part of the question can be what are the immediate opportunities for cash. And as we said in our prepared remarks, we're going to evaluate pretty much every opportunity out there. So if it's acquisitions, share buybacks, reducing debt. all of them are on the table. So at a point in time in the year and kind of where our marginal cost of capital sits, we'll make that decision.

Yes. I think that's very well said. The only thing I'd add to that is that to the extent we are exercising sort of the share buyback opportunity, that would be done in a leverage neutral to slightly deleveraging way. So those two options will need to be paired together.

Got it. Okay. And then back earlier in the call, Jeffrey, I think you mentioned that recoveries would be a headwind in 2026. So assuming you did say that, I was just wondering if you could go through why is that? And is it related to occupancy levels, so you might have said something about real estate tax appeals, but yes.

Yes. So I want to point back to some of our comments in calls earlier this year. We did have some pretty sizable tax refunds in Q2 and through Q3 of 2025, which are going to act to the headwind as we go into 2026. And then as we look at kind of the leasing pipeline and the activity that we're seeing within our operating markets, it's very important for us to make sure that we're putting the right OpEx expenditures in the assets to make sure that we can get the best leasing activity and really present our assets in the right way. So you're going to see a slight uptick in OpEx perspective, but that's really going to be, I think, pretty impactful for how we drive revenue going forward. .

The next question comes from Michael Carroll with RBC.

I wanted to circle back on your comments regarding the leasing pipeline. I appreciate the color on the increase over the past year. But has that improvement been pretty steady over the past 12 months? I'm just -- I'm trying to understand if the pipeline continues to build at these levels or at what point could it plateau at the levels that you're talking about?

Yes, the pipeline is pretty consistently grown over the last several quarters. We've had some big executions out of that pipeline as well and have more than backfilled that number. So we do feel like there's additional momentum to see lease executions continue to improve as well as the pipeline side continue to improve behind it.

What you heard from Rob is that we've got great activity and momentum in markets that have been consistently strong performers over the last few years like Bellevue and San Diego. We've got markets where we've recently seen substantial activity and a real recovery, and I would put San Francisco and Seattle, Denver [indiscernible], Freemont Lake Union in that bucket. And because of the portfolio allocation work we've done, our capital recycling work we've done in LA, we've got a lot more traction and activity in L.A. than we had 24 months ago.

So it has been pretty broad-based across all of our markets. And I think there are good fundamental reasons why we're seeing that improvement in the pipeline. I would just reiterate that the pipeline has continued to grow despite the fact that executions have continued to grow as well. So we are more than backfilling that pipeline.

Great. And then what about the breakout of the pipeline? I know you said that there is different categories of early-stage and late-stage type leasing activity. has all those categories kind of grown in a similar amount? Or has there been a focus where you're seeing more growth in the early stages, for example, I guess what's the breakout? How has that trended over the past 12 months?

Yes, the pipeline really started to accelerate. Obviously, you start by seeing it really build in the early-stage deals. And it's hard to kind of call like this and communicate a tremendous amount of conviction in those early stages where you don't know how much of that is going to convert.

Over the last couple of quarters, we have seen it sort of even out. And so you've seen what started earlier in this recovery. as a real expansion of the early-stage pipeline move to the mid-stage pipeline and the late-stage pipeline, and that's really what's underscored the elevated executions we've had over the last couple of quarters as well.

So I think it's all consistent. It's playing out the way you would expect it to. I think just based on how transaction activity comes together, but we've continued to see it in really all three of those buckets and continue to build that funnel with additional early-stage deals that we believe are more likely than they might have been 24 months ago to continue to move through the pipeline.

Our next question comes from John Kim with BMI.

On the Nautilus campus, do you anticipate acquiring more life science assets, given there's a lot of the market from willing sellers? Or is it really just focused on this opportunity because of Torrey Pine? And I was wondering if you can give us the timing of the occupancy ramp to get to your upper single-digit yield.

Yes. I would say, look, we don't have any specific mandates to acquire life science to get to a certain percentage of the portfolio or anything like that. We, I think, have acted in a way that's been highly opportunistic, and we would continue to expect it to navigate a capital deployment in that way as well. We're really thrilled about this opportunity. As I mentioned, I really view this as a generational opportunity to enter a market that is tightly held as Torrey Pines is. And with enough scale, I think, to really be able to establish a presence there and continue to benefit not only life science projects we have in other submarkets within the San Diego portfolio, but even sort of the broader, more national reputation around life science.

So I think this was a really interesting transaction that accomplished a lot for us strategically, but we certainly don't feel any mandate. And as we've talked about in our prepared remarks and prior Q&A questions, as we look at sort of the set of available capital deployment opportunities at this point in time, we're going to be very mindful of the signals we're receiving from both the public and private markets. And I think we've got a lot of interesting opportunities on the table for capital deployment. And then, Eliott?

And to the second part of your question, so we have about 50,000 square feet to lease at the campus and that's going to be the main driver that gets us up to that mean upper single-digits return. So you can assume we underwrote it conservative length because that's how we approach these sorts of things, but that is the main factor that we'll get to start.

Right. And as Eliott said in his prepared remarks, working on spec suites at the project, it's a very manageable amount of square footage to lease as Eliott points out, that 50,000 to 55,000 square foot range and the spec suite program we think is going to be highly effective there.

Okay. And then can I get your latest views on Flower Mart? I think you've said in the past, you prefer not to do stand-alone multifamily development. But just given how much San Francisco rents have moved, would you contemplate changing that strategy and keeping that asset for development, if you could develop that and then track the deals?

Look, everything is on the table, right? And so I think as we've talked about since we began this process of rementioning Flower Mart, it was important to us from the very beginning to appreciate that the San Francisco market has in the past and could very likely come back very quickly. And so what we didn't want to do was commit to a different entitlement path at the project that was less dense or took away opportunities we already have embedded in the current entitlement.

So we've been pursuing the word I'd continue to use as it relates to what we're working towards at the power line. There's a lot of optionality and flexibility around our entitlements and around the mix of uses we can develop at the site. We are fully on track with the work that we've been doing at the Flower Mart, Jeffrey reiterated in his prepared remarks that things are playing out the way we expected them to our guidance around when we'll stop capitalizing Flower Mart consistent with what we communicated last year. So things are fully on track as it relates to getting that additional flexibility.

And as we get closer to the point in time where we have that flexibility in place, we'll continue to assess how different asset classes are penciling and what that means for the path going forward.

I would be hesitant for us as Kilroy on a stand-alone basis, develop multifamily. I don't think we have a cost of capital that makes a tremendous amount of sense us to do that. But there are many opportunities where we can joint venture or contribute the land or sell outright if we decide that, that multifamily path for a portion of the project makes sense.

And as we continue to get closer, Rob mentioned in his comments about San Francisco as well. that the number of big contiguous blocks that are left and available in the market has dwindled significantly. And we think over the next quarter or 2, that picture is going to continue to shift and evolve in our favor. And so that's why flexibility around the path for Flower Mart has been more important than driving to one outcome at a point in time. And I feel like we've put all the right pieces in place to be able to make the absolute best decision when we get there, and we'll know more as this year evolves.

Thank you. Our next question comes from Peter Abramowitz with Deutsche Bank.

Yes. Just wondering if you could talk sort of about the cumulative NOI impact of the capital recycling activity, particularly Sabre Spring, Sunset Media Center, and then the offset from acquisition in Nautilus. I guess how should we think about kind of the overall NOI impact and how that's based into the guidance for 2026?

Yes. I'd say, look, I think if we just talk about sort of cap rates and returns for a moment. When we step back and look at all the activity we completed over the course of 2025 and then KSS, which closed in early January.

As we think about 2026 sort of implied cap rate on that pool is probably in and around 8%, probably a bit inside of across the entirety of that pool.

Eliott mentioned in his prepared remarks, and it's pretty consistent with what we had reported on Maple Plaza as well. that we're in sort of in the mid- to slightly above mid-single-digit going in return, with the real path on both of those projects to getting into the stabilized yields in the high single digits.

So I think once we hit stabilization on those projects, we're actually net accretive relative to where the sales have been, but there is sort of a path to get there. We mentioned -- I mentioned in my prepared remarks, we've had great success on lease-up at Maple Plaza, and we just talked about Nautilus. There's 50,000 square feet to lease there to get to that stabilized yield number. So the path is pretty clear, and we feel a high degree of conviction in both of those lease-up and stabilization exercises.

