Good afternoon, everyone. Welcome to Bank of America's 2025 Global Real Estate Conference. I'm Yana Gallen, B of A Senior Analyst covering office suites. We're very pleased today to have with us Kilroy Realty CEO, Angela Aman, CFO, Jeffrey Kuehling, CIO, Eliott Trencher, Chief Leasing Officer, Rob Paratte, and VP of Corporate Finance, Doug Bettisworth. I will first turn it over to Angela to give some opening remarks, but I'd love to open up questions to the room, or I can start with a few that I've prepared.
Thank you, everybody, for coming today, for your attention to the company. I think Kilroy is at a really important point from an inflection standpoint in our West Coast markets. As we've talked about in the last few quarters, we've really seen a resurgence in demand and activity across most of our West Coast markets, particularly in the San Francisco Bay Area, and most interestingly, I think, within the city of San Francisco itself, as both we get a public policy environment in the city that's more conducive to business growth and new business formation, and we're benefiting from the trends we're seeing across the AI space as those companies continue to take incremental demand. We've also been active on the capital allocation front.
We've been working through monetizations of our non-income-producing land bank for some time, and we're starting to see the fruition of those efforts with some recent announcements there. We're pleased to see the activity on that front and have also announced success on the operating property disposition standpoint. We've not only been able to monetize a pretty large asset in the San Francisco Bay Area at pricing we think is very compelling, but also some smaller assets, including in the Los Angeles market. I think we're seeing great success really across every facet of the business and are interested and excited to take your questions.
Maybe starting out, Angela, you're coming up to your two-year mark, and just curious if you could kind of talk through some of the key changes looking back over this time period and kind of what's next.
Yeah. In terms of key changes at the company, I'd say a few things, and they are somewhat interrelated, but I'll put them in two different buckets. One sort of on the portfolio side, and then the second on the platform side. I think to just start on the platform side in terms of the team and how we're executing on the business really across every component or every facet of the business, we've made a lot of key changes, most of which were announced really kind of in the middle of last year when I was six to nine months kind of into the seat. Most notably, we split the CFO and CIO role.
We brought Jeffrey Kuehling on board, somebody I'd worked with for a very long time, and who has a real skill set and capability not only on capital allocation and strategic planning, certainly, but also on data, the way information moves across companies, and how to really make sure that we're putting Kilroy in a position to be a little bit more data forward and engaged with data across every component of our business, and that more people within the company have access to information that'll help facilitate better decision making across the board. That's been an important change. In addition to that, we brought on a new Chief Technology Officer. We also brought in a new Chief Human Resources Officer. We promoted somebody internally to General Counsel.
We brought on additional leasing support both at a senior level in the San Francisco region overall, and importantly, additional leasing talent specifically on the life science side to focus on KOP in particular. There have been a lot of changes across the board, but I would say, again, stepping back, a lot of what we're doing is to make sure, yes, that every component of the business has the resources it needs to execute on, I think, some pretty ambitious goals we're setting for ourselves and holding ourselves accountable for. Really also putting us in a position again to make the best decisions possible, to be a little bit more data engaged and data forward as we think about how to take the business to the next level.
At the same time, we've been stepping back and doing the broader exercise on the portfolio, a lot of which was done really in that first year I was on board, but really thinking about the assets we own, the types of assets we own, the sub-markets we own them in within our five core markets, and challenging ourselves to step back and think about how our asset class and asset classes have really changed over the last 5 years-10 years and what that means for the portfolios we own, the places we own them, and how we might think differently about shifting and changing the portfolio to make sure that we're staying ahead of those trends and that we can meet tenant demand as it presents itself in our markets as it continues to shift and change in pretty interesting and dynamic ways.
I think there's been a lot of work on that side too. I think some of the transactions I referenced in my opening remarks, both on the land sale side and the operating property disposition side, really reflect sort of that assessment that we've done. Throughout the entirety of the development, the future development land bank, we took a big step back and really, yes, thought through what our initial investment thesis was for each one of those parcels, but really challenged ourselves to understand and embrace whatever the highest and best use for each parcel in the future land bank is today and what decisions do we need to make associated with that. We've got a number of different parcels within the future land bank where the investment thesis originally was to develop them as office or life science assets and where that investment thesis really doesn't hold today.
