管理層發言
Hello everyone, thank you for joining us and welcome to Kilroy Realty Corporation's Second Quarter 2026 Earnings Conference Call. After today's prepared remarks, we will host a question-and-answer session. Please press *1 to raise your hand. To withdraw your question, press *1 again. On the call today are Angela Aman, CEO; Jeffrey Kuehling, EVP, CFO and Treasurer; and Eliott Trencher, EVP, CIO. In addition, Justin W. Smart, President, and A. Robert Paratte, EVP, Chief Leasing Officer, will be available for Q&A. Please note that some of the information that will be discussed during this call is forward-looking in nature. Please refer to the company's supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being webcast live on the company's website and will be available for replay. The company's earnings release and supplemental package have been filed on a Form 8-K with the SEC and both are also available on the company's website. I will now turn the call over to Angela Aman. Please go ahead, Angela.
Thanks, Marina, and thank you all for joining us today. We are pleased to report on a strong quarter of disciplined execution across every facet of our business. We are capitalizing on the ongoing recovery to drive strategic leasing activity while prudently allocating capital and proactively ensuring financial strength and flexibility. The second quarter saw a continuation and broadening of the recovery that has been taking hold over the last year across our innovation-driven markets. Strong new business formation and growth both within and outside of the artificial intelligence ecosystem and shrinking shadow supply as large-scale space rationalizations by legacy tenants are being addressed are resulting in a diminishing inventory of high-quality available space and improving lease economics. Existing tenants within our markets and within our own portfolio are taking note, demonstrating a greater sense of urgency as it relates to early renewal discussions in order to secure their long-term occupancy needs. As we execute during the second half of this year, we intend to capitalize on growing levels of tenant activity while remaining mindful of the positive inflection in supply-demand dynamics. During the second quarter, we executed approximately 370,000 square feet of new and renewal leases, bringing year-to-date leasing volume to roughly 944,000 square feet, an increase of more than 40% versus the first six months of 2025. For all comparable leases signed during the quarter, GAAP rental rates were up 21%, and cash rents were up 6.1%. When excluding leases signed on spaces vacant for longer than 12 months, releasing spreads improve further to 27.3% GAAP and 15.6% on a cash basis. As we look ahead, we are focused on two primary data points related to the future growth potential of our portfolio: one, the magnitude of our signed-but-not-yet-commenced pool, and two, the size and quality of our forward leasing pipeline. At June 30, the signed-but-not-yet-commenced pool consisted of over 1 million square feet of leases, representing more than $78 million of annualized base rent, or ABR. It is worth noting that the ABR per square foot associated with the signed-but-not-yet-commenced pool is over $75, 30% above our current portfolio-wide ABR per square foot. In addition, 86% of the signed-but-not-yet-commenced pool comprised 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. Over the last quarter, we have seen a material expansion in the size of the forward leasing pipeline. At June 30, the total square footage represented by pipeline transactions was 34% higher than at the end of the first quarter, with the LOI and late-stage pipeline up approximately 77%, reflecting broad-based improvement across markets and tenant industries and the ongoing flight-to-quality trends that are driving demand for premium assets. Our team is focused on converting these transactions to signed leases as expeditiously as possible, and we look forward to reporting our progress as we move through the balance of this year. San Francisco, our largest market, continues to lead the West Coast recovery, posting its fourth consecutive quarter of positive net absorption. Flight-to-quality dynamics are readily apparent, with trophy and Class A assets capturing the overwhelming majority of recent leasing activity, which has helped compress both competitive sublease availability and direct vacancy in the market. Many tenants continue to prioritize move-in-ready spaces and buildings, and 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 years in San Francisco's recent history. Encouragingly, the composition of demand is broad-based, supported by both traditional occupiers and the continued expansion of the AI ecosystem, which represents approximately one-third of the active tenant demand pipeline in the market. Importantly, although the initial stages of the San Francisco recovery were promising, they were relatively narrow in scope. Now we are seeing tangible interest migrate across our multitenant assets in the South of Market (SoMa) submarket, which saw a sequential increase in tour activity during the second quarter of nearly 65%. Turning to the Pacific Northwest, we are encouraged by momentum in both our primary submarkets in the region. In Bellevue, recent large lease executions have constrained remaining high-quality availability, intensifying the competition we are seeing at Key Center and Skyline. In Seattle, while leasing in the CBD remains challenging, our portfolio—which is concentrated in South Lake Union and Denny Regrade—has seen a significant pickup in activity. West 8 continues to be the primary beneficiary, 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 LA. 