Would Kilroy carry interest expense into 2027 for Flower Mart, or would they sell the asset, and when would an announcement be made?

The company is focused on completing a process with the city by Q4 2026 to enhance flexibility for Flower Mart, allowing for a wider range of uses and phasing. This will enable better decisions on ownership and development, aiming to place the site into service as soon as economically feasible. “But right now, the primary focus for everybody on this platform is that we get to the end of the process with the city that we do everything we need to do to ensure that the Flower Mart site is placed into development, placed into service as soon as economically feasible in order to support the needs of the Central SOMA community.”

Can you elaborate on the increased demand for KOP 2, including tour activity, conversion to leases, and changes in yield expectations or stabilization timeline?

Touring activity for KOP 2 significantly increased from 317,000 sq ft in Q1 to over 800,000 sq ft in Q2. There's broad interest across various sizes, including multiple parties for the last spec suite and activity on new spec labs. Larger requirements (over 100,000 sq ft) and robotics companies are also contributing to demand, which is encouraging for KOP 2. “We went from 317,000 square feet of tours in Q1 of '26 to over 800,000 feet of tours, and we're talking to many of those firms now.”

Given the DIRECTV lease expiration in Q4 2027, is there more confidence in re-leasing that building, or is it still viewed as a sale candidate?

The company continues to evaluate all options for the Kilroy Airport Center campus. The market is moving in the right direction due to returning industries like defense, aerospace, and robotics. There's time before the Q4 2027 expiration, and all possible options to maximize value will be explored. “We continue to evaluate all options with respect to the Kilroy airports on our campus. I think we'll have multiple different paths we can take there.”

KRC

Kilroy Realty (KRC) Q2 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q2 FY26)· Real Estate· Jul 28, 2026

Source: earnings call transcript

Executive summary

Kilroy Realty Corporation Q2 FY26 — Strong Leasing Momentum and Market Recovery

Kilroy Realty reported a strong second quarter, driven by robust leasing activity and broad-based market recovery across its West Coast portfolio, particularly in San Francisco. The company is capitalizing on improving supply-demand dynamics and tenant urgency, while strategically managing its capital structure and evaluating acquisition and disposition opportunities. Management expressed optimism for continued execution through the balance of the year, despite some near-term occupancy impacts and development project timelines.

Highlights

Executed approximately 376,000 square feet of new and renewal leases in Q2, bringing YTD leasing volume to 944,000 square feet, a 40% increase over H1 2025.
GAAP rental rates were up 21% and cash rents were up 6.1% for comparable leases signed in Q2, with re-leasing spreads improving to 27.3% (GAAP) and 15.6% (cash) excluding spaces vacant over 12 months.
Signed but not yet commenced pool grew to over 1 million square feet, representing more than $78 million of annualized base rent (ABR), with ABR per square foot 30% above current portfolio-wide ABR.
Total square footage represented by the forward leasing pipeline was 34% higher than Q1, with LOI and late-stage pipeline up approximately 77%.
Successfully amended and extended unsecured credit facilities, increasing revolver capacity to $1.25 billion and term loan to $250 million, and repaid $200 million of private placing notes ahead of schedule.

Concerns

Portfolio occupancy, including KOP 2, ended Q2 at 77%, down 60 basis points from prior quarter due to two large move-outs that negatively impacted occupancy by approximately 140 basis points.
Flower Mart development economics are not yet supported by current rents for either office or residential projects, with expense capitalization expected to stop at year-end 2026.
Difficult year-over-year comparison for same-property NOI in Q3 2025 due to $4 million in restoration fees and net real estate tax refund benefits recognized in Q3 2025.

Guidance & targets

Category	Target	Timeline	Confidence
FFO per diluted share	$3.49 to $3.63 high materiality	FY26	High
Same-property NOI growth	25 to 125 basis points high materiality	FY26	High
Flower Mart expense capitalization	Stop at year-end 2026 medium materiality	FY26	High
Land sales under contract	$165 million medium materiality	FY26-FY27	High

