Q2 2020 Kilroy Realty Corp Earnings Call
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20, Kelway Realty Corporation earnings Conference call.
That's will be listen only mode should you need assistance, they signally conference specialist.
<unk> star than zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. You asked the question. You Me Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note. This about is being recorded I would now like to turn the conference over to Tyler Rose Executive Vice President and Chief Executive Officer. Please go ahead.
Good morning, everyone. Thank you for joining us on the call with me today are gone Kilroy. Several <unk> senior members of our management team will be available for <unk>.
Okay, I need to say that somebody information, we'll be discussing and forward looking in nature. Please refer to our supplemental package for statement regarding forward looking information in this call and in the supplemental. This call is been called got live on our website and will be available for replay for the next eight days, but both bike phone it over the Internet our earnings release, a supplemental package.
Filed on form 8-K, with U.S.P.C. and both are also available on our website dramas protocol to look at our industry in markets and then highlight second quarter activities in our priorities as we moved through the second half of the year I will review second quarter financial results give an update on rent collections, and then review our financial position.
We'll be happy to take your questions were once again, calling in from different locations. So bear with us if there any delays in our responses John.
Thank you Todd thanks, everyone for joining us.
We hope Youre doing well in this extraordinary circumstances that we find ourselves.
Today, it's always a lot easier to navigate I pad. It's all my children. Please disappeared guy He's got a phone call right now I'm I'm sure. Many of you have to do the same.
Eric Care, you were made vigilant and guiding our organization through the current crisis in positioning us to outperform in the future.
Where we were working from a strong foundation financially we have 1.3 billion of liquidity no near term debt maturities and a well capitalized kind of base. Our development projects are 90% leased and fully funded operationally, we have a well designed highly sustainable and young portfolio.
We continue to make great progress on reducing our exposure to lease expirations.
We've reduced our average annual exploration through 20, 22% to 4%.
Approximately 575000 square feet, which compares the 6% at the beginning of the year and 5% as of last quarter.
We received a lot of questions in recent months about how the pandemic could affect our industry.
Our markets at our company, so before I get into second quarter highlights, let me share some observations and taught.
We're in constant contact with our tenant base up and down the coast and they are focused on re establishing their work environment and getting back to the off as well at the same time protecting the safety of their employees. The next 12 months is likely to be a transition period, there's likely to be trial and error experimentation.
And stops and starts as a pandemic runs its course as businesses gain experience with what works best for them. The results could have some applications for our industry for example.
[noise] counts will evaluate the quality of the physical workplace more than ever with particular focus on the ability to control their space, including lobbies common areas and elevators to minimize physical interaction with outsiders and enhance security [noise].
Buildings with fewer stories to maximize elevator to minimize rather elevator usage larger spaces with bigger floor plates higher ceilings, a larger common areas to accommodate social doesn't say more flexible spaces that allow for greater creativity and how interior office space is laid out and how traffic.
Flow is direct.
Healthier spaces, including better H.B. I see systems more natural light and fresh air with increased access to rub jacks and other outdoor spaces and well capitalized landlords.
It was willing to invest in people or infrastructure in their buildings in order to ensure a safe environment for all tenants.
Well some of these considerations are driven by short term needs.
It has argued that they have become industry norms, continuing a flight to newer higher quality properties and accelerating the obsolescence of older buildings.
We believe these [noise] excuse me.
Trends not only distinguish our portfolio from our peers, but further validate our development strategy and our commitment to sustainability and wellness.
Specifically, we have one of the youngest portfolios on the West coast with an average age of 10 years.
43% of our portfolio is very well certified the highest certification like any company in the world.
85% of our portfolio consistent blow in mid rise buildings more than 90% of our buildings have large floor plates, allowing tenets greater flexibility for configuration.
And approximately 90% of our portfolio offers rooftop deck said another outdoor common areas.
Another topic of discussion this transition period, that's how prevalent work from home will become.
It's still early but our view is that workplace flexibility will become more common and it will be in conjunction with the office not replaced the office. We're seeing tenant studied decreased density levels and I work spaces and consider additional kitchens dining and common areas that require more space.
On a broader perspective, they often since we know what has been around as long as the moderate corporation and the role it plays in uniting our workforce or out of common set a goal is has essentially as ever and while offices have evolved that's organizational needs have changed the successful corporate cultures that are in place today underscore the importance of.
Immuno weren't spaces and physical proximity.
All of the most essential attributes it seems highly successful companies effective collaboration continued innovation higher productivity benefit greatly from personal human interaction.
Good question, a rising him at the crisis has held various real estate markets will perform.
