Q4 2020 Kilroy Realty Corp Earnings Call
[music].
Good afternoon, everyone and welcome to the Q4 2020, Kilroy Realty Corp earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions John.
Ask a question you May press Star and then one withdraw.
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Please also note that todays event is being recorded.
At this time I'd like to turn the conference call over to Matt to.
Michelle Noh CFO Ma'am. Please go ahead.
Thank you.
Good morning, everyone. Thank you for joining us on the call with me today are John Kilroy, Tyler Rose rock price and Eliott trencher.
At the outset I need to say that some of the information we will be discussing is forward looking in nature.
Please refer to our supplemental package for a statement regarding the forward looking information on this call and in the supplemental.
This call is being 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 SEC and both are also available on our website.
John will start the call with a review of 2020 business conditions in our markets and our objectives for 2021.
I will discuss fourth quarter financial results and provide you with an earnings roadmap for this year.
Then we'll be happy to take your questions.
We are once again, calling in from different locations. So bear with us if there are any delays in our responses.
John.
Thanks, Michelle and welcome to your first call as our new CFO. Congratulations Hello, everybody. Thank you for joining US today I hope everyone is safe and healthy and has a brighter outlook for 2021.
Let me start with a few comments about 2020, we entered the year at a very strong position leasing activity was solid rents were increasing tenants are expanding and we had expectations of another record year.
And while the pandemic up ended our lives in the markets. We think our 2020 performance was very strong all things considered.
We moved swiftly to further strengthen our balance sheet, we work with our tenants and workforce to adopt healthy and safety protocols, we executed to our current development program largely on schedule and on budget, we delivered solid financial results and raised our dividend and.
And we achieve carbon neutral operations, a key pillar of our ESG program.
Now in month two of 2021, we are seeing a number of signs of renewed positivity, which we will balance with discipline as we continue to differentiate trc as best in class and a market leader within our industry, Let me review, where we stand today.
We have a solid balance sheet, we ended the fourth quarter with liquidity of approximately $1.5 billion and net debt to EBITA of five eight times, our under construction development remains largely leased and fully funded with cash on hand.
We have a world class tenant base supporting our stabilized portfolio results, our average portfolio wide rent collection across 2020 exceeded 97% with office and life Science rent collection at 99% many of our Tech media and life science tenants, including some of the largest and most successful companies in.
The world continue to grow last year and remains stronger than ever our lease explorations are limited they averaged six 3% per year through 2025, and our portfolio was 94, 3% leased despite shelter in place restrictions, we signed more than 730000 square feet of.
New or renewal leases in 2020 with strong average rental rates that were up 37% on a GAAP basis and 18% on a cash basis.
Our development projects under construction are delivering substantial cash flow and value, we completed core and shell construction on $1 3 billion of office space and 371 residential units in 2020, including in the fourth quarter completion of our $300 million Netflix on volume project.
By year end 2021, we expect to complete an additional $770 million of office and life Science space and 193 residential units at that point, our development program. Excluding 2100, kettner, we'll be generating an estimated $140 million of annualized cash NOI.
And our approximately $2 billion investment in these projects is expected to yield more than seven 5% on a cash basis across office and life science based on market cap rates, we think we've created significant value.
Our future development pipeline is diversified by market by product by start schedule and even by industry and it has an attractive basis, our pipeline of projects aggregating approximately 6 million square feet of which approximately 40% as life science spans the most innovation driven and.
Tractive Submarkets, along the west coast, including Seattle, San Francisco, South San Francisco, Los Angeles, and San Diego, We continue to make great progress on entitlements positioning these projects for future starts when conditions makes sense.
Particular note we are fully entitled for an additional 2 million square feet of Kilroy, Oyster point and the city of South San Francisco and continue to see strong interest from potential tenants.
Phase III start this year is a strong possibility based on our ongoing discussions with multiple prospective tenants phase to total approximately 900000 square feet across three buildings and can be developed in phases. The incremental investment for phase two would be approximately 700.
$50 million with an estimated spend of approximately $275 million through the end of 2022.
We remain committed to a prudent capital recycling program as integral part of our core business strategy, we completed $76 million of dispositions in the fourth quarter and realized a gain of approximately $36 million.
Despite the issues created by the pandemic, we increased our dividend for the fifth year in a row, bringing the cumulative five year increase to over 40%.
We were one of only two office rates to increase its dividend last year. Lastly, we continue to build on our strong leadership role in ESG, we achieve carbon neutral operations last year multiple decades ahead of both California, and federal standards and continued to advance our leadership in the design of <unk>.
<unk> are sustainable and healthy workplaces.
We've been recognized year after year by many industry groups across the world, including <unk>, B, which is ranked US leading office developer globally, and leading office come in the Americas across all asset classes for the past seven years. We have won the EPA is highest honor of energy star.
Partner of the years, saying a sustained excellence award for the past five years and NAREIT leader in the Light award for the past seven years. We are included in the Dow Jones sustainability World Index in the Bloomberg gender equality index, and we have the largest fit well portfolio in the world among non government organizations.
<unk>, while we are proud of our accomplishments, we will continue to look for new and better ways to foster a diverse and inclusive work environment engage our communities and minimize the environmental impact.
Switching gears I'd.
I'd like to comment on the current business environment and the implications on our company on strategy first we believe companies and employees want to return to work Rob's going to talk about this further in our report based on our discussions with tenants companies are focused on bringing their employees back together and productive common word.
Spaces, where they can collaborate in person.
In the short term companies will adjust their space to address heightened health and safety concerns delek.
They will exert more active control over work space access and layout.
They will have heightened expectations about the quality of ventilation systems.
They will seek ways to give their employees more access to natural light fresh air and personal space longer term. We expect these tenant preferences will get incorporated into the commercial real estate landscape and will help reshape property design standards for operational systems and management practices for the largest and most influential.
Tenants generic office space is a non starter they will require environments tailored to their specific needs. These trends all favor our young and modern portfolio our development experience our track record of partnership with innovative and creative companies and our demonstrated ability to adapt.
