Kilroy Realty Corporation

Hello, everyone, and welcome to the KRC 4Q25 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. After the presentation, you will have the opportunity to ask any questions, which you can do so by pressing Start, followed by the number 1 on your telephone keypad. I will now hand over to Doug Bettesworth, 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 Ahman, CEO, Jeffrey Keeling, EVP CFO and Treasurer, and Elliot Trencher, EVP CIO. In addition, Justin Smart, President, and Rob Perot, 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 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 our 2026 guidance. Sam will 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 remained focused on driving leasing across both our operating and development portfolios, harvesting value through non-core asset sales, monetizing or advancing strategic plans for parcels within our future development pipeline, and thoughtfully redeploying proceeds into 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 six 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 in 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 Fittler Club at Columbia Square to backfill the space recently vacated by Neuhaus following their bankruptcy filing, minimizing downtime and avoiding outsized capital investment on a highly specialized space. In West LA, 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 Hills sub-market. In Seattle, 74,000 square feet of new long-term lease executions at West 8th, our recently renovated and repositioned project in the Denny Regrade sub-market. 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 KOP2 to 44%. We are thrilled by the momentum we've captured at KOP2 over the last two 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 six months, which has led to a reopening of the IPO and follow-on markets. Last week alone, four biotech companies completed IPO transactions, collectively raising nearly a billion dollars. 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 KOP2, 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 NBC Biolabs, a well-established life science incubator in the San Francisco Bay Area that has the financial wherewithal and scientific expertise to capably vet and support early-stage companies. In addition, we've gained exposure to mid-stage and late-stage life science companies in our spec suites, where our capital investment is specifically designed to be highly reusable 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 cashless stability through a 16-and-a-half-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 two. Across the KOP2 leasing transactions completed to date, we expect varying occupancy commencement timelines 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 timelines 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 KOP2, as reported in our supplemental financial package. With these refinements incorporated, our anticipated yield at KOP2 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 asset that no longer met our stringent criteria for incremental investment. 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 $150 million. 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 $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 six months. Our value-add acquisitions in Beverly Hills and Torrey Pines represent historic opportunities to reshape the portfolio in response to our rapidly evolving environments. 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 non-core assets whose forward returns fall below our cost of capital. And as we evaluate redeployment alternatives, 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 Kilroy 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. Elliot?