We believe that our west coast markets are among the most attractive in the world and that's all the uncertainty over the last several months one thing that has become clear is the strength and resilience say other technology media and life science companies that drive our markets. These companies continue to grow their revenue are well capitalized.
And our position for growth.
The NASDAQ is near an all time high the IPO market. It's open any M&A has resumed with Amazon and over announced a high profile deal generates a lot.
These key industries are concentrated in our markets are hard to duplicate another areas of the country and the success, we helped drive broader market recoveries, a recent Bloomberg and now analyst analysis, rather have the nation's 100 largest metro areas came to a summer conclusion.
Francisco Silicon Valley, and Seattle, all ranked among the top five regions.
Disposition for a relatively quick and strong recovery from the Corona virus recession.
The strength is visible in our current tenant roster Threeq words of our annual rental revenue comes from technology life Science of media companies. Most of them are publicly traded and investment grade rated.
All of them ranked among the world's most innovative and successful businesses and their collective presence is constantly attracting more innovation driven firms Dolby or deep reservoir of ideas and talent that is very difficult to replicate.
Now moving to our second quarter highlights overall recollection remained strong across the quarter and into July the average second quarter rent collection rate for all of our properties was 95% at a strong 98% for office and life Science and July's collection rate was also 95.
10 across the portfolio and 97% profits in life Science Tyrell would give a complete update and his remarks on these trends.
We executed two under 86000 square feet of leases in our stabilized portfolio approximately three quarters were renewals that rental rates that were up 11% on a cash basis and 30% on a GAAP basis. This included two larger renewals one in San Diego for 119000 square B and one of the Bay area up 30.
7000 square feet with the exception to that expiring long beach lease in the fourth quarter. This year, we have no exploration larger than 65000 square feet until 2022 at the end of June our stabilized portfolio was 96% leased.
We continued to execute on our $2 billion of construction projects. The total remaining construction spend across this pipeline is fully funded with existing liquidity and the office in life science components of these projects are 90% leased when stabilized over the next few years, the six projects will generate aggregate annually.
As cash net operating income of approximately $145 million.
I want to give a shout out to our development team at last as last month, the National Association for industrial and office Parks now up selected care say as its 2020 developer of the year.
This is the associations highest honor and a significant acknowledgment of our company is ongoing efforts to lead through innovation.
On the disposition front, we selected a few smaller assets.
Earlier in the year to dispose of during the course of the year.
We're unable to say exactly when these will take place because tours and lenders and things like that are unable.
So in fact.
Come see the buildings given the restrictions.
Bob Let me Rerate reiterate reiterate a few points leasing activity has picked up a bit from the March April lows, and we've not seen immaterial impact if any on economics.
The company has never been better positioned to be both defensive as well as off match.
Our stabilized portfolio is young modern sustainable leads the world and wellness. Our expirations are limited our tenant base is largely healthy well capitalized and poised for further growth.
Our under construction development projects are fully funded to 90% leased our future development pipeline has diversified across product types as well as markets and has an attractive basis and our balance sheet is solved with significant liquidity low leverage and no near term debt maturities last night I want to recognize the entire still right.
Team has continued to do a phenomenal job, whether it's working with our kind of partners with the communities in which we operate or on internal corporate functions. Thank you all now I'll turn the call back to charter.
Thanks, John for the quarter, we reported AFFO of 78 cents per share. This reflects 17 cents per share in total severance costs and five cents per share related to our assessment of tenant credit and collectability of rent excluding the impact of these items, our underlying second quarter financial performance was solid with AFFO on a dollar per share.
Turning to same store results cash NOI grew 10.9% and GAAP NOI was down 1.3% in the second quarter cash NOI growth was largely driven by higher rental rates and cash commencement of several large leases.
GAAP NOI was impacted by the revenue or verticals I just mentioned, excluding the revenue of our full same store gap and why was up close to 2%.
At the end of the second quarter, our favorite portfolio was 92.3% occupied and 96% leased.
Moving to our balance sheet in April we completed a debt placement of $350 million boosting our liquidity to $1.3 billion that includes approximately $560 million in cash and 700 million Sun $750 million available under our revolver, our net debt to the second quarter annualized EBITDA is 5.7 times.
Excluding the severance costs.
This liquidity provides ample resources to fully fund our remaining $625 million of current development spending over the next two years.
We also have plenty of room under our bank financial covenants with more than 60% cushion or approximately $250 million of anti Christian.
Now let me give you some color on rent collection in the second quarter Android today.
Across all property types, we collected 95% of second quarter contractual buildings. This reflects an average collection rate of 98% from office, 88% from residential and 32% from retail and across July our collection rate currently stands at 95%. This reflect a collection rate of 97%.
Some office, 87% from residential and 46% from retail.