Second the economic demand drivers continue to be technology media and life science companies, most of whom remain headquartered in or committed to the west coast public market returns to VC funding for tech healthcare and biotech has surpassed other industries by more than two times over the past decade.
Further they have demonstrated the range and depth of their value throughout the pandemic and they derive huge benefits from clustering in locations that support their constant need for talent capital and exposure to new ideas. These industry clusters are in the west coast markets the pandemic experience.
Brought new thinking about how and where people can work companies.
Companies may be more willing to experiment with diversifying their workspace location and densities, but the speed scale and growth for these innovation driven industries will drive strong demand for workspace and multiple competing markets.
We believe the west coast with the Central actual capital World Class universities, and research institutions and unique quality of life will continue to win that competition specifically.
Specifically, we believe life science industry represents a huge opportunity for our company. The pandemic has highlighted how critically important.
Total innovation is to our economy and.
<unk> health the attention is now driving big increases in private and public investments the growing demand for quality lab in workspace and preferred West Coast Life Science, Submarkets has driven vacancy rates to 2% or lower.
We've been building the capabilities to serve life science tenants for more than two decades, and we are now on a strong position to capitalize on additional opportunities.
We currently have the third largest portfolio of life science and healthcare tenants among publicly traded Reits approximately 14% of our total base rent.
And pro forma for the development of the entirety of our life science and healthcare tenant base will roughly double in size.
Third from a political landscape most state and local governments on the West coast remain focused on managing the negative impact of the Corona virus is a virus is controlled we expect them to move quickly to restore the economic health and a highly value quality of life of their major urban centers, we plan to.
Take an active role on that work.
We fought hard along with others to stop the destructive economic impact of proposition 15 here in California.
We will be just as active going forward and supporting business friendly initiatives for civic recovery and pushing back against destructive ones.
Lastly, having operated through multiple cycles. We believe we are unique uniquely qualified to navigate through this downturn given our track record of unlocking value in our ability to adapt last cycle. We believe we set ourselves apart from the competition through our entry into the San Francisco and Seattle markets, where we.
<unk> early on tenants preferences for inspiring and collaborative workplaces are strong growth drivers of office demand than in 2018, we were deliberate in increasing our life science footprint in a meaningful way with the acquisition of Kilroy Oyster point land.
We are focused on differentiating ourselves again this cycle bolstered by a strong balance sheet and an experienced team and a high quality portfolio.
Let me close with our five key objectives for 2021, one maintaining a strong financial foundation with sufficient liquidity that allows us to play defense and offense.
To maximizing the value in our operating portfolio throughout through proactively managing lease expirations and boosting sustainability and wellness profiles.
Three completing the leasing completing and leasing on our remaining under construction development projects and preparing for new development starts as they makes sense, including <unk> phase III.
For staying agile and continuing to evaluate our capital allocation opportunities and strategies.
Fifth and final working with government agencies to positively influence public positive policy.
All of US here at Cara CRA energized we're.
We're ready to tackle this new year. We appreciate the many challenges and uncertainties that lie ahead of us it will likely be a tough transitional period, but we have never been better positioned to take on the year's challenges and opportunities. We're financially strong operationally sound and prepared to act decisively as <unk>.
Vince unfold that completes my remarks, now I'll turn the call over to Michelle Michelle.
Thank you John.
<unk> was <unk> 95 per share in the fourth quarter and $3 71 for the year throughout 2000 20-F, a final benefited from the growing contribution of our current development pipeline as well as higher rents across our stabilized portfolio.
These benefits were offset by one time charges revenue reductions related to our assessment of tenant credit and Collectability on Frank as well as lower parking revenues as a result of the COVID-19 pandemic.
Fourth quarter <unk> benefited from the revenue commencement of our Netflix on Vine project in November.
Offsetting debt <unk> included six five cents of extraordinary items comprised of a net <unk> <unk> per share of COVID-19 charges, primarily driven by co working advertising and residential tenant credit assessments and three five.
15 expense.
Turning to same store operating results cash same store NOI increased three 9% in the fourth quarter and eight 3% for the year largely due to high higher rental revenues driven by the commencement of and burn off of free rent from several large San Francisco leases.
GAAP same store NOI declined two 3% in the quarter and one 4% for the year.
Excluding the COVID-19 related net charges GAAP same store NOI would have been positive 6% in the fourth quarter and one 4% for the full year 2020.
At the end of the fourth quarter, our stabilized portfolio was 91, 2% occupied and 94, 3% lease.
The occupancy and percentage lease decline of a 100 basis points from the third quarter was primarily attributable to the 136000 square foot exploration and the long Beach sub market, which we previously discussed on prior calls.
Overall rent collection in the fourth quarter exceeded 96% with office and life Science rent collection north of 98%.
These strong rent collection levels have remained consistently consistent across the 10 months of the pandemic as our well capitalized technology life Science and media tenant base continues to outperform.
Including the disposition John mentioned, our liquidity today stands at approximately $1 5 billion, including approximately $700 million in cash.
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For the year.
We estimate that our G&A will be in a range of 82 million to 86 million per the year.
NOI margin is expected to be in line with our historical average ranging between 70 and 71%.
With respect to our retail portfolio, we extended the rent relief program, which included approximately 90% of our retail tenants through the end of February.
This has a minor earnings impact and from a cash perspective, one months of rent deferral for these tenants is approximately $1 5 million.
Non contractual parking income totals approximately $1 5 million of NOI per month, we expect to receive about a third of this amount until businesses resume more normal operations.
With respect to lease expirations, we have approximately 450000 square feet of expirations remaining to be leased this year with only two leases that are greater than 50000 square feet expiring in the third quarter.
Additionally, we are currently in discussions with a tenant and the la region that had an option to terminate up to 150000 square feet in 2022.
It did not validly exercise its option.
To come on this.
We expect to commence revenue recognition for the following office and life science projects within the following time frame.
At $94 55, Towne Centre drive, we expect revenue commencement on 100% of the project by the end of the first quarter.
