Q1 2021 Kilroy Realty Corp Earnings Call
Yes.
Good day and welcome to the Kilroy Realty Corporation first quarter 2021 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 today's presentation there'll be an opportunity to ask questions to ask a question you May press star.
And then one on your Touchtone phone withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Michelle Noh Chief Financial Officer. Please go ahead ma'am.
Thank you good morning, everyone. Thank you for joining us on the call with me today are John Kilroy, Colorado's raw price and Eliott trencher at the outset and need to say that some of the information we will be discussing is forward looking and nature. Please refer to the supplemental package force statement regarding debt.
Forward looking information on this call and in the supplemental this.
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 and our earnings release and supplemental package have been filed on form 8-K with the SEC and both are also available on our website and John will start the call with a review of the quarter and Brazil.
Conditions in our markets I will discuss first quarter financial results and provide you with the earnings guidance for the second quarter, then we'll be happy to take your questions John.
Thank you Michelle Hello, everybody. Thank you for joining us today.
We're pleased to see optimism and beginning to take hold and the economy as economists are forecasting strength and corporate earnings housing and job growth and global growth has rebounded more quickly than expected. These indicators all bode well for real estate and we are increasingly positive on tenant demand.
While we understand there will be headwinds I had it appears we have turned the corner.
We've seen the frequency of property tours significantly increase across all our markets.
And San Francisco for example, brokers are reporting tour activity approaching pre pandemic level gymnic level.
And with Seattle, San Diego, and Los Angeles reporting similar increases.
Further new requirements are starting to appear more regularly with tenants looking to renew their leases expand their workforce and upgrade and inferior work environments for modern buildings and superior space and.
And our portfolio, we signed more than 200000 square feet of leases and the first quarter compared to 61000 square feet last quarter, and we are beginning to see traction on 'twenty 100, catheter and San Diego.
High quality, well located assets and our markets continue to command strong valuations in many cases with record pricing and with respect to life science demand and the San Francisco Bay area and San Diego is very robust the combined trends of the flight to newer higher quality properties and the acceleration.
And of obsolescence of older buildings work in our favor.
They validate our development strategy and our commitment to sustainability and wellness.
And we are increasingly hearing from companies that they are advancing and return to office plans, Google Amazon Facebook, Microsoft and Netflix are among the many technology and media companies that are moving their entry timelines forward with that overview, let's take a closer look at three key objectives.
That underpin our past present and future success first we continue to focus on a disciplined and thoughtful approach to capital allocation looking back we completed more than $12 billion and transactions over the past decade that are fundamentally reshaped our portfolio diversified our market footprint.
And produce one of the most valuable development pipelines and the country and.
And last month's sales the exchanges and other milestone and these efforts we acquired the land Cypress 95.002 million 14 invest an additional $490 million to develop the 750000 square foot property and leased it to dropbox, while under construction for a 15 year term and 2017 we.
<unk> completed the sale of the property late last month for $1 1 billion or 14 $840 per square foot nearly doubling our total investment it was a record price for commercial real estate and San Francisco, we chose to sell the exchange because it monetize the full value of an asset with limited options for us to add.
Incremental value and it also provided us with substantial capital for new investments.
And I like to point out that the transaction and also demonstrates a significant disconnect between public and private market valuations.
The second objective is the strategic expansion of our life science portfolio, primarily focused at least for the near term on entitled land that we already own.
The forces currently driving growth and the life science market are substantial but effective capital deployment and the sector at this point requires caution and discipline and.
We continue to see properties marketed and acquired for life Science that we believe will not be successful with the expertise. We have built in this sector and the pipeline of land sites, we have accumulated and several of the best sub markets. We believe we are well position for a new round of significant value creation.
Later this quarter, we plan to commence construction on the second phase of our roughly 50 acre 3 million square foot Kilroy Oyster point life Science campus and South San Francisco Phase.
Phase two will include 900000 square feet of space across three buildings and.
And will represent a projected total investment of $900 million approximately 150 million has already been invested and lands and infrastructure. We believe we are ideally positioned with the phase two and are already in negotiations with several prospective tenants and.
In addition to K O P phase two we're also planning three new life science projects and San Diego on properties, we own Santa Fe Summit on the 56 corridor and two others in the UTC Submarket at Santa Fe Summit, we have full entitlements to build approximately 650000 square feet of life science.
Product and and the heart of U T. C. We plan to develop a 60000 square foot property at 90, 514, Towne Centre drive as well as Redeveloped 46, 90 executive drive a nearby 50000 square foot building with its existing lease expires in 2020 two and like.
K O P phase two we are in negotiations on all three properties in San Diego and the aggregate. These four projects will add approximately $1 7 million square feet to our current life science portfolio and and the longer term phases, three and four and five of Kilroy Oyster point, we will expand our life science.
Portfolio by an additional one 8 million square feet.
And I think this all up we have a future life science development pipeline fully entitled for close to three 5 million square feet when completed and fully leased it would increase our revenues from life science and health care tenants from 14% to more than 30% all else being equal we will have assembled the best in class.
Life Science portfolio of approximately 5 million square feet with an average age of three years and the best locations.
The third objective is our commitment to build a portfolio and a company debt leads and wellness and sustainability and meets the highest expectations for diversity equity and inclusion as most of you know this has been a passion of ours for some time, we are the industry leader and every measurable category.
Sustainable property and company operations, culminating last year and the achievement of carbon neutral operations, we're making substantial progress and enhancing the health and wellness profiles of our stabilized portfolio and we now have the most certified fit well projects underway of Andy Nongovernment property owner across our <unk>.