There is a very compelling path forward for those sites as residential or as some other use. Those are the kinds of opportunities within that future pipeline that we've been monetizing. I think today doing so successfully at prices that I think are very compelling and getting compelling even relative to our original basis. On the operating property side, it's been sort of a similar evaluation process, but where are those assets today? What's changed? Are there assets specific with the tenancy in that building or within the sub-market? If we step back and re-underwrite those assets today, looking forward, where do we have capital tied up in the portfolio that is earning a forward cost of capital below our cost of capital?
We should take advantages to monetize those assets and look for additional opportunities to redeploy, either reinvesting in our existing asset base in many cases or being prepared to take advantage of what we believed we would see coming and we're now actually seeing come to fruition, which is a more thriving transaction market even across our West Coast markets and in our asset classes. We're seeing a return of activity. We're seeing more liquidity in the market, both for the types of assets we want to sell and some very high-quality opportunities that we think we should really consider.
Thank you. Maybe turning it to Jeffrey, you're almost at the one-year mark. Kind of similar question, just talking about the changes you've made, changes you're looking to make. You inherited a pretty strong balance sheet, but kind of thoughts around target leverages.
Absolutely. As Angela mentioned, a lot of the work that I've really been focused on for the last year has been internal from a data perspective, where you see that from external stakeholders, how we communicate in our supplemental, the type of information we can get out to the investor base, and how we really get in front of the four decisions we're making. Part of that is improving the disclosure process around capitalized items and allowing all investors to get the information at the same point in time. More recently, we put in our third investment-grade credit rating with Fitch. Part of that thought process was really how do we make sure we have all the information out to the fixed income community? How do we really provide full access to the debt investors? How do we make sure that everyone has the opportunity to engage with our story?
As I look forward, we did execute a bond offering early August, which puts us in a great position as we roll through the rest of 2025. As you mentioned, the team has done a great job structuring the balance sheet. We've got a well-laddered maturity schedule, which allows us to be a frequent participant in the debt capital markets. A lot of it is just continuing that momentum as we go through the lease-up cycle in our assets.
Thank you. Maybe for Rob, you know Angela touched on kind of the positive momentum in San Francisco and AI leasing tech requirements, but maybe if you could kind of walk us through what you're seeing.
Sure. Good afternoon, everyone. I'd say as little as nine months ago, the outlook in San Francisco was very different. AI was on the cusp of starting to grow, but really the only AI of note was OpenAI, who took a large amount of space in the Mission Bay submarket of San Francisco. If you fast forward to today, AI is probably the primary driver for demand in the market. It has expanded the footprint that it's looking in. Companies wanted to be close to Mission Bay, close to OpenAI, but now you're seeing that spread into the south market financial district, which wasn't happening for quite some time. A lot of the demand in the past had gone to the north market financial district because there were more amenities. Now you have a sea change really happening on multiple fronts.
We have a new political environment, new mayor, basically a new Board of Supervisors that's much more business-friendly. That in turn has cleaned up the streets dramatically, and that in turn has opened more retail or allowed more retail to open successfully. That has helped employers bring employees back to work. I think all of you have seen in the national press that San Francisco, instead of being the poster child for what's wrong, is now getting a lot of credit. Deservedly, the current mayor and that administration is really making a marked difference. That's coming up in the conversations we're having. We've done our share of AI leasing and continue to see that demand. Venture capital funding continues to flow into San Francisco primarily. If you look across the country, there are other pockets like Bellevue and Seattle where we have assets as well.
AI is a force to be reckoned with and will continue to grow. We used to talk, I'll finish with, we used to talk about the average AI tenant's 5,000 ft, and six months later, it's 10,000 ft. Now there's no real talk on that because it's pretty much across the spectrum. It's a real and viable business. I'd say the last thing on San Francisco is that the fire category tenants have also been active and absorbing space. Things are really making a turn. We still have work, but things are making a turn.
Great. Maybe if you could touch a little bit on kind of the KOP too and just life science demand in general.
My favorite subject. We, in our last earnings call, you heard Angela talk about the demand we KOP. we continue to work on that demand and expect by the end of the year that we'll have 100,000 ft of leases that we will sign. We're very confident in that. Our team on the ground is very deeply involved in the intense negotiations that go on and the discussions about technical capabilities of the buildings for life science users. What's really pleasing about not only the transactions we have that we're working on is that the pipeline has continued to grow. I would remind everyone, we just delivered the project at the end of last year. It's the newest delivered project in South San Francisco, actually Bay Area from a life science and scale point of view.