At one Paseo office, we expect revenue commencement on the remaining one third of the project by September.
At 383, Dexter, we expect the remaining 51% of the 635000 square foot project to come on line in the fourth quarter.
And on <unk> phase one we expect revenue commencement on the entirety of the 656000 square foot project by December.
With respect to <unk>, our living on Vine residential project of 193 units, we expect completion and delivery in the spring.
Due to COVID-19 restrictions, we expect relatively modest leasing this year.
At one Paseo residential we expect the project to be between 75% to 80% leased by year end.
And lastly, we anticipate development spending of $275 million to $350 million on our projects under construction and the high end could increase to $450 million. If we start <unk> phase two.
That completes my remarks, now we'll be happy to take your questions on.
Operator.
Ladies and gentlemen at this time well begin the question and answer session.
To ask a question you May press Star then one to withdraw your question as you May Press Star two.
If you are using a speaker phone we do ask you. Please pick up the handset before pressing the keys to ensure the best sound quality.
Once again that is star and then one to ask a question.
Our first question today comes from.
Annual Korchman from Citi. Please go ahead with your question.
Hey, everyone.
Michelle and Elliot Congrats congratulations on your promotions.
Elliot one for you you are taking more active role on the sort of investment pipeline. What types of deals are you most focused on and sort of what time are you guys thinking about as you make those investments.
Share many happy to take that I think strategically not much is going to change I mean, we're going to continue to focus on deals that fit our profile and John talks about a lot the circle square and triangle, we're going to continue to follow that right. It's got to be well located it's got to have the.
<unk> phones, and the right physicality and the math has to make sense. So we think that if it's not broke don't fix it and what we've been doing from a capital allocation perspective has been.
Pretty good and we're going to keep doing it that way.
Great and then Michelle you mentioned.
Debt Directv is.
So our desire to terminate part of their lease.
And I think you mentioned that you're in discussions with them I guess the question Mark was what changed.
Them that they all have a decided to state when previously they they've made then pressure on us they were going to start.
Yeah, Rob do you want to handle that share how're you doing Manny this is rob per rep.
We've had discussions with them over the past two or three years and they or their business. This is really a directv entity, but after AT&T acquired Directv they've had multi.
Multiple scenarios for <unk>.
In fact, growing and contracting and then staying stable.
And so I don't want to get into a lot of the discussion about what we're doing with them, but we are.
Engaged with them and we will report when we have more clarity on what the outcome is going to be but.
It's basically been driven by their business needs changing over time.
Great. Thanks Al.
Our next question comes from Nick <unk> from Scotiabank. Please go ahead with your question.
Okay. Thank you I guess first question was just on.
Not the decision to not provide guidance maybe you can just.
You'll walk us through a little bit on the on the thought process and then Michele I know you didn't give a lot of components I'm, sorry, I think you were cutting up a little bit or maybe it was my phone but.
I don't know if you if you did give any.
Range to think about in terms of occupancy.
Year end, how to think about that in sort of the same store portfolio.
And I guess also on the lease expirations, how we should think about and your confidence in getting re leasing done this year the fourth quarter volume what did look a little bit light on that front.
Yeah.
Okay.
Okay.
And Michele.
Michelle.
This is John we can hear you its like Youre cutting out every other word.
I'm the only one I think Nick mentioned that I don't know whether you can hear me clearly, but you've got a problem on your end on broadcast.
Okay, Yeah, it looks like our line is choppy.
It's better now.
Okay, Nick I heard the first two.
Two parts of your question I'll take the.
The guidance piece with respect to occupancy and same store and Tyler can provide a little bit more color on.
While we chose not to provide guidance I think with respect to the occupancy range did not include that in my prepared remarks.
More to come.
<unk> as we get more visibility in terms of where the restrictions on COVID-19 goes.
But I think Directionally, we think occupancy should be higher in 2020, given all the development leasing that will come online towards the end of this year, we've got roughly 2 million square feet. That's coming on line. That's a 100% leased so I think hopefully that gives you a sense.
Where occupancies going and then we did not provide.
Same store.
NOI guidance either in more to comments, we get more visibility as we move through the year.
Yes. This is Tyler I think that from Charlotte said are the reason, we're not providing guidance, there's really nothing all that much has changed from last quarter, where we.
It Didnt see a lot of visibility to where things are going with some of our income in terms of parking income retail income.
Even residential income and were very solid on the office front, but.
Given that we're still on lockdown.
It's just a little too early we think to provide guidance hopefully we can do it next quarter.
But more to come on that.
Okay. Thanks.
Congrats on the promotion as everyone is well just one other question is.
On the leasing markets maybe.
Rob.
Date on.
What youre seeing in terms of tenant demand.
<unk> is picking up.
At all perhaps you can go through some of your markets and just I guess, a big picture, how we should think about.
<unk>.
Yeah.
Retaining tenants among the lease explorations this year versus.
Any sort of gut feel also about a rebound in new leasing activity for the portfolio. Thanks.
Hi, Nick.
I'll try to keep this to a brief answer but you asked a lot there.
I would say definitely that the overall market sentiment throughout our portfolio in the first months of 2021, which is really kind of just three weeks is significantly more positive.
If you start in Seattle and look at how the companies that have moved up there continue to hire.
Net tech job growth in 2020 was 6500, new jobs and Thats, a direct correlation to the fact that Seattle and Bellevue are becoming the cloud headquarters for the World. So you have Amazon Web services, Microsoft Google Cloud all of them have expanded all of them have continued to hire them.
Employees.
Microsoft which hit.
For many years, particularly in Bellevue retracted has actually renewed leases in the Bellevue area and has taken small amounts of space outside of the Redmond campus. So.
It's just a good indication that Bellevue and Seattle.
<unk> to have the.
The employee pool that employers are looking for in fact hiring in Seattle has outpaced hiring in Austin for Tech talent.
And that's based on Linkedin surveys that were recently done. So we continue to feel really good about the Pacific Northwest as you know our portfolio in Bellevue is.