Segment performance

Segment	Revenue	YoY	QoQ	Margin
San Francisco San Francisco continues to lead the West Coast recovery with strong flight-to-quality dynamics and increasing effective rents. Availability of large contiguous blocks has materially declined, driving tenant urgency. Broad-based demand includes traditional occupiers and the AI ecosystem. Net absorption: positive (fourth consecutive quarter)Active tenant demand: >10M sq ftAI ecosystem share of demand: ~1/3Tour activity in South of Market submarket: +65% sequentiallyVacancy in 100 First/Salesforce Campus submarket: ~12%	—	15%	—	—
Pacific Northwest (Bellevue, Seattle) Encouraging momentum in both primary submarkets. Bellevue has constrained high-quality availability, intensifying competition. Seattle's portfolio (South Lake Union, Denny Regrade) has seen a significant pickup in activity, particularly at West 8th. New leases at West 8th: ~150,000 sq ft (over last several quarters)	—	—	—	—
San Diego (Del Mar) Suburban markets like Del Mar, where most exposure is concentrated, continue to perform exceptionally well. The downtown submarket remains challenged, but 2100 Kettner in Little Italy resonates with tenants. Office vacancy rates in suburban markets: lowSublease availability in suburban markets: limited	—	—	—	—
Los Angeles (Beverly Hills, Culver City, South Bay, Santa Monica, West L.A.) Cautious optimism with green shoots emerging. Broad-based demand in Beverly Hills, tech and AI demand expanding in Culver City, and aerospace/defense/robotics/advanced manufacturing growing across the South Bay. Large tenant demand re-emerging in Santa Monica and West L.A. Santa Monica Media Center leased: 100%	—	—	—	—

KRC operating KPIs by quarter

KRC operating KPIs stated on its earnings calls, by fiscal quarter
KPI	Mar 2026 Q1 FY26	This call Jun 2026 Q2 FY26	Change vs prior quarter
Square feet Leasing productivity	~568K sq ft Against this backdrop, our team's disciplined execution drove our strongest first quarter leasing results since 2017 and total productivity of approximately 568,000 square feet, 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. Source: earnings call transcript	~376K sq ft During the second quarter, we executed approximately 376,000 square feet of new and renewal leases, bringing year-to-date leasing volume to roughly 944,000 square feet, an increase of more than 40% versus the first 6 months of 2025. Source: earnings call transcript	—
Occupancy rate	77.6% As a result, portfolio occupancy ended the quarter at 77.6%, excluding KOP 2, the first quarter occupancy would have been 81.5%, down only 10 basis points despite our previously communicated first quarter move-outs. Source: earnings call transcript	77% Portfolio occupancy, including KOP 2, ended the quarter at 77%, down 60 basis points from the prior quarter despite 2 previously communicated, largely about that negatively impacted occupancy by approximately 140 basis points. Source: earnings call transcript	-0.6 pt

Operating figures the company stated on at least two of the calls shown, checked against each call's transcript. Click a figure to read the sentence. A dash means it was not stated that quarter.

Orderbook & backlog

Signed but not yet commenced pool 1M sq ft 2026-06-30

Represents over $78M of annualized base rent (ABR); 86% comprised of triple net lease structures; ABR per sq ft is $75, 30% above current portfolio-wide ABR.

Land sales under contract $165M 2026-06-30

Roughly half expected to close late 2026 or early 2027.

Deals & partnerships

Edema Pharmaceuticals Lease agreement

Executed a 38,000 square foot lease at Kilroy Oyster Point Phase 2 during the quarter.

Universal Music Group Lease agreement

Executed a 51,000 square foot lease at Santa Monica Media Center, bringing the project to 100% leased.

Capital programs

Kilroy Oyster Point Phase 2 (KOP 2) Development underway

Period spend: $150M +/-

Primary component of the development spend for FY26. Capital spend expected to accelerate in H2 FY26 as leasing activity and build-out continue.

Risks & headwinds

Occupancy decline due to large move-outs Q2 FY26

Portfolio occupancy down 60 bps QoQ, negatively impacted by ~140 bps from two large move-outs.

Mitigation:Strong leasing activities and significant commencement activity provided counterbalance; increased tenant renewal activity.

Flower Mart development economics Ongoing, until market conditions improve

Current rents do not yet support development economics for office or residential.

Mitigation:Working with the city of San Francisco on revised plan for greater flexibility and broader range of uses; expect to stop expense capitalization at year-end 2026.

Difficult year-over-year comparison for same-property NOI Q3 FY26

$4 million or 230 basis points in restoration fees and net real estate tax refund benefits recognized in Q3 2025.

Mitigation:Not explicitly stated, but implies awareness and management of expectations.

Elongated lease execution timelines Ongoing

Lease execution timelines remain elongated.