We're getting a lot of attention drawn to us because of the scale of the project, the amenities we're offering, as well as what's happening as momentum is building. The market's hearing about things we're working on, and that's leading others to begin discussions. I couldn't be more excited about it. We have to keep our sleeves rolled up and execute.
Yeah, I mean, we came out with a 100,000 sq ft target. Again, that's executions by year end 2025, as Rob said. I just want to underscore, we feel really good about that number. Things have only continued to progress on each of the deals we're working on in a positive direction. Nothing has changed from a sentiment perspective or directional perspective, certainly to the negative since the last earnings call. We feel really good about that. We think we'll see executions both in Q3 and Q4. As Rob's underlining, the pipeline behind those deals is growing really nicely as well.
What are asking KOP now?
It depends on whether we have some speculative lab space. We've also got shell condition space, so it really depends on the package. Asking rents from ourselves as well as our competitors haven't really changed that much. In the $80s triple net in that area, depending on tenant improvement in term and tenant.
Thank you. Is that pipeline on life science and/or traditional tech? I think we went toward it in March. I believe in Donald, the promo event. I remember hearing that at the time, I don't think traditional tech was necessarily looking in that market. Has that changed?
I would say what we said on the conference call specifically around the first 100,000 sq ft is that those are life science deals. One, we've been very open. We got a lot of space to KOP phase II, as everybody is well aware in this room. We've been very open to exploring what has been pretty broad-based demand. The deals that are going to cross the finish line first are all kind of in the life science or life science adjacent kind of categories. Some of the demand behind those deals has been a little bit more tech. We are seeing some interest at KOP or some AI uses that have robotics sort of uses and might use dry lab space and things like that. Just like other ways in which that forward pipeline kind of continues to expand and grow.
There is going to be a pretty healthy contingent of life science in this lease-up process as well. We think about that, and I do think it's strategically important for the asset. The asset does not need to lease up to all life science. When we think about phases III, IV, V down the KOP, there is real benefit to having a real core stable of life science tenants there that can facilitate the next wave of life science growth at the project. We're really excited that that demand has materialized and that that's some of the first demand that's materializing and getting across the finish line. We got plenty of space to fill, and we're open to a broader mix of uses as we were in phase I.
Do you just talk about the life, is this, are you seeing demand because you have a new facility and you know well-located, I call it a facility? Can you just put that in the context of general life science demand overall? Is this a pretty uncertain environment?
I think the market overall has seen a pickup in activity. I'm talking specifically the market, not the national market. We're not in Boston. We're not in some of these other core life science markets. We have some exposure in San Diego and then really South San Francisco. Within the South San Francisco KOP sits, we've definitely seen some broader pickup in life science demand and executions. I think without question, in my opinion, and Rob will jump in here as think KOP 2 is seeing a disproportionate amount of activity and will experience a disproportionate amount of executions for tenants looking for new incremental space because of the quality of this project. It's not just the quality of the physical plant, which is exceptional.
This was purpose-built for life science, and it really meets the needs of some of the most discerning users in the market, but also because of the way this project has been amenitized. Both amenities on site, the coastal views, the proximity to some other outdoor amenities in the area, I think it really sets this asset apart from others in the market.
The only thing I'd add is that there's less hesitancy on the tenant's part in terms of making decisions and really focusing on a location. A year or two ago, there was a lot of hesitancy. Boards were being very tight with allowing companies to take on more space, but some of that resulted in pent-up demand, and that's one of the things we're seeing as well. As Angela said, in the broader purview or view of the Bay Area, life science has picked up. It's not where it was at the peak, but it's picking up, and VC funding is continuing to come into that space. We're seeing it sort of across the spectrum.
Is the bridge still aligned with sort of that AI? Talking about AI as something that's at that, I think it's still an AI world, to be honest.
