Kilroy Realty Corporation (KRC) Earnings

Management highlights

### Market Specific Leasing & Demand Trends - **San Francisco (largest market):** Posted its fourth consecutive quarter of positive net absorption, with flight-to-quality trends driving nearly all recent leasing activity to Trophy and Class A assets, compressing sublease availability and direct vacancy. Average effective rents increased 15% year-over-year, total active tenant demand exceeds 10 million square feet (a level not seen since 2019), and demand is broad-based, with AI-related tenants accounting for one-third of the active pipeline. Tour activity in the South of Market (SoMa) submarket increased nearly 65% sequentially in Q2, showing the recovery is broadening beyond initial narrow pockets. - **Pacific Northwest:** Bellevue has seen constrained high-quality availability after recent large lease executions, intensifying competition for space at the company's Key Center and Skyline assets. In Seattle, while CBD leasing remains challenging, the company's South Lake Union and Denny Regrade portfolio has seen a significant activity pickup, with 150,000 square feet of new leases executed at West 8 over recent quarters and a strong forward pipeline of new and expansion leasing. - **San Diego:** Suburban markets like Del Mar, where the company holds most of its exposure, continue to perform exceptionally well with low office vacancy and limited sublease availability. The downtown submarket remains challenged, but the company's 2100 Kettner vacancy continues to attract active tenants, and the team has captured outsized leasing demand. - **Los Angeles:** Cautious optimism as green shoots emerge: broad-based demand in Beverly Hills, growing AI and tech demand in Culver City, growing aerospace/defense/robotics/advanced manufacturing demand across the South Bay, and reemerging large tenant demand in Santa Monica and West LA. The company executed a 51,000-square-foot lease with Universal Music Group at Santa Monica Media Center in Q2, bringing the project to 100% leased. - **Austin:** Large amounts of new supply delivered over recent years are being steadily absorbed, tenant demand has positively inflected, and the competitive landscape for remaining Class A space has notably improved. ### Life Science Sector Update - Industry fundamentals are improving: the XBI biotech index is up more than 70% year-over-year, biotech IPO and follow-on equity markets are open, M&A and licensing activity is exceptionally high, and novel FDA drug approvals remain on pace with 2025 levels. At KOP Phase 2 (Kilroy Oyster Point), after executing a 38,000-square-foot lease with Olema Pharmaceuticals in Q2, tour and proposal activity has increased meaningfully, with active interest in all unleased space across the multitenant building and large-format users reengaging with the market. Lease execution timelines remain elongated, but management is optimistic about overall demand quality. ### Capital Allocation & Balance Sheet - Management continues to prioritize simplifying and streamlining the portfolio, improving long-term cash flow durability and growth. The company has completed significant work to rationalize the development pipeline, monetize non-strategic land parcels, dispose of lower-quality/capital-intensive assets that no longer meet return hurdles, and opportunistically reinvest in core markets, improving its ability to capitalize on improving market conditions. Year-to-date 2026, the company has completed $348 million in asset dispositions, and $165 million of land sales are currently under contract, with roughly half expected to close in late 2026 or early 2027. In Q2, the company amended and extended its unsecured credit facilities, expanding capacity, extending maturities to 2030/2031, and improving pricing by 20 bps, resulting in approximately $1.6 billion of available liquidity. In July 2026, the company repaid $200 million of maturing private placement notes three months ahead of schedule. ### Flower Mart Development Update - The company continues to work constructively with the City of San Francisco on revised plans for the Flower Mart site, which will provide greater phasing flexibility and allow a broader range of uses including residential to maximize optionality. Current rents do not yet support development economics for either office or residential, so the company expects to stop expense capitalization at year-end 2026, consistent with prior guidance.

Guidance

- Management affirmed its prior full-year 2026 guidance range, maintaining a full-year 2026 diluted FFO range of $3.49 to $3.63 per share and a same-property NOI growth range of 25 bps to 125 bps. - A difficult year-over-year comparison is expected in Q3 2026, due to $4 million (32 bps) of one-time restoration fees and net real estate tax refund benefits recognized in Q3 2025. - The sequential step-down in implied H2 2026 FFO relative to H1 2026 is primarily driven by the removal of the one-time Q2 2026 bankruptcy settlement gain; backing out this one-time item and carrying the run rate forward hits the midpoint of the full-year guidance range, with the primary swing factor for hitting the high vs low end of the range being the pace of disposition activity in H2 2026. - To reach the high end of the guidance range, the company would need to accelerate rent commencements from the pipeline into 2026, which would primarily generate a noncash straight-line GAAP benefit rather than a large impact on 2026 cash same-property growth.