Virtually leased and our Dexter project is completely leased so we're in really good shape and it's a market that we see.
Having a long term.
Improvement over time, just because of the share presence and size of the tech companies that are.
In the market.
In San Francisco.
We have San Francisco has been more shut down than any city in the country and more shut down longer than any city in the country.
We have had more tour activity in January than we had.
In March and April combined.
Worried about 70% right now in January so far of tour activity pre COVID-19. So theres definitely a pickup two phenomenon that are happening as that of the sublease space Thats on the market that is long term.
Brokers and this is through multiple brokerage houses are projecting that that sublease space. One example would be Macy's dot com, there's others out there that are large will be absorbed.
In this year in 2021.
The second trend is that again 19000, new jobs by the five largest public.
Public companies that are headquartered in the Bay area has been added between Q2, 'twenty and Q4, 'twenty and if you just use sort of a rough.
Depending on what your density number is per employee that equates to about $4.
Seven 5 million square feet and I, just I just have to say I just I don't think all of those people are going to be working at home 24, 7% is going to have a positive impact on the on the office market.
Skipping to la in the Bay area.
Actually don't let me leave the Bay area.
Life Sciences is a force to be reckoned with it continues to be the most dynamic.
In terms of activity and what we see going on there is no very limited supply I mean, really biomed and their gateway or the specific project is going to be the only shell on core complete project by the end of this year I'll give you just a quick analogy there was a company in Hayward, which is in the East Bay.
Life Science company came out of nowhere signed 109000 square foot lease in Sierra point in December.
And that literally came out of nowhere they had the choice to wait for the.
The biomass project, but they ended up taking share a point, which we think is a secondary market to oyster point, just so they could lock in space. So I think it gives you a flavor of the robust nature of the life science market and what's going on there.
And one other piece of color I'd give you if you look at life science in the Bay area. There are about a dozen life science biotech companies and mission Bay in San Francisco.
There are over 180 of those companies in South San Francisco. So, it's just a very vibrant growing market and we're really happy about that.
Los Angeles has been right up there with San Francisco in terms of.
Shut down and very restrictive shutdown, but I think a really good bellwether indicator is that restaurant activity and interest and we have a couple of restaurants that are vacant has picked up we had no activity whatsoever in 'twenty I mean, a couple of inquiries, but now we have conversations on paper.
Being exchanged in Los Angeles, as well as San Diego on vacant retail that we have.
And as we've said on previous calls.
Really the sweet spot in Los Angeles, or three markets Culver City, Hollywood, Burbank, and Thats, where the production is happening that's where the employees are.
I think youre going to see a continued trend of employees and employers seeking out space.
Of the 405 freeway for the reasons I just cited.
<unk> access housing talent and where the employers are base. So.
I think in general what these markets I've talked about so far youre just going to see this we're in a transitional period right now and it's.
It's the sentiment in the markets is that.
People are feeling better about it and and sublease space will be absorbed and things will start to slowly improve.
San Diego All finished quickly again very robust life science market, you've also got it compounded by Amazon and Apple both competing for would've been life science space with life Science companies.
So areas like UTC del Mar, where we operate.
We're really benefiting from that demand so.
Again, it's a transitional year I don't want to be overly optimistic there is we have a ways to go right. We have to get that vaccine out into People's arms, but it's feeling.
Hundred percent better than it did.
March or April or May of last year.
Okay, great. Thanks, Thank you.
Our next question comes from Craig Mailman from Keybanc Capital markets. Please go ahead with your question.
Everyone I just wanted to circle back on the Directv.
Michelle I think you said 2022 would be the termination can you just kind of give a little bit of details about their their termination option and also outside of Directv, maybe any other top 15 tenants with near term.
Early exploration options that we should have on the radar.
Yeah, Hi, Greg We're limited in terms of what we can say on Directv at this time.
But I said that they have a contraction option at the end of 2020.
At the end of 2020 with.
The effective date.
<unk> early in January of 2022 for up to 150000 square feet and with respect to our top 15 tenants. There are no other material contraction options associated with any of those tenants.
Okay. That's helpful.
And then just on kind of maybe Directv, but in general in a Rob that was a really good overview on the leasing, but just a little bit on kind.
What your Mark to market is in the portfolio I know theres a lot of concern about net effective rents getting weak, but your mark to market some of which are pretty strong. So just your ability to absorb any potential weakness here in the near to medium term in your markets.
Yes.
I'll start this and Michel may want to want to jump in on it.
Craig I think again, if you look at what's happening in this transformational on the West coast, but I think it's going to happen across the country. There are there are companies that grew and they grew into b quality type buildings. They are still growing and theyre going to use this opportunity whether it's in San Francisco La the west coast or in New York.
To upgrade their facilities and that's what we're seeing happening and in fact, the example, I gave in San Francisco of tour activity and that sort of thing our debt. Very example, where a company there are growth companies Theyre NB product buildings. They can now take advantage of a product and.
We have the good fortune of being pretty leased up in San Francisco.
And what I think youre going to see is that institutional quality, great landlords with great product are going to hold their rates and youre seeing that already across the board with renewals not only with kilroy, but renewals.
The other trophy properties that are in the San Francisco financial District, where rates.
Renewal rates have been either at pre.
Pre COVID-19 rates or higher.
You may see landlords in those in that description I just gave the class a institutional class of landlord.
Increasing <unk> here and there but.
<unk>.
If we had a lot of space I think we'd feel comfortable keeping our rates, where they were pre COVID-19 given the quality of our portfolio.
Yeah, and on the lease explorations or on <unk>.
Mark to market rent on it.
Hard to peg where rents are at.
At this point, but.
We said there is limited explorations in 'twenty 'twenty, one and we think rents are roughly 20% below market.
That's helpful. Thanks.
And our next question comes from Steve <unk> from Evercore ISI. Please go ahead with your question.