And we continue to priorities prioritize the number of human capital management initiatives, including diversity and hiring career development and strong team building and mentoring. We are dedicated to these actions because they benefit our tenants our communities and importantly, our shareholders they make our properties more attractive and more.
Our durable they make our enterprise smarter better manage and a more rewarding placed and which to work I'm always proud to note. The many accolades and awards we receive each year for our efforts in these areas to wrap up let me reiterate a few points one demand for quality space and our markets is increasing both from a lease.
<unk> perspective, as well as an investment perspective, highlighting the embedded value across our portfolio too we have been successful with our capital allocation program, which focuses on assembling a young modern well and sustainable portfolio located and strong growth markets and lastly, we are well positioned.
And to monetize entitled Life Science sites that we already owned through our development program. This provides us with a clear advantage to develop best in class product with superior returns and that completes my remarks, now I'll turn the call over to Michelle Michelle.
Thank you John SFO with 98 per share and the first quarter and included a penny of COVID-19, tags, which when task driven by residential and half driven by office tenant credit and assessments. These charges are clearly trending and the right traction from the last few quarters.
<unk> per share and the quarter reflected continued growth and the contribution from our current development pipeline Netflix on vine contributed a full quarter of earnings and we recognize revenue on our 90 455 Towne Center drive project and early January these benefits were partially offset by the exploration of the 136000 square foot.
And long beach, and the fourth quarter.
And our same store results first quarter cash NOI was down two 9% and.
Adjusted for $4 7 million and lease termination payments and the first quarter of 2020 cash same store NOI growth would have been positive <unk>, 7%.
GAAP same store NOI was down one, 4%, reflecting lower occupancy and lower parking income.
During the quarter, we signed more than 200000 square feet of leases of which two thirds flow renewals and one third when new leases cash rent spreads were positive four 9% and GAAP rent spreads were positive 15, 4%.
And when spreads were largely driven by three renewal leases, which had an average term of two years and located in our second tier markets generally within projects currently undergoing renovation.
At the end of the first quarter, our stabilized portfolio was 91, 5% occupied which was up 30 basis points from the prior quarter and 93, 3% leased which was down 100 basis points from last quarter, driven by the sale of the exchange and small exploration across the portfolio.
Overall rent collection and the first quarter was 96% with office and life Science rent collection of 98% and April our overall rent.
Overall collection rate is currently 95%.
And these continued strong rent collection levels reflect our well capitalized technology and life Science and media campaign.
Now turning to the balance sheet and April we secured a $1 1 billion sustainability linked credit facility and extended the time to 2025 with two six month extension option and.
And your credit facility reflects the 10 basis point reduction and pricing with a sustainability kpis and metrics that allows us to save an additional one basis point, assuming we had annual targets.
Under an accordion feature we may borrow up to $1 6 billion with lender approval and <unk>.
<unk> of this amendment further enhances our liquidity profile, we have no material debt maturities until 2023.
And after accounting for the sale of the exchange our liquidity today stands at approximately $2 6 billion approximately including approximately $1 5 billion of cash and full availability of the $1 1 billion under the new revolver.
And our current net debt to Q1 annualized EBITDA is about four times, but we expect this to increase over time as the cash and deploy.
Given the continuing uncertainty associated with the COVID-19 pandemic as well as the various options, we're evaluating and deploying proceeds from the sale of exchange we are not providing full year 2021 guidance at this time.
However, we are providing guidance for the second quarter based on the following key assumptions.
The sale of the exchange contributed approximately 13 at that time.
<unk> per share and the first quarter.
NOI margin is expected to be approximately 70%.
G&A will range between $22 million to $24 million, reflecting seasonal corporate expenses and the second quarter.
GAAP interest is expected to be similar to the first quarter and.
And we expect straight line rent to decline roughly $6 million to $9 million from the first quarter driven by the sale and the exchange as well as continued burn off of free rent.
And our newest residential project located on our Hollywood next year's campus. We completed the 193 residential units net April and we will cease capping interest.
Lastly, we expect quota and occupancy to remain relatively flat to the first quarter ranging roughly between 91, 3% to 91, 5%.
So to summarize our first quarter results adjusted for one penny related to COVID-19 charges would have been 99 per share of F. F. L.
If we then adjusted for the impact of the sale of the exchange slightly higher G&A and bringing those regarding online we project second quarter <unk> per share to range between 80 to 86 and with a midpoint of <unk> 83.
Further the following assumptions based on what we know today and that also help you assess our earnings results for the full year with respect to our retail portfolio. We extended the rent relief program, which included approximately 90% of our retail tenants through the end of May and this has a minor earnings impact and from a cash perspective.
One month of rent to file for these tenants and 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 380000 square feet of expirations remaining to be leased this year with only two leases that are greater than 50000 square feet.
Both expire and the third quarter, and we're making good progress on one of them.
Additionally, as we have previously reported we are in a legal dispute with AT&T, which had a contraction option and up to 150000 square feet and 2022, we strongly believe the tenant did not violently exercise its option.
We expect to commence revenue recognition for the following office and life science projects within the following time frame.
At one Paseo office, we expect revenue commencement on our remaining 16000 square foot lease by the end of the third quarter.
<unk> three Dexter, while we forecast the remaining 51% of the 635000 square foot project to come online by the end of this year revenue recognition will ultimately depend on working with the tenant to complete our Ti work and.
And at <unk> Phase, one and we expect revenue commencement on the entirety and the 656000 square foot project by the end of this year.
At one Paseo residential we have had strong leasing to date, putting us on pace to be at the high and as our original year and occupancy range of 75% to 80% and.
