KRC - NYSE

Hello, and welcome to the Kilroy Realty Corporation 1Q '25 Earnings Conference Call. My name is Harry, and I will be your operator today. All lines are currently in a listen-only mode and there will be an opportunity for Q&A after management's prepared remarks. [Operator Instructions]. I would now like to hand the conference over to Doug Bettisworth. Vice President, Corporate Finance. Thank you. Please go ahead.

Good morning, everyone. Thank you for joining us. On the call with me today are Angela Aman, CEO; Jeffrey Kuehling, EVP, CFO and Treasurer; and Eliott Trencher, EVP, CIO. In addition, Justin Smart, President; and Rob Paratte, EVP, Chief Leasing Officer, will be available for Q&A. Please note that some of the information we will be discussing during this call is forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information on this call and in the supplemental. This call is being webcast live on our website and will be available for replay for the next eight days, our earnings release and supplemental package have been filed on a Form 8-K with the SEC, and both are also available on our website. Angela will start the call with a strategic overview and quarterly highlights. Eliott will provide a transaction market outlook and Jeffrey will discuss our financial results and provide you with updated 2025 guidance. Then we will be happy to take your questions. Angela?

Thanks, Doug and thank you all for joining today's call. Despite an environment defined by volatility and macroeconomic uncertainty, I'm pleased to report on a positive start to 2025, with solid leasing activity executed during the quarter and encouraging forward leasing indicators across our portfolio. Office demand in our markets continues to rebound as we benefit from the ongoing solidification of return to office mandates, recent meaningful improvements in the health, safety and vibrancy of some of our most important submarkets and materially growing demand from the burgeoning AI industry. San Francisco best represents the intersection of these important trends. The rapid expansion of new AI business formation and growth in the City of San Francisco, combined with recent RTO mandates for major employers in the market and a crime rate that is now the lowest in 23 years, have all contributed to growing foot traffic and the re-amenitization of major office corridors in the city. During Q1, we saw signs of this positive momentum playing out in our portfolio with the execution of a nearly 60,000 square foot lease with a technology company at our 201 3rd Street asset, representing our largest lease execution in the city since 2019. In addition, during the period, we also experienced a 60% year-over-year increase in tour activity in our San Francisco portfolio, providing strong visibility on the future pipeline. As discussed on prior calls, we have also seen some large, well-established AI users expand into other West Coast markets and the ongoing search for high-quality talent. As an example, during the first quarter, we signed a 34,000 square foot expansion of a 9,000 square foot data analytics and AI tenant that originally took occupancy just last year at our recently redeveloped West 8th asset in Seattle. This transaction represents a common theme in AI leasing. Tenants are being rational and disciplined as they initially leased space, while placing a high priority on landlords who will work with them to accommodate future growth needs. And often, as in this example, anticipated future growth is materializing quickly as these businesses rapidly scale. Across the entirety of our office portfolio, the forward leasing pipeline continues to expand in size and improve in quality. During the first quarter, we saw a 40% year-over-year portfolio-wide improvement into our activity despite the increase in volatility that defined the first two months of this year. Although it's reasonable to question of recent headlines, will impact the pace of future leasing activity. We have, to date seen a de minimis impact on transaction volume or velocity. Turning to life science. The industry entered 2025 with a combination of hope related to the economic and market backdrop for the sector and caution on the policy and regulatory outlook. Since then, market volatility has dampened some enthusiasm around the return of public market financing for the space, while the policy and regulatory outlook has proven more complicated than originally anticipated. That said, the scope of the opportunity for the life science sector remains unprecedented and recent messaging from the newly appointed FDA Commissioner that emphasize a commitment to protecting innovation and maintaining a science-based approach to regulation has been broadly encouraging. While there's little question that the sector will need to continue to adapt to a rapidly evolving financial and regulatory climate. Consistent with what we have seen play out on the office side, there has been, to date, no discernible impact on life science leasing momentum in our portfolio. During Q1, at our KOP Phase 2 development project in South San Francisco, we continue to experience meaningful tenant engagement, supported by the project's differentiated design, high-quality construction, broad amenity offerings and importantly, scale, which provides confidence in our ability to meet the ambitious future growth objectives of many of these prospects. We have advanced our discussions with several potential tenants. And are actively working with them on space plans and pricing. Active demand requirements currently include tenants interested in our spec suites as well as several users in discussions for full floors or multiple floors on the campus. We understand and appreciate the attention and focus that this project continues to receive from the investment community, and we will provide timely updates on the status of lease-up when they are available. As Eliott will cover in a moment, we remain very active on the capital allocation front as we work towards monetizing those parcels in our future land bank with the highest and best use outside of the company's core competencies. Last night announcing that the first phase of our Santa Fe Summit land parcel disposition is now under contract. In addition, we are also evaluating a number of operating property dispositions where we can achieve attractive valuations and advance our broader strategic goals for the portfolio. As we realize proceeds from these efforts, we will evaluate the full spectrum of redeployment opportunities, including acquisitions, leverage reductions and/or stock buybacks, appropriately balancing economics, future growth plans and balance sheet strength. I'm also pleased to highlight that in April, we published our annual sustainability report, introducing new ambitious goals that we hope to achieve by 2030 across a wide range of important environmental and social topics. Corporate responsibility is embedded into our culture at Kilroy, and I am excited about the significant milestones that we, as a team are committed to realizing over the coming years to maintain our leadership in this important area. Looking ahead, our focus remains on staying agile, investing in our tenants, portfolio and platform and maintaining superior financial and operational flexibility. I want to thank the Kilroy team for their hard work and dedication, throughout a challenging start to 2025. Particularly for our Los Angeles-based team that continue to execute despite significant disruption associated with the January fires and for continuing to respond to change with courage and innovation. Kilroy is well positioned to execute on our near- and long-term goals and to capitalize on the exciting trends playing out across our West Coast market. Eliott?

