Q1 2020 Earnings Call

Thursday Thursday hello and welcome Realty Corporation q120 earnings conference call all participants will be in listen-only mode. Should you need assistance, please signal a conference specialist. We're pressing the star key.

After today's presentation. There will be an opportunity to ask questions to ask a question. You may press the star them one on your touchtone phone to withdraw your question, please press star than to please note. Today's Thursday is being recorded. And now I'd like to turn the conference over to your host today. Tyler Rose rose, please. Go ahead.

Good morning, everyone and thank you for joining us on the call with me today or John Kilroy and several other senior members of our management team. We will be available for Q&A at the outset and I need to say that some of the information we will be discussing a thing as forward-looking in nature. Please refer to our supplemental package for a statement regarding the forward-looking information in this call. And in the supplemental it's called being telecast live on our website and will be available for the next 8 Days both my phone and over the Internet or earnings release and supplemental package have been filed on a form 8-k with and both are also available on our website John will start the call with the actions. We have taken to protect employees support our tenants and to stay in our organization through this unprecedented Health pandemic people. Then review the impact covid-19 has had on our business markets and development plans and woke up up with our priorities as we move through the remainder of the year.

Provide brief first-quarter financial highlights give an update on rent Collections and then review our current financial position and we'll be happy to take your take your questions. We're all calling and remotely so bear with us if there are any delayed responses John. Thanks Tyler and hello everyone. Thank you for dialing in today. We appreciate the many of you are juggling a lot of personal professional challenges right now with the first time. I can honestly say that I've taken the load out of the washing machine 5 minutes minutes before a conference call all of us that the company here hope that you and your loved ones are saved in importantly. We want to acknowledge the men and women who are servicing the most critical elements of our society during this time. We're so grateful to everybody medical professionals research is groceries truckers all the rest. They're helping us stay well and children place here at KRC. We have been in Daily communication with our employees are tenants and Thursday.

Construction team since the West Coast began shutting down non-essential business activity roughly six weeks ago. Our corporate team largely working from home has adjusted its operating calls to ensure that everyone from our Engineers to our board of directors is getting the guidance and support they need to make good decisions.

Oliver operating properties are open and staff with on-site property managers and security and all our following CDC recommendations for virus mitigation including frequent high-touch wage cleaning and daily disinfecting the start. Let me review where we stand financially and operationally for those of you who follow our company closely, you know that we operate from a call box set up business principles that emphasize Financial strength top-quality markets and assets and strong credit tenants We have basically built a moat around this company and came into Iraq crisis in a strong position. We have significant liquidity limited expirations a young portfolio access to multiple sources of capital no near term debt maturities almost no secured debt and a well-capitalized tenant base.

Let me review this and more detail. Our balance sheet is solid. We have one point four billion of immediately liquid assets. This includes 1 billion of cash from the $725 million thoughts down in mid-march of all our Equity forward sales and $350 million from the recession was the private placement debt. We also have 370 million available in DEC page a city under our credit facility further adding to our balance sheet strength. We don't have any debt maturities until twenty $23 excluding our credit facility which matures in the third quarter of 2022 are stabilized portfolio was in excellent shape heading into this crisis and remained at 97% least at the end of March. We have only 5% of our choices rolling annually or the next three years and our average lease term is approximately 7 years having said that we are seeing some stress in in primarily non office revenue streams dead.

Which I'll discuss in a moment.

Are two billion of projects under construction including the three projects. Now in the tenant Improvement phase have been effectively dearest and fully funded the office and life science component of these projects is off at least two large technology media and life science companies. The projects have a total remaining construction span of approximately $225 million that is fully funded with the liquidity. I'm just above the properties are located in the submarkets of Seattle South San Francisco Los Angeles and San Diego and all remain under construction our relationship with large stable and Thursday customers are proving to be an advantage are perform a top-15 tenants account for approximately 50% of our annual revenues. They are for the most part publicly traded and investment-grade rated. These leases have an average term of longer than ten years with average annual rent escalators of 3% Some of our top tents are even in the business of making stay at home life.

That easier include organic apple Amazon and Netflix while we are in solid shape financially and operationally the most immediate impact our business is largely in the non off those components of our company including retail co-working transient parking and residential. Well, none of them by themselves is that material the impact from some a state wage is longer than others are exposure to retail is approximately 3% of our revenues and most of that is concentrated in a handful of properties. Most notably one Paseo in San Diego. But as of now, we have established a program with approx 90% of our retail tenants that provides them with two months of rent relief and gets added onto the to an extended term Arco working exposure is approx 1.8% of our revenues with most of it in one very high quality property and Hollywood title will discuss this component further in his remarks wage.

We also have transient parking that makes up approximately 2% of our revenues. We estimate that this Revenue stream which includes daily short-term and event parking will be impacted while the states orders are in place. But we'll ramp back up is people to come back to work lastly leasing activity is quieted in our residential portfolio, which makes up approximately 2% of our revenues took the crisis-hit. Columbia Square was ninety-five percent occupied. The first phase of one Paseo was already 70% leased and second phased reached over 15% least just a few weeks off our opening. We have implemented virtual tour and leasing program and we have made some success. But until the stay-at-home Wars are lifted. We expect to pay some Leasing and move in to be slow.