And just to add to that, as we thought about it, we're touching on the 2026 impact, but I think it's also important to consider the impact beyond that. And when you take that, call it, 4-ish cap rate that Angela referenced, layer on the above market in-place rents at the assets that we sold later on the short lease term, and that's going to bring the future returns a lot lower.

On top of that, the CapEx flows to the economic returns are even lower. None of these actually factor in the last piece, which is the land sales, which we're obviously selling at 0 or negative cap rates. So it really helps kind of manage that discrepancy.

Yes. Eliott thinking really important point here, which is that we're working to be very balanced. I think we are IRR long-term return, buyers and sellers but we are very cognizant of the near-term impact on earnings associated with this portfolio recycling activity, and we're really working hard to balance those two things.

And things like the land sales certainly make that easier. But even across the operating portfolio dispositions, I think we're doing a very effective job and managing that dilution while also creating a portfolio that's stronger where the cash flow is more durable and that will grow faster over the medium to longer term.

Okay. That's helpful. And then a strategic one or a question on kind of strategy on capital allocation as well. I think, Eliott, you talked about in your comments, you really focus on the lack of supply in Torrey Pines in San Diego overall. I guess I'm just curious, one, sort of what do you see from a demand perspective? Do you feel like that has bottomed in the life science market in San Diego? And then two, the supply dynamic is maybe not as favorable in the Bay Area. So is that to say, maybe asking John's question a different way, would you be willing to invest in more life science assets if they were in the Bay Area? Or is this more specific to kind of a better backdrop in San Diego and what you view as unique opportunities?

Yes, we do think that Torrey Pines is a really unique opportunity with great, not only physicality of the asset, but great submarket dynamics as well. we have, I think, significantly out leased the competition in South San Francisco. We have additional vacancy there at that project to work through. And so I think we'd be harder pressed to buy additional vacancy in the South San Francisco market today, despite the fact that we feel great about not only what we accomplished at KOP in '25, but the future pipeline there as well. .

This was great campus, Nautilus with great campus and a great submarket, great long-term fundamentals and a very manageable amount of leasing to complete to get to a stabilized yield number.

So I think it just it really things really lined up. We think it was a tremendous opportunity that was in the best interest of shareholders. And as we move forward, we're going to be thinking about not only the opportunities that present themselves in the market. importantly, signals we're getting from the public market as well as we think about redeployment for disposition proceeds.

The next question comes from Dylan Burzinski with Green Street Advisors.

Good to hear you guys sort of occupancy guidance and '26 is sort of flattish versus where it was in '25. Are you able to sort of give any sort of guardrails around the ramp of that occupancy throughout the year. Jeffrey, you mentioned that a lot of the expirations are half weighted. So it seems like occupancy to sort of ramp towards the back half? Are you able to give any sort of guidance as to sort of where year-end occupancy, '26 will land versus where it ended '25?

Yes. I mean just as it relates to the trajectory of occupancy, I would say, not surprisingly based on the disclosure on the lease expiration page, you should expect it to drop during 2026 in the second quarter. And that just speaks to the move-out activity we have in the first half of the year and sort of the pace of moving some of those leases and the signed but not commenced bucket into occupancy over the course of the year.

We give guidance on sort of average occupancy. We haven't given guidance on year-end occupancy, but we'll continue to evaluate that and provide as much color and context as we can around occupancy as we move through the year.

Appreciate that. And then maybe turning over to demand. Obviously, you guys mentioned or highlighted several times, there's a strong demand environment across nearly all of your markets. So sort of just curious the backdrop for demand, if you look at sort of office using jobs, it would suggest that demand is much stronger than job creation and where it's been over the last 18 months. It seems like demand has benefited not only in your guys' market footprint, but across the U.S. in general, as RTOs picked up, you've seen this flood of pent-up demand.

So any sort of sense of when you guys think demand will be back to being driven by the job growth outlook rather than the sort of pent-up demand environment we've been in?

Yes. I mean, look, it's different market to market, right, and even in some cases, submarket to submarket. But what I can tell you across our West Coast markets is that we'll generally, yes, I think there's been some pent-up demand as people have brought folks back into the office. But the bigger component we're seeing is what's been happening from a new business formation and growth perspective in our innovation-driven West Coast markets. And companies from outside of the West Coast, establishing presences in some of our markets in order to tap into the tech talent that's resident in those markets. And that's been a really powerful driver of of leasing demand and growth over the last couple of quarters, particularly in San Francisco, particularly in Bellevue, particularly in Seattle, where you've got significant concentrations of [indiscernible] available.

So [ RTO ] is a component of it, certainly. But I think what's happening from a new business formation and growth perspective is what's really exciting about the West Coast markets right now.

The next question comes from Upal Rana with KeyBanc.

Just on the disposition front, you've already mentioned how you're thinking about capital recycling this year. But just thinking about it broadly, how much more is there to do, not just this year, but just going forward overall, just to optimize the portfolio?

Upal, it's Eliott. Look, I think there's always something to do in part that's because the dynamics in our markets are constantly evolving. And so it's on us to be actively evaluating what those trends are and how they impact different parts of the portfolio. So historically, we've always been asset sellers, and we think that, that will set be something that we can continue to do and should continue to do over time in order to deliver a portfolio that -- and have that optimal cash flow stream that's diverse and growing and stable.

Okay. Great. That was helpful. And then just last one for me. on the short-term leasing. It did come down this quarter. I'm just curious if you've seen any of those leases start to convert to longer-term leases? Or are they still continuing to release in the shorter-term increments? .

I mean some of it's been renewal activity as people just in a little bit more time to make decisions to finalize renewals or to relocate in certain circumstances. Some of it has been short-term new and people taking temporary space ahead of their permanent space being available. So that's been a dynamic we've seen over the last couple of quarters as well.

I think it speaks to the broader dynamics we've been talking about over the last several quarters, particularly in markets like San Francisco, where there's been a real priority on space that's ready and available today. So some of the short-term new leasing has reflected our team doing a really great job of being creative and finding space in the portfolio to put tenants in temporarily while we build out and complete their space.

And that, in some cases, is one long-term deal. So I'm really thrilled with the way we're executing and how we're approaching it, how we're understanding what tenants need and what's going to get deals across the finish line. And that's probably going to continue to be some part of the leasing activity going forward. But to your point, overall short-term leasing has come down pretty significantly.

Thank you. Our final question comes from Anthony Paolone with JPMorgan.

Okay. I was wondering, can you maybe give us a sense as to like where the FFO run rate kind of finishes the year relative to the, say, [ 3.35 ] midpoint?

I think we're hesitant to give much of a trajectory as it relates to that. What I will say, and this is the biggest thing to note as it relates to the FFO trajectory is the guidance around Flower Mart, right? And the expectation that Flower Mart ceases capitalization at the end of the second quarter, first half from an FFO perspective, like it looks higher than second half, which might be what's embedded in your question. But I don't think at this point, it makes sense for us to be more specific on that.

Thank you. Those are all the questions we have. And so this concludes our call. Thank you all for your participation. You may now disconnect your lines.

Hello, everyone, and welcome to the KRC Third Quarter '25 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions]

I would now like to turn the call over to Doug Bettisworth, Vice President of Corporate Finance to begin. Please go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are Angela Aman, CEO; Jeffrey Kuehling, EVP, CFO and Treasurer; and Eliott Trencher, EVP, CIO. In addition, Justin Smart, President; and Rob Paratte, EVP, Chief Leasing Officer, will be available for Q&A.

Please note that some of the information we will be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being webcast live on our website and will be available for replay for the next 8 days. Our earnings release and supplemental package have been filed on a Form 8-K with the SEC and both are also available on our website. Angela will start the call with a strategic overview and quarterly highlights. Eliott will provide an update on our recent transaction activity and Jeffrey will discuss our financial results and provide you with updated 2025 guidance. Then we'll be happy to take your questions. Angela?

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. 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. 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.

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 in concentrated tech and biotech hubs. 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 million square feet, up from approximately 7 million square feet last quarter, with much of this demand being driven by AI and other technology companies.

Importantly, the growth in demand statistics has persisted even if 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. Against this backdrop, I'm pleased to report another strong quarter of execution across our portfolio. During the quarter, we signed over 550,000 square feet of new and renewal leases, marking our highest third quarter of leasing activity and our strongest year-to-date performance in 6 years.

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 95,000 square feet 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.

At 201 Third Street, 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. 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.

Encouragingly, as the San Francisco recovery continues to accelerate. We're now seeing this momentum expand to nearby assets in our portfolio, which is 360 Third Street, where we recently signed our first lease since 2022. 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, 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 Delmar. And at Long Beach, we executed a short-term renewal with SCAN for 87,000 of their approximately 220,000 square feet at Aero. 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 to quarter end, we signed an additional 148,000 square feet of renewals related to 2026 lease expirations, as Jeffrey will detail in a moment.

