Kilroy's Q3 2025 Earnings Call: Contradictions Emerge on Flower Mart Project, Occupancy, Leasing Strategies, and Financial Reporting

Guidance:

• 2025 FFO raised to $4.18–$4.24 per share (midpoint +$0.11).
• Flower Mart interest and other expense capitalization expected to continue through June 2026.
• Kilroy Oyster Point (KOP 2) to transition to stabilized portfolio in January 2026; tenants begin occupancy in H1 2026 with quarterly run-rates of ~ $5M operating expenses/property taxes and ~$10M capitalized interest during build-out.
• 2026 expirations now ~970,000 sqft after recent renewals; focus on new leasing to backfill remaining expirations.

Business Commentary:

• Office Leasing Recovery:
• Kilroy Realty reported 550,000 square feet of new and renewal leases for Q3, marking the highest third quarter of leasing activity in six years.

• The recovery was driven by increasing demand across office and life science sectors fueled by advancements in artificial intelligence and the resurgence in office demand.

• Life Science Project Progress:

• At Kilroy Oyster Point Phase 2, 84,000 square feet of leases were signed, including significant deals with biotech companies like MBC BioLabs and Acadia Pharmaceuticals.

• The progress is attributed to an improving regulatory environment and increased activity in biotech M&A, leading to a robust pipeline and growth in demand for life science space.

• Strategic Acquisitions and Dispositions:

• Kilroy completed the $365 million sale of a Silicon Valley campus and acquired Maple Plaza in Beverly Hills for $205 million.

• These transactions were part of the company's strategy to rotate capital out of assets where value has been maximized and reinvest in opportunities aligned with long-term strategic vision.

• Improved Financial Guidance and Fundamentals:

• The company raised its 2025 FFO outlook to a range of $4.18 to $4.24 per share, reflecting $0.11 per share increase at the midpoint.
• This revision was driven by stronger-than-expected leasing activity and interest capitalization adjustments, along with updates to Flower Mart project assumptions.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted accelerating leasing momentum: "signed over 550,000 square feet" and "highest third quarter of leasing activity." They raised 2025 FFO guidance to $4.18–$4.24 and noted strong transaction activity (Silicon Valley sale $365M, Maple Plaza acquisition $205M). KOP 2 leasing (84k sqft) and SOMA tour activity up 170% were cited as evidence of improving fundamentals.

Q&A:

• Question from Nicholas Yulico (Scotiabank Global Banking and Markets, Research Division): So first question is, I guess, just turning towards some of the expirations you talked about getting addressed for 2026. And I know you had a higher also retention ratio this quarter. So at a high level, I mean, are there any sort of thoughts you can give us on like next year, how to think about retention for expirations and then also getting some benefit, as you talked about from commencing occupancy on that gap right now between signed, but not occupied space?
  Response: Remaining 2026 expirations are ~970k sqft (down from 1.9M at start of year); limited additional renewals expected so management will rely on new leasing—especially deals that can commence occupancy in 2026—to offset move-outs.

• Question from Nicholas Yulico (Scotiabank Global Banking and Markets, Research Division): Okay. And then just second question is on San Francisco. If you could talk a little bit more about how you're seeing your space be competitive in the market versus other options? And then also sort of an update on competitive sublease space that's in the market, and sort of just sort of depth of the tenant pool there overall?
  Response: Tenants prioritize speed to occupancy and landlords who can deliver certainty; Kilroy's SOMA assets are highly competitive with strong tour activity (SOMA tours +170% YOY) and meaningful sublease space being removed from market, supporting sustained recovery.

• Question from Jana Galan (BofA Securities, Research Division): Congrats on a great quarter. I wanted to follow up on the increased leasing outlook near term at KOP 2 and just kind of the current demand in tours, whether that continues to be more traditional biotech or it's kind of across the board?
  Response: KOP 2 demand is primarily biotech/life-science (first 3 deals biotech-related), with a robust pipeline that should exceed the 100k sqft year-end goal; market-leading life-science projects are seeing the most demand.

• Question from Jana Galan (BofA Securities, Research Division): And just given kind of the improvement and diversity in activity across the portfolio, should we think about that there'll be less reliance on kind of the shorter-term leasing going forward?
  Response: Some short-term renewals will persist, but most new leasing is not truly short-term; Kilroy sees demand for 3–5 year terms from growth-stage AI tenants and will offer flexibility where appropriate.

• Question from Steve Sakwa (Evercore ISI Institutional Equities, Research Division): Jeffrey, I don't know if you could provide a little bit more color on just the NeueHouse lease. I appreciate you for clarifying that, that really was, I guess, in the quarter end occupancy and comes out in the fourth quarter, but could you maybe just help size up for us kind of what the rent contribution was from NeueHouse in the third quarter so we could just kind of adjust the revenues appropriately for that?
  Response: Management won't disclose tenant-level rent; NeueHouse departure drives a ~50–60 bps occupancy hit in Q4 and they expect to re-lease quickly given the high-quality build-out and unique assets.