Notwithstanding, the stress were seeing are non office components. We're still making some leasing progress throughout the portfolio just in the last two weeks. We've signed two leases that are closed on a third that total one hundred twenty-three thousand square feet. They include a lease with a life science company in San Diego at least for the gaming company and Los Angeles and in Seattle. We Advanced negotiations with a major technology company given the unprecedented challenges. We are working through it is difficult to give a roadmap today for the next six to twelve months and while wage always Endeavor to provide Clarity. This is not one of those times where we can however here are four key areas in which we will be laser-focused as we may move through this crisis first. We will continue with our conservative approach to balance sheet management. We are focused on maintaining a strong credit profile with low leverage and diversified access to Capital.

This includes continuing the effort to complete 150 to 3.

A hundred million of dispositions, which was the guidance range we had communicated on our last call before The Crisis began. We were making good progress on to the dispositions off ever given the current environment where lenders are unable to appraise advisors unable to tour will have to take a wait-and-see approach second. We are highly focused on completing our two billion of them instruction development. We are the fortunate position of having largely secured construction materials and are now in the tenant Improvement phase and several projects. We will continue to stay close to the construction. You workers is across the various jurisdictions to ensure our projects are moving ahead safely and it's close to on time as possible third or leasing teams are unwavering in their efforts to lease up they could and expiring space. Well new tenant tours around hold we continue to see progress with existing tenants for renewals and expansions. We have not seen a material. Yep.

Of economic terms across the office and life-science transactions and expect those sectors to see continued growth and we have as we previously reported. We only have one expiration over a thousand square feet this year. That's the hundred and thirty some odd thousand square foot lease or a Long Beach property. We where we are in discussions at least a significant portion of that space to a credit tenant June 4th. We are looking ahead. Well at this point demand patterns for Real Estate sectors are unpredictable in our discussions with our office and life-science customers. It is clear that will be a flight to Quality. They will focus on buildings that are sustainable have modern systems and the accommodate the changing protocols that companies are implementing as you've seen over many years have been leaders in the functionality of space. We were one of the first to embrace sustainability and most recently we began focusing on well and well buildings all of this. We think differentiates dead.

Differentiates us from many of our peers and we are now taking the lead and creating best practices for the future. We have already brought a hygienist on board. We are we thinking how people in our building and wage touch. We are evaluating how to manage elevator occupancy levels. We are studying ways to improve filtration systems and we are working on new policies and procedures that emphasize personal space and adhere to social distancing guidelines a lot more of this to come to wrap up. I want to make the point that our employees have done a phenomenal job in responding to rapidly changing circumstances. One of the few pleasures of this crisis for me has been to witness how effectively they have adapted on the Fly and the level of commitment and concern they had shown for our tenants are business partners in one another that's the picture of where we stand today at KRC. We believe that our organization and our people are well prepared to focus through this crisis dead.

And there are companies well positioned to move ahead that completes my remarks now turn the call over to Todd or solder. Thanks, John.

We reported solid first-quarter results that came in above our expectations. They do not have course reflect any meaningful impact from the current crisis ffo was a dollar per share in the first quarter driven by early renting out the exchange offset by a reduction in revenue of approximately six cents per share primarily related to the cumulative impact of transitioning a co-working tenant and to retail tenants to a cash basis of reporting as a result of the pandemic turning to same-store results cache NY grew 14.9% and Gap in a while. I was effectively flat in the first quarter cash and a white growth was largely driven by a gentle rates cash commencement of several large leases as well as a cash lease termination payment that was accrued in 2019, excluding the payment cash same store in a while. I was up 11.3% wage Gap in Hawaii was impacted by the revenue reversals. I just mentioned excluding the reversals same-store Gap and was up 4.2% at the end of the quarter are stabilized portfolio with 93.5% off.

But and 97.3% least in mid-march as the severity and wide-ranging impact of the coronavirus became more apparent we decided to physically settle all of our outstanding Equity forwards adding approximately 725 million dollars of cash to our balance sheet further given the ongoing uncertainty in the capital markets and the potential delay in our dispositions. We access the private debt market and raised $3,000 in tenure debt at a rate of 4.27% to further add to our liquidity. We completed the transaction just two days ago. It was oversubscribed an upside and had a strong list of potential investors with these two transactions and availability of 370 million dollars under our revolver our current liquidity chose one point four billion dollars and our net debt to first quarter annualized e bataw is v p 6 x

This liquidity allows us to fund our remaining 725 million dollars of development spending and further provides us with sufficient resources to be offensive should opportunities arrive. Additionally. We have plenty of room under Financial covenants with more than a 45% cushion or approximately 250 million dollars of an odd question has drawn mentioned our top 15 tenants make up about 50% of our revenues in addition another 25% of our revenues come from publicly traded sponsored or investment-grade rated tenants.

Now, let me give you some color on rent collections for the month of April across all property types, excluding the retail restructuring John mentioned we have collected at approx 96% of our a contractual rent Billings adjusted for the retail restructurings. We've collected 93% of our buildings, including 96% from office and 88% from residential generally in terms of pace of payment. There were a few delays but by mid month, we received a large majority of the expected buildings lastly. We are withdrawing our earnings guidance for 2020 of this time given the uncertainty of generated by the coronavirus and its impact on business activity while we have identified the primary areas of potential impact on our portfolio from covid-19 today. There are too many factors that could change our assumptions including Revenue recognition timing back related factors.

instead of formal guidance

Can offer the following assumptions based on what we know today, but maybe abused in assessing our potential earnings results for the remainder of the Year from a financing perspective the early drawdown of equity and the debt offering will have that dilute of a fact of approximately Seventeen cents per share on our earnings when compared to our original guidance. We have no plans to complete additional Capital raises at this time. However, as our track record has shown we take a conservative approach to managing a balance sheet and we will be nimble to ensure adequate adequate liquidity as needed as John discussed or disposition plan is likely delayed with the timing unknown this time. The retail rent relief program will have a minor earnings impact from a cash perspective one month of rent deferral for these tenants is approximately 1.5 million dollars off non-contractual parking income totals approximately 1.5 million dollars of noi per month. We expect the impact of this Revenue stream to be closely tied to the shelter-in-place time frame across

Residential portfolio we expect limited and one Paseo and some occupancy declines at Columbia Square.