Thanks, Angela. Office sales volume in the first quarter was roughly flat year-over-year. That said, there's a wider array of capital pursuing deals, which can generally be grouped into three buckets: institutional, high net worth and users. Institutional capital pulled back the most when rates increased in 2022, but has returned in recent quarters. For example, 300 Howard Street, a vacant 400,000 square foot building in San Francisco was recently recapitalized by two institutional groups for $111 million or $265 per square foot. The price per pound for this building is consistent with other trades of vacant properties in Downtown San Francisco, but the transaction is meaningful for the city since it is the first stand-alone deal over $100 million since 2022. Furthermore, the recap is a great endorsement from sophisticated investors that the changes in the city are tangible and putting San Francisco on the right track. Additionally, users have been selectively buying office buildings over the past few years, filling a void in the market. The latest example is LendingClub, who recently went under contract to acquire 88 Kearney Street in San Francisco for $75 million or roughly $320 per square foot. The significance of this trend is that it reinforces the importance of and commitment to the office and highlights that companies place value in office buildings beyond what investors are currently underwriting. While both of these transactions are in the City of San Francisco, there is similar dynamics playing out across all of our markets with notable activity increases in Silicon Valley and Seattle, Bellevue. Turning to our land sites. We continue to work on maximizing value across the pipeline. As previously discussed, at the Flower Mart in San Francisco, value maximization will come from both creating optionality and the ultimate use and optionality in the phasing of execution. To that end, we continue to work through our internal process evaluating alternatives and are hopeful of getting a warm receptivity from the new growth-oriented leadership at the city. There is still more work to be done, and we will provide further updates as appropriate over the coming quarters. The second way we are working to maximize value is through select sales. As Angela mentioned, we signed an agreement to sell a portion of our Santa Fe Summit site in San Diego for a gross price of $38 million. The sale covers five of the 22 acres, and the deal is scheduled to close upon the receipt of entitlements, which we estimate to be in 2026. We remain in active negotiations on multiple other sites in Southern California and continue to be on track to generate gross proceeds inclusive of this initial sale in excess of $150 million. As previously discussed, we anticipate the future land sales to have elongated closing time lines with proceeds to be realized over the next few years. With that, I will turn the call over to Jeffrey.

Thanks, Eliott. Before we dive into quarterly results, I want to spend a few moments highlighting the enhancements we made to our disclosures this quarter. First, we provided additional details around the individual components of rental income. The added context highlights the strength of our operating portfolio by more readily identifying drivers of our rental income stream. Second, we added a reconciliation from cash NOI to total NOI. We hope the schedule provides a more intuitive view of our business and visibility into the earnings impacts of nonrecurring items, specifically items like restoration and settlement income. Finally, we introduced an additional retention statistic that highlights the effect of direct leases executed with in-place subtenants. The new metric acknowledges where we've eliminated downtime and maintained occupancy by retaining the in-place sub-time. In the first quarter, the retention rate, including subtenants was almost 1,500 basis points higher than our base retention rate. For comparison, our 2024 retention rate, including subtenants, would have been 42% and almost 1,100 basis points higher than our base retention rate. Now turning to the first quarter. FFO was $1.02 per diluted share and cash same-property NOI declined 160 basis points year-over-year. During the period, we delivered cash same-property base rent growth of 90 basis points despite a 300 basis point decline in average occupancy, reflecting the strong contractual rent escalations embedded throughout our portfolio. Occupancy ended the quarter at 81.4%, down from 82.8% at year-end. And on our last earnings call, we discussed the known move-outs of several larger tenants in the first quarter totaling 216,000 square feet. The one meaningful variance from our previous expectations was the timing of Dermtex downsizes and renewal. The 110,000 square foot lease expired in March and is shown as a month-to-month expiration on the lease expiration schedule in the supplemental as of March 31. In April, the downsize in renewal was executed, resulting in an 81,000 square foot move-out in the second quarter. First quarter GAAP re-leasing spreads were negative 15.8%, while cash re-leasing spreads were negative 23%. Re-leasing spreads were impacted by a single large transaction in which we invested minimal capital to secure a three-year lease with an existing subtenant. The shorter lease term provides us with the opportunity to reset rents earlier when the market recovers. This deal resulted in a strong net effective rent. However, the minimal capital commitment led to lower base rents and spreads. Excluding the impact of that single lease, cash re-leasing spreads would have been approximately negative 8.3%, which is consistent with last quarter. Turning to guidance, we're reaffirming our full year guidance, including FFO, cash same-property NOI growth and average occupancy expectations. The midpoint of our range implies a modest deceleration of FFO, consistent with our average occupancy assumptions, as a reminder, the midpoint of guidance also assumes the cessation of interest capitalization at the Flower Mart in the second half of the year. As it relates to the balance sheet, Kilroy has a significant unencumbered asset base, a well-lettered debt maturity schedule and substantial liquidity, which together create tremendous financial flexibility and position Kilroy to be nimble and responsive as we navigate a dynamic capital allocation environment in the coming quarters. With that, we're happy to answer your questions. Operator?