• Question from Steve Sakwa (Evercore ISI Institutional Equities, Research Division): And just any comment, Rob, just about kind of how the rent would maybe stack up to the prior rent? Would that be a roll up, roll down, flat?
  Response: Outcome is deal-specific; unique historic/event space may command premium depending on user and required capital.

• Question from Seth Bergey (Citigroup Inc., Research Division): I guess the first one, just to go back to kind of the KOP leasing activity you've done. Can you provide a bit more color on kind of the lease economics you're achieving there? And maybe touch on kind of how those leases kind of compared to your initial underwriting?
  Response: Rents are broadly in line with original underwriting; tenant improvement costs are higher, and spec-suite TI is fully burdened in reported metrics though much of that capital is reusable.

• Question from Seth Bergey (Citigroup Inc., Research Division): That's helpful. And then maybe for a second one. I believe in your prepared remarks, you mentioned 1.9 million square feet of kind of '26 expirations that kind of need to be backfilled primarily kind of by new leasing activity. Can you just kind of quantify kind of what the tour activity you're seeing on those spaces and maybe kind of how it compares to last quarter or some way to benchmark it just kind of as you guys are seeing this recovery in demand?
  Response: The original 1.9M has been reduced to ~970k sqft; tour activity and pipeline are strong across markets (SOMA tours +170% YOY) and marketing/lease plans are in place for remaining vacancy.

• Question from Anthony Paolone (JPMorgan Chase & Co, Research Division): I just want to go back to KOP and revisit the prior question a bit. One, at the rate -- at the rental rates you're achieving and what you're seeing out there? What would the yield be on your cost? And then the second part of that, the $1.25 billion. Remind me, is that fully loaded for tenant improvements, leasing commissions, prebuilts, all that?
  Response: Too early to provide project-level yields—only ~10% leased (84k/~875k); supplemental reflects original capital expectations and management will update economics as leasing progresses.

• Question from Anthony Paolone (JPMorgan Chase & Co, Research Division): Okay. But -- so then, I mean, you mentioned the capital running a little bit ahead of plan rents kind of more or less in line. So does that mean it likely us to bump up a bit or still too early to tell?
  Response: Still too early; management will reassess as additional leases are signed.

• Question from Brendan Lynch (Barclays Bank PLC, Research Division): You've mentioned some of the components that will feed into this, but guidance calls for a 1% contraction year-over-year, but same-property NOI was up 1.4% year-to-date. Maybe just walk us through some of the considerations that we should keep an eye on in the fourth quarter?
  Response: Key Q4 headwind is a difficult comp: last year's Q4 included ~$6.7M of restoration fee income that will not recur, driving expected sequential decline.

• Question from Brendan Lynch (Barclays Bank PLC, Research Division): Okay. That's helpful. And then maybe just -- you mentioned strength in all your markets. Maybe just hone in on Austin. It looked like you had a lot of leasing progress there at the Indeed Tower. Maybe any extra color that you can provide there and an update on the ground floor space that's available?
  Response: Austin team leased the ground-floor 'post' to a national F&B operator (tenant undisclosed); spec suites are leasing during construction and only two contiguous floors remain for larger tenants—leasing momentum strong.

• Question from John Kim (BMO Capital Markets Equity Research): I had a couple of questions on your leasing pipeline at KOP 2. If you could maybe provide some more color on how large that pipeline is today versus last quarter or the last time you provided an update. And how many of these tenants are growing within the South San Francisco market versus just upgrading space within the market or musical chairs?
  Response: Pipeline has increased vs prior quarters and is attracting Bay Area-wide interest; majority activity is life-science and includes both relocations/upgrades and local expansions.

• Question from John Kim (BMO Capital Markets Equity Research): Okay. On the 970,000 square feet of potential move-outs next year, can you provide color on why these tenants are not renewing their space? And just your ability to backfill that space next year either through leasing or extending the current leasing?
  Response: Reasons vary (e.g., tenant moving to owner-occupied space); retention on original 1.9M was ~40% and management believes remaining vacancy can be addressed via targeted new leasing and dispositions.

• Question from Upal Rana (KeyBanc Capital Markets Inc., Research Division): I wanted to get your thoughts on your capital allocation strategy and priorities going forward, especially with the recent Maple Plaza acquisition and the expectation of getting the space back for next year?
  Response: Kilroy is evaluating all options—acquisitions (office/life-science), dispositions, and buybacks—prioritizing opportunities where the platform can create value; net seller ~$200M YTD and will deploy capital selectively.