And lastly, we anticipate remaining development spending of $300 million to $350 million, including.
Spending to commence copay price too.
Now that completes my remarks, now we'll be happy to take your questions operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Okay.
And the first question will come from Nick <unk> with Scotiabank. Please go ahead.
Hi, Thank you I guess just first question is on.
The cash and its on the balance sheet right now and I know you do have a large restricted cash balances does that mean that you're earmarking that towards a 10.
10, 31 purchase and if so maybe you can just give us a feel for.
And how that cash might be deployed for income producing day, one assets versus.
Money being set aside for future development.
Yes. This is John.
And.
As you know we have the ability to do exchanges and we have that ability through.
And until the fourth quarter.
And we and.
Net context, we designated pool of up to $2 billion of potential acquisitions from which to do roughly $1 billion worth of exchange.
We're looking at that with Ernest and I can't get into specifics. We also have the ability to use a substantial portion of the cash.
For other purposes like develop it and if we go that route then we would.
And have the ability to do a special.
Which we would determine if and wanted to do that and the fourth quarter. So all of that is on the table I think by the.
The next conference call, possibly by NAREIT, we'll be able to give you a better description.
Description of what direction, we're going but you can imagine where we're looking at a lot of different things right now.
Okay. That's helpful. John. Thanks Second question is just on the increased tour activity.
You did cite and some of the markets.
And tenant demand it sounds like coming back and some cases I guess just.
And if you or Rob and Mike you've gone through some some of the markets in terms of what your what you are seeing from.
Tech other sectors.
And as you're thinking about space now.
And a post COVID-19 world, whether youre seeing any any trends there and any impact as well from this idea of an assigned seating.
And companies thinking about maybe a hybrid work.
<unk> model going forward, which could have some impact on number of desks number of people and the office and potential space impact as well.
Rob do you want to cover that one.
Sure Nick how are you.
Let me start with just a highlight a general highlight on the West coast and what we're seeing and I think it's there are two really important and the fact that our.
Our reality right now, which is the job postings and 2021, thus far.
Our exceed our 2020 and all of our Submarkets.
The second fact is that major tech has accelerated their plans as John mentioned to return to work.
Some are moving back and made some are coming back in June and some are coming back in July.
And those move ins will.
B progressive that won't be all at once but those two components are really important and the last piece you alluded to is true activity.
And this is very recent information corrective and he is either close to or at and pre pandemic levels. So when you couple these things together, that's what's going to create demand and.
And when you are.
And hiring into that.
I think it's.
And I'll get into it and the minute, but the job postings and Seattle, San Francisco and San Diego or are just pretty amazing compared to years past, including 2019, which was.
A banner year.
I would say that stem hiring just starting with Seattle stem hiring and Seattle is up 21%.
Right now there are 57000 job postings and the Seattle, MSA, which is an incredible number and that's that's in March of 'twenty one.
If you look at Submarkets, Amazon and it's been exceptionally busy with three deals and Bellevue that total over $2 6 million seats, so their need and desire for space continues sort of unabated and I would say.
What we're also seeing and Seattle for the first time, and probably a year or two year and a half is the tours and Seattle exceeded tours and Bellevue and you know that Bellevue was probably the hottest market and the country. During the pandemic. So I think that's very notable.
There are several late late round VC backed firms such as convoy and remedy and snowflake all of which have requirements over 100000 feet that are.
Circulating in the market right now and we're also seeing and Seattle professional service companies, making long range commitments there.
And there are natural lease expirations occur so.
Things are looking good and Seattle, there is like most markets Theres more sublease space.
On the market and then.
There was and in 2019, but.
And we're fairly confident with the activity, we see that the sublease space.
We'll get absorbed.
Theres about 2 million square feet and under construction and the Seattle area that can deliver between now and 'twenty three.
Of that space 17 percentage leased and has.
Pretty good activity.
San Francisco was actually and I don't want to be overly optimistic here, but these are these are facts. So.
Let me just give you some job posting information and in March of 2019, there were 64000 job postings for stem and.
In 2021, and remember 2019 was a banner year in 2021, there are 68000 and that's as of March so.
So pretty healthy jump, considering we're coming out of a pretty tough.
Environment.
I think some promising signs and San Francisco are the brokers are tracking about $6 3 million square feet of demand.
And pre COVID-19, we were running around 8 million to 9 million square feet.
Now today, there are 17 tenants over 100000 square feet 10 of those 17 represent growth requirements.
There are over a dozen law firms right now touring for over 15000 feet.
So there's a lot of change and what we've been reporting and the past quarters.
As we've come out of this pandemic, so I think San Francisco, although it's undeniable that theres a lot of sublease space on the market and another $1 8 million got added.
In Q1 that sublease space is seeing activity and.
One example would be.
The macys dotcom space has significant activity on a lot of that space. So I think touching on some of John's comments.
Waiting to sublease is that there is going to be a flight to quality, whether its direct or sublease space, but certainly well positioned well located.
Tech friendly fit and that out.
<unk> space, and it's going to do well.
And our markets and Los Angeles, Culver City and <unk>.
Hollywood things have remained very strong due to the hiring from the content producers.
There is little to no vacancy and the Hollywood market right now Burbank has seen some growth we're not in Burbank, but those three markets are really where the entertainment industry is very active.
And the west side of L. A has some sublease space that they have to deal with but.
And our experience with West L. A tenants that ticket typically have not been.
The first to absorb space. They typically are a little slower to pick up but we think that the quality sublease space and the market will be absorbed and lastly, San Diego is just amazing.
Takeaway and the Submarkets were in del Mar.
T C and a little Italy, 2100, kettner location downtown.