Taking into account the renewal signed subsequent to quarter end, 2026 lease expirations now total approximately 970,000 square feet, reflecting a retention ratio of over 40% on the pool reported at the beginning of this year. 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. 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. 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.

Turning to life science. We're encouraged by a variety of important signals that speak to the improving fundamentals we're seeing in our portfolio. 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 announcement.

In addition, biotech M&A volume has accelerated with large pharmaceutical companies actively pursue new pipelines to offset significant patent expirations over the coming years.

Kilroy Oyster Point Phase 2, 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. We're pleased to report that we've signed 84,000 square feet of leases to date with well-established biotech companies. In addition to the 24,000 square foot lease with Color that was announced in September, last night, we announced the execution of a 44,000 square foot lease with MBC BioLabs and a 16,000 square foot lease with Acadia Pharmaceuticals. MBC 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. MBC's presence will help create a diversified tenant base of early-stage biotech companies at KOP, advancing our strategic goal of cultivating a dynamic innovation-driven life science ecosystem at Kilroy Oyster Point that will support the long-term growth and value creation of the project.

MBC is expected to commence occupancy in the fourth quarter of 2026. 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. Acadia is expected to take occupancy in the second quarter of 2026.

The future pipeline at KOP 2 is robust, and we're actively engaged with a variety of potential tenants, including several with larger format requirements. These discussions, though still early, reflect both an overall improvement in the life science market and a growing appreciation of Kilroy Oyster Point's purpose-built life science construction and market-leading amenitization. Based on the status of current conversations, we believe that KOP 2 is now well positioned to exceed our previously communicated goal of 100,000 square feet 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.

From a capital allocation perspective, we continue to be active and disciplined as we recycle capital with a focus on long-term cash flow growth and value creation. 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, 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 4-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 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.

Looking forward, expect us to continue to thoughtfully and strategically rotate capital out of assets where we believe value has been maximized and as proceeds are realized, pursue a balanced mix of selective reinvestment opportunities and debt repayment, considering all redeployment alternatives with a focus on optimizing portfolio returns and maintaining a strong and flexible capital structure.

With respect to future development pipeline, we continue to work through additional land parcel monetization and expect to have further announcements in the coming quarters. In addition, we've been hard at work on the Flower Mart project, which is our single largest investment in the future pipeline. 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.

During September, as part of our redesign and reimagining and Flower Mart project, we submitted 4 development scenarios to the City's Planning Department, 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 time line required to secure the optionality we're targeting. 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. 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 have accelerated. I couldn't be any more pleased with the energy, enthusiasm and execution that this team is delivering each and every day. Eliott?

Thanks, Angela. As Angela noted, fundamentals are accelerating across all of our markets, which is not only good for leasing, but also for transactions. Buyers are underwriting vacancy and rollover with more conviction, leading to deeper bidding pools, which in turn is giving sellers increased confidence 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. We had a productive first 3 quarters of the year, closing on $405 million of previously disclosed sales. As we continue to evaluate dispositions, our strategy remains the same. Monetized properties in lower conviction locations at values that imply forward returns less than our cost of capital. We are fortunate to have the benefit of a strong balance sheet, meaning we are not going to sell at any price and instead, we'll only transact when a deal meets our rigorous thresholds.

Turning to land sales. As previously discussed, we had $79 million under contract between 26th Street in Santa Monica and Santa Fe Summit in San Diego. Both buyers continue to advance their plans and the transactions will close upon receipt of entitlements, which we currently estimate to be mid-2026. 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 Beverly Hill. Beverly Hills has many of the characteristics we look for in the submarket. It's centrally located within the west side of Los Angeles with proximity to decision-makers, amenities and a diverse mix of tenants across multiple industries. Because it is essentially located the barriers to entry are quite high with cumulative new supply of only 260,000 square feet over the last 10 years.

Additionally, 3 of the neighboring properties totaling roughly 400,000 square feet have been acquired by users in recent quarters, which has further reduced competitive supply and enhanced vibrancy in the micro market. 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. As we lease up vacancy, we anticipate a stabilized yield in the high single digits and an unlevered IRR in the low double digits. In the few weeks we have owned the building, leasing activity has been strong from a mix of new leasing from new and existing tenants, 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. 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. However, 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.

With that, I will turn the call over to Jeffrey.

Thanks, Eliott. FFO for the quarter was $1.08 per diluted share, which includes approximately $0.03 per share of onetime items, including $0.02 per share related to real estate tax appeal wins, an additional $0.01 per share of noncash 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. Occupancy statistics now reflect the recently stabilized redevelopment projects, 4400 Bahana Drive and 4690 Executive Drive, which represented a 50 basis point negative impact to occupancy during the third quarter. 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. The improvement relative to our prior expectations was a result of earlier than anticipated rent commitments totaling approximately 200,000 square feet, all of which were originally projected to take occupancy in the fourth quarter.

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. It's important to note that KOP 2 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. Additionally, our assumptions now reflect the bankruptcy-related October move-out of NeueHouse, a 95,000 square foot tenant at Columbia Square.

While the departure is now reflected in our occupancy outlook, the space's high-quality build-out and historical significance are generating strong interest from prospective users and the team is working diligently to minimize downtime.

Portfolio retention 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 Ride Games at Westside Media Center and a 67,000 square foot lease with ByteDance, a current subtenant with a 2026 expiration at Key Center. 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.

Turning to guidance. We raised our 2025 FFO outlook to a range of $4.18 to $4.24 per share, representing an $0.11 per share increase at the midpoint. This revision reflects several key updates to our expectations. We now anticipate approximately $0.05 of additional noncash income driven by tenants taking occupancy earlier than expected in the previously mentioned straight-line bad debt reversal that occurred in the third quarter. 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. With the progress made to date and the recent submission of our development applications, we're in a stronger position to find the process time line and have updated our assumptions accordingly. As the reentitlement process advances, we anticipate reaching a point we are short of executing a demand-driven development, all feasible progress that the project will be complete, at which time, capitalization will need to be suspended indefinitely. 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. Following the 84,000 square feet of lease executions to date in our healthy forward pipeline, it's appropriate to begin framing up the project's expected NOI and FFO impacts in 2026. 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 and KOP 2 totaled approximately $5 million while capitalized interest totaled approximately $10 million, both of which are a reasonable 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 projects will moderate before becoming a net contributor to growth in the coming years.

With that, we're happy to answer your questions.

[Operator Instructions] Our first question today comes from the line of Nick Yulico with Scotiabank.

So first question is, I guess, just turning towards some of the expirations you talked about getting addressed for 2026. 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 retention for expirations and then also getting some benefit, as you talked about from commencing occupancy on that gap right now between signed, but not occupied space?

Sure. Thanks, Nick. This is Angela. I'd start with sort of going back to where we started with the 2026 expiration pool at the beginning of 2025. We were showing about 1.9 million square feet, 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 square feet of renewals that were signed subsequent to quarter end. We're down to a remaining expiration pool in 2026 of about 970,000 square feet.

As I mentioned earlier, I think there's a limited opportunity for additional renewals out of that pool. So we do expect that you're going to see move-outs in 2026 for the majority of what's left in the 2026 expiration pool, and we'll need to offset that through new leasing, right, both through a combination of, as you point out, a pretty healthy spread between signed and commenced occupancy 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 interest that tenants have and getting into space as quickly as possible. We've seen that 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, 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 exploration activity in 2026 or offsetting it.

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

Okay. And then just second question is on San Francisco. If you could talk a little bit more about how you're seeing your space be competitive in the market versus other options? And then also sort of an update on competitive sublease space that's in the market, and sort of just sort of depth of the tenant pool there overall?

Sure. Yes, I'll take the first part, and then going to turn it over to Rob to talk about some of the more specific dynamics in the market. But 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.

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 9 to 12 months ago, that's really captured our SOMA assets and in particular, 201 Third, where as I mentioned earlier, we've now completed 3 consecutive quarters of major leasing at that property. We're now seeing that activity expand further into SOMA and into assets like 360 Third Street. So we've seen really sort of a healthy dynamic is where tenants are willing to look at expanded. 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.

Thanks, Angela. Nick, it's Rob Paratte. 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 our touring. 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 where San Francisco particularly has dramatically improved in the past couple of quarters.