I think to answer that question, is it positive or negative within our markets or talking about it nationally, I think those are probably different outcomes as well. There's still a ton none of us know. Right? I think one of the most interesting parts about the capital allocation puzzle I thought when I took this role was exactly that. How do we take advantage of what AI is going to do for demand in our West Coast markets, and particularly in the San Francisco Bay Area where we have so much of the portfolio? How do we also make sure that we're taking all the steps necessary to future-proof the portfolio against what AI might do on the other side? That's going to change both potentially the types of assets, it's going to change submarkets, it's going to change all kinds of positioning.
There are all kinds of positioning considerations we should take into account. Without having a crystal ball or a perfect answer to this question, all I can say is that we're really listening and really paying attention for how some of those dynamics are going to play out. I do think innovation hubs, like the markets we operate in, are going to be net beneficiaries. I can't say that's going to be true overall on a national basis, but I certainly think the types of activity we're seeing in our markets are going to continue to position them at the forefront. I know that it's really easy to paint a draconian case where just all jobs go away, and you've seen white papers and other things to that effect.
I think we all also realize and appreciate this would be the first major technological revolution where the outcome is that we do exactly the same things we've always done as an economy. We just do them more efficiently. I just think that's an incredibly unlikely outcome. There will be a lot of new business formation and growth that comes on the other side of AI, and I think we just have to be very attuned to it. We have to pay attention to where it's coming from, what the requirements of those kinds of tenants are, and we have to get in front of it.
You're seeing us do that right now in the city of San Francisco by really understanding what are the core needs of AI tenants taking space in the market today, and how do we make sure the vacancy we have in our own portfolio is optimized to lean into that demand. Right? That's why you've heard us start talking probably last year at some point about the needs that many of these tenants have for immediate occupancy, the need they have for flexibility in term, potentially expansion flexibility down the road, like all of these kinds of things, which is why we've been very successful in the case of the Harvey AI deal we signed in the second quarter to reuse existing improvements from a financial services user that vacated the space in the fourth quarter of last year.
We're going to have Harvey AI open in the portfolio in occupancy by the fourth quarter of this year. That's a two-quarter lag from lease execution. That's just one example. That trend and what they need from us right now is going to continue to shift and change as these companies continue to mature. All I can say is that our job is to really pay attention to how that's shifting and changing, where it's shifting and changing, and how we get in front and stay in front of it.
Maybe if you could kind of touch on just kind of general color on TIs and lease economics, and maybe the differences between this kind of new class of tenants versus you were also saying the traditional FIRE tenants are picking up in San Francisco.
Again, it's very transaction specific. You can read a headline that tenant improvements are up, and no doubt they are. A lot of that was inflation driven. It seems like it's sort of plateaued. If you're going from shell to building out space, allowances can be as high as $150 a ft in a city like San Francisco, but that can also be the case in Austin. It's very dependent on what the tenant needs and the tenant's capability of putting their own money in the space. The other part of this is that what we've done consciously, strategically, is to build pre-built space in a variety of formats in markets where that sort of space is in demand. That would be for the AI tenants, as Angela talked about. Most of them need space now.
They can't take a year to build out space, find an architect, et cetera. We've done very well with our spec suite program. We're really judicious about how many spec suites we take on in a particular market. We put our teams through a pretty rigorous process to justify. That TI for a spec suite is something we control. The numbers are less than what I talked about. It's also highly reusable for the next tenant that comes in because the other piece of color would be with AI specifically, you see a lot of shorter-term leases. That's because these companies have large expectations for growth. They want that flexibility so that they have expansion space in the near term.
Yeah, I mean, Rob's making a really important point around the spec suites. We, you know, going back to the time I started, I think, and the company had had a very well-functioning spec suite program before that. Really being intentional about where we have spec suite inventory that's getting taken down quickly, and how do we make sure we keep the teams in a position where they've got plenty of inventory that we can continue to leg into that demand. It was really clear to see it coming, I think, in the city of San Francisco, given the AI tenants and their specific requirements. I think an incremental surprise over the last 12 months-1 8 months has been the degree to which spec suite activity has accelerated in markets like Austin and Seattle and some of those other places as well. It's a wide range of tenants, right?
The spec suites in Austin continue to do very well, and it hasn't been really AI tenant driven. It's been professional service firms, law firms, engineering firms, a wide range of uses. As Rob said, there's a lot of efficiencies to us in that kind of build-out. We can control the timeline, we can control the capital in a different way, and we can be pretty confident that that capital is going to be reusable on the back end.