Segment performance

Kilroy Realty is a commercial office and life science real estate firm operating across 5 core West Coast markets and life science assets. Portfolio-wide occupancy ended Q2 2026 at 77%, down 60 bps quarter-over-quarter, impacted by two large pre-communicated move-outs that reduced occupancy by 140 bps, partially offset by strong commencement activity from recent leasing. For the second quarter, diluted FFO was $0.92 per share, which included a one-time $5.9 million ($0.05 per share) bankruptcy settlement from 2023. Same-property cash NOI increased 1.5% year-over-year, with gains from the bankruptcy settlement and base rent growth partially offset by difficult year-over-year comparisons from non-recurring positive benefits recognized in Q2 2025. Q2 2026 new and renewal leasing totaled 370,000 square feet, bringing year-to-date volume to 944,000 square feet, a 40% increase compared to the first half of 2025. Across all comparable new leases signed in the quarter, GAAP rental rates increased 21% and cash rents increased 6.1%; excluding spaces vacant for more than 12 months, GAAP releasing spreads improved to 27.3% and cash releasing spreads improved to 15.6%, marking the first positive quarter for both GAAP and cash spreads in nearly two years. The signed-but-not-yet-commenced (SNO) lease pool totals 1 million square feet, representing $78 million in annualized base rent (ABR), with an ABR per square foot 30% above the current portfolio average; 86% of SNO leases are triple net structures (compared to 53% of the existing portfolio), providing a disproportionate positive impact to future NOI. The total forward leasing pipeline square footage was 34% higher at the end of Q2 than at the end of Q1, with LOI and late-stage pipeline up approximately 77%.

Risks & headwinds

- Lease execution timelines for life science transactions remain elongated, and it is uncertain which prospective transactions will ultimately close and on what timeline. - Leasing spreads and occupancy growth are expected to fluctuate quarter to quarter based on the mix of transactions executed, and the recovery is not expected to follow a perfectly straight line quarter over quarter. - Current rents for the Flower Mart site do not yet support development economics for office or residential uses, creating uncertainty around the near-term timeline and profitability of developing the site. - While transaction markets have improved, acquisition opportunities must still meet stringent risk-adjusted return hurdles, and there is no guarantee attractive opportunities will materialize.

Analyst Q&A

• Q: Given the broad-based strong leasing spreads in Q2, what should investors expect for future portfolio mark-to-market trends, and what is the outlook for Flower Mart development use? /

  A: Management noted Q2 2026 positive spreads were broad-based, not driven by just 1-2 large leases, but spreads will continue to fluctuate quarter to quarter based on transaction mix. Overall portfolio mark-to-market remains consistent with prior commentary: the company's average rents are above market in San Francisco and LA, and below market in its other three markets, with the above-market premium in San Francisco compressing as market rents rise. For Flower Mart, residential development is closer to penciling out economically than office currently, but both are improving, so the final mix will depend on market trends over coming quarters.

• Q: What is the timeline and strategic path for Flower Mart, and how is demand progressing at KOP Phase 2? /

  A: Management expects to complete the city approval process for revised, more flexible development plans in Q4 2026, which will remove legacy constraints on phasing and expand allowed uses, improving the site's long-term economic value. After approvals are finalized, management will evaluate all options, including full residential, full commercial, or a mixed-use development, and will assess whether to continue full ownership, sell, or enter a JV. For KOP Phase 2, touring activity increased from 317,000 square feet in Q1 to over 800,000 square feet in Q2, with active interest across 20,000-100,000+ square foot requirements, two new spec lab floors under construction (already seeing pre-interest), and growing robotics demand in the region that may also drive additional leasing.

• Q: What positive surprises are you seeing in the recovery, and what factors could slow it down? What is the outlook for releasing or selling the DIRECTV campus expiring in Q4 2027? /

  A: Management cited the faster-than-expected broadening of the San Francisco recovery as a positive surprise, with early renewal activity from existing tenants increasing much sooner than expected as tenants recognize tightening availability and rising rents. Positive trends are also emerging faster than expected in previously slow LA submarkets, driven by growing aerospace, defense, and robotics demand. For the DIRECTV campus in LA, management noted the market for this asset has improved meaningfully due to growing industry demand, and multiple paths (releasing or disposition) are now viable; with the lease expiration not until Q4 2027, the company has time to evaluate all options to maximize shareholder value.

• Q: What types of acquisition opportunities are you pursuing, and is there pricing disconnect between fundamentals and asset values that creates opportunities? /

  A: Management focuses exclusively on its existing five core West Coast markets, and primarily targets core-plus or value-add opportunities where the company can add value via leasing expertise, capital investment, or repositioning, rather than buying fully stabilized core assets that do not meet return hurdles. Management confirms it is seeing mismatches between current asset pricing and improving fundamentals (both for potential buys and sells), which is consistent with the firm's investment strategy of looking for mispriced assets. The company evaluates both office and life science opportunities, with no preset target mix — it will only act when opportunities meet strict risk-adjusted return criteria, and is comfortable being patient if no attractive deals emerge.