KILROY REALTY CORP Q1 2026 earnings call

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 Elliot Trencher, EVP, CIO. In addition, Justin W. 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 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 updated 2026 guidance. We'll be happy to take your questions. Angela?

Thanks, Doug. 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 rationalizations 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, with total productivity of approximately 568,000 sq ft, 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 rents 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.

This first quarter leasing exceeded 3 million sq ft, 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 sq ft at 201 Third before signing a 62,000 sq ft expansion this quarter, with occupancy occurring in April 2026, just one month following lease execution. This significant expansion, occurring within one 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 their 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 five of our recently constructed spec suites leased by completion. We're also thrilled to be experiencing strong demand across other core Bay Area submarkets.

At Crossing 900 in downtown Redwood City, we completed a 27,000 sq ft 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've 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 Eighth.

Following approximately 74,000 sq ft of new lease executions at West Eighth in the fourth quarter of last year, we're pleased to announce an additional 76,000 sq ft of new leases signed at the project year to date, including a 43,000 sq ft lease with General Motors signed in the first quarter and a 33,000 sq ft 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, as 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 twelve-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 two years. Of particular note within the region, Arrow in Long Beach is seeing a pickup in tour activity as the local market begins to experience a resurgence in defense and aerospace requirements. Blackwelder in Culver City is seeing an acceleration in activity from a wide variety of users, including technology and AI companies. 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, KOPT 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 sq ft 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 KOPT phase II, 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 two 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 two 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 value, valuation 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. 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 priced 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 sq ft office project, is located just blocks from Kilroy's highly successful Crossing 900 asset, which has remained 100% leased since delivery in 2015. Over time, we've consistently captured meaningful rent growth at Crossing 900, re-leasing over 80,000 sq ft since the fourth quarter of 2023 at 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 sq ft, 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.

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 sq ft, the first time an institutional property has eclipsed the $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 sq ft 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 one 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 two 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 spent 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 non-strategic lands. Turning to acquisitions.

As Angela mentioned, we closed on a joint venture to develop 1900 Broadway, a 250,000 sq ft project in downtown Redwood City that is already roughly 60% 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 returned 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, 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 four 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 constrained. 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, Elliot. Before turning to results, I want to highlight two disclosure enhancements this quarter aimed at providing investors with better visibility into leasing performance and how 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 sq ft 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, KOPT entered the stabilized pool during the quarter, impacting reported portfolio metrics. As a result, portfolio occupancy ended the quarter at 77.6%. Excluding KOPT, 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 1.0% 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 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 -10.6% and CAS spreads of -16.8%. Those spreads were driven primarily by two 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 two leases were partially offset by 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 effective rent of the quarter in our operating portfolio, but also delivered significant positive cash and GAAP re-leasing spreads. Leasing on space 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-$3.63 per diluted share, reflecting improving performance 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-$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 two factors. First, in April, we received a $5.9 million settlement related to the 23andMe bankruptcy, which fully resolves 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 to reflect our progress to date. We moved decisively, closing dispositions earlier than anticipated and recycling capital into compelling investment opportunities, including $73 million of opportunistic share repurchases and prudent debt repayment.

Looking ahead, as Angela and Elliot 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.