Thank you. [Operator Instructions]. Our first question today will be from the line of Michael Carroll with RBC. Please go ahead. Your line is open.

Yes, thanks. I got on a little late, so I'm not sure if I missed this or not. But Angela, can you provide an update on how you're viewing the Flower Mart site right now? And maybe can you provide some potential options that Kilroy might have for that specific site and what you're analyzing today?

Sure. Yes, Eliott talked about this a little bit in his prepared remarks, but all we can say at this point is consistent with what we said last quarter. The exercise we're going through is intended to explore a wider range of uses for the Flower Mart site than what was originally programmed. And also to ensure that we can execute it in a way where it can be phased, and we can be responsive to the market as it continues to improve and recover in San Francisco. As I mentioned earlier, we're very bullish about what we're seeing in the city of San Francisco from a leasing standpoint and from a safety and vibrancy standpoint, particularly just over the last few months. We are working hard on the Flower Mart side and Eliott mentioned, we're very hopeful that we'll get a warm receptivity from the new administration.

And then maybe can you talk a little bit about the timing? I mean, I'm not sure if that is visible right now, but I mean, is this -- when we're making these decisions, is it within the next year? Or how long should we expect this kind of annualization to take place?

Yes. I think we're actively underway on a number of different things as it relates to the site and having those conversations beginning and expect to continue to have those conversations with the city over the course of this year. There are a lot of different paths that this process could take. And so -- excuse me, that makes it a little difficult to get perfect visibility on what we think the timing of an actual conclusion here is on the Flower Mart side. But I would remind you that what we had incorporated into guidance was an assumption that at some point in the second half of the year, we stopped capitalizing on the Flower Mart. And to the extent we have more clarity on which of the various paths we're on at that point, we can update that assumption as appropriate.

The next question today will be from the line of Jana Galen with Bank of America. Please go ahead. Your line is open.

Thank you. Good morning.

Good morning.

Just hoping you could comment a little bit more on the level of leasing this quarter. Maybe some has pulled forward in 4Q or perhaps the fires in L.A. impacted the leasing sales cycle there. Just any kind of commentary around what the forward pipeline looks like today maybe geographically? Thank you.

Yes. I'll make a couple of comments and then turn it over to Rob to give a broader overview of kind of the pipeline and how it sits today. But I would say, the activity in the quarter represented a few things. I think you're right to highlight that Q4 was an exceptionally large leasing volume quarter for us. So without a question, there were a couple of deals in that pool that would have otherwise occurred in the first quarter, but ended up getting pulled forward into the fourth quarter. So positive in terms of our ability to get occupancy turned on as quickly as possible, but certainly impacted quarter-to-quarter leasing activity to some extent. We also had a couple of deals in the pool for the first quarter that just slipped into the first week of April. And I think if those deals had happened just a week earlier, our leasing volume would have been a healthy increase on a quarter-over-quarter basis -- or excuse me, a year-over-year basis relative to the first quarter of 2024. We feel really good about the pipeline and where it sits and the work that the team has done really across regions to rebuild the pipeline off of that really significant volume in the fourth quarter of last year, and I'll let Rob touch on that.

Yes. I think, Jane, just to add to what Angela said, everything is what's going on. I mean our leasing teams are fully engaged and are very energized working knee deep in a lot of transactions. And as Angela said, some quarters, we are lucky and we pull in business from the forthcoming quarter and get it done, like we did in Q4. And then in some quarters like Q1, some of it spilled into Q2. But our pipeline, I think the thing that's really important to know is that our leasing team is really focused on rebuilding the pipeline. And so we have numerous transactions right now that are promising. And I think it's going to be a matter of time before it plays out. And when you really look at demand characteristics in our different markets, they do operate in different modes at different times, which is sort of a good thing for Kilroy. Right now, San Francisco is very active. It's had its first quarter of net positive absorption in five years according to CBRE. So that's a very promising trend. And we've seen that activity show up in our portfolio, which is pretty impressive. Bellevue, Washington, again, very strong market. Oftentimes, we wish we had more space there to lease. And I think that Seattle itself is benefiting from some of the same things Angela said in her script, in terms of the political environment, law enforcement and cleaning up the street. So we're seeing at West 8th, quite a good uptick of activity from a variety of tenants. To your point in the latter part of your question, L.A., particularly on the West side, has been slower. I think part of that is a natural disruption from the fires. We have seen a slight uptick in our activities. So we're hoping that that trend continues. But L.A. has had -- as in last quarter, L.A. just had more issues surrounding it than other markets. However, I will say that Long Beach or asset and Long Beach aero continues to perform quite well from a leasing perspective. In the last two markets, San Diego and Austin are doing fine, and we have a good pipeline in both those regions.

