Kilroy Realty Corp. 2026 Q3 Earnings Call

I will now turn the call over to John Perry, Senior Vice President of Investor Relations and Capital Markets. John, please go ahead. Thanks, Marina.

Good morning, everyone. Thank you for joining us, and welcome to the Kilroy Realty Corporation third quarter 2026 earnings call. On the call today are Angela Aman, CEO, and Eliott Trencher, EVP, CIO, and Interim CFO. In addition, Rob Paratte, EVP and 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 forward-looking information on this call and in a 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. With that, I'd like to hand the call over to Angela.

Thanks, John, and thank you all for joining us today. We're pleased to report on an exceptional quarter of leasing activity with not only robust deal volume, but also some of the strongest lease economics reported over the last six years. Our activity this quarter underscores the breadth and depth of the commercial real estate recovery, continuing to gain momentum across our West Coast markets. As the innovation economy and supporting ecosystem experience record growth against a backdrop of shrinking high-quality availability. This dynamic has not been lost on users, who are increasingly shifting from a flexibility and optionality mindset to one that recognizes the need to proactively plan for long-term space needs, creating a renewed sense of urgency from tenants.

During the third quarter, we executed approximately 815,000 square feet of new and renewal leases, substantially all of which were long-term in nature, bringing year-to-date leasing volume to over 1.75 million square feet, an increase of nearly 44% versus the first nine months of 2025. During the period, all five of our regions reported sequential improvements in leased occupancy of more than 100 basis points, with activity well-diversified across 45 separate transactions executed with an ever-expanding roster of new and existing tenants, including those in the technology, AI, robotics and automation, biotech, legal, financial, and professional services industries. This quarter's re-leasing spreads were amongst the highest reported since before the pandemic, particularly meaningful given the large volume of activity this quarter. For all comparable leases signed during the period, GAAP rental rates were up 30.6%, and cash rents were up 9.7%.

When excluding leases signed on spaces vacant for longer than 12 months, re-leasing spreads improved further to 37.9% and 13.9% on a GAAP and cash basis respectively. It is worth noting that year-to-date annualized capital per square foot for second-generation deals was down 2.4% relative to the same period in 2025, despite an improvement in re-leasing spreads of roughly 2,000 basis points. The leasing strength this quarter has further enhanced the transparency of our future growth outlook. The spread between billed and leased occupancy now stands at 610 basis points, and the total signed but not yet commenced pool is now comprised of more than 1.4 million square feet of executed leases, representing nearly $101 million of contractually obligated annualized base rent, or ABR. The ABR per square foot associated with the signed but not yet commenced pool is nearly $72, approximately 22% above our current portfolio-wide average.

In addition, 78% of the signed but not yet commenced pool is comprised of triple-net lease structures versus 54% of the existing portfolio. As we pointed out before, taken together, these statistics underscore that average commencements from this pool will have a disproportionately positive impact on NOI as they occur over the coming years, providing strong visibility on future bottom-line growth. Importantly, despite the significance of our third quarter leasing volume, our forward pipeline further expanded during the period, with total square footage represented by pipeline transactions up 20% quarter-over-quarter. We remain focused on quickly converting the current pipeline into signed leases and look forward to updating you on our progress as we move through the balance of this year and into 2027.

With just over 6% of our total portfolio ABR expiring between now and the end of next year, we believe this pipeline activity, combined with an improving supply-demand backdrop in our markets, positions us well for further net leasing gains. Now turning to our markets. The San Francisco Bay Area continues to lead the way, both in terms of executed deal volume and forward pipeline activity. As we discussed last quarter, tenant demand across the market remains robust and optionality is quickly dwindling, resulting in both a strong new deal pipeline and an acceleration of inbound requests from large tenants looking to discuss early renewal opportunities to lock in their space requirements in what is quickly becoming an increasingly competitive environment.