Well, it appears that we're on track as originally contemplated with Revenue recognition on our development project shelter-in-place and ordinances and availability and Manpower May impacted. Our best wage at this point is as follows in Hollywood Netflix on Vine is on track to deliver in the fourth quarter and the on Vine residential Tower is scheduled for the first quarter of 2021 in San Diego off remaining 146 residential units at 1 Paseo or estimated to deliver late in the second quarter of this year and 1/2 sale office is scheduled delivered in phases starting late in the third quarter off and in Seattle. We expect the first phase of three three Dexter totaling about three hundred and thirty thousand square feet to begin Revenue recognition late in the third quarter of this year.

Finally across our stabilized portfolio. We have several buildings that are undergoing tenant improvement work prior to the new tenants taking occupancy for a time about 30% of RTI projects were racing delayed completion for those ordinances will be lifted as of May 4th and it appears this is now behind us.

That completes my remarks now. We'll be happy to take your question operator.

operator

Yes, thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone to we try your question, please press star at this page, please pause momentarily while we will assemble our roster.

And the first question today comes from Jason green with evercore. Good morning. Just a question on the private placement. Are you able to provide how much more expensive that would have been had you issued unsecured debt to the broader market and also How deep the private placement Market is today for the right companies.

Yeah, I mean one of the reasons we didn't do public bonds was the market is very volatile right now and the and the pricing Discovery was unsure. So to be honest, it's hard to know exactly what what the range would have been dead. But it you know it it's fairly close to the private placement. We did, you know, four and a quarter of effectively on our deal and it may have been a little bit lower, you know, if we hit the right day on the public side, but it also could have been higher so don't offer a lot of more visibility than that got it and and then for the 3% of revenue from retail tenant to be able to provide what collections were for those specific tenants.

So for the for the obviously we didn't bill for the tennis we gave rent really for it. So we didn't collect any of that for the for the rents that we did Bill for we collected about 80%

Okay. Thank you.

Thank you. And the next question comes from Craig Melman with keybanc capital markets. Hey guys, Tyler just on the kind of the cash accounting transition for those ten. They not paid them either and that's why you guys recognize it in 1 Q or they kind of came to a recognition. They wouldn't pay in April.

Well for the co-working tenant, they they paid in March, but you know, we don't want to get into the specific negotiations with with all these tenants, but it was more of an April issue for the co-founded and and you know our expectations for how they might play out. And with the retail tenants. We we were having some issues with those tenants already.

That's helpful. Then John maybe just bigger picture. I know it's very early with everything going on. But kind of West Coast Tennessee early adopters of work from home relative to most often tenants, but typically more dense. So just curious kind of where you think the rent or office demand could kind of shake out here as a pandemic wages. Yeah. Well, well, why don't you handle that and maybe I'll follow up sure how you doing Craig, you know, it's again, we're kind of right in the thick of this and and focused on getting you know our tenants back to work with their employees safely, but when you when you really look at what's going to happen, I think is that uh, if you take for example company that's got a hundred square feet per person right now. Um, maybe they'll be looking at a hundred fifty square feet per person in the future. We don't know what offset we're working from home.

Very hard to answer but I can say, you know with certainty that in the business sectors we focus on whether it's life science, you know, you can't create a virus or vaccine. Excuse me, a vaccine page, uh working from home. You can't create a Hollywood, you know, Blockbuster film working from home and Nora. Can you develop you know, state-of-the-art software? So I think that is working from home is probably been more legitimised than it ever has been but I think you know, it's not going to completely offset the increase in space. I think the tenants are going to need in order to function going forward so hard to say where we end up with this but I'm confident that at least in the portfolio that Kilroy has John outlined in his remarks, you know, these firms are going to need to and want to get back into the workplace.

That that self then just one.

Last one the development pipeline is is well least here and you guys clearly have you know additional projects that could have started this cycle just some thoughts on you know, something like the Flower Mart. How long is that gets delayed till next cycle then just also as you guys think about the risk-reward aspect versus maybe being able to pick off some opportunities if there's distress here should we expect that off the balance of power kind of moved back to to Acquisitions versus development? Well, I don't know about Acquisitions right now because I haven't seen it sufficient information with regard to Opportunities of the same quality assets and locations that we like where there's a price that we that we like to the contrary we've seen on the deals that have clothes that continue to close at very low cap rates and not the kind of upside we want so it's too early to tell on Acquisitions. Obviously. We were I think the earliest in probably the most aggressive in wage

2010 when we could see that the you know that recession was uh go to see some daylight and if those opportunities present themselves who will on the question of development team as we commented on in our earlier remarks. We are 90% leased on office and life-science that 10% was just started this summer. That's that's under project down a Little Italy submarket of of San Diego and I'm confident that's going to lease up while it's under construction terms of spec development. You've seen us in the past be aggressive on spec development, but always balancing not just building more and more spec always making sure we were getting either things pre-leased substantially or that stuff. We started was under construction before starting new spec clearly the biased Now versus two or three months ago is to be far more conservative on spec development. I see no potential wage.

