Q3 2020 Kilroy Realty Corp Earnings Call
All participants will be in listen only mode should you need assistance. Please title a conference specialist by pressing the star key followed by zero.
After todays presentation, there would be an opportunity to ask questions.
A question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event being recorded I would now like to turn the culprits over to Tyler Rose Executive Vice President and CFO. Please Tyler go ahead.
[music] good morning, everyone. Thank you for joining us on the call with me today are DRONCO right and several other members of our management team will be available for <unk> at the outset I need to say that some of the information we'll be discussing is 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 this call.
Being telecast live on our website and will be available for replay for the next eight days, both by phone and over the Internet our earnings release and supplemental package have been filed on a form 8-K with the FCC and both are also available on our website John will start the call with third quarter highlights and an update on our market conditions I will discuss shortly after it was all.
Then we'll be happy to take your questions John.
Hey, Thanks, Tyler and Hello, everyone. Thank you for joining us today.
Third call during the call that period I don't think any of US thought did they also said that we would still be in the panned out.
And then make at this point, but having said that we continue to perform well remain optimistic about the future.
Hi, Kara Sea, we remain focused on several key areas that position us well to play both deep and it's an off balance over the coming months and years. These include maintaining a strong financial foundation proactively managing lease expirations and our stabilized portfolio executing our under construction development projects does.
Regarding our future development starts working with governmental agencies to influence policy as much as possible and preparing for a post cobot future, which includes continuously enhancing the quality of our portfolio from a sustainability of wellness perspective.
While we believe we are doing well in all these areas. We also continue to do well both financially and operationally you're our third quarter highlights. We ended the quarter with 1.4 billion of liquidity. This includes the successful completion of 425 million Green bond offering in August or under construction development is now fully funded.
With cash on hand.
Our high quality tenant profile continues to demonstrate its value.
Overall rent collection in the third quarter exceeded 96% with off at Sun Life Science front collection north of 98%.
These strong recollection levels have remained consistent across the seven minutes month, so the pandemic.
As our well capitalized technology and life science tenant base continues to outperform.
We continue to make progress in addressing our near term lease expirations, saying, so signing renewal leases in our stabilized portfolio during the quarter approximately 115000 square feet, while leasing volumes were light rental rates on these leases were up 15% on a cash basis and 34% on a GAAP basis.
Our average annual lease explorations through 2023 now stand at approximately 6.5% weather.
With exception of a fourth quarter exploration. This year, we do not have any exploration is greater than 60000 square feet through the end of 2021.
Leasing activity continues to be impacted by sheltered place regulations that make it difficult to tour the.
The Bell about EUR 1.9 billion of construction project remains on track with the expected delivery of the Netflix on buying office project in the fourth quarter when stabilized the pipeline is expected to generate 140 million of annualized cash net operating income.
That's an update on the quarter moving forward well, it's still early days, an understanding of the Pandemics pandemics lasting impact we do see some important things developing these include the physical makeup of commercial work space and the industries that drive it skews the first theme as life science.
Not a secret that the life science industry has positively impacted by quoted and we believe it will continue to benefit for the foreseeable future.
You see investment in life Science has been averaging 20 billion annually for the past five years healthcare expenditures have risen to approximately 20% of the annual GDP as our nation's population ages.
And the FDA has become increasingly proactive in driving new drug development.
The pandemic is moving more private and public investment into the sector and encouraging the creation of a range of new startups we.
We believe they will want to locate their labs and their talent and current life science clusters looking.
Looking at the West Coast markets, we serve.
Current square footage dedicated to life science use totals about 20 million square feet with direct vacancy rates that ranged from 2% to 3%.
We estimate current demand in these markets had approximately 5.5 million square feet.
We've been building the capabilities to serve this market for more than two decades and are well positioned to continue to capitalize on opportunities.
Today, our pro forma life science footprint, which includes existing properties life science capable assets and the tide and life Science development.
Totals approximately 5 million square feet.
We have the third largest portfolio of life science and healthcare tenants among publicly traded Reits as a percentage of total base rent.
Several life science tenants within the care see portfolio continue to do quite well, including NERC run our largest San Diego Tenet. The last quarter had two medicines approved by the FDA and Labcorp South San Francisco tenants that report strong earnings last quarter, driven by increased cobot, 19th testing volume.
We believe our life science portfolio deserves more appreciation as it is essentially fully leased and strong tenants such as Acadias, Stanford University, 23, and me and so forth.
Recent market activity Oh.
Highlights our portfolio's embedded value. In addition to the strong valuation of the Biomed recapitalization the sale of the Genesis buildings located on the west side or the non traditional side of the one to one freeway and sell San Francisco for approximately 1200 and $75 per square foot is a great comp for the kids.
Oyster point, particularly given that these buildings are not its ideally located or as modern.
I hope he is our 39 acre 2.5 million square foot life Science development project in South San Francisco, we are a construction on phase one a 650000 square foot project is 100% leased and built with state of the art life Science infrastructure.
Well I would total basis of approximately $865 per square foot and is core clearly worth substantially more today.
Okay LP pays two through four are fully entitled for another 2 million square feet of lab space and office space.
We currently are seeing strong interest and kill P. base too from a variety of tenants and are looking carefully at the possibility of a base to start sometime next year to quantify phase two is approximately 900000 square feet and we have considerably more interest with active discussions than we do.
Square footage.
The second thing is wellness, we have been in constant contact with our tenant base since the pandemic began the leaders of these entities are focused on physical design space, the adaptability, environmental health safety and comfort and increasing square footage per worker.
Well some of these concerns are driven by short term needs. We believe that Werent space wellness is an issue that is here to stay.