Lastly, given the uncertainty and generated by the current virus and its impact on the economy, we're not providing specific earnings guidance again this quarter. Instead, we can offer the following assumptions based on what we know today, but maybe abuse in assessing our potential earnings result for the remainder of the year.
We project remaining 2020 development spending to be between 250 to 300 million dollar.
Given the recent roll back on retail Reopenings in our markets were currently in discussions with many of our retail tenants as you may recall last quarter, we established a two month retail rent relief program, which included approximately 90% of our retail tenants. This had a minor earnings impact and from a cash perspective, one month of rent deferral for these tenants.
It is approximately $1.5 million.
We subsequently extended the rent relief program through July and expect to lengthen This program again.
Non contractual parking income totaled approximately 1.5 million dollar of into why per month, we expect to receive about a third of this amount until the shelter in place rules are lifted.
At three to three Dexter in Seattle, we commence revenue recognition on 312000 square feet or 49% of the total project in June.
The remaining phases are expected to come online next year.
In July we commenced revenue recognition on another 336000 square feet of space at one of the sale office in San Diego, bringing the total revenue commencement of this product to 20% the project at least eight tenants. So we expect revenue recognition in phases throughout the remainder of this year.
Also in July we delivered 146 residential units one Paseo. This was the third and final phase as a reminder, we delivered the first phase 237 units late last year and the second phase 225 units earlier. This year in total the 608 unit project is now 38% lead and.
We've seen leasing momentum pick up over the last month.
We expect commencement of revenue recognition on the entirety of the Netflix on Vine project or 355000 square feet a space at the end of the year.
And with respect to the residential portion living on bond that's scheduled for delivery in the first quarter of 2021.
From a financing perspective, we take a conservative approach to managing our balance sheet, and we will be nimble to ensure adequate liquidity or be opportunistic depending on market conditions.
With respect to cash same store NOI growth, we've had a very strong first half of the year at 12.9%. We don't expect the second half to be as strong given some onetime items in last years numbers and the impact of the credit issues. We have discussed while it's difficult to estimate at this point, we expect to full year to be in the mid single digit range.
Lastly, we project DNA of approximately $18 million per quarter for the remainder of the year.
That completes my remarks, now we'd be happy to take your questions operator.
We will now begin the question answer session to ask your question you May Press Star then one on your telephone keypad.
We're usually speakerphone, please pick up your handset equal pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then soon.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Nick Yulico Scotiabank. Please go ahead.
Thank you I guess first off.
Just one.
Follow up on the same store NOI number that you just I think you said about mid single digit range on same store NOI for this year I just want to carry that net of cash number and then does that exclude any.
Any impact from.
Any of the tenant deferrals set your you've given.
It is a cash number I know it but we're not excluding the deferral.
Okay. So that's actually the deferral is a negative impact to your reported same store that's right yes.
Okay Thats helpful. Thanks, and then I guess, just going back to the leasing markets.
You know any any more thoughts John on just how.
Hi Tech companies are our are sort of changing their use no particular downtown San Francisco was very hot market ahead of coated.
Heard rumblings of at least one.
Larger Tech company now not looking to do a lease in San Francisco This year now.
Behavior, changing the toward San Francisco or or other if your markets sort of on a relative basis, how would you kind of rank the strength of your markets right now.
I'm going to have Rob Gill with that if I may but before he starts again.
I think this it's safe to say that all companies are focused on.
What's cobot doing to their businesses, how is that impacting their real estate how is it impacting their ability to get back to work so anything and everything that can be put on pause generally is being put on pause just as I'm sure. It is in your family Air businesses essence, human nature, Rob do you want to go through the market.
Sure start wherever you want and.
Sure sure John This is Rob Paratte Hi, Nick.
I'd start by saying it by lump the bear in Seattle together that.
Look we traded tech companies as you know have led the stock market.
Since the pandemic started and those publicly traded tech companies many of which are our tenants are pretty resilient and there the industries that are expected to.
Come out faster and the various sectors of the tech market like information services software publishing scientific and R&D all of those were going to be leaders.
When things normalize and I think kind of a broader answered your question about what what the company's you're talking about including stays on hold goes directly to what John said, So the large company you mentioned.
In San Francisco to put her on hold literally did that it's on hold until they can ascertain.
I think a better forecast about when people do come back to work and how long that's going to take and I think this all centers around the when people can be vaccinated, one thing to get a vaccine, but people need to get vaccinated.
Specifically up in Seattle, I'll, just touch on this briefly but.
Notwithstanding what I said about the stock market.
Bellevue is going through a major transformation continues to greatness pandemic, where spaces being absorbed Amazon just reached recently signed a 2 million square foot lease in downtown Bellevue.