As we've said on previous calls and John has talked about quite a bit we have this convergence of tech and life science competing for space, particularly and UTC and UTC vacancy.
And they can see rate right now is about 2%. So that's call it, causing a spillover into other desirable submarkets and that's why.
As John mentioned in his comments the development.
<unk> that were.
Pursuing.
We're really.
Pleased about in terms of the activity we have.
I would say.
Relating to the life science market, what's going on and San Diego's exactly what's going on at Oyster point up and the Bay area as well.
770000 square feet of net absorption in Q1.
And our vacancy rate went from four to two.
No.
That's pretty amazing and the last point I'd make about venture capital and the Bay area is at about $5 billion of VC funding.
And for life Science, and Q1 has been placed and that's a record. So overall I would say based on all of these markets and I know I spoke quickly but.
Things are looking up it won't be a linear progression.
And you know, we're gonna have to keep monitoring sublease space, particularly in San Francisco, but things are certainly looking better than they have.
Okay very helpful. Thanks, a lot.
The next question will come from Jamie Feldman with Bank of America. Please go ahead.
Thank you.
That was really helpful color on the markets can you talk about where you think and mark to market might be today.
And you guys had positive leasing spreads, but maybe if you go through the different regions, how much debt markets and moved on a net effective basis, and how does that compare to your portfolio or what's wrong and.
You're going to handle it.
Michelle.
Yeah I guess.
I don't think we have enough data points to to.
Comment on where net effective rents.
Our today and we.
Provided.
And market rents pre COVID-19, but I don't think that's as relevant.
Okay.
Jamie Jamie.
Jamie This is John if I could just add a little color to that.
Obviously, I'm going to move around a little bit and <unk>.
Bellevue the rents we're doing today are the highest rents we've ever achieved and Bellevue, the highest and the market.
And as ever achieved.
We haven't done any leasing and downtown Seattle, because everything's lease that we own with regard to San Francisco, we're still seeing very strong rents for pre pandemic rent.
And rents for quality space that we have.
And Hollywood.
Hollywood, we have some vacancy at the.
Columbia Square product.
And the rates, we're negotiating our strong rates Culver city has been very strong.
In San Diego, our rents on office space are all time high and our runs on <unk>.
Life Science are all time high and then back to South San Francisco, where we have phase two of.
K O P about ready to start.
We think the rents will be up over what we did and phase one which was around 67 triple net we think rents will be up 10% or more.
Okay.
Thank you and then when you go through your markets and kind of leased or occupancy per cent and the quarter.
CBD San Francisco was down.
But the rest of the Bay area was actually up slightly or flat to up slightly depending on the submarket.
Is there something to read from that debt.
And <unk>.
I know the market stats for the first Silicon Valley, even better also but what are you guys seeing on the ground and how do you think that trends.
And Jamie are you asking about.
And I didn't hear the first part is and the occupancy are you asking about.
And demand.
Well I guess both.
My question was if you look at your.
Bay area stats from the quarter.
San Francisco occupancy rate declined, but your the rest of the Bay area and Silicon Valley Peninsula.
Actually increased slightly.
Is that indicative of what's really happening and the market I know you don't have that much rolling quarter to quarter. So I'm just trying to get a sense of would you say that.
That part of the southern part of the Bay area is really holding up much better than downtown San Francisco.
I wouldn't say, it's holding up much better, but silicon valley has not had the severe shutdown I mean, everyone was shut down but San Francisco is still only at 25%.
Workforce.
That's available to occupy buildings and Silicon Valley has had.
No.
Again, you have to be really careful about how you generalize, but silicon valley and well located transit centric locations.
<unk> has weathered the storm fairly well.
I would go back to what you were talking to John talking with John about and market rates and just what's happening and if you look at the premium class a product and San Francisco and as you know, we don't have a lot of space available but.
One market 555 mission ferry building all have made deals over $100 a square foot and that is.
Rates are pre pandemic rates so.
Things are holding up it's just San Francisco supposedly next week, we'll go into the lease prescriptive tier and that coincides with companies also I think accelerating their plans to bring people back to work.
Hey, Jamie and he'll yet.
Just to add to that and your question on the difference between the city and the valley for US, It's a function of our rollover and where there was rollover and the particular quarter. There really wasn't much to speak of in the valley. So I wouldn't read too much into that.
The occupancy.
Differences.
Okay. Thanks Elliot.
And when you think about all the capital that's been raised and the Bay area and.
And what that's going to mean for job growth and space demand do you think that you can parse that out by downtown versus valley.
It's too early.
Well I think a lot of it is downtown right now there's 12 active requirements that are.
VC backed firms there they are relatively smaller but they're strong.
And as trading a strong commitment to the city.
There were also I would add I, just I can't add the names but.
There'll be public soon but two large firms did a study over the last six months about potentially looking at the East Bay as a location to relocate two and.
They've now shelved those plans. These are two separate companies shelves and those plants up.
And returned to focus on San Francisco, So again I think that.
Specially if you look at the <unk>.
And the check that's and San Francisco.
Pretty much all <unk>.
Stated a commitment to the city and returning back to work, so and specifically I mean sales force is coming back and some percentage form and May Facebook is going to occupy one and one freemont and park tower, starting in June and a scaled fashion.
And Google and doing the same thing so there's a lot that's going to happen this summer.
Okay, Alright, thank you very much.
Yeah.
The next question will come from Steve <unk> with Evercore ISI. Please go ahead.
Thanks, I guess good morning out there.
I guess I wanted to follow up on maybe Jamie's question, just on demand, but Rob maybe the sublease space has remained high in San Francisco.