Yes, I'd just reiterate also the tour activity we mentioned in the prepared remarks, we're up 40% portfolio-wide and importantly, up 60% in the city of San Francisco. So we really are seeing good momentum build. And I think the team is working hard to take advantage of that, capitalize on it.

Thank you. Very helpful. That's it for me.

The next question today will be from the line of Steve Sakwa with Evercore ISI. Please go ahead. Your line is now open.

Yes, thanks. Angela, I just wanted to come back to the leasing pipeline and the deal activity you mentioned that slipped. I guess, one, could you just kind of actually quantify what the leasing pipeline is? And what level of deals kind of slipped, I guess, from Q1 into April?

Yes, I think the pipeline is up something like 15% on a quarter-over-quarter basis. We don't typically talk about the absolute size of the pipeline, but you have seen really healthy momentum kind of rebuilding that pipeline. And again, I think tour activity tends to be one of the most important leading indicators in terms of forward lease activity. So we're seeing really good progress there, as I mentioned, with a 40% portfolio-wide improvement. Really driven by the city of San Francisco, but certainly more broad-based as well. Across the different markets, as Rob was highlighting. We've got different dynamics playing out in many of our markets. But I think across the board, seeing that improvement and return to office across many of our metrics, seeing the last election results and the way that several of our cities are improving from a health, safety and vibrancy perspective, all of that is certainly contributing to the pipeline. And then really in San Francisco and to some degree, Seattle Bellevue a little bit in San Diego as well. We're seeing AI as a real driver of leasing activity and momentum more broadly across the board.

I'm sorry, but were you able to quantify the April, I think you said some deals that you thought would get done in Q1 kind of slipped into Q2. So is there a quantification you can put around that?

Yes. There was probably at least, I'm going to say 50,000 to 60,000 square feet of deals that just slipped into the first quarter of April. But again, the pipeline was at March 31st, the forward pipeline was about 15% of where it had been at 12/31.

The next question today will be from the line of Seth Bergey with Citigroup. Please go ahead. Your line is open.

Hi, this is Sydney [indiscernible] on for Seth. So on the sale of land, Santa Fe Summit for $38 million, is the plan for a second phase of the sale of the other 17 acres. And then more broadly, how are you thinking about monetizing the land bank versus other existing operating portfolio dispositions?

Hey, Sidney, it's Eliott. So we are evaluating a few different sales that I referenced in the prepared remarks, that is one of them. And the way we sort of thought about the land sales are to kind of focus on where we think that there's appetite from third-party capital. And today, that's really around land where there's a higher and better use outside of office and life science. It also kind of aligns well because -- frankly, that's our core competency. And if we have well located land, that should ultimately go towards office and life science. Those are sites that we ought to be developing, when the time is right, which is not yet. But -- that's how we thought about the prioritization of the land bank. The second piece of your question, anything we do in terms of monetizing the land bank doesn't preclude us from looking at operating property sales. And so we are looking at some of those as well. And Similarly, the strategy there is to kind of look at where we think that there is appetite from third-party capital, where we think that there's good value, and that value is -- and our view of what the outlook that asset or that market will be -- is less optimistic than maybe where third-party capital value it. And so that's how we've tried to prioritize what assets we look to monetize.

Great. Thanks. And then one more for me. In terms of renewals, are you still seeing companies reduce base on renewals? Or have you seen more of a trend of expansions like the one at West 8th?

I thought if I misunderstood the question, I apologize. But in terms of renewals, we're seeing, for the most part, companies retaining the footprint they've had. And then I know you are asking about renewals, but in many cases, in San Francisco, particularly new companies coming to market are actually looking for more -- the space requirement changes. Particularly for AI companies where flexibility is very important to them. And so that's how, as Angela mentioned in her remarks, the large deal that we did in San Francisco was the result of being able to accommodate a dynamic sort of growth pattern they have. So on a renewal basis, it's much better than it was 1.5 years ago where most companies were trying to adjust 5% or 10%. We're seeing people stay in the same footprint.

The next question will be from the line of Caitlin Burrows with Goldman Sachs. Please go ahead. Your line is open.

Hi, good morning. Maybe just -- yes, I think its morning there. Just a question on the capitalized interest point. So it seems like the two big movers to capitalize interest over the next 12 months will be KOP 2 and Flower Mart. So maybe just starting with KOP 2 is the right way to think about it, the $828 million that you've incurred so far, that could go up to, it seems like roughly $1 billion that, that will come off in early '26. And then similarly, for Flower Mart, I'm wondering since it not specifically listed as like how much you've spent on it, I don't think. How much -- or like if there's a way you could quantify better what that impact could be?