They themselves are transforming that market by adding 15000 employees to the Bellevue area and they're not the only tech company. There are we at Salesforce and Facebook et cetera.
So I, just think Seattle and cells will do well when things normalize and I think a lot of what I've, just said applies to the bay area as well and when you layer into the Bay area. The life Science component we're now.
Demand is up to 4 million seed so that's almost a million see more than what we were tracking last quarter.
I think everything bodes well for a recovery when people can get back into work and as you know in California. We've had several most cities the pad.
To dial back their reopenings, which has impacted touring.
Turing was up in May and June and its dial back again, particularly in Los Angeles San Francisco.
If you'd like just touch quickly on L.A.O.L.A. is doing well in certain submarkets like Hollywood and Culver City, where there's.
Pretty strong demand record demand actually from.
Content producers so.
We feel very good about though there's two sub markets.
And if I could just follow up its very helpful details.
About San Francisco, specifically I mean, the board system was already running at overcapacity before Cove and now.
Imagine, it's just a lot more challenging to figure out how do you get employees back to work in San Francisco using Bart does that change the leasing dynamic because it push.
Larger tech companies or maybe increasingly look.
At Oyster point instead of.
Flower Mart.
You want me to handle that John.
Yes.
Yes.
I think companies will be looking at a variety of factors like that Nick I.
Bart and Cal train, which are major modes of mass transit the bay area have undertaken.
Really strict protocols in terms of cleaning and everything just like the New York Subways.
And I think it's just too early to tell what modes of transportation.
People will use and keep in mind, a lot of the Bay area, particularly San Francisco employees are living in San Francisco So.
It's not for most of the areas neighborhoods that the tech workers were living in its not a far bike ride or walk to most office spaces.
Okay.
I would add I'd add to that I do think that.
South San Francisco is very well position.
We have a lot of life science.
As demand and there is increasing demand from hack part of that was simply because it's a.
This is even a free gold thing if you look at what strike lease recovered.
It's very accessible from both the city and from further south in the Valley.
In the flower Mart.
Im going to come on stream for a number of years. So I think it will do very well because of the fact that is exactly the kind of product that companies are gravitating to but more to come on that.
Okay. Thank you John.
Our next question comes from Emmanuel Korchman of Citi. Please go ahead.
Hey, everyone.
Rob maybe this is one for you in Hollywood It looks like you had a pretty sizable decline in occupancy and I know in the last call you talked about some co working tenants that you're working through deals with is that vacancy related to that same co working tens if not can you give us some more color as to what drove that increased vacancy in Hollywood.
Yes, Tyler maybe I can.
I've been on the M&A.
Yes. It is not the co working tenant we discussed last quarter, there's still an occupancy.
It's a marketing company and our Columbia Square project that at file for bankruptcy. So there was about 50 basis points of impact to our occupancy.
Great. Thank you and then John you talked about the resiliency of newer buildings or the demand.
It should be outside for newer buildings versus older ones.
Can you, possibly in some way address sort of the pricing gap between the two our tenants just going to lease more actively in the newer buildings because it fits their needs better.
Or is there going to be pricing that holds up in one class a buildings and less so on the other.
I think I'd comment around as the at least temporarily in past calls I'm happy to elaborate.
My sense is that there we're entering a period, where there will be more extreme recognition.
I have that have not you either have to kind of building the big companies one.
And you will command a significant premium and rent.
At or you don't have those kind of building and I think that you're Justin W. Two high tide, because most companies the big companies, if you're not the kind of products they want they're not going to lease at any rate.
Thank you.
The next question comes from the Sockwell Evercore. Please go ahead.
Hi, Thanks, I guess, one question, maybe a little difficult to answer today, but.
How do you guys sort of look at your Mark to market on the overall portfolio I realize market rents are up a bit of an enigma, but where would you sort of put that figure today.
Yes. This is Tyler I'll start and then I can handed over to Rob I you know before the.
Started we were about the across all of our markets about 20%.
Under market and a in a good position that was like 30% in San Francisco and and different amounts throughout the portfolio.
Rob I'll, let you sort of thinking was our respond to where you think things have changed since then if we have enough data points.
Hi, Steve It's Rob.
I don't know that we have enough data points that you heard on our first quarter call. The leasing activity that kind of bridge the second first quarter.
In San Francisco, particularly rates have held on direct stays and class a institutionally on product. So a lot of the leasing that was done in that time period Q1, Q2 was done at over $100 a foot fully service. So those are pre coated rate.
We are holding I would say.
San Francisco and Seattle, although there just aren't that many data points.
But if you look at.
Some of the renewals we've done that John highlighted in his remarks.
We've we've been able to increase our rental rates.