We will see a large premium placement office properties that can provide larger were light filled floor plates greater flexibility in the layout traffic flow and use of interior spaces stronger integration of work space with the outdoor world in nature and top quality state of the art operating systems that not only protect but any.
Yeah its employees help.
Dennis will want to partner with well capitalized landlords, who are willing to and able to invest in both innovative design and advanced infrastructure and their development.
We believe these trends will give clear a see a big competitive advantage.
In our markets.
Our existing portfolio is among the youngest and best designed to meet these needs we've done a leader and understanding and adopting design practices and systems that enhance the willingness of our buildings occupancy and we now have the highest number of fit well sort of five properties of any company in the world.
We have deep experience in pursuing new development concepts to integrate the best most innovative thinking and sustainability and wellness, but we believe that these attributes make here see a top partner of choice going forward.
Let me wrap up with a few additional thoughts on today's markets and what me loud lie ahead.
Amidst all the uncertainty and 2020 it remains clear that technology media and life science will still be the growth engine of our economy.
Many companies in these industries continue to thrive in what is an otherwise challenging time and the biggest concentration of these sectors is on the west coast and in our markets. We remain confident cluster of intellectual capital top notch universities and a good quality of life found in our markets, it's tough to replicate and a differentiating.
Factor for kilowatt.
I don't have a crystal ball, but from a continued discussion with our customers I'm fairly confident that companies, both large and small established and start ups are going to want to bring their people together in communal work spaces. When the pandemic has passed.
Having been through a few cycles I cannot stress enough the importance of leadership teams during down cycles for companies as well as municipalities well good times, a rising tide lifts all boats markets. Like these are best suited for those with high conviction a track record of success and the ability to adapt last cycle. We believe we have differentiated.
It ourselves from the competition through our entry into San Francisco, and Seattle, and we look forward to the challenge of deferred shading ourselves again in this cycle and I'm confident we will.
And we have never been better positioned our stabilized portfolio is young modern sustainable and 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 at 90% leased our future development pipeline is diversified across product types as well as markets and has a very attractive basis and our balance sheet is solid with significant liquidity low leverage and no near term maturities and I'm going to turn the call back to Tyler Tyler.
Thanks, John for the quarter, we reported AFFO of 99 cents per share as we continue to see the positive contribution from development third quarter FFO benefited from a full quarter contribution of 49% or three to three Dexter in Seattle as well as an incremental GAAP revenue from the office space at our one Paseo mixed use project in del Mar.
Our third quarter AFFO also included a two cents per share allowance related to our ongoing assessment of tenant credit and collectability of rent looking.
Looking at same store operating results cash same store NOI increased 3.8% in the quarter, largely driven by higher rental rates than the burn off of free rent GAAP same store NOI declined 1.9%, primarily due to prior year, one time payment.
At the end of the third quarter, our stabilized portfolio was 92.2% occupied and 95.5% leased as John mentioned in August we completed a 425 million dollar public offering of 12 year unsecured green bonds with an annual interest rate of 2.5%. This was our second green bond offering we used a portion of the proceeds.
To fully repay a $150 million term loan facility.
With those transactions completed our liquidity today, a town stands approximately 1.4 billion, including approximately $685 million in cash and $750 million available under our revolver, our net debt to third quarter annualized EBITDA is 5.6 times.
We are again not providing specific earnings guidance this quarter, but I can offer the following assumptions based on what we know today and maybe abuse and assessing our potential earnings result for the remainder of the year.
<unk> proposition 15 perspective, we have made a seven cents per share investment into feeding. This property tax increase initiative. This includes three cents of expenses already incurred in quarter, two and three and four cents that will show up in our fourth quarter DNA.
We project remaining 2020 development spending to be between $100 million to $200 million.
We are in advanced discussions on the sale of a building in San Francisco in the San Francisco Bay area for approximately $75 million with expecting closing later this quarter as a side note from a valuation standpoint, well there haven't been a lot of transactions. We've recently seen several trade to the strong valuation. These include a multitenant building in Seattle.
At $1000 per foot Multitenant building in Santa Monica for $800 per foot and several trades in San Francisco, ranging from 1030 $100 per foot. So we will continue to evaluate disposition opportunities as appropriate.
We remain in close discussions with our retail tenants to understand their financial condition. As you may recall over the last two quarters, we established a rent relief program, which included approximately 90% of our retail tenants. This had a minor impact from a car or minor earnings impact and from a cash perspective, one month of rent deferral for these tenants is approx.
Only $1.5 million.
Non contractual parking income totaled approximately $1.5 million of in Hawaii.
We expect to receive about a third of this amount until the shelter in place rules are lifted.
At one Paseo in del Mar as of October we commence revenue recognition on 59% of the 285000 square foot office project.
We expect to commence revenue recognition on the remaining leased office space in phases throughout the remainder of this year.
Also at one Paseo in July we delivered 146 residential units. This was the third and final phase as a reminder, we delivered the first phase of 237 units late last year and the second phase 225 units earlier this year and total to 608 unit project is now 51% leaf and we've seen leasing momentum.
Pick up over the last month.
We expect commencement of revenue recognition on the Netflix on buying office project next month.
And with respect to the residential portion living on buying it is on target for delivery in the first quarter of 2021.
That completes my remarks, and I'll now, we'll be happy to take your questions operator.
Okay.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then shoot.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Manny Korchman with Citi.
Please mr. Manny you mean.
Great. Thank you, it's Michael Bilerman here with Manny.
John Good morning out there.
I want to come back to your opening comments, where you sort of talked about how this is going to on longer than all of us.
Only had hoped earlier in the year, but.
But then you you commented that you remain very optimistic about the future and I'm wondering if you can sort of dig into that a little bit more 'cause.
Because it feels as though the number of tenants in your markets coming out and talking about either a permanent work from home or a hybrid solution.