Thanks, a bunch of my questions were asked already but maybe Michele I just wanted to make sure I understand you talked a little bit about the retail and some of the rent that you are not collecting I just want to know kind of in aggregate. When you sort of look at the Q4 results I am trying to really just get a kind of an aggregate number of how much rent you are.
Sure, maybe not collecting from office, but primarily retail tenants.
Debt are still kind of in your occupancy stats that maybe move to cash accounting so like what is not being recognized in.
In the P&L today that you may start to collect going forward.
Yes, So we said.
90, roughly 90% of our retail tenants are on the rent deferral program.
And roughly 70% of that program are already on a cash basis.
Does that answer your question Steve.
Well I mean I can follow up just looking for maybe a dollar figure just to kind of say 2 million 5 million $10 million I'm trying to kind of get a sense for those tenants sort of all come back.
What is the dollar amount that we should be thinking about maybe you won't get all of it back with sort of what's the growth potential.
Pick up that you might get up all of those tenants came back online and we're sort of paying rent again.
Okay.
Yes, I think we said in.
Michelle comments on one month of rent deferral for these tenants is approximately $1 $5, so from a quarter before $9 million.
Okay and anything on co working or is it really the issue really I guess.
Centered on just retail.
So on co working we had we didn't have a lot of co working going into the into the.
Crisis.
And we've taken most of our co working tenants to a cash basis already we're really just left with one co working tenant.
And on an immaterial amount if we did go to cash basis of around a penny for 2021. So we're in very good shape on the co working from.
Yes, Steve This is John and tighter you might comment on this the other component of rent that we're not collecting that we normally collect would be monthly and transient parking revenue.
The magnitude of that Tyler.
It's about $1 million on a half a month.
Okay.
Okay.
Great that's helpful and then I.
I know you said, it's kind of early lease termination is not really prevalent in the current portfolio today, but I'm. Just curious Rob is are things like that becoming any more prevalent in lease discussions I know I heard about one at least in New York and I'm. Just wondering if tenants are looking for more flexibility or are they trying to.
Some kind of early.
Early termination.
Claws into the leases to give them a little more flexibility.
It's an interesting question, Steve if you go back pre Covid.
Particularly with tech companies the reason that if they tried to negotiate.
Terminations and that sort of thing was because they were growing so quickly they were afraid of growing out of the premises they had.
And we haven't seen it comes up frankly in every negotiation is kind of in every cycle.
We had kilroy have had a good portion of resisting giving those sorts of.
The concessions primarily because we're also in a lot of what we've done is ground up development and it just doesn't pencil to.
Give a termination right.
Ground up development.
Got it.
Conversely also you do have discussions about options to grow in that sort of thing that happened as well. So it's not just always ratcheting down there is often more often than not discussion about okay. If we're taking a building what happens when we need more space, where can we grow that kind of thing.
Okay. That's it from me thanks.
And our next question comes from Derek Johnston from Deutsche Bank. Please go ahead with your question.
Hi, everyone. Thank you.
While many point towards San Fran is one of the weaker U S markets at this point.
There's still pretty well leased there but.
You had mentioned demand in sublet headwinds kind of remain.
More concerning to us as your la lease right now.
Now it only 88, 3% I think further declining in <unk> by 330 basis points.
And this is the weakest we've seen since we've been keeping track back to 2012. So I asked the question is what drove this quarter's big decline and what can you guys do to plug the hole on L. A.
You want to start.
I'll address the.
The vacancy in La we have in Hollywood space, That's about 75000 square feet. It's in Columbia Square, which is the preeminent class a project in Hollywood.
As I said with tech on every other company production companies have basically been on hold over 2020.
To just give some color we had little to no interest and we are also negotiating with a tenant that was in the space to terminate them but.
In 2020, we had little to no activity on that space and now we have.
Five different entities looking at either all of it or portions of it and Thats again thats come up in the last two to three months, so wherever their space and vacancy I guarantee it's been hampered by lack of availability of people to tour.
People not being comfortable touring if even if they can do to the pandemic and so it has really impacted law, but I feel given the growth and the demand that we see.
From the content producers and the strength of these companies.
I think we're going to be just fine.
And just a follow up on your question about the occupancy decline.
Largely it was driven by the long beach exploration that we've talked about and.
And that impacted both L. A on the overall portfolio obviously.
Okay. Thank you and next.
This is more big picture, but how is the work from home trends changed business leader decision, making and I'd say, especially for timing and fire tenants. We acknowledge life science has been a bright spot, but I'd say, we have a pretty good sense of the cyclical impacts of a recession on office Reits, but there does seem to be.
Some evidence of a work from home secular shift at play as well how do you view and could you address the possible impacts on what work from home secular risk on office space demand and net effective rents in your markets from what you can see at this time. Thank you.
Yeah.
Sure. This is Rob I'll address that again.
As I said earlier, when I was going through some of the hiring numbers. It's just it's just not possible with that many people are going to be working from home 24, 7%. There is there is and if you look at if you look at the Fang companies and the other large tech companies behind them and including fire category tenants.
Every one of those entities.
Is pretty much a work in the office entity and some of them have been very public about it if you look in <unk>.
Google Netflix and what their CEO said about.
Working from home versus working in the office Microsoft's CEO same thing.
As John said in his remarks working from home. The pandemic has changed the dynamic working from home will be a more accepted practice, if you will or a more formalized practice. If you will in every work force and labor for US However, youre not going to be doing the team building youre not doing the collaboration it's extremely.
Difficult, we're going through it at kilroy ourselves extremely difficult to onboard new employees when they can't meet their colleagues or really ramp up as quickly as they would ordinarily and frankly.
Aside from the employer demands, it's also becoming pretty clear from an employees, especially young talented aspiring employees, who really cant get face time with their bosses.
And get a career path established because they are working from home. So I think the world looks to tech.
To be the leaders in what's going on in right. Now Tech has said people should stay home until we have clarity on the pandemic.
But the conversations we're having with our tech clients and other large tech companies are.
Yes.
Some of the advanced plans to begin opening in 2021 when they were.