And I'm curious if your expectation is for that to start to really get pulled back is as tenants you know start to come back and maybe to that sales force.
The majority of the space at $3 50 mission on the sublet market. So I'm curious if you start to.
Some of that space to come off you know, maybe in Q2 or perhaps by the summer.
Yes, Hi, Steve and good.
Good question.
I think one of the things thats encouraging about what we see going on with sublease space.
Two things kind of after the.
Opposite ends of the spectrum smaller tenants and the 10 to 20000 foot range or looking at sublease space and those are generally companies that.
Either have a lease exploration coming up or.
And have grown modestly, but they're starting to look at sublease space in order to give them flexibility and bring people back to work on the other and of the spectrum. There are some larger deals over 50000 feet looking at sublease space. So you know.
And we're watching closely.
Now, there's about 535000 feet of pending deals that will be.
Absorption and the city so.
When those happen that'll be a very positive occurrence, obviously and we still have a lot of sublease space to deal with and to the last point and your question.
We are seeing some companies taking space off the market.
As they plan to move back and and others that have had space on the market, we're basically saying if they could get anyone to nibble on it.
And they've got very short and restrictive terms.
On the lease so that in some cases, you see sublease space that is not for the terminal beliefs. It's actually two years three years, because the tenant wants the flexibility to move back in and that last component of sublease spaces.
Think difficult to move and a market like this where there's a lot of options for tenants.
So and to your question, if we keep going at the pace, we're seeing that we've been talking about San Francisco today.
I think things could absorb quicker than people were thinking, but it's hard to pinpoint is it second.
Second quarter might still be a little early the third and fourth I think we'll definitely see some absorption of it.
Okay great.
John I know you sort of outlined the exchange transaction and a lot of things still up and the air whether you find a and <unk>.
Acquisition or two to 10, and 31 and two but if you did not making that kind of the.
The base case can you just maybe help us frame out what the special dividend might be and how much you'd be able to.
Retained for the development of K O P too.
Yeah, it's roughly 50%.
A little bit more that we'd be able to retain.
But I again, I don't think it would be.
Appropriate for you to think debt that situation is likely to happen, but we were not going to get into discussing transactions and progress.
And I understand but 50% of the of the total sales price might need to be special dividend. If you couldnt find something.
Yeah roughly okay.
And.
And then just lastly, Michele I just wanted to circle back you made a bunch of comments and you said something about 333, Dexter and and and I know that the remaining 51% I thought was supposed to be rent commencing in Q4, but it sounded like you were a little hesitant on that as being kind of a hard date and it sounds like maybe there's some kind of ti build out issues is it does it sounding.
That might slip a little bit into first quarter 'twenty two.
Yeah, It's it's hard to tell right now.
Hang it hopefully it should come in by the end of the year, but it's going to be driven by Ti build out and that we're working with the tenant on.
Got it okay. Thanks very much.
The next question will come from Emmanuel Korchman with Citi. Please go ahead.
Hey, everyone.
John I think you mentioned this in your prepared remarks about just the amount of people talking about and doing.
Life Science, a couple of questions related to that one given the large amount of square footage that you outlined and your own portfolio that will be that life science and nature, how much of that is gonna be lab versus office.
And at least two of life science or science tenant and.
And the second question is when tenants are out there looking for space and.
How much work and and or other ways are they underwriting the who the landlord is going to be before signing a lease.
Yes.
Our ratio of lab and office varies obviously by tenants. So it's hard to predict what that will be.
So I really can't give you a specific there are many but.
We expect the buildings that we talked about.
Life Science, all to have a quite a bit and lab.
And then with regard to your second question I'm, sorry could you repeat it for me.
And just how tenants are thinking about who the landlord or.
Maybe this specific location and buildings are rather than saying Oh. Good look at this as a life science development. They told me it's life science.
And that's an office build outs before.
And how much experience you really neat.
Yeah well.
And our life Sciences, and as tricky as a lot of people. Thank you and obviously you have to have the right floor ratios and ceiling heights, and structural and mechanical systems and so forth. So the the bones or the square and might triangle square and circle.
The bones and the physicality is important you can't make a 11 and foot, Florida floor space, a 15 foot or a 14 foot floor. Just physically you can't unless you carve and floor above so some buildings is physically won't won't adapt to it or they don't have the right ratios of the structure and so forth.
And what we're seeing is a lot of stuff the market. We've mentioned this on previous calls to questions. We see a lot of stuff being market is prospectively.
Convert to life science that we look at it and we just go this is baloney.
You could you do it.
Maybe would it be ideal know would it be top tier no.
And we don't want that kind of product it's on the fringe.
With regard to your issue of landlord.
I think it's pretty important these people are generally very sticky and their and their occupancy.
And they tend to stay for a long time and back to the lab issue debt. It's not unusual for these companies spend for $500 a square foot or more.
And have their own money on top of a 100 or $200 of landlord provided ti.
And so they have a huge investment that causes them to be very sticky and the thing that we're seeing and life science and we've talked about this for a number of years now is that the life Science community is looking for the same thing that the tech community has been looking for over the last 10 years, which are modern facilities.
Attract and retain the best in class employees with.
The life Science stuff is looking and a lot more like the tech campuses now.
Notwithstanding their special needs.
But they want that same kind of feeling and the same kind of vibe and the same kind of amenities inside and outside and so forth and we think that's what kilroy does best.
And a lot of this conversion stuff that people are talking about it doesn't really have that vibe that doesn't mean that in some cases it can't be.
Developed, especially if you have and a property and then finally a lot of stuff is big market as life science, because people know that market is hot.