Starting and expect development for you know within the next twelve months and I don't know that we'll start any development within the next twelve months even if it's leased.

Great. Thank you.

Thank you. And the next question comes from Jimmy Fallon with Bank of America.

Great. Thank you. I guess John going back to some of your comments about some of the hygiene upgrades. I think you've mentioned you hired a hygienist and you're focusing on upgrading assets, you know, as you talk to tenants wage. What do you think? The costs are to start getting buildings ready both for the near-term and then just kind of longer-term changes in design that we might start to see. Yeah. It's a really big question. We have that task for security consists of twelve people. It includes our chief engineer who is comes out of the life science biotech area and is is one of the page there. So this is really familiar ground for him. One of the things we've been doing raw and others in our asset management people. I'm meeting regularly or meeting virtually regularly with our tenant base both from the tech the life science as well as the general, you know other populations about what protocols

calls their companies are developing and as you know in our

Portfolio we have buildings that are least exclusively to tenants and then we have some that are multi-tenant. And so they different a little dipper a little bit but I I would get into a long list and long litany Jamie of the things that we're doing some of them. I I don't want to tell our competitors what we're doing cuz I intend to lead this just like we've got to stay nobility. We intend to lead the the new wave if you will in this area, but we are doing you know, the simple things like, you know, we have em robots to clean the clean the filtration systems that you know, the the air conditioning conduit and so forth. We have we may end up with clean rooms in buildings where everything's got to go back up. We'll see about that. We have engaged hygienist. As I said, we're working on where all the logical places are too, you know minimize touch and wage.

Make sure that we are cleaning things appropriately and so forth. So these are all sort of the things that are happening right now. We're working with our tenant basis. They pop up these buildings. Most of the big tenants are not intending from what we've been told to go back and say okay all hundred percent of the population of this building is going to arrive on day one. They're going to phase it off with the most essential operations. And and then on the spacing side of things we're working with tennis some of whom want to rearrange and have more square footage for person off. And then on the design side of it you have sort of three things going on one is the core portfolio. Most of ours is very new age, you know, so it comports with many of the things that people want which is more air conditioning capacity, you know, greater width and stairwells greater building, Florida floral Heights more Open Spaces you're going dead.

Terrorists is a rooftop decks and controlled Open Spaces become far more valuable from everything. We're hearing with our tenant-based. So we think we're well-positioned with the many of our projects because they embrace all those things there will be some, you know, we already pressurize our lobbies in various ways that may change. So we're really getting a a tremendous amount of input not always the same from our various check and life science companies and we're putting together our own protocols. So this is going to be a this is going to be an ongoing process, but we intend as I say to be, you know a leader in this in this response and effort.

All right. That's very helpful. Thank you thinking about the difference of markets in the Bay Area. You know CBD San Francisco Peninsula Silicon Valley. Can you give us a sense of how those different submarkets are behaving differently and how the tenant base is dictating that I mean, we see headlines coming out of CBD San Francisco about you know, higher higher space sublease space in the fourth quarter and layoff announcements seem to be more concentrated there. But just from you know, you guys are clearly on the ground. Just I love to get more more of your thoughts on how those three areas are really different right now dead. Yeah, you want to take that one? Sure. Hi Genie, you know start with San Francisco. Unfortunately the way the quarter fell between them know March and April several transactions that were very close were on the cusp of being signed the last day of March spilled over to April. So um and a lot of that wage,

in Subway States, but

Also there have been some significant renewals that were done to the tune of about five hundred almost six hundred thousand square feet that sell right between the 30th and 1st. So the data doesn't roll back. So I think what the reality is in terms of just pure activity, you know, there's no doubt that there's suddenly the space will will come to Market. But from what we're seeing in in a conversation, we're having with a variety of folks whether it be tenants that are subleasing or Brokers or other owners quality sublease space as we've always said is getting to the end as you know, getting into uh, significant documentation and and those numbers I just went over in terms of sublease space do not include the macys.com stage which is terrific space and you know, I don't know Macy strategy, but I assume they're probably trying to find a large single-tenant because that building would be perfect for that wage.

You know on the on the in the valley where things are a little less dense in terms of just you know, buildings how buildings are laid out and that kind of thing, you know, we have several companies that we've been talking to, uh, real time that are looking at a lot of the things John was talking about just in terms of getting people back to work. They're not talking about uh, putting space on the market but they're looking pretty innovative ways to get their own employees into uh into the work environment safely. So thermal imaging and that kind of thing, but in terms of the valley itself may have been on the capital side there have been some deals that were put on hold in terms of just acquisition and that kind of thing but from a leasing perspective we are again right in the middle of this coated thing. So it's uh much like San Francisco just there there is activity. It's just sporadic

Okay, do you think you know the shape of the downturn and this recession you didn't get hits one of these, you know Silicon Valley any more or less than CBD San Francisco or do you think it's it would be pretty easy.

I think it's going to be interesting. I mean, I think I could you know, like we've seen in Seattle and obviously in Silicon Valley in San Francisco. I think this radial approach to occupancy wage become more popular meaning you may see less fully occupied dense campuses and more satellite type offices. But again, I would kind of go back to if you look if you look at our premise that Silicon Valley it's always been the Haves and the Have Nots so, you know those properties that are near Transit lines and easily accessible and amenities and that kind of thing off or still going to be the ones that I think lead any kind of recovery just you know, the world isn't going to stop and people will want amenities and you know, they will be going out to dinner and that sort of wage in the future thinking they haven't have not Jamie that where we would where we would expect to see this. I used term flight to Quality in my prepared remarks dead.