Mid 'twenty one when they were actually looking at the end of 'twenty. One. So I think there's a lot that's going to unfold here in the next three to four months, but.
I personally just think you can't make a film at home.
You can't collaborate on software or a complex problem solving from home and so as we said there are going to be various times people are working from home, but youre going to have large teams needing to be in office space using the technology that office provides.
Yeah.
Our next question comes from frankly from BMO. Please go ahead with your question.
Hi, Good morning, everyone. Just wanted to touch on some of the prominent headquarter relocations announced since your last call on California.
Your thoughts on the longer term.
Implications there on maybe in the shorter term have you seen any early impact on rents our tenants further delaying leasing decisions.
Alright ill address.
I'll address part of it and John Please jump in if you feel like you want to but lets specifically talk about Oracle for example.
Been a long time headquartered Bay area company.
They announced moving to Austin their headquarters, but if you look at Oracle over the last 15 years in the Bay area. They have not been an absorber of space they have not signed one.
Third party lease.
Since they've been headquartered in the Bay area, they've grown by acquiring companies. They have generally kept the space of the company they acquired or as the lease expired didnt renew it and.
And absorb it within their portfolio.
What what we understand about that relocation as they are continuing.
To grow in higher Tech talent in the Bay area, they're not planning to pull the plug on on the people that actually create their growth in their business and they are continuing to look at other markets to expand as well so.
I think it depends on how you look at our headquarters relocation on what that really means does it mean, the support services like HR accounting finance that sort of thing that are going to markets like Texas versus.
Where the talent and where you can hire the talent.
In bulk.
Is.
Okay. Thanks, and then a question on the redevelopment opportunity that blackwelder what are your current thoughts there.
Can we see redevelopment plans accelerate given the strong leasing activity in Culver City market and just general overall strong media content demand.
Yeah. This is John.
<unk>.
We're evaluating that.
We had some elections that had to occur in law before we.
Wanted to develop our expansion plans there.
We will be able to talk more about this over the course of the next 12 months.
But I don't see anything happening.
Soon we.
We have tenants that are in place we have people that want all of the space that comes up and we will take everything that we have.
If we go down that route then we block ourselves from future development. So we're sort of in the assessment period with Covid in and.
And the things that we've been talking about so much on this call.
It just hasnt been a.
On a high priority for us to figure out the development scheme, there, but we will be.
Okay. Thank you.
Our next question comes from Dave Rodgers from Baird. Please go ahead with your question.
Yeah, maybe John or Elliot you guys have become more positive over the last couple of quarters just on the ability to develop here in 2021 and that came through again today I guess I'm curious on the flip side of that from a funding perspective, how you think about funding maybe kao phase two are you comfortable where you're at today and then John.
Talk a little bit more about some of the asset sales you had previously discussed that were put on hold with COVID-19 and how the demand might be for those kind of credit tenant net leased assets that you had considered selling force, yes, well, let me deal with the development.
Ben.
And some of this is a.
As a repeat of what we had in our prepared remarks.
Michelle mentioned, but.
We have $1 6 billion of development underway today.
And the spin pardon me to spend on that in 2021 is $275 million in.
In 2022 is $200 million and then we're done.
If we add <unk> phase two.
There is roughly $750 million of incremental spending.
And if we started that in the second core.
We'd spend about.
$75 million this year.
$200 million next year, and then $475 million in 2023 2024 with most I think probably most of that is weighted to 2023.
So if you add all that up.
You've got.
Roughly.
$350 million 275 on the curb under.
<unk> plus 75 in Q2. This year next year 200 to finish off the current development 200 more per K O P phase to that $7 50 over the next two years day.
Alright.
And then $4 75 in 2023, 2024, so a $1 million or $1 to 25% round numbers.
And then Michele you want to talk about our.
Just remind everybody what are.
Current cash on hand, and bank lines are and then I'll deal with you.
The second part of your question, which is.
Dispositions.
Sure Yeah on as I mentioned, we've got roughly $1 billion in half from liquidity today.
Right.
Okay.
Michelle Michelle Youre, breaking up again, you're breaking up.
Okay.
Okay.
Maybe you call net calling calling on by yourself on maybe.
And maybe I'll just try to deal with that if you can hear me can people hear me.
Yes, yes, okay, great sorry about this confusion I mean, it just comes with the telephone company I guess.
As.
Michelle mentioned, we have roughly $1 five and current liquidity half of that's on our line half of it is in cash.
So we're well.
Lately funded on anything its underdevelopment and anything thats underway.
Our would become underway.
Over the next couple of years, obviously, if we start something else and we've got to talk about it. We've always said with the flower Mart debt, we will have our funding plan in order and communicate that to the market before we start I don't see starting the flower Mart anytime soon.
Clarity on that.
Nothing else is ready to go from at least another year.
In terms of.
Dispositions.
As we always do we.
Evaluate what things we might do I think we will have some thoughts on that to express.
Within the next couple of conference calls nothing to expressed today other than.
On the market is strong for good assets very strong.
And I don't.
Elliott could give you examples on that some of the record price per square foot in cap rates and so forth. So we think we're in great shape on the liquidity from great firepower to do whatever we want to do from an opportunistic standpoint, and we're going to stay that way.
We're not seeing anything thats really in distressed debt, we would have an interest in buying.
At this point.
Alright, Thanks John.
Youre welcome.
Yes.
And our next question comes from Jamie Feldman from Bank of America. Please go ahead with your question.
Thank you I wanted to get your thoughts on life science supply with so much capital going into the space can you maybe talk about if you look over the next couple of years.
The demand pipeline versus the supply pipeline in Seattle, San Diego and.
Bay area.
Yeah, well this is John Jamie.
The new year.
Let me give you a couple of thoughts on life Science supply and then Rob.
Drilling into specific markets.
It's interesting on life Science now.
The dues your.
Flavor.
And I would say that a little bit kiddingly, but its true we are seeing crummy old shopping centers that don't have any relationship do any life science market.
Or any kind of proximity to what drives life science build themselves as a life science entitled Future Life Science campus and so forth that's just nonsense.