To that end, during the third quarter, we signed a 12-year, 243,000 square foot renewal with Box at Crossing 900 in downtown Redwood City at highly compelling lease economics, reflecting the overall strength of the submarket and further validating our conviction in the nearby 1900 Broadway development project we announced earlier this year. More broadly across the San Francisco market, demand from growing technology and AI companies continues to accelerate. Over the last two quarters, we have also seen a meaningful uptick in activity from robotics users, particularly in the Peninsula and Silicon Valley submarkets. In Q3, we capitalized on this growing category of demand by signing a 65,000 square foot lease with Ulysses, an oceanic robotics company, at Oyster Point Tech in South San Francisco, in space formerly leased to 23andMe.

In Seattle, where we experienced our largest sequential increase in leased occupancy during the period at 220 basis points. We continue to see improving broad-based demand from a wide range of tech, AI, legal, financial, and professional service users. Notable activity in the third quarter included a 28,000 square foot lease at West Eighth with Morrison Foerster, an international law firm who will join an expanding list of top caliber tenants of the project over the last few quarters. In San Diego, our concentration in suburban markets such as Del Mar continues to provide opportunities to leverage our scale to meet the evolving needs of tenants.

During the quarter, we facilitated the relocation of top tier law firm Greenberg Traurig from One Paseo to nearby Kilroy Center Del Mar, or KCDM, in order to double their footprint while concurrently executing a direct new deal and expansion with an existing subtenant at One Paseo, facilitating their growth into the space that will be vacated by Greenberg. While One Paseo remains over 99% leased, we have had vacancy at KCDM, which has recently experienced significant momentum. During the quarter, we signed a total of four new leases at the project, including the lease with Greenberg, for a total of approximately 70,000 square feet. Blended re-leasing spreads across all of these transactions totaled 38% and 12% on a GAAP and cash basis respectively. In Los Angeles, the recovery remains more nuanced and submarket dependent.

In Beverly Hills and Culver City, we continue to experience broad based demand from a wide variety of high quality users. At Blackwelder in Culver City, we signed two new leases during the quarter with well capitalized tech and fintech tenants, building upon other successful leasing at the project earlier this year. While the South Bay submarkets remain slower, we are seeing the early signs of an uptick in defense, aerospace, and advanced manufacturing demand, which could be a meaningful driver of activity in the region over the coming years. Lastly, in Austin, Indeed Tower is now over 90% leased, following a new deal with a media company during the quarter.

Although the market continues to work through the significant amount of new supply that is delivered in recent years, tenant demand remains healthy, and strong execution activity continues to chip away at the backlog of competitive space, which has translated into increased momentum at the project. With respect to the life science sector, public and private equity capital markets remain open, and the M&A licensing and approval landscapes all remain supportive, which has translated into higher levels of activity as we've moved through 2026. During the third quarter, we signed a 49,000 square foot full building lease with a life science company at 4400 Bohannon, a building within our Menlo Corporate Center campus that underwent a life science conversion project that stabilized about a year ago.

Life science demand at the project has been negligible since conversion delivered, but due to improvements in biotech capital markets and the tightening of high quality life science availability across the Bay Area, we saw multiple parties competing for the space during the second and third quarters, ultimately driving a strong outcome for the project. At Kilroy Oyster Point Phase 2, the momentum that we discussed last quarter has continued unabated, with ongoing active negotiations for all remaining vacancy within our multi-tenant building and a growing list of larger potential users for our full building on the campus. Our ability to accommodate a wide range of user size requirements within both phase 2 and future phases continues to distinguish KOP from much of the competitive set.

In particular, our remaining spec suites are a material advantage as we compete for larger requirements in the market, some of which are prioritizing the near term availability of temporary space they can occupy while they customize and build out their permanent premises. We're excited about where we stand at KOP 2, and we look forward to providing additional updates over the next several quarters. Lastly, on investments, while Eliott will discuss our thoughts on the current transaction environment in a moment, I do want to provide a quick update on the Flower Mart project, where we continue to make meaningful progress on the finalization of the amendment to our development agreement with the City of San Francisco.