Sure, Caitlin. This is Jeffrey. You nailed it with KOP 2. So it will come off in early 2026. And then last quarter, we did touch on some of the individual components for the Flower Mart. So there's about $7 million of capitalized interest per quarter and then an additional $1 million of carry costs for the parcel such as insurance or taxes.

Okay. Yes, got it. And then maybe just in terms of like the types of users that are active. You guys have talked about AI a bunch, which is great to hear. I know isn't like the biggest exposure for you guys. But I guess, could you talk a little bit about the types of usage that you're talking to? And if, I guess, who's most active outside of AI and how that's been evolving over the past couple of months.

Yes, Caitlin, this is Rob. I'll talk about a couple of markets. If you look at Bellevue, for example, there is an AI component to it. Our transaction in Bellevue was the third largest of the quarter in Q1, but there's other uses such as private services, law firms, Tommy Bahama with a large renewal that happened in South Lake Union, a retailer, and that was office space, not retail space, Lululemon being another retailer that used office space. In San Francisco, the most notable additions aside from technology where really JPMorgan and their large renewal with the city and Morgan Lewis moving to the Trans-America Pyramid. And I think just one side note that's really, I think, compelling about the change in San Francisco related to JPMorgan through a combination of their expanding business, it's a key market for them. The combination of expanding business in philanthropy on their own account, they're saying that they've -- they're contributing up to $1.2 billion to the economic growth and prosperity of San Francisco, and we're seeing more companies doing that. So this tracks exactly with what Angela was saying about the improving environment. So professional services have always been part of San Francisco, and you're going to continue to see that, I think, particularly with the large law firms that are either wanting to come here for technology or just other Pacific business.

The next question today will be from the line of Nick Yulico with Scotiabank. Please go ahead. Your line is open.

Hi, thanks. So I guess just going to the occupancy guidance range for the year. So if we adjust for Derm tech happening in the second quarter, not first quarter, it looks like you're sort of right in the middle of that average occupancy guidance right now with that impact. So can you just maybe flesh out a bit like what the assumptions are to get to bottom or high end of the range in terms of what does that mean? For leasing activity picking up or not and any major known move-outs still expected? Thanks.

Yes. Thanks, Nick. This is Jeffrey. You nailed the Derm tech comment. There's one more lease that looks like it might be a Q2 effect, 23andMe in South San Francisco, about 65,000 square feet. So that's contemplated within our guidance range. Obviously, if that happens in the quarter, you'll see the occupancy move down just a bit. When we think about the third quarter, I just want to remind everyone that we do have two development properties that will be coming into the stabilized pool, which will affect, occupancy is included within our guidance range. So that will bring it down a touch in the third quarter as well. And when we get to the fourth quarter, our projections are pretty stable at that point. And we -- as you see with the signed but not occupied range this quarter. There is a bunch of rent starts that are coming online at the end of the year. So you'll see the final number kind of bounce around and give or take on how many of those we get started.

Yes. I think the other thing to note is just Rob did a good job on hitting, particularly in San Francisco, which is our largest market. The degree to which tenants are looking for plug-and-play space and flexibility in the ultimate footprint in youth and really working to get into space as quickly as possible. So that's where our spec suite program is particularly effective. And we do have a number of market-ready spec suites available in that market as well as across other markets as well. But to the extent over the next quarter or two, we really can accelerate leasing activity, we've got a shot at getting some of those in occupancy by year-end, which would drive us to the upper end of the range. So that's really the focus in terms of for the variability in terms of what could get us to the top end of the range. But even just based on things that are signed to date, we expect Q4 to be positive net absorption quarter.

Okay. Yes. Thanks. That's helpful. I guess just then following up to on the spec suites at KOP 2. So it sounds like maybe that getting some leasing there could be in the upper end of the guidance range? And is that right? And then also just sort of a timing standpoint, I mean, if you were to get any sort of lease signing on how fast that could actually hit occupancy in the spec suites? Thanks.

Right. So when Jeffrey mentioned the redevelopment assets that are coming into the stabilized occupancy pool in Q3, those are redevelopment properties, not KOP. KOP wouldn't come in until 2026. So lease-up at KOP is not a driver of the occupancy guidance we've given or our performance within that range. I do want, Rob, to spend a minute though, just talking a little bit and expanding on the momentum we've seen in KOP, which has been notable and as I mentioned earlier, has included activity both on the spec suites as well as full floor multiple floor users on the campus.

Sure. Hi, Nick. We continue -- we've said this before, but we continue to entertain steady interest and activity from early stage and mid-emerging science companies. We also still see a variety of users in tech and fintech, but really the predominant user is related to life science. I can't really speak to what others have said or the macro environment, but we're very busy on the ground at KOP, it's actually pretty exciting. We've got ongoing conversations going with two larger users right now, both of whom are in need of scale and a path to future growth. And obviously, our campus and the land we have plays into that very well. I would say also just giving more color that we're commencing space planning and design planning dialogue with several of these users. And with a couple, we're into detailed cost estimation analysis with a variety of single-floor users. And those are really -- I'm giving that color because those are really important precursors to the next step of getting to either a completed LOI or a lease. So we do have a lot going on. It's -- I think the macro situation doesn't help expedite getting things signed, but we have people that are very focused and haven't seen a pullback to date. So -- and lastly, to your question to Angela, the spec suites are by building those and marketing them now, we actually have quite a bit of activity on those. So that is a good 2025 possibility.