AI demand continues to be a very strong driver in the market. There's about 1.5 million square feet of AI demand currently touring in San Francisco. And then relating to sublease space over 2 million square feet of sublease space has been basically taken off the market through either going direct, taken off the market by the sublessor or being leased. And that's a notable number. And when you look at the Kilroy portfolio, we've had 200,000 square feet taken off the market this quarter by tenants. So all of that points to, I think, a sustained recovery as the office fundamentals are improving and showing signs of sustained recovery, we're already at pre-pandemic levels, as Angela 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 '26.

Our next question comes from Jana Galan with Bank of America.

Congrats on a great quarter. I wanted to follow up on the increased leasing outlook near term at KOP 2 and just kind of the current demand in tours, whether that continues to be more traditional biotech or it's kind of across the board?

Sure. I'll -- let me kind of frame up where we are with life science in KOP in South San Francisco. So in Q3, there were slightly over 600,000 square feet of leases signed, which is on par again with pre-pandemic levels. Look, 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. And our life science team -- dedicated life science team is nimble accretive and they're really quick to respond adding to this momentum, which gives me a lot of confidence that momentum will not only continue in Q4, the remainder of Q4 as Angela said, but well into Q1 and 2026.

Life science demand rose over 20% from 1.8 million feet to 2 million feet in Q3, another very positive 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. 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. And that's not just South San Francisco specifically, it's a trend moving from South San Francisco down through the peninsula.

Yes. I think -- I mean, Rob's really hitting on the right point. We're thrilled to be at the point we are right now. It's 84,000 square feet of leases executed at KOP. As you've alluded to, we feel like we're very well positioned to exceed the goal we put out for ourselves last quarter of 100,000 square feet by year-end. I also think, as we indicated last quarter, we're very pleased that the first wave of deals we're signing at KOP 2 have all been biotech, biotech related.

I think that's a really important point as we think about the future growth and evolution of this project in Phases 3, 4 and 5 down the road. We're being very intentional about creating the right sort of life science ecosystem at the project that can support that growth down the road as well. And then Rob made a really important point, which is 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 finishing this project, but we are seeing really important demand that's giving us a little bit more leverage in leasing for the remainder of KOP 2 from other uses outside of life science as well.

So overall, I think 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, really pleased that we're able, with these first leases that are being signed, take the first steps at creating that dynamic life science ecosystem on site.

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?

Yes. I mean this quarter, the shorter-term leasing, I think it was 129,000 square feet. Most of that was renewal activity. And I spoke to some of that in my prepared remarks. We're going to be flexible 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. 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. There continues 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, still a desire for leases that are shorter-term in nature than a traditional 10-year lease. So we are seeing that demand in sort of that 3- to 5-year window for many of these AI companies, 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.

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 have space over the next 5 to 10 years, 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. But the truly short-term leases, again, have been almost all renewal activity. And that's, in many ways, just a normal recurring part of the business.

Our next question comes from Steve Sakwa with Evercore ISI.

Jeffrey, I don't know if you could provide a little bit more color on just the NeueHouse lease. I appreciate you for clarifying that, that really was, I guess, in the quarter end occupancy and comes out in the fourth quarter, 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?

Yes. We don't -- Steve, 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. 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.

Rob and team, I'll let Rob comment on sort of the re-leasing backdrop for that space in a moment. But we're really focused on re-leasing that space as quickly as we can. 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.

Steve, yes, we started fairly early on looking at opportunities for the former NeueHouse space in terms of what can be done with it. And I'm actually pretty pleased with the activity we've seen from a variety of sectors, including the hospitality and entertainment sectors. And as you know, the space is very highly designed, very well designed. We own all the FF&E. 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.

And I think most -- or not most importantly, but very important aspect is that the historic studio, the CBS former auditorium can house up to 400 people. 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. So again, we're seeing kind of a disparate group of interested parties right now that we're talking to.

And just any comment, Rob, just about kind of how the rent would maybe stack up to the prior rent? Would that be a roll up, roll down, flat?

Hard to say, Steve. It depends. I mean some of these uses may have more new for capital depending on if it moves toward hospitality. It's really going to be very deal specific, 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 30s and 40s and 50s at the prime of Hollywood that cache carries a lot of value for future users.

Our next question comes from Seth Bergey with Citigroup.

I guess the first one, just to go back to kind of the KOP leasing activity you've done. Can you provide a bit more color on kind of the lease economics you're achieving there? And maybe touch on kind of how those leases kind of compared to your initial underwriting?

I'll start with the beginning that the lease economics vary between whether it's a spec lab or whether it's going from shell construction. So there's variability there. But we're very attuned to what the market is and happy with where we're getting -- where we're achieving our rental rates. And TIs have no doubt gone up since we originally underwrote the project, but we're meeting the market in terms of where the demand is and providing that value that I mentioned earlier.

Yes, I think Rob categorized it exactly right, which is I do think rents have held in pretty well relative to our original underwriting, even on these first handful of deals we're executing, which you would expect to come in a little bit below. So rents are pretty much in line. 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 the -- our disclosure around the lease executions in the second -- or for 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 TI numbers, even though those tend to be almost by definition, some shorter-term deals and that capital is designed to be easily reusable for future tenants. So that's just one element I would note, as you think about some of the TI numbers you're seeing in the supplemental and we'll see on the spec suite deals going forward.

That's helpful. And then maybe for a second one. I believe in your prepared remarks, you mentioned 1.9 million square feet of kind of '26 expirations that kind of need to be backfilled primarily kind of by new leasing activity. 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 some way to benchmark it just kind of as you guys are seeing this recovery in demand?

Yes. Let me make a point of clarification, and then I'll turn it over to Rob. But 1.9 million was the 2026 lease expiration tower we were facing at the beginning of 2025. Over the course of the last 3 quarters and with some renewal signed subsequent to quarter end, we're now down to 970,000 square feet of remaining 2026 lease expiration. So we've substantially addressed that original tower. That's translated into about a 40% retention on the original 1.9 million square feet with additional vacancy or potential move-outs being addressed through disposition. 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. And we mentioned specifically in San Francisco, a 170% increase in tour activity in our SOMA properties, in particular, where we do have vacancy. We're seeing really great momentum. But I'll let Rob comment on the broader pipeline and tour activity.

Yes. Seth, the only thing I'd add to what Angela has said is that it goes beyond the market we're talking about. And it's just that demand is across the board increasing of the 900,000 feet remaining. There's always a chance someone -- a lot of times things pop up at the end, where somebody wants to hold over, it could end up in 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. That said, we have marketing and business plans put together for all that vacancy for the 900,000 that remains. And we're really positioning it early on to start leasing it and are in conversations on some of it already.

Our next question comes from Anthony Paolone with JPMorgan.

I just want to go back to KOP and revisit the prior question a bit. Just a 2-parter there. One, at the rate -- at the rental rates you're achieving and what you're seeing out there? What would the yield be on your cost? And then the second part of that, the $1.25 billion. Remind me, is that fully loaded for tenant improvements, leasing commissions, prebuilts, all that?

Yes. I mean I'll make a couple of comments. We're 10% leased on this project right now, right? So we've got an 84,000 square foot lease on 875,000 square feet or thereabouts. So I think it's a little premature to talk to the total economics of the projects overall. I think as we continue to execute on this project and we demonstrate further progress on the leasing, it will be the right time to take a step back and talk about the overall economics of this project. But doing so on the first 3 leases that got executed is just a little bit premature.

The numbers we have in the supplemental do reflect our original expectations as it related to capital. So at the right time, and again, as we get through additional leasing activity, we'll update as appropriate.

Okay. But -- so then, I mean, you mentioned the capital running a little bit ahead of plan rents kind of more or less in line. So does that mean it likely us to bump up a bit or still too early to tell?

It's still too early to tell. I think it's -- we'll continue to evaluate as we get additional leases signed and hope to have additional updates over the coming quarters.

Our next question comes from Brendan Lynch with Barclays.

You've mentioned some of the components that will feed into this, but guidance calls for a 1% contraction year-over-year, but same-property NOI was up 1.4% year-to-date. Maybe just walk us through some of the considerations that we should keep an eye on in the fourth quarter?

Yes. Thanks, Brendan. 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 run down or expect to see that.

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

Sure, Brendan, and the ground floor space is exactly what I wanted to talk about, which is, I think, a really monumental accomplishment by our Austin team leasing what we call the post, which is a freestanding historic building on the project site. And 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 had many successful startups and built several chains through that entity.

And 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 the foot traffic and demand on the Sixth Street corridor, where we are, but it's also a really important amenity. It's big enough, meaningful enough that it's a big enough amenity for the overall Austin CBD. And all I can say is it's a complicated project. It took a long time. We have a multi-floor building that's historic that was in shell condition and will truly be special space. And I think all of us at Kilroy really look to our Austin team for having the perseverance and patience to go through that and execute it.