And also letting their employees work from anywhere in the future. Despite some of the benefit that you talked about termed intellectual capital the University system quality of life.
I think that once all the debatable right now on the coast.
But all of those elements you have.
What gives you the confidence that they're going to come back to communal spaces and how do you think those basins are going to evolve.
The markets that you operate in.
That's a long question Michael soap I forget a few pieces in my response Liza.
Please ask again.
Well this cold thing nobody knew how long it was going to go when we heard a lot about you know, it's going to be over and how many months and of course it hasn't done that nobody knows how long it's going to go well I'm encouraged by is we're seeing people really want to get back to work, whether it's you know kilroy or whether it's our tenants what were hearing is that people are going.
[noise] APE shit about working from home.
Some people like it for sure but.
But we're also hearing that productivity is down 50%.
As a result of work from home now that is not going to be universal to every single company because we hear a lot of things that you do.
In the news and so forth and a lot of times. The headlines are pretty draconian and then you read through the wrong and they said well we had to provide work from home until July of 2021, or whatever the date might be because people need to make plans for their apartments, they need to make plans for their day care they need to make plans.
And people are concerned about their work, so they're giving them as much flexibility as possible with regard to the issue of quality of life I will freely admit the quality of life in some of the cities like La and San Francisco, obviously other cities across the country and are the basically the.
A big Liberals states to the Big Liberal law.
Cities.
Have issues and they have to resolve them, but on a positive basis. We're now seeing the number of tests in San Francisco, which increased dramatically.
Now I'll be reduced and with plans by the city to further reduce them and yet homeless off the streets and into shelters, that's going to take time, but it's a positive thing that companies can see there. The cities are making progress in L.A., they're doing the same things that come out rather old robustly about saying.
We're going to make shoulders available you're going to have to get off because the cities. All now recognize that their revenue base is going to be totally messed up if these companies leap and they're starting to respond to the market forces that we all learned in econ one on one so I'm optimistic about those things I'm always a little.
Pessimistic about policies of politicians, because as everybody knows on this call I hate politicians almost universally nobody would hire any of these people and yet.
They think they know better but now what we're seeing in varying degrees of success.
Veracity is politicians say hey, we've got to straighten. This out so that is a positive shift and what else also saying is isn't the case as an example on prop 15, which would reverse for commercial properties prop 13 projection. We've seen that go from 20, the yes on prop up 15, so that's a bad thing.
Hey gone from a roughly a 20 point positive spread.
Spread to now its running behind no on 15, and that's been the result of a lot of people not just in the real estate industry.
But but but primarily getting together and raising 70 $580 million whatever it is.
Two.
To get out the reality the real true information of what prop 15, a yes vote would do that coalition I have a meeting tomorrow or rather Friday, My office and L.A. with some of the most powerful people in the state that want to join together always been one of many force.
Does that have been promoting this should have a coalition of business people from the real estate and other industries to influence the policymakers I haven't seen that in 20 years in California. So there are some positive things.
With regard to quality of life the call the life in some cases, it's gotten better because there have been some reductions in the residential rents and so forth and some of these markets. So it's a bit of a you know fits and starts that I'm seeing some of the green shoots that I didnt see before but we have real problems no question about it with regard to demand.
Well, we're not seeing a lot of multi tenant unless their leases are coming due talk about significant increases in space. We are seeing some really big deals that Rob can cover.
That are being transacted for all of our markets and we have negotiations or or is it your negotiations or discussions with both tech and life science.
With regard to a number of our markets in for development. So those are all positive.
You know I I have to take a look at things as a leader of a company hopefully as a glass half full rather than a glass half empty.
I'm feeling better about what I'm seeing now than I was three months ago.
Because first you have to have people agree there is a problem and then that they want to work together to address the problem and that it's vitally important to do so that was not the reality three six months ago and I think once this election, that's just such a.
Mess gets behind US I think people will hopefully come together not just be as defensive.
As we've seen in this cycle and others. So those those are kind of you know my my thoughts based upon interaction with others.
And with regard to space per person and what we're hearing is that add Rob correct me if I'm wrong on this that we're looking at roughly a 30% to 40% increase in space per person from what the trend was pre cove. It now.
Who knows how that will play out whether you know, we'll see 30% people work from home and that the ministers, 30% more space per person I can't tell you how that is going to work out it'll work out and we'll see it overtime.
Like did I hopefully capture everything you asked.
That's impressive John.
And even give you a heads up on the question. So thank you [laughter], it's you're welcome you're welcome I listen I got to tell you that the role of the modern CEO and real estate right now.
Has changed dramatically from what we have historically all been doing we're now a solidly in the political arena and I can say I'm not going to say, who but you will you have other calls that are some of the west coast recent some of the east coast reach and we're all talking.
They were all pissed.
And we're taking the gloves off.
Yep.
Sounds good thanks John.
Yeah, you're welcome.
Our next question comes from newly cool costs have been please.
Please make go ahead.
Thanks.
John I guess.
Curious what your thoughts are right now about looking at pieces of portfolio and SDN as candidates for asset sales or additional joint ventures. I mean, you have done that in the past you haven't bought back much stock historically.
Would you look at that I know you have a program in place would you consider increasing it or even maybe.
If you did some more asset sales preserving some capital putting on aside to fund future development of Oyster point so.
You don't have to do let's say another forward equity deal right now where your stock prices.
Well I have absolutely no zero interest in selling stock at these prices zero.
With regard to the development program.
We had forecasted beat pre cope with that the only development than we might start in 2021, what 2021 wouldn't.
Would be.
Oyster point phase.
Ladies too.
And and that remains on track.
We think that phase two is going to make eminent sense based upon the demand, we're seeing and we're seeing very significant demand and we have early stage negotiations and some proposals going back and forth on large blocks of space. You know 300, 400 500000 square feet of crack.