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. 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. The XBI is up more than 70% year-over-year. The biotech IPO and follow-on equity markets are open, and the M&A and licensing landscape is exceptionally active, all of which help recycle capital within the ecosystem. In addition, FDA approvals have remained strong with novel drug approvals on pace with 2025 levels despite a period of leadership and staffing transition at the agency. At KOP Phase 2, where we executed the previously announced 38,000-square-foot lease with Olema Pharmaceuticals during the quarter, we have seen a meaningful pickup in tour and proposal activity across a wide range of size requirements. Today, we have active interest in all unleased space in our multitenant building, and we are seeing a variety of larger format users begin to reengage the market, a very encouraging sign for our remaining full-building opportunity. While lease execution timelines remain elongated and it is difficult to predict with certainty which transactions will ultimately materialize and on what timeframe, we are optimistic by the overall level and quality of life sciences demand in the market and the degree to which KOP's differentiated tenant value proposition continues to resonate with prospective users. As we work to capitalize on recent momentum, we remain focused on both speed to occupancy and net effective rent maximization across the campus. In terms of capital allocation, as Eliott will touch on in a moment, we continue to advance our objectives of simplifying and streamlining the portfolio while improving the long-term durability and growth of our cash flow stream. We are pleased with our successful track record over the last several years and believe that the significant work that has been completed to rationalize the future development pipeline, 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 has 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 is more depth to buyer pools, optimism on leasing fundamentals, and confidence in the financing market. As a result, deal volume nationally is up 20% year-over-year. San Francisco has been the biggest beneficiary of this trend among the markets in our portfolio. Deal volume is on track to be the highest since 2021. Deal size is increasing with nine-figure deals becoming more common, and investment profiles are broadening out, with core-plus and value-add deals seeing more interest from sophisticated capital. For Kilroy, the improvements in the transaction market present opportunity in several ways. First, as a seller, more deal volume has led to improved pricing and certainty of execution. We have already capitalized on this by selling $348 million year-to-date, including the $22 million LA residential sale discussed last quarter. We are pleased with the capital recycling completed to date and, as market trends continue to evolve, we will explore additional disposition opportunities. Notably, we are starting to see some instances of buyers pricing risk more generously, specifically as it relates to future leasing demand and/or CapEx requirements. We will evaluate these opportunities carefully and sell to strength if we believe the risk-adjusted returns are favorable for shareholders. Second, this presents opportunity as a buyer. More volume and better asset quality increase the chances of finding investments that meet our stringent criteria. We are actively evaluating several acquisitions, but we will be patient and picky to keep our discipline in seeking appropriate risk-adjusted returns. As we have demonstrated in the past, our investment decisions will continue to balance our goals of improving portfolio quality and strengthening our balance sheet. Turning to our future development pipeline, we continue to evaluate additional opportunities to sell non-strategic land and expect to have more to discuss later this year. As a reminder, we have $165 million of land sales under contract with roughly half expected to close late this year or early next year. Lastly, as it relates to the Flower Mart, our overall path forward remains consistent with what we discussed last quarter. We continue to work constructively with the city of San Francisco on revised plans for the site. Importantly, the updated framework is expected to provide greater flexibility around phasing as well as a broader range of uses, including residential, in order to maximize optionality as market conditions improve. As current rents do not yet support development economics for either an office or residential project, we expect to stop expense capitalization at year-end 2026, consistent with our prior expectations. With that, I will turn the call over to Jeffrey.