And then what that leaves us with is our office space. And we continue -- again, I can't speak to the competition. I can only speak to what we see. And as Angela has 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 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 at Indeed Tower, and we think this post enhancement will also lead to increased activity. And I think long-term, just a great investment in that project.

Our next question comes from John Kim with BMO.

I had a couple of questions on your leasing pipeline at KOP 2. 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 musical chairs?

John, it's Rob. I'd say our demand -- I mean, we've said this for maybe 3 quarters now that our demand has continued to increase, at least we've seen an uptick and continuous uptick in tour activity. Suffice to say what I said earlier that we're confident in the pipeline we have in the remainder of Q4 and the executions that Angela talked about. And I think that our momentum is strong enough that Q1 and Q2 well into 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 we have a very concerted focused marketing effort. The project can accommodate tech as well as life science. The bulk of our activity is in the life science space because it's purpose-built life science, but other entities are also interested in it. So I'm very confident in the pipeline we got.

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

If they're seeking additional space within the market? Or is it just upgrading the space?

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

Okay. On the 970,000 square feet of potential move-outs next year, can you provide color on why these tenants are not renewing their space? And just your ability to backfill that space next year either through leasing or extending the current leasing?

Yes. I mean, I guess, I'd go back to the comments I made earlier. When you think about the 1.9 million we started the year with and look at just what's been re-leased on a long-term basis within that pool, we've achieved a 40% retention rate or a little bit over 40%, which is a material improvement since any year through the pandemic. So actually, on a 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 close to pre-pandemic level of retention.

So it's just a combination of tenants with shifting needs. We mentioned one example in my script that was a tenant moving to owner-occupied space. There's been 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 pretty historical levels of activity from a move-out perspective.

Our next question comes from Upal Rana with KeyCorp.

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 the space back for next year?

Paul, it's Eliott. I mean, as we mentioned, we're looking at all different alternatives that are out there. So our general alternatives are anything from investing in an asset, be that an office asset or life sciences asset or buying back stock, and we just sort of evaluate the opportunities as they present themselves.

Overall, we've been encouraged at the types of opportunities that are out there and we're fortunate enough to be successful in closing on Maple Plaza. But we'll see. We'll see what else comes out, but we're definitely spending time looking at all of the above.

Yes. And just to add to that, we're a net seller this year so far of about $200 million. We continue to evaluate what we think are a growing number of opportunities in the market. And then a point Eliott 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 in a unique period of time where valuations are pretty compelling and compelling relative to other alternatives.

Okay. Great. That was helpful. And then as a follow-up, could you talk a little bit more about Flower Mart? And could you share any recent conversations you've had with the city on that project? You mentioned continuing GAAP interest there until June 2026, but any additional color there would be helpful.

Yes, sure. 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 as I mentioned in my script, we submitted to the planning department recently, I believe, in early September, additional potential path forward for the Flower Mart that included a broader mix of commercial and residential uses. We're going through the exercise of the planning department to understand sort of what's achievable on the site and how that would lay out and what the ultimate path forward will look like from an execution perspective.

So as I said earlier, we're pretty early days in those conversations, but everything to date has been constructive and encouraging. And I think we are aligned with the city in ensuring that whatever ultimately gets approved here meets the needs of the San Francisco community as it continues to evolve.

Our next question comes from Caitlin Burrows with Goldman Sachs.

I guess maybe just as a follow-up on the Flower Mart point. So it seems like over the, call it, year-to-date, the amount of activity that you've been able to continue doing has changed and your own expectations have changed. I guess, can you just go through like what those changes are and like the current expectation is for June 30? 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 again?

Thanks, Caitlin. As 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 is unique relative to the way San Francisco has historically approved projects. So the time line and the path forward hasn't been completely clear, which is why we've tried to do the best job we can of being transparent with investors about what we know at different periods in time and then updating those expectations as appropriate.

With us filing the additional proposals or additional potential paths for the Flower Mart with the planning department, in September, we have greater clarity on that process -- that step of the entitlement process and believe that will take us through the first half 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 maybe a minor point on the Silicon Valley sale. Could you guys give us more detail just on when that closed in September if it was the beginning of the month or the end of the month?

It would be very end of the month.

Our next question comes from Michael Carroll with RBC.

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

Yes. I think it's a little too early, right? I think if you take a look and it's been reported in the press at our application to the planning department, you see a wide range of uses for different potential paths that include commercial, a full commercial program like we're currently entitled for a fully residential program, a mix of different uses on site as well. So I just think what we're looking for right now is making sure that we have all the flexibility and optionality with our existing entitlements and with the development agreement to execute on whichever one of those paths is ultimately going to maximize value for 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.

So stay tuned. We're continuing to work through it. I'm really pleased with the progress we've made to date, but we have some significant work still to do.

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

Yes. I think to get to the $150 million, those are things that are actively being worked on right now. So I think that, that should be more near than long-term. And we've really focused our efforts on where we thought there were actionable items within the land bank. And so as markets continue to recover, I think that the opportunity set 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 what remains.

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

Our next question comes from Omo Okusanya with Deutsche Bank.

Just a quick one around just some of the quarterly numbers. Eliott, could you again just walk us through the straight-line bad debt reversal exactly what that was? And also what drove the fairly large increase in tenant reimbursements quarter-over-quarter?

Tayo, it's Jeffrey. Straight-line bad debt, it's just a function related to a tenant moving from cash to accrual. So we had to unwind the previous adjustment we made in the prior period. 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 quarter-over-quarter.

Got you. Okay. That's helpful. And then on the whole slide in regards to just 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 that is for KRC. I mean, could we kind of see some AI companies in some of the KOP Phase II cards? Like how do you kind of help us kind of think through that a little bit more about kind of new -- kind of new leasing that would come from that driver?

Yes. I mean I think if you look at -- and I mentioned the total requirements in 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, and we were totaling and had been covering around 7 million square feet for quite a while. A big driver of that is AI-related companies. 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, but 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 portfolio and we would expect that to continue.

As I mentioned earlier, we've worked really hard to understand what those tenants need from landlords and how we can really hit that demand and that need and a lot of it has been from -- a lot of it has been from understanding their need for very near-term occupancy. And so getting tenants into space as quickly as possible, we're using existing improvements as we did in the case of Harvey AI building out spec suites trying to get in front of some of that demand, all those things are really impactful in our ability to capture an outsized share of AI demand going forward.

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

Our next question comes from Dylan Burzinski with Green Street Advisors.

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

Yes. So we're really seeing all of the above, and we've seen core deals, core plus value-add and then heavy repositioning opportunities. And I think that speaks to just the overall trends. As far as where we try to spend our time, it's more bottoms up than top down. And we're looking at the dynamics of that particular asset in that particular submarket and then how it relates to other risks that are already existing in the portfolio. And so we want to make sure that we're smart and thoughtful about the kind of risk that we're taking and not necessarily doubling down on existing opportunities that already exist with vacancy that we had elsewhere in the portfolio.

So in the instance of Maple, 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 that give us enough runway to be able to execute on a lease-up plan. And so far, we feel encouraged by what we see.

Yes, I'd just add to that. I think 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 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 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.

Our next question is a follow-up from Caitlin Burrows with Goldman Sachs.

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

Yes. I think it's a really good question, Caitlin. I think it's a little bit difficult to answer when you think about how we report our spreads. There's no cutoff in terms of how long a space has been vacant. We're showing you basically a complete population. So it's really going to depend on where the new leasing activity happens across the portfolio in 2026. From a market-by-market perspective, we have markets where we believe we're below market and where leasing in those markets are going to result in pretty positive spread dynamics. And then markets, including the city of San Francisco, where we're probably still reporting a role -- a step down in rents as we re-lease space.

I think the most important thing to consider about San Francisco and the overall dynamics in that market, is that obviously, as we all know, that's a market that really was challenging, very challenging. Even 12 months ago, still a lot of vacancy in the market that's starting to be addressed. We're getting more stability on the occupancy side. You're seeing it through new leasing activity. And as Rob mentioned earlier, sublease space 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 the direction, there will be inherently more pricing power in the market.

So I think we're at the -- I think all the pieces are in place, including that growing demand picture for things to continue to get better in San Francisco. The leases signed over the next year, probably on average in that market are going to be negative re-leasing spreads.