And you're going to I think based upon everything. We're hearing from our Big Ten. It's the focus is going to be

On buildings, they control landlords that will work with them to introduce and enforce their protocols particularly if they happen to be in a multi-tenant building buildings that have the kinds of things you need to have in order to have greater separation, which you get is higher ceiling height greater ventilation systems wider still stairwell added a elevator capacity. I think they'll be a a potential Advantage for shorter buildings versus taller buildings just because the travel times in elevators and whatnot and people off social distancing thing and the wellness and and all the other things that are going to play into this. So in most cases modern buildings are going to perform I think much better if they're in the right location if compared to older buildings,

Okay, great. Thank you both for your thoughts.

Thank you. And the next question comes from Nikki lucoa Scotiabank.

Thanks, I guess I just want first go off. Go back to the the co-working, you know tenant that where you had it go to cash cash basis reporting. Can you just give us a feel for for you know, what drove that and how we should think about, you know the rest of the co-working tendency, which I know you said I think is just under 2% of Revenue off. You know, how how confident you feel in in terms of you know, getting that right right now?

Well, I can cover the economics and John can talk about co-working in general. But in terms of you know, we don't have these have we don't have a lot. It's 1.8% of our revenues. It's really just three tenants through folio want to know one in San Francisco and and a little bit actually in San in San Diego and Seattle I guess but what's that one tenant had mentioned earlier they paid March, but they did not pay April and we felt that was the right thing to do to reverse all this straight line rant and any accounts receivable that was outstanding at that point. So that's why we did what we did based on our view of how it may play out over time. And with the other tenants one of them has paid rent and one of them were negotiating with

Just in terms of just intrusive thoughts on on co-working. I believe the two smaller co-workers. We have our in buildings that we bought that had those and it's the only one we did directly was the one in Hollywood which is trip tremendous Pace, you know, if we were to get that back we do extremely well with it take a little time to reposition month. But you know, I've met no bones about it. I've never really come out and condemned co-working. I've I've regularly either myself or Rob or whatever or whoever have shared with you that we're just not Believers in it. We never liked the idea that you didn't really have a credit entity you had this rapid expansion going on which you know with club and weren't making any money. I'm old-fashioned. I like companies that make money and can pay red. I've been you know through a bunch of these recessions and I can tell you that that's a much better situation than the alternative wage.

I never liked the

Idea that we're putting up the capital for somebody else to create a positive Arbitrage for themselves. I didn't like fact that you had so many people coming in the building. You didn't know who they were. And so I am very fortunate that we don't have big exposure there in in terms of where this goes. There are others that have a lot more exposure to it and they probably have thought it through more than I I know with our our big tennis. Some of them have used the Enterprise version of that which works well for them, but they're they're some of their concerns are who else is in the building and how do we make sure that that building if it's multi-tenant, uh adoption and everybody adopts the protocols that that those bigger tenants have and so, you know, I'm not going to play out over time and we'll see how it works. I'm just glad we don't have a lot of the co-working space in our portfolio.

Okay, that's helpful. Thanks. You just one other question is on, you know as we think about your portfolio and and maybe we can just get a little update on you know, the exposure to em, you know, bigger tenants versus smaller tenants as we thinking about some of the smaller tenants in the portfolio, you know, do you have any early indication you can give us in terms of you know, potential credit issue uncollectible rents, you know, just kind of thinking about the piece of the portfolio that is, you know, smaller tenants that aren't as long capitalised.

Yeah, I can start there. So as we said you can break it into pieces of the top 15 tenants make up about 50% of our revenues and they're all strong companies another 25% off. I said in my remarks of our revenues come from the other companies that are publicly traded investment-grade or sponsored. So it's really just the 5% at the bottom that are startups vc-backed thumb tenants that you know, probably are are a little bit more risk as I said in my comments if you exclude co-working we collected 97% of our office rent. So Thursday, we haven't had a lot of issues today. Obviously, it's you know going to play out over the next couple of months and we'll see what happens. But you know, we feel we're we're pretty well-positioned on this given the quality of the tenant pays.

Okay. Appreciate it. Thank you.

Thank you, and the next question comes from John Kim with BMO Capital markets.

Thanks. Good morning. Tyler looking at your 2020 assumptions. It appears that development and the revenue recognition is really the main item of uncertainty. Just want to make sure that was the case wage. Exactly. I wanted to know if you could provide any color and occupancy. You're 97% least today. You have 4% expiring this year is 93% truly the floor where occupancy condemn.

Yeah on the latter one. I mean we are not giving guidance so I'm not going to get into specifics but no, I don't think it's the floor. I mean that's the issue. That's why we're not giving guidance and which goes back to your first question. I mean, I think the other the other piece of them are, you know, there is revenue recognition there is developments coming online, but we just don't know how the office business is going to be impacted over the next several months and how fast it will come back and and if we will have other tenant issues and so long for those reasons, we can't really give guidance and and we don't know what our occupancy is going to be. I mean, I think it's in that range but it's you know, there's certainly the possibility that could be lower than that. We don't think eventually but and and they may not at all. I mean we just we you know, we're hoping we come back to that number, you know at the end of the year, but we'll would we just have to see yeah, they're way I'd say life is that we don't have the expectation of being lower but these are unprecedented of times and bad stuff can happen. We're not we're not seeing the bad stuff other than as we've expressed on this call.

With regard to various segments of particularly of the non.

Just like side part of the business, but but it's just uncertain.