Okay, and then maybe sort of a a two parter just on sublease in general.
It's clear that San Francisco is seeing a pretty big uptick in the sublease space and in particular I know one of your large tenants Dropbox put close to 275000 feet on the market, albeit for maybe a five year period. So can you maybe just speak to the sublease market in general and what sort of pressures you might.
He is more of that comes to market in places like San Francisco.
Sure Steve.
Let me, let me set the table with just some numbers the.
Sublease space in the market right now is about 5 million square feet. A 2.3 million was added during coated and put that in perspective, the direct vacancy rate in San Francisco right. Now is about 5.4% subleases, 2.5% of that to compare that to the dot com bust.
Correct vacancy was 6.8 excuse me was 8.3% and sublease space was 6.8% so.
Very different dynamics between dot com and today.
Of the sublease space that was added in April and June about the relative length of lease term is about two and a half years and.
According to JLL, what they refer to 30% of that spaces lift and shift space, which means basically tenant has.
It's a pre planned move where the tenant is moving into new facilities and subleasing. The old am I think that two and a half your term corroborate set.
As I mentioned earlier rents in class a assets are maintaining.
No there first year rental rates.
And I think that would include in.
Well placed sublease space like the Macy's Dot com space.
I don't I don't want to comment on any of our specific tenants and you know the subleasing that you mentioned with respect to Dropbox. It I don't want to comment.
On their business, but the last thing I'd say about sublease space in San Francisco is that 60% of what's on the market expires in the next three to four years and that space will then if it's not least become direct space again, and I just believe with the institutional landlords quality landlords with class a product there is not.
Going to be the pressure because of the lack of direct inventory to drop rates.
The last piece of information, which might be interesting for you is that.
In Q2, 850000 see sublease space was either removed from the market, which means the sub landlord decided not to sublease it or it was actually sublet. So there is activity.
And I think a lot of tenants as John said earlier lot of tenants are trying to plan and uncertainty. So when there's two to two and a half your three year space that provides the flexibility that.
Good good get tenants through this uncertain time.
Okay. Thanks, and just last question I mean, John you mentioned, you've only got about 4% of your space Rolling through 2022, so pretty minimal.
Rollover exposure.
Including you know up in San Francisco, but are you doing things differently today to address that are you trying to pull forward more things are tenants coming to you more proactively you know sort of whereas that discussion.
Yes, Steve we've always try to manage things pretty well.
It can always do which one.
We'd like but in this case, we've had the view that let's work with tenants that went to extend early.
There's just not enough data points.
Really.
In some cases on some of the recent renewals.
These tenants.
In one case had an auction in one case I think didn't have an option both wanted to stay.
One tenant the larger one with very concerned about it going to.
Arbitration, because a good ended up being a rate that.
Could have really gotten out of.
Beyond their expectation, we just decided that we'd have a negotiated transaction, where they could live with it and we could live with it so that just happened to be it's very circumstantial.
We're not actively going out endeavoring to.
Sign up people that have six years left on a lease to attend the early we're having some requests to do that and we'll evaluate each one of those your independently.
Okay. Thanks, Thats it for me.
The next question comes from John Kim of BMO Capital. Please go ahead.
Thanks. Good morning, I was wondering if you could share your your views based on discussions you've had with tenants on the impact of this that and then make two more secondary tech markets outside of the West coast.
Whether or not you can take tenets are going to expand further conversely pulling back.
Yeah, Rob you want to cover that one I'm not sure enough data.
Yes, it really hasnt.
Come up in the conversations we've had John I mean, as I said earlier every company what John said this too is focused on.
How to get people back to work in the facilities, they have and I think that.
You've seen tech expand dramatically in other markets like Austin.
Back east et cetera that that trend will likely not change because they just can draw on talent from a lighter.
You know network.
Based on the strong demand from life science tenants.
Can you discuss your willingness to.
Starting the spec development and life sciences, or or maybe even convert some office planned development to last night.
Yeah, I don't know that we're looking at converting anything.
On the drawing boards, but.
As you know many of our buildings that we have developed.
Recently.
I'd been developed to be sort of a hybrid where you can do lifesize or office Dropbox was one strike was another.
On the building that we leased at 90 455 town Center downtown San Diego with the became a major Tech company, but it was designed for life science.
So we're sort of doing more of that where do we can go either way where the market is robust for both kinds of users.
But John with regard to develop my Theres nothing I've mentioned in prior calls there's nothing that we can start we physically could start before I think it's the first quarter, maybe the end of the first quarter next year and that would be phase two of Kilroy Oyster point, which is lifestyle.
And that so that's that's the next one up again subject to market conditions and all the other things that we always talk about but we're seeing strong demand from lifesize. There, we're seeing strong demand for attack there.