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

Good afternoon, everyone. Welcome to Bank of America's 2025 Global Real Estate Conference. I'm Jana Galan, BofA's senior analyst covering office REITs. We're very pleased today to have with us Kilroy Realty, CEO, Angela Aman; CFO, Jeffrey Kuehling; CIO, Eliott Trencher, Chief Leasing Officer; Rob Paratte; and VP of Corporate Finance, Doug Bettisworth.

I will first turn it over to Angela to give some opening remarks, but I'd love to open up questions to the room or I can start with a few that I've prepared.

Sounds good. Well, thank you, everybody, for coming today for your attention to the company. I think Kilroy's had a really important point from an inflection standpoint in our West Coast markets. As we've talked about in the last few quarters, we've really seen a resurgence in demand and activity across most of our West Coast markets, but particularly in the San Francisco Bay area.

And most interestingly, I think within the city of San Francisco itself, as both we get a public policy environment in the city that's more conducive to business growth and new business formation, and we're benefiting from the trends we're seeing across the AI space as those companies continue to take incremental demand.

We've also been active on the capital allocation front. We've been working through monetizations of our nonincome-producing land bank for some time, and we're starting to see the fruition of those efforts with some recent announcements there. So we're pleased to see the activity on that front and then have also announced a success on the operating disposition, operating property disposition standpoint.

So we've not only been able to monetize a pretty large asset in the San Francisco Bay Area at pricing, we think, is very compelling. But also some smaller assets, including in the Los Angeles market. So I think we're seeing great success really across every facet of the business and are interested and excited to take your questions.

Maybe starting out, Angela, you're coming up to your 2-year mark. And just curious if you could kind of talk through some of the key changes looking back over this time period and kind of what's next?

Yes. In terms of key changes at the company, I'd say a few things, and they are somewhat interrelated, but I'll put them in 2 different buckets, one sort of on the portfolio side and then the second on the platform side. I think to just start on the platform side in terms of the team and how we're executing on the business really across every component or every facet of the business. We've made a lot of key changes, most of which were announced really kind of in the middle of last year, when I was 6 to 9 months kind of into the seat.

Most notably, we split the CFO and CIO role. We brought Jeffrey on board, somebody I had worked with for a very long time and who has a real skill set and capability not only on capital allocation and strategic planning, certainly, but also on data, the way information moves across companies and how to really make sure that we're putting Kilroy in a position to be a little bit more data forward and engaged with data across every component of our business and that more people within the company have access to information that will help facilitate better decision-making kind of across the board. So that's been an important change.

In addition to that, we brought on a new Chief Technology Officer. We also brought in a new Chief Human Resources Officer. We promoted somebody internally to General Counsel. We brought on additional leasing support both at a senior level in the San Francisco region overall. And then importantly, additional leasing talent, specifically on the life science side to focus on KOP in particular. So there have been a lot of changes across the board.

But I would say, again, kind of stepping back, a lot of what we're doing is to make sure, yes, that every component of the business has the resources it needs to execute on, I think, some pretty ambitious goals we're setting for ourselves and holding ourselves accountable for. And two, but really also putting us in a position, again, to make the best decisions possible to be a little bit more data engaged and data forward as we think about how to take the business to the next level.

At the same time, we've been stepping back and doing the broader exercise on the portfolio, a lot of which was done really in that first year I was on board. But really thinking about the assets we own, the types of assets we own, the submarkets we own them in within our 5 core markets and challenging ourselves to step back and think about how our asset class and asset classes have really changed over the last 5 to 10 years. And what that means for the portfolio as we own, the places we own them and how we might think differently about shifting and changing the portfolio to make sure that we're staying ahead of those trends and that we can meet tenant demand as it presents itself in our markets as it continues to shift and change in pretty interesting and dynamic way.

So I think there's been a lot of work on that side, too. I think some of the transactions I referenced in my opening remarks both on the land sales side and the operating property disposition side really reflects sort of that assessment that we've done, right, throughout the entirety of the development, the future development land bank. We took a big step back and really yes, thought through what our initial investment thesis was for each one of those parcels, but really challenged ourselves to understand and embrace whatever the highest and best use for each parcel in the future land bank is today. And what decisions do we need to make associated with that, right?

So we've got a number of different parcels within the future land bank where the investment thesis originally was to develop them as office or life science assets and where that investment thesis really doesn't hold today. But there is a very compelling path forward for those sites as residential or as some other use. And so those are the kinds of opportunities within that future pipeline that we've been monetizing. And I think to date doing so successfully at prices that I think are very compelling and compelling even original relative to our original basis.

On the operating property side, it's been sort of a similar evaluation process. But where are those assets today, what's changed either asset-specific, with the tenancy in that building or within the submarket. And what -- if we step back and re-underwrite those assets today, looking forward, where do we have capital tied up in the portfolio that is earning a forward cost of capital below our cost of capital and where should we take advantages to monetize those assets and look for additional opportunities to redeploy either reinvesting in our existing asset base in many cases or being prepared to take advantage for what we believed we would see coming, and we're now actually seeing come to fruition, which is a more thriving transaction market even across our West Coast markets and in our asset classes. So we're seeing a return of activity. We're seeing more liquidity in the market, both for the types of assets we want to sell and some very high-quality opportunities that we think we should really consider.

Thank you. And then maybe turning it to Jeffrey, you're almost at the 1-year mark. Kind of similar question on just kind of talking about the changes you've made, the changes you're looking to make and you inherited a pretty strong balance sheet, but kind of thoughts around target leverages.

Absolutely. So as Angela mentioned, a lot of the work that I've really been focused on for the last year has been internal from a data perspective, where you see that from an external stakeholders how we communicate in our supplemental, the type of information we can get out to the investor base and how we really get in front of the 4 decisions we're making. So part of that is improving the disclosure process around capitalized items and allowing all investors to get the information at the same point in time.

More recently, we put in our third investment grade credit rating with Fitch, part of that thought process was really how do we make sure we have all the information of the fixed income community, how do we really provide full access to the debt investors and how do we make sure that everyone has opportunity to engage with our story. As I look forward, right, we did execute a bond offering early August, which was in a great position as we roll through the rest of 2025.

As you mentioned, the team has done a great job structuring the balance sheet. So we've got a well-laddered maturity schedule, which allows us to be a frequent participating in the debt capital markets. So a lot of it is just continuing that momentum as we go through the lease up cycle in our assets.

Thank you. And then maybe for Rob, Angela touched on kind of the positive momentum in San Francisco and AI leasing, tech requirements, but maybe if you could kind of walk us through what you're seeing?

Sure. Good afternoon, everyone. I'd say as little as 9 months ago, the outlook in San Francisco was very different. AI was on the cusp of starting to grow. But really, the only AI of note was OpenAI, who took a large amount of space in the Mission Bay submarket of San Francisco. But if you fast forward to today, AI is probably the primary driver for demand in the market. It has expanded the footprint that it's looking in.

So companies wanted to be close to Mission Bay, close to OpenAI, but now you're seeing that spread into the South Market Financial District, which wasn't happening for quite some time. A lot of the demand in the past had gone to the North of Market Financial District because there were more amenities. So now you have a sea change really happening on multiple fronts.

We have a new political environment, new Mayor, basically a new board of supervisors that's much more business-friendly. That, in turn, has cleaned up the streets dramatically. And that, in turn, has opened more retailer or allowed more retail to open successfully, and that has helped employers bring employees back to work.

And I think all of you have seen in the national press that San Francisco, instead of being the poster child for what's wrong is now getting a lot of credit and deservedly the current Mayor in that administration is really making a marked difference, and that's coming up in the conversations we're having. We've done our share of AI leasing and continue to see that demand.

Venture capital funding continues to flow into San Francisco primarily. If you look across the country, there are other pockets like Bellevue and Seattle, where we have assets as well. But AI is a force to be reckoned with, and we'll continue to grow. We used to talk -- we used to talk about the average AI tenants, 5,000 feet. And 6 months later, it's 10,000 feet. Now there's no real talk on that because it's pretty much across the spectrum. So it's a real and viable business.

And I'd say the last thing on San Francisco is that the fire category tenants have also been active and absorbing space. So things are really making a turn. We still have work, but things are making a turn.

Great. And maybe if you could touch a little bit on kind of the KOP 2? And just life science demand in general?

My favorite subject. We -- in our last earnings call, you've heard Angela talk about the demand we have at KOP. We continue to work on that demand and expect by the end of the year that we'll have 100,000 feet of leases that we will sign. We're very confident in that. And our team on the ground is very deeply involved in the intense negotiations that go on and the discussions about technical capabilities of the buildings for life science users are -- what's really pleasing about not only the transactions we have that we're working on is that the pipeline has continued to grow.