The next question today will be from the line of John P. Kim with BMO. Please go ahead. Your line is open.

Thank you. Just following up on KOP 2. We've seen this quarter that you were a little bit more, I would say aggressive on lease spreads and higher TIs, is that something that you're doing now at KOP 2 to help stimulate demand as you look for anchor tenants?

Yes. Well, I want to first address sort of the question about spreads and leasing activity that was executed in the quarter, and then I'll let Rob kind of touch again on the leasing strategy at KOP 2. But just remember what Jeffrey mentioned in his remarks, that really the driver of the negative spreads during the quarter, the most significant driver of the negative spreads was one larger lease we signed. It was a direct deal with an existing subtenant that had very little capital in it. And that drove, as a result of having no capital and comping off of a deal that had a full capital market TI package the optically looks like a lower spread. But as Jeffrey mentioned, it was a very positive net effective rent. And I think the right decision for that building. It's also a three-year lease, which gives us the ability to get another bite at the apple and reset rent in a few years as the market continues to improve. So I think across the board, that was the right decision. So obviously, contributing to a negative spread number in the quarter. I think if you just look at second-generation leasing, I think that the TILC number was pretty consistent actually with where we had been throughout all of 2024. So I think if there was any increase, it was only in first gen space, and it's just a function of the build-out of those tenants. But I think a very small pool there as well.

Sure. And kudos to you, John, on your Cinco de Mayo comment yesterday that was clever. We -- back to KOP specifically, we have a variety of offerings, whether it's Shell or whether it's the existing spec suites, and we have a variety of sizes in the spec suites. And we have a really good handle on what the competition is doing, and we price everything and we're going aggressively after tenants based on a variety of factors, meaning who's the tenant, when is their occupancy or expected occupancy, how much space do they need and there are other factors. And I don't want to go too much into what our strategy is because I know a lot of people listen to this call, but we're seeing every transaction that's in the market, and we're talking to a lot of folks right now. And as I said earlier to Nick, I think that we're working on some really promising transactions.

Yes. I think, obviously, it's a very competitive environment right now given the amount of supply in South San Francisco. But we have an incredibly high-quality well-amenitized project. And I think the biggest thing that's been driving forward some of the conversations we've been having on the leasing side at KOP 2 really has been the scale of our project and our ability to accommodate future growth for a lot of these tenants. That's been much more important in the conversations or at least as important as just economics and the competitive environment there.

And maybe a follow-up for Rob. Can you rank your markets in terms of where you see the most leasing activity and the likelihood of occupancy growth. I noticed this quarter, Seattle and Austin had an increase in lease rates. So I don't know if that is representative of what you're seeing on the ground with your pipeline?

Yes. I mean I think Bellevue is our strongest market, most activity. San Diego is also extremely strong. The problem we have at One Paseo as we run out of space quickly. But we've had some recent expansions, and it continues to be our second strongest market. Austin rates maintain and we're still in the high 40s, low 50s, triple net depending on the other parts of the package, the concessions and things like that. But those markets are all very promising. And I think San Francisco, even there is still a dichotomy between top-tier rents and the lower tier rents. But because our product, the product we have right now and the reason we're getting activity on it is it's really well suited to these emerging life -- excuse me, emerging technology companies, both AI and regular tech. So on one hand, at projects like 201 3rd, we have a lot of tech interest, at projects like 303 2nd. We have a mix of technology and more fire category, I would say tenants and 101st sort of has that mix as well. So I think that San Francisco is just going to take time. We're seeing positive movement on sublease space. It's now down to 6 million feet. That's partly absorption and partly converting to direct space. We have, as I said earlier, positive absorption for the first time in Q1. And notably, demand is at 7 million feet right now. So I think that I can't predict rent growth there, but I think we're seeing better circumstances than we did not that long ago.

Yes, I'd just add to that. One thing we talked about on last quarter's call was the opportunity embedded in the portfolio from just some of our highest quality vacancies, which included [indiscernible] in Seattle, Indeed Tower in Austin and 2100 Kettner. And the improvements in the lease rate you mentioned, in Seattle and Indeed, really were those -- and in Austin were really those -- two of those three assets, I would also say one of the leases that slipped from late March into early April was at 2100 Kettner. So we are making really good progress at leasing up, I think, very compelling economics, some of the highest quality vacancies in the portfolio and putting us in a position to realize that growth as quickly as possible.

The next question will be from the line of Dylan Burzinski with Green Street Advisors. Please go ahead. Your line is open.

Hi, good morning. Thanks for taking the question. I guess just going back to some of the comments made on KOP Phase 2, are you guys able to sort of give a square footage of the overall pipeline that is sort of touring or looking at that space today? And maybe if you can comment on sort of the two larger users that are interested just how big of a potential space needs those are?