And I think we're going to see a number of folks that have been buying stuff for quote life science and quote.
Sure.
Valter based upon from the deals that we've seen and our markets that we've looked at and you drive up and you just go no way or you go through it and go through the math you go no way or you go yes, you could do it but you could end up with product that is not going to be highly desirable either for.
Leasing, which means youre going to have to then compete on rent and economics, which is a lousy place to come for us to be and.
Ultimately its valuation is going to be.
So I just think that we're ideally positioned with the properties the $3 6 million square feet of development within our portfolio right now on a property we own that's entitled this and terrific locations that we can build brand new product that state of the art and it has all the bells and whistles.
And that the life science user wants.
Hey, John It's Lee.
Michael Bilerman.
I know the main focus right now is identifying new investments for the cash that you've been able to raise either new assets, new opportunities or existing development opportunities and I wanted to get your perspective of how you think about your stock as a potential investment if you're not able to identify those apis.
<unk>.
And thinking about it while you have a distribution of the gain that you would need to be made you could do that distribution and 90% in stock.
And so could you think about doing a large scale share repurchase Dutch tender or something else.
To effectively take advantage of buying into your existing portfolio and buying more of effectively or development sites.
Does that rank in your mind, and and where does that sit overall as you think about deploying your capital yes.
I don't want to take anything Michael off the table with regard to the direction. We might go we do have some significant a fairly significant period of time within which to determine whether we're going to do exchanges. You can imagine that we've been busy looking at various opportunities and the markets we like best.
And for a product that we feel meet our criteria.
And if it's 10 31, most of that will be into.
Existing product.
Some could be into.
And the occasional land site, where we think we can create substantial value. So we are evaluating everything and I'm going to be able or with the company will be much better able.
And within the next few months to address your question and the questions that others have raised but understand that we're looking at everything.
It was more so a specific question about your stock and how Youre discounted shares today, which you know your portfolio better than anybody else and the value of it.
Imagine that has to be a pretty attractive.
And four or five months down the road.
And may not be at these levels. If all of these other things that you're talking about come to fruition. So you may have a moment in time, where today that may be your best alternatives.
And that's what I was trying to get you to sort of focus on yeah.
Just don't feel comfortable giving you a specific answer to that question.
Obviously, if we go that route.
And we internally.
Need to go through a process.
But understand that we look at everything all the time.
We're gonna be diligent with regard to where we allocate our capital we pride ourselves on that.
And more to come.
Okay. Thanks, John.
Welcome and Mike Michael.
The next question will come from Craig Mailman with Keybanc capital markets. Please go ahead.
And everyone.
Just kind of curious on the exchange I wish you the buyer paid a pretty healthy.
Price per pound, there and talk as they want to kind of go life science, there and maybe get Dropbox and I guess.
And just kind of curious what you think if someone went that route how much more they would have to spend per foot to kind of get two and all in basis on that building and what that kind of tells you about the value creation that you guys have within the three and 5 million square foot entitled Life Science pipeline that you have.
Yeah, Let me, let me say that.
We obviously when we consider selling something we take a look at.
Not only.
What we are selling it for and is that an attractive price. We also take a look at what we might do with the money.
With regard to redeploying it and what that might create and the way of added shareholder value specifically to the conversion.
I'm just going to give you order of magnitude numbers that could be off by 10 or 20%, but if you take a look at the property was improved with tenant improvements.
Many of those 10 and improvements would remain but many of them wouldn't it already has the backbone because it was developed for life science, but I would think you could probably spent 100 bucks a square foot, possibly more and ti, but price you'd have downtime plus you would have to move people out.
Plus you would have and it by downtime you'd have probably a year of tenant improvement construction and that sort of thing.
And which you wouldn't have rent.
You might end up with a buyout or something.
But we didn't we we took a look at all the various options that one might consider and felt that the transaction. We did was a very appropriate and excellent transaction for Kilroy I don't know what the return thresholds are for the buyer of the building.
And what their plan is they never discuss that with us to my knowledge.
And the building certainly would perform well for life science.
We did not go down that route obviously, because we sold so I can't speak specifically to what the ultimate cost would be but you have got carry on your.
Your and I mean, if you just look at the quick math you'd have carry on your.
And on your <unk> would have the vacancy and no return on your money while that was happening.
Credited by and you kind of buyout one might yet you would have the tenant improvement costs and the soft costs associated with that and then you'd have whatever the lease economics or whether there's free rent or whether theres phased move in or that sort of thing and you know you can get into all kinds of assumptions.
We felt again to the transaction that we did that it was really a good transaction for the asset that we stated when we announced it that we thought.
<unk>.
And its value to us today at 14, $840 a foot was greater for us.
And more certain for us than what we might do with it and the future.
Others may have a different.
Point of view, that's the beauty of business.
That's helpful.
But needless to say relative to the basis, you guys are paying U K L. P.
It feels like life science assets.
Youre going to create a significant amount of value.
And if you think about <unk>. If you think about <unk>. The first phase 650000 feet was roughly I think around 900 Bucks a foot.
Is that right Michelle yes, that's right and the second phase is roughly a $1000 a foot.
And there are various things with regard to the different sites and so forth and contribute to that obviously some cost escalation, but the rents have escalated as nicely.
And you take a look at.
What one of our competitors.
<unk> property debt.
Recently, and the last 12 months whatever it was on the other side of the 101.
Which is the location and that's fine it's not nearly as quality location and our opinion as S. K O P. We're sort of main and main and I think they paid what was the <unk> hundred 50, <unk> hundred dollars a foot.
And that was on rents that were lower than the rents we achieved as I recall and.