Thanks, Eliott. FFO for the quarter was $0.92 per diluted share, which includes a $5.9 million bankruptcy settlement through 2023 and represents $0.05 per share. This settlement was disclosed and incorporated in last quarter's adjusted guidance. Portfolio occupancy, including KOP Phase 2, ended the quarter at 77%, down 60 basis points from the prior quarter despite two previously communicated large move-outs that negatively impacted occupancy by approximately 140 basis points. Strong leasing activity over the last several quarters resulted in significant commencement activity during Q2, providing an important counterbalance to the quarter's large move-outs. In addition, as Angela previously mentioned, tenant posture around renewal activity appears to be changing. During the second quarter, we executed approximately 75,000 square feet of renewals on space that we had previously anticipated would vacate. This helped to drive overall retention to 27.9% during the quarter, or 30% year-to-date, including subtenants. As we look ahead, the balance of our 2026 expiration schedule becomes more granular, with no remaining expirations above 50,000 square feet. Combined with the visibility provided by our signed-but-not-commenced pipeline, which grew incrementally during the second quarter despite significant commencement activity, we are confident in the path to occupancy stabilization and growth. Cash same-property NOI increased 1.5% in the second quarter driven by the previously mentioned bankruptcy settlement from 2023 and base rent growth. These gains were partially offset by nonrecurring bad debt reversals and net expense due to a difficult year-over-year comparison related to positive benefits recognized in the second quarter of 2025. On the leasing front, both GAAP and cash re-leasing spreads were meaningfully positive this quarter at 21% and 6.1%, respectively. Leasing spreads on space vacant for 12 months or less were even stronger, generating positive GAAP spreads of 27.3% and cash spreads of 15.6%. This marks the first quarter that both GAAP and cash re-leasing spreads were positive in nearly two years, which we view as further evidence that the improved leasing environment we have discussed over the last several quarters is increasingly translating into stronger lease economics across the portfolio. While leasing spreads will fluctuate quarter to quarter based on the mix of transactions executed, we were encouraged by the breadth of positive mark-to-market activity achieved during the period. Turning to the balance sheet, during the quarter we amended and extended our unsecured credit facilities, increasing the size, extending the term and improving pricing by 20 basis points. We increased our revolver from $1.1 billion to $1.25 billion and extended the maturity date to July 2030. The term loan was upsized from $200 million to $250 million and extended five years to July 2031. The incremental $50 million of term loan capacity is a delayed draw feature available to us through June 2027. We are grateful for the continued support of our banking group whose confidence allowed us to complete this transaction with improved terms and leaves us well positioned to navigate what remains a dynamic market. In July, we also elected to repay the outstanding $200 million of private placement notes with cash on hand approximately three months ahead of the 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 basis points to 125 basis points. As it relates to the same-property NOI growth trajectory, please note that in the third quarter of 2025 we recognized $4 million or 32 basis points in restoration fees and net real estate tax refund benefits, which will create a difficult year-over-year comparison in Q3. In conclusion, this quarter marked meaningful progress across every operational and financial metric. Leasing momentum continues to improve, GAAP and cash re-leasing spreads were positive, our signed-but-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. With that, we are happy to answer your questions.
分析師問答
We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. We ask that you pick up your handset when asked a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jana Galan with Bank of America. Please go ahead.
Thank you and congrats on the quarter. Maybe digging into the leasing spreads, which were very strong and very encouraging to hear and were pretty broad-based across the various markets. Can you help us think about what we should expect moving forward on the mark-to-market on the overall portfolio?
Sure. I will jump in here and then Rob and Jeffrey can jump in as well. A few points: as Jeffrey mentioned and you highlighted, Jana, the spreads in the quarter were pretty broad-based. This is not a quarter that was driven by one or two leases. We had 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 on 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 and the mix of markets those transactions are in. So spreads, even as we continue to move in the right direction in terms of the improvement in broader lease economics, can vary quarter to quarter based on the pool. As we think about the broader mark-to-market across the portfolio, it is reasonably consistent with what we have described on previous calls. We continue to move in the right direction. We continue to be a bit above market in both San Francisco and Los Angeles, and below market in our other three markets. I would note that in San Francisco, and LA, but San Francisco to a larger degree, the degree to which we are currently sitting above market has compressed over the last quarter or two as we have seen that improvement in supply-demand dynamics translate into stronger leasing economics. Thank you.
And then maybe following up just on Flower Mart where you are seeing current rents not yet supporting office or residential development, but both are moving very quickly. Any indication of which would make more sense, or could this maybe go all office eventually?
Hi, Jana. We are still not quite there, but taking what Angela just said and applying it to Flower Mart, we are getting closer day by day because the market continues to strengthen. Right now, residential markets are a little bit closer to penciling in terms of where rents need to be to justify development, but both are improving at a pretty good clip, and so we will see how the next several quarters play out.
Your next question comes from the line of Seth Bergey with Citi. Your line is open. Please go ahead.