And I would remind everyone, we just delivered the project at the end of last year. So it's the newest delivered project in South San Francisco actually Bay Area from a life science and scale point of view, and we're getting a lot of attention drawn to us because of the scale of the project, the amenities we're offering as well as what's happening is momentum is building, the market's hearing about things we're working on, and that's leading others to begin discussions.

So I couldn't be more excited about it. But again, we have to keep our sleeves rolled up and execute.

Yes. I mean we came out with a 100,000 square foot target. Again, that's executions by year-end 2025, as Rob said, and I just want to underscore, we feel really good about that number. Things have only continued to progress on each of the deals we're working on in a positive direction. Nothing has changed from a sentiment perspective or a directional perspective, certainly to the negative, since the last earnings call. So we feel really good about that. We think we'll see executions, both in Q3 and Q4. And as Rob's underlining, the pipeline behind those deals is growing really nicely as well.

Can you follow up what you're asking about rent side KOP?

Again, it depends on whether we have some speculative lab space, and we've also got shell condition space. So it really depends on the package, but asking rents from ourselves as well as our competitors haven't really changed that much. So in the 80s triple net in that area, depending on tenant improvement and term and tenant.

Is that pipeline life science and your traditional tech, I think moving toward March, I believe it is not currently for month end, or are we at the time a traditional effect was necessary looking in that month -- is that...

I would say, what we said on the conference call, specifically around the first 100,000 square feet is that those are life science deals. One, we've been very open. We got a lot of space to fill at KOP Phase 2 as everybody is well aware in this room. So we've been very open to exploring the -- what has been pretty broad-based demand. But the deals that are going to cross the finish line first are all kind of in the life science or life science adjacent kind of categories.

Some of the demand behind those deals is -- has been a little bit more tech. We are seeing some interest at assets like KOP or some AI uses that have robotics sort of uses and might use dry lab space and things like that. So again, just like other ways in which that forward pipeline kind of continues to expand and grow. But there is going to be a pretty healthy contingent of life science in this lease-up process as well.

We think about that, and I do think it's strategically important for the asset. The asset does not need to lease up to all life science but I think when we think about Phases 3, 4, 5 down the road at KOP, there is real benefit to having a real core stable of life science tenants there, that can facilitate the next wave of life science growth at the project. And so we're really excited that, that demand has materialized, and that's some of the first demand that's materializing and getting across the finish line. But again, we got plenty of space to fill, and we're open to a broader mix of uses as we were in Phase 1.

Okay. Can you just talk about in terms of life -- is this -- are you seeing demand because you have a new facility and well-located [indiscernible] facility. Can you just put that in the context of general life science demand overall? It is pretty uncertain environment...

I think the market overall has seen a pickup in activity. And I'm talking specifically the market, not the national market. We're not in Boston. We're not in some of these other core life science markets. We have some exposure in San Diego and then really South San Francisco. Within the South San Francisco market where KOP sits, we've definitely seen some broader pickup in life science demand and executions.

But I think without question, in my opinion, and Rob will jump in here as well, I think KOP 2 is seeing a disproportionate amount of activity, and we'll experience a disproportionate amount of executions for tenants looking for new incremental space because of the quality of this project. It's not just the quality of the physical plant, which is exceptional, this is purpose built for life science and it really meets the needs of some of the most discerning users in the market, but also because of the way this project has been amenitized. Both amenities on site, the coastal views, the proximity to some other outdoor amenities in the area. I think it really sets this asset apart from others in the market.

The only thing I'd add is that there's less hesitancy on the tenant's part in terms of making decisions and really focusing on a location a year or 2 ago, there was a lot of hesitancy. Boards were being very tight with allowing companies to take on more space.

But some of that resulted in pent-up demand, and that's one of the things we're seeing as well. So as Angela said, in the broader purview of or view of the Bay Area, Life Science has picked up. It's not where it was at the peak. But it's picking up and VC funding is continuing to come into that space. So we're seeing it sort of across the spectrum.

There is still a lot of concern that [Technical Difficulty]...

I think to answer that -- is it positive or negative within our markets or just talking about it nationally, I think those are probably different outcomes as well. There's still a ton none of us know, right? And to be honest, I think one of the most interesting parts about the capital allocation puzzle, I thought when I took this role was exactly that. How do we take advantage of what AI is going to do for demand in our West Coast markets and particularly in the San Francisco Bay Area, where we have so much of the portfolio.

But how do we also make sure that we're taking all the steps necessary to future-proof the portfolio against what AI might do on the other side. And that's going to change both potentially the types of assets, it's going to change submarkets, it's going to change like all kinds of positioning, or all kinds of positioning considerations we should take into account.

So without having a crystal ball or like a perfect answer to this question, all I can say is that we're really listening and really paying attention for how some of those dynamics are going to play out. I do think innovation hubs like the markets we operate in are going to be net beneficiaries. I can't say that's going to be true overall on a national basis. But I certainly think the types of activity we're seeing in our markets are going to continue to position them at the forefront.

I know that it's really easy to paint a Dorconian case where just all jobs go away, and you've seen white papers and other things to that effect. But I think we also realize and appreciate this would be the first major technological revolution where the outcome is that we do exactly the same things we've always done. As an economy, we just do them more efficiently. I just think that's an incredibly unlikely outcome. There will be a lot of new business formation and growth that comes on the other side of AI. And I think we just have to be very attuned to it. We have to pay attention to where it's coming from, what the requirements of those kinds of tenants are and we have to get in front of it.

And you're seeing us do that right now in the city of San Francisco by really understanding what are the core needs of AI tenants taking space in the market today. And how do we make sure the vacancy we have in our own portfolio is optimized to lean into that demand, right?

So that's why you've heard us start talking probably last year at some point about the needs that many of these tenants have for immediate occupancy, the need they have for flexibility in term, potentially expansion flexibility down the road like all of these kinds of things, which is why we've been very successful in the case of the Harvey AI deal we signed in the second quarter to reuse existing improvements from a financial services user that vacated the space in the fourth quarter of last year. And we're going to have Harvey AI open in the portfolio in occupancy by the fourth quarter of this year, right? That's a 2-quarter lag from lease execution.

So -- that's just one example. And that trend and what they need from us right now is going to continue to shift and change as these companies continue to mature. All I can say is that our job is to really pay attention to how that's shifting and changing, where it's shifting and changing and how we get in front and stay in front of it.

Maybe if you could kind of touch on just kind of general color on TIs and lease economics and maybe the differences between this kind of new class of tenants versus you were also saying the traditional fire tenants are picking up in San Francisco.

Again, it's very transaction-specific. You can read a headline that tenant improvements are up, and no doubt they are. A lot of that was inflation driven. It seems like it's sort of plateaued. If you're going from shell to building out space allowances can be as high as $150 a foot in a city like San Francisco, but that can also be the case in Austin. Again, it's very dependent on what the tenant needs and tenants capability of putting their own money in the space.

The other part of this is that what we've done consciously, strategically is to build prebuilt space in a variety of formats in markets where that sort of space is in demand, and that would be for the AI tenants, as Angela talked about.

Most of them need space now. They can't take a year to build-out space, find an architect, et cetera. So we've done very well with our spec suite program and we're really judicious about how many spec suites we take on in a particular market, and we put our teams through a pretty rigorous process to justify. But again, that TI for a spec suite is something we control. So the numbers are less than what I talked about. And it's also highly reusable for the next tenant that comes in because I guess the other piece of color would be with AI specifically, you see a lot of shorter-term leases, and that's because these companies have large expectations for growth, and they want that flexibility so that they have expansion space in the near term.

Yes. I mean Rob's making a really important point around the spec suites. We -- going back to the time I started. I think in the company, it had a very well-functioning spec suite program before that. But really being intentional about where we have spec suite inventory, that's getting taken down quickly. And how do we make sure we keep the teams in a position where they've got plenty of inventory that we can continue to lag into that demand. It was really clear to see it coming, I think, in the city of San Francisco, given the AI tenant and their specific requirements, I think an incremental surprise over the last 12 to 18 months has been the degree to which spec suite activity has accelerated in markets like Austin and Seattle and some of those other places as well.

And it's a wide range of tenants, right? The spec suites in Austin continue to do very well. And it hasn't been really AI tenant driven. It's been professional service firms. It's been law firms. It's been like engineering firms, it's been a wide range of uses. And as Rob said, there's a lot of efficiencies to us in that kind of build out. We can control the time line, we can control the capital in a different way, and we can be pretty confident that, that capital is going to be reusable in the back end.