That's likely to be the next start again subject to market conditions phase two is three buildings, it's roughly 900000 feet positive parking structure.
We have.
You know the entitlements in place we're going through building permit process now and we should be in a position if we want the star.
In the first quarter of next year.
Okay, and then finally I realize it's a one off events, but the the termination payment for Jeff talking with some surprisingly high this quarter.
And I'm wondering if you could elaborate on how you in the board concluded this amount.
Yeah, well it was pursuant to the agreement his agreement was entered into in 1996 dynamic.
And so it was a legacy.
On track and we paid what was pursuant to the contract.
And we heard very clearly from the marketplace that they want us one way or another to solve their due notices to get rid of the the contract and Jeff rightfully. So.
He was in a position where he didnt have to do anything at an evergreen contract with a stated amount in terms of what the payment was to get out of it and so we meet with Ford.
With him and concluded pursuant to the terms of the agreement the board and we Didnt have we didn't have any choices.
Are there any remaining legacy contracts like that.
Not in our company.
Okay, great. Thank you.
Welcome.
The next question comes from Blaine Heck of Wells Fargo. Please go ahead.
Great. Thanks can you talk about any movement, you're seeing and construction costs recently and and whether you think maybe potential decreases in construction costs could you know keep pace with or or even outpace any potential decreases in rents you know such that some of these future development projects.
Yes can still pencil out to an extent acceptable yields or even maybe look better than what you might have had pro forma.
Yes, good question that we wanted to that.
Monthly with all the pricing, we do with major contractors. If you look at the it did short accurate answer is I don't know, but we will obviously time will tell if you look at the construction starts.
Around the country, they're down tremendously.
If you look at the book of business that the major contractors have they're down tremendously. If you look at the book of business that I forget the name number of publication names that have publications that our team monitors, but if you look at the book of business that the architects have is challenged.
Tremendously.
Oh, you're seeing a big contraction in construction starts and in projects that are being designed for the future, which all of which would suggest.
That commodity pricing as well as labor.
We'll end up being less expensive.
And just reserves correctly, that's what we're likely to see.
Your supposition about rental going down and construction costs going down and you will you know perhaps remain the same and I'm I'm kind of paraphrasing.
I'm not sure the rents are going to go down for new construction.
You know people like us make the decision if we're going to start something do we feel comfortable that the rents we need to have we can get.
We don't feel comfortable we don't start there's always the case, where you started back and you find that the markets change you don't get what you want and that can happen.
I do think construction costs will go down labor never likes to talk about it going down because they're just that's.
No they don't like to have knowledge.
It's just too early to tell but a lot of things can throw these things off it if all of its gotten there is a massive trillion dollar two trillion dollar infrastructure Bill passed by the Federal government then commodity pricing is likely you know to do not come down.
As much so to me too many variables to give you specific answer but I think it's a good question. One that we will continue to to speak about on these calls.
Got it that's helpful and I think that makes sense quick one for my second last quarter, you guys mentioned being in discussions with a large credit tenant to backfill at least some of the hundred 30000 square foot move out in long Beach.
Just how are those discussions progressed as and as negotiation stand now.
What are the prospects of getting that backfield quickly.
Hi, Blaine its Rob.
I don't want to get into too many specifics because a lot of people listen in on these calls.
We have discussions going on right now with.
Three different entities for space in that vacancy.
And we feel good about the prospects for getting at least up based on just the activity we see.
In the market, that's the best quality asset in the long Beach market.
And it's it's well recognized Tonight, just without predicting mores feel good about our prospects in terms of the activity we've got.
Got it thanks guys.
The next question comes from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
Thank you.
I'm wondering if you guys thought about redesigning any of your future developments based on.
On the standards or just what you think tenants may want.
Pandemic.
Well, we're always thinking about Jamie and we've done a leader as I mentioned in my comments, we are the world's leader in well as the world's leader with a world leader sustainability.
I think we're probably the world's leader rooftop deck.
We as a company have a culture and a mission to make sure that we are producing the very best of what people want that withstand you'll have a long runway in front of it contrast that with older stock to frequently can physically change enough to be as modern.
As tenants want them to be so we're doing that we're already doing that we yes, if I want to give any of our competitors city.
Any of our inside information on how we go about it but we have a team of people both internally and that we work with externally.
That is really cutting edge, it's basically a war room kind of discussion of where things going how do we tested and it's proven to be a a tremendous asset bricco ROI and it's one of the reasons. We we embrace sustainability in became the world's later in the embraced well this became a world.
Leader and were I think we're doing the same thing with regard to working with our tenants with regard to reintroduction to the work place and the changes that may or may need to be made and of course with regard to the buildings that we have underway.