Hi. Thanks for taking my question. Maybe just a follow-up on Flower Mart. Would you look to carry the interest expense in 2027? Or given that the current market is not supporting additional office or residential development, would you look to sell or joint venture that asset? And when would you expect to potentially announce something to the investment community?
We have been focused on making sure that as we move through a process with Flower Mart that we are being 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 and are confident that we will be at the end of that process sometime later in the fourth quarter of this year. That process will 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 relief under the legacy development agreement that would have made it very difficult economically to phase the project in any way that made sense. To make the next best decision on Flower Mart, it is critical that we get through this process with the city to enhance our flexibility and optionality at the site, which I believe will improve the economic value of the Flower Mart site long term. As we continue through this process and get into year-end as we solidify the additional flexibility we expect to have, we are evaluating the market and being mindful of the next best path, whether that is all residential, all commercial, or most likely a mix of uses. We will be able to make better decisions around what that means in terms of our continued ownership of all or part of the site, but right now, the primary focus is to finish the process with the city and ensure the Flower Mart site is placed into development and service as soon as economically feasible to support the needs of the Central SoMa community. Thanks.
And then just on KOP Phase 2, encouraging to hear that the life science market is improving. Could you bucket some of the increase in demand you are seeing for the project into how much of that is tour activity, how much do you expect to convert into leases? Do you have any leases out? And given the overall strength of improving demand, have your yield expectations or timeline for stabilization changed for the project?
Sure. Let me lay a backdrop regarding Q2 leasing in South San Francisco and the Peninsula. There were only eight leases signed over 20,000 square feet in Q2, which follows a very strong 2025. One of the largest was our deal with Olema. Two others were in Silicon Valley and two were in the East Bay. What has changed dramatically is the amount of touring activity, which is the highest predictor of where you are going next, meaning LOIs or leases. We went from 317,000 square feet of tours in Q1 2026 to over 800,000 square feet of tours, and we are talking to many of those firms now. To give more color on the level of activity, we have a broad range of sizes that we are talking to. Many of the current deals in the market are in the 20,000- to 40,000-square-foot range. Our last spec suite that is available has multiple parties interested in it, and we expect to be able to report something shortly. We are also building two new floors of spec labs, which will be available in December and January, respectively, and we already have activity on the bulk of those. When you look at larger requirements, there are eight requirements over 100,000 square feet, and the next tier down includes about 25 tenants in the 20,000- to 70,000-square-foot range. That mix is driving the 800,000 square feet of touring activity we have had. One last point: we are seeing more robotics companies in the Peninsula and South San Francisco with large requirements, many over 100,000 square feet, which will reduce available space for life science companies to take for R&D-type space. We think that will benefit Oyster Point. KOP is not suited for R&D-type space, but we could handle robotics or certain uses. So we see demand coming in on multiple fronts right now, and it has not looked this good in quite a while.
Your next question comes from the line of Steve Sakwa with Evercore ISI. Your line is open. Please go ahead.
Good morning. Your commentary around leasing is certainly constructive. As you look at the pace of the recovery over the next couple of years, what are the things that are positively surprising you, and what could slow or hamper the overall recovery in the Kilroy portfolio?
Thanks, Steve. We feel really good about what we have seen over the last quarter or two as it relates to strengthening of the leasing environment. It is true across markets, with different drivers in each. In San Francisco, we have seen a significant change in tone driven by the degree to which availability has been taken up, the focus on high-quality space, and the flight-to-quality trends that have limited remaining large blocks. This has translated quickly into improved lease economics. One of the most encouraging dynamics is that many existing tenants with longer-dated expirations are recognizing that availability will be much more limited in the future and large blocks will be at a premium, prompting earlier renewal discussions than we expected. There is no single data point in any of our markets that is making us feel good about the durability of the recovery; rather, it feels broad-based. We are seeing the elements we want to see fall into place, and on a compressed timeframe driven by new business formation and growth in markets like San Francisco that is pulling tenants off the sidelines. Even in markets that have been slower for us, like Los Angeles, we are seeing good trends across many submarkets. The South Bay through Long Beach in defense, aerospace, and robotics has been encouraging. We continue to emphasize that recovery will not be a perfectly straight line, and leasing activity and spread activity can vary quarter to quarter, but overall the trend is positive, the pipeline is sizable, and rents are firming up. We look forward to executing through the balance of the year.