In the last couple of years, kind of downside and struggle of activity and move-outs and reopen the mission. We got a big slug of expirations in 2026. Just wondering, how much is that dialogue changing, rationally, and is there any talk of expansions too?
In certain circumstances, absolutely, there are talk about expansions. Right? We've had some of those in the portfolio. We've got some good examples in Seattle, actually, at our West 8th project where we brought tenants in and had them expand pretty quickly. In other cases in the portfolio, we've seen a ton of expansion activity in our San Diego portfolio in Del Mar. There are certainly pockets where we've seen a lot of that activity. I would say some of the move-out activity, and I hesitate a little in terms of how to frame this, but I think what's important to remember is that even as you see some move-outs from tenants that we've known are coming in terms of downsizes or vacates in the portfolio, I really believe the degree to which our markets are at an inflection point, that's a lagging indicator.
If we focus on that piece, which is important, and I'm not trying to discount, you're missing, I think, the strength of leasing activity. We're really trying to help people see the power behind that sign but not commence occupancy pool that's now at a five-year high, I think, for the company. The degree to which that's actually the right indicator of health in the market and kind of where we're headed from here. We just, in the last quarter, with the disposition of the four-building campus in Silicon Valley, addressed the largest expiration in the 2026 pool. 2026 is still an elevated expiration year for us. As we've been talking about kind of how to think about occupancy next year, we can't give at this point any specific trajectory in occupancy in 2026, like we've done in 2025.
I would say even if you assume retention is sort of consistent with what we've seen in the last couple of years, we really just need like a pre-pandemic level of new leasing activity over the next three to four quarters to kind of keep occupancy stable throughout that larger expiration year. That's putting aside KOP2, which will come into the occupancy pool in the first quarter, which is a very important caveat.
On more of a same portfolio basis, I think the line of sight, given that sign but not commence pool, and given how many commencements we're going to have in Q4 and into the first half of 2026 already, I think it's reasonable to feel like a lot of moving pieces, retention pieces, big moving piece, the leasing progress over the next three to four quarters will matter a lot, and how many of those tenants we can get into occupancy during 2026 matters. I think we feel good that a lot of pieces, a lot of work to be done, but there's a pathway there.
Help us with what kind of the historical retention rate is. I don't know if you think of it as pre-COVID or just what you've been averaging the last few years.
It's probably more in the 50% range. We've been averaging something probably closer to 30%. One thing we started disclosing, I think, in the first quarter of this year is that retention rate, if you include all new leases we're doing that are direct deals with existing subtenants. Right? Before, if we did a direct deal with a subtenant at lease expiration, that was counted as 0% retention in those statistics. Given the higher prevalence of sublease space across the portfolio, we didn't take away the original metric, but we added a supplementary metric to help better understand, I think, the consistency in the portfolio and our ability to minimize some of that downtime as we do some of those direct deals. That's been higher, probably in the 10 percentage point range.
You've probably been closer to 35% or 40%, let's say, if you included some of those direct deals with subtenants. It's somewhere in that range. It's still been clearly below the historical average. Frankly, I would assume, I mean, the expectation I'm sort of setting with my earlier comments, we're not at this point anticipating a major improvement in retention next year. Again, I don't think we have to be to, on a full-year basis, putting aside KOP2 coming into the pool, hold occupancy flat or have a shot at growing it.
How much of the entire portfolio is sublet?
It's around 15% - 20% in total.
And pre-COVID?
Call it 10%-ish.
Are there any kind of known move-outs to call out for the second half of 2025 or early 2026?
Yeah. I'll give sort of the occupancy trajectory we've talked about for 2025 already. There are no huge names or pieces, but what we did say is that we should expect to take a step back in occupancy again in Q3 for two reasons. We have a little bit of negative net absorption in Q3 and smaller move-outs, nothing all that significant, but it would probably be in line with the negative absorption we saw in Q2. Call it somewhere between, let's say, 75,000 sq ft and 100,000 sq ft, something like that. We also have two redevelopment assets that will enter the pool in Q3 as well. Those are entering the pool 0% occupied, but one of them is now almost 50% leased. In Q4, we think we're positive net absorption.