So I'm optimistic about that.
And as I did want to point out again, I think we have you know a very favorable land basis at the flower Mart and so forth that I've always said that could be the next cycle and it may very well be the next cycle.
Because I'm not gonna start the flower Mart without greater clarity I think anybody who did that would be kind of foolish.
In a big cotton Big Big dollar amount.
With regard to asset sales its been really hampered by the building that we're selling into various not the city for 75 million of the tighter convention. It's a great building and its you know its a stabilized fix deal and so the the great. The the value per square foot I think is around 900 bucks or so.
And we'll have more of those but what are the problems. We've had is you can't cure a lot of these things.
Because of the regulations in place that was one we actually had a tours on.
And had it in the market pre.
ER pre cobot.
With regard to recapping projects or with regard to.
Selling projects you know, we always look at that and I'm I'm agnostic I've No mother fixation about any particular building no matter how beautiful it is a pretty it is are you know jazzy. It is that's just.
Not the way, we work or we have a lot of options to do that.
In terms of funding phase two Tiger can talk more specifically about that that's part of your question did I capture everything Nick.
Oh, Yeah, no. That's helpful. Thanks, Yeah, Okay great.
I guess, just just a follow up is on the on the tenant side. If you could just talk about how those discussions are going you know you did.
Yeah renewals this quarter did have a shorter lease term averaging 17 months you know what kind of drove that what should we think that that continues over the next couple of quarters shorter term renewals is tenants kind of figure out what their space needs are and <unk>. And then also are you know are you seeing any increase in sublease.
Space within your own portfolio. Thanks.
Yeah, Rob you want to cover those please.
Sure sure Hi, Nick This is Rob Paratte.
Good afternoon, everyone.
So the the first part of your question right.
Relating to a tenant sentiment and what's going on with renewals across the board and across I mean across the country really.
Tenants or are paying rents based on flexibility. They are looking for ways to avoid making long term decisions, while they try to figure out how to get their workforces back as John said earlier.
A lot of tenants have plans to come back in June July sometimes its you know later summer 21.
And with that kind of lead time, it's much harder for them to predict when they're going to have their full work horses back. So flexibility is a key and we've always worked very closely with our tenants and frankly, it's one of the ways. We keep our renewal rates. So high is working with them when the markets are very tight and finding.
Alternatives form and then when markets have uncertainty. We also work with them. So I think that the trend of short term renewals.
We'll continue I don't know how long that will continue because oftentimes that kind of flexibility comes with a cost because as you look at these expirations that will happen, whether it's you know 17 months or 24 months 36 months out there.
They are likely to be expiring in what's an improving economy, because we're not going to be in the situation. We are today forever and so I always look at that as something that if I were a tenant I'd keep my eye on because eventually demand will increase and when it does come back. These expirations are going to be.
Impacted as we've mentioned with respect to sublease space, specifically in our portfolio.
You know there is some sub lease space that's been put on the market. That's it's been well publicized excuse me.
And as Tyler's talked about on past calls.
We tend to have a smaller tenants component in the Los Angeles area.
No we have had some subleased space occurred down there, but if you look at Kilroy is overall.
Tenant base, which is extremely strong in terms of the large tech that we have none of the large tech companies have put any subleased space on the market in our portfolio.
Okay. Thank you Rob.
Our next question comes from Chip Soc.
With Evercore. Please keep you may proceed.
Thanks, Tyler I know you took a small charge this quarter and as I look at the supplemental you collected 90, 98% or so of the wrench in Q3, so the 2% debt that sort of wasn't collected.
Is that sort of part of the recent write offs and does that sort of limit the risk going forward or or is that 2% still unaccounted for and possibly future write offs.
Well in terms of the calculations for the quarter and then as October, but and we're still getting rents for October so that number could go up but.
If it's sort of a tougher and tougher calculation in terms of the reserves were looking at tenants who are struggling.
I haven't paid and you know of that two cents that we had a write off on about 60% was setting up reserves for those tenants that we're worried about and 40% was for going to cash collection and basically writing off the straight line rent. So it was sort of split 60, 40 on that basis and 50% of that was office.
Two cents. So you know, it's broken up into a bunch of different pieces.
I guess I'm just trying to assess you know I I know you can't take write offs just.
Currently take write offs I'm, just trying to get a sense for the amount of other problems that you're sort of monitoring and are you sort of at this point towards the tail end of that or are there still you know other retailers or co working tenants that are in the portfolio that you still have kind of submissions over.
Yeah, I mean, it's hard to say I mean, obviously, we hope are at the tail end you can see our the numbers have trended from the first quarter to the second quarter to third quarter down every quarter. So we you know we don't see anything else coming I mean, there are some tenants in our portfolio on more on the retail side in a gym side that we're watching.
And the co working tenants, we continue to watch, but no. We don't we don't anticipate a lot of problems, but those are those the types of tenants, where we're we're watching.
Okay, and then I guess, John or Rob.
Don't know the last time, you guys did 8000 square feet of new leasing.
And I know San Francisco has just a you know sort of turned on the spigot to watch will allow non essential businesses to come back, but you know that the tech companies have obviously Ah.
Given people you know months and months, if not quarters to get back to work. So you know is.
Is it your belief that until the buildings are really more at 50, 60% occupancy and you've got most of the folks back that new leasing just remains kind of been a wall here.
Yeah. This is John I'm sure Rob will have some comments by the way I'm off mute right.
Yep Yep, good like I am [laughter] always check have been talking to myself and our meetings lately for.
With viewed on so I apologize I'm look you're right Steve.
People are just now beginning to get back to work in San Francisco and driving around when I was in the city yesterday and the day before.