Thanks. As a follow-up, you have the DIRECTV space coming due a little over a year from now, and you talked about defense tech and robotics. To what extent do you have more confidence around releasing that building, or do you still view it as a potential sale candidate?
We continue to evaluate all options with respect to the Kilroy Airport Center campus. There will be multiple paths we can take there. What is happening in that market is interesting: industries that were prevalent in that market are coming back given how technology is changing, with new companies and existing companies expanding or changing how they use space. We feel things are moving in the right direction at that location for either releasing or disposition. The bulk of that lease expiration does not occur until the fourth quarter of 2027, so we have time and will continue to explore all options to maximize value.
Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Your line is open. Please go ahead.
Hi, good morning. My first question was about 2027 renewals. When you look at the lease expirations in 2027, it's around 1 million square feet, essentially the same as a year ago. When do you start making progress on those 2027 expirations, and how does that make you feel about 2027 retention versus 2026?
The weight in LA is primarily driven by the DIRECTV/AT&T expiration in the fourth quarter of 2027. Outside of that, the 2027 expiration pool is highly granular in nature; we may have one other expiration around 80,000 to 90,000 square feet, and after that, expirations drop below 50,000 square feet. We feel good about the granularity of the pool. Obviously, we need to work through DIRECTV/AT&T and the Kilroy Airport Center, where we are exploring a wide range of options. Outside of that, given the granularity and diversification, we feel pretty good about renewal possibilities.
On the development front, guidance for development spend is now plus or minus $150 million for the year. Which projects do you expect to be active in the second half?
The primary component of the development spend is for KOP Phase 2. As leasing activity and build-out from some of the commitments in the signed-but-not-commenced pipeline continue, you will see capital spend accelerate in the second half of the year.
Your next question comes from the line of Blaine Heck with Wells Fargo. Your line is open. Please go ahead.
Thanks. Angela, your remarks on the markets are helpful. Can you or Rob talk about the relative strength of Silicon Valley and the Peninsula versus the San Francisco CBD? Are you seeing tenants being priced out or not finding large enough contiguous space in San Francisco and looking more toward the Valley or Peninsula?
Good question. We are seeing an equilibrium come back between San Francisco and the Valley. For years, the Valley had a lot of vacant space that is being absorbed. There is a notable influx of robotics companies, autonomous vehicle companies, and others coming into the market. Certain formats lend themselves better to the Valley—like Waymo in one of our buildings—and other formats lend themselves better to San Francisco or South San Francisco locations. We are not seeing displacement so much as choice between San Francisco and Silicon Valley. I would highlight Redwood City where we continue to be pleased with activity at Crossing 900 and at 1900 Broadway, our new development. Redwood City has become an important market within Silicon Valley. Overall, it looks like a broad-based recovery and demand profile across Silicon Valley up to San Francisco.
One other point is that sublease space in the Valley has been coming off the market at a good clip, with existing users pulling space off. Over the last couple of quarters, that has been a significant driver of tightening in the Silicon Valley market as well.
Thanks. One more for Rob: concessions and CapEx—concessions on executed leases decreased a bit this quarter. Was that a mix issue, or are there trends to read into with respect to tenant improvements and free rent in particular?
It's partly a mix issue, but as the market has improved, particularly in San Francisco, we have had more leverage. For example, at 201 Third, we've seen tenant improvement pricing move from the low $50s per square foot into the high $70s per square foot historically, which gives us more leverage to negotiate CapEx down. It depends on the deal—whether space is delivered in shell condition or with improvements. Our spec suite program has been a positive, where we tightly control the cost, design, and construction, and tenants are using those suites. As markets improve, we expect leverage to move further into the landlord's favor.
One additional point: across our markets we had been running at about one month per year of the lease for free rent. During this quarter, with the population of deals executed, we were closer to 0.5 month per year of the lease, which is the most favorable it's been in several years. Rob and I continue to debate whether that's a trend or a mix issue, but holistically things are moving in the right direction on lease economics.
Your next question comes from the line of Dylan Burzinski with Green Street. Your line is open. Please go ahead.
Good morning. Thanks for taking the question. Eliott, you mentioned you are evaluating several acquisition opportunities as capital markets improve. Are you seeing divergences between the demand fundamentals you observe and how cap rates or price per square foot are being set across markets? In other words, opportunities for Kilroy to take advantage of pricing reacting more slowly to fundamentals?