Yes. I mean I guess I'll start with that the second part of your question first. I mentioned in the prepared remarks, we've got some users looking at the spec suites. We have a number of users looking at spec suites, and those generally range from 15,000 to 25,000 square feet. Floor plates at KOP 2 are in the 40,000 to 44,000 square foot range. So when I mentioned other larger tenants exploring full floor uses or multiple floor uses, I would say it's somewhere between one and three floors at other parts of the campus.

That's helpful. And then I guess just maybe touching on sort of net effectives, especially in San Francisco. Eliott, I think you alluded to that deal that Blackstone and DivcoWest did. But as you start to see potential basis resets across your various markets, do you guys sort of view that as a potential for a further step down in terms of net effective rents given the much lower basis that these buyers are coming in at?

I think it's a little early to say. And without talking about any individual owners basis specifically, I think that there's a balance between where someone has sort of bought a building and then what kind of capital they're intending to put into the building. And certainly, some of the trades earlier in the cycle, which had a lower basis, our view was those buildings needed a fair amount of capital. So it will be interesting to see how different folks business plans play out, what the total amenity offerings are and how they kind of contrast to market to see what that means in terms of tenant preference.

The next question today will be from the line of Peter Abramowitz with Jefferies. Please go ahead. Your line is open.

Yes, thank you for taking the question. Just want to ask, have you commented on DirecTV and their expiration '26 and '27. And can you kind of handicap what you think the likelihood of a renewal is?

I won't handicap it, but we have discussions with them. They've been a long-term tenant. So I don't have much more to say right now. The '27 expiration is one we're focused on as well as '26.

Yes. I think that -- yes, the team over the last couple of quarters has done a great job of trying to really get ahead of the 2026 expirations and having active dialogue and conversations with really everybody expiring next year and starting to have those conversations as well with 2027 and is a little bit early in some of the 2027 and plans for many of our tenants continue to shift and change, particularly as we return to office policies continue to solidify. So even conversations we had six months ago have changed, I think, for the better in terms of renewal retention over the recent quarters.

Okay. That's helpful. And then just a follow-up on Eliott's comments earlier, I believe you mentioned the possibility of selling operating properties in addition to land. So just wondering if you could comment on any kind of comparable trades in your markets? And if you could give us any more info on maybe markets that you're looking at trim exposure in or characteristics of those assets you might be looking to sell and what you think pricing would be like today?

Yes. So we touched on a few comps in San Francisco. Those were for buildings that were much less occupied than market. So it's just important when you think about basis to kind of factor that in. as we have thought about our dispose, it's not necessarily catered to a particular strategy of getting out of this market or getting into that market. It's really as we have evaluated each asset and try to make a determination on how we see the next few years playing out of that particular asset. And then based on other characteristics or qualities, how big the asset is, how much capital it will require, who the likely buyer pool is trying to make a determination of where we think we can get great execution. So it's where the concentric circle of something that doesn't fit in our medium-term strategic plan, overlaps with where we think that there is capital that's going to price this efficiently is how we've kind of concentrated on our dispo [ph] strategy.

Thank you. The next question will be from the line of Upal Rana with KeyCorp. Please go ahead. Your line is open.

Great. Thank you. Just on Derm tech, their downsizing was communicated on prior calls, but was the result of what you expected? And what has been the demand on the space that they've given back? Thanks.

I'd say the result is better than we expected and we're marketing. I mean, obviously, keeping them in the whole space would have been better, but the outcome was good for us, and we're marketing the remaining space it's actually a really good building and fitted out nicely. So we have seen some activity on it.

Yes. Remember, Derm Tech was a bankruptcy. And so there's new ownership there, and it just has taken them -- it took them a little bit longer than we expected for them to really get their arms around the business and understand what their needs were going to be, but I think this was roughly in line with what we had expected.

Okay. Great. And then in gross to the recovery in L.A., how is it progressing? And how would you characterize the office demand? Or have any requirements shifted at all from potential tenants across the various submarkets?

Yes. It's -- L.A. is such a fragmented large market, meaning there's so many smaller submarkets. But if you look at Long Beach, for example, it's actually, as I said earlier, done very well, and due to the campus, we renovated the campus, and that's paid off. We've also -- we're located right between L.A. X basically in Orange County. So it's a very convenient stop-off point. It's a lot of business going on between those areas. Hollywood has -- for us, we don't have studio space in Hollywood. Hollywood for us has had some activity, and it's improved a little bit over the last year or so. So we're working on some things that we hope to bring to fruition. And I think the west side -- it's just -- it's a matter of how much space was absorbed in the past. You kind of hit this plateau usually when there's a lot of leasing, and there was a lot of big tech leasing on the West side over the past 2 years. And I think part of that is tenants just either trying to right size or figure out that they've got enough space. But we're seeing a little bit of thing. I mean we've had some uptick in tour activity at our assets on the West side. It's just going to take time. And the last thing I'd say is I think the political environment in L.A. is just getting better but a little bit behind where we are in Seattle and San Francisco.

The next question will be from the line of Yang Ku with Wells Fargo. Please go ahead. Your line is now open.