Brokers have great imaginations, and I think they've taken them to new heights.
As a flavor there has been some real success in the traditional life science markets on converting.
Office space or other space that has the physicality physical characteristics that lends itself to conversion and then theres a whole bunch of people talking about it and what we see in the private world.
There are a lot of people that are out trying to raise funds or have raised funds too.
Let's say, they're going to expand life science and they are buying some strange things and wish him every success, but I don't think all of them are going to be successful that doesn't mean, there won't be supply increases there will but if you look at where we're primarily focused which is the city of south San Francisco, we have the largest.
Development.
Of life Science capability.
Any major cluster.
On the West coast, if not the entire country, we have the ability to deliver many millions more square feet there.
In the best market on the West Coast, where it's proven it's kind of.
Main and main if you will.
In terms of the supply that's coming on stream, Rob I don't know if you want to talk about that with regard to Seattle or if youre prepared to talk about that with regard to Seattle and San Diego.
And.
Sure Jamie.
Again, starting with Seattle, the life Science hub in Seattle, the place to be South Lake Union and similar to Oyster point as well as our UTC locations. You have these competing forces of tech companies and life science companies and.
This is somewhat of a generalization, but life science companies are going to cluster around universities in the same way the tech companies do so right now in Seattle.
Biomet has a project there is very little.
Supply, it's hard to find sites for life Science, and I think another phenomenon that may change or life science may be forced to change the way they operate as the tech is much more nimble and much more agile and they ended up signing leases quicker than life science companies do I gave that example earlier about the life science.
In South San Francisco.
Signed in December it's just.
It's a different way of operating and they need to be more nimble and it's and it's very difficult. There are secondary markets outside of the cluster area that I would call South San from.
South Lake Union.
But.
We're at Kilroy wants to be as where there is.
Supply constraints, where it's harder to get sites and where you can drive rents so.
South San Francisco as I mentioned.
Tracking $2 2 million square feet of supply two thirds of that is already leased.
Biomed will have the only ground up construction shell on core complete end of this year.
And I gave you. An example, again earlier about the 180 different companies biotech companies in that market.
And it is not there its unrelenting.
Tracking about three and a half million square feet of demand right now.
Our tenants and our projects specifically oyster point.
We've been very active in presentations.
<unk>.
Zoom meetings and some physical on site presentations to company. So we're feeling very good about that and again talking about clusters, you really only have south San Francisco and then you have parts of San Mateo County, but but the life science market in the Bay area really kind of stops at Palo Alto, So it's hard to.
Imagine going back to John's point about conversions and that sort of thing that Youll see life science leapfrog into San Jose for example, even though there is R&D type product that may be able to be converted that's not where they want to be and then San Diego, particularly UTC where vacancies.
One 4%.
I mentioned earlier the theme and I just mentioned it now too you've got these competing forces of.
Tech versus life Science and.
It's literally a race for space.
So hopefully that gives you some color.
Yes, Jamie there is a building that I toured the other day that will go on mentioned Thats here in San Diego. This office building its institutionally on its got some vacancy it will have.
On some increased vacancy over time, but not for a number of years.
Would not be a product that I would have been interested in buying for office and it's now being marketed for as life Science conversion I Wouldnt walked it intuitive the other day no way.
No way.
So there is there's just so much noise in the market right now everything is about life science.
Hi.
And there are some excellent examples of where it does work it will work.
He is.
We communicated that to the market I am sure on some of the stuff, we're doing in San Diego and elsewhere.
But theres a lot thats just being.
The market is as potential life science that in my view doesn't stand a chance.
Okay. I appreciate the color I guess as I think about it though or as you guys think about it I mean do you feel like there's a window here.
As we talk to people across the different markets Boston, especially.
<unk> got a couple of years here of really good demand and under supply and then the.
Question is what does it look like after that do you feel the same way in your markets like there's kind of a race to get the good product up or do you think you can be patient and as long as you have the best product youre not in any hurry.
Well.
We always look at the competitive set of what might be coming back on the market becoming vacant or.
Might be developed and you try to as best you can.
Put yourself in a window, where you kind of have a sweet spot and I think that's exactly what is happening with phase two.
K op.
Sure.
We have a beautiful window there on a couple of years, where there is no product that can come on stream to compete with us and certainly nothing of any high quality and then beyond that.
We are kind of at the ultimate sweet spot there. So I think that we will have.
Great demand unless demand were to drive completely we're in a great spot and as Rob mentioned, we can lease the whole thing's attack.
Which is not our intent, but we could.
So we've got kind of competing demands there and other than that we have some life science capable stuff that we can develop down in <unk>.
Orange or rather in San Diego, it's too early to talk about that hopefully later this year, we'll have something we could talk about I am not promising but we're having some good discussions.
And yes, it could it could.
B.
Is that all remember the old thing that always happened in office billings when I was a private guy there was a report that said a market needs 400000 square feet of office space.
To meet demand and then eight different developers go out and develop 400000 square feet and so all of a sudden you're flooded the market with oversupply could that happen, it's kind of hard to see it happening in the preferred locations because the barriers to entry are so great.
A lot of people could develop what they call life science product.
On areas, where patent which haven't been traditional life science markets.
But I'm not sure people will go there. So we will just see what happens but.
There is a lot of froth in the brokerage community and in some of the folks trying to get into life science that haven't had experience in it so we'll see what happens.
Okay.
Really helpful.
Then just thinking about leasing volume so dropped to 61000 square feet. This quarter 123000 last quarter.
You talked about more activity when how long do you think before that number starts to grow again is it a six months lag.
Yeah, Hey, Rob, Yes, yes, sorry, you Rob do you want to talk about kind of what's gone on in the first month of the year for US and then further to sharing.
Sharing these questions so.
I.
I may have said this earlier, we signed 75000 feet of leases in January.
With a cash increase of 10% to 15% GAAP increase of 20% we have other.
Leasing activity, we're working on that Havent, we havent announced yet.