Mitigation:Optimistic about overall level and quality of life science demand; focus on speed to occupancy and net effective rent maximization.

DIRECTV AT&T lease expiration Q4 FY27

Bulk of lease expiration in Q4 2027.

Mitigation:Exploring all possible options (re-leasing or disposition) for the Kilroy Airport Center campus; market conditions in the area are improving.

What to watch in Q3 FY26

Flower Mart process with city

Q4 FY26

Current Ongoing discussions for revised plan

Target Conclusion of process with city

Why it matters

This will determine the future flexibility and optionality for the Flower Mart site, impacting its economic value and development path.

We continue to work through a process with the city right now, and we are confident that we will be at the end of that process sometime later in the fourth quarter of this year.

Find out whether KRC delivers this. Inve re-checks your case every morning.

Q&A highlights

What should be expected for leasing spreads moving forward, and how does the overall portfolio's mark-to-market look?

Q2 spreads were broad-based and positive across markets. While spreads will fluctuate, the overall trend is positive. The portfolio is above market in San Francisco and Los Angeles, and below in other markets, but the 'above market' compression in SF/LA indicates improving dynamics.

“As Jeffrey mentioned and you highlighted, Jana, the spreads in the quarter were pretty broad-based. This wasn't a quarter that was driven by 1 or 2 leases. We had pretty consistently positive economics across most of the pool of leases that were signed during the quarter in a wide range of markets.”

asked by Jana Galan · answered by Angela Aman

3 min read 7 chapters

Detailed narrative

West Coast Market Recovery and Leasing Momentum

The company observed a continuation and broadening of the recovery across its patient-driven markets, fueled by strong new business formation, growth in AI, and shrinking shadow supply. This has led to diminishing inventory of high-quality available space and improving lease economics.

Tenant urgency for early renewal discussions has increased, with Q2 leasing volume up 40% year-over-year. The forward leasing pipeline expanded significantly, with LOI and late-stage pipeline up 77%.

San Francisco Market Dynamics

San Francisco, the largest market, posted its fourth consecutive quarter of positive net absorption, driven by flight-to-quality dynamics. Average effective rents increased approximately 15% year-over-year. Active tenant demand surpassed 10 million square feet, a level not seen since 2019, with AI ecosystem representing approximately one-third of this demand.

Tangible interest is migrating across multi-tenant assets in the South of Market submarket, which saw a 65% sequential increase in tour activity.

Life Sciences Sector Performance

Industry fundamentals in the life sciences sector continue to improve, with the XPI up more than 70% year-over-year. Biotech IPO and follow-on equity markets are open, and M&A/licensing activity is robust. At Kilroy Oyster Point Phase 2 (KOP 2), there has been a meaningful pickup in tour and proposal activity, with active interest in all unleased space and larger format users re-engaging the market.

Robotics companies are also creating large requirements in the Peninsula, potentially reducing available R&D space for life sciences.

Capital Allocation and Balance Sheet Strength

Kilroy Realty is focused on simplifying the portfolio, improving cash flow durability, and maintaining financial strength. The company has sold $348 million year-to-date, including a $202 million LA residential sale. The capital markets for office and life science are strengthening, leading to improved pricing and certainty of execution for dispositions.

The company also amended and extended its unsecured credit facilities, increasing available capacity and extending duration, resulting in approximately $1.6 billion of available liquidity.

Flower Mart Development Update

The company continues to work with the city of San Francisco on a revised plan for the Flower Mart site, expected to conclude in Q4 2026. The updated framework aims to provide greater flexibility around phasing and a broader range of uses, including residential, to maximize optionality.

Current rents do not yet support development economics for either office or residential, and expense capitalization is expected to stop at year-end 2026.

KOP 2 Leasing and Development Spend

At Kilroy Oyster Point Phase 2, a 38,000 square foot lease was executed with Edema Pharmaceuticals during the quarter. The primary component of the company's development spend, guided at plus or minus $150 million for the year, is allocated to KOP 2. Capital spend is expected to accelerate in the second half of the year as leasing activity and build-out for signed leases continue.

Acquisition Strategy

The improved transaction market presents acquisition opportunities, with the company actively evaluating several. The investment philosophy focuses on asset-by-asset evaluation, seeking mismatches between demand fundamentals and values. Kilroy typically targets core-plus or value-add opportunities where its expertise in leasing up vacancy, investing capital, or taking a position on future lease roll can create value, rather than purely core assets.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.