Good question. The answer is potentially yes, and that applies to both buying and selling. Our investment philosophy is to look asset by asset, take a forward-looking view of fundamentals, and overlay where we think values are. We have seen some mismatches, which is why we sold certain assets late last year and early this year in some LA markets. That approach also informed our position on Maple Plaza, which is playing out well. We look for mispricings and will act when the returns are compelling, but we are also comfortable being patient.
A quick follow-up: within that opportunity set on the acquisition side, are you continuing to look at life science assets?
We are looking at both office and life science, which align with our expertise. It's important to be very picky about life science assets—being in the right cluster, in a supply-constrained location, and finding something that can outperform over the coming years. Life science is part of what we will do, but there is no strategic goal to do more or less; it depends on the opportunities that present themselves.
Your next question comes from the line of Michael Carroll with RBC Capital Markets. Line is open. Please go ahead.
Thanks. Eliott, can you give ideas of the types of acquisition deals Kilroy finds intriguing? Are you looking more at lease-up type deals that need CapEx or repositioning? Any markets more interesting right now?
On markets, we are focused on the five markets we operate in. Regarding deal types, historically our acquisitions tend to have a value-add component where we bring expertise—leasing up vacancy, investing capital, or taking a position on future lease roll. We have not historically bought a lot of core assets because those haven't met our risk-adjusted return targets. We generally look at core-plus or value-add where we can bring something to the table, including scale or market-specific expertise.
Follow-up on San Francisco: tenants seem motivated given dwindling large blocks. How much FOMO is in the market now and will that ramp over the next few quarters?
There is definitely some degree of FOMO in the market. New tenants seeking space have been acting decisively for some time, prioritizing move-in-ready space and space that accommodates future growth. The shift over the last quarter has been among existing tenants with term who are now thinking about how the market is changing. It's both the trajectory of rents and the availability of space that are changing tenant behavior. Tenants used to believe they could wait and find better deals later; that belief has receded. If they have space they like now, they are engaging earlier. This is a positive dynamic and reflects a broadening recovery across markets. We have seen more legacy tenants engage across a wider range of industries.
To add, there are roughly 10 million square feet of demand in San Francisco now. Year-to-date, about 7.5 million square feet has been leased in the city, and availability dropped by about 4.5 million square feet. That is a dramatic drop and is focusing tenants on what is left and whether their expirations are now or in a few years. Submarkets like Showplace Square, Mission Bay, and Jackson Square have seen high demand recently, and now South Financial District is seeing demand. For example, vacancy in the submarket around 101 First, where our asset and the Salesforce campus are located, has dropped to about 12%. We have been fortunate to improve leasing at assets like 201 Third from about 25% leased to almost 90% in just over a year, and we are now focused on 303 and 63.
Your next question comes from the line of John Kim with BMO Capital Markets. Your line is open. Please go ahead.
Angela, you mentioned demand for move-in-ready space. Are you providing or do you plan to provide more spec space to accommodate that demand? How much of your portfolio can that be, and how do leasing economics compare to a standard lease?
We have been intentional and measured with a spec suite strategy across the portfolio, particularly in San Francisco where demand for move-in-ready space has been strong. The dynamic has come from a combination of spec suites we build out and reuse of recently vacated space where tenants can take existing improvements, lowering overall capital needs. We are designing and planning additional spec suites where appropriate, but it's not one-size-fits-all: some spaces are better left in shell condition for tenants who need full build-outs. We are targeted and strategic in how we spend capital to ensure high conviction that we can lease the space quickly. At 201 Third, we actually leased all spec suites while they were still in construction, which is the kind of outcome we aim for.
Do you disclose sublease availability in your 10-Qs, and what is that figure today in the Kilroy portfolio?
We are around the 7% to 8% range of sublease availability today, down from low-double digits at its peak.
Your next question comes from the line of Brendan Lynch with Barclays. Your line is open. Please go ahead.
Hi. This is Annabel on for Brendan Lynch. Thank you for taking our question. How should we think about the pace of move-in from your growing backlog of signed-but-not-yet-commenced leases?
Annabel, the best starting point is the signed-but-not-occupied disclosure on page 18 of the supplemental. The important piece this quarter is that leasing activity increased the size of that pool. Second-half commencements remain pretty consistent with what they were last quarter, but there is a sizable increase in 2027 commencements. We still see a lot of positive momentum, and as new leasing activity comes in, that will help drive occupancy higher.
