Kilroy Realty Corporation

you to ask any questions, which you can do so by pressing star, followed by the number one on your telephone keypad. I would now like to hand the call over to Doug Bettisworth, Vice President, Corporate Finance. Please go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are Angela Ahman, CEO, Jeffrey Keeling, EBP CFO and Treasurer, and Elliot Trencher, EBP CIO. In addition, Justin Smart, President and and Rob Perot, EVP, Chief Leasing Officer, will be available for Q&A. Please note that some of this information that 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 eight days. Our earnings release and supplemental package have been filed on a form 8K with the SEC, and both are also available on our website. Angela will start the call with a strategic overview and quarterly highlights. Elliot 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. Before we begin, I want to take a moment to acknowledge the tragic events that played out last night in New York City. We're thinking about the victims, their families, and everyone who was directly impacted. by the traumatic events as they unfolded. Our hearts go out to everyone impacted. Turning to last night's release, I'm pleased to report on a strong quarter of execution across every discipline within our company as West Coast Office fundamentals continue to solidify. During the quarter, we signed over 400,000 square feet of new and renewal leases, a material improvement both sequentially and year over year as a pickup and tenant sentiment and ongoing flight to quality dynamics in the office market uniquely position our premium portfolio to capture accelerating tenant demand. In parallel, we're seeing early indications of an improvement in the transaction environment as both buyers and sellers appear more prepared to execute, an encouraging signal that market participants have greater conviction in the continued path of the West Coast office recovery. From a leasing perspective, we saw significant strength this quarter in both San Francisco and San Diego. with the recent inflection and activity in the city of San Francisco being particularly notable. Active tenant demand in the city has nearly doubled since 2023, now totaling approximately 7 million square feet, despite a significant increase in recent execution velocity. We appear to be at the tail end of major space givebacks by big tech companies, and the market can now benefit from the substantial growth and expansion of companies in the AI space. In addition, positive trends in public safety and downtown revitalization efforts by the city's new administration have given tenants the confidence to expand their search parameters outside of the financial district and into the south of market or SOMA sub-market, where our assets have seen 110% year-over-year increase into our activity. A clear example of these dynamics is the 93,000 square foot lease we signed in the second quarter with an AI tenant at our 201 3rd Street asset in SOMA. This large transaction marks the second consecutive quarter of major leasing at this property and underscores the ability of our leasing team understand the specific needs of rapidly scaling AI tenants, many of whom are actively prioritizing landlords who can accommodate their anticipated growth trajectories and provide flexibility that will allow them to grow incrementally over time. We're excited about the turnaround we're seeing play out in San Francisco and are well positioned to capitalize on the accelerating momentum. In San Diego, which has been a consistently strong market for some time, we experienced broad-based activity in the second quarter across all sub-markets. In Del Mar Heights, we signed a renewal and expansion at one Paseo at the highest rate ever recorded for an office lease in San Diego County. In Little Italy, we signed a 24,000 square foot lease at our recently developed 2100 Kettner asset, continuing the accretive lease up of some of the highest quality vacancy in our portfolio. And in UTC, we signed a 25,000 square foot lease at our 4690 Executive Drive redevelopment project with a leading research and healthcare institute. As it relates to development leasing at Kilroy Oyster Point, our premier development project in the heart of the South San Francisco life science ecosystem, we're pleased to report that we have advanced to active lease negotiations on multiple transactions, totaling approximately 100,000 square feet, and we anticipate lease executions with these life science and healthcare tenants during the third and fourth quarters. As we progress deals that have been in the pipeline for some time, We've also continued to see meaningful engagement from new prospects as well. Tour activity during the second quarter accelerated meaningfully and highlights the degree to which the quality and scale of Kilroy Oyster Point continues to resonate with high caliber, growth-oriented tenants seeking purpose-built infrastructure in a primary innovation cluster, even against the backdrop of a more challenging life science ecosystem. Turning to capital allocation, we'll remain active and disciplined as we recycle capital with a focus on long-term cash flow growth and value creation, being responsive to evolving dynamics in the office and life science sectors, and changes in the relative attractiveness of the various submarkets in which we operate. As we look forward, we believe that continued portfolio rotation, executed thoughtfully and strategically, will be key to unlocking value in today's environment. Our investments team has been very active over the last several quarters on teeing up dispositions and underwriting acquisitions that fit with our long term objectives. Accordingly, last night, we announced the disposition of an operating property in downtown Santa Monica and the execution of a contract to sell a four building campus in Silicon Valley, which is expected to close at the end of the third quarter. These dispositions, a detract evaluation, have allowed us to efficiently monetize several lower growth assets that we believe would have required outsized reinvestment capital over the coming years. As proceeds are realized, We'll pursue a balanced mix of selective reinvestment opportunities and debt repayment, with a focus on optimizing portfolio returns and maintaining a strong and flexible capital structure. We're pleased to see the pipeline of actionable, value-accretive opportunities in some of the highest-performing submarkets on the West Coast and in Austin continue to grow. And as always, we'll be evaluating such opportunities relative to all of our reinvestment options, including leveraged neutral stock buybacks. As it relates to our future development pipeline, we've made further progress on monetizing land parcels that have a highest and best use outside of the company's core competencies. As discussed last quarter, in April, we signed an agreement to sell a portion of our Santa Fe Summit site in San Diego. And last night, we announced an agreement to sell the land parcel at 26th Street in Los Angeles. These announced transactions, which aggregate total expected gross proceeds of $79 million, represent over half of our stated goal of realizing $150 million from the monetization of the future pipeline, with proceeds to be realized over the next several years as re-entitlement efforts are completed. The Flower Mart project, which consists of a seven-acre development site in the central SOMA submarket of San Francisco, remains our single largest investment in the future development pipeline. As discussed on the last several conference calls, long-term value maximization at the Flower Mart will require the creation of significant additional flexibility and optionality as it relates to both the ultimate mix of uses on site and the phasing of development execution. Over the course of the last six months, our development team has worked diligently on a significant redesign and reimagining of the Flower Mart project that will allow us to be responsive to market conditions as they continue to evolve. As you may remember, we're currently entitled for a 2.3 million square foot primarily office project. And while we remain very encouraged by the resurgence in office demand in San Francisco, We also remain convicted that maximizing value on the site will require a broader mix of uses than originally contemplated, which may allow for the development of certain components of the project earlier than otherwise anticipated. We have recently had constructive and encouraging conversations with the City regarding our proposed modifications to the program. While these discussions are still ongoing, we've gained greater clarity around both the approval process and the timeline required to secure the flexibility we're working towards. As a result, Based on the best information we have available today, we expect interest and other expense capitalization at the Flower Mart to cease at the end of 2025. While we will update this assumption as appropriate, we're not currently assuming any capitalization of the project in 2026. I want to conclude by thanking the entire Kilroy team for another outstanding quarter of execution across all fronts. The pace of work has accelerated across the company as leasing and transaction activity has increased, and I'm grateful for the way the entire organization has responded. At the same time, this team's willingness to innovate and embrace change is creating additional value for our stakeholders each and every day and positioning us for continued success in the quarters ahead. Elliot?