On Flower Mart, it looks like the the guidelines data requirements to begin construction within eighteen months. Do you anticipate receiving extension on this or is this a pretty loose that definition? That's not that's not that's not the case.

It's not okay.

Okay, thank you. Thank you and the next question custom Lane heck with Wells Fargo.

Great. Thanks, John. Do you have any concern about the level of Supply that's going to be coming to the market in Seattle over the next few years not just in in Seattle proper, but but also in Bellevue, I mean it seemed as though the demand level was more than enough to support all the oncoming Supply pre-coated. I guess has your view changed of the risk in that Market at all. Well, I think our view has changed in all markets too much more of a wait-and-see versus everything is Rosy and proceed but you're you're quite right that the percentage of new development that is scheduled for some of which is under construction in Bellevue is unprecedented and is a significant amount of you know, as a percentage of the current Supply Rob Rob. Maybe you can handle this a little bit but it's about seventy percent release of the Dead.

Stop that. It's under construction. Is that correct? In Bellevue? Yeah, and um, you know, there have been there are some transactions pending that are quite large, uh over a million volts with one company right now. I just I just can't name names but you know the supply and Belleview traditionally has been something we've watched for a uh-uh closely in terms of Georgia having to compete against that but if you look at our portfolio specifically we're pretty locked out if you if you've noticed we have not made any announcements about buying a new development sites in Bellevue. While others have been buying at some a pre-leased and that's great. But we have not we have nothing from a development standpoint. In fact in Bellevue currently and I don't anticipate as having anything unless there was some, you know extraordinary opportunity with the the one development site we have other than a couple little tiny ones ninja

233 Dexter which are you know, six and twelve thousand square foot Lots is the property that we block called the formerly known as the Vans I guess is still not as advanced parcels and that's going to take about two years with all the entitlement. We have a terrific land far basis there. And so, you know, if if if the bar gets still lousy and two years, we'll sit on the land. But in the meantime, we'll get it in titled appropriately and work all that stuff out be ready to pull the trigger winning if it makes sense.

Got it.

Helpful, and that's out of curiosity. Can you can you talk about what led to the earlier than expected Revenue recognition at the exchange? I think you know last quarter of the expectation was to have a phase three recognition in the third quarter, but it seems as though they took the space here in the first quarter, you know, I'm assuming they take took occupancy before the crisis, but you know any color commentary on that would be helpful.

Yeah. No, they just as you say they just were able to get into more quickly. They wanted to get into the space and they completed the work ahead of schedule. And so it came in ahead of our numbers. Nothing more complicated than that.

All right. Thanks. And then last one, you know, it looked like halfbacks per square foot concessions in general were a little lower this quarter. Can you just talk about whether that was a mix issue and I guess maybe for Rob more generally wage. Are you expecting to see a trend lower with with respect to TI's and Trigger rent in your Market?

I'll I'll handle the ladder and Tyler. Maybe you can touch on the former. But as far as the ladder goes in terms of more t i or less t i it's you know, it's hard to predict right now. I mean, I think the construction, you know with things continue in the way they have construction pricing may come down and and tenant improvements therefore would as well in terms of just anything that we see I think it's really just mediate a longer construction. For certain projects that already we're seeing that the cities are allowed to start, uh, you know construction, I guess particularly in San Francisco so hard to predict

You understand the area construction right now with the the the equivalent of social distancing or whatever they call for construction their new guidelines. And so I could very well slow things down a little bit because it could mean that instead of having perhaps two hundred people on a job. You have a 170 people. We just don't have any experience with it yet. It's too too soon until and you know, all the cities are trying to figure this stuff out as well. One thing that does trouble me and I don't know just intellectually and I don't know if it will become a problem. I think the the you'll see as a lot less Construction.

And you're going to and I think you'll see a potential slowdowns and planning departments and whatnot because these cities are all getting clobbered wage. Well in the revenue side, and we don't know how that plays out. It doesn't impact us with regard to maybe modestly with regard to Future to an improvement work or something, but it doesn't doesn't impact us right now with regarding development we have going on does it in the future? I don't know the, you know, the the wage is all going to play out over time, and I don't think anybody has a sufficiently clear. There's no crystal ball here.

All right. Great. Thanks guys.

Thank you, and the next question comes from any question was City.

Hey everyone, Tyler, you talked about, you know doing the entire forward Equity, but I don't think you necessarily mention why you guys showed it to do that? Was it something in the contract the 4th. What was it? Just the you felt better having cash. And for what Equity contract out there. Was there a deal that maybe you're you're targeting want to have the capital better you go. So why do it all now?

Yeah, I know. It wasn't there was nothing in the contract that forced to do just that in abundance of caution given the situation we felt we felt having you know immediately available cash was the right thing to do them by drawing down the equity we didn't increase our leverage at the same time. I mean we could have drawn the bank line, but that would have increased our our leverage amount and we felt it was more conservative to just to to draw down the equity. So it was just an abundance of caution being conservative and knowing that you know, we would have the the cash available to complete our development if if things got you know crazy.

And Rob maybe going back to a point you made I think you talked about, you know tenants or or maybe users beheaded on on a large massive assets of Tampa. I think it's a term you use and then you're building Flower Mart which seems like a big campus for maybe one maybe two tenants. How do you balance those two thoughts as to you know, do tenants want to have all their employees together or would they prefer to split them up amongst assets our buildings, you know hard to predict but I think the final Mark the beauty of the Flower Mart is it's you know, you could do one large tenant, but you can do five or six or seven tenth so and they are separate and distinct blocks of space. So for an urban setting, it's actually a much more spread out if you will perform at a high rise, and when you back to one of John's earlier comments, if you look at something like the Flower Mart, we had so many fewer elevator travel times dead.