• Question from Upal Rana (KeyBanc Capital Markets Inc., Research Division): Okay. Great. That was helpful. And then as a follow-up, could you talk a little bit more about Flower Mart? And could you share any recent conversations you've had with the city on that project? You mentioned continuing GAAP interest there until June 2026, but any additional color there would be helpful.
  Response: Submitted four development scenarios to SF Planning (commercial/residential/mixed); discussions constructive and management now expects capitalization to continue through June 2026 while entitlements proceed.

• Question from Caitlin Burrows (Goldman Sachs Group, Inc., Research Division): I guess maybe just as a follow-up on the Flower Mart point. So it seems like over the, call it, year-to-date, the amount of activity that you've been able to continue doing has changed and your own expectations have changed. I guess, can you just go through like what those changes are and like the current expectation is for June 30? Like how much visibility do you have on that? Or is it kind of up to the city and that's causing the changes and kind of we'll see as it gets closer to June, if that changes again?
  Response: Visibility improved after filing additional proposals in September; timeline through first half 2026 is management's current assumption but remains contingent on the entitlement process and will be updated as needed.

• Question from Caitlin Burrows (Goldman Sachs Group, Inc., Research Division): Okay. And then just maybe a minor point on the Silicon Valley sale. Could you guys give us more detail just on when that closed in September if it was the beginning of the month or the end of the month?
  Response: Sale closed at the very end of September.

• Question from Michael Carroll (RBC Capital Markets, Research Division): I wanted to quickly circle up on the Flower Mart. Are you able to have discussions with potential partners as you kind of reentitle that site if you're going to build resi and/or sell off certain sites? Or is it just too early to tell? You can't have those discussions because you just don't know what the city is going to be willing to give you yet?
  Response: Too early to finalize partner discussions; multiple use scenarios are being evaluated and management needs more clarity from the city before locking partners or structure.

• Question from Michael Carroll (RBC Capital Markets, Research Division): Okay. That's helpful. And then just related to the other land sales that you kind of mentioned in your prepared remarks, are these really going to be focused on the parcels that have kind of been preannounced? Or are there other potential sales that could be announced that's new that we haven't heard about yet. I mean, I guess, are these like kind of the near-term type events? Or are these going to be a longer-term multiple year process to kind of wind down that land book?
  Response: The $150M land-sale target includes announced and yet-to-be-announced parcels; management expects a number of these transactions to be near-term (contingent on entitlements) as the first phase of monetization.

• Question from Omotayo Okusanya (Deutsche Bank AG, Research Division): Just a quick one around just some of the quarterly numbers. Eliott, could you again just walk us through the straight-line bad debt reversal exactly what that was? And also what drove the fairly large increase in tenant reimbursements quarter-over-quarter?
  Response: Straight-line bad debt reversal arose from a tenant moving from cash to accrual accounting, requiring an unwind; reimbursement income change Q2→Q3 was about $1.5M sequentially and is treated net of op-ex and taxes.

• Question from Omotayo Okusanya (Deutsche Bank AG, Research Division): Got you. Okay. That's helpful. And then on the whole slide in regards to just potential office demand from AI. And Angela, you kind of made a couple of comments earlier on. But I guess from our end, like how does one really kind of think through how large of an opportunity that is for KRC. I mean, could we kind of see some AI companies in some of the KOP Phase II cards? Like how do you kind of help us kind of think through that a little bit more about kind of new -- kind of new leasing that would come from that driver?
  Response: San Francisco requirements ~9M sqft (up from ~7M last quarter), with >30% AI/AI-related demand; AI is driving leasing especially in SOMA and Kilroy will capture this via rapid delivery/spec suites and existing improvements—AI demand is visible across markets including KOP and Pacific Northwest.

• Question from Dylan Burzinski (Green Street Advisors, LLC, Research Division): Eliott, just going back to your comments around sort of the capital markets and transaction environment improving in terms of owners bringing their -- being more comfortable bringing their properties to market. Are you seeing more of these types of assets that are being brought to market, more similar in risk profile to Maple Plaza or are you seeing more stabilized core deals coming to market. I guess just as you guys are evaluating these opportunities, given the existing level of vacancy in the market, are you guys more focused on maybe more stabilized type transactions? Or is it really a project level of risk-reward analysis that you guys are doing?
  Response: We see a full spectrum—core, core-plus and heavy repositioning—and evaluate opportunities bottom-up, prioritizing assets where Kilroy's platform can create value rather than simply buying stabilized core assets.