Can you give a little more color on your leasing pipeline and how much of that is new leases versus renewals?
I won't get too specific on details, but the quarter end does not stop the pipeline we have. We illustrated activity at KOP where tours increased from about 300,000 square feet to over 800,000 square feet quarter over quarter. Across the portfolio, we are seeing increased activity. West 8 is performing well and attracting premier tenants. We are seeing activity in Austin too, which is notable during the summer. I'm very happy with the pipeline and expect more to come.
To add, the signed-but-not-commenced pool has been driven largely by high-quality vacancies and projects like KOP Phase 2. That has resulted in a higher rent per square foot in the pool, with a lot of first-generation leasing that should disproportionately contribute to NOI as leases commence. The recent expansion in the pipeline also reflects a resurgence in tenants engaging on renewals; that part of the pipeline had been more limited as tenants previously preserved optionality. The current pipeline composition is more balanced and reinforces how broad-based the recovery is.
Your next question comes from the line of Upal Rana with KeyBanc Capital Markets. Your line is open. Please go ahead.
Thanks. Jeffrey, the company generated $1.83 in the first half and the full-year earnings guidance implies a step down in the back half. Can you walk us through the specific items driving the sequential step down and the timing—particularly dispositions, known move-outs, signed-but-not-commenced leases, and development carry—so we understand moving to the high or low end of your guidance range?
The easiest way to think about it is to take the Q2 run rate, back out the one-time $0.05 item for the nonrecurring income, and carry that forward to get to the midpoint of the guidance range. From there, the main driver is capital recycling assumptions—disposition activity. Interest expense or capitalized interest shouldn't move much in the near term. So the path to the high end versus the low end primarily depends on how dispositions play out in the back half.
Thanks. Rob, similar to trends we saw with some other AI-related tenants expanding quickly, are you seeing a potential second wave of AI tenant expansion across your portfolio—either tenants already in your portfolio or new ones?
We have seen a clear example with Anthropic: they signed 249,000 square feet at 500 Howard and then quickly followed with 72,000 square feet at 405 Howard. We've also observed tenants in our portfolio expand soon after initial moves. So yes, we are seeing expansion behavior and some rapid follow-on leasing among AI tenants.
Your next question comes from the line of Vikram Malhotra with Mizuho. Your line is open. Please go ahead.
Morning. On guidance, signed-but-not-commenced leases will have an impact over time and new signing is likely more 2027 commencement. In terms of the biggest swing factors in the second half to get to the high or low end of the guidance, can you walk through puts and takes given the positive commentary?
To push to the high end, it will be a function of our ability to accelerate rent commencements into 2026. That won't have a huge impact on cash same-property NOI, but it would build more of a noncash straight-line GAAP effect. The team is working to get tenants into spaces as quickly as possible. Spec suite leasing is one lever because lead times are shorter than a traditional leasing cycle. Continued execution day to day can help push to the top end.
One more: the SNO pipeline you disclosed is predominantly triple net, so theoretically there is a margin benefit as those commence. Can you give a high-level sense of how much tenant improvement or leasing CapEx is associated with that and how it will hit AFFO next year?
We consistently highlight the importance of triple net leases in the signed-but-not-commenced pipeline. The ABR number we disclose is a GAAP figure, but as these leases commence you will see a larger impact on NOI than occupancy alone would suggest. Eighty-six percent of the signed-but-not-commenced pipeline is triple net, which is disclosed on Page 18. The pipeline is roughly 50/50 first-generation and second-generation, so to understand capital needs you can reference our historical disclosures on first- and second-generation capital. That historical data provides a good starting point for modeling leasing CapEx.
Your next question comes from the line of Anthony Paolone with JPMorgan. Your line is open. Please go ahead.
I have one on numbers that may overlap. If I look at the $21 million to $24 million of NOI drag from development properties this year, do you have that number for Q2 or the first half so we understand the cadence?
The primary driver of that NOI drag is KOP Phase 2, and you will see it accelerate throughout the year. We capitalized part of KOP Phase 2 in Q1; by Q2 the run rate is more stabilized for that property. The total disclosed number was assumed to be relatively ratable throughout the year. Q2 is a good starting point: Q1 was slightly higher, but otherwise you can spread the total across the year to approximate the quarter cadence. As tenants take occupancy, that drag will be incrementally offset.
There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.