Mean if people are going to restrict the number of people getting in cabs that's going to have an impact on high rises and flower Mark with its layout is I think perfectly suited for me, dating, um, whatever the new world brings in terms of just elevator density and capacity. So I I you know, I see Flower Mart has something that's in an urban setting like San Francisco or Mac and what-have-you something that's actually more spread out than a typical office environment.

It'll put put that in to put that in perspective The Flower Mart when it's fully build-out is the equivalent of almost to Salesforce Towers, but it's in five buildings the tallest of which I think is fifteen stories.

Thank you. And the next question comes on John gani with State Farm.

Great. Thank you big picture. John State of California has been really aggressive on the stay-in-place very aggressive on residential tenant relief long-term impact on the political environment in California. Do you think this turns California off to the right or the left or no change? Oh my God, John. I wish I knew the answer to that. I've been trying to figure that one out and influence it for most of my life. And and that's you know, that's the thing about you stick your finger in jello you try to re shave you pull it out looks exactly the same. I got I got I kind of wonder if you know, that's a good analogy. I think the what I'm hopeful up here is that you know, California is had its share of problems some of them.

Conflicted I am seeing more dialogue between the political parties and between businesses and the unions. There's always going to be ranked or they're not going to Stir It Up for elections and whatnot. But I'm hopeful and this maybe just hope and not become reality. But I'm hopeful that people are going to see that we need to be able to work together and we need to have good protocols on this stuff. I do compliment the state and the city of San Francisco and some of the other cities for taking aggressive action on this issue begin with you could criticize any particular aspect of it. Just like you can criticize some of the things the federal government has done and what not. But, you know, they're they're trying their best. There's something I think in California has been jerks and I won't mention who they are, but they're

Were South in north and not too far south. I just don't know how it will work on a public side of things. I that's just that's a question if I knew the answer to that, you know, everybody be asking me and probably paying me. They I I do think that there is going to be a move towards probably that will be home of Lee become more prevalent with which you would for future buildings the wellness aspect of it the thoughtfulness with regard to how it they perform and the kind of filtration systems and so forth. They have to have where that goes. I'm not sure but I think it's probably a logical Fallout from this. I'm just so thankful. We don't own a lot of older stock the Overstock that we do own was, you know stuff that we could make in a you know, Ultra Modern buildings, maybe not enough to saw but on the inside and I just think there's going to be dead.

a real haves versus have-nots in the flight to Quality

In quality is not just fancier, you know chandeliers. It's it's more in the systems and things I talked about before.

And then a little follow-up any thinking on split roll prop thirteen. Does it get table? Does it still on the ballot in November? How's that shake out? You want to handle that. Yeah. Yeah. No, it's still on the ballot. They went back and got more signatures on a slightly adjusted proposal. But with the good news is we're what we're hearing. Anyway, five or advisors is that it's pulling worse than it did before I think businesses and people are tired of the higher taxes. And so, you know, we'll see but the it it it's still on the ballot but long but long way to go before November, but the polling is getting worse for them. Okay. Thank you. Good luck. Thanks. Thank you. Thank you and the next month. I'm tired Katana with mizuba.

Yes, a quick follow-up on the retail side. How are you guys kind of thinking about can a bad debt expense related to retail a given the number of retail tenants would have paid thousands and some other masking program to lease or rent abatement.

Yeah, you probably know under the new lease accounting there really is no such thing anymore as bad debt expense. And so what you do is you reverse your your Revenue it's in revenues. And so that's what we did in the first quarter we offer for for those two tenants that we talked about and we'll just have to see how it goes for, you know the rest of the retail portfolio over over time, but we have our eye on that and I you know, we as we said we have a deferral or a, you know, a rent relief program for ninety percent of those tenants and we'll be monitoring that but if if if if they're not going to pay their rent a long time, then we'll have to you know adjust in in revenues. Okay and with you know, sir.

Yeah, this is John Keller. I was going to say with regard to retail remember there are we lump retail to show up to reflect what percentage of Revenue it is. But most of our retail jobs, you know, like an optical shop or a restaurant or something in an office building the only concentration we really have of retail is that one Paseo which is brand-new, you know, big open-air area of the single life. No escalators, uh, you know, no enclosure. It's the kind of retail that people want and it's the kind of physical plant where you walk and be more, you know, socially distance or whatever the term is today. So it's going to take a while for retail to come back. I think restaurants, you know, people are going to have like a I'm not sure anybody wants to go eat in a crowded restaurant right now. So that's going to take a little while to come back. It's just too difficult to predict what the when will when will dead

Uh achieved rent collection, but it's time.

Said, you know, we're going to work with these folks.

Understood the two months of rent relief that's being given. Is that are you just pack it on 2 months more on on to the lease or are you is it possible? It's going to suck what time?

Well, we're out cuz they'll be they'll be in some cases. There'll be a negotiation. That's what we've offered just because we knew they weren't going to be able to withstand this our our view is a month of our retail is our amenities to our you know, our uh office life science or residence as the case may be and we want to work with them. We're not going to let him, you know pants us but we do want to work with them and in some cases it'll simply be in most cases. It's going to be we gave him too much of a choice. They had two months of extension. Do we have to give them more relief depending upon the circumstances if somebody doesn't like the two months and the two months. Addon, then we might customize it took a little different. So it's going to you know, that's all going to play out. It's not a lot of square footage. It's not a lot of transactions, but we have a team working on it and we should be able to dress more.