We have made some changes on some with regard to flower Mart.
We've broken out into a smaller component so that we can.
The next one month of anywhere to four to 500000 feet.
Other than started one building one of the buildings with about a million 400000 feet, we've broken out into.
Smaller components that can be joined so things like that we're constantly working on how we create greater flexibility and optionality with regard to what we have to start how we can break it up between Canada.
I mentioned in our last call that I think tenants are going to gravitate, the bigger tenants more and more they already have to gravitate more and more to one of the.
Absolute control of their premises and again that is easier when it's a single building where they occupy all of it as opposed to being a portion of much taller buildings.
No I made in my comments earlier. This morning are this afternoon.
What are your located on that we're very geared toward.
Low to mid rise, we only have two buildings that are over 25 stories in the.
The portfolio.
So we're doing all the things you're asking about.
Okay. Do you think is going to be a meaningful change to construction.
In terms of it.
Yeah types of.
Thanks, Good you put in the buildings that will cost more well you beat you've seen our construction costs. If you were to go it I don't look at other People's construction cost that you if youre looking at the Supplementals or whatever you all look at to see what costs are or our buildings versus other buildings I know, we build to a higher level of quality.
Most of our competitors do and I'm not speaking with just about recent speaking about.
Anybody who does stuff, we do with more flexibility and Optionality and yet I think our cost structure has been pretty much in line with most others.
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Oh it.
I remember my dad used to say to me.
You know, there's engineering, which as I engineered costs out of something in there as art and that is how you end up.
Probably a better mouse trap, but trying to keep it at the same level of cost and art is is that isn't artful thing and we do a pretty good job that we by no means build the cheapest buildings.
We have as you've seen almost always we've been the market leader on rent.
As because we're we're delivering what people want.
That makes sense.
And then at the beginning of the call you talked about.
Lots of conversations with tenants.
Different tenants or thinking about what you see it is a meaningful difference between sectors in terms of whose thinking about work from home and just thinking about hybrid model.
Just curious if there's any kind of differentiation there well like site people, it's hard to do life science from home right.
So that.
Thanks to itself with regard to the two.
If you're a small tenant.
And you occupied two or 3000 feet and you've got to work from home right now by law.
Why would you renew your lease you just wait for there's always 2000 via available somewhere I think the smaller Kenneth.
Are likely to be less inclined to renew leases than big Canada.
Hi, Rob why don't you take that one because you you spent so much time.
Yes, Hi, Jamie.
And just.
I think John hit the nail on the head, it's just that the smaller tenants or.
Probably more susceptible to what's going on today and that they can save money by not.
Renewing leases, but we're not really seeing a sector by sector change everybody is talking about I think a fact is that work from home will be more.
Acceptable and predominant than it had been on the past, but it's going to be a blend of work from home and office and I know.
Again, I think I've said this on our first quarter call, but just our own employee base I know people are dying to get back to work, we're not really a tech company, even though we worked closely with them.
I know that that sentiment as echoed by a lot of companies. They are there in fact Ceos and executive teams are working hard to put programs together that make employees comfortable.
Going back to that work space. So you know its health screening its biometrics, it's all sorts of new technology that frankly, a lot of ours. Our tenants are developing in order to make the work workspace.
Safe, so that employees feel comfortable coming back, but I can't you know I think.
Even fire category tenants I think there's probably going to be some flexibility in work from home versus coming to work, but it's it's going to be balanced.
And are you seeing any pickup in demand for office is closer to where people live.
Distributed.
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Yeah, I think thats going to that was a trend in the past and I think it's going to continue I just think that.
No one.
Other than being shutting their apartments, none of the young tech employees in San Francisco or.
Talking about moving out I mean, they they want to get back out with their friends and they want to get back to work from what we're hearing and.
That's also why a lot of the facilities managers in corporate real estate executives that John and I talked to are reluctant to put space on the sublease market because they need the flexibility and they're afraid that if they put something on the market and it gets sublet when things normalize they're going to be short on space. So.
There's a lot of dynamics going on right now and like John said in his remarks, there's going to be kind of some moves forward and maybe some of its backwards as we sort through this for the remainder of the year.
You know, there's there's where we're in discussions with a couple of tenants that are in the portfolio now that have needs for significant expansion in some of that's driven by increase in workforce is some of it's being driven by reconfiguration of space.
I've had a large not too long ago with well pre code.
With a.
I guess, we had a virtual lunch that's right.
Where they had recently taken an entire building and one of the cities in which we operate and it with several hundred thousand feet and he said now with the elevator situation in that particular high rise they need twice as much space because they can't operate in that building the way there.