And our first phase and we're thinking we're going to achieve higher rents.
Pretty significantly higher rents and phase two.
So if you apply sort of a cap rate to top tier.
Life science, which would be <unk>.
<unk> or lower than office.
And you look at the rents and what not I think I think we create.
Massive amount of value through the product that we will be developing over the next couple of years.
So you're right.
And just I know I've asked this question and in the past and you guys have said you're looking outside of your core markets potentially for life Sciences that is.
Is there any update on that today are you any closer with this capital infusion or is it you.
And you guys still kind of doing due diligence at this point.
I'm going to be able to we as a company should be able to speak to that much better.
With a couple of months.
Okay Fair enough and then just one last one from Michelle you had mentioned.
AT&T and Directv is there anything that you guys are reserving or anything on the balance sheet for that or kind of how does that play itself out from an earnings perspective.
No.
Not including any reserves and our second quarter guidance and as we said we're in and legal dispute so.
And now more.
But nothing is at 150 out of the numbers or are you guys still accruing for that.
And are 50000 square feet.
We're still collecting rent on that at this point so they're there they're the option is to expire and the beginning of 'twenty two so no matter what they still pay around for 'twenty one.
Okay perfect. Thank you.
The next question will come from Derek Johnston with Deutsche Bank. Please go ahead.
Hi, everybody. Thank you most of my questions were answered so forgive me for getting a bit creative.
Are you concerned that the work from home and hybrid model began a snowball effect and and start to become viewed as a way for companies to address the assets and their ESG programs and that would be by offering a greater work life balance and possibly the need for less office space now.
Not smart enough to come up with this but I've heard it tossed around do you mind weighing and.
Yes.
Ask it or.
A wild question I don't think Thats why its going to play out at all where everything. We're hearing. This is John speaking everything. We're hearing is that people are exhausted by work from home they want and get back they can't wait for the schools that haven't reopened are reopened so they get their kids back into school, both to be educated and as socially.
<unk>.
B.
Vance and for themselves to get back to.
And productive.
Life and not not just live and your part B of your house. So we're not.
And there'll be some of that at the margin sure Theres always been a work from home crowd.
Particularly amongst independents and so forth there will certainly be some work from home options that people companies are going to provide but I.
I think that's a.
And nice question and I have around and cocktail or a glass of coffee and coffee house or on a college university sort of intellectual.
Speak.
No offense.
I understand theres, just not a lot more left over and hiring.
How about the 10 31 exchange elimination and that continues to come up more frequency more frequently.
How do you feel about the potential elimination do you think it has any lags or merit to it and do you think the administration and understand the CRE implications what day.
And you think about that John.
Well it is a concern.
Any time either of these crackpot parties put up.
And things like that it can have and implications.
We're members of the real estate Roundtable obviously.
And at NAREIT and other trade groups.
Volume et cetera, they're all working to defeat the concept of the 10 31 elimination I think it would be a harmful and.
Tell you what I think it happens I think.
We are a reasonably big sized company as are most rates and I think what the elimination of 10 and 31 do we will do is just consolidate more power and the bigger companies all at the expense of the families and smaller operators and I think it would be a travesty I think of probably and.
And in some ways, a b and advantage to the big companies, but it will be terribly harmful to smaller operators.
And and I think it's just bad policy in terms of.
Of.
Sure.
Rating or whatever it's too early to tell we've obviously seen a lot of stupid ideas come out of the administration.
As well as amongst the states and it just gives me.
No.
As everybody knows it's on this call and certainly speak I have no use for most people and government like.
Zero.
And or and this just further causes me to feel that way because the policy implications that are being discussed here.
And my mind insane.
Thank you John.
Yeah.
The next question will come from Dave Rodgers with Baird. Please go ahead.
Yes, good morning out there John just a couple of follow ups from me and one was.
And 90 455 was not a lab deal down in San Diego, So curious on comments around kettner and the demand and progress that you might be making there and.
And then I think the second question you had talked about and the last couple of quarters doing asset sales clearly achieved a big one this quarter I guess notwithstanding reinvesting those proceeds what's your continued view on monetizing assets here, if you're able to reinvest those proceeds does that continue this year does that get pushed out yes.
At the margin and there might be something that goes out this year, but Dave I don't think there's going to be.
It's unlikely that there's going to be anything that's significant and at least at this point.
We're always trim and are the.
And the margins.
Around the portfolio.
Youre right $94 55 wasn't life Science, we had a big life Science company and we had.
Even bigger Tech company and the Tech company one.
And that's probably a good thing because we've done a lot.
With that particular company and.
And probably likely to do more.
In terms of the ketner progress.
It is hard to lease a building when you can't do any tours and until we.
And I don't know what Rob you could help me out here, but we had a handful of tours and 2020.
It was hard to even get our broker that come to the building because everybody is all taking COVID-19 very seriously as we continue to take it seriously, but now we're seeing a lot of tours.
We're seeing a lot of interest from one floor to floor three four users we're seeing a lot of interest from big companies that would take the whole thing.
Can't wait for us to be able to have.
And all the people that are on this call that want to come out and come through and see.
And what we're doing and San Diego Elliott.
Elliot and I are sitting in our San Diego office, which is at one for sale and.
And.
I'll tell you I'll put our one Paseo project against Anybody's project and the country of the World I think it's the most amazing thing I've ever seen and everybody sees it.
Says that and as you can tell the leasing performance both on the retail and the office has just been extraordinary we're getting the highest rents and resi the highest rents and retail and highest rents and office in San Diego's history and by a huge margin.
What we've done and 2100 kettner.
That building is the shell will be done.
Elliot.