I would think by the next call.

Thank you and good luck. Thank you. Thank you. And the next question comes from Dan is male with Green Street advisors John just want to follow up prior statements on State and local budgets which are clearly under pressure in this environment and might be a driver of new permitting or rezoning of areas to ensure a budget. I know know, this is off on a near-term issue, but are there any opportunities here for Kilroy? I'm thinking of the black leather all their site and particularly. Yeah. I don't want to go fart down that road down. Let's just say that we have a group of people working on a variety of things that are kind of in the confines your question and you know, who knows how this is going to play out. As you know, California is a very complicated place. It's very easy to file a lawsuit. One of the things that I hope will happen. Now is that in in Willard at the margin or will it you know more seriously, you know, can we get Thursday?

Rid of some of the nimbyism that is made it so difficult to get things done particularly when we know that we have to build more housing in the state. We have to build more apartments in the state wage. We have we have to be able, you know to to deal with the growth that we continue to have and does that translate into more efficient wage policies more to come. I'm hoping

but remember my Jello comment got it just construction pricing, you know understand that things are very difficult to predict this environment. But uh Veda nagarajan call it, you know low to mid-single-digit the last few years and just what's what's happening with oil and other Commodities. Is it your expectation for that Trend to reverse

Yeah, I think.

So but again, we there's no real data of substance or of you know enough things to to back to confirm that but what if if you look at the architectural book or whatever they call it or as we do we also talked with you know, we do business with probably twenty major architectural firms that are either headquarters here or International and most of them will tell you that their book of business is dried up. So that tells me that you're going to end up with a lot less construction and for you know, the oil and other Commodities you mentioned it seems to me that that's likely to lower-cost somewhat or at least lower the growth and cost labor is the other thing that's you know, a big driver of this stuff and I'm not sure labor costs are going to go down and then don't know the implications that I mentioned earlier. I think at the margin it's not going to be a big impact.

But you know the fact that you may not be able to build certain things as quickly because of the new rules with regard to how close construction people can be and so forth and there's all these little things that just just don't know the answer.

Got it. You're welcome.

Thank you. And the next question comes from Dave Rogers with Baird.

Yeah, good afternoon. Everybody first question, maybe for Tyler just to follow up with something John. It said earlier about maybe being more conservative on development. No spec development and maybe no development at what point in that process. Maybe do you have thoughts about the capitalization and things like The Flower Mart land and improvements, you know future phases in that process.

Yeah, so if if we completely stopped work and don't do any you know development work or entitlement work or permitting work. Then we would have to evaluate whether we need to stop capitalizing interests. But you know clearly I'm not in that mode at all as Don said we're going to get our project ready to go. We just may not kick them off. And so if you know a year or two from now, we're all ready to go cuz it's going to take awhile and all these projects, you know, and then the market is still not ready. Then we'll have to address it at that point but it's probably more of a medium to longer-term issue. I appreciate that and then John maybe one follow-up and I did get off the call for a bit. So if I miss this, I apologize but San Diego is a much smaller portion of your portfolio today and and you've done a great job of kind of repositioning out but I just last cycle that was a particularly hard hit area for you at the office building and you kind of talk about how you feel about credit San Diego and it's kind of the overall Market down there today versus maybe what we saw in the last cycle.

Yeah, well, you know, I mean and you commented on we got out of some rental. So we got out of five fifteen with the exception of super springs where it's mostly credit tenants a.m. And we you know, we got out of Mission Valley and all the rest so our

Concentration is there in Carmel Valley Del Mar Heights a little bit out on I-15 with joy Silver Springs. And then of course the area and then we have the development side under way a Little Italy and the credit quality of our tenants in San Diego is demonstrably higher. I'd say across the board and Tyler jump in here, you know, if you think about where I was in in 2008 in San Diego, we had a lot of tenants that weren't that high credit. We had a lot of lease expirations coming up Thursday and I think we went from like ninety-nine percent least to somewhere in the seventies in about a year and half. We had so many terminations part of that was because of the the, you know, the fact require a lot of properties as well as done a lot of leasing it just have to be cooked her it so we have much better lease expiration profile in San Diego and across the company. We have a much better credit profile in faith.

Diego and across the country company, we have a much higher quality of building in San Diego the flight to Quality thing that I mentioned and we're very well least in San Diego and so much of that has been done over the last couple of years. So, you know, I don't want to say I'm a I'm a Karma guy. I want to be careful what I say cuz you might find that you you know, you turn the tide off but I think we feel pretty good about a most of our tenants and the quality of the Enterprise and the quality of the people. That's the other thing. I think we have a far better team. So I'm pretty awful at San Diego's going to continue to be a winner. If you look at some of the deals we've done down there. It's been extremely high credit, you know, we did, you know one Paseo all you know, the the the jpmorgan's Bank of America Deloitte that level of quality and then the other stuff in Delmar wage.

High quality as well. And of course, I can't tell you who the ten. It is everybody knows but I'm not supposed to say who took the building. I forget what we call it the Town Center Drive building which is one of the top 50 companies in the world. So we'll see.

I appreciate all the other colors.

Thank you. And is this all the time? We have her questions right now. We're like to return the four to Tyler Rose for any closing comments. Thank you for joining us today. We appreciate your continuing interest in life, and we wish you all remain healthy and safe. Thank you very much.

Thank you. The conference is now concluded. Thank you for attending today's presentation, you know disconnect your lines.