Great I just want to go back to your occupancy guidance commentary. So it looks like the redevelopment assets that's coming back online in Q3 with estimated stabilization base in Q3. Are you saying that those are going to be coming back online at 100% leased? How should we think about that?

They're not going to be coming on at 100% leased. As we reported in the supplemental this quarter, they were 0% leased. So there is some progress that's being made on those, but I would assume that, obviously, the full basis goes into the denominator and there might be some amount of leasing when they stabilize.

Okay. So when you're talking about estimated stabilization date, how should we think about that?

Yes. The stabilization is basically -- it's communicated in the supplemental as Q3. It's not based on hitting a leasing target. It's based on the time since substantial completion of those projects. So they will come on in Q3 regardless of what percent lease they're at, at that point in time.

Got you. Thanks for that. And then just one last from me. You talked about DirecTV leased in '26, how should we think about the length in lease that's expiring in 2016 also?

We have some things going on there that we -- I don't want to name tenants, but we have I explain more about your question because we did announce that we took care of some of that leasing.

If you remember last quarter, that's our largest expiration in 2026, which is just under 600,000 feet. We've announced, as of last quarter that we had addressed, I believe, 430,000 feet of that. And as footnoted on the lease expiration page in the supplemental.

The next question today will be from the line of Brendan Lynch with Barclays. Please go ahead. Your line is open.

Great. Thank you for taking my question. Eliott, entitlements in California can be quite challenging. What do you see as the risk that the Santa Fe Summit site doesn't receive the entitlements that the buyer is seeking?

So the transaction that we've completed has a residential as-of-right use. And so that's the reason that this portion was the first portion to be sold. So can't predict how any process will go out, but this is something that has a right. We're confident we can do.

Okay. Thank you. It sounds like you're a bit tight on capacity in San Diego. What is the prospect of developing the rest of the space at Santa Fe some it into incremental office space?

That's not our expectation. I think one development in a lot of markets. You need it does not make sense today, and that's why we have not undertaken any kind of development. But as I kind of mentioned earlier, that's the balance of the Santa Fe summit land site is something that we are evaluating as one of our potential land sales. And that area has really transformed. There's been a lot more residential that's come into that part of town. And so we think there's a higher and better use there.

Yes. To your point, though, I mean, San Diego has been a great market for us. We've performed extraordinarily well, particularly in submarkets like Delmar, which is what drove the acquisition we did last year to continue to increase exposure and capacity in San Diego and give the team more to lease in that market since it's been going as well as it has. So we're certainly interested in continuing to grow that portfolio. This site just doesn't, to Eliott's point, really, it's not office or life sciences are not the best uses for this site.

Thank you. And the next question will be from the line of Steve Sakwa of Evercore ISI. Steve please go ahead. Your line is open. And please limit yourself to one question.

Hi, Steve.

Just want to follow up on the land and the sale of Santa Fe Summit. If you do kind of the quick math the 5 acres you're selling is, I think, north of $7 million an acre. And I realize it's only a piece of that whole land parcel. But kind of would suggest that maybe there's not impairments and maybe there's even upside. Just trying to think through kind of the value there and maybe how to think about value for the overall land portfolio? And I guess what would ultimately precipitous kind of think about taking impairments on the land bank?

I'll start on that. So I think that to Brendan's question, part of why the deal was structured the way it was is because this first phase is at the right. The balance of the site is not, and so there will be a change in use required there if it does go residential. So when you think about what that means on a per acre basis, oftentimes, there's a negotiation with city to get an actual change in use. So it's not an unreasonable starting point, but our expectation is that anything that happens on the balance would not quite be at the per acre value that we executed on the first phase. As far as the $150 million plus that we've talked about, for land sales in the works, our expectation for those are that they are at or better than where we're carrying them.

Our next question will be from the line of Caitlin Burrows with Goldman Sachs. Caitlin your line is open. Please go ahead. And limit yourself to one question. Thank you.

[Technical Difficulty] at disclosures. So I was just wondering if you could go through your thinking...

My apologies to interrupt. If you want to just ask question again. Thank you. Apologies we missed the first part of the question.

Yes. I know you guys made some updates to your disclosure. So I was just wondering if you could go through your thinking on taking out the same-store NOI GAAP trends and the commenced leasing if you thought it was creating confusion or being understood incorrectly?

Sure. We tried to just reevaluate the entire package to make sure it was really clear on what the economic drivers of our business were. So specifically, when we're looking at cash versus GAAP NOI, the revenue recognition timing with some of the nonrecurring items seem to be causing a lot of volatility in maybe confusion for understanding our business. So we tried to step back and simplify the same-property NOI disclosure to make sure that it actually tracks more closely with the economics of the day-to-day business. And then by expanding kind of the reconciliation between cash and total NOI. We hope that's much easier to see just how those kind of items flow through the financial statements. As we think about kind of leases commence. We think there's a lot of information on kind of the forward-looking part of our business, specifically with the signed but not occupied spreads available, the leases we executed in the period that we thought gave enough context for people to understand where the business was going from a forward perspective, and I decided that was probably the best disclosure to keep.