We feel really good about that number given how much of that is coming from leases that are already signed and contractually obligated. Yes, there's work to do to get them open on schedule. Harvey by itself is almost 100,000 sq ft, and that's coming into the pool, we believe, in Q4. The move-outs through the balance of the year, there are a number of names, but they're all pretty granular move-outs. As we look forward to 2026, we haven't called out anyone in particular. There have been a lot of times spent talking about what had been an almost 500,000 sq ft expiration in 2026, but that's the one that had been addressed with the announced disposition in Q2. It's now a more granular pool, which I think is good news.
There are a handful of them, you know, call it four or five, that are between 100,000 sq ft and 200,000 sq ft. We're working diligently with all those tenants to understand what their plans are for next year. We'll communicate more specifically on a trajectory as soon as we complete more of those conversations and we see what new leasing activity we're able to report over the next quarter or two.
Thank you. Maybe to get Eliott in the conversation, you were very active on dispositions clearly in the market. Maybe if you could just kind of talk about what you're seeing, kind of the change in activity.
Yeah, sure. We did get a lot more active going into this year on the dispo side. I think that we've tried to be pretty deliberate around our dispo strategy. Prior to this, we hadn't sold anything since 2022. When interest rates went up, the market got a lot thinner in terms of bidder pools, and we were in the fortunate position that we didn't have to start selling things just to sell them. We started to see more liquidity come to the space, come back to the office space. I think that's a function of some of the leasing improvements that we're talking about, giving buyers a little bit more confidence. Frankly, the lending environment has gotten a little bit more conducive for folks as well. There's more capital out there looking for office.
We kind of started with the sale in Santa Monica that we closed, and now the one in Silicon Valley that is going to close at the end of the third quarter. We've also seen the check size that folks are willing to write get a little bit bigger. Whereas a year ago, maybe we needed to sell something $100 million or less, I don't think that's necessarily the case today. That just gives us a little bit more optionality as a seller. Our strategy has generally been look for areas where we may not have as much conviction at what the forward-looking prospects are as others, and try to lean into those dispos. Fortunately, there seems to be enough capital out there, especially if there's something that's a little more opportunistic. I think that where the capital may be a little bit thinner is on the core side.
That generally hasn't been an issue for us. Maybe I'll touch on acquisitions as well. I think that similarly, we're seeing more folks, more sellers come to the market who are now market sellers. If this were a year ago, you might see somebody coming, bringing an asset, and just trying to get data points on where the bids are. Now, a lot more people that are coming are ready to transact wherever the market says the value is. That one warrants us spending more time because we know that there are real counterparties. The second thing that we've also seen is that the quality of opportunities has gotten better. That means both the asset quality itself and also some of the locations. There are markets that historically had been a little tougher to penetrate where there are real sellers coming. We're spending a lot more time evaluating those opportunities.
How are the different buyers and sellers out there thinking about, is it cap rates? Is it yield on cost? Is it price per sq ft?
Yeah, it'll differ based on who the buyer is and what the opportunity is. I think that early on in the recovery, the plays were much more per pound plays. I think now there's a mix of both. You'll have some folks, depending on what their capital is like, where they're just trying to get in on a good basis. Maybe they can get to the yield return that they like quickly. If not, they feel good enough about where they are that they're still willing to take that bet. You are also seeing more folks that are now saying, what is my return on cost? How quick can I get there? What is my IRR? How quick can I get there? What does the exit look like? It's becoming a lot more normal.
A lot of the activity is starting to be seen kind of San Francisco, but do you also see it kind of in broader Northern California and Seattle?
I would say all of our markets, and the quality of opportunity improving is not specific to one market. We are seeing it in multiple markets. I think that for us, it's a function of where do we have conviction around what a lease might look like or where rent growth may come back sooner versus later. That kind of warrants where we spend our time.
Unfortunately, we're at the end of the session, but I do have three final rapid-fire questions to ask. When the Fed starts to cut, do you expect rates for long-term debt to decline, stay flat, or rise?
Mostly stay flat.
Last year, the majority of companies stated they're ramping up spending on AI initiatives. How would you characterize your plans for next year? Spend more, flat, or lower?
Spend incrementally more. Yeah.
Do you believe same-store net operating income for your sector will be higher, lower, or the same next year?
The sector higher.
Thank you. Thank you so much.
Thank you, Yana.