Kilroy Realty Corporation

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 as the pace of lease executions has significantly increased. with San Francisco leading all U.S. metros in 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 six years. Leasing momentum was robust in San Francisco, with activity in the south of market or SOMA sub-market 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 3rd 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 3rd 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, such as 363rd 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 Del Mar. And in Long Beach, we executed a short-term renewal with SCAN for 87,000 of their approximately 220,000 square feet at Arrow. While we anticipate that SCAN will vacate at the end of their extended term and relocate into owner-occupied space, the phasing of this move out provides valuable near-term stability as we work to programmatically backfill. In subsequent 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 signs subsequent 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 at more than 20% year-to-date with strong, broad-based performance from both large and small-cap biotech companies, fueled in part by greater clarity on the regulatory backdrop for the sector, and a variety of positive company-specific clinical trial and drug approval announcements. In addition, biotech M&A volume has accelerated, as 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 executions of a 44,000 square foot lease with NBC Biolabs and a 16,000 square foot lease with Acadia Pharmaceuticals. NBC Biolabs is the Bay Area's leading life science incubator, and it's helped launch more than 500 companies, collectively raising over $20 billion in capital. NBC'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. NBC 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 KOP2 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 KOP2 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 sub-markets 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 four-building campus in Silicon Valley for gross sales proceeds of $365 million, and the acquisition of Maple Plaza, a Class A office campus in the iconic Beverly Hills submarket of Los Angeles, 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 of the Flower Mart project, we submitted four 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 timeline 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. Elliot?

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 in 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 three quarters of the year, closing on $405 million of previously disclosed sales. As we continue to evaluate dispositions, our strategy remains the same. Monetize properties in lower conviction locations 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 have $79 million under contract between 26th Street and 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 and Beverly Hills. Beverly Hills has many of the characteristics we look for in the sub-market. It is centrally located within the west side of Los Angeles with proximity to decision makers, amenities, and a diverse mix of tenants across multiple industries. Because it is centrally located, the barriers to entry are quite high, with cumulative new supply of only 260,000 square feet over the last 10 years. Additionally, three 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, Elliot. FFO for the quarter was $1.08 per diluted share, which includes approximately $0.03 per share of one-time items, including $0.02 per share related to real estate tax appeal wins, an additional $0.01 per share of non-cash income related to a reversal of straight-line bad debt expense. Cash same property NOI growth for the third quarter was 60 basis points, with the previously mentioned real estate tax appeals contributing 150 basis points of growth. Occupancy statistics now reflect the recently stabilized redevelopment projects, 4400 Bohannon 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 project 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 this 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 KOP2 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 Neuhaus, 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 sub-tenants, stands at 39%. Following quarter end, we executed a 79,000 square foot renewal with Riot Games at Westside Media Center and a 67,000 square foot lease with ByteDance, a current subtenant with a 2026 expiration at Key Center. While these recent transactions are not yet reflected in our operational metrics, we are very pleased with our leasing performance on 2026 expirations, which demonstrate strong momentum heading into next year. Turning to guidance, we raised our 2025 SFO outlook to range of 418 to 424 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 non-cash 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 FlowerMark project, which is now expected to cease capitalization in June 2026. With the progress made to date and the recent submission of our development application, we're in a stronger position to define the process timeline and have updated our assumptions accordingly. As the re-entitlement process advances, we anticipate reaching a point where short of executing a demand-driven development, all feasible progress of 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 the 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 at KOP2 totaled approximately $5 million, while capitalized interest totaled approximately $10 million, both of which are 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 project will moderate before becoming a net contributor to growth in the coming years. With that, we're happy to answer your questions.