That was actually traffic and were not nearly as robust a number of people walking around the streets, but there were people walking around the streets a month ago, you get far you know a cannonball down the streets and likely not hit a car there was traffic on the on a one on one freeway going over the Golden Gate Bridge.
Traffic over the Bay bridge and so forth there is traffic at Oakland when I went to the airport. The other day haven't seen that in months. So you know it is improving and with this now the ability to go to 25% workforce in San Francisco.
People are going to get back to work and I think it's going to change, but it's not going to happen overnight. There's still there's still a fear about co bed right and there is a <unk>. Some people seem to have any view or some people seem to have a lot of fear.
And you know, it's going to take a while so I don't think you can make there's not enough data to make any trend you just kind of have to look at this as gut feel.
But I think its positive.
I think we'll probably see and some municipalities.
Oh you.
Subject to the numbers of new cases, and so forth.
A relaxation post the election, because theres a lot of people playing games with politics here.
So more to come Rob I don't know if you have anything to add to that.
Yeah, John Steve the only thing I'd add to that is that if you. If you go back to May and June corporate real estate executives sentiment was.
I wouldn't say negative, but they were very concerned because they were looking at a tidal wave coming at him, which is how do we bring people back to work. They were thinking you know people would be backed by June or July.
And you know they just had the tsunami coming at them.
Today, they have plans in place every company, we're talking to has some form of plan in place that are actually in a lot of cases, bringing people back into the office smaller groups of people have been asking to come in.
So I think once sentiment gets to that point that we're talking about now where they can take their eye off the how do we get people back in I do think you're going to start seeing especially the larger companies look at.
You know how to secure longer term requirements I can't name names, but a company that we know pretty well as hired a thousand engineers. That's a thousand engineers since co that started and that they're going to need to put those engineers somewhere in in Hollywood.
Production is back on stage again, so you've got Sony and Netflix in production and for every production job. The statistic is there's seven jobs that are ancillary or support jobs. So that's going to start impacting we think.
You know demand for office space, There and then lastly life science hasn't missed a beat in fact, there's more demand for.
For life Science and discussions in life Science.
Going on throughout our markets, which is really exciting.
Exciting for us to be working on.
Okay, Great last question John.
You mentioned, a flower Mart, probably next cycle at this point I just want to make sure there are any.
[noise] issues or or.
Requirements on Kilroy to kind of start at some point given that you've got your profit them or at this point, you've got your allocation and now it just becomes when it's economical for you to start.
Yeah, well, we have a development agreement. Unlike most others and we have a longer period of time within which to start it would starting is basically starting a foundation or something.
So I'm not worried about any restriction or prohibition.
With regard to any potential delays we have.
City have you think about it has counted on apartment [laughter]. Jeremy is countered on billions of dollars of revenue and tens of thousands of jobs from central Soma.
And of course, they've built the central Soma subway and have other things.
That are planned, including you know massive amounts of development fees from the flower Mart and other projects like in the area.
They want to make sure they get that revenue at some point, it's a vitally important to them to fund.
Affordable housing and transportation and so forth. So I have no doubt, they're going to be very cooperative with others as well so I'm not I'm not I don't have that concern Steve.
Okay, great. Thanks.
You're welcome.
Our next question comes from Craig Mailman with Keybanc capital markets. Please Craig go ahead.
Hey, guys.
You know clearly life science continues to be a strong suit for the office sector. You know you guys or have some projects ready to go and there's been a lot of talk about conversions are you guys concerned at all about or an uptick in supply here in the near to medium term with everyone kind of getting it.
On the game.
You want me to touch on that John.
Oh, maybe on mute now.
Hi, Craig I'll I'll handle that you know.
A lot of the conversions that are going on are not.
They're just sat there conversions so.
You know entrepreneurs, who are taking what was designed as an office building and some of it is older product in fact, a lot of its older product and repurchasing it into.
What they hope will be a successful life science project and that that's a difficult road to go down I know the ceiling heights capacities of the mechanical and HPC systems et cetera create a lot of.
Problems and modern life science companies.
One and can afford the best state of the art facilities and so the other thing I'd say is where we're seeing conversions.
They are typically not in the prime markets, where we operate and you know Seattle.
South San Francisco or San Diego So.
It's definitely a trend I mean life science every everyone is talking about life science across the board across the spectrum.
But again I think conversions are a pretty difficult different product class then.
You know a prime life Science project like Kilroy, Sharepoint or our portfolio in San Diego.
That's helpful and I don't know if John the still on but clearly he touched on that you guys need to move into San Francisco After the financial crisis and have been opportunistic in the past and you clearly have talking this cycle about maybe bringing your act to another market and it seems like maybe your expertise.
Life Science would be one area, where you could where that would translate into other markets I'm just curious.
Now given the lack of distress so far I know, it's been tough but is this on the radar as as a potential as you know this pandemic continues to unfold and maybe break free some opportunities that we could see you guys enter a new market for life science specifically.
John if you come back.
No well, everyone you cover that Hey, Craig its Elliot trencher.
Yes, I'd say that is on our radar screen.
We like the life science business, and we're prepared to grow into it if we see the right opportunity, but similar to what happened last cycle, where we didn't make our first acquisition until 2010, and we're going to be patient and so I think that we're going to look at everything and move when when we.
Think it's appropriate.
Thank you Elliot and then just one last one any.
Any changes to yields on on your resi projects that are under development just given the softening in the in the resi market.
Yeah ill take that one again I think it's fair to say that rents are down a little bit from earlier. This year for sure. So note that I think thats a reasonable assumption on your part.
Awesome. Thank you.
Our next question comes from Jamie Feldman with Bank of America. Please Jamie go ahead.
Thank you. Thank you said early in your comments, there's some pretty large deals floating around some of the markets can you just provide some more color on.