Angela, in the last couple of years, [Technical Difficulty] some loan activity and move outs and we have innovation and we got a big level explorations in '26. Just wondering how much of that dialogue changing [rationally]? And is there any thought of expansions here?

I mean in certain circumstances, absolutely, there are talk about expansions, right? And we've had some of those in the portfolio. We've got some good examples in Seattle, actually at our West 8th project, where we brought tenants in and had them expand pretty quickly. And other cases in the portfolio. We've seen a ton of expansion activity at -- in our San Diego portfolio in Del Mar. So there are certainly pockets where we've seen a lot of that activity.

I would say some of the move-out activity and I hesitate a little in terms of how to frame this. But I think what's important to remember is that even as you see some move-outs from tenants that we've known are coming in terms of downsizes or vacates in the portfolio. I really believe the degree to which our markets are at an inflection point, that's a lagging indicator. And you're not -- if we focus on that piece, which is important, and I'm not trying to discount, you're missing, I think, the strength of leasing activity. We're really trying to help people see the power behind that signed but not commenced occupancy pool, that's now at a 5-year high, I think, for the company, and the degree to which that's actually the right indicator of health in the market and kind of where we're headed from here.

We just, in the last quarter with the disposition of the 4 building campus in Silicon Valley addressed the largest expiration in the 2026 pool. The 2026 is still an elevated expiration year for us. As we've been talking about kind of how to think about occupancy next year, and we can't give, at this point any specific trajectory in occupancy in 2026 like we've done in 2025. I would say even if you assume retention is sort of consistent with what we've seen in the last couple of years, we really just need like a pre-pandemic level of new leasing activity over the next 3 to 4 quarters to kind of keep occupancy stable throughout that larger exploration here.

That's putting aside KOP 2, which will come into the occupancy pool in the first quarter, which is a very important caveat, but on more of like a same portfolio basis, I think the line of sight given that signed but not commenced pool and given how many commencements we're going to have in Q4 and into the first half of 2026 already, I think it's reasonable to feel like a lot of moving pieces, retention piece is a big moving piece, the leasing progress over the next 3 to 4 quarters will matter a lot and how many of those tenants we can get into occupancy during 2026 matters.

But I think we feel good that a lot of pieces, a lot of work to be done, but there's a pathway there.

Help us with what kind of like the historical retention rate is? I don't know if you think of it as like pre-COVID or just what you've been averaging the last few years?

It's probably more in the 50% range, and we've been averaging something probably closer to 30%. One thing we started disclosing. I think at the -- in the first quarter of this year is that retention rate, if you include all new leases we're doing that are direct deals with existing subtenants, right? So before, if we did a direct deal with a subtenant at lease expiration, that was counted at 0% retention in those statistics. Given the higher prevalence of sublease space across the portfolio, we didn't take away the original metric, but we added a supplementary metric to help better understand, I think, the consistency in the portfolio and our ability to minimize some of that downtime as we do some of those direct deals.

So that's been higher probably in the 10 percentage point range. Probably been closer to 35 or 40, let's say, if you included some of those direct deals with subtenants. But it's somewhere in that range. So it's still been clearly below the historical average.

And frankly, I would assume -- I mean, the expectation I'm sort of setting with my earlier comments, we're not at this point anticipating a major improvement in retention next year. But again, I don't think we have to be to, on a full year basis, putting aside KOP 2 coming into the pool, hold occupancy flat or have a shot at growing it.

How much of the entire portfolio is sublet?

You have the numbers?

It's around 15% to 20% in total.

Pre-COVID?

Call it, 10-ish.

And are there any kind of known move-outs to kind of call out for second half '25 or early '26?

Yes. Well, I'll give sort of the occupancy trajectory we've talked about for '25 already. There are no huge names or pieces. But what we did say is that we should expect to take a step back in occupancy again in Q3 for 2 reasons. We have a little bit of negative net absorption in Q3 and smaller move-outs, nothing all that significant, but it would probably be in line with the negative absorption we saw in Q2, call it somewhere between, let's say, 75,000 and 100,000 square feet, something like that.

But we also have 2 redevelopment assets that will enter the pool in Q3 as well. Those are entering the pool, 0% occupied, but one of them is now 50 -- almost 50% leased. In Q4, we think we're positive net absorption, and we feel really good about that number given how much of that is coming from leases that are already signed and contractually obligated.

So yes, there's work to do to get them open on schedule. But again, Harvey by itself is almost 100,000 square feet, and that's coming into the pool, we believe, in Q4. So the move outs through the balance of the year, there are a number of names, but they're all pretty granular move-outs. And as we look forward to 2026, we haven't called out any one in particular. There have been a lot of time spent talking about what had been an almost 500,000 square foot expiration in 2026, but that's the one that had been addressed with the announced disposition in Q2.

They are more -- it's now a more granular pool, which I think is good news. But there are a handful of them, call it, 4 or 5 that are between 100,000 and 200,000 square feet. And we're working diligently with all those tenants to understand what their plans are for next year. We'll communicate more specifically on a trajectory as soon as we complete more of those conversations and we see what new leasing activity we're able to report over the next quarter or 2.

And maybe to get Elliott in the conversation, you were very active on dispositions clearly in the market. And maybe if you could just kind of talk about what you're seeing kind of the change in activity?

Yes, sure. So we did get a lot more active in going into this year on the dispo side. I think that we've tried to be pretty deliberate around our dispo strategy. Prior to this, we hadn't sold anything since 2022. When interest rates went up, the market got a lot thinner in terms of bidder pools and we were in the fortunate position that we didn't have to start selling things just to sell them.

We started to see more liquidity come to the space, come back to the office space. I think that's a function of some of the leasing improvements that we're talking about, giving buyers a little bit more confidence. And frankly, the lending environment has gotten a little bit more conducive for folks as well. And so there's more capital out there looking for office. We kind of started with the sale in Santa Monica that we closed and now the one in Silicon Valley that is going to close at the end of the third quarter.

But we've also seen the check size that folks are willing to write get a little bit bigger. So whereas a year ago, maybe you said we needed to sell something $100 million or less. I don't think that's necessarily the case today. And so that just gives us a little bit more optionality as a seller. And our strategy has generally been, look for areas where we may not have as much conviction on what the forward-looking prospects are as others and try to lean into those dispos. And fortunately, there seems to be enough capital out there, especially if there's something that's a little bit more opportunistic. I think that where the capital may be a little bit thinner is on the core side. But we're generally -- that generally hasn't been an issue for us.

Maybe I'll touch on acquisitions as well. I think that similarly, we're seeing more folks, more sellers come to the market who are now market sellers. And if this were a year ago, you might see somebody coming, bringing an asset and just trying to get data points on where the bids are. Now a lot more people that are coming are ready to transact wherever the market says the value is. And so that one warrants us spending more time because we know that there are real counterparties.

But the second thing that we've also seen is that the quality of opportunities have gotten better and that means both the asset quality itself and also some of the locations. And so there are markets that historically had been a little tougher to penetrate where there are real sellers coming. And so we're spending a lot more time evaluating those opportunities.

And how are the different buyers and sellers out there thinking about? Is it cap rates? Is it yield on cost? Is it price per square foot?

Yes. It will differ based on who the buyer is and what the opportunity is. I think that early on in the recovery, the plays were much more per pound plays. And I think now there's a mix of both. And so you'll have some folks depending on what their capital is like, where they're just -- they're trying to get in on a good basis. And maybe they can get to the yield return that they like quickly. But if not, they feel good enough about where they are that they're still willing to take that bet. But you are also seeing more folks that are now saying, what is my return on cost? How quick can I get there? What is my IRR? How quick can I get there? What does the exit look like? So it's becoming a lot more normal.

And I guess a lot of the activity is starting to be seen kind of San Francisco, but do you also see it kind of in broader Northern California and Seattle?

I would say all of our markets and the quality of opportunity improving is not specific to one market. We are seeing it in multiple markets. And I think that for us, it's a function of where do we have conviction around what a lease might look like or where rent growth may come back sooner versus later, and that kind of warrants where we spend our time.

So unfortunately, we're at the end of the session, but I do have 3 final rapid questions, rapid-fire questions to ask. So when the Fed starts to cut, do you expect rates for long-term debt to decline, stay flat or rise?

Mostly stay flat.

Last year, the majority of companies stated they're ramping up spending on AI initiatives. How would you characterize your plans for next year? Spend more flat or lower?

Spend is incrementally more. Yes.

And then do you believe same-store NOI for your sector will be higher, lower or the same next year?

The sector, higher.

Thank you. Thank you so much.

Thank you, Jana.