• Question from Caitlin Burrows (Goldman Sachs Group, Inc., Research Division): I feel we've talked a lot about the leasing volume, but not as much on the pricing side. So it looks like the leasing spreads you guys report did get better in the third quarter. I guess as you guys look out to 2026, do you have an idea of, if you think like the year-to-date results or the 3Q results would be more telling of what could happen in the future? Any comments on what you expect on like the pricing side?
  Response: Spreads will be market-specific: some markets should see positive spread as leases reprice up, while San Francisco likely will show negative re-leasing spreads on average in near term despite improving occupancy because many leases are repricing from elevated prior vacancy.

Contradiction Point 1

Flower Mart Project Timeline and Strategy

It involves differing statements about the timeline and strategy related to the Flower Mart project, which could impact development plans and financial projections.

What is the current leasing pipeline size at KOP 2, and how many tenants are expanding there? - John Kim (BMO Capital Markets Equity Research)

2025Q3: We've submitted new development scenarios to the Planning Department, aiming for flexibility and optionality. We expect interest and other expenses to cease by June 2026. - Angela Aman(CEO & Director)

What do you consider as selective reinvestment opportunities? - Michael Carroll (RBC Capital Markets, Research Division)

2025Q2: It's too early to determine if and when we could start a new development, especially if it's a non-office build. - Angela M. Aman (CEO & Director)

Contradiction Point 2

Occupancy and Leasing Outlook

It involves differing perspectives on the company's occupancy levels and leasing outlook, which are crucial for understanding the company's financial performance and market strategy.

How should we assess 2026 lease expirations and the focus on renewals versus new leasing activity? - Nicholas Yulico (Scotiabank Global Banking and Markets, Research Division)

2025Q3: We started the year with around 1.9 million square feet of 2026 expirations, now down to 970,000 square feet, achieving a retention rate over 40%. We believe the remaining pool will be managed through new leasing rather than renewals. - Angela Aman(CEO & Director)

What is the current visibility on 2025 occupancy given planned 2024 move-outs, particularly in Q1? Do you expect a potential bottom this year? - Pal Reiner (KeyCorp)

2024Q4: We have some significant move-outs in Q1, including an 80,000 square foot move-out and a short-term lease associated with a bankruptcy situation expected to significantly downsize. After Q1, we expect a lot more stability in occupancy level. - Angela Aman(CEO & Director)

Contradiction Point 3

Tenant Reimbursements and Financial Reporting

It involves changes in the company's financial reporting and tenant reimbursement strategies, which could impact investor understanding of the company's financial health.

Can you explain the straight-line bad debt reversal and the increase in tenant reimbursements? - Omotayo Okusanya (Deutsche Bank AG, Research Division)

2025Q3: The straight-line bad debt is a function of moving from cash to accrual, and the reimbursement increase is due to adjustments in operating expenses and taxes. - Jeffrey Kuehling(Treasurer, Executive VP & CFO)

What is the 2025 occupancy visibility, due to planned move-outs this year, particularly Q1? Will you bottom out this year? - Pal Reiner (KeyCorp)

2024Q4: The change to the Blackwell GPU mask is complete without functional changes. Production is expected in Q4. - Jensen Huang(CEO)

Contradiction Point 4

Leasing Activity and Tenant Retention

It reflects differing perspectives on the leasing activity and tenant retention strategies, which are crucial for understanding the company's growth and stability.

How will you address 2026 lease expirations and prioritize renewal vs. new leasing activity? - Nicholas Yulico (Scotiabank Global Banking and Markets, Research Division)

2025Q3: We started the year with around 1.9 million square feet of 2026 expirations, now down to 970,000 square feet, achieving a retention rate over 40%. - Angela Aman(CEO & Director)

What leasing changes do you anticipate in 2026 compared to 2025? How is your tenant retention strategy evolving? - Seth Bergey (Citigroup Inc., Research Division)

2025Q2: We have about 40% of leases that are coming up in '26 that we've been able to renew thus far. And we expect to be at a renewal rate of at least 40% across our portfolio. - A. Robert Paratte(EVP & Chief Leasing Officer)

Contradiction Point 5

Leasing Activity and Pipeline Growth

It involves the leasing activity and pipeline growth, which are crucial indicators for Kilroy Realty's revenue and occupancy levels.

How much tour activity remains in the 2026 expirations compared to last quarter? - Seth Bergey (Citigroup Inc., Research Division)

2025Q3: Overall, tour activity is robust, especially in San Francisco and SOMA. KOP's pipeline is strong, attracting tenants from across the Bay Area. - Angela Aman(CEO), Rob Paratte(EVP & Chief Leasing Officer)

Could you comment further on leasing levels this quarter? - Jana Galen (BofA Securities)

2025Q1: We're rebuilding the pipeline, especially in San Francisco, with a 60% year-over-year increase in tour activity. San Francisco, Bellevue, and Seattle are active, with L.A. seeing a slight uptick. - Angela Aman(CEO), Robert Paratte(EVP & Chief Leasing Officer)