Just the size of those markets.
Even the timing.
This would actually do something.
Sure Jamie This is Rob how are you.
You know starting with Seattle over the last 45 days, there's just been a tremendous amount of activity up in that market in general.
You know Facebook, Google Amazon have all taken space and in 2020 during this pandemic.
And specific examples are that have been published or Facebook buying.
The Ari I buildings in eastern Bellevue.
At a really healthy cap rate or implied cap rate.
The Amazon has signed a 2 million square foot lease in Bellevue.
And there's been some other renewal activity that gives US you know a very positive view on the.
Bellevue market.
In San Francisco, as we've said as San Francisco's had the most restrictive shutdown of any city in the U.S. and we're just starting to see the 25% return to work.
The Shining Star has been life science and I won't go beyond what John said, which is that we have interest that exceeds the amount of space we have in phase two.
I do wish to point and you know we're in active discussions with a variety of companies that.
Have me feeling very optimistic about that phase as well as just the.
Office market for the life science market we're in.
You know extra point.
The other two markets that I would say have had a lot of activity or Hollywood.
And Culver City.
Net flicks, and Amazon and Apple and the other companies that are there.
Has looked at expansions in fact that flexes expanded by about 300000 feet.
Between Hollywood and between Burbank.
Recently, so you know that's a that's a bellwether for those two submarkets. The last thing there has been some expansion on the west side to Facebook took about 85000 feet on the west side, plus Playa Vista.
And then San Diego has as we've said before really come onto its own weve seen apple in our portfolio extend down there.
Large tech has discovered San Diego and there's a lot of promising.
Interest and activity I would say that's happening there and the last thing I'd say about you know San Diego like South San Francisco extremely tight life science market and a lot of demand from life science companies.
In the life science segments of the market in San Diego.
Okay. That's helpful.
And then I wanted to get your thoughts on the Dropbox announcement for the Dropbox Studios layout and I'm just curious.
Does that change how you would be designing buildings going forward and I just want to get your reaction in terms of does that something you think more tenants will be doing going forward.
Hi, This is John on the call.
I don't want to step over Jon if he's he's on all you know I think Jamie a lot of companies are experimenting right now and you know the headlines reflect that three or four months ago. It was you know people announcing permanent work from home and and even those companies that have announced it a dial that back and what companies are.
Really looking to do now is figure out how to adapt at work space to be.
Tech companies have always been flexible with their employees they've never told them you have to work in a specific market. So even before the pandemic if a Google employee wanted to work in Austin put his hand up or her hand up the company would accommodate that so flexibilities always been a key and so with these companies are trying to do.
This figure out how to make the workspace a safe even with a a vaccine, but b how to make it even more productive Microsoft.
Microsoft's CEO selection Mandela has had a lot of quotes and articles written about him in terms of his concern with the whole work from home.
Phenomenon and what it's doing which is you know burning out people are working more hours he's concerned about productivity and so what they're doing with their workspace is looking at how to.
Enhance the social capital as he puts it that they spent so much time building in hiring people so to get specific it's probably more.
Areas on a floor, where there's more congregating and collaboration type space as opposed to hard fixed benches or been a lot of great studies done by gensler.
Who's looking at this globally and some of the other three agreements the maximum time permitted for recording your message if you're satisfied with your message with one to listen to your message press to kill me race and re record Prince Street.
[laughter], sorry, I guess exceeded my time there.
Anyway.
Yeah.
[laughter] picks up the operator was tired of hearing me talk.
But anyway, I think I think you're going to see a lot of adaptation in how office space is used and how companies bring people back and you know there's going to be flexibility. So we know for a fact teams that are working on a product are going to need to come into the office certain days or certain months and.
How does that get accommodated when you have a team that may be global coming to a central location and so a studio concept again I think it's an that it it's almost moving toward more of a hospitality sort of lay out as opposed to as I said earlier, just hard fixed work, you know workstations or benches.
And do you think the design exchange lends itself to that or.
I do.
I do I think one of the hallmarks of the exchange like flower Mart or the large floor plates and that's what you really need to accommodate what I'm talking about is a large floor plate ware. If you have 70000 feet you can.
You can segment that floor into different functions and as they as the architects refer to a different neighborhoods. So different things are happening in that space.
And it may be different departments that are working in those different segments or maybe again a team that's working on software or trying to hack you know a database or what have you.
It takes collaboration and complex problem solving and how does that work and flow. So you're not you know truly segmenting the space with hard walls here, you're making a space that again kind of fits more into the house to tell you.
Arena and the Best example, I can use its how you've seen hotel lobbies modified to become gathering and meeting areas as opposed to you just check in.
Okay Alright.
All right great. Thanks sounds like we'll be talking about this for a long time I appreciate your thoughts.
Sure.
And just as an aside John is trying to get back on the call, but for some technical reason a cancer, we'll just keep going and hopefully we'll get him back on as soon as possible.
Operator keep going up.
Yeah sure. Thank you.
Our next question comes from Blaine Heck with Wells Fargo. Please brain go ahead.
I agree thanks, probably for Rob or John if he comes back so clearly there hasn't been a lot of leasing going on but I'm wondering if you guys can give us any sense of how much you think net effective rents have declined from pre pandemic levels in each of your markets and and what the impact of sublease space have been.
On asking rents, especially in San Francisco in L.A., where are you guys have the majority of your expirations next year.
Hi, Blaine.
This is Rob again.
No the problem with net effective rents and pinpointing, where they are today is that there's just not enough data. There just are no data points are been very few.
Isolated new leases done during this time, particularly in the last three to four months and as John said earlier in his comments.
It's just it's just extremely tough too.