In our core portfolio and I think to more directly answer your question, Jamie about how long.
Two things are happening I think companies have been on hold basically for a year and there are fundamental changes that are happening within those companies. For example, like I said, if they have a lease that's coming up and theyre going to be product building and they want a theyre going to make that move is a strategic move.
I think the more robust.
The recovery if you will will happen when there are larger numbers of vaccines out and people are actually coming back to the office and their companies are providing that.
Flexibility and upside on other calls several of the companies were close to have changed their plans, where they are actually opening offices that people were forbidden to go to.
We're opening them now.
With plans for them to be back at work in March not the entire workforce, but people that have put their hands up saying I can't work at home anymore. So I really think it's watched that vaccine rollout and you'll I think you'll see a correlation to leasing activity tour activity et cetera.
Okay. Thanks, Rob.
I appreciate everyone's thoughts.
Our next question comes from John Kim from BMO Capital markets. Please go ahead with your question.
Thank you and good morning.
John You mentioned in your prepared remarks.
Having net liquidity to go on the offense potentially can you just elaborate on what that means is that development opportunities or something else potentially as.
Well, if you take a look at.
Not that this is.
The absolute roadmap, but if you take a look at 'twenty 'twenty. One on 2010, you saw us move to San Francisco in Seattle, you saw US buy then you saw us develop and we bought a very good price. It we're not seeing the pricing thats attractive to us as a buyer today, but if we do.
Do and it meets our kind of our square circle and circle will be active.
I don't know that I don't know how much of that will happen I think that.
There's a lot of folks that.
Could become sellers, if the vaccine doesn't rollout do I want do we want to be a big buyer if the vaccine doesn't rollout that's a whole different question.
But we have a lot of discussions with people people that are interested in buying our product people that may be interested in selling their product there isn't clarity at this point John that there is a path to <unk>.
Highly accretive acquisitions.
There may be.
Limited about in the value add area, we always see some of that but.
That's what my comments were directed at.
Yeah.
Got it okay.
And it sounds like I believe from Rob's comments that you want to hold rents given the quality of your portfolio.
But given where your occupancy level is today at what point do you think about becoming more aggressive in building up occupancy never going to share that with you on up.
On.
We're not going to comment on that on this call I don't know, how many tenants listen or we get our report but.
I don't think that is in our best interest to communicate well.
We obviously have the market is pretty efficient.
And if we feel that we can get high rents.
We will get them and if we feel we can't and we have to adjust we will adjust.
If I could squeeze one more in the.
The direct TV termination is there a termination fee associated with that or is there no penalty.
Okay.
Yes.
There is a fee associated with it.
Alright.
Okay. Thank you.
And once again, if you'd like to ask a question. Please press star and one our next question comes from Daniel Ismail from Green Street Advisors. Please go ahead with your question.
Great. Thank you I was hoping to get a bit more color on your health.
On your life Science and health care exposure can you parse out how much of that 14% of branches currently being used as lab space.
Okay.
Yes.
Well.
This is Ed this is Elliot so it's not an exact science, but I think you can also referred to we've given you square footages.
Much of our spaces.
Life Science, and I think we've talked about debt as a 1 billion plus right now thats active lifestyle and so thats one data point.
Tying into the 14% is a little trickier, but call it 25% to 30% give or take.
Okay great.
And then going back on the 'twenty 'twenty, one objectives, John you mentioned, taking a more active role on the regulatory fronts.
There anything currently on your radar or being pursued at the moment.
With regards to.
Any of those things you mentioned on past.
Well, yes, I mean, if you think about it there is.
I'll address that in greater depth as the year goes on I don't really want to give the opposition.
Too much of a heads up but let's just say there is a bunch of US worked on prop 15 in that group.
The coalition has grown significantly.
To include a lot more of the real estate companies and we're pissed off.
Okay fair enough, we're going to we're going on.
We're going to fight and I think climates right you see right now recall up Ednas I'm not saying this is part of it part of the initiative, but you can see in California, I think you are in California.
Yes, we are.
So.
Our governor is not very popular not popular with box boys restaurant tours executives.
Everybody's pissed off things, Susan <unk> at and I do too.
And there's a lot of yeti it's out there.
And they need to be they need to be confronted.
In policy needs to be.
Good not bad.
We have our problems just like all.
States and.
<unk> big cities that have been stupid and we have a lot of stupid people and a lot of stupid policies.
And Theres a lot of us that are pissed off.
Not just people in the real estate business or people that are wealthy people at every level.
And I think youre going to see a groundswell of opposition to tax increases and do other things and that's what the polls are showing.
And we have as I, often say, if we were a rug merchant we could roll up the rugs put them on the car and go over to Arizona, or Nevada, or wherever we can we got real estate, it's stuck to the ground.
We got on a flight.
And do you foresee this being more of a state level issue or working with the local jurisdictions you guys invested in San Francisco, San Diego where else on it.
Fortunately the idiots are everywhere and we're going to have to confront them quite a few different venues some will be at the state level.
Idiot policy, whether it's policy or people.
But also at the local level there hasnt been sufficient pushback I think we.
As a as a state.
Some of these cities I would apply to some of the cities and states outside of California.
It's been too good for too long and people just look the other way I don't like this policy, but.
It seems to be going well.
People are starting to say this is getting expensive. This is being intrusive I'm tired people, telling me what to do I want to fight back on <unk>.
Second charge on all going to take it anymore I think that was aligned from a moving network that probably nobody on this call remembers because it was so long ago, but it's sort of that attitude and.
There are some policies that need to change there is a lot of good policies and a lot of bandwidth.
Got it appreciate the color on the Kansas, John You're welcome.
You know how much I loved politician.
And ladies and gentlemen, with that we'll conclude today's question and answer session I'd like to turn the floor back over to management for any closing remarks.
Thank you for joining us today, we appreciate your continuing interest in KFC.
Goodbye.
Yes.
And ladies and gentlemen, with that we'll conclude today's conference. We do thank you for joining you may now disconnect your lines.