Our protocols require them to operate and they wish to have now they haven't taken that particular building, but they need more there needed ended double up his was just comment double up in terms of the amount of space. So we're going to see this kind of fits and starts some companies are going to put on hold that.
Those decisions that they don't need to make.
Companies are going to have to be configure their space in a way that requires them to take more space in some cases, we'll see companies that were reduced their footprint and I think the you know, there's there's going to be a combination or a variety of all that stuff.
Well, we're all tired of Cove, it I know with most kids at home and so forth I think everybody would you know brought all the reason we want to get get through this thing but back is it hasn't been that long it's been drew a four month and.
You know everybody is trying to figure out how to move forward in a constructive way is good and we're going to see.
We're going to see that.
Manifests itself in all the ways I just mentioned.
Okay, all right. Thanks for your thoughts.
You're welcome.
The next question comes from Dave Rodgers of Baird. Please go ahead.
Yeah. Good morning out there just a couple of cleanup questions for me with regard to the severance John or Tyler, where they're more than just Jeff and that number I mean have you taken a little bit of a cut it and just a different parts of the organization is nowhere, but just wanted to clarify on that versus just yet.
Well, yes, we have reduced our workforce.
Tom.
Right and we're always going to be tried to rightsize.
I wonder what are they exotic fine it's tough.
And I'm involved in some other entities.
Beyond Kilroy and.
You know.
The Big challenged everybody has is nobody do you think of gaming footballers 100 yards, you know where the goal line is or you know what the time line is it's an hour game. It's a 100 yards the goal lines down there and so there is some there's some visual AIDS. If you will how you doing and what decisions you should make depending upon.
Time, you have left I think about cobot is nobody knows how long it's going to laugh nobody knows what the goal lines are nobody knows how long the games going to be and I don't I should move that we're getting good very serious issue and so you know how do you how do you know what the right size of your Oregon eight organization is mark.
Who is always to make sure that you have the talent you need to play off is indeed beds and adjust at all at the margin you make sure that you're you're not.
I have excessive.
Seth.
And you thought back any.
What was it 2000 8009, we made some pretty drastic headcount reductions.
There, we could see that they're going to be a couple of years of significant downside answer that much of the development. If you go back that chart that I frequently show about when we acquired when we developed when we dispose of assets.
The thing I like about that chart that shows that it there are times when you're not doing any development and therefore, you reduce the number of development people there's times when you're not doing any acquisitions and therefore, you reduce the number of acquisition people and we're going to be mindful of that as we navigate the months in years ahead.
Thanks to the color on that maybe for Rob John the utility or utilization of your office buildings today to be.
Probably was down in the low single digit at some point have you seen that recovery at all or not we're that today.
Hi, Dave.
It has recovered but keep in mind for most of California, we have to as governor new some calls it but you know address adjust the dimmer switch downward again.
So it's also changed again, but in May and June there was definitely an uptick I'd say, probably up to 25% to 35% occupancy just based on our.
Parking garage isn't that sort of thing and art access information, but.
Again once once in California, right now is spiking as you know, it's kind of like Mark was so.
People are not in office as much as they were but there are definitely no wanting to get back. It's just a matter of again ceiling safe and also government restrictions same thing for delay.
Okay, and then I think Jamie it's a little bit about this I don't want to beat the dead horse, but on the new tenant activity five deal that you signed in the quarter about 10000 square feet eat it sounds like you guys were saying nothing much to conclude from that it's obviously, a small subset but is there any directionality from that that would kind of give you better clarity.
On where we had in the third quarter and beyond.
I think it's you're asking you know I think that what we're going to see for the remainder of the you're probably Q1 is.
More emphasis on renewals the new space, but again, it's very market oriented for example in San Diego.
In San Diego County, There were 40 40 deals over 20000 feet.
Completed 80% of those were new deals not renewals. So there's no growth in San Diego and not in that example, and then other areas are just going to see I think renewals so in San Francisco, it's about.
55% right now you know, 50% to 55% renewal versus new.
For the activity, so again very market specific.
Hollywood and entertainment, you'll see I think absorption.
Alright, Thanks for that and then maybe tied to last question for you on the tenant in Hollywood that you mentioned the marketing from that went bankrupt that impact was that covered in the prior reserves or did you take especially impact are able to go back and maybe get some kind of credit enhancement on that post those there.
Roger any thoughts around their bill.
It didn't have a financial impact in the second quarter.
But obviously going forward, assuming they don't recover will have an impact in the second half of the year, but from a earning perspective. There was there was really no material impact on the second quarter.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Tyler Rose for any closing remarks.
Thank you for joining us today, we appreciate your continuing interest and care fee and we wish you all remain healthy unsafe. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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