To get things done because you're not able to be face to face. The you know specifically in San Francisco, What I'd say is if you look at the renewals that have been done recently say in the last four to five months Goldman Sachs exercising an option to renew at 555, California at over 117.
Dollars a foot fully service is an indicator of.
The fact that trophy buildings in great locations with tenants that need to be there or not having that precipitous rent crop and sublease space always.
Is trading at a discount and if you're a company and Youve got everybody working from home under lease expires in the next year or two.
It probably makes sense to go fishing and see if you can sublease space to mitigate some of your losses, but.
Or you're you're.
Offset your rental expense, but I always look at sub lease space, whether it's in Seattle or any of our markets and lets just focus in on San Francisco and segmented I mean, you you know the number right now that's reported this about six and a half million feet, it's probably more like seven.
But if you really look at that it break that down 80% of that is located in the financial district in mid market area, San Francisco half of the sublease space in the market expires in 2023. So if you are leasing space as a tenant you decided to put space on the market with a 23 expiration date.
There's no way you can compete with direct space or even long term sublease space, you're going to have to significantly discount that space and what I think we'll see with some of that short term sublease space is that it will become flex space as companies do start bringing people back and affecting so.
Distancing in their space layouts, they may need to take and we've heard.
Actually participated in some conversations on just that fact, so again I think you really need to look at where.
You know there's the headline number and then there's really how do you segment, the sublease space, but it's no doubt something we we keep a very close eye on we keep a close eye on it with respect to our tenants, but also what's going on in the market and the last thing I'd say about our.
Our kilroy portfolio is we really have very little space to.
Police on a direct basis, we've only got 6% roll.
Through 2023, with the largest being 60000 feet.
That's portfolio wide so.
Again hard to pinpoint your question direct rent a net effective rents and I think sublease space, especially depending on the type of it this.
This is going to be all over the map in terms of.
You know where things get done.
Okay, great Rob Thanks in Tyler just looking at same store cash NOI for the quarter it.
It seems as though the reduction in expenses was the major driver of the positive result, so I just wanted to ask if all of that expense reduction was related to lower utilization in your office buildings or whether there were any other expense savings that you think could carry forward and kind of a more normal environment.
Yeah actually you know the reason it wasn't totally related expenses in fact, not not hardly at all because if you noted tenant reimbursements were down by approximately the same amount. So we just didn't recover.
The offset of that so it wasn't really related to expenses as much of that was related to higher rents and burn off of free rent. So.
Wouldn't there is less occupancy in the buildings and so we are having with expenses, but we're not benefiting from that as much.
As we are benefiting from the higher rent.
Got it thanks.
John are you back.
Oh, okay.
Our Tyler Tigerman comps Oh, Yeah, now we can hear you.
Hey, sorry, everybody I've been I've heard more classical music and been very frustrated because I've connected now the fourth time, ER and I can hear everybody, but nobody could hear me until this moment. So I do apologize. This is a good reflection of work from home.
[laughter].
Okay, operator keep going.
Okay. Thanks.
Next question comes from John Kim with BMO. Please John go ahead.
Thanks, Good morning.
But given your comments on site.
Yeah.
And in particular are you do you have an updated views on whether or not flower Mart could be developed as a lifetime thats. It.
Well sure I mean, so can.
You know and I don't know that it would make sense or not we'll see but it's interesting everybody's on the bandwagon as Rob said about life science and we've if anybody knows where Richmond is in the Bay area. It's on the east side.
The northeast is kind of the north and east side of Moran ER and it is the were seeing Interoil has the big refinery and they pay all the citizens that live there are several thousand dollars a year because of the health concerns and there's a two old malls.
That failed and they are now being marketed as life science projects that could accommodate several million square feet, you can call a a donkey a horse, but it doesn't make a horse.
And I think what we're seeing right now is everybody is trying to say life Sciences Hot So let's say a this try to convert everything let's try to re designated every property and every state here and everywhere.
Life Science, you're going to hear a lot of that in a lot of it's just total nonsense.
With regard to the flower Mart sure we could do that I don't I don't know that life science wants to be there, but we certainly good.
In your brief absent on the call Elliot mentioned that you may be looking enter other biotech markets.
And I'm wondering if the main rationale for that is that it would provide you some operational advantages to have a more of a a national AD Tech platform.
Or do you see developing opportunities on east coast that are as attractive as the west coast.
You know I'd like to answer that but I'm not going to because as you know everybody that Sun life science is going to be listening to what we have to say and I'm not going to talk about any strategic thoughts that we have but know that we are focused on life science. We are focused on looking at we have.
When looking for a number of years it a couple of different markets.
I don't want to be buying at the top of the market.
Unless we believe rents are going to go up substantially and so forth that I want to make sure that if we move into a market that we can have the scale that allows us to do the kind of the things that we do at Kilroy, well, Oh, which requires you know talented people and requires as they say the scale or can make that happen so more to come nothing eminent.
But we're very focused.
And then John did that Mike just to set the record record straight I I don't think the Elliott said that we're actively looking at other markets, but to be clear I think I said, yeah, I mean, the largest correcting the joint globally when I say when I say actively I mean, we are active in evaluating other markets we are not.
Active in executing any strategy for another market.
Right.
That makes sense, Okay, and then Tyler you mentioned the $75 million asset sale I was wondering if you could provide any color on the sale whether or not it was a non core asset or did you just find.
Operative opportunistic pricing and if you can give any guidance on the cap rate expectation on sale.
Yeah, and I think we've come in a little bit about it I mean, it was a pretty covered or marketing process that.
That was started back in earlier this year.
I think John said it was around $900 a foot transaction, we're not going to comment and we haven't closed yet we're still under confidentiality, we hope to close here in the next month or so and we can provide more details but were prevented from talking too much about the transaction until it closes.
Okay. Thank you.