Second core I guess later, yes mid year.
Yep.
I invite all of you to take a look at it and you tell me what you think about that building and I think it's going to be.
A very high rent.
Achiever and I think the value creation, there will be enormous as a percentage of our investment it's not that big of an assets. So it's only a couple of hundred thousand square feet, what does that 100.
Okay.
How many million dollars yes.
It's 200000 square feet and how many million roughly.
It's a $140 million project.
Sorry, I can't remember all these numbers anymore, but.
I think we will see that that's likely to be another exchange in terms of value creation, and I'm, not saying, we're going to sell it but.
We're very keen on what's going on and San Diego here.
And as.
Elliott and Rob and I guess and my comments made earlier and our formal part of the report with regard to life science.
We're seeing life science move into Carmel Valley, they've always been here and that's also called Denmark, where one paseo is and where other assets are here at the intersection of 56 and the five we're seeing life science really come in here strongly we're seeing them go out to 56.
And I think we're going to see.
Values and.
And UTC.
Obviously.
Lori Pines.
Here and del Mar and up to 56 climb dramatically and in the years ahead I'm going to make a prediction that we're going to start seeing San Diego San Francisco pre.
Pre pandemic rents in.
And these markets and they're not too distant future.
Thanks, John.
Youre welcome.
The next question will come from Frank Lee with BMO. Please go ahead.
Hi, good morning, everyone.
Can you provide and update on the tenant demand in terms of square footage and Youre seeing it <unk> phase II.
And also city still on several hundred thousand of development rights. There just wondering what is the likelihood and if there is even an opportunity to acquire additional square footage from them.
Excuse me and I got the K O P phase two square footage demand and what was the second part of your question.
And just wondering if the city still own several hundred thousand of development rights and then just.
Just curious to see if there's even an opportunity and acquired the square footage from them.
Yeah, I'm not going to comment on that.
But with regard to <unk> phase two.
Rob do you want to take that I don't know that I would share with the exact square footage, but I know it's.
Several multiples of the size of the project.
Yes, so Frank Phase two is about 900000 square feet three buildings.
And we've said this actually said this on our Q4 call also that we've got.
Activity and interest and.
And more space and we are delivering.
So we're pretty excited about them and being a little bit coy, just because I don't want to.
And <unk> too much because this is a public call, but we're.
We're really pleased with the activity, we have and when you look at this project.
Again, as John was going talking about one to say Oh. This one for life science on the Bay is incredible and you. There is a big distinction between 30 plus acres adjacent to the San Francisco Bay was a life science campus and.
And the other life science product in and around the market, whether it be Sierra point or other parts of South San Francisco that are more adjacent to industrial areas. I think it's just going to be a tougher challenge for those projects to lease because life science companies are after talent just like tech so all of those.
Great biologist scientists et cetera are highly sought after and these companies are doing exactly what tech has done which is to provide.
And environment that helps attract and retain people and that's what we're helping them do by building.
And the type of layout and.
Campus that we're doing.
I hope that answers your questions, yes, it definitely does and then.
Last one from me just wanted to touch on the acquisition opportunities you're evaluating with the exchange sales proceeds.
What is the appetite for value add opportunities versus more core classic.
This is John.
We're looking at a range of things that are.
And some are core but have leasing therefore value to add and markets, where we think the rents are going to grow tremendously.
There are value add opportunities that are more traditional there is ground up development and a few.
And.
It's going to be a mix.
We're not looking to just buy and asset at a low cap rate and sit on it.
And.
Value add are value creators and we pride ourselves at that there's lots of ways to create value you can buy in assets. It is core and a low cap rate that is where it's going to roll. The rents are going to skyrocket, you can add <unk>.
Physical things to it you can expand properties and <unk>.
All of the kinds of things that we have done and.
And you know as to do are under consideration.
And just back to the Bay area of life Science demand there is about $4 2 million square feet.
Uh huh.
Demand and the life science area, and San Francisco and most of that is in South San Francisco, where there's a vacancy rate of under 2%.
So you can imagine we're talking to a lot of folks.
Okay. Thank you.
The next question will come from Ole Matteo Okusanya with Mizuho. Please go ahead.
Yes. This one is kind of more from Michelle Michelle and I'm, just trying to understand a QQ guy.
Guidance, a little bit better I mean, <unk> 98, and you add back the one time charge at 99 and you pick out 13.
Foreign exchange you're at 86, you have higher G&A by a penny at 85, but the guidance range is 80 to 86.
And the understand the range is kind of what gets you to.
So that and 80 versus you potentially moving higher from kind of like the 85 starting point.
Yes, so on the walk to the midpoint.
Starting with the first quarter, we said we're at 98, plus you add back the penny for the COVID-19 charge. So youre at 99 less the impact of the exchange, which we said is 13.
Less the remaining AR.
And about three for both G&A as well as the lease up of CRD and gets you to 16 cents getting you to the midpoint and with respect to the range that we provided of 80 to 86.
We just think there is still a lot of uncertainty and the marketplace right now and our markets are starting to open up again, so we wanted to give ourselves flexibility.
And this is Tyler just on the difficulty of providing guidance and this market. I think this is an example of that I mean, you've got seasonality you got uncertainty and the market and for US the three drivers and Michelle just went through which were.
Exchange DNA and <unk> and those are all temporary.
Adjustments to our <unk>, so theoretically over time, we're going to be picking all of that back up so.
It's just another example of why guidance is difficult right now.
Understood. Thank you for the clarification.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Michelle Noh for any closing remarks. Please go ahead.
Thank you for joining us today, we appreciate your continuing interest and KFC.
Goodbye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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