Our next question comes from on the Tiotwo Sonya with Mizuho. Please on the prior you May proceed.
Hi, Yes, good morning to you all over there on the West Coast, John just want to you quite a few polls out there just in regards to prop 13, but the one you just mentioned as the first one I've ever heard of that.
That has Ah, yes votes out behind the mills, So I'm just curious.
If it starts off a little bit about that whole that in kind of a number of holes ties that were involved in it and why you have more confidence that one versus some of the other polls that have kind of the profit impact.
Well bill because most of the polls are or are slanted and I don't think accurate. The the groups that were working with have had historically the most accurate polls on these issues and that's the date I'm looking at I can't tell you what exactly the names of them are but.
We it's close race for sure.
And this demonstrates in California, just how screwed up it is because we have a heavily biased.
State government, it's all Democrat Democratic Governor Democratic Surety General Democrat or Senate Democrat or Assembly.
And they had gone out with a a description of prop 15 that is remarkable ladies color as to how it was approved by the attorney General add it misled people and so if you read that you know it sort of sounds good sounds.
Like 40% is going to go to schools. So.
Some other percentage is going to go to government, but when asked the question.
Of the schools and the government is this money going to the pension funds the unsustainable pension funds or is it going to the classroom. They will not answer what does that tell you and its people learn more about that it has changed so there is a lot of.
The struggle that a lot of us have that are fighting. These things is that we're fighting what I consider to be a fairly corrupt machine.
This information to the voters and we see that same kind of thing on both sides with regard to the national election. So the polls are also.
Our mid heats up many times biased I'm not a pollster. So I can't go much further than that but we have seen this major shift it's close but we're seeing again almost every week.
And so I'm cautiously optimistic.
Probably 15 or.
We'll get defeated.
Cautiously helpfulness [laughter] I hate politicians, I guess I just tell you right now they are that we know we know [laughter] [laughter]. Thanks Scott.
Yeah, you're welcome.
Our next question comes from Danielle Ismail with Green Street. Please.
Please Daniel go ahead.
Great. Thank you John I wanted to revisit the comments you mentioned about productivity being down for those firms are working from home I'm in your discussions with tenants are you noticing any distinctions among industries, so larger or smaller firms or geographies, where you're noticing more of those.
Uncertainty regarding productivity come up.
Well I mean to think about it I actually if you're in the production business and entertainment. So forth. If you can't go to work your your shoes, you're not getting much done or if you're a lot of the big Tech and so forth that Rob was mentioning what we're hearing there is a productivity is way off.
And as Rob mentioned with regard to the to the CEO of Microsoft has been very outspoken with regard to the sort of the social capital issue and whatnot, if you're a small company say your group of consultants and your you know I'll just make it up you're hearing 8000 feet and you've got you know I don't know how many.
Poise 20 or something.
And you basically on the telephone talking to people and doing things with a computer you probably can do that from home pretty well.
Ah so there's going to be different for different kinds of companies and whatnot.
I have I got to tell you a little story, we've got a woman who runs that works for us and San Diego and choose the executive and senior husband had remodeled or house and they were there with their children their dogs and all the rest and thinking this was just really wonderful a couple of months in gosh I'd like to work from home from ever after about three or four months past she find.
I could get back to the office, because San Diego opened a little bit earlier with regard to the percentage you could get in and her thing is I never want to work from home again as long as I live I can't I had there's no separation between work and home life, you're always on demand with everybody. Your kids are in zoom. Your dogs are barking your husband.
You are you have nothing else to say so there I think that the anthropologist you're going to have a really interesting time, Oh 10, 20 years from now looking back at this period and I I would imagine it's going to be pretty shocking with regard to some of the damage to people.
Socially or kids, particularly but also executives if you look at it in the statistics and I'm not again, I'm, giving you kinda directional I don't know the exact numbers, but I was told by the head of the psychiatric department or biggest.
Our medical centers in the country. The divorces are up 34% that that drug use is way up alcoholism is way up suicide is way up. These are all manifestations of people just being miserably unhappy and and I think that there is some kind of pollyannish thing that everybody can work from home and its Kumar.
Or is.
It was insane.
Yeah.
Great and then just a quick follow up on the long Beach exploration at any update there in terms of backfilling that space or or or long term plans for that property.
Hi, Daniel it's Rob Paratte, so with regard to.
What we're doing at the property, we're doing Oh, what I would call a medium refresh just some landscaping lobbies updating that sort of thing.
And specifically with respect to the vacancy I don't want to get into.
A lot of detailed because we have some discussions going on but I was on a call yesterday with a very good credit company that we've been talking to and.
They are you know, bringing our transaction to their executive team.
At the end of November and were feeling fairly good about our prospects there. So they wouldn't take all the space, but it's just an example of the.
Demand, we have there and you know the problem is it's just taking it's taking a long time because people want it back to John's point and my question about productivity. It takes twice as long to get people on a phone and on a zoom call and talk through.
No do we renew do we move what's it cost and getting all the different teams that have been put to that decision.
Together on a call so.
I personally feel good about the prospects in long Beach, it's the best in class asset.
In that Submarket, and it's perfectly situated between la and Orange County, and that's why the tenant roster. We have is what it is which is a lot of.
Very strong national companies that have regional offices salespeople that sort of thing locating there.
Great. Thanks, everyone.
This concludes our question and answer session I would like to turn the conference back over to Tyler Rose for any closing remarks, please mr. Tyler.
Thank you for joining us today, we appreciate your continuing interest in care, they and we wish you all remain healthy and say goodbye.
The conference has now concluded. Thank you all pertaining to today's presentation you may now disconnect.
[music].
[noise] [noise].
[music].
[music].
HM.
[noise].
[noise].
[noise